New South Wales Supreme Court CITATION : Lipa v Metabolic & Anor [2006] NSWSC 997 HEARING DATE(S) : 23 August 2006 JUDGMENT DATE : 27 September 2006 JURISDICTION : Common Law Division JUDGMENT OF : Associate Justice Harrison DECISION : (1) The plaintiff's notice of motion filed 5 May 2006 is dismissed; (2) The plaintiff is to pay the defendants' costs as agreed or assessed. CATCHWORDS : Summary judgment on part of claim - dishonoured cheque Bills of Exchange Act 1909 (Cth) Bills of Exchange Amendment Act 1986 (Cth) - s 3(2) Cheques Act 1986 (Cth) - ss 3, 10, 18, 27, 28 LEGISLATION CITED : Cheques and Payment Orders Act 1986 Civil Procedure Act 2005 (NSW) - s 100 Sale of Goods Act 1923 (NSW) - s 54 Uniform Civil Procedure Rules 2005 (NSW) - 13.1(1) Buying Systems (Aust) Pty Ltd v Tien Mah Litho Printing Co (Pte) Ltd [1986] 5 NSWLR 317 CASES CITED : Inflatable Toy Company Pty Ltd v State Bank of New South Wales Ltd (1994) 34 NSWLR 243 In re Deveze 1878 Chancery Appeals Lipa Pharmaceuticals Limited - Plaintiff PARTIES : Metabolic Research Pty Limited - First Defendant Craig Stephen Leonard - Second Defendant FILE NUMBER(S) : SC 10838/2006 COUNSEL : Mr S J Burchett - Plaintiff Mr D A Allen - Defendants SOLICITORS : Home Wilkinson Lowry, Lawyers - Plaintiff Linde Business Law - Defendants IN THE SUPREME COURT OF NEW SOUTH WALES COMMON LAW DIVISION ASSOCIATE JUSTICE HARRISON WEDNESDAY, 27 SEPTEMBER 2006 10838/2006 - LIPA PHARMACEUTICALS LIMITED v METABOLIC RESEARCH PTY LIMITED & ANOR JUDGMENT (Summary judgment on part of claim - dishonoured cheque) 1 HER HONOUR: The plaintiff, Lipa Pharmaceuticals Limited (Lipa), manufactures and supplies pharmaceutical products. The first defendant, Metabolic Research Pty Limited (Metabolic), is a wholesaler of pharmaceutical products. Craig Stephen Leonard, the second defendant, is the sole director of Metabolic. By agreements dated 30 April 2005 Lipa agreed to supply and Metabolic agreed to take delivery of and pay for quantities of remission "Cell Support" tablets. Lipa claims the sum of $1,385,760.47. Dishonoured cheque pleading 2 Paragraphs [10], [11] and [12] of the statement of claim read: "10. On or about 25 July 2005, Metabolic drew cheque number 606281 on Greater Building Society Limited for the sum of $389,936.25, payable to LIPA. 11. On or about 25 July 2005, LIPA presented the cheque to Greater Building Society Limited for payment. 12. On or about 27 July 2005, Greater Society Limited notified LIPA that the cheque was dishonoured." 3 By defence filed 27 March 2006 (filed on behalf of both defendants) the first defendant does not admit paragraphs [10], [11] and [12] and denies paragraph [15] of the statement of claim. (Defence paras [5] and [8]). 4 On 23 August 2006 Metabolic filed a cross claim. The cross claim asserts that the manufacture and bottling of "Cell Support" tablets was defective and unmerchantable in that firstly, the labelling of the product was warped and blistered; and secondly, the labelling of the product was generally of poor quality, such that the product had to be returned to the cross defendant. It has been neatly summed up in the following three sentences by Mr Leonard where he purportedly said in a conversation with Craig Arthur Blanchette, the Sales and Marketing Manager of Lipa (Aff, 2/06/06 [18]): "What the fuck is going on? The labelling of the entire first batch of Cell Support that you have delivered is all fucked up. It is all creased and bubbled and the labels are absolute shit quality." 5 Metabolic seeks relief under the Sale of Goods Act 1923 (NSW) and claims damages. The notice of motion 6 By notice of motion filed 5 May 2006 the plaintiff seeks an order pursuant to Rule 13.1(1) of the Uniform Civil Procedure Rules 2005 (NSW) (UCPR) that judgment be given for the plaintiff against the first defendant for $389,936.25, being part of the sum of $1,309,489.85 claimed by the plaintiff against the first defendant on the plaintiff's further or alternate cause of action against the first defendant in the statement of claim filed 21 February 2006, together with interest on the sum of $389,936.25 pursuant to s 100 of the Civil Procedure Act 2005 (NSW) from 27 July 2005 until the date of this order. The basis of this application is that Lipa contends that Metabolic has no defence to the dishonoured cheque issue. Lipa relied on the affidavits of Thomas Arthur McDonald sworn 5 May 2006, Craig Arthur Blanchette sworn 26 June 2006 and Kuulei Tukuafu sworn 22 June 2006. The defendant relied upon the affidavit of Craig Leonard sworn 2 June 2006. The law 7 Rule 13.1(1) of the UCPR provides: 13.1(1) If, on application by the plaintiff in relation to the plaintiff's claim for relief or any part of the plaintiff's claim for relief: (a) there is evidence of the facts on which the claim or part of the claim is based, and (b) there is evidence, given by the plaintiff or by some responsible person, that, in the belief of the person giving the evidence, the defendant has no defence to the claim or part of the claim, or no defence except as to the amount of any damages claimed, the court may give such judgment for the plaintiff, or make such order on the claim or that part of the claim, as the case requires." 