SUEN HO SUN v. KAMENAR INTERNATIONAL LTD.

--------------------

-----------------------

J U D G M E N T

-----------------------

Hunter, J. A. :

1. This is the defendant's anneal against decision of Deputy Judge Rogers given on 3rd November, when he allowed the plaintiff's appeal from the Master, and gave leave to the plaintiff to enter summary judgment against the defendant for a sum of $676,970.75 on a dishonoured cheque.

2. The facts giving rise to the dispute can be summarised in this way. The parties both deal in angora rabbit hair. In Autumn 1987 the plaintiff had 273 bales of hair, which came from the PRC, for sale. He was apparently looking for the price of US$20 a kg. The defendant acting by the deponent to the two affidavits made on behalf of the defendant a Mr. Parker, carried out an inspection, was not very impressed by the quality, and was not prepared to go higher than US$19 a kg. He wanted a special condition added: that the price would only be 70% of that unless his Italian sub-buyer accepted the consignment as grade 3 angora rabbit hair.

3. There are apparently various grades of angora hair numbered 1 to 4 with the lowest grade being, "ungraded". They are not clearly defined or apparently definable upon the evidence. They are used apparently in the trade. In this case the defendant asserts and the plaintiff denies that the plaintiff was saying that the hair was grade 3. The defendant anon his inspection seems s to have been satisfied that it was not grade 3, but he was apparently hoping to persuade his sub-buyer that it was. It is a slightly bizarre situation in some respects.

4. No contract resulted from that inspection. More talking went on, followed by a second and more careful inspection. On that occasion the defendant took an even poorer view of the quality of the bulk, and was then prepared to offer US$17 for two lots, which was the bulk of the consignment, and US$19 for one lot and again on the same condition as before: namely (I read from the affirmation)

"if the defendant's overseas Italian buyer found that the said goods were below grade 3, the defendant would only pay 70% of the unit price"

It is then asserted by the defendant that the condition was accented and the contract made for the purchase of the whole lot at those two unit prices of US$17 and US$19 The affidavit goes on :

"An agreement was then reached between the plaintiff and myself for the sale and purchase of the said goods on the said condition. Payment for the said goods was agreed to be 70% of the total purchase price by cash and the balance of 30% by a post-dated cheque".

5. Delivery was effected of the whole 273 bales on 13th November. The cash payment of 70% wad duly made. A post-dated cheque was delivered on 21st November post-dated to 4th January apparently with a letter in these terms :

"We enclose herewith a Cashier's Order for HK$1,479,598.41 in your favour in first settlement of our purchase of 273 bales totaling 16,766.83 kg of angora from you. This represent 70% of our total purchase price of HK$2,256,569.16 less our deposit of HK$100,000.00. The balance of HK$676,970.75 will be payable to you on January 4, 1988."

That was the sum for which the cheque was drawn and delivered that date. It is explained in the affidavit that the reason why the cheque was post-dated to 4th January was that it was expected that they would know their Italian buyer's view by that date. The affidavit goes on in paragraph 28 in these terms:

"In the premises there was a clear and mutual understanding between the Plaintiff and the Defendant that the drawing and delivery of the said cheque was subject to a condition precedent that the Plaintiff would only be paid on the said cheque if the said goods were accepted by the Defendant's overseas Italian buyer as Grade 3 Angora rabbit hair, and that the Plaintiff would not present the said cheque for payment unless and until the said goods were accepted by the Defendant's overseas Italian buyer as Grade 3 Angora rabbit hair".

6. What happened thereafter was this. Without any prior initimation of acceptance or rejection from the Italians to the defendant, the defendant countermanded payment of the cheque, so at was dishonoured when it was presented on or about 4th January. Later in January the Italians, upon the evidence put in by the defendant objected to the quality of the goods and said they were not Grade 3 angora. In those circumstances this action was commenced by the plaintiff simply suing on the cheque.

7. Before the judge below two points were taken. First it was said that there was conditional delivery of this cheque within section 21 of the Ordinance and reliance was particularly placed upon paragraph 28 of the affarmation which I have just read. Secondly at was said that there was a total failure of consideration.

8. The judge rejected bot those arguments and in my view he was quite right to do so. As far as conditional delivery is concerned I can see nothing in the evidence filed which starts to make out a true case of conditional delivery of a cheque. It is important to bear in mind that this is a limited defence. This appears from P 373 of the 25th edition of Byles on Bills of Exchange, where the author comments upon the selfsame section which fortunately has the same number in the English Bills of Exchange Act. He says :

"the section allows evidence to be led (other than as against a holder in due course) that there was no delvery by the defendant with the intention of transferring property in the instrument..... or that the delivery was subject to the fulfillment of a condition suspending the operation of the instrument".

