XCHRX THE HONGKONG CHINESE BANK, LTD. v. DELON PHOTO & HI-FI CENTRE LTD.

HCA 373/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 373 OF 2000

___________________

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

J U D G M E N T

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

1. This is the plaintiff's appeal against the Order of Master Barnes dated 31 March 2000 granting the defendant unconditional leave to defend and awarding costs of the plaintiff's application for summary judgment to the defendant in any event with certificate for counsel.

2. When the appeal came before me in the afternoon of 20 April 2000, Miss Gekko Lan, counsel for the plaintiff, applied for leave to admit the 2nd Affidavit of Chan Sze Chit dated 14 April 2000. Leave was necessary as Master Jones had ordered on 13 March 2000 that there should be no further affidavit evidence without leave of the Court.

No statement of the deponent's belief of no defence

3. I drew Miss Lan's attention to the fact that the plaintiff's affidavit evidence did not contain any statement of the deponent's belief that there was no defence to the claim. I granted Miss Lan a short adjournment to consider the point. After the adjournment Miss Lan submitted that the omission was capable of being cured and invited me to proceed with the hearing of the appeal with an undertaking by the plaintiff's solicitors to put such affidavit evidence before me.

4. Mr Andrew James Chandler, counsel for the defendant objected to both applications.

5. I gave leave to admit the 2nd Affidavit of Chan Sze Chit, it being common practice for the judge in chambers, subject to the question of costs, to admit further or additional affidavit evidence, paragraph 58/1/3 of the Supreme Court Practice 1999. Mr Chandler did not ask for time, whether to consider the plaintiff's further affidavit evidence or to deal with it by affidavit evidence.

6. It is a necessary condition for proceeding under Order 14 that the application must be supported by an affidavit which complies with rule 2, otherwise the summons may be dismissed. The affidavit must fulfil the following two requirements: (1) it must verify the facts on which the claim or part of a claim to which the application relates is based; and (2) it must state the deponent's belief that there is no defence to that claim or part, or no defence except as to the amount of any damages claimed. Any defects or omissions in the original affidavit may be cured or supplemented or supplied by an affidavit made subsequently and the Court looks at the matter both on jurisdiction, and on merits, "at the end of the day on the affidavits which have been filed", paragraph 14/2/6 of the Supreme Court Practice 1999. See also Les Fils Dreyfus, etc. v. Clarke [1958] 1 W.L.R. 300, CA.

7. In my judgment, the omission was a slip, but a fundamental omission. It was capable of being cured. I decided to proceed to hear the appeal after solicitors for the plaintiff gave an undertaking through Miss Lan to place the relevant affidavit evidence before me before the conclusion of the hearing that afternoon. In the event, the 2nd Affirmation of Chow Ming Po Aaron was placed before me before the conclusion of the hearing. Mr Chandler did not ask for time, whether to consider the such affidavit evidence or to deal with it by affidavit evidence.

8. At the conclusion of the hearing, I told the parties that Judgment would be handed down in open Court on 28 April 2000.

The subject instrument

9. The subject instrument is one with the name of the defendant printed on top, dated "22 Oct 1999"; with the words "Pay Wonderful Enjoy International Limited or bearer HK Dollars THE SUM HK$150,000.00 cts"; "To: Hang Seng Bank Limited, Hung Hom Branch 21 Ma Tau Wai Rd. Kowloon"; numbered "165777"; generally crossed with the words "A/C PAYEE ONLY" between the two lines of the general crossing; and signed for and on behalf of the defendant.

10. In my judgment, the subject instrument is clearly and unarguably an unconditional order in writing, addressed by one person, i.e. the defendant drawer, to a banker, i.e. Hang Seng Bank Limited, signed by the person giving it, i.e. the defendant, requiring the person to whom it is addressed, i.e. Hang Seng Bank Limited, to pay on demand a sum certain in money, i.e. $150,000, to or to the order of a specified person, i.e. Wonderful Enjoy International Limited ("the payee"), that is to say a cheque within the meaning of sections 3 and 73 of the Bills of Exchange Ordinance, Cap. 19. The subject instrument shall be referred to as "the Cheque".

