FEDERAL COURT OF AUSTRALIA Strategic Financial and Project Services Pty Limited v Bank of China [2011] FCA 325 Citation: Strategic Financial and Project Services Pty Limited v Bank of China [2011] FCA 325 Parties: STRATEGIC FINANCIAL AND PROJECT SERVICES PTY LIMITED and ENERGREEN WIND SYSTEMS PTY LIMITED v BANK OF CHINA LIMITED and COMMONWEALTH BANK OF AUSTRALIA File number(s): NSD 1900 of 2008 Judge: EMMETT J Date of judgment: 2 March 2011 Legislation: Bills of Exchange Act 1909 (Cth) ss 4, 13, 34, 43, 61, 89, 95 Federal Court of Australia Act 1976 (Cth) s 31A Federal Court Rules O 20 r 5 Measures for the Implementation of Administration of Negotiable Instruments, People's Republic of China Negotiable Instruments Law, People's Republic of China Uniform Commercial Code, United States of America Cases cited: Spencer v Commonwealth (2010) 269 ALR 233 Date of hearing: 2 March 2011 Place: Sydney Division: GENERAL DIVISION Category: No catchwords Number of paragraphs: 37 Counsel for the applicants: I. M. Jackman SC, J. K. Taylor Solicitors for the applicants: Colin Biggers & Paisley Counsel for the first respondent: T. E. F. Hughes QC, S. Golledge Solicitors for the first respondent: Freehills Counsel for the second respondent: B. Edel Solicitors for the second respondent: Henry Davis York IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1900 of 2008 BETWEEN: STRATEGIC FINANCIAL AND PROJECTS SERVICES PTY LIMITED First Applicant ENERGREEN WIND SYSTEMS PTY LIMITED Second Applicant AND: BANK OF CHINA LIMITED First Respondent COMMONWEALTH BANK OF AUSTRALIA Second Respondent JUDGE: EMMETT J DATE OF ORDER: 2 MARCH 2011 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The amended notice of motion filed on 1 December 2010 be dismissed. 2. Bank of China pay Strategic Financial and Projects Services' costs of the motion. 3. The applicants in the proceeding serve no later than 8 April 2011 any proposed further amended statement of claim and any further evidence on which they intend to rely. 4. The proceeding be listed for further directions at 9.30am on Friday, 15 April 2011. 5. The applicants inform the second respondent in the proceeding of the above Orders. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using Federal Law Search on the Court's website. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1900 of 2008 BETWEEN: STRATEGIC FINANCIAL AND PROJECTS SERVICES PTY LIMITED First Applicant ENERGREEN WIND SYSTEMS PTY LIMITED Second Applicant AND: BANK OF CHINA LIMITED First Respondent COMMONWEALTH BANK OF AUSTRALIA Second Respondent JUDGE: EMMETT J DATE: 2 MARCH 2011 PLACE: SYDNEY REASONS FOR JUDGMENT 1 I have before me an application for summary dismissal of certain claims made in a proceeding commenced initially in 2008. By its amended notice of motion the first respondent, Bank of China Limited (Bank of China), seeks an order pursuant to s 31A(2) of the Federal Court of Australia Act 1976 (Cth) that certain claims made by the first applicant, Strategic Financial and Projects Services Pty Ltd (Strategic), be dismissed. Alternatively, Bank of China seeks an order under order 20 rule 5 of the Federal Court Rules that those claims be dismissed. 2 The claims in question arise out of an instrument bearing the date 18 August 2006 which is expressed to be a promissory note. The party named on the promissory note is Qiannanzhou Huabang City Gas-fired Estates Development Limited (QHC). The instrument has at its foot a further statement expressed to be a bank endorsement by Bank of China. In their third further amended statement of claim the applicants, including Strategic, allege two separate causes of action in the alternative based on the instrument of 18 August 2006. 3 The first cause of action, which is pleaded effectively in paragraphs 5 to 13 of the third further amended statement of claim, assumes that the instrument is a promissory note within the meaning of the Bills of Exchange Act 1909 (Cth) (the Bills of Exchange Act). The second cause of action, which is pleaded in paragraphs 13A to 13G, is based on the instrument being a promissory note under the laws of the People's Republic of China. It is desirable to summarise the effect of the causes of action as pleaded. 4 First, in relation to the Bills of Exchange Act, the allegations are, relevantly, as follows: 5. On or about 18 August of 2006, (a) QHC made a promissory note whereby it promised to pay to the order of Monibrook Pty Ltd (Monibrook) or to the holder of the note on 18 August 2008 the sum of $US50 million, and (b) Bank of China endorsed and confirmed the note. 6. It was an express term of the note that the note was transferable, assignable and divisible and the note was governed and to be construed in accordance with the laws of the People's Republic of China, the United States of America, Switzerland and Australia. 