9. In my judgment there was no such condition here at all. This cheque was simply delivered as a cheque in part payment of the purchase price, the payment of the "balance of 30%" of the purchase price as the deponent described it. What was really sought to he done here was to vary the conditions of payment by oral agreement. The cheque as it stood was an unconditional order in writing by the defendants to their bankers to pay the sum named to the plaintiff on or after 4th January. When all those oral conditions are read into it, the effect is quite different. It becomes, first, a conditional order to pay, conditional upon acceptance of the goods by the sub-buyer. Secondly it is not an order to pay on or after 4th January; it is an order to nay only after such acceptance happens and is communicated. Thirdly, by a second affidavit, it is said to be an unconditional order to pay unless countermanded earlier by this defendant. This really left the document as totally worthless in the plaintiff's hands.

10. That defence was considered and rejected by the trial judge. He referred to the leading authorities : New London Credit Limited v. Neale [1898] 2 OB 487 where one finds the principle particularly in the judgment of A L Smith, LJ at p 490 and Vaughan Williams LJ at p 491. Hitchings and Coulthurst Company v Northern Leather Company of America [1914] 3 KB 907 a decision of Bailhache J; and thirdly the Hong Kong decision of Great Sincere Trading Co Ltd v Swee Hong and Co [1968] HKLR 660. All of these cases show that attempts like this to alter the terms of payments are quite inconsistent with the written instrument and are not admissible in evidence.

11. Secondly the judge rejected the plea of total failure of consideration. Again in my judgment he was right to do so. This cheque was paid as port and parcel of the total purchase price of these goods. The goods were retained. There has been no attempt to reject, no assertion of any right to reject. So that it is impossible to fault the judgment he gave upon the basis of the arguments presented to him. It is also, by a strange coincidence, impossible to fault the last page of his judgment when he said that having regard the problems facing this defendant he would only have granted conditional leave to defend upon payment to the full sum into Court.

12. In this Court Mr Robert Tang has taken a new point as far as this case is concerned. He advances a defence of quantified partial failure of consideration. The argument is a very fine one and a very narrow one. He does not seek to criticise the judge's closing remarks. He does not seek to assert that this is other than a very difficult defence. He does not seek to assert that he is entitled to more than conditional leave to defend, conditional upon the whole sum be paid into Court. But he says, on the authorities and on the facts asserted by Mr Parker in his affidavit, he may have only a shadowy arguable defence, but he has an arguable defence. Or putting it the other way round, this Court in these circumstances cannot say positively that there is no arguable defence.

13. The way in which it is put is this. This is a contract for the payment oof a price of 100% liable to be reduced to 70% if the goods in effect are rejected as Grade 3 by the Italian sub-buyer. It is said that that either produces two contract prices and in the events alleged here the contract price is 70%; or, and it comes really to the same thing, this 30% is a liquidated allowance (I carefully avoid the word "damages") - a liquidated allowance against the purchase price to recognise defects in quality which were to be solely decided by this Italian suh-buyer.

14. One only has to state that proposition to nee that it is a somewhat bizarre one. But Mr Tang seeks to accommodate all those problems of credibility within his concession about shadowy defence. He says : Look at what is said: this amounts to an arguable defence in law if it is made out.

15. He starts by drawing our attention to dicta in the House of Lords in Nova (Jersey) Knit Limited v Spinnerei G.m.b.H [1977] 1 WLR 713. The dicta start at p 720 where Lord Wilberforce said this :

"I take it to be clear law that unliquidate of cross-claims cannot be relied upon by way of extinguishing set-off against a claim on a bill of exchange : Warwick v Nairn (1855) 10 Exch 762; James Lamont & Co Ltd v Hyland Ltd [1950] 1 KB 585. 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 : Warwick v Nairn, 10 Exch 762; Agra and Masterman's Bank Ltd v Leighton (1866) LR 2 Exch 56; James Lamont & Co Ltd v Hyland Ltd [1950] 1 KB 505, Brown, Shipley & Co Ltd v Alivia Hosiery Ltd [1966] 1 LJoyd's Rep 668^".

Then on p 732 H one finds this in the speech of Lord Russell of Killowen :

"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".

16. So Mr Tang starts with dicta of the highest authority that you can have a defence of quantified partial failure of consideration to a claim under a bill of exchange. The problem starts when you look at the authorities particularly relied upon by Lord Wilberforce, because you find that the only one which supports the proposition in relation to ascertained and liquidated claims is the Agra Bank case. All the others are decisions that unliquidated claims for damages are no answer.

