XCHRX ALEX & STEPHEN LTD. v. WING JET TEXTILES LTD.

1998 No. A16787

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

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J U D G M E N T

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1. This is a Master's appeal from a decision of Ms. Registrar Chu given on 10th June 1999 ordering that final judgment be given for the Plaintiff against the Defendant for the sum claimed in these proceedings with interest, in respect of two dishonoured cheques.

2. The facts are these. The Plaintiff is a supplier of cotton raw materials including yarn. The Defendant is in the business of trading cotton yarn and production of cotton fabrics and has been a customer of the Plaintiff, although with what regularity is to some extent in dispute, since about 1986.

3. On 21st June 1998 the parties entered into a contract for the Defendant to purchase 500 bales of 100% combed cotton yarn under the brand name "Jing Hua" to be delivered in July 1998 in 4 equal instalments at a total price of $2365000.00. This was reduced into writing and signed by the parties on 24th June. The written contract provided for payment to be "45 days post-dated cheque against delivery".

4. The goods were duly delivered to the Defendant on four dates in July and invoices issued dated 10th, 13th, 20th and 28th July 1998 respectively. Each invoice bore the words "Terms of payment: 45 days PDC", which I take to mean 45 days post-dated cheque, and also a note reading: "Any complaint must be notified within 7 days from delivery. No responsibility after this date will be acceptable to us."

5. No cheques were forthcoming immediately, until 5th August, when a cheque for $1183250.00 post-dated to 30th August was tendered, and 19th August, when a further cheque for $1176896.00 post-dated to 12th September was also tendered. These would accord roughly to the terms of payment in the contract.

6. The Defendant maintains that, in spite of the wording of the contract and the invoices, they were entitled, in accordance with the previous course of dealing, to an interest free period of 45 days from the date of delivery to settle the price for the yarn before tendering any payment at all. However, Mr. Chan in his affidavit on behalf of the Defendant says that it was exceptionally agreed in this case to issue the post-dated cheques on condition that should there be any dispute regarding the quality of the yarn they must not be presented for payment until the dispute was resolved.

7. The cheques were presented for payment on 31st August and 18th September respectively and were dishonoured marked "refer to drawer". Meanwhile, the Defendant says, in August some of the cotton yarn was resold by them to its customers, and it is noted here that they are referred to throughout the Defendant's affidavit in the plural, and towards the end of August and early September they received "vigorous complaints" from their customers concerning the cotton yarn, that it was so bad that it could "hardly" be used for weaving. The complaints were as to the yarn's strength and evenness.

8. Mr. Chan says that he told the Plaintiff's Ms. Yi of the complaints, although when he does not say, and requested her not to present the Defendant's cheques until the dispute was resolved. It is denied by Ms. Yi that any complaint was received. Mr. Chan said that he could give her no particulars of the complaints or documentary evidence because he was not in a position from a commercial point of view to disclose particulars of their own customers. He says that the request was ignored and the first cheque presented. Following the first cheque being dishonoured, Mr. Chan says that negotiations ensued regarding the dispute and the Plaintiff was requested not to present the second cheque, although Ms. Yi says that the discussions were solely as to how and when the Defendant would make payment. However, it was presented, also dishonoured, and these proceedings were commenced on 30th September 1998.

9. It is submitted by counsel for the Defendant that there are three arguable defences to this claim: (i) total failure of consideration, (ii) alternatively, quantified partial failure of consideration, and (iii) conditional delivery. I will consider each in turn.

Total failure of consideration

10. Counsel for the Defendant contends that the evidence shows that the yarn delivered was wholly of unmerchantable quality and had no commercial value at all.

