PHONEYORK CO LTD v. CHESSON INTERNATIONAL (HOLDINGS) LTD

HCA 2192/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2192 OF 2007

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J U D G M E N T

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1.  This is the plaintiff’s appeal from the decision of Master S Kwang refusing its application for summary judgment and giving the defendant unconditional leave to defend.

2.  The plaintiff sues on a dishonoured cheque for $7.9 million.  It says the cheque was given by the defendant for payment of the initial deposit for the sale and purchase of an old industrial building in Kwun Tong, which is owned by the plaintiff.  The price was $158 million, and the initial deposit was 5% of that price.

3.  The plaintiff relies on a preliminary sale and purchase agreement dated 29 September 2007 and signed by both sides in support of its case.  The preliminary agreement clearly sets out the parties, the property, the total purchase price, the various deposits to pay, the payment and receipt of the initial deposit (by the subject cheque) as well as some additional terms.  Two estate agents in the employ of Centaline Property Agency Limited were responsible for bringing the parties together to the deal.

4.  The defendant’s case, which is given by its controlling director and shareholder, Mr Kai Yau Ming, is quite different.  Mr Kai is no doubt a successful and seasoned businessman, who is also greatly dedicated to promoting Chinese culture, particularly Chinese calligraphy and painting.  In 2007, he wanted to buy suitable premises in Kwun Tong for holding art and culture exhibitions.  The two estate agents introduced the subject industrial building to him for consideration.  Mr Kai had a site visit of the building and was generally interested.  But he wanted to meet with the vendor (or more correctly, the person owning and controlling the vendor company) for face-to-face negotiations.

5.  The agents told him that the “owner” was an elderly gentleman in his eighties, and he was not prepared to meet with potential buyers for negotiation unless it was really a keen and sincere potential buyer.

6.  At that time, the asking price for the building was $160 million, which Mr Kai found to be way too high; a bank valuation had put the property at around $110 to $120 million.  But the owner appeared to be quite firm on the price.  The asking price was only nominally reduced from $160 million, first to $159.8 million, and then to $158 million, after negotiations through the agents.

7.  This made Mr Kai even more eager to meet with the owner to negotiate with him face-to-face about the price.  The agents told him, however, that he should first sign a preliminary sale and purchase agreement and write a cheque for the initial deposit to show his sincerity to the owner, before the owner would be prepared to meet with him. 

8.  Upon the repeated urging of the agents to Mr Kai to first sign a preliminary agreement and write a cheque so as to secure a meeting with the owner, Mr Kai eventually agreed to do so on 29 September 2007.  The preliminary agreement that the agents asked Mr Kai to sign was a standard Centaline agreement, which was already pre-signed by a director of the plaintiff.  As mentioned, it set out a total purchase price at $158 million, with an initial deposit of $7.9 million payable upon signing of the preliminary agreement.  It contained additional terms and provided for the sale and purchase subject to existing tenancies.

9.  Mr Kai signed the preliminary agreement and issued a company cheque for $7.9 million.  However, he made the two agents sign an “explanatory memorandum”, which he caused his secretary to prepare, to set out the circumstances for giving the cheque to the agents.  The memorandum reads: 

“志成國際（集團）有限公司

關於購買鴻圖道82號安達工業大廈的情況說明

29 Sep 2007

1. 本公司開出恒生銀行373725#支票，金額$7,900,000.-（柒佰玖拾萬元正）該支票只作購買關於購買鴻圖道82號安達工業大廈的預付訂金專款專用，不可作其他用途。

2. 據了解，該業主曾委託多間地產商出售該處物業，根據慣例，購買雙方在成交後都須支付1%的佣金給中介人。因該物業的業主售价太高，我們買方已感到困難，因此，該物業如能完成交易，我方只能擔負0.5%的佣金。

3. 本公司要求能儘早與業主見面，具體商討有關購買事宜。

4. 此支票僅用於該大廈出售價港幣1.58億方為有效。

5. 交票日期2007年9月29日，若超過30天不成功，需於10天內退票。

志成國際（集團）有限公司:  [defendant’s company chop]

中原地產中介人簽名:   [signature]”

10.  That was on 29 September 2007.  Still not satisfied with having got the agents sign the explanatory memorandum, Mr Kai through his secretary had the agents return to his office together with the cheque on 2 October to add endorsement on the back of the cheque.  The endorsement was essentially identical to paragraphs 1, 4 and 5 of the explanatory memorandum.

11.  According to Mr Kai, the estate agents assured him that the signed preliminary sale and purchase agreement as well as the cheque would only be shown to the owner so as to demonstrate the defendant’s sincerity to negotiate and buy the building.  They were not to be handed over to the owner nor were they intended to be effective and binding there and then.

