VSC STEEL CO LTD v. WING KEY CONSTRUCTION CO LTD

DCCJ 888/2010

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 888 OF 2010

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BETWEEN

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J U D G M E N T

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Background

1.  The Plaintiff (“Steel Company”) claims for a sum of $500,000 under a cheque dated 7 March 2009 (“Cheque”) which was issued by the Defendant (“Construction”).  The Steel Company claims that the Cheque was issued for partial settlement of the outstanding price of steel which it had sold and delivered to a company related to Construction, namely, Wing Key Construction Engineering Ltd. (“Engineering”).  By way of defence, Construction claims that the Cheque was issued by mistake, in that it should have been issued by Engineering, and not by Construction, since the contract for the sale and purchase of steel was made between the Steel Company and Engineering.  It is alleged that there was no consideration for Construction’s payment under the Cheque.

2.  It is not in dispute that the contract for the sale and supply of steel was made between the Steel Company and Engineering, as evidenced by the letter of agreement dated 21 October 2008 (“Agreement”) signed by the parties.  The Agreement was for the Steel Company’s sale of 800MT of steel to Engineering, for the works at 12-22 Davis Street, Hong Kong (“Project”). Construction was the main contractor of the Project and Engineering was Construction's subcontractor. As at February 2009, a sum of over $2 million was outstanding and due from Engineering to the Steel Company under the Agreement, and this fact is not disputed. 

3.  Under the Agreement, a deposit of $400,000 was paid by Engineering to the Steel Company upon the signing of the Agreement.  The steel was to be supplied by partial deliveries commencing November 2008 until June 2009, Engineering being entitled to serve 3 days notice for each delivery required.  Payment for each delivery was to be made by Engineering within 45 days from the date of delivery, 8% of the payment for each delivery being deducted from the deposit, and the balance to be paid within 45 days of delivery.

4.  It is claimed by the Steel Company that since late 2008 or early 2009, Engineering became late in making payments under the Agreement, which led to discussions in February 2009 between Mr. Lai Yun Kwai (“Mr. Lai”) of Engineering and Mr. Woo and Mr. Chin of the Steel Company in respect of the payments due from Engineering.  Mr. Woo claims that as a result of such negotiations, it was agreed that Mr. Lai would send to the Steel Company a post-dated cheque for $500,000 in part payment of Engineering’s outstanding dues, and that a personal guarantee would be signed by Mr. Lai to cover Engineering’s liability to the Steel Company in connection with all transactions between Engineering and the Steel Company.

5.  It is not disputed that Mr. Lai did sign a guarantee in favour of the Steel Company on 23 February 2009.  It is also not in dispute that the Steel Company received the Cheque around 23 February 2009, post-dated to 7 March 2009, and that further steel products were delivered by the Steel Company to Engineering on 25 February 2009.

6.  Mr. Lai claims that in February 2009, the Steel Company had asked for part payment of the goods delivered under the Agreement, and had sought a personal guarantee from him as a condition for the Steel Company's continuation of supply of steel under the Agreement and for further time being granted to Engineering to make payment of the outstanding amounts due.  Mr. Lai claims that he had signed the Cheque in favour of the Steel Company to cover the part payment of the goods under the Agreement, but he claims that it was only on 6 March 2009 that he discovered that the Cheque had been issued by Construction, instead of Engineering.  Mr. Lai claims that Construction and Engineering are two separate companies, of which both Mr. Lai is director.  He claims that he then informed Mr. Woo of this mistake, and asked him not to present the Cheque, to which Mr. Woo agreed.  On 9 March 2009, Mr. Lai countermanded the Cheque, which led to its dishonour when it was presented by the Steel Company to the bank for payment on 25 March 2009.

7.  Mr. Woo and the Steel Company deny the existence of the mistake alleged by Mr. Lai, or that it had any effect, and also deny that Mr. Lai had informed them of the alleged mistake.

Issues

8.  The issues for determination at trial are simply: 

(1)   Was there any operative mistake relating to the issue of the Cheque? 

(2)   Was the Cheque supported by consideration? 

