Grace Chu Chan Po Kee v. The Hong Kong Chinese Bank Ltd and Another

HCCL001571/1978

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

Coram: Cons, J.

Date of Judgment: 9 January 1979

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

JUDGMENT

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

1. The plaintiff is a customer of the defendant bank. At the end of last year she had three accounts there. One of them was a loan account on which she owed the bank HK$1,300,000. On the 25th November Sir Sik Nin Chau, pursuant to an agreement made earlier with the plaintiff, drew upon the defendant bank a cheque to the same amount of $1,300,000 payable to the plaintiff and crossed. The plaintiff sent it to the bank through her solicitors on the 1st December with a covering letter instructing the bank to pay it into her loan account. That should, of course, have cleared the account.

2. Normally a customer who pays a crossed cheque into his own bank will not know immediately whether that cheque will be met. His bank will pass it through the Clearing House and it may under the rules of the Clearing House be rejected by the drawee bank up to 1 p.m. on the following day. However, it is fairly common practice for banks not to present house cheques through the Clearing House, that is cheques drawn by one customer of the bank in favour of another. They deal with them by internal transfers. The defendant bank adopted this course and in effect presented the cheque to itself. It was then necessary to decide whether or not the cheque should be met. The bank did not make that decision straight away. It deferred its decision until the 22nd December, that is almost three weeks later. On that day the bank decided not to pay the cheque and on the next day returned it to the plaintiff's solicitors. It is now formally conceded by the bank that this exceeded "the time established by the custom and practice of banks in Hong Kong within which paying banks in Hong Kong decide the fate of a cheque which has not been presented to the paying banker through the Clearing House". The question in this case is whether that makes the defendant bank in any way liable to the plaintiff.

3. Mr. Yorke for the plaintiff puts his case in three ways. Firstly, that the plaintiff is a holder of the cheque in due course. This point is not open to him before me but he wishes to reserve it for the future. Secondly, that the plaintiff is a holder of the cheque for value. It is not disputed that she gave value. Thirdly, and this is his main contention, that once the "time established by the custom and practice of banks" had passed the bank as paying bank had lost its right to reject the cheque and in consequence the bank as collecting bank for the plaintiff had no right to accept its return. I must confess that in earlier proceedings under Order 14 I failed to appreciate the true basis of this contention. I looked for equitable grounds. But this was wrong. Mr. Yorke specifically spurns the assistance of equity. He puts his claim fairly and squarely upon the law merchant, and in so far as that law applies to negotiable instruments.

4. Mr. Leggatt, who appears for the bank, answers that the fatal weakness of the plaintiff's contention is simply that the bank is under no legal liability to pay her; that she has no cause of action in any size, shape or form whatsoever. A bank, he says, might in circumstances such as these become liable by express contract. That would have been so in the case of Boyd v. Emerson⁽¹⁾ if the plaintiff there had made good his allegations. Otherwise a bank is only liable if it has actually received payment or its equivalent on behalf of its customer or is for some reason estopped from denying that it has done so. He suggests that every case in which a plaintiff has been successful can be justified in one of these ways. That is certainly so in respect of those cases to which I have been referred. But that does not take the matter much further. In no case at all has the present contention been put forward. Mr. Yorke sought to show that Mann, J., had it in mind in the Australian case of Riedell v. Commercial Bank of Australia⁽²⁾ but that he could not rely upon it due to the strict rules of pleading then in force. I regret I find myself unable to read his judgment in this way.

5. The law merchant was originally not part of the common law of England. In the introduction to the third edition of his work on Bills of Exchange Chalmers quotes from Lord Blackburn:

6. The law merchant has not remained static. In Goodwin v. Robarts⁽³⁾ Lord Cockburn, C.J., says this (p.346):

"Having given the fullest consideration to this argument we are of opinion that it cannot prevail. It is founded on the view that the law merchant thus referred to is fixed and stereotyped, and incapable of being expanded and enlarged so as to meet the wants and requirements of trade in the varying circumstances of commerce. It is true that the law merchant is sometimes spoken of as a fixed body of law, forming part of the common law, and as it were coeval with it. But as a matter of legal history, this view is altogether incorrect. The law merchant thus spoken of with reference to bills of exchange and other negotiable securities, though forming part of the general body of the lex mercatoria, is of comparatively recent origin. It is neither more nor less than the usages of merchants and traders in the different departments of trade, ratified by the decisions of Courts of law, which, upon such usages being proved before them, have adopted them as settled law with a view to the interests of trade and the public convenience, the Court proceeding herein on the well-known principle of law that, with reference to transactions in the different departments of trade, Courts of law, in giving effect to the contracts and dealings of the parties, will assume that the latter have dealt with one another on the footing of any custom or usage prevailing generally in the particular department. By this process, what before was usage only, unsanctioned by legal decision, has become engrafted upon, or incorporated into, the common law, and may thus be said to form part of it."