7. On or about 30 August 2006 Bank of China delivered the note to the second respondent, the Commonwealth Bank of Australia (the Commonwealth Bank) 8. By endorsing the note as set out in paragraph 5(b) the Bank of China promised that on presentation the note would be accepted and paid according to its tenor and became precluded from denying to the holder the genuineness and regularity of the drawer's signature and all previous endorsements. 8A. The note was a bearer note within the meaning of section 13(3) of the Bills of Exchange Act. 9. On 25 August 2006 Monibrook assigned the note to Strategic and at all material times thereafter Strategic has been and continues to be the holder of the note. 9A. On or about 19 February 2007 Strategic obtained the note from the Commonwealth Bank on behalf of Monibrook and became the bearer or, alternatively, the holder of the note. 10. On or about 12 August 2008 Strategic sent the note to Bank of China so that it could be presented on 18 August 2008. 11. On 18 August 2008 Strategic presented the note to Bank of China for payment according to its tenor but the note was not honoured by Bank of China. It remains unpaid. 12. Bank of China became liable to compensate Strategic as holder of the note for the amount of the note together with interest. 13. Despite demand being made Bank of China has failed and neglected to pay such sum to Strategic. 5 That is the end of the allegation so far as the cause of action based on the Bills of Exchange Act is concerned. The third further amended statement of claim then makes the following allegations under the rubric 'Strategic's claim against Bank of China on the note under the laws of the People's Republic of China': 13A. Further, or in the alternative, the note is governed by the laws of the People's Republic of China. 13B. The note is a Promissory Note within the meaning of the Negotiable Instruments Law of the People's Republic of China. In that regard Strategic relies upon Article 73 of that Law. 13C. On or about 25 August 2006 Monibrook transferred the note to Strategic. 13D. On or around 19 February 2007 Strategic obtained possession of the note from Monibrook, or from the Commonwealth Bank on behalf of Monibrook. 13E. On or about 18 August 2008 Strategic presented the note to Bank of China for payment. 13F. Bank of China refused and continues to refuse payment on the note. 13G. In the premises Bank of China is liable to Strategic in the amount of US$50 million, plus interest from 18 August 2008. In that regard Strategic relies upon Articles 68 and 70 of the Negotiable Instruments Law. 6 By its amended notice of motion Bank of China seeks orders that the claims made in paragraphs 8A to 13 and paragraphs 13A to 13G be dismissed summarily. Before dealing with the arguments, it is desirable to say something about the test to be applied under s 31A of the Federal Court of Australia Act. Section 31A relevantly provides that the court may give judgment for one party against another in relation to any part of a proceeding if the first party is defending the proceeding, or that part of the proceeding, and the court is satisfied that the other party has no reasonable prospect of success in prosecuting the proceeding or that part of the proceeding. 7 Section 31A will apply to a case where the pleadings disclose no reasonable cause of action and the deficiency is incurable. It will include a case in which there is unanswerable or unanswered evidence of a fact fatal to the pleaded case and any case that might be propounded by permissible amendment. However, the power to order summary or final judgment is one that should be exercised with great care, and it should never be exercised unless it is clear that there is no real question to be tried. Ordinarily a party is not to be denied the opportunity to place his or her case before the court in the normal way, and after taking advantage of the usual interlocutory processes. The test to be applied has been expressed in various ways, but all of the verbal formulae that have been used are intended to describe a high degree of certainty about the ultimate outcome of the proceeding if it were allowed to go to trial in the ordinary way. 8 Section 31A requires a practical judgment by the court as to whether Strategic, in this case, has more than a fanciful prospect of success. That may be a judgment of law, of fact or of mixed law and fact. Where there are factual issues capable of being disputed and in dispute, summary dismissal should not be awarded simply because the Court has formed the view that the moving party is unlikely to succeed on the