INTERGULF EXPRESS H.K. LTD. AND ANOTHER v. DELTA ASIA CREDIT LTD.

FACV No. 3 of 1998

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

FINAL APPEAL NO. 3 OF 1998 (CIVIL)

(ON APPEAL FROM CACV No. 184 OF 1997)

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J U D G M E N T

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Chief Justice Li:

1. I have read the judgment of Mr Justice Litton PJ and agree with it. For the reasons which he gives, I would allow the appeal and make the orders including those as to costs set out in his conclusion.

Mr Justice Litton PJ:

Introduction

2. The appellants (plaintiffs at trial) are related companies having common shareholders and directors, with cargo forwarding as their principal business. They received, in the course of their business, cheques in foreign currencies, mainly Japanese yen and U.S dollars. Since 1981 they have dealt with most of these by negotiating them for Hong Kong dollars with the respondent (defendant at trial), an authorized foreign exchange dealer. For this purpose the appellants opened an account with the respondent in 1981. The account was opened by the appellants giving to the respondent (i) copies of minutes of directors' meetings of the two companies authorizing the transaction, (ii) specimen signatures of the directors entitled to act for the appellant companies, and by the appellants' directors signing a standard form of document provided by the respondent headed "Undertaking and Indemnity". The provisions of this standard form document will need detailed examination later, as it is upon the proper construction of its provisions that this appeal turns.

3. Business got underway in 1981. When cheques were ready for negotiation with the respondent the appellants' accountant would telephone the respondent to ascertain the exchange rate offered; if that was acceptable the accountant would have the cheques endorsed by two of the authorized signatories and have them delivered to the respondent's office in exchange for Hong Kong dollar cheques drawn by the respondent, crossed, payable to the order of one or other of the appellants. Business was conducted smoothly in this way for over a decade.

4. In March 1991 one Leung Lik Shan came to be employed by the appellants' group of companies. He was in overall charge of their accounts department. He had no signing rights and was not an authorized signatory in respect of the appellants' dealings with the respondent. He negotiated rates of exchange with the respondent and dealt with the mechanics of discounting third-party cheques on behalf of the appellants. To pick up the trial judge's narrative of the history at this point:

" No doubt he (Leung) became a familiar figure in the halls of Delta (the respondent), for often he undertook this activity personally. Tables reveal that between June 1991 and December 1992 there were some 90 separate transactions totalling over $12 million. Invariably Delta's cheques in payment were, in compliance with Delta's standard practice (which practice is evidenced in clause 5 in the undertaking and indemnity) made payable to the payee in each case and crossed, and found their way to the appropriate bank account.

But this did not always happen. Beginning in December 1991 and thereafter until October 1992, shortly before discovery, Leung on occasion asked that the cheque for payment be crossed payable to cash. Delta obliged. Leung then misappropriated those cheques, paying them into his own account for his own use. The irregularity did not come to light until the latter part of 1992."

5. The total amount stolen by Leung came to about HK $2.54 million. The appellants managed to re-coup $466,000 and claimed against the respondent for the shortfall of $2,010,372 and interest.

The appellants' claim

6. The appellants' case is simply this: By the contract entered into between the parties in October 1981, under the terms of which the business was thereafter conducted, the respondent was bound to settle each foreign exchange transaction by means of Hong Kong dollar crossed cheques made out in favour of the appellants, unless the appellants had, by their written instructions, authorized otherwise. They never did. Hence, when the respondent handed to Leung cash cheques in purported settlement of the foreign exchange transactions, it was in breach of contract.

The defence

7. The respondent's answer to the claim is equally simple: Accepting that the parties were in a contractual relationship, nevertheless the document upon which the appellants in their pleaded case rely - the "Undertaking and Indemnity" signed at the time the account was opened in October 1981 - was a unilateral document which imposed obligations on the appellants only; it gave the respondent contractual rights but imposed no obligations. Hence the respondent was at liberty to vary the practice under which the parties had been conducting business for a decade or more and hand cash cheques over to the appellants' employee in exchange for the foreign currency cheques without attracting legal liability.

8. Other defences dealt with at trial have fallen by the wayside and need not be mentioned here.

The proceedings in the lower courts

9. The trial judge, Deputy Judge Gill, by his judgment dated 27 June 1997, found for the respondent. The appeal by the appellants to the Court of Appeal (Godfrey and Liu JJA, and Keith J) was dismissed on 21 November 1997.

The "Undertaking and Indemnity"

10. The "Undertaking and Indemnity" dated 15 October 1981 executed by the 1st appellant - and another one in identical terms executed by the 2nd appellant on 2 November 1981 - provides as follows:

" I/We hereby request and authorise you to purchase cheques from me/us from time to time. In consideration of the purchase of cheques by you,

I/We, Intergulf Express H.K. Ltd. of Rm. 201-2 Kowloon Air Freight Agents Terminal, 70-78 Sung Wong Toi Road, Kowloon hereby agree without reserve to bind myself/ourselves to the terms and conditions as setforth below:-

(1) Your records for transactions of cheques purchased from me/us will be the only true and indisputable evidence of the transactions of purchases of cheques. I/we am/are unconditionally bound by your records.

