XCHRX CHEVALIER (E&M CONTRACTING)LIMITED v. ROTEGEAR DEVELOPMENT LIMITED AND OTHERS

1990 No. A1717

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

_________________

_________________

J U D G M E N T

_________________

1. This is an appeal by the 5th Defendant against a judgment dated 3rd June 1994, given by a master pursuant to Order 14, under which the Plaintiff was awarded HK$1.8m being part of the total claim of some HK$5m.

2. The Plaintiff and 1st Defendant were parties to a contract dated 13th July 1988 under which the Plaintiff, as sub-contractor, was to install certain air-conditioning equipment (the Contract). It appears that the Plaintiff, as agent of the 1st Defendant, was also to purchase some of the necessary equipment as specified by the 1st Defendant. There was to be a lump sum for the Contract of HK$5.3m. 90% of that sum was to be paid by monthly payments. Completion was to be "at the early of March 1989" (happily, completion was later extended so that the need to decide what "early" meant was avoided). In fact the work was not completed by early March or by March at all. There is a dispute as to who was at fanlt, a dispute which cannot be resolved at this stage. Work having started, however, the 1st Defendant failed to make monthly payments so that by August the Plaintiff was threatening to walk away from the job. On 11th August 1989, these two parties apparently resolved their differences to enable the Contract to be completed. The 1st Defendant made an offer which was accepted by the Plaintiff and which was in the following terms (the Agreement):

"1. We hereby offer to settle the outstanding sum in respect of the above sub-contract works on the following terms:-

1.1 We hereby confirm and acknowledge that an aggregate sum of HK$3,300,000.00, as to HK$1,300,000.00 being part of the purchase price for material and equipment delivered to site and as to the remaining HK$2,000,000.00 being part of the progress payment under the sub-contract, is now due and payable by us to your goodself. We hereby expressly admit full liability of the aforesaid outstanding sums. We shall in all events settle this sums by 6 installments in the following manner.

1.1.1 a sum of HK$500,000.00 to be paid forthwith. (Already Paid)

1.1.2 a sum of HK$200,000.00 to be paid forthwith. (Already Paid)

1.1.3 a sum of HK$600,000.00 to be paid on or before 21 August 1989.

1.1.4 a sum of HK$800,000.00 to be paid on or before 30 September 1989.

1.1.5. a sum of HK$600,000.00 to be paid on or before 30 October 1989.

1.1.6 a sum of HK$600,000.00 to be paid on or before 15 November 1989.

1.2 If we fail to pay any of the aforesaid installments in the manner aforesaid, all the remaining installments will become payable immediately and be subject to interest charged at the rate of 1% per month from the date of default until full payment.

1.3 Notwithstanding the aforesaid, we also hereby admit and acknowledge liability to you for the remaining balance of the purchase price of material and equipment at HK$200,000.00, we shall in any event pay you the said sum of HK$200,000.00 immediately after the manual start-up of chiller installations on your part.

1.4 Notwithstanding the aforesaid, we also hereby admit and acknowledge liability to you for the remaining balance of the progress payment of the above works. In this connection, we undertake to settle all subsequent invoices issued by you for further payments under the sub-contract within 45 days after your insurance of the same. Such payment shall however be subject to your manual start-up of the chiller installation within 28 days after the hand-over of site for cooling tower area and upper roof area provided that you are entitled to ask for extension of time to do the requisite works in case of our default or that of other sub-contractors at the site under the sub-contract works.

1.5 We will procure our directors namely Mr. Ng Fuk Lung, Mr. Ng Fuk Hing, Mr. Ngai Man Fai and Mr. Wong Yan Wai to execute a joint and several personal guarantee in your favour to secure full and due performance of the terms herein contained.

1.6 We undertake to indemnify and keep you indemnified against all costs and expenses (including legal costs and disbursements on a full indemnity basis) incurred by you in respect of any matter of proceedings in connection with this letter."

3. The guarantee referred to in paragraph 1.5 was obtained and was in the following terms: -

"To: Chevalier (E&M Contracting) Ltd

Personal Guarantee

In consideration of your agreeing to abstain for the time being from enforcing payment of HK$3,300,000.00 (hereinafter called "the said debt") due to you by Rotegear Development Limited. (hereinafter called "the debtor") of which we are directors and also to accept the debtor's proposed settlement terms as stipulated in the letter written to you by the debtor on the even date, a copy of which is attached to this Guarantee and initialed by me for the purpose of identification, we Ng Fuk Hing, Ng Fuk Lung, Ngai Man Fai, and Wong Yan Wai hereby jointly and severally absolutely and unconditionally guarantee the full payment of the sum and the due performance and observance of the settlement terms upon the following conditions:

1. If the debtor shall make default in the payment of any sum under the said letter or in the performance of observance of any of the provision on its part contained in the said letter, we and each of us will jointly and severally upon a written request by you fully pay you the sum which shall be so in arrear or, as the case may be, pay to you all losses damages expenses and costs which you shall be entitled to recover by reason of such default.