8 The evidence in relation to the cheque number 606281 dated 20 July 2005 in the sum of $389,936.25 (the cheque) is in dispute. Mr Leonard's version of events is that at the time this cheque was drawn by his office he was travelling on business in Queensland for two weeks. As he was the only person at Metabolic who was the signatory to the company bank accounts, he had pre-signed a number of bank cheques to enable payments to be made in his absence. 9 In the week prior to his departure Mr Leonard discussed with Mr Blanchette rebottling a batch of tablets into smaller bottles. He expected that costs for rebottling would be between $30,000 and $40,000. While in Queensland Mr Leonard's sister, Michelle Leonard, telephoned him and told him that they had received an invoice from Lipa for around $38,000. She asked whether they should pay the invoice. Mr Leonard said that the invoice must have been for the new bottling and enquired as to whether $40,000 from Mayne had been paid into the company's account. Ms Leonard replied that it had. Mr Leonard then instructed her to write a cheque and send it off. Ms Leonard passed on the instruction to Kay Lovell, Mr Leonard's secretary. Ms Lovell wrote on pre-signed cheque 606281 the name of Lipa and inserted the sum of $389,936.25 in words and numerals. Of course there is a big difference between $389,936.25 and $38,000. 10 On 23 July 2005 Mr Leonard returned to the office. When he was going through the accounts he notice the error. On 25 July 2005 Mr Leonard telephoned Mr Blanchette and said "My secretary has gone and written a cheque to Lipa for about $390,000 for some invoice you sent me. When I told her to pay it she told me it was for $39,000 and I thought it was the invoice for the re-bottling that you are doing." Mr Blanchette replied "We haven't even issued that invoice yet." Mr Leonard said "It was sent by mistake. If you try and bank it, it will bounce." Mr Blanchette replied "Don't worry it is nothing to worry about it I will take care of it." 11 After this conversation Mr Leonard assumed that Lipa would not attempt to bank the cheque and he did not make any attempt to stop payment. Mr Leonard did not hear anything further from Lipa with respect to the cheque until he received letters from the solicitors for Lipa in early 2006. Mr Leonard said that, had he known that the amount of the invoice was for the sum of $389,936.25, he would never have authorised the cheque being drawn. 12 On 25 July 2005, Lipa presented the cheque for payment. On 2 August 2005 Lipa received a letter from the ANZ bank notifying it of the dishonour. Mr Blanchette denies having conversations with Mr Leonard, either about repackaging of the bottles or the cheque. While Mr Leonard's explanation sounds implausible, it may have occurred. It would be unwise, in the short time I observed him being cross examined, to make any findings concerning his credit. Rather, I accept that the events surrounding the dishonour of the cheque are the subject of dispute. As this is a summary judgment application, I have taken Metabolic's evidence at its highest. 13 However, Lipa's Counsel submitted that the law is clear and that Mr Leonard's explanation does not provide a defence to the dishonoured cheque issue. Metabolic's defence to the dishonoured cheque is that the amount specified in the cheque was a mistake in that it should have been for the amount of $38,000 and not $389,936.25. 14 Lipa referred to Buying Systems (Aust) Pty Ltd v Tien Mah Litho Printing Co (Pte) Ltd [1986] 5 NSWLR 317 at 327 where Cohen J stated: "…the debt of the defendant arises out of two dishonoured bills of exchange. If they had been sued on, apart from limited defences, there could not have been set up any set-off or counterclaim. A stay of judgment on a bill of exchange pending the hearing of a counter-claim has invariably been refused. As was said by Sir Eric Sachs in Cebora SNC v SIP (Industrial Products) Ltd [1976] 1 Lloyd's Rep 271 at 278-279: "Any erosion of the certainties of the application by our Courts of the law merchant relating to bills of exchange is likely to work to the detriment of this country, which depends on international trade to a degree that needs no emphasis. For some generations one of those certainties has been that the bona fide holder for value of a bill of exchange is entitled, save in truly exceptional circumstances, on its maturity to have it treated as cash, so that in an action upon it the Court will refuse to regard either as a defence or as grounds for a stay of execution any set off, legal or equitable, or any counterclaim, whether arising on the particular transaction upon which the bill of exchange came into existence, or, a fortiori, arising in any other way. This rule of practice is thus, in effect, pay up on the