(2) The acceptance of cheques will be at your absolute discretion.

If, for whatever reason, a cheque is not accepted, it is my/our understanding that you reserve the absolute right to cancel the order.

(3) The responsibility to deliver cheques purchased rests with me/us. Collection of cheques by you does not form part of the services offered. However, it is my/our understanding that cheques may be collected by you at your absolute discretion only at my/our request and when the circumstances permit. In the event that cheques are collected by you, I/we undertake that this is solely at my/our own risk.

(4) Delivery of cheques must be made by me/us immediately after confirmation of your purchase order.

If, for whatever reason, delivery of cheques is not made on the date of the execution of the order, it is my/our understanding that you reserve the absolute right to cancel the order.

(5) It is my/our understanding that foreign exchange transactions are settled by Hong Kong Dollar crossed cheques in my/our favour, and only at my/our written request or standing instruction, acceptable by you, will cash be paid.

Whereas you have adhered to my/our request, I/we agree without reserve to waive the rights for any claim against you.

(6) When any cheque purchased from me/us is unpaid, I/we further agree to the following:-

(a) If, for whatever reason, the original cheque is not available, a photo-copy of the cheque together with the relevant supporting documents will be accepted by me/us as concrete and indisputable evidence for the unpaid/returned cheque.

(b) Any unpaid/returned cheque is to be refunded by me/us immediately, calculated at your prevailing T/T selling rate at the date of settlement.

(c) For any unpaid/returned cheque, interest at the rate of 1% per month is charged from the date of negotiation to the date of full settlement, subject to a minimum charge of HK$10.- per cheque.

(d) Where fate is requested on a cheque telegraphically, all telegram charges will be borne by me/us.

(e) Any other charges such as protect fees, legal fees, correspondence charges, etc. will be automatically passed on to me/us.

(f) It is my/our understanding that you reserve the full right to change any of the terms and charges mentioned in (a) to (e) above with due notification.

(7) In consideration of the purchase of cheques by you, I/we hereby agree to indemnify and hold you harmless from and against any and all consequences which may arise or result from the handling of any cheques which have been unpaid for any reason, or from the cancellation of the purchase order as mentioned in (2) and (4) above, and to reimburse you on demand for any and all payments, losses, costs, and damages which you may suffer, sustain or be required to make by reason or on account thereof at any time or times, and upon your request to appear and defend at my/own cost and expense any action which may be commenced against you in connection therewith.

I/We further confirm and agree to return to you any amount which has been wrongly paid to me/us.

(8) Should I/we fail to comply with any of the terms and conditions as specified above, I/we cannot challenge your right of recourse, and any proceedings which you may deem necessary to bring against me/us.

Dated the 15th day of October 1981
In agreement with the terms specified above
Signed.... etc."

11. The crucial clause, for the purposes of this case, is clause 5. What the respondent says is this: Upon the natural and ordinary meaning of the words used in clause 5, it is simply an acknowledgment by the appellants as regards the respondent's practice in foreign exchange transactions; it imposes no obligation on the respondent to effect payment always by crossed cheque made payable to the customer; it is at liberty to vary its own practice without attracting liability. This argument found favour with the courts below.

Approach to construction

12. What falls for construction, at the end of the day, are not the bare words in clause 5 in terms of syntax and grammar; it is the meaning of clause 5 in the context of the contractual arrangement as a whole. The document was put forward by the respondent in October 1981 as the terms applicable to future cheque-purchasing transactions between the parties, and became binding when the appellants' directors appended their signatures to the document. Parties can, of course, enter into what are called unilateral contracts in which only one party is bound. But an agreement, by its very nature, is a bilateral transaction. It would be an unusual case if all the obligations fall only one way.

13. The contractual basis for settling foreign exchange transactions is that set out in clause 5: The delivery by the respondent of Hong Kong dollar crossed cheques in payment for foreign-currency cheques purchased by the respondent. This was, obviously, a convenient and safe way of doing business and was advantageous for both parties. The commercial context of the agreement suggests that the parties contemplated that the only way in which the respondent would settle was by the procedure set out in clause 5, and cash (or in effect it's equivalent cash cheques) would only be delivered in purported settlement if the customer had so requested in writing (or there were "standing instructions" to the same effect) and this was acceptable to the respondent.