Was there any operative mistake relating to the issue of the Cheque? 

9.  Although the Defence and the evidence of Construction refer to the alleged “mistake” on its part relating to the issue of the Cheque, it is not clear from the pleadings how this can constitute a mistake which can operate on the facts of this case to vitiate the contract evidenced by the Cheque, or otherwise affect the rights of the Steel Company under the Cheque.  It is a mistake which, even on Construction’s case, was made by Mr. Lai unilaterally as to the account on which the cheque should be drawn (Construction’s, and not Engineering’s).  Perhaps for that reason, Counsel for Construction emphasized at the trial that the defence relied upon by Construction is that there was in fact no consideration to support the Cheque, by virtue or as a result of Mr. Lai’s mistake which led to the issue of the Cheque. Counsel stressed that non est factum is not relied upon as a defence.

10.  In Mr. Lai’s witness statement, it is claimed that when the Steel Company sought payment under the Agreement, the accountant of Construction, who also served Engineering, issued the Cheque on Construction’s account.  The Cheque was signed by Mr. Lai, who was at the material time a director of both Engineering and Construction.  It was only on 6 March 2009, a day before the Cheque was due, that the other director of Construction, Madam Wu, told Mr. Lai that it was a “mistake” to use Construction’s Cheque for payment of the goods under the Agreement between the Steel Company and Engineering.  It is claimed that Mr. Lai then informed Mr. Woo of the Steel Company of the mistake, and asked Mr. Woo not to present the Cheque.

11.  When cross-examined in Court, Mr. Lai claimed that, first, he very rarely signed cheques for the 2 companies, Construction and Engineering, but he was authorized to sign Construction’s cheques.  He claimed that usually, it would be Madam Wu who would sign cheques for Construction, but he accepted that the Cheque was given to him to sign. Mr. Lai accepted that he knew that the Cheque was issued to the Steel Company, and that it was for $500,000, as Mr. Woo had called him and had said that the amount outstanding under the Agreement was substantial and that some interim payment was required.  Mr. Lai also accepted that he had signed the Cheque, and had intended to give the Cheque to the Steel Company as payment of the outstanding price of the steel delivered under the Agreement with Engineering.

12.  Mr. Lai claims that he had telephoned Mr. Woo of the Steel Company upon his discovery of the mistake relating to the Cheque, and had told Mr. Woo of such mistake.  According to Mr. Lai, Mr. Woo simply asked Mr. Lai to give him a replacement for the Cheque.  It is common ground that no such replacement was ever issued or given by Mr. Lai or by Engineering before the presentation of the Cheque to the bank on 25 March 2009.

13.  According to Mr. Woo, Mr. Lai never told him of any mistake relating to the Cheque.  Mr. Woo’s evidence is that when Engineering became late in payments under the Agreement, he had discussed the matter many times with Mr. Lai.  Throughout, Mr. Lai had sought indulgence from the Steel Company, saying that “their company” had a cashflow problem at the time, as the developer of the Project had withheld payments and owed “their company” money.  Mr. Woo claims that Mr. Lai asked the Steel Company to support him by continuing to supply steel under the Agreement notwithstanding Engineering's default in payment and to extend the time for payment, but as there was a substantial amount of over $2 million outstanding under the Agreement,  Mr. Woo informed Mr. Lai that the Steel Company would only be prepared to continue its supply of the steel under the Agreement, as Mr. Lai wanted, if there was some part payment of the outstanding price and a personal guarantee from Mr. Lai, who was a shareholder and director of Engineering.  According to Mr. Woo, it was finally agreed, after some negotiation, that Mr. Lai would sign a personal guarantee for Engineering’s liabilities under the Agreement and would further give to the Steel Company a post-dated cheque for $500,000. 

14.  Mr. Woo admitted that he had never been told that there were 2 companies of Wing Key, that at the time of the negotiations, they were discussing the indebtedness of Engineering under the Agreement, and that no one had ever specified which company or party would be issuing the post-dated cheque.  Eventually, Mr. Lai signed a guarantee on 23 February 2009, and the Steel Company was given the Cheque on the same day.  Mr. Woo’s evidence is that he had not noted which company had issued the Cheque, but that the Steel Company would have accepted any cheque from any Wing Key company for the sum of $500,000, as their concern was only to collect the money.