11. The evidence that the Defendant points to in support of that is in two parts; the first consists of two letters from a company called Golden Faith Industrial Ltd., dated 8th September 1998 and 5th October 1998, stating that goods delivered to them by the Defendant, consisting of 75 bales and 125 bales of cotton yarn respectively, are of inferior quality, for reasons listed, and saying : "Should our buyer sustain any loss on same, we will hold you fully responsible for it."; the second is a report from The Hong Kong Standards and Testing Centre Ltd. dated 20th January 1999, which shows that a sample of yarn of "JH" brand, which for the purposes of these proceedings I take to be from the goods supplied, fails the "Breaking Load" test by some 15.5%, and states that it is not up to the standard of "Commercial Requirement". Interestingly it passes the "Thin places" and "Thick places" tests, which was one of the complaints from the customer.

12. To deal with the letters first, I note a number of matters. First, there is only one customer, not the customers referred to by Mr. Chan. Either this was indeed the only customer who was supplied with these goods and complained, or others were also supplied from whom we have no evidence of complaint. The latter will be relevant in considering the second alternative defence put forward. Second, the customer is not rejecting to goods as totally unmerchantable, merely saying that if there is a problem they will hold the Defendant responsible. Thirdly, the Defendant has produced no evidence that there was any further complaint of a loss being made by the customer or their buyer, or the goods being returned. It would appear that, in spite of the complaint, the sale was successful and the goods used without loss.

13. As to the report, this does not go so far as to say that the goods cannot be used. At most they are of an inferior quality, and particularly in the light of the evidence relating to the one customer who we know was supplied, apparently successfully, on its own the report does not support a claim that the goods are wholly unmerchantable.

14. In any event there has been no attempt to reject the goods by the Defendant. Indeed, Ms. Yi says that, after the cheques were dishonoured, the Plaintiff suggested to the Defendant that the goods could be returned if they could not pay. In the Defendant's latest affidavit filed three days before this hearing, this was not denied. Yet no part of the goods has been returned or any offer by the Defendant to return them made.

15. I am according satisfied that the evidence here falls far short of showing any arguable case that the goods supplied had no commercial value or were of such unmerchantable quality that there was total failure of consideration.

Quantified partial failure of consideration

16. The authorities on the question of whether this provides an arguable defence to an action on a bill of exchange are few and inconclusive. The latest that I was referred to was that of Suen Ho Sun v Kamenar International Ltd. [1989] 1 HKR 135. There Hunter JA, in considering what he describes, at p. 141, as "a grey area of the law, where there is a good deal of real ambiguity as to what has to be proved to establish this defence of quantified partial failure.", reluctantly gave conditional leave to defend on the facts of that case, expressing doubt as to whether they really did amount to a quantified partial failure of consideration defence, or whether they were no more than a dressed up unliquidated damages claim.

17. For it is clear that unless the claim by the Defendant is a matter of definite computation rather than unliquidated damages, there can be no arguable defence.

18. As Lord Wilberforce said in Nova (Jersey) Knit v. Kammgarn Spinnerei GmbH [1977]1 W.L.R. 713, at p. 720:

" I take it to be clear law that unliquidated cross-claims cannot be relied upon by way of extinguishing set-off against a claim on a bill of exchange...... As between the immediate parties, a partial failure of consideration may be relied upon as a pro tanto defence, but only when the amount involved is ascertained and liquidated...."

19. And further emphasized by Lord Russell of Killowen at p. 732:

" It is in my opinion well established that a claim for unliquidated damages under a contract for sale is no defence to a claim under a bill of exchange accepted by the purchaser: nor is it available as set-off or counterclaim. This is a deep rooted concept of English commercial law. A vendor and purchaser who agree upon payment by acceptance of bills of exchange do so not simply upon the basis that credit is given to the purchaser so that the vendor must in due course sue for the price under the contract of sale. The bill is itself a contract separate from the contract of sale. Its purpose is not merely to serve as a negotiable instrument, it is also to avoid postponement of the purchaser's liability to the vendor himself, a postponement grounded upon some allegation of failure in some respect by the vendor under the underlying contract, unless it be total or quantified partial failure of consideration."