14. True it is that the expression used in clause 5 is: "It is my/our understanding that ....". It does not say: "It is agreed that ...". But, in the context of the transaction as a whole, to confine the meaning of those words to a bare acknowledgment by the appellants as to the respondent's practice, without necessarily putting on the respondent an obligation to adhere to that practice, is to deprive the agreement of much of its commercial purpose. In practical terms, what it means is this: The respondent could have handed a bundle of bank-notes to a messenger, recorded the transaction in its book as completed (which, according to clause 1 of the Undertaking and Indemnity, constitutes "the only true and indisputable evidence of the transaction") and considered itself discharged of liability. Such an absurd result could not have been within the contemplation of the parties.

"Unilateral document"

15. In the Court of Appeal Godfrey JA (who gave the first judgment) asserted that the Undertaking and Indemnity was a unilateral document imposing obligations on the appellants alone and therefore no question of the construction of the document arose.

16. But, as was put to counsel for the respondent in the course of argument: Assume, instead of the Undertaking and Indemnity, the respondent had a sign on its door which said:

"We buy foreign currency cheques by Hong Kong dollar crossed cheques in the customer's favour".

17. This is, in a sense, a unilateral document; but it is also the term on which the respondent represented it would do business. If the customer accepted the term, both parties are bound. Can it sensibly be argued that the respondent could unilaterally change the mode of doing business, hand cash over to the customer's messenger and claim to be discharged from liability?

18. In the Court of Appeal Liu JA agreed with Godfrey JA's reasoning. Keith J, agreeing with Godfrey JA in the result, said that the document did three things, one of which was this:

"(iii) It provided that if the Plaintiffs requested the Defendant in writing to depart from its practice, no claim would be made by the Plaintiffs if payment in cash caused the Plaintiffs loss (because, for example, the cash was diverted and never reached the Plaintiffs)" (emphasis added).

19. This comes close to saying that if no such written request were made and the respondent nevertheless paid in cash then claim could be made for the resulting loss. When the proper construction of a commercial document turns upon such fine distinctions, it would be appropriate to look beyond the narrow confines of syntax and grammar to the wider aims of the contract.

20. In my judgment, the Court of Appeal's approach to the construction of clause 5 is unnecessarily narrow and literal; it in effect begins and ends with the assertion that the Undertaking and Indemnity is a "unilateral document", binding upon the appellants only. Hence Godfrey JA said that "no question of the construction of the document arose". I cannot, with respect, agree with this approach.

21. It is, perhaps, not without some significance that this narrow view of clause 5 came to be adopted by the respondent only at the last minute, just before trial, when the Defence was amended a second time. Until then, the respondent was relying upon "cash authorization forms" which, it asserted, the appellants had signed authorizing it (under clause 5) to make payment in cash or by way of cash cheque when purchasing the appellants' cheques. This was denied by the appellants. No contradicting evidence was apparently forthcoming from the respondent. Thus, on the eve of trial, an amendment of para 3(a) of the Defence was inserted: "It is not admitted that clause 5 imposes an obligation on the Defendant to pay by crossed cheques": It was this last-minute amendment which prevailed at trial.

22. The respondent, it appears, had in the past tendered to the appellants on several occasions "cash authorization forms" for the appellants' signature; the appellants had refused to sign. Obviously, if the respondent had thought all along that, despite clause 5, it was free to settle the purchase of the appellants' cheques by cash or cash cheques, then no "cash authorization forms" were necessary to protect it from liability. Whilst it is true that, at the end of the day, the case turns upon a pure matter of construction, according to the words used, nevertheless where the evidence indicates that the parties themselves had at one time taken one view of the meaning of their own contract, a court would hesitate to attribute to it a different meaning.

23. Some further indication of the bilateral nature of the contract is provided by clause 6, which deals with the event of a third-party cheque, purchased by the respondent, being dishonoured upon presentation: Where clause 6(c) provides for interest to be charged against the appellants at the rate of 1% per month, it limits the respondent to not charging more than 1% per month, without "due notification" as provided for in clause 6(f). There the obligations were clearly bilateral.

Conclusion

24. In my judgment the construction of clause 5 contended for by the appellants is correct. It follows that the judgments in the two courts below must be discharged and judgment must be entered for the appellants for $2,010,371. As to interest on that sum, it is not disputed (though not agreed) that the appellants are entitled to interest as from 1 January 1993 at the rate of 1% above prime until judgment. I would so order. As to costs, the appellants must have the costs of the appeal to this court, and the costs in the courts below. The sum of $400,000 paid into court by the appellants pursuant to the order of the Court of Appeal dated 9 January 1998 must be paid out to the appellants or their solicitors.

Mr Justice Ching PJ:

25. I agree.

Mr Justice Bokhary PJ:

26. I also agree.

Lord Cooke of Thorndon NPJ:

27. I also agree.

Chief Justice Li:

28. The Court, being unanimous, allows the appeal and makes the orders set out in the conclusion to the judgment of Mr Justice Litton PJ including those relating to costs.