2. We further jointly and severally undertake that we personally guarantee the due performance of all the terms set out in the said letter by the debtor and that we assume full responsibility for the same.

3. Any arrangement dealings made between you and the debtor or your neglect of forebearance in requiring or enforcing payment or other obligation against the debtor shall not in any way prejudice or affect our liability hereunder.

4. This guarantee shall be governed by and construed in accordance with the laws of Hong Kong."

4. That document was signed by the four persons named.

5. The 1st Defendant paid $1.5m pursuant to the Agreement. It did not pay any further monies, leaving a balance of $1.8m outstanding. It is for that sum that the Plaintiff obtained judgment against the 5th Defendant as being a sum incontestably due to it. To complete the picture, the 1st Defendant did not make any other payments to the Plaintiff for work which was being done pursuant to the Contract. It was subsequently agreed that the Plaintiff would provide manual start-up, as required in clause 1.4 of the Agreement, on 30th September. In fact, manual start-up did not take place until 30th December, some 91 days after the agreed date. By then the Plaintiff, having treated the 1st Defendant's failure to make payment as repudiation of the contract, had left the site.

6. As this stage of the proceedings, it being impossible to determine the relative merits of the Plaintiff's and 1st Defendant's assertions as to who was in the wrong, the 1st Defendant arguably has a claim for liquidated damages in excess of $4m, by virtue of a provision in the Contract for damages at the rate of $50,000 per day for failure to complete the works by the date specified. It also arguably has claims for unliquidated damages for extra costs caused by the Plaintiffs' withdrawal in December, for deviation from contract specifications; and for failure to remove debris and clean up the site. These claims constitute the first of two defences raised by the 5th Defendant. The 5th Defendant asserts that he is entitled to be exempt from liability under the guarantee to the extent that a right of set-off was available to the 1st Defendant as the principal debtor. The 2nd defence is that the Plaintiff has made no written request for payment pursuant to clause 1 of the guarantee.

7. To answer the 1st defence, it is the Plaintiff's case that the Agreement is a promissory note because it meets all the requirements of section 89 of the Bills of Exchange Ordinance, in that it is an unconditional promise in writing to pay on demand or at a fixed or determinable further time, a sum certain in money to or to the order of a specified person or the bearer. If that be correct, the Plaintiff argues that set-off would not be available to the 5th Defendant because it is trite law that a promissory note or bill of exchange is to be treated as cash and honoured unless tainted by fraud or total failure of consideration. Mr. Shieh for the 5th Defendant did not dissent from that proposition. He argued, however, that the Agreement does not constitute a promissory note. First, he said the words "on or before" contained in paragraphs 1.1.3 - 6 are not an unconditional promise to pay at a fixed future time. He relied upon the decisions in Williamson and Others v. Rider (1963) 1 QB 89 and Claydon and Another v. Bradley and Another (1987) 1 WLR 521. Both were decisions of the Court of Appeal. In Williamson Danckwerts and Willmer L.J.J. both held that the words "on or before" created an uncertainty and a contingency in the time for payment. Ormerod L.J. dissented. He found that there was a fixed date for payment so that if the promisor failed to pay on that date, he could be sued, but if he chose to pay earlier the holder of the bill or note was under an obligation to accept that payment.

8. In Clavdon the document acknowledged receipt of a sum of money "as a loan to be paid back in full by 1st July 1983". The Court of Appeal found the case indistinguishable from Williamson by which it was bound. It seems tolerably clear, however, that Dillon L.J., who gave the leading judgment, was reluctant to reach the conclusion which he did.

9. The dissenting judgment of Ormerod L.J. has been followed by courts in both Canada and Ireland. It is also preferred by Byles on Bills of Exchange 26th edition at paragraph 84 and by Chalmers and Guest on Bills of Exchange Cheques and Promissory Notes 14th edition page 67.