factual issue. Where the success of a proceeding depends upon propositions of law apparently precluded by existing authority, that may not always be the end of the matter, since existing authority may be overruled, qualified or further explained. A question that arises in an application such as this is whether Strategic's pleading leaves open the possibility of requiring factual explanation and possible amendment of its case based upon the instrument that I have described: see generally Spencer v Commonwealth (2010) 269 ALR 233 at paragraphs 22, 24, 25 and 31. It is with those principles in mind that I shall address the complaints made by Bank of China concerning the third further amended statement of claim. 9 First, it is necessary to describe the instrument in question in more detail. As I have said, it is expressed to be a "promissory note." Underneath that title there are references to the number of the promissory note, the currency, the amount, the place of issue, the date of issue, the maturity date and the beneficiary. The beneficiary named is Monibrook. 10 Relevantly, the instrument says as follows: For value received we, QHC, hereby promise to pay on time, in full and without delay against this promissory note to the order of Monibrook, the bearer or holder thereof at maturity the sum of $US50 million in lawful currency upon presentation and surrender of this promissory note at the counters of our bank, Bank of China. This promissory note is transferable, assignable and divisible without any prior notification to us and/or our bank. This promissory note shall be governed and construed in accordance with the laws of the People's Republic of China, USA, Switzerland and Australia. 11 Appearing below this are the purported signatures of the chairman and general manager of QHC. At the foot of the page is another heading: 'Bank Endorsement'. Under that heading the following appears: We, Bank of China, with full bank responsibility do hereby confirm and endorse the promissory note hereof under our bank registration. 12 Appearing below this are the purported signatures of the president and a bank officer of Bank of China. I interpose here that pleadings raise the issue of whether or not the purported signature on behalf of Bank of China is valid or a forgery. 13 The third further amended statement of claim alleges, as I have said, that on 25 August 2006 Monibrook assigned the note to Strategic. That assignment is particularised by reference to an Asset Management Agreement of 25 August 2006, the parties to which are Monibrook, Strategic and the second applicant, Energreen Wind Systems Pty Limited, to which I shall refer as "Energreen." The assets management agreement provided for an investment of a sum of money in a venture there described. The deed of assignment pertaining to the note is also dated 25 August 2006, and is expressed to be between Monibrook, as assignor, and Strategic, as assignee. By the deed of assignment Monibrook purported to assign and to transfer to Strategic the promissory note endorsed or issued by the Bank of China. 14 There is no evidence of any assignment or other endorsement in favour of Strategic on the instrument in question. In relation to the cause of action under the Bills of Exchange Act, Bank of China contends that, if the instrument is a valid promissory note, it is properly understood to be a note payable to order, that there has been no endorsement of the note in favour of Strategic, and therefore that Strategic cannot be a holder of the note. Strategic, on the other hand, contends that the effect of the promissory note is to create a bearer instrument and that it is the bearer within the meaning of the Bills of Exchange Act. That question turns upon the curious language of the promissory note, namely: to the order of Monibrook, the bearer or holder thereof at maturity. 15 That phrase is certainly ambiguous. It could possibly mean: pay to the order of Monibrook, to the order of the bearer or to the holder at maturity. Another possibility is: pay to the order of Monibrook or the bearer or holder at maturity. Bank of China places considerable store on the words "at maturity" as indicating that there is no apparent inconsistency in the instrument in the use of both expressions "to the order" and "the bearer." That is to say, Bank of China says that the phrase should be construed as meaning that the promisor is promising to pay to the order of Monibrook or, at maturity, whoever happens to be the bearer or holder of the instrument. 