7. Since that was said much of the law merchant as it relates to negotiable instruments has been codified. Lord Wright was referring to the Bills of Exchange Act, 1882 and its equivalent in India when he said in Bank of Baroda, Ltd. v. Punjab National Bank, Ltd.⁽⁴⁾:

"Both have been based on the law developed by the English courts as a part of the law merchant, which the common law originally received on the basis of what was proved to the court to be the custom of European business men in their dealings, but which eventually, under the name of the law merchant, was integrated with and became a part of the common law. The law of negotiable instruments was peculiarly adapted to codification, because it was so largely precise and formal. Hence the English Act was described as a codifying Act, and so, in fact, was the Indian Act."

But codification was not the end of the line. Lord Wright continued a little further on:

"But the law merchant is not a closed book, nor is it fixed or stereotyped. This was explained by Cockburn C.J. in Goodwin v. Robarts (1875) L.R. 10 Ex. 337,346 et. seq. Practices of business men change, and courts of law in giving effect to the dealings of the parties will assume that they have dealt with one another on the footing of any relevant custom or usage prevailing at the time in the particular trade or class of transaction. Hence evidence is admitted of custom and usage, which when juridically ascertained and established become incorporated in the common law."

8. It is against this background that the present situation must be considered. Mr. Yorke relies primarily, I think, on a basic principle of the law merchant first set out in Cocks v. Masterman⁽⁵⁾. Mathew, J., in The London and River Plate Bank, Ltd. v. The Bank of Liverpool, Ltd.⁽⁶⁾ put it this way:

"when a bill becomes due and is presented for payment the holder ought to know at once whether the bill is going to be paid or not".

This aspect of a bill is described by the learned editors of Paget's Law of Banking, 8th edition (at p.375) as "an element essential to the negotiability of the instrument and imperatively demanded by the exigencies of business". It is not a question of whether the payee may suffer any prejudice. "The law does not permit any enquiry as to that in the case of negotiable instruments; and it is highly expedient that that should be so": per Cresswell, J., in Mather v. Maidstone⁽⁷⁾. Mathew, J., in The London and River Plate Bank, Ltd. Case says:

"it is manifest that the position of a man of business may be most seriously compromised, even by the delay of a day" (p.11).

"That", once again the learned editors of Paget say, "is really the key to the whole situation. Certainty is the essence of negotiability, which could not exist without it. To Mathew, J., is due the credit of having first fully expounded it in terms carrying conviction alike to lawyers and business men". And that, argues Mr. Yorke, is where the defendant bank failed. It did not give the plaintiff the immediate certainty to which she was entitled. If she had chanced to present the cheque through some other bank she would have had that certainty. The cheque would have been passed through the Clearing House and failure to reject within the stipulated time would have amounted to payment: Riedell v. Commercial Bank of Australia. The plaintiff should not suffer, argues Mr. Yorke, simply because she happens to be a customer of the same bank.

9. He seeks also to draw support from the case of Boyd v. Emerson. In that case Mr. Boyd left a cheque with his bankers. It was drawn on them by a third party. He gave them no particular instructions, other than to place it to his account or to his credit. The account of the third party was at that moment overdrawn, but that was not unusual. The bankers did not mention these matters to Mr. Boyd. They made enquiries to see if funds might be or become available. It seems there were none and the bankers decided not to pay. That fact was communicated to Mr. Boyd the following evening. He subsequently brought action against the bank. It was an action in assumpsit. The declarations stated that in consideration of Mr. Boyd's paying the cheque to the bank the bank promised to pay the amount of the cheque to him or to give him credit to the same extent. Mr. Boyd lost his action. As a question of fact the court found that he had not made good his declarations. There was no proof of an express promise nor circumstances from which a promise could be implied. The court found that the bank had received the cheque merely to collect payment on Mr. Boyd's behalf and in that circumstance notice of dishonour had been given within sufficient time.

10. It is suggested that it is inherent in the decision that if the bank had taken the cheque as paying bank it would have been out of time when it rejected that cheque. That may perhaps be so. But I do not think the court really considered the question of time in this respect at all. The court did not look upon the bank, as we have in the present case, as being both collecting bank and paying bank within itself. The court seems to have taken the view that those two roles were mutually exclusive. There is, however, a dictum which strongly supports the plaintiff's contention. Taunton, J., at p.201 says this:

"The cheque was paid in on the 19th; and on the 20th, at 7 o'clock in the evening, notice of dishonour was given to the plaintiff. There is not then, in this case such a laches as entitles the plaintiff to say that the defendants have made the cheque their own."

