HOVEN INTERNATIONAL LTD v. MASS RESOURCES DEVELOPMENT LTD AND ANOTHER

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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

JUDGMENT

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

The applications

1. The Plaintiff claimed against the 1st Defendant $3 million being money lent by the Plaintiff to the 1st Defendant. The Plaintiff also made an alternative claim against the 2nd Defendant as the drawer of a cheque for the same amount. The Plaintiff applied for summary judgment against the Defendants. Judgment was sought against the Defendants in the alternative. The Master granted conditional leave to the Defendants to defend upon payment into Court by the Defendants of $3 million. The Defendants appealed, seeking dismissal of the Plaintiff's summons. The Plaintiff also appealed, seeking judgment against the Defendants in the alternative. Mr Yeung, Counsel for the Plaintiff, informed the Court today that he is seeking judgment against the 1st Defendant only.

Plaintiff's case

2. The Plaintiff's case is that it lent the money to the 1st Defendant on 28th February 1995. The agreement between the parties was that the sum with interest was to be repaid within seven days. This was not done. In purported repayment of this sum the 2nd Defendant drew a cheque dated 31st December 1995 for $3 million and delivered it to the Plaintiff. The cheque was dishonoured upon presentation.

The defence

3. The defence is that in April 1994, the 1st Defendant entered into various agreements with the Plaintiff, through its agent by the name of "Belongings Co. Ltd.", in the purchase and sale of properties. The purchase would be on a short term basis and the properties would be sold at a time to be agreed by both parties.

4. Subsequently the market value of the properties dropped and the 1st Defendant encountered cashflow problems. The Plaintiff agreed to lend $3 million to the 1st Defendant and it was agreed that the money would be repaid as soon as all the properties were sold.

5. The parties between February and September 1995 agreed not to sell the properties. In September 1995, the Plaintiff requested for repayment of the loan. According to the Defendants' evidence, the 1st Defendant informed the Plaintiff that the 1st Defendant was not liable to repay the debt because some of the properties had not yet been sold. The Plaintiff "then requested that as security for the loan under the Loan Agreement, the 2nd Defendant should send the Plaintiff a post-dated cheque in sum of $3,000,000 to show the 1st Defendant's 'sincerity' to honour the loan agreement, subject to the condition that the Plaintiff would not present the cheque until the Properties were sold pursuant to the Agreements" : paragraph 10 of the 1st affirmation of Mr Lai Shing-kai.

6. The 1st Defendant agreed and a post-dated cheque of $3 million was sent to the Plaintiff. The 1st Defendant maintains that its liability to repay the $3 million has not arisen. The 2nd Defendant contends that the cheque was given to the Plaintiff without consideration.

Test

7. The test in 0.14 application is set out in the often quoted judgment of Ng Shou Chun v. Hung Chun Sang (1994) 1 HKC155. At p.158, Godfrey J.A. stated this:

"It will in future be sufficient for the court to ask itself the simple question - is what the defendant says credible, if so, he must have leave to defend, if not the plaintiff is entitled to summary judgment."

Bokhary J.A. in In the matter of Safe Rich Industries Ltd.

(C.A. No.810/1994) stated this:

"The test at the summary stage is indeed as simple as whether the defendant's assertions are believable. But it must recognized - because failure to recognize it would create a debt lodger's charter - that whether the defendant's assertion are believable is a question to be answered not by taking those assertions in isolation but rather by taking them in the context of so much of the background as is either undisputed or beyond reasonable dispute".

Defence of 1st Defendant is not credible

8. It is not necessary for me to resolve the question whether there was any joint venture agreement between the Plaintiff and the 1st Defendant. The Plaintiff said in April 1994, it was still a shelf company and the current shareholders only took up the shares in August 1994. Even assuming that there was such a joint venture agreement, I find the 1st Defendant's defence is simply not credible.

9. The loan receipt issued by the 1st Defendant did not say that the $3 million was only to be paid upon the properties being sold. There was no response by the 1st Defendant that its liability had not arisen when the Plaintiff and its solicitors issued the letters of demand. The letters actually referred to the term of the loan, namely, that it was to be repaid in seven days and a draft writ which again set out the terms of the loan was enclosed with the demand letter. On the contrary, on 22nd September 1995, the 1st Defendant wrote to the Plaintiff saying:

"With reference to the captioned loan, we are in utmost sincere to enclose herewith out Bank of China Cheque No.385625 in an amount of $3 million for the settlement."