The plaintiff's case

11. The plaintiff is a bank, claiming to be holder in due course of the Cheuqe. Its case is that by letter dated 1 April 1999, it granted banking facilities to the payee which was the bank's customer. The facilities included an overdraft of up to $2.5 million and an advance of up to $2 million against presentation of post-dated cheques. The post-dated cheques should not exceed $150,000 for each drawer and the drawers must be on the bank's approved cheque drawer list. On 24 August 1999, the payee applied to discount the Cheque and endorsed it in support of its application. The endorsement in blank appeared on the back of the Cheque. The payee was on the bank's approved cheque drawer list. The bank approved the application and credited $147,272.43 to the payee's account on 24 August 1999. Paragraph 5 of the Affidavit of Chan Sze Chit stated that:-

"I confirm that the Plaintiff did not have any knowledge of the business relationship between Wonderful and the Defendant, in particular, the alleged subsequent breach of contract by Wonderful at the time of the aforesaid advance."

Paragraph 6 of the 2nd Affidavit of Chan Sze Chit stated that:-

"As I have deposed to in my previous affidavit, the Plaintiff had no knowledge of the alleged contract between the Defendant and Wonderful nor the alleged subsequent breach thereof on the part of Wonderful at all material times. The evidence now before the court clearly shows that the Plaintiff indeed took the subject cheque in good faith and for value. Therefore, even putting the Defendant's case to the highest, it does no more than giving the Defendant a personal defence against Wonderful which the Plaintiff is not bound."

The defendant's case

12. By Paragraph 2(A) of the Amended Defence, the defendant admitted that the defendant "has issued the cheque in question ('the cheque')" and denied that the plaintiff "was a holder in due course of the cheque". The defendant's case is pleaded in the rest of paragraph 2 of the Amended Defence:-

"(B) The Defendant avers that it drew the cheque and delivered it to Wonderful Enjoy International Limited ("the payee"), and the payee, in fraud of the Defendant indorsed the cheque to the Plaintiff. The particulars of the fraud are as follows: -

Particulars

(1) On 22 July 1999, the Defendant entered into a contract with the payee for the purchase of certain Hi-Fi products for the total price of HK$416,000.00. It was a term of that contract that the Defendant would issue the payee a post-dated cheque as an act of good faith.

(2) The cheque was issued to the payee upon the conditions, inter alia, that the cheque was to be a good-will and a good-faith gesture and that the cheque would not be taken as a means of deposit, and that the cheque was non-transferable and would not to (sic) be used for any other purpose other than as a good-will and a good-faith gesture, and in the event of non-delivery the cheque would be returned to the Defendant.

(3) On 24 August 1999, the payee, in breach of the aforestated conditions, indorsed the cheque to the Plaintiff.

(C) The Defendant will rely at trial on Section 30(2) of the Bills of Exchange Ordinance, Cap 19, for its full terms and effect. The Plaintiff has a duty to show and prove that it gave value in good faith for the cheque."

CONSIDERATION AND CONCLUSION

Admissibility of evidence on the 3 alleged conditions

13. The defendant alleged 3 conditions, i.e.

(i) the Cheque was to be a good-will and a good-faith gesture and that the Cheque would not be taken as a means of deposit;

(ii) the Cheque was non-transferable and would not to be used for any other purpose other than as a good-will and a good-faith gesture, and

(iii) in the event of non-delivery the Cheque would be returned to the Defendant.

14. The defendant relied on the following provisions of a written contract dated 22 July 1999 made between the defendant as buyer and the payee as seller:-

"6. As a good-will and good faith gesture, the buyer shall issue a post-dated cheque amounting to Hongkong dollars one hundred and fifty thousand drawable in the name of the seller but this post-dated cheque shall not be taken as the means of payment.

7. The post-dated cheque is issued to the seller on condition that it is not transferable and shall not be used for any other purposes except as a good-will and good-faith gesture.

8. In the event of the non-delivery of goods on the date specified the seller undertakes to return the post-dated cheque to the buyer immediately"

15. But is such evidence, which although in writing, is nevertheless extrinsic to the Cheque, admissible in an action between the plaintiff indorsee and the defendant drawer? In my judgment, the answer is clearly "no".