11. I must also mention the case of Parr's Bank Ltd. v. Thomas Ashby & Co.⁽⁸⁾. The plaintiffs were a bank with their head office in the City of London and many "country" branches. Cheques paid into the country branches were cleared through the Clearing House by the head office. The defendants were country bankers at Staines and who cleared their cheques through London agents. One Saturday morning a customer paid a cheque into the plaintiffs' country branch at Kensington. It was for £307 and was drawn upon the defendants. The Kensington branch duly forwarded the cheque to the head office and on the following Monday morning, at the usual time of 12 noon, the cheque was cleared with the defendants' London agents. The London agents sent the cheque along with others to the defendants for payment. The defendants acknowledged receipt of the cheques by a note which asked the agents to debit their account with an amount which included the cheque for £307. That note was sent to the London agents on the Tuesday. Early on the Wednesday morning the defendants advised their London agents by telegram not to pay the £307. At the noon clearing that day the London agents showed the telegram to the plaintiffs and the account between those two was readjusted. The rules of the Clearing House include this rule:

The telegram that the defendants sent on the Wednesday morning added that the cheque had been returned to Parr's Kensington branch. In fact this was not so. It was not sent until late that afternoon by which time the branch had paid out £65 on the strength of the payment in. The branch would not have paid that money if the cheque had been received back in the morning.

12. In the action between the banks the plaintiffs contended firstly that there had been payment of the £307 and secondly that as to the £65 the defendants were estopped. The plaintiffs failed on the first contention. They succeeded on the second. The judgment does not give the reason why the first contention failed but, as Mr. Leggatt points out, there was no payment on the facts. There was provisional payment at 12 noon on the Monday. That payment would have become absolute at 12 noon on the Wednesday if nothing had been said by then. However the defendants' telegram arrived in time and the provisional payment was set aside.

13. The reason for the success of the second contention is succinctly set out in the judgment:

"The learned judge found, as a fact, that the practice was for one country bank which received the cheque from another country bank which it did not intend to pay to return the cheque by return of post to the bank into which it had been paid. The defendants had not observed that practice, and they must have known what the result would be. The plaintiffs had acted on the faith of the representation made by the defendants when they met Frost's draft for £65. There was a representation that the cheque for £307 was a paid cheque and a representation that would lead the plaintiffs to act upon it. They had acted upon it. There must be judgment for the plaintiffs for £65".

14. This case is thus clearly consistent with Mr. Leggatt's argument. There was no payment of £307, the plaintiffs were unable to recover that sum. There were facts to found estoppel as to part of that sum, the plaintiffs were able to recover that part. Mr. Leggatt says the case goes further, to demolish wholly the present plaintiff's contention. For if that contention be correct Parr's Bank should have recovered the whole amount. I do not think that this necessarily follows, for the defendant bank in that case had made up its mind in time and had notified the party to whom it was primarily liable, i.e. the London head office of the plaintiff. The cheque had in fact been dishonoured. The learned judge mentions that twice in his judgment. The bank was only estopped from relying upon that fact because it had not followed another banking practice, i.e. physically to return the cheque on the next day direct to the country branch concerned. That is not the position in the present case. The bank here simply did not make up its mind, at least, in my view, not until it was too late. For I am eventually persuaded that there is substance in the principle Mr. Yorke puts forward and that by it a bank is required to give a decision either on demand or within such time as has been established by the common consent of banks and those who make use of their facilities. In the present instance the bank did not do that. It delayed. And by the delay it has, to borrow the words of Taunton, J., "made the cheque its own". The plaintiff has not pleaded her case in those words. She asks for an order and declarations. I think the situation will be sufficiently met by a declaration that her indebtedness to the defendant bank had been reduced by $1,300,000 as from the 3rd December, 1977. The rest is a matter of account and will automatically follow.

15. In view of this conclusion it is not necessary for me to express a considered opinion upon the second of Mr. Yorke's contentions, that is, that the holder of a cheque for value the plaintiff is entitled to all the rights that the maker had therein. I would only say that I would have been slow to accept that contention. It is contrary to established opinion and I cannot myself see why that opinion should be affected by the decision in Joachimson v. Swiss Bank Corporation⁽⁹⁾. On the other hand I would have accepted Mr. Yorke's argument that the bank had given implied consent to Sir Sik Nin Chau to overdraw his account as he wished within lawful limits. In my view that agreement had become implicit from the course of conduct between himself and the bank over at least the last ten years. The bank could put an end to that agreement only by notice. It is pertinent perhaps to note that in fact it did give such notice on the 30th December.

16. For these reasons I make a declaration in favour of the plaintiff in the terms I have already mentioned. The plaintiff is to have her costs.

Representation:

Mr. R. Yorke, Q.C., and Mr. Charles Ching, Q.C., and Mr. Fung (Johnson, Stokes & Master) for plaintiff.

Mr. Andrew Leggatt, Q.C., Mr. Andrew Li and Mr. Robert Kotewall (P.C. Woo & Co.) for defendant.

(1) [1834] 2 A. & E. 184; 111 English Reports 71

(2) [1931] Vict. L.R. 382

(3) L.R. 10 Ex. 337

(4) [1944] A.C. 176 at 183

(5) [1829] 9 B. & C. 902

(6) [1896] 1 Q.B. 7

(7) [1856] 18 C.B. 273

(8) (1898) 14 T.L.R. 563

(9) [1921] 3 K.B. 110