Sum Wing Credits Ltd v. Shun Yip Textiles Ltd and Others

HCA001848/1987

HEADNOTE

The drawer of a cheque marked it "Not Negotiable, A/C Payee only". The payee indorsed it over, for value. The indorsee took the cheque in good faith, without notice of the circumstances in which the payee had obtained it. The drawer countermanded payment of the cheque. The indorsee sued the drawer, who claimed (1) that because of the marking the cheque was not only not negotiable, but was not transferable; (2) that because, in the circumstances in which it had obtained it, the payee could not have sued on the cheque, the indorsee could not do so either; (3) that as between the drawer and the payee there was a total failure of consideration, which defeated the title of the indorsee.

1987. No. A1848

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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BETWEEN

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Coram: The Hon, Mr. Justice Godfrey in Court

Date of Hearing: 6 & 7 October 1988

Date of Delivery of Judgment: 21 October 1988

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JUDGMENT

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1. This is an action brought by a moneylender, Sum Wing Credits Ltd.("the indorsee") against Shun Yip Textiles Ltd. ("the drawer") and Tsang Kwok Lam and Tsang Yuk Mui, trading as the Kwok Shing Garment Factory ("the Payee"). The drawer has countermanded payment of a cheque drawn by the drawer in favour of the payee and indorsed over by the payee to the indorsee. The indorsee has obtained judgment against the payee. That judgment is unsatisfied, and the indorsee accordingly now proceeds against the drawer.

2. The material facts, as I find them, are as follows.

3. The drawer is a silk trader. Its finances are managed by one Ko Pui Shuen ("Ko"). The payee, a firm, was a customer of the drawer. The firm's finances were managed by one Tsang Kwok Yan ("the elder brother") on behalf of its proprietors Tsang Kwok Lam ("the younger brother") and Tsang Kwok Mui, a sister of the other two.

4. In January 1987 the elder brother asked Ko for her help. He asked her for a post-dated cheque of the drawer, made out in favour of the payee, merely (he said) to show to the younger brother, who had been nagging the elder brother about the state of the firm's accounts. He told Ko he wanted it only for a few days and that at the end of that time he would return it. Ko was concerned that the elder brother really wanted a cheque from the drawer in order to discount it, and not simply to use it in order to deceive the younger brother. The elder brother promised Ko that he would not discount the cheque; but she did not trust him. Eventually, she decided to help him as he had requested; but only subject to safeguards. First, she insisted on his providing her with the payee's cheque, for the same amount as the amount of the cheque which she was to draw in favour of the payee, but dated some days earlier. Secondly, she insisted that the cheque she was to draw should be one in which the word "bearer" would be crossed out and which would be crossed and marked "Not Negotiable. A/C payee only". On this second matter, she had taken advice from the drawer's bank, and from someone with an accountancy qualification; and she had concluded that if the cheque were to be given to the elder brother in this state, then, in the normal course of events, the payee would be unable to transfer it.

5. The upshot was that, on 8th January 1987, she gave the elder brother the cheque in question ("the drawer's cheque"), made out in favour of the payee, in the sum of HK$331,320 (the sum suggested by the elder brother). She dated it 5th March 1987 (a date three days later than the date of the payee's cheque mentioned below). She crossed out the word "bearer" on the drawer's cheque and she crossed and marked it "Not Negotiable. A/C payee only". In return, she took from the elder brother a cheque ("the payee's cheque") for the same amount, signed by the younger brother, and dated 2nd March 1987. She never intended that the drawer's cheque should be presented for payment in breach of her arrangement with the elder brother; but she thought she had protected herself against the consequences if that were to happen.

6. In fact (as any reader of the story so far will have guessed) on 9th January 1987 the payee discounted the drawer's cheque, endorsing it for value over to the indorsee.

7. After a few days Ko, through her clerk, asked the elder brother for the return of the drawer's cheque. The elder brother fobbed her off, and went on doing so until by 27th February 1987 Ko realised she would not get the drawer's cheque back and that the payee's cheque would be dishonoured if presented for payment. Nevertheless(and understandably) she did present the payee's cheque for payment and inevitably it was in fact returned unpaid. She also countermanded payment of the drawer's cheque : but this was now in the hands of the indorsee. Finding that the payment of the cheque had been countermanded, the indorsee instituted these proceedings. The question I have to decide is whether, in these circumstances, the drawer is liable to the indorsee on the drawer's cheque.