16 To put that in context it is desirable to say something about the relevant provisions of the Bills of Exchange Act. Under s 13(2), a negotiable bill may be payable either to order or to bearer. Under s 13(3), a bill is payable to bearer which is expressed to be so payable, or on which the only or last indorsement is an indorsement in blank. Under s 13(4), a bill is payable to order if it is expressed to be so payable, or is expressed to be payable to a particular person and does not contain words prohibiting transfer. Section 13(5) provides that, where a bill is expressed to be payable to the order of a specified person, it is nevertheless payable to the person or his or her order at his or her option. 17 Section 34 of the Bills of Exchange Act deals with a holder in due course. Under s 34(1) a holder in due course is a holder who has taken a bill under certain conditions, namely, (a) that he or she became the holder of it before it was overdue, and (b) he or she took the bill in good faith and for value. Under s 34(3), a holder who derives his or her title to a bill through a holder in due course has all the rights of that holder in due course. Holder is defined in s 4 as the payee or indorsee of the bill or a note who is in possession of it, or is the bearer of it. Bearer, under section 4, is the person in possession of a bill or note which is payable to bearer. The significance of those terms is to be found in s 43(1), which provides that the holder of a bill may sue on the bill in his or her own name. Where the holder is a holder in due course he or she holds the bill free from any defect of title of prior parties, and may enforce payment against all parties liable on the bill. Under s 61, where a person signs a bill otherwise than as drawer or acceptor, that person thereby incurs the liabilities of an indorser to a holder in due course. 18 Part IV of the Bills of Exchange Act is concerned with promissory notes and includes s 89 and s 95. Under s 89(1), a promissory note is defined as an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay, on demand or at a fixed or determinable future time, a sum certain in money, to or to the order of a specified person or to bearer. 19 Under s 95(1), provisions of the Bills of Exchange Act relating to bills of exchange apply, with necessary modifications, to promissory notes. In applying those provisions the maker of a note is to be deemed to correspond with the acceptor of a bill, and the first indorser of the note is to be deemed to correspond with the drawer of an accepted bill payable to drawer's order. Thus, the provisions to which I have referred apply to promissory notes. Strategic claims that it is the bearer of the instrument in the present case, in that it is in possession of the note, and that the note is payable to bearer. The argument proceeded on the basis that the deed of assignment was not an endorsement by Monibrook for the purposes of the Bills of Exchange Act. 20 I am to decide the question of whether the instrument is a bearer instrument or payable to order according to the criteria relating to summary judgment to which I have referred. I do not consider, therefore, that I am required to resolve the question as I would if deciding it on a final basis. Clearly enough, the language of the instrument leaves something to be desired. I consider that it is at least arguable, and that the argument is rational, that the payee, in effect, includes a bearer. I was not taken to any authority that determined decisively how an instrument in these terms should be construed. 21 Strategic's contention is that the better view is that the instrument is a bearer note within s 13(3) of the Bills of Exchange Act in that it is expressed to be payable to bearer. The instrument is certainly expressed to be payable to bearer, although it is also arguable, as Bank of China contends, that the phrase only means 'payable to the bearer at maturity', assuming that at that stage the instrument has been endorsed in blank. It has not been endorsed in blank at this stage. There is, in my view, a real argument that there is inconsistency internally within the phrase. I am disposed to conclude that a bill or a note is either payable to bearer or payable to order, but cannot be payable to both. Accordingly, the question is how to construe this instrument in those circumstances. 22 Some store was placed on the 17th edition of Chalmers & Guest on Bills of Exchange and Cheques, which suggests that a bill payable to bearer or order should be taken to be payable to bearer. The text cites, in support of that proposition, the United States Uniform Commercial Code. Paragraph 3-109(a)(1) of that Code states that a promise or order is payable to bearer if it states that it is payable to bearer, or to the order of bearer, or otherwise indicates that the person in possession of the promise or order is entitled to payment. The official comment on the code observes that an instrument that purports to be payable both to order and to bearer states contradictory terms, and that a transferee of the instrument should be able to rely on the bearer term and acquire rights as a holder without obtaining the indorsement of the identified payee. 