20. It is therefore clear that, on the authorities available, it may be possible to have an arguable defence on partial failure of consideration in the very narrow circumstances envisaged in those authorities, that a definite computation of what is claimed to be that partial failure of consideration is possible and available on the facts, that, in effect, the Defendant's claim is ascertained and liquidated.

21. I turn then to the situation here.

22. First of all, how much of the 500 bales of yarn is it contended is of no value and for which the Defendant is entitled to claim to set off the full purchase price? It is not in dispute that 200 bales have been sold on to the Defendant's buyer, with no evidence, in spite of the letters of complaint, of any rejection or even loss. So the Defendant can hardly claim the price of those.

23. What of the rest? As I have noted above, Mr. Chan, the director of the Defendant, said in his affidavit that a portion of the cotton yarn was resold by them to their customers, in the plural, and the word is repeated four times in the same paragraph in his first affidavit and three times in paragraph 3 of his second. Yet we have evidence here of complaints by only one customer. There is nowhere in the affidavit evidence, or in the Defendant's pleaded case in the amended defence, any statement as to whether or not any other part of the goods in question were sold on, and no evidence as to how much of them remain in the Defendant's possession.

24. Even if I were to accept that there were 300 bales lying unsold in the Defendant's warehouse, can I assume, on the basis of the test report that these are of no commercial value whatsoever, and in effect a total loss?

25. I regret that I cannot. We have already seen that part of the same consignment has apparently been successfully sold and used, and the report itself does not go so far as to claim that the yarn is of no commercial value. It says merely that the results of the tests are "not up to the standard of Commercial Requirement with respect to the related test(s)".

26. So where is the "definite computation" of the Defendant's claim? They cannot point to a precise amount of the goods which they say they cannot sell, and cannot, on the evidence, show anything more than that the goods may be of inferior quality, but short of being totally unmerchantable.

27. This can at best only give rise to a claim for unliquidated damages, which does not afford a defence on a claim for a dishonoured cheque.

Conditional delivery

28. The contract here contains express terms as to payment, namely "45 days post-dated cheque" and that is precisely what, eventually, the Defendant tendered. The cheques themselves were delivered in payment of the purchase price and are on the face of them unconditional orders in writing to the Defendant's bankers to pay the sum stated on the dates specified.

29. The Defendant's case on this is that their Mr. Chan only tendered the two cheques on the condition that "should there be any dispute regarding the quality of the cotton yarn, the Plaintiff must not present the cheques for payment unless and until the dispute was resolved by the parties by negotiation."

30. In order to establish that delivery is conditional, evidence may be admitted that there was no delivery by the Defendant with the intention of transferring property in the cheque, or that the delivery was subject to the fulfilment of a condition suspending the operation of the instrument - see Byles on Bills of Exchange. But the leading authorities are clear that attempts to alter the terms of payment are not admissible in evidence where they are inconsistent with the written instrument.

31. Here we have only the assertion of the Defendant that the cheques were delivered subject to the fulfilment of a condition, and the question next arises as to whether that assertion is, is the circumstances of this case, credible.

32. I regret that I do not find it to be so. It is clear that the Plaintiff was contractually entitled to receive the cheques upon delivery, and there is no evidence, again apart from the Defendant's bald assertion, that this term was ineffective as a result of previous course of dealings. Further, there was no suggestion at the time the cheques were delivered that the yarn was anything less than the quality the Defendant expected, and again there is no evidence that previous dealings had led them to have any suspicion as to that quality.

33. The only other matter raised on this by the Defendant was the payment of RMB80000 to the Plaintiff on 14th September 1998. It was contended that this was evidence that some sort of "earnest money" was paid pending resolution of the dispute. I do not find this credible either. At that time the Defendant already owed a considerable sum of money on the first dishonoured cheque, and the obvious conclusion is that any payment made was in part payment of what was owed.

34. In the circumstances I am satisfied that the evidence does not disclose an arguable defence under this head.

35. This appeal is accordingly dismissed with costs to the Plaintiff to be taxed.