15.  According to Mr. Woo, when Mr. Lai called him on 6 March 2009, he only said that they had no money and asked the Steel Company not to present the Cheque.  Mr. Woo claims that Mr. Lai did not say anything about any mistake in having issued the wrong cheque.  He later found out from his credit control department that the Cheque could not be presented. 

16.  Mr. Chin who was also involved in the discussions between the Steel Company and Mr. Lai in February 2009 said in his evidence that the request for Mr. Lai’s guarantee and for a cheque for $500,000 was made at the same time as a condition for the continuous supply of steel under the Agreement, and that they had not specified that Engineering, or any other company, was to issue the cheque.  Mr. Chin’s evidence is that they would accept, and would have had to accept, a cheque from any company.

17.  It is not in dispute that on 5 March 2009, a fax was sent by Engineering to the Steel Company (“Fax”).  Mr. Lai confirmed that he had instructed his staff to send the Fax.  The Fax referred to the Cheque and requested the Steel Company not to present the Cheque for payment until receipt of Engineering’s notice.  The Fax enclosed 2 payment certificates (“Payment Certificates”): one relating to a construction project in Stanley and stating Construction as the main contractor, and another relating to the Project (of which Construction was the main contractor), apparently to support the statement made in the Fax that payments would be received within the month.

18.  In a case such as this where there are serious disputes on the facts, I find it more useful to rely on such contemporaneous documents as do exist and to compare the witnesses’ evidence with such contemporaneous documentation and other undisputed or indisputable evidence as an aid to test the reliability of the oral testimony of witnesses.  This is because the parties’ evidence by the time of trial is often affected not only by lapse of time but by their subjective interpretation of the issues in dispute and their perception of the parties’ rights and wrongs, and their retrospective interpretation of the meaning and effect of any payments made and their unilateral declaration of their intention in making the payments.

19.  Having considered the evidence in this case, I reject Mr. Lai’s evidence that at the time when he signed the Cheque, he had thought that he was signing a cheque of Engineering (as he so claimed in the course of his re-examination).  It is clear that he knew that he was signing the Cheque for Construction, and that the Cheque was to be issued to settle in part the indebtedness of Engineering under the Agreement, pursuant to the demands made by the Steel Company.  This is supported by the Fax which, contrary to Mr. Lai’s claim that the Cheque should not be presented as it was issued by mistake, sought an extension of time for the presentation of the Cheque and in support of such request for extension, attached the Payment Certificates to evidence that money would be paid within the month to Construction (the main contractor in both the projects to which the Payment Certificates relate).

20.  Mr. Lai claims that when the Fax was sent, it had not been known to him that the Cheque was a mistake as it should not have been drawn on Construction’s account.  If that was the case, then I see no relevance in attaching the Payment Certificates to the Fax, since the Payment Certificates name Construction as the main contractor and the designated beneficiary under the Payment Certificates, and tallies with Construction being the issuer of the Cheque. Engineering has not been shown on the evidence to be related in any way to the payment certificate relating to the Stanley project.

21.  The Fax from Mr. Lai, under Engineering's letterhead, referred to "our company's cheque". Even if "our company" could be referred to Engineering, it is not conclusive to show that the issuer of the Cheque was intended to be Engineering and cannot be Construction. I accept the evidence of Mr. Woo and Mr. Chin that the parties had never specified that the postdated cheque to be delivered to the Steel Company could only be issued by Engineering. The reference in the Fax could simply mean the Cheque which was given by Mr. Lai on behalf of Engineering to the Steel Company.

22.  Given the circumstances of this case and the fact that the Steel Company had been pressing for settlement of the outstanding amount under the Agreement since February 2009 if not end 2008, it is also inherently improbable that if Mr. Lai had indeed made a mistake and had informed Mr. Woo of the alleged mistake on 6 March 2009, Mr. Woo and Mr. Chin would not have followed up to press Mr. Lai and Engineering for a replacement of the “mistaken” cheque. It is not disputed that throughout the period of time between 6 March 2009 (when Mr. Lai allegedly advised Mr. Woo of the mistake) and 25 March 2009 (when the Cheque was presented for payment and dishonoured), neither Mr. Lai nor Engineering ever issued a cheque to replace the Cheque.