bill of exchange first and pursue claims later." Stephenson LJ on the same page (at 278) said: "Bills of exchange are treated as cash, and unless there are exceptional circumstances where there is an action between the immediate parties to a bill of exchange judgment will not be held up by virtue of a counterclaim by the defendant, and execution will not be stayed." In Nova (Jersey) Knit Ltd v Kammgarn Spinnerei GmbH [1977] 1 WLR713; [1977] 2 All ER 463, this principle was repeated in judgments in the House of Lords. Lord Russell said (at 732; 479): "… It is in my opinion well established that a claim for unliquidated damages under a contract for sale is no defence to a claim under a bill of exchange accepted by the purchaser: nor is it available as a set-off or counterclaim. This is a deep rooted concept of English commercial law." This referred to a counter-claim based on the contract under which the bill of exchange was payment. It would apply all the more to a claim arising independently of that transaction." 15 Cohen J in Buying Systems acknowledged that there are limited defences to a dishonoured bill of exchange. The general rule is that the defendant must pay the plaintiff on the bill of exchange first and pursue claims later. However, this depends upon whether or not Metabolic has a defence under the Cheques Act 1986 (Cth). 16 Section 3(2) of the Bills of Exchange Amendment Act 1986 (Cth) provides that the Bills of Exchange Act 1909 (Cth) does not apply to an instrument to which the Cheques and Payment Orders Act 1986 applies. The Cheques Act was formerly known as the Cheques and Payment Orders Act. The Cheques Act 17 Both parties referred to sections of the Cheques Act 1986 (Cth). Section 3(3) and (4) of the Cheques Act read: "(3) Where a person obtains a cheque: (a) by fraud, duress or other unlawful means: or (b) for an illegal consideration; the person's title to the cheque is defective. (4) Subsection (3) shall not be taken to limit by implication the circumstances in which the title of a person to a cheque is defective." 18 None of the defences in s 3(3) apply here. 19 Section 10 of the Cheques Act says: "(1) A cheque is an unconditional order in writing that: (a) is addressed by a person to another person, being a financial institution; and (b) is signed by the person giving it; and (c) requires the financial institution to pay on demand a sum certain in money. (2) An instrument that does not comply with subsection (1), or that orders any act to be done in addition to the payment of money, is not a cheque." 20 Metabolic referred to ss 18, 27 and 28 of the Cheques Act as a means of providing a defence. 21 Section 18 reads: "18. Inchoate instruments (1) Where the drawer of an instrument that is signed, but is otherwise wanting in a material particular necessary for the instrument to be, on its face, a complete cheque, delivers the instrument to another person in order that the instrument may be filled up as a complete cheque, any person in possession of the instrument shall be presumed, unless the contrary is proved, to have authority to fill up the instrument as a complete cheque in any way the person sees fit. (2) Subject to subsection (4), an instrument to which subsection (1) applies is not enforceable against the drawer or a person who becomes an indorser of the instrument before the instrument is filled up as a complete cheque unless the instrument is filled up within a reasonable time and strictly in accordance with the authority given. (3) Reasonable time, for the purposes of subsection (2), is a question of fact. (4) An instrument of the kind referred to in subsection (1) that has been filled up as a complete cheque shall, as regards a holder in due course, be conclusively presumed: (a) to have been delivered to another person in order that the instrument might be filled up as a complete cheque; and (b) to have been filled up within a reasonable time and strictly in accordance with the authority given." 22 Under s 3(1): "'delivery', in relation to a cheque, means the transfer of possession of the cheque from one person to another." 23 Metabolic is a company. The sole director and authorised signatory on the account is the second defendant, Mr Leonard. Mr Leonard signed a number of blank cheques and left them with an employee of the company. He telephoned his sister to authorise the employee who held the blank cheques to complete a cheque to the plaintiff in the amount of approximately $38,000. The employee completed the cheque in the amount of $380,000 outside the scope of authority given by Mr Leonard. Mr Leonard also says that, when he became aware of the error, he contacted Mr Blanchette to inform him. He says the plaintiff told him not to worry about it. 24 An inchoate cheque is not enforceable against a drawer unless it is completed strictly in accordance with the authority given (s 18(2)). In this case, the employee did not complete the cheque in accordance with the authority she was given. 