XCHRX PACIFIC CONSTRUCTION HOLDINGS LTD. v. SHAUN BOWERS

HCA4599/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.4599 OF 1999

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J U D G M E N T

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1. This is an appeal against a decision of Master S. Kwan on 21 January 2000 when she dismissed the plaintiff's summons for summary judgment pursuant to Order 14 RHC and gave the defendant unconditional leave to defend. The appeal will be allowed.

BACKGROUND

2. The defendant was the former Managing Director of the plaintiff. In or around July 1998 a dispute emerged between them concerning the alleged improper use of company funds by the defendant. Several months of negotiations followed concerning the amount of money which the defendant had misappropriated and the appropriate method of restitution. These negotiations culminated in meetings over two to three days just prior to Christmas 1998.

3. On 24 December 1998 the parties reached a settlement. A "Restitution Agreement" was signed which annexed a Promissory Note, also signed. By the agreement the defendant acknowledged he had, without authority, appropriated $678,281 of the company's money. He further agreed to be removed as a Director. He agreed to repay $315,000 immediately and the balance by three installments. The agreement further guaranteed the defendant three months future employment with the company on a probationary basis but not as a Director. The annexed Promissory Note is headed "Acknowledgement of Debt and Promissory Note". It is a deed by which to the defendant promised to pay the agreed sum together with interest. It was signed, sealed and delivered.

4. In the three months following the signing of the agreement and the Promissory Note, the defendant had access to company records and accounts. In that time he prepared a claim against the company amounting to $1.27 million in excess of the balance due on the Promissory Note. He also refused to make financial disclosures which the agreement stipulated. The company investigated the claim. Its investigations resulted in a conclusion that the claim was false and based, substantially, on claims made by other Directors of the company and of the defendant's wife. On 5 March 1999, as a result of its investigations, the plaintiff made a call on the Promissory Note.

THE PLAINTIFF'S CASE

5. The terms of the settlement were reached after lengthy negotiations. The agreed figure which the defendant acknowledged was a compromise. As such it is an agreement of accord and satisfaction. Claims by either side which pre-date the agreement are extinguished. The defendant repudiated the agreement. The plaintiff called the Promissory Note to which there is no defence.

6. In this court's judgment, the plaintiff's case must succeed. There is no credible argument against it. The following points are made in support.

(a) The plaintiff has produced all the necessary evidence. There is no dispute that the Restitution Agreement was signed. There is no dispute the Promissory Note was signed. There is unchallenged evidence that the agreement was repudiated and the note dishonoured.

(b) There was obvious consideration for the agreement. The defendant was given time to pay the balance and was given future employment. In addition there was a forbearance to sue by the plaintiff.

(c) No claim is made that there was undue influence prior to the signing. There is no claim of oppression.

(d) The defendant concedes he took informal legal advice prior to signing the agreement. He was a mature businessman who plainly understood the negotiations and the settlement and the binding nature of the agreement.

(e) The defendant has, very sensibly, abandoned a claim he was intoxicated at the material time.

(f) The defendant's "defences" have changed as the case has progressed. He firstly claimed that there were mistakes made when the agreed sum due was finalized. Even if correct this would be irrelevant as the agreement was a compromise. In any event the defendant, in a late affidavit claimed, he had in fact loaned money to the company. Neither suggestion would provide a defence to the Promissory Note and, in any event, no documentary evidence was provided for the latter claim.

7. His third defence is that there was a collateral oral agreement made at the time of the signing of the written agreement, of which the plaintiff is in breach. This is the real crux of his case against summary judgment. I deal with it below.

THE DEFENCE CASE

8. It is submitted that either the agreement contained an express oral term (to review the accounts later and make an adjustment to the figure if appropriate) and therefore the written agreement did not constitute the entire agreement or, in the alternative, there was an oral collateral agreement to the same effect.

9. In support the defence points to various extracts in the defendant's affidavits. The submission continues that, in the circumstances, the Promissory Note was intended to be a form of security for any sums due to the plaintiff. As such, because no satisfactory review of the accounts has been carried out by the plaintiff, the Promissory Note continues to operate as an escrow.

10. The submission that the Promissory Note should be construed as an escrow was rejected in the court below, correctly. There is simply no credible evidence to suggest that the agreement was intended to have anything other than immediate effect. An assertion by the defendant to the contrary does not provide a sustainable defence.

11. The submission which found favour in the court below was that the defendant should have leave to defend because of the contention that a prior collateral agreement to review the accounts after the Promissory Note was signed had been made. The submission continues that if there was a collateral agreement to review later and if the review was properly carried out, it could have resulted in a defence of set off in the defendant's favour which amounts to a triable issue.