12.  The agents, according to Mr Kai, had promised to arrange a meeting for him with the owner of the building for negotiation.  But that promise did not materialise.  Rather, on 3 October 2007, the cheque was presented for payment and it was not honoured.  “Refer to drawer” was the response given to the plaintiff’s banker for not honouring the cheque.  It was presented for the second time on the same day, and again no payment was obtained.  This time, the plaintiff was told by its banker: “refer to drawer, present after 8 October 2007”.  The plaintiff presented the cheque for payment for a third time on 8 October 2007, and this time payment was countermanded.

13.  According to Mr Kai, he caused enquiries to be made with relevant government departments on 2 October 2007 and found out that the building could not be used for exhibition of Chinese calligraphy and painting.  Moreover, he discovered that there were still tenants operating inside the building and vacant possession could not be delivered.  Furthermore, the building was more than 37 years old and it would take at least 2 or 3 years to repair and rebuild the building to a desirable state and therefore it could not be used immediately.  Mr Kai claims that all these constituted misrepresentations by the estate agents (as agents for the vendor) regarding whether the building was fit for use as an exhibition centre and whether vacant possession would be delivered upon completion.

14.  The defendant therefore runs a number of defences, namely, total failure of consideration, non-delivery of the cheque, conditional delivery, payment of the cheque being conditional as well as misrepresentations.

15.  It seems to me that the appeal turns on whether Mr Kai’s story is believable.  That is the bottom line of the matter.  For Mr Edward Chan SC, appearing for the plaintiff together with Mr Lee Tung Ming, accepts that if Mr Kai’s story is true, and the cheque is never meant to be given to the plaintiff, there is simply no or no effective delivery of the cheque to the plaintiff and the plaintiff cannot sue on it.

16.  Turning to whether the defendant’s story is believable, it is necessary to remind oneself that one is not trying the case.  The question is whether the story is believable at this stage, rather than whether it is to be believed.

17.  At first blush, the plaintiff’s case looks overwhelming enough.  As Mr Chan has lost no time to point out to the Court, we have here a signed preliminary sale and purchase agreement and the cheque is for the payment of the initial deposit specified in the agreement.  Moreover, when one looks at the explanatory memorandum, paragraphs 1 and 4 are wholly consistent with the cheque being issued for payment of the initial deposit for the purchase of the industrial building for $158 million.  Paragraph 2 of the memorandum again confirms the sale of the property – the purchaser there is saying that the price is too high and therefore the estate agents’ commission from the purchaser’s side is only to be 0.5% of the sale price.  Mr Chan says paragraph 3 is neither here nor there because there could be many other matters to be discussed amongst the vendor and purchaser, apart from those terms already agreed in the preliminary sale and purchase agreement and the additional terms attached to it.  As for paragraph 5, Mr Chan contends that it provides for the contingency where despite the defendant’s signing the preliminary sale and purchase agreement and issuing the cheque for the initial deposit, no binding agreement could be concluded because prior to communication of the (purchaser’s) acceptance to the vendor, the vendor could have withdrawn the offer for sale or could have agreed to sell the building to someone else through other estate agents.

18.  Most importantly, as Mr Chan has also pointed out, the memorandum did not say that the cheque was only written and the preliminary agreement signed to show sincerity on the part of the defendant, or that they were never meant to be handed over to the vendor.

19.  Mr Chan also submits that when the cheque was returned on the second occasion after it was re-presented for payment, instead of countermanding payment of the cheque, what the defendant did was to tell the plaintiff, through the banks involved, to re-present the cheque for payment after 8 October 2007.  Again, this is quite inconsistent with Mr Kai’s present story.

20.  I can see the full force of all these points.

21.  I could add one further point against Mr Kai’s story, ie that if the purpose of the meeting with the owner of the building was to negotiate the price with him, then signing a preliminary agreement for the purchase of the building at $158 million and writing a cheque for the initial deposit at 5% of that price would certainly not help the purchaser bargain down the price of $158 million insisted upon by the vendor.  Nor would it show any sincerity to the vendor by signing the preliminary agreement and issuing the cheque if the true intention of the defendant was to meet with the vendor and then ask him to reduce the price.