10. Persuasive though decisions of the English Court of Appeal are, I would have no hesitation in following the alternative course. Where words "on or before" are used in a bill or promissory note, I find it difficult to see how it can be said that there is not a fixed or determinable future time. There is a specified date at which, if payment has not been made, the holder can sue the promisor. I have no hesitation in rejecting this limb of Mr. Shieh's argument. If the matter rested there, I would equally have no hesitation in saying that the Agreement constitutes a promissory note.

11. The second limb of Mr. Shieh's argument is, however, far more compelling. In Clavdon, the Court of Appeal found the document in question to be not a promissory note on a second ground, namely that it was primarily a receipt coupled with a promise to pay and was not intended to be negotiable. For this, the Court of Appeal relied upon the Privy Council decision in Akbar Khan v. Attar Singh (1936) 2 All E.R. 545. In that case, the Privy Council considered the definition of a promissory note in the Indian Negotiable Instruments Act 1881 and the Indian Stamp Act 1899. Although the definition in the Indian Legislation did not coincide with the English definition of a promissory note contained in s.83 of the Bills of Exchange Act (which is identical with s.89 of our Ordinance) Neill L.J. found that decision helpful, in particular the following passage from the judgment delivered by Lord Atkin at page 550:

"Their Lordships prefer to decide this point on the broad ground that such a document as this is not and could not be intended to be brought within a definition relating to documents which are to be negotiable instruments. Such documents must come into existence for the purpose only of recording an agreement to pay money and nothing more, though of course they may state the consideration. Receipts and agreements generally are not intended to be negotiable, and serious embarrassment would be caused in commerce if the negotiable net were cast too wide. This document plainly is a receipt for money containing the terms on which it is to be repaid ... Being primarily a receipt even if coupled with a promise to pay it is not a promissory note."

12. Relying on that passage, Neill L.J. said that the document with which he was concerned was primarily a receipt and not a document he would regard as intended to be negotiable or capable of being enforced by a holder in due course. Dillon L.J. thought the approach of the Privy Council to be applicable to the case with which he was concerned. He said that if the statutory definition of a promissory note is applied literally, it would cover a range of documents which would not normally be regarded as promissory notes or bills of exchange.

13. For the Plaintiff, Mr. Yeung submitted that Claydon is of no assistance to the 5th Defendant. He said that both the Court of Appeal and the Privy Council decided that the respective documents were not promissory notes because they were simply receipts which did not survive the test of being an unconditional promise required by the legislation. Further, he said that negotiability is not a requirement for a promissory note and therefore whether or not the intention of the parties was that the document should be negotiable is irrelevant.

14. It is not, of course, necessary for me for the purpose of Order 14 to make a positive finding. Mr. Shieh has only to show an arguable case. Were it necessary, however, I would have little difficulty in holding that the Agreement is not a promissory note. Both a bill of exchange and a promissory note are normally negotiable although, of course, the parties to such a document may provide for it to be not negotiable. It seems to me therefore that the negotiability or otherwise of the document is of considerable relevance. Quite plainly, the Agreement was never intended to be negotiable. It was simply an agreement to compromise the problems prevailing between the two parties at the time when it was made. It is the sort of document that is commonly found where parties to a building contract have fallen into dispute and sorted out their difficulties in a sensible manner. The idea that an agreement of this nature should become a form of commercial paper is quite simply laughable.

15. In the circumstances, the Plaintiff's argument, that the 5th Defendant cannot rely on the right of set-off because the Agreement is a promissory note, must fail. The Plaintiff, however, has a second argument in relation to set-off, namely that under the Agreement the 1st Defendant waived its right to set-off. Mr. Yeung for the Plaintiff said that in paragraph 1.1 of the Agreement, the 1st Defendant confirmed and admitted full liability for a present debt and undertook "in all events" to settle its liability by specified instalments. He said a similar expression "in any event" is used in clause 1.3, while clause 1.4 provides for a condition applicable only to invoices still to be issued by the Plaintiff. He argued, therefore, that set-off is only available in relation to payments falling within clause 1.4, whereas payments falling within clause 1.1 are unconditional. He said, and I do not think that this was disputed, that in determining whether or not a debt is to be paid without deduction, regard may be had to the factual and commercial background of the transaction. Given the background which I outlined earlier, Mr. Yeung submitted that it was plainly the Plaintiff's concern that it should get its money in full, or at least security for payment of that money, before continuing with the Contract.

16. It is, of course, permissible to look at the background to an agreement as an aid to a construction. It is not, of course, permissible to look subjectively at the asserted intention of one of the parties thereto. The intention is to be inferred from the wording of the document read in the light of the background in which it was made.