16. Phipson on Evidence, 15th edition, paragraph 42-24 states the rule in these terms (emphasis added):-

"Bills and notes, though required by law to be in writing, may, however, be varied by contemporaneous written (but not oral) agreement, provided that it is made between the same parties and is parcel of the transaction, i.e. that the bill and writing together form one contract as where A sues B on a bill of exchange payable six months after date, B may rely on a written agreement made at the same time as the bill, that 'A would review if circumstances prevents B meeting it at maturity" But it would be otherwise if the bill were sued on by an indorsee or the agreement were oral".

17. In Maillard v Page, LR 5 Ex. 312, at p. 319, Channell B. and Pigott regarded the point as unarguable in the case of the bill being sued upon by an indorsee without notice of the agreement (emphasis added):-

"This is the case of a written contemporaneous agreement varying the effect of the bill as between the parties to the agreement. If the bill had been sued upon by an indorsee without notice of the agreement, it would not be contended that the agreement would afford a defence. If the agreement for a renewal had been contemporaneous, but not put into writing, it would not be admissible, and so could not be taken to be part of the contract between the parties."

18. Chalmers and Guest on Bills of Exchange, Cheques and Promissory Notes, 15th edition, is to be same effect, see paragraphs 384 - 389 (emphasis added):-

"The contracts of the various parties to a bill of exchange or promissory note are contracts which are required by law to be in writing. They are, therefore, like any other contract which has been reduced to writing, subject (in England) to what is commonly known as the 'parol evidence rule'. The rule has been summarised as follows: 'Parol testimony cannot be received to contradict, vary, add to or subtract from the terms of a written contract or the terms in which the parties have deliberately agreed to record any part of their contract.' The effect is to bind a party to his contract as written on the instrument: extrinsic evidence (the words ' whether oral or written' appears in the footenote) is, in general, inadmissible to prove that the terms of the contract differed from those expressed in writing on the bill or note.

...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 ...

... on the other hand, ' written agreement on a distinct paper, to renew, or in other respects to qualify, the liability of the maker or acceptor, is good as between the original parties, evidence may always be given of a written agreement to vary the effect of the instrument and regulate their rights as between themselves ...

... However, a person to whom a bill or note is negotiated or delivered is entitled to assume that each party's promise is absolute and unqualified unless it is otherwise indicated on the instrument itself. In most cases, therefore, extrinsic evidence will be admissible only as between immediate parties, or as regards a remote party who took the instrument with knowledge of the qualification."

19. All 3 conditions contradict, vary, or subtract from the absolute and unqualified promise in the Cheque. There is no allegation that the plaintiff took the Cheque with knowledge of the qualification.

20. Further, condition (i) that the Cheque would not be taken as a means of deposit is neither here nor there and does not begin to help the defendant unless the defendant was saying that the Cheque would not be presented for payment or would not be payable at all. The defendant clearly admitted by its Amended Defence that the Cheque was a cheque and as Barnes J. said in Man Sun Finance (International) Corporation Limited v Wong Kwan-Man, [1982] HKLR 146 at p. 148 (reversed on appeal on the ground that the defendant there did not succeed in displacing the presumption in section 30, Man Sun Finance (International) Corporation Limited v Wong Kwan-Man, Civil Appeal No. 34 of 1982, 5 May, 1982, Hon. Leonard VP, Cons JA and Kempster J, unreported) such evidence is inadmissible:-

"At the trial the defendant sought to adduce evidence with a view to establishing that there was an oral agreement between the parties made contemporaneously with delivery of the cheque that it would not be presented by the plaintiff for payment ... Leading counsel for the plaintiff objected that the evidence sought to be so led was inadmissible. It was, however, agreed between counsel for both parties that I should take the evidence first and rule upon the issue after hearing their submissions on admissibility. Those submissions were made during counsels' final addresses and I now give my ruling.

It is a general rule that evidence of a parol agreement contradicting a term of a contemporaneous written agreement is inadmissible. A cheque is, by statutory definition (Section 3(1) Bills of Exchange Ord.), a bill of exchange payable on demand or at some future time. The defendant seeks to adduce evidence that there was an oral agreement that the cheque was not to be payable at all. He, therefore, seeks to prove an oral agreement denying the existence of an essential characteristic of the instrument he admits by his pleading to be a cheque. He is not allowed to do that ... I rule, therefore, that the evidence led for the purpose of showing that the cheque was not payable is not admissible ..."