The cheque enclosed was dated 22nd January 1996. The reference to "settlement" in the letter must be a reference to settlement on the due date of the cheque. There was not other qualification. This cheque was returned by the Plaintiff and on 23rd September 1995, the 1st Defendant wrote again to the Plaintiff:

"We refer to the letter dated 19th September 1995 from Messrs Tsang and Chan to us enclosing a draft Writ of Summons claiming the captioned loan from us on your behalf and the subsequent telephone conversation between our Mr Lai and your Mr He. As spoken, we need more time to repay the captioned loan to you. In order to show our sincerity and commitment to pay, we enclose our cheque No.385640 drawn on dated 31st December 1995 in an amount of $3 million for your attention and future action. We agree that your receipt and retention of the said cheque shall not in any way affect your right to claim against us at any time in relation to the said loan."

This letter is totally inconsistent with any agreement on repayment of the loan on the disposal of the property. The letters are clear acknowledgments of the debt and the 1st Defendant is simply seeking an indulgence of time to repay the money.

10. Further the 1st Defendant's contention just does not make commercial sense. It is said by Mr Lai in his affirmation that, "The 1st Defendant should repay the said sum as soon as all the Properties were sold pursuant to the terms of the Agreements so that the 1st Defendant could apply the profits of the investment in the Properties to repay the said loan." Taken to its logical conclusion, this would in effect mean that the 1st Defendant would never have to repay the loan if no profit was to be made because of the drop in the value of the properties. In any event, this would involve an indefinite suspension on the repayment of the loan.

11. Furthermore, the allegation that the cheque was not to be presented until the properties are disposed of is to introduce extrinsic oral evidence to contradict the express term of the cheque, namely payment on 31st December 1995. This is not permissible: see Great Sincere Trading Co. v. Swee Hong & Co. (1968) HKLR 660.

12. Mr Tsang argued for the existence of a collateral agreement which would overcome the parole evidence rule. He referred me to the Law of Contract by Treital, 9th Edition, p.183. It is clear from the passage cited, "The test seems to be whether the evidence relates to a term which would go to the essence of the whole transaction : if so, it cannot be regarded as evidence of a collateral contract and will be inadmissible."

13. The loan is not disputed, the issue is on the term of repayment. That must be an essential term of the agreement. In any event, this alleged term is totally inconsistent with what is said in the two letters I have just referred to.

14. In my view, the 1st Defendant clearly has no defence to the action and judgment should be entered in favour of the Plaintiff.

2nd Defendant

15. As to the 2nd Defendant, the Plaintiff is only seeking a claim against the 1st Defendant only. But as both parties have addressed me on the issue, I will briefly deal with this matter.

16. The central issue is one of consideration by forbearance to sue. The 2nd Defendant's defence of absence of consideration is unsustainable. There is, of course, no promise to forbear to sue, on the contrary the Plaintiff expressly reserves its right to sue the 1st Defendant. However, there is, clearly forbearance by the Plaintiff to sue on the debt. The cheque in question is post-dated for three months. Although the letter of 23rd September 1995 stated that the receipt by the Plaintiff of the cheque shall not in any way affect the Plaintiff's right to claim against the 1st Defendant at any time in relation to the loan, the Plaintiff did not proceed against the 1st Defendant until January 1996 when the cheque was dishonoured. The consideration for the cheque is the actual forbearance by the Plaintiff to sue during this period. The fact that the Plaintiff has since sued the 1st Defendant does not relieve the 2nd Defendant from liability. There was atmost a forbearance to sue the 1st Defendant for the period of three odd months. It was a virtual certainty that the Plaintiff would sue the 1st Defendant: the draft writ against the 1st Defendant was enclosed in the demand letter of 19th September 1995. See also para.3-088, Chitty on Contracts, 27th Edition.

17. The other issue is the question of conditional payment and collateral contract which I had already dealt with. Hence, judgment should also be entered against the 2nd Defendant but for Mr Yeung's election to enter judgment against the 1st Defendant only.