17. The wording is therefore important particularly the phrase "in all events". To assist, Mr. Yeung referred to the Shorter Oxford English Dictionary in which the phrase is defined as "in any case; whatever happens or happened".

18. Mr. Shieh said that very clear words are required in order to exclude a right of set-off. If there is doubt then the document to be relied on will be construed contra proferentem. He referred to Connaught Restaurants Limited v. Indoor Leisure Limited (1994) 1 WLR 501 a decision of the Court of Appeal concerning the phrase "without any deduction" in relation to rent in a tenancy agreement. The Court of Appeal found that although the expression had previously been widely used, it was insufficient by itself to operate by implication as an exclusion of the lessee's equitable right to set-off.

19. If the phrase "without any deduction" failed to meet the acid test, it seems to me that the phrase "at all events" must fall far short of passing the necessary test. The phrase could, as Mr. Shieh suggested, mean a number of things such as waiver of any rights of set-off whether or not yet accrued; waiver of set-off already accrued; that the sum would remain payable regardless of whether or not the Plaintiff made any further performance of the Contract; a way of emphasising that the money had to be paid whatever business or commercial difficulties the 1st Defendant might subsequently encounter.

20. In the circumstances, I find it arguable that the 1st Defendant did not waive any rights of set-off.

21. The 2nd defence is that there has been no written request for payment as required by clause 1 of the guarantee. For the purpose of this appeal at least, it was not in dispute that no proper written request has been made to the 5th Defendant. Paradoxically, however, Mr. Yeung relied upon an admission said to be made by the 5th Defendant in his defence that such a request had been made. He said that the 5th Defendant should not be allowed to retract that admission without an adequate explanation. Suffice it to say it is from clear on the pleadings that any such admission has been made and, in any event, I would in all the circumstances have no hesitation in allowing the 5th Defendant to resile from it should it be necessary.

22. The substance of Mr. Yeung's argument, however, is that by clause 2 of the guarantee the 5th Defendant has entered 2 separate covenants or obligations distinct from the obligation contained in clause 1. First, by guaranteeing due performance the 5th Defendant has entered a covenant therefor. If the Plaintiff fails to carry out the terms of the Agreement, the 5th Defendant is in breach of covenant and subject to a cause of action in damages for which no demand is necessary. Second, by assuming full responsibility, the 5th Defendant has assumed a primary obligation for which no demand again is necessary.

23. Mr. Yeung relied upon Monschi v.L.E.P. Air Services Limited and Others (1973) AC 331 in support of his argument based upon the guarantee of due performance. With respect, I do not think that this case assists. The guarantee there was contained in one clause, in a detailed agreement, by which the appellant "personally guaranteed the performance". The House of Lords found that once the company which he had guaranteed failed to perform the agreement, the appellant was in breach and became liable in damages. About that there can, I think, be no doubt. The words relied upon by Mr. Yeung, however, cannot be looked at in isolation but in the context of the complete form of guarantee. If Mr. Yeung is right about clause 2 then clause 1, which is drawn in rather more detail, becomes otiose. It would be unsatisfactory to construe a document so that what on the face of it is the principal clause becomes wholly ineffective.

24. Mr. Shieh suggested that one possible construction that would give effect to both clauses 1 and 2 would be to regard clause 2 as imposing the obligation or obligations upon the 5th Defendant and clause 1 as providing the mechanism by which the Plaintiff can enforce to those obligations. Construed in that way a written request would be a condition precedent to the recovery of any payment by the Plaintiff.

25. I take into account the particular wording of clause 2. I take into account the use of the word "further" which, as Mr. Yeung argued, suggests something separate and distinct from clause 1. I find it difficult to accept, however, that having carefully drawn the preamble and clause 1, the parties immediately negated the effect of that clause by the insertion of clause 2, by which the 5th Defendant would be liable to pay the Plaintiff without notice or demand because of his guarantee of due performance and the covenant thereby undertaken or because he had assumed a principal obligation for which no demand again is necessary. I am not at this stage prepared to accept such a construction. I think the construction contended for by Mr. Shieh is at least arguable. It may be if the matter goes to trial that there will be admissible evidence to show objectively the true intention of the parties to the guarantee.

26. In the circumstances, I am satisfied that this matter should go to trial and that the 5th Defendant should be given unconditional leave to defend. I therefore allow the appeal and set aside the judgment given by the master.

27. I make an order nisi that the 5th Defendant should have the costs here and below in any event.