21. The Cheque contains no words prohibiting transfer or indicating an intention that it should not be transferable and is clearly transferable (section 8(1)). Condition (ii) is untenable as words prohibiting transfer or indicating an intention that it should not be transferable should be contained in the Cheque itself and not in a secret (secret so far as the plaintiff was concerned) agreement between the defendant and the payee.

22. Condition (iii) is clearly a condition subsequent and as Godfrey J. (as he then was) said in a case cited by Miss Lan, Sum Wing Credits Limited v Shun Yip Textiles Limited and another [1988] HKC 405 at pp. 409 - 410 (reversed on appeal on another point in Sum Wing Credits Limited v Shun Yip Textiles Limited and another [1990] 1 HKLR 440, a case cited by Mr Chandler), inadmissible:-

"The original defence that the cheque was delivered conditionally so that the delivery to the indorsee was ineffectual (see s 21) was eventually and in my view rightly abandoned ...

The drawer stipulated that the drawer's cheque should (and expected that it would) be returned to it within a short time, but that is another matter altogether. The drawer was quite prepared, if the drawer's cheque was not so returned, to present the payee's cheque for payment and allow its own cheque, for the same amount, also to be presented for payment. The condition was a condition subsequent, ie a condition of defeasance ('if your cheque is not met then I shall not be obliged to meet mine') not a condition precedent to the effectual delivery of the cheque and the coming into force of the drawer's obligation: compare Hitchings and Coulthurst Co v Northern Leather Co of America and Doushkess (1914) 3 KB 907. As that case shows, I cannot receive evidence of such an arrangement in breach of the parol evidence rule, to contradict the terms of the drawer's cheque which does not suggest any such condition of defeasance on its face. (And see also New London Credit Syndicate Ltd v Neale (1898) 2 QB 487.)"

23. As evidence on the conditions is not admissible, the foundation of the defendant's is gone and there is no issue of any breach of those conditions and no issue of fraud. I shall say in passing that the 3 conditions read together suggests that the Cheque was a cheque unless and until non-delivery by the agreed date.

"Good faith" and wilful blindness

24. Mr Chandler told me that the defendant was not alleging actual knowledge on the part of the plaintiff. By section 96, a thing is deemed to be done in good faith, within the meaning of the Ordinance, where it is in fact done honestly, whether it is done negligently or not. I asked Mr Chandler whether he was disputing the honesty of the plaintiff. His reply was that he was putting the plaintiff to proof. I cannot detect anything on the materials before me pointing even vaguely to any want of faith on the plaintiff's part. None of the matters mentioned by Mr Chandler gives rise to the slightest suspicion in my judgment, and I do not see anything even remotely untoward in the conduct of the plaintiff which strikes me as having acted in a perfectly conventional way in discounting cheques including the Cheque. The plaintiff's good faith is remaining wholly intact and it is clear that the plaintiff holds the Cheque free from equities and the defendant remains liable on them, no matter what problems might have arisen in the relationship between the defendant and the payee. Compare Wayfoong Credit Limited v Remoco (HK) Limited [1983] 2 HKC 445 at p. 448 G - p. 449 C.

"A/C payee only"

25. Mr. Chandler submitted that "A/C payee only" was his strongest point and that they had similar practical effect as the words "Not Negotiable, A/C Payee only" in Sum Wing Credits Limited v Shun Yip Textiles Limited and another [1990] 1 HKLR 440. The ratio of the Court of Appeal judgment was that the inscription of "Not Negotiable, A/C payee only" on the face of the cheque was crucial to the whole of that case. By reason of section 81, a person taking a cheque which bore on it the words "not negotiable" should not have a better title to the cheque than that which the person from whom he took it had and by reason of section 29(2), "the title of a person who negotiated a bill is defective within the meaning of this Ordinance when he ... negotiates it in breach of faith", the indorsee obtained no better title than the payee who had destroyed his own title by negotiating the cheque in breach of faith. The cheque in that case was not a negotiable instrument but the Cheque is negotiable and that case is clearly distinguishable.