8. Various sections of the Bills of Exchange Ordinance Cap. 19, are or may be relevant to a resolution of this question and I now set out these sections (so far as material).

9. I turn now to consider the case in the light of these statutory provisions.

10. When the indorsee took the drawer's cheque it did not get a better title to the drawer's cheque than the payee had : see section 81. But that is not to say that is did not get any title; quite the opposite. If the indorsee was capable of getting some sort of title to the cheque, however defective, the arguement (which was advanced before me) that the cheque was not capable of transfer at all is obviously negated. And in the face of the express provisions of section 81,the argument is wholly untenable; a crossing "Not Negotiable" cannot be read as "indicating an intention that [the cheque] should not be transferable" inthe sense in which those words are used in section 8(1). The point is well summarized in Chitty on Contracts 25th Edition (1983) Vol. II at para. 2552 : "......... while a cheque crossed "not negotiable" remains transferable, each transferee takes it subject to the defects in the title of all previous parties ...

11. Then was there any defect in the payee's title to the cheque? If there was no such defect, the drawer has no defence to the indorsee's claim. The original defence that the cheque was delivered conditionally, so that the delivery to the indorsee was ineffectual (see section 21), was eventually and in my view rightly abandoned. When, as here, a cheque (being for this purpose a species of bill) is no longer in the possession of the drawer, a valid and unconditional delivery by the drawer is presumed until the contrary is proved : see section 21(3). (If the holder is a holder in due course, the presumption is conclusive, but that is not the case here : the indorsee is a holder for value, but is not, and in the light of the markings on the drawer's cheque does not claim to be, a holder in due course.) The drawer has not proved that its delivery of the drawer's cheque was conditional. 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, i.e. 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 Company v. Northern Leather Company 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 Limited v. Neale [1898] 2 QB 487,)

12. An alternative case advanced by the drawer and raised by amendment at the trial was to the effect that the payee negotiated the drawer's cheque in breach of faith and thus conferred on the indorsee at best a defective title, which the indorsee cannot set up as against the drawer : see section 29. But the breach of faith here was a breach of faith on the part of the payee towards the drawer, with which the indorsee had nothing to do; the breach of faith with which the section is concerned is a breach of faith on the part of the party to whom the bill is negotiated. In the absence of proof that the indorsee was a party to the breach of faith, this defence fails. The breach of faith on the part of the payee did not affect its title to the cheque, although it would have afforded a personal defence to the drawer if the payee had sued the drawer on the drawer's cheque despite the failure by the payee to meet its own cheque. But in fact the position is that, subsequent to the breach of faith on the part of the payee, the indorsee, itself acting in good faith and without notice of the payee's breach of faith, gave value for the cheque : the indorsee is therefore protected by section 30(2). If it had been pleaded and proved that the drawer's cheque had been obtained by fraud, the position would have been different. But, very properly, this was not pleaded. The drawer knew what it was doing; it issued its own cheque, the drawer's cheque, with its eyes open, relying for its protection on the delivery to the drawer of the payee's cheque.

13. The last defence was total failure of consideration. But this defence fails on the facts and on the law. The drawer received consideration for the drawer's cheque in the form of the payee's cheque, a cheque for the same amount as the amount of the drawer's cheque. And the indorsee is a holder for value of the drawer's cheque, having furnished consideration to the transferor for the drawer's cheque when it discounted it. (I should add that even if there was a total absence of consideration between the drawer and the payee, this does not affect a holder for value such as the indorsee : see Mills v. Barber [1836] 1 M and W 425. As a holder for value has furnished consideration to the transferor, the absence of consideration between prior parties does not constitute a valid defence against him.)

14. For these reasons, I will give judgment for the indorsee on this claim, with interest and costs.

Representation:

Mr. Alan Hoo leading Mr. Y. L. Wong instructed by Messrs. P. T. Yeung & Tang for the Plaintiff.

Mr. Jimmy Kwong instructed by Messrs. William Sin & So for the 1st Defendant.