22.  However, the test, at this stage, remains whether Mr Kai’s story is believable, not whether it is to be believed.

23.  I agree with Mr Daniel Fung SC, Mr Gary Lam with him, for the defendant, that the undeniable fact in the present case, which makes it stand out from other dishonoured cheque cases, is that the defendant has prepared the explanatory memorandum as well as made the endorsement on the back of the cheque.  Paragraph 3 of the explanatory memorandum specifically says that the defendant requested a meeting with the owner as soon as possible so as to discuss or negotiate substantially with the owner matters relating to the purchase of the building (本公司要求能盡早與業主見面，具體商討有關購買事宜).  It does arguably suggest that the negotiations between the parties have not been completed.  Of course, it could mean that the defendant wanted to meet with the plaintiff and negotiate on other terms not already covered by the preliminary agreement – in that sense, paragraph 3 would not be inconsistent with there having been, or there being going to be (subject to communication of the acceptance to the vendor), a binding agreement between the parties.  However, it could, arguably, also mean that the parties had not yet concluded any binding agreement, and the defendant was requesting for a meeting as soon as possible to negotiate with the owner directly.

24.  Paragraph 5 seems also to support Mr Kai’s story to an arguable extent.  It speaks of the estate agent returning the cheque (退票) – as opposed to returning any money – to the defendant if the matter is not successful within 30 days (交票日期2007年9月29日，若超過30天不成功，須於10天內退票).  The parties are ad idem that the 30 days period refers to the conclusion of a binding agreement, rather than the completion of the sale and purchase of the building, within that period of time, for quite obviously, completion would normally require a period longer than 30 days.

25.  If there has already been made, upon the signing of the preliminary agreement by the defendant (the plaintiff having signed it earlier), a binding agreement between the parties, then paragraph 5 is difficult to understand.  Mr Chan has argued in his reply submission that no binding agreement came into existence when the defendant signed the preliminary agreement, even though the plaintiff had signed it first.  It was because the defendant’s acceptance of the plaintiff’s offer would still need to be communicated to the plaintiff.  In the meantime, the plaintiff could have withdrawn the offer, particularly if he had managed to sell the property through another estate agent at a more attractive price.  That is certainly a fair enough suggestion.  However, my task here is to see whether paragraph 5 cannot be read, arguably, in any other way, in order to determine out whether Mr Kai’s story is believable at all.

26.  In my view, if what is preventing the conclusion of a binding agreement between the parties was merely the communication of the acceptance of the offer to the vendor, the period of 30 days given in paragraph 5 would seem to have been far too long.  Rather, again arguably speaking, paragraph 5 seems to suggest that at the time of writing the explanatory memorandum, no binding agreement had yet been concluded, and the estate agents were given a period of 30 days to bring about the conclusion of the agreement between the parties.  And when read together with paragraph 3, the way forward was to arrange a meeting between the parties as soon as possible.

27.  In my view, this possible reading of the memorandum is also supported by paragraph 2.  Paragraph 2 simply says that the estate agents are only to get 0.5% commission “if” the transaction can be completed (該物業如能完成交易，我方只能擔負0.5% 的佣金).  Of course, here, the relevant point is the completion of the transaction (完成交易) rather than conclusion of a binding agreement.  But it must be remembered that the explanatory memorandum is not a legal document drafted by lawyers.  Whilst to a conveyancing lawyer, concluding a binding agreement and completing the transaction are two distinct and separate matters, it is arguable that to a layman, this distinction may not be apparent.  For the purposes of deciding whether a believable story has been put forward, paragraph 2 is capable of meaning that at the time of the explanatory memorandum, no agreement had yet been concluded and therefore the obligation to pay commission was still an “if”.

28.  Paragraph 2 is supportive of Mr Kai’s story in another sense.  Given that the preliminary agreement has already set out the amount of commission payable to the estate agents, paragraph 2 of the memorandum is wholly redundant if there has been made a concluded agreement between the parties, or if there is going to be one subject to communication of the defendant’s acceptance to the vendor.  Paragraph 2 makes much more sense if the negotiations have not yet been concluded and the purchase price is still a matter of negotiation between the parties.  It provides that the estate agents’ commission from the purchaser’s side is to be at 0.5% of whatever may eventually be the purchase price after further negotiation.

29.  As for paragraphs 1 and 4, paragraph 1 is, arguably, neutral enough because it simply restricts the cheque to payment of the initial deposit for the purchase of the building in question, but not the purchase of any other properties, even if they are owned by the same owner.

30.  As for paragraph 4, there is an ambiguity as to whether the price $158 million is a transaction price or asking price.  The Chinese term used is “出售價”, which can mean either.  If it means the asking price, then paragraph 4 is not inconsistent with the defendant’s case.  The cheque is given to the estate agents to show sincerity to the owner only if the owner is prepared to sell at $158 million (or less – after further negotiations with the defendant), but not if the vendor wants any higher price – after all, according to the evidence, it was a rising market then.