26. In Tse Chun Hung & another v Chang Chung [1999] 3 HKLRD 138 Deputy Judge Li said that:-

"The business efficacy in this case is the need affirmed by unchallengeable judicial authority to prevent embezzlement by recipients. Mr Chun suggested at one stage that he did not see how split cheques could achieve that purpose. He said that if solicitors for the vendor cannot be trusted then no payment at all should be made to them; on the other hand, if a cheque can be handed over to those solicitors then why the need to split it into two or more. I could not believe such spurious argument would be advanced until I heard it. Counsel cannot be so naive as not to know the protection afforded by crossed and ' account payee only' bills of exchange".

27. The learned Deputy Judge did not say what protection afforded by crossed and "account payee only" bills of exchange he was referring to and for this reason I derive no assistance from the remark of the learned Deputy Judge.

28. We do not have the equivalent of section 81A of the English Act which was inserted by section 1 of the Cheques Act 1992. In Hong Kong "account payee only" cheques remain transferable and negotiable. In Bank of Credit and Commerce Hong Kong Limited (formerly known as Hong Kong Metropolitan Bank Limited) v Hong Kong Yung Hong Trading Company Limited [1985] HKLR 391 Rhind J. summarised the law on such cheques in these terms:-

"On the cheque was a crossing with the words 'Account Payee Only'. The defendant company has sought to argue that those words affect the transferability of the cheque with the result that Mr. Lo is the only one entitled to sue upon it. However, I do not regard that point as any longer arguable at first instance in Hong Kong. Trial judges in Hong Kong have consistently held that the words "Account Payee Only" do not affect transferability or negotiability, but are no more than a warning to the collecting banker to ensure that it applies the proceeds of the cheque for the account of the named payee only or to an account authorized by the named payee. See Asiatic European Corp. Ltd. v. Overseas Trust Bank Ltd. [1967] HKLR 1; Edward Wong Finance Co. Ltd. v. Infinity Industrial Co. Ltd. HCA No. 3469/77, unreported (since then reported in [1997 - 1999] HKC 449) and Wayfoong Credit Ltd. v. Remoco (Hong Kong) Ltd. HCA No. 662/83, unreported (since then reported in HKC and referred to above). Academic opinion is to the same effect in Hong Kong. See 1979 Hong Kong Law Journal at page 341. There is also a Privy Council decision involving an appeal from Australia to the same effect: Universal Guarantee Pty. v. National Bank of Australasia Ltd. [1965] All ER 98.

29. The warning to the collecting banker is to exercise the reasonable care of a prudent banker to satisfy himself that the named payee has authorised collection for the indorsee, see Zanda Investment Limited v Bank of America National Trust and Savings Association [1994] 2 HKC 409 at p. 424. As the payee endorsed the Cheque in blank and gave it to the plaintiff, there is no question of any negligence had there been an issue under section 86.

Sections 29 and 30

30. In the course of the hearing, I questioned the need on the part of the plaintiff to invoke section 30. Section 30(1) is a presumption which is displaced in circumstances under sub-section (2). I know of no authority requiring a holder of a cheque or a bill of exchange to invoke the presumption under section 30 or indeed any other presumption. A presumption is a presumption. The plaintiff is clearly a holder who has taken the Cheque, complete and regular on the face of it, under the conditions that he became the holder of it before it was overdue and he took the bill in good faith within the meaning of section 96 and for value, and that at the time the Cheque was negotiated to the plaintiff, the plaintiff had no notice of any defect in the title of the payee who negotiated it and is thus a holder in due course under section 29(1). Absent notice on the part of the plaintiff of any defect in the title of the payee, the defect in the title of the payee dealt with under section 29(2) simply does not come in as the Cheque is negotiable. As I have concluded that there should be summary judgment for the plaintiff, this point should be reserved for more mature consideration.

Conclusion

31. In my judgment, there is no triable issue and no other reason for a trial and the plaintiff should therefore have judgment. As the plaintiff could not have succeeded on the materials before the learned Master, I am provisionally of the view that I should not disturb the order on costs made by the learned Master. I therefore order that paragraphs 1 - 3 of the Order of the learned Master be set aside and that final judgment in this action be entered in favour of the plaintiff against the defendant for the amount claimed in the Statement of Claim with interest at judgment rate or rates from 23 October 1999. I make an order nisi that the plaintiff should have costs of this action, except that the plaintiff should only have 3/4 of its costs on 20 April 2000.