23 While those observations are certainly not decisive, they may, in the absence of authority binding on this court, carry some weight, and be persuasive as to the meaning of the relevant phrase in this context. As I have said, this phrase is not simply "payable to order or bearer" because it has the addition of the words "at maturity", but, for the reasons I have indicated, that in itself is ambiguous in effect. In the circumstances, I am not persuaded that the claim based on the Bills of Exchange Act is fanciful or that it could not succeed. Accordingly, I would not be prepared to dismiss the claim formulated in paragraphs 8A to 13. 24 It may, therefore, be unnecessary to examine the claim based on Chinese law. The advantage, from Bank of China's point of view, in dismissing the claims based on the Bills of Exchange Act or the Chinese law, is that in lieu of a claim for $50 million there would remain a claim for damages actually suffered by reason of reliance placed upon the validity of the instrument as a promissory note. So long as there remains a claim based on the Bills of Exchange Act there is no particular utility in dismissing the claim insofar as it is based on the Chinese law. 25 However, it is nonetheless appropriate to make some observations about the application of the Chinese law. Bank of China relied on a report of 1 December 2010 by Professor Hui Huang, an associate professor in the Faculty of Law of the Chinese University of Hong Kong, and a conjoint associate professor in the Faculty of Law at the University of New South Wales. Professor Huang was asked to express his opinion as to the following four questions: (1) whether the instrument complies with the law of the People's Republic of China, in particular, the Negotiable Instruments Law and the Measures for the Implementation of Administration of Negotiable Instruments; (2) whether the law of the People's Republic of China allows for the issue of promissory notes by commercial entities such as QHC, in particular, whether Article 7 of the Measures has the effect that the instrument does or does not constitute a promissory note for the purposes of the law of the People's Republic of China; (3) if the answer to the first or second questions is no, what the effect is of such non-compliance with the Negotiable Instruments Law and the Measures; and (4) if the instrument is not a promissory note under the law of the People's Republic of China, at least initially as so defined, whether it becomes one by reason of the purported endorsement by the Bank of China. 26 Professor Huang answered the questions as follows. First, the instrument does not comply with the law of the People's Republic of China, in particular, the Negotiable Instruments Law and the Measures. Second, under the law of the People's Republic of China, promissory notes cannot be issued by non-financial entities such as QHC. According to Article 7 of the Measures, the instrument does not constitute a promissory note for the purposes of the law of the People's Republic of China. Third, the effect of such non-compliance under the Negotiable Instruments Law and the Measures is that the instrument is invalid and unenforceable. Fourth, the instrument cannot become a promissory note by reason of the purported endorsement by the Bank of China. 27 Professor Huang gave some reasonably detailed reasoning for reaching those conclusions. At the end of his report he observes that he had basically finished writing the report when he was provided with a copy of an expert report prepared by Ms Guan, an expert witness retained by Strategic, of 18 November 2010. 28 Articles 68 and 70, on which reliance is placed in the third further amended statement of claim, state that the drawer, endorser, acceptor and guarantor of a bill of exchange are jointly and severally liable to the holder and that the holder may demand the person against whom the right of recourse is exercised to pay the sum payable by the bill dishonoured, interest calculated at the rate prescribed and expenses for obtaining relevant evidence of dishonour and for sending notices. 29 By Article 80, those provisions apply to the exercise of the right of recourse in respect of promissory notes. 30 Article 73 provides that a promissory note is a negotiable instrument signed and issued by the maker promising to unconditionally pay the payee or bearer a sum certain in money at sight. A promissory note as used in the law is defined as a banker's promissory note. Article 7 of the Measures states that the makers of bank promissory notes shall be banks that have been granted approval by the People's Bank of China to conduct bank promissory note business. 