12. On an analysis of all the material facts and in the circumstances of this case such a submission should have failed. Such a defence had no prospect of success both in law and on the known facts.

(A) Law

(i) The statement of the law in Chitty on Contracts (28th Edition) is supported by numerous authorities and is as follows :-

"In particular, the contracts of the various parties to a bill of exchange or promissory note must be in writing. It is well established that, even as between immediate parties to a bill or note, evidence will not be admitted to prove an oral agreement to qualify the absolute undertaking of a party on the instrument, for example, to show 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."

(ii) Moreover, this Promissory Note was the result of a negotiated compromise. Any submissions to the contrary are unsustainable on any sensible analysis of the known facts. As such, the law is equally clear. Chitty again :-

"Once a valid compromise has been reached, it is not open to the party against whom the claim is made to avoid the compromise on the ground that the claim was in fact invalid, provided that the claim was made in good faith and was reasonably believed to be valid by the party asserting it ... In order to establish a valid compromise, it must be shown that there has been an agreement (accord) which is complete and certain in its terms, and that consideration (satisfaction) has been given or promised in return for the promised or actual forbearance to pursue the claim."

(iii) Further, the consequence of seeking to prove the collateral agreement is to establish the defence of set-off. If the defendant, in fact, has a counterclaim (the bona fides of which is difficult to discern on the material before the court), it is open to the defendant to pursue it in a separate action. It is not open to him, in the unexceptional circumstances of this case, to plead a set-off. The law is clear :-

"In an action on a dishonoured bill of exchange, or cheque or promissory note, a wholly different practice prevails so far as setting up the defence of set-off or counterclaim is concerned. In such an action, save in exceptional circumstances or upon strong grounds the defendant will not be allowed to set up a set-off or counterclaim for damages for breach of some other contract or the commission of a tort, and the plaintiff is entitled to judgment for the amount of his claim without a stay of execution ... This practice will obtain whether the counterclaim is connected with or arises out of or is independent of the contract in respect of which the bill, cheque or note was given, and whether or not the action is between the immediate parties to the bill. The principle is that a bill, cheque or note is given and taken in payment as so much cash, and not as merely giving a right of action for the creditor to litigate a counterclaim."

(White Book)

(B) Facts

13. In addition to the uncontested facts already referred to, the plaintiff places further reliance on the following matters which question the defendant's credibility. When deciding if the defendant has a credible defence on triable issues, they are matters which the court can, and does, take into account.

(i) His claim now that he never misappropriated company money is a hollow plea in the light of the clear words of the Restitution Agreement in which he acknowledges a debt which has arisen as a result of misappropriation by him.

(ii) The clear words of the company minutes of a meeting held on 19 December 1998 are to the same effect.

(iii) The defendant's original counterclaim of $1.27 million was reduced to a mere $135,798. After the company's initial investigation into the counterclaim 90% of it was found to be without any justification. The defendant accepted this. The plaintiff further claims that the remaining balance is also wholly unjustified.

(iv) The defendant has been able to produce no documentation in support of his claim that he loaned the company $280,692.

(v) Even though it is no longer relied on, the defendant's claim that the Restitution Agreement cannot be binding because he was intoxicated at the time is a pointer to his lack of bona fides. The allegation was never sustainable. He was "clutching at straws" then. He is clutching at different straws now.

(vi) There are other more detailed, illustrations of his lack of credibility, concerning particular transactions and particular expenses claims. It is not necessary to recite these individual examples where the overall picture clearly portrays a litigant who should not be allowed his day in court. To do so would merely delay the inevitable.

14. In conclusion, the application of the unchallenged and/or unarguable facts to the law as outlined hitherto leaves the defendant falling short of even the low threshold necessary to resist an Order 14 application. No triable issue has been raised on the Promissory Note. No credible defence to the plaintiff's claim, who is suing on a Promissory Note which formed part of a compromise, is discernable. Such defences that have been advanced (and there have been more than one) are either untenable at law and/or implausible on a realistic analysis of the factual material.

15. Accordingly, I allow this appeal. There will be judgment for the plaintiff in the sum claimed, namely $363,281.47. Costs and interest are in the court's discretion. The Restitution Agreement does make provision for interest and costs. However it is within the court's discretion to deal with costs and interest in these proceedings in a way otherwise than that provided for in the original agreement between the parties. I do so in the interests of fairness and simplicity. Interest of the judgment sum will be at prime +1% from 24 December 1998 to the date of this judgment. Costs of the appeal and before the learned master, including the costs of the adjournment on 9 March shall be to the plaintiff. This is a costs order nisi.