23.  Mr. Lai’s claim, that he had asked Mr. Woo to come to the construction site to collect the “correct” replacement cheque any time, but that no one from the Steel Company had ever done so, defies belief.  Mr. Lam admits that Mr. Woo and Mr. Chin had come to the site frequently during the relevant time to discuss payments under the Agreement, but that no one had ever asked for the replacement cheque, nor had he or anyone representing Engineering signed any cheque to give to the Steel Company as a substitute for the Cheque.   

24.  Clearly, on 5 and 6 March 2009 when Mr. Lai asked the Steel Company not to present the Cheque on 7 March 2009, it was because the financial situation of Construction and Engineering was such that they could not have sufficient funds to honour the Cheque.  Mr. Lai’s assertion that Construction had funds to meet the payment remains a bare assertion, and one that contradicts the contents of the Fax.

25.  Even if there was a mistake made by Mr. Lai as to the bank account on which the Cheque should be drawn, in the light of all the evidence, I fail to see how the alleged mistake made by Mr. Lai himself or by Construction’s accountant can affect the Steel Company as the named payee.  The mistake was made by Construction or Mr. Lai unilaterally, without the knowledge of or any inducement by the Steel Company at the time when the Cheque was issued.  It is also clear from the evidence of the negotiations made between Mr. Woo and Mr. Chin of the Steel Company and Mr. Lai for Engineering in February 2009 that the issuer of the Cheque was not a material or fundamental term of the agreement for the extension of time for Engineering’s payment and the Steel Company’s continuous supply of the steel under the Agreement. I do not accept that any valid defence has been shown.

Was there consideration for the Cheque?

26.  I have no doubt that on the evidence, the Cheque was issued by Construction and delivered to the Steel Company in consideration of indulgence and time being given to Engineering to make payment of the amounts outstanding under the Agreement.  I accept the Steel Company’s evidence that as a result of Mr. Lai’s agreement to sign a personal guarantee and to procure to be delivered to the Steel Company a cheque post-dated to 7 March 2009 for $500,000, the Steel Company refrained from terminating its Agreement with Engineering, as it would have been entitled to do on the ground of Engineering’s breach in failing to make payment of the price of the steel when due, and instead continued to supply steel to Engineering for the Project, as it did on 25 February 2009.  I totally fail to see how it can be argued that there was no consideration for Construction’s Cheque to the Steel Company.

27.  Mr. Lai raised for the first time in his testimony that the Steel Company had insisted on delivering the balance of the steel under the Agreement in February 2009, not as a result of his personal guarantee or the Cheque, but because the price of steel had dropped since the date of the Agreement.  Counsel for Construction sought to argue that this shows that the Steel Company had not suffered any detriment in the form of forbearance to sue.  I reject this argument, since it was perfectly within the Steel Company’s contractual entitlement to insist on delivering the balance of the contractual amount of steel under the Agreement at the contractual price, and to sue for the contractual price in the event of Engineering’s default in payment, notwithstanding any drop or change in the price of steel after the Agreement. In refraining from taking action to enforce its rights, the Steel Company had clearly suffered detriment and furnished good consideration.

28.  Apart from indulgence being given to Engineering as the consideration in law for Construction’s Cheque, the Cheque was accepted by the Steel Company as part payment of the outstanding price of the steel under the Agreement, and I do not see any inconsistency in the pleading made in the Statement of Claim, to which Counsel for Construction has referred.

Conclusion

29.  I reject Construction’s Defence, and give judgment in favour of the Steel Company in the sum of $500,000 as claimed, with interest at judgment rate from the date of service of the Writ to the date of payment.  I will also make an order nisi that the costs of the action are to be paid by Construction to the Steel Company, with certificate for counsel, to be taxed if not agreed.