XCHRX PROSPERITY LAMPS & COMPONENTS LTD. v. ROTEGEAR CORPORATION LTD.

HCA13203/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.13203 OF 1999

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J U D G M E N T

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The appeal

1. This is the defendant's appeal against the decision of the Master who granted judgment to the plaintiff in the sum of $1,965,514 with interest and costs.

The background

2. The plaintiff's claim is based on three cheques drawn by the defendant in favour of the plaintiff. They were dishonoured upon presentation for payment. The parties had a contractual relationship. The plaintiff claims that it had sold and delivered material for electrical installation to the defendant and the defendant had failed to pay for the balance of the goods. The defendant, on the other hand, contended that the parties had entered into a joint venture agreement to carry out a building project and it claims for money due from the plaintiff from the joint venture. The dispute is not a matter that needs to be resolved for the purpose of this appeal.

The defence

3. The defendant's defence to the cheques is this. Ms Lily Chang of the plaintiff informed Mr Hugh Wong of the defendant that she was pressed by the accounts department of the plaintiff to recover money advanced by the plaintiff for the project. She asked Mr Wong to do her a favour by issuing post-dated cheques to the plaintiff so that she could show the cheques to the accounts department in order to alleviate the pressure on her.

4. Mr Wong told her that according to the terms of the joint venture agreement, the defendant was not liable to make payment to the plaintiff out of its own pocket. The defendant was only required to make payment to the plaintiff after it received interim payment from the contractor. However, at the requests of Ms Chang, Mr Wong agreed to issue the post-dated cheques to the plaintiff but told her that the said cheques were drawn and delivered to her for the purpose of showing them to the accounts department in order to alleviate the pressure on her. The plaintiff should not present the cheques for payment unless and until the contractor had made payment to the defendant and without the prior consent of the defendant. Ms Chang agreed. The contractor failed to pay the defendant and as a result the defendant is not liable to the plaintiff. The allegations are denied by the plaintiff.

Unconditional order for payment

5. The starting point is that a cheque is an unconditional order in writing requiring the bank to pay on demand, or at a fixed or determinable future, a sum certain in money to a specified person : sections 3 and 73(1) of the Bills of Exchange Ordinance ("the Ordinance").

6. The parties in this case are business people engaged in a commercial venture. It is reasonable to assume that the parties will know the nature of a cheque. It is astounding that the defendant would simply issue cheques to the plaintiff in order to alleviate the pressure that Ms Chang might have from the plaintiff.

7. Further, according to the defendant's own letter of 30 September 1998, the post-dated cheques issued by the defendant to the plaintiff were actually taken into account when the defendant calculated the balance of the money that were due to the plaintiff. This really shows the incredible nature of the defence now relied by the defendant. Their cheques are clearly intended to be used as real instruments of payment.

8. It is submitted that two of the cheques dated 31 December 1998 and 31 January 1999 respectively were only presented on 12 July 1999. This is about six months after the date of the cheques. It is submitted that the delay in presenting the two cheques supports the defendant's case about the oral agreement.

9. While there may be a banking practice in Hong Kong that banks will refer to the drawer cheques that were presented after six months of the due dates, there really is no law that prohibits such a presentation. In any event, on the facts of this case, I do not find that the delay in presenting the two cheques would support the defendant's contention.

Section 21(2)(b)

10. Mr Wong, counsel for the defendant, relied on section 21(2)(b) of the Ordinance which provides that as between immediate parties, the delivery may be shown to have been conditional or for a special purpose only, and not for the purpose of transferring the property in the bill. The case of Plaza Co. & Ors. v. Tso Kar Yin [1959] HKLR 390 was relied upon. In an action on a promissory note, it was held that a triable issue had been raised regarding the circumstances in which the note was executed. In that case, it was suggested that there was a joint venture agreement between the parties.

11. Ken Kee Securities Co. v. Wong Ying Cheong (No.1) [1973-76] HKC 55, although not relied upon, was cited in Mr Wong's list of authorities. In that case it was said that there was an agreement between the parties that the cheques would be held as security and would not be presented until an agreed day. It was held that whether the cheques were handed over as an escrow was a matter of fact and needed to be tried.

Parol evidence rule

12. The real question is whether the oral evidence regarding how the cheques came to be issued is admissible at all. This point was not addressed in either Plaza Company or Ken Kee Securities. In Chalmers and Guest on Bills of Exchange, Cheques and Promissory Notes, 15th Ed. (1998) at para.380, the authors stated this :

" The defect in delivery may be established by oral evidence. The parol evidence rule (see infra) does not apply."

And then they said :

"... In practice, however, it may be difficult to distinguish between situations where it is orally agreed that the bill is not to become operative pending the fulfilment of a condition (in which case oral evidence of the conditional delivery will be admitted) and situations where the bill is delivered operatively but subject to an oral agreement in defeasance of a party's liability on the bill (in which case oral evidence to qualify the terms of the written instrument will normally not be admitted)."

Then at para.385, it is stated as follows :

".... However, since the contracts of the parties to a bill or note must be in writing, oral evidence is in principle excluded by the operation of the rule, even as between immediate parties to the instrument. There is, perhaps, less injustice in this than at first sight appears. In view of the formal nature of negotiable instruments, it is arguable that to admit such evidence would undermine the certainty and finality which ought to attach to each party's promise on the instrument. 'What is to become of bills of exchange and promissory notes', said Lord Ellenborough, 'if they may be cut down by a secret agreement that they shall not be put in suit?'"

Then at para.386, it is stated as follows :

" Most cases where the parol evidence rule has been applied are cases where a party to a bill or note has sought to qualify his absolute undertaking on the instrument by adducing evidence of a contemporaneous oral agreement in defeasance of that undertaking, that is to say, that his liability is to be enforceable against him only in certain contingencies or that it is to be postponed to a time later than that expressed on the face of the instrument. Since the effect of such evidence would be to contradict the terms of the written instrument, it is inadmissible."

Oral agreement in defeasance of the undertaking

13. In the present case, the effect of the alleged oral agreement is to render the cheques to be meaningless. They are not to take effect until some third party had paid the defendant first. In other words, if the defendant was not paid by the third party, it did not need pay the plaintiff at all. This is not a condition suspending the operation of the cheques but in defeasance of the undertaking to pay. This clearly falls foul of the parol evidence rule. Oral evidence is not admissible because it contradicts the terms of the written instruments, namely the cheques. The situation is covered in Great Sincere Trading Co. Ltd. v. Swee Hong & Co. [1968] HKLR 660, when Mills-Owens J at p.664 stated this :

"It is as if when the cheque was handed over the defendants said this is a cheque which is not a cheque unless we are put in funds."

See also Chitty on Contracts 28th Ed. Vol 1, para. 12-099 and Neo-Concept Industrial Co. Ltd v. Sportex Industrial Ltd [1992] 2 HKC 452.

14. The dispute relating to the underlying contract between the parties, in my view, has no relevance to the claim on the cheques which are separate and distinct contracts.

Conclusion

15. In my view, the Master was correct to give judgment to the plaintiff, the appeal is accordingly dismissed.