17. When one turns to the Agra Bank case, one looks in vain for very cleal enlightenment. Of the three judges concerned, only two deal with this problem in a way which is of any help to us. Bramwell B put it on a quite different basis. Channell B and Pigott B both adopted as correct a statement in Byles on Bills, 6th edition p 505 which is cited in the argument of Sir John Honeyman at p 61. The learned author says:

"Partial fai1ure of consideration will constitute no defence if the quantum to be deducted on that account be a matter not of definite computation but of unliquidated damages".

Channell B and pilot B took up those words "definite computation". The problem which arises under that is whether the "definite computation" arose out of assertion in a plea which had to be treated as factually correct for the purpose of demurrer, so that Mr. Tang can say there is a insignificant distinction between assertion of fact in a pleading in those circumstances and the sworn testimony put before the court, under Order 14. In both cases the court has to assume facts. That is one possibility.

18. The other is that-it was in fact admitted because when one looks earlier into the argument of Sir John Honeyman one finds this. "For it is stated by the plea and admitted by the demurrer that by reason of the non-completion of the shipment, a shipment became valueless to him". The splitting of the consideration which arose in that case; arose because it was alleged, and if that statement is to be taken at face value admitted, that there was a partial delivery not a full delivery. So that the splitting of the consideration had been brought about by the act of the seller himself, and to that quantum split the defendant could apply the contract price. In other words upon asserted fact, but indisputed this was not simply based upon asserted fact, but indisputed fact or perhaps indisputable fact. The difference between those two propositions in the Order 14 context is vast.

19. The final problem about the law arises from another comment in Pyles when dealing with failure of consideration, at p 246. The current editor speaks of partial failure, cites amongst other cases in note 25 the Agra Bank but then goes on :

"Some authorities however have treated the claim on a bill as indivisible so that partial failure or absence of consideration cannot be pleaded by way of defence".

In those circumstances, it seems to me that the position comes it to this.

20. First, we are in 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. It may be that if this matter is going to have been properly investigated, one is going to have to go much more deeply into these earlier 19th century authorities. That is more a function for a trial than for Order 14.

21. Secondly, speaking from myself, I have very considerable doubts as to whether the facts asserted here really do amount to a quantified partial failure of consideration defence, or whether they are no more than a dressed up unliquidated damages claim. This is calculated to give rise to a nice question of fact at any trial.

22. Thirdly if the defence gets over that factual hurdle, I do not think that the main point relied upon by Mr Chain before us is going to he fatal. He submitted, correctly, that his client's cause of action on the cheque accrued on 5th January (assuming that it was presented and dishonoured on that date) and that he need look no further than that. But I do not believe that necessarily shuts out a defence arising after that cause of action accrued, and perhaps after action brought, which does in fact go to the underlying contract and comes within the dicta of Lord Russell, simply because it did not accrue until about a month later.

23. Fourthly and finally, I have very considerable doubts about the facts which go beyond the shadowy defence concession. I have a strong suspicion that the present defence is put in this form for tactical purposes to provide a defence to the cheque, but if it works and there is a trial the whole thing will be subsumed in a much greater damages claim for unliquidated damages on the basis of the sums, which are put in evidence, for which the goods were apparently re-sold to Italian buyers.

24. The answer as far as I an concerned is that I am unable for the purposes of Order 14, in this very confused area, to say positively that this defence is worse than shadowy and does not exist as an arguable defence at all.

25. In those circumstances, and not without hesitation, I feel constrained to allow this appeal, and to grant conditional leave to defendant, conditional upon the whole claim being brought into court within 7 days.

26. We will hear counsel as to costs, but I think it right and possibly helful to indicate what is going through my mind at the moment. It is impossible to criticise the judge in the court below on the argument presented to him. So I would not disturb his order for casts in any way at all.

27. As far as the costs of the appeal are concerned, I would he minded to make what I concede to be a highly unusual order, and leave them in the discretion of the trial judge. I say that for this reason. If at the trial this 30% defence succeeds upon the basis that this is a 30% liquidation and limitation, then plainly the defence will succeed and plainly the defendant will be entitled to its costs of today. Conversely if either that defence fails on the facts, or it it is completely overtaken by an unliquidated claim in damages which would not to have had the desired effect today, then even though that defence might ultimately succeed by way of counterclaim, it should not carry the costs of today's appeal. That is the order which I would propose this Court should make.

Power, J.A. :

28. I concur and have nothing to add.