25 It is my view that the defendant has an arguable defence under s 18(2) of the Cheques Act. 26 Section 18(4) of the Cheques Act provides a holder in due course with additional protection in relation to inchoate cheques. Section 50 of the Cheques Act sets out the elements which must be satisfied for a holder of a cheque to be a holder in due course. Whilst it is not necessary to go through those elements in the context of this case, given that the cheque was only provided to the original payee and not negotiated to another party, I note that under s 50(1)(a)(iii) the cheque must not be crossed as "not negotiable" for a holder to be a holder in due course. The cheque to Lipa was so crossed. But, in any event, the original payee of a cheque cannot be a holder in due course. In Inflatable Toy Company Pty Ltd v State Bank of New South Wales Ltd (1994) 34 NSWLR 243 Young J (as he then was) said (252 to 253): "The other point is whether the second defendant should be treated as a holder in due course of the bill and so have certain protections under the Bills of Exchange Act 1909 (Cth)…I accept Mr Svehla's submissions that the original payee of the bill of exchange, as was the second defendant in this case, cannot be a holder in due course of the bill within the meaning of s34 of the Bills of Exchange Act 1909 (Cth) because it is not a person that had the bill negotiated to it within the meaning of that definition. This is clearly held in R E Jones Ltd v Waring and Gillow Ltd [1926] AC 670 at 680 and in Ayres v Moore [1940] 1 KB 278 at 286-287 and these decisions are now so implanted in commercial law that they should be followed: see too Yan v Post Office Bank Ltd [1994] 1 NZLR 154." 27 Section 27 reads: "27 Drawing or indorsement may be shown to be ineffective Subject to section 28, the delivery of a cheque by the drawer or an indorser may be shown to have been conditional, or for a special purpose only, and not in order to issue the cheque or transfer it by negotiation, as the case may be." 28 However s 28 reads: "28. Presumption of effective delivery (1) The drawer of a cheque shall: (a) as regards a holder in due course—be conclusively presumed to have made an effective delivery of the cheque so as to complete the drawer's contract on the cheque; and (b) as regards a holder who is not a holder in due course—be presumed, unless the contrary is proved, to have made an effective delivery of the cheque so as to complete the drawer's contract on the cheque. (2) An indorser of a cheque shall: (a) as regards a holder in due course: (i) where the holder in due course took the cheque from the indorser—be presumed, unless the contrary is proved, to have made an effective delivery of the cheque so as to complete the indorser's contract on the cheque; or (ii) in any other case—be conclusively presumed to have made an effective delivery of the cheque so as to complete the indorser's contract on the cheque; and (b) as regards a holder who is not a holder in due course—be presumed, unless the contrary is proved, to have made an effective delivery of the cheque so as to complete the indorser's contract on the cheque. (3) Nothing in this section affects the operation of subsection 18(1) or (4) in relation to an instrument of the kind referred to in that first-mentioned subsection." 29 Metabolic says that the delivery was conditional, in that Mr Leonard on the same day that the cheque was presented spoke to Mr Blanchette informing him of the error in the amount. Metabolic referred to a passage In re Deveze 1878 Chancery Appeals where it was held that the property in the bills of exchange did not pass to the indorsee until the letter had left the office where it was posted. The cheque was delivered on the same day as Mr Leonard says that he had the conversation with Mr Blanchette whereby he told Mr Blanchette "If you try to bank it, it will bounce". Section 28(1)(b) has the effect of making a presumption of delivery. The Leonard conversation may, when the full facts are known, rebut the presumption of delivery. It depends in part upon the timing of the presentation of the cheque and the telephone call. 30 Metabolic submitted that under s 54 of the Sale of Goods Act there had been an abatement of the contract between the parties so that there was no debt payable by Metabolic. Section 54 refers to remedies for breach of warranty. It does not refer to abatement. It does refer to breach of warranty in diminution or extinction of price but it does not provide a defence to the dishonoured cheque. 31 Section 18(2) of the Cheques Act provides an arguable defence and the matter should go to trial. The plaintiff's notice of motion filed 5 May 2006 is dismissed. 32 Costs are discretionary. Costs usually follow the event. The plaintiff is to pay the defendants' costs as agreed or assessed. The Court orders: (1) The plaintiff's notice of motion filed 5 May 2006 is dismissed. (2) The plaintiff is to pay the defendants' costs as agreed or assessed. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.