31.  Mr Chan contends that does not make sense.  What matters is the price agreed upon by the parties after negotiation, rather than the vendor’s asking price.  If the term means the asking price, there is no need to include paragraph 4 in the memorandum in the first place.

32.  That is a fine point by itself, but I am not here trying the case.  Nor do I find it wholly absurd to include paragraph 4 in the memorandum if “出售價” means the asking price.  At the lowest, including something redundant or quite meaningless in the memorandum, merely out of abundance of caution, does not by itself turn the whole story of the defendant unbelievable.  But more importantly, the asking price could conceivably be of significance to the defendant.  If the vendor were to raise the asking price to one that the purchaser should find it wholly impossible to accept, there would simply be no point in meeting with the vendor to negotiate.  It would be a waste of time and the purchaser might as well start looking for other properties.

33.  All this is a matter of evidence and argument.

34.  Mr Chan argues that even the defendant’s counsel have not pleaded “出售價” to mean the asking price in the defence.  The pleaded translation simply treats $158 million as the purchase price.  However, I note that in Mr Kai’s own affirmation (paragraph 19) where he deals with paragraphs 3 to 5 of the explanatory memorandum, he says “this cheque is only to be used and valid for the sale of the premises at $158 million”.  I do not find his understanding of paragraph 4 to be necessarily inconsistent with reading “出售價” as the asking price.

35.  In any event, I find all these very fine arguments more suitable to be ventilated at trial rather than at this Order 14 stage.  The test, as I have said many times, is whether the defendant’s story is believable.  Whether it should be believed is a matter for the trial judge.

36.  As for the suggestion that the cheque should be re-presented after 8 October,  I have the impression that it was linked to some extent to the estate agents’ promise at one stage to arrange for a meeting between Mr Kai and the owner on 5 or 8 August.  The evidence from Mr Kai on this aspect is far from satisfactory.  I have fully borne this in mind.  But having looked at the matter in the round, I am unable to say that his story is unbelievable and should be rejected summarily.

37.  As for the question I raised earlier, namely, how do the signing of the preliminary agreement for the sale and purchase of the building at $158 million plus the issuing of the cheque for $7.9 million show sincerity to the vendor, and how would it enable the purchaser to bargain down the asking price of the vendor in the face-to-face negotiation that he so much wanted to have, again the bottom line is whether the defendant’s story is so unbelievable that it should be rejected summarily.  I will not repeat the logical difficulty with the defendant’s case.  But is it unbelievable?  On reflection, it is not.  First, logic is not everything and people, including experienced businessmen, do not always behave in the most logical manner.  When something as abstract as sincerity is concerned, application of strict logic could be dangerous and misleading.  Secondly, it is conceivable that Mr Kai was so confident in his own ability to persuade the owner to reduce the price if only he could have a chance to see him that he was prepared to sign the preliminary agreement and write the cheque for the initial deposit even though he found the price (namely $158 million) to be far too high.  He was prepared to do so because that was the only way, so he had been told by the estate agents, for him to secure a meeting with the owner.  And he sought to protect his own position by requiring the estate agents to sign the explanatory memorandum and even to bring the cheque back to him a few days later to add the endorsement on the back of the cheque.

38.  I accept that the defendant could have put everything beyond dispute by stating clearly in the memorandum as well as on the back of the cheque that the cheque was merely to be shown to the vendor to show sincerity.  But that is not the question.  The question is whether the failure to do so renders the whole story unbelievable.  In my view, the answer is “no”.  There could be explanations why a person sometimes fails to do even the most obvious thing.  It is really a matter for trial.

39.  In those circumstances, I cannot reject summarily Mr Kai’s assertions as being wholly unbelievable.  All the arguments and counter arguments must be tested at trial.

40.  That being the case, I am of the further view that the defendant has an arguable defence as a matter of law.  If the defendant’s story is accepted, the cheque was never meant to be handed over to the vendor.  Put in legal terms, there was no delivery or effective delivery.  Or, delivery was conditional.  Moreover, as no binding agreement for the sale and purchase of the building was intended, there was also a total failure of consideration for the cheque.

41.  Given my conclusion, I need not deal with the other defences also raised on behalf of the defendant.

42.  It is relatively rare for the court to give leave to defend in a dishonoured cheque case.  But each case depends on its own facts and the applicable principles are the same.  I have come to the conclusion that the Master’s decision was indeed the right one.  The defendant has shown an arguable defence and it is not shadowy.  There is no question of imposing conditions.

43.  I order that the appeal be dismissed.  I make a costs order nisi that the costs of the appeal be paid by the plaintiff to the defendant, with a certificate for two counsel.