31 The Bank of China says that, in the circumstances of those laws, the instrument cannot satisfy the requirements of the Negotiable Instruments Law, and that therefore it is not open to Strategic to rely as it does in the third further amended statement of claim on the operation of that law. 32 Strategic draws attention to two matters. First of all, Article 35 of the Measures provides that in determining the formats of the negotiable instruments, the People's Bank of China may take into consideration the actual needs of the ethnic minority regions and foreign embassies and consulates in China and add languages of the ethnic minorities or foreign languages to the forms. Precisely what effect this would have is by no means clear, but Strategic says that it indicates that the translations of the laws that are presently in evidence are not necessarily exhaustive statements of the law in question. 33 Secondly, attention was drawn to the note in Professor Huang's report, to which I have referred above, that there is another report apparently addressing questions similar to those addressed by Professor Huang. For reasons that are somewhat obscure, neither party chose to put before the court Ms Guan's report of 18 November 2010. Strategic says that the onus is entirely on Bank of China, and if Bank of China wishes to demonstrate that Ms Guan's report does not refute the opinion of Professor Huang, it was incumbent upon Bank of China to tender Ms Guan's report. Bank of China, on the other hand, suggested that some inference can be drawn from the absence of the tender by Strategic that Ms Guan's report does not effectively refute the fairly unequivocal statements of Professor Huang. 34 Senior counsel for Strategic also intimated from the bar table that, although directions were given for the filing of evidence in relation to the proceeding, Strategic proposes to seek leave to rely on further evidence, and may indeed seek leave to amend its current pleading in relation to the Chinese cause of action. Whether that leave would be granted, either to rely on further evidence or to amend, is not before me at the moment. It is, however, impossible for me to say that leave would not be granted. 35 I raised the possibility that it may have been appropriate for the hearing of this application for summary dismissal to be deferred in relation to the Chinese cause of action, until such time as those matters were resolved. However, having regard to the conclusion that I have reached in relation to the bills of exchange cause of action, it may be, for the reasons I have indicated earlier, that there would be no utility in pursuing summary dismissal of the Chinese claim itself. On the other hand, it is difficult to see how the case based on the Chinese law would succeed if the opinions of Professor Huang are accepted at face value. While I have been taken briefly to Professor Huang's reasoning, it occurs to me that it is at least arguable that some of the questions raised by senior counsel for Strategic are not addressed in terms by Professor Huang's report. For example, it was suggested by senior counsel for Strategic that the part of the instrument described as "bank endorsement" might be such that the instrument as a whole could be said to be a promissory note issued by Bank of China. 36 While Professor Huang expresses the view that the instrument cannot become a promissory note by reason of the purported endorsement, his reasoning indicates that he may not necessarily have addressed the argument formulated on behalf of Strategic. There is no point in my speculating about those matters, since there was no cross-examination of Professor Huang, and the matters were not pursued in any depth. The matters, however, do suggest that it may well be that the pleading in paragraphs 13A to 13G is defective, hence the intimation given by senior counsel for Strategic that an application to amend may be made. 37 In the circumstances, even though I might be disposed to strike out paragraphs 13A to 13G, I would not do so without granting leave to re-plead, and I would not be minded to direct summary dismissal of the claim insofar as it is based in the alternative on the laws of the People's Republic of China. It follows from what I have said that the notice of motion should be dismissed. I order Bank of China to pay Strategic's costs of the motion. I certify that the preceding thirty-seven (37) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett. Associate: Dated: 6 April 2011