INABATA SANGYO (HK) LTD v. SUPERIOR PRECISION ENGINEERING CO. LTD AND OTHERS

HCA1086/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1086 OF 2008

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J U D G M E N T

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1. There were originally two summonses to be dealt with, namely :

(a)  plaintiff’s summons for summary judgment against the 1^st, 3^rd and 4^th defendants; and

(b) the 1^st defendant’s summons to strike out the plaintiff’s Statement of Claim.

2. At the start of the hearing, leave was given to the 1^st defendant to withdraw its summons for striking out.

3. This judgment therefore only deals with the plaintiff’s application for summary judgment.

Background

4. The 1^st defendant is a company incorporated in Hong Kong.

5. The 2^nd, 3^rd, 4^th and 5^th defendants were directors of the 1^st defendant at all material times.

6. On 18 August 2005 the 1^st defendant entered into a written Sales Contract (“the Sales Contract”) with the plaintiff whereby the 1^st defendant agreed to buy from the plaintiff 12 hydraulic injection moulding machines (“the Goods”) for JP¥256,300,000.

7. By a written Guarantee dated 19 August 2005, the 2^nd to 5^th defendants guaranteed the payment of the purchase price by the 1^st defendant under the Sales Contract.

8. The Goods were duly delivered by the plaintiff on various dates and the purchase price under the Sales Contract fell due in the amounts and on the dates as follows :

(a)  JP¥30,300,000 on 29 October 2006;

(b) JP¥116,000,000 on 13 January 2007; and

(c) JP¥110,000,000 on 4 March 2007

9. In November 2006 there was an oral agreement reached between the plaintiff and the 1^st defendant (inter alia) as follows :

(a)  payment of the JP¥30,300,000 be deferred by 4 months to 28 February 2007;

(b) payment of the JP¥116,000,000 and JP¥110,000,000 be deferred for 6 months until 13 July and 4 September 2007 respectively; and

(c) provided that interest on the outstanding purchase price above at the agreed rate of 6% p.a. be paid to the plaintiff by the 1^st defendant on a monthly basis until full payment of the purchase price.

10. On 9 May 2007, the 1^st defendant made part payment of JP¥2,190,839 to the plaintiff in part settlement of the purchase price under the Sales Contract.

11. On 15 June 2007 a further part payment of JP¥30,300,000 was paid by the 1^st defendant to the plaintiff under the Sales Contract.

12. By 12 July 2007 the plaintiff’s statement of account showed the outstanding purchase price under the Sales Contract to be JP¥226,000,000 and the outstanding interest to be JP¥3,278,170.

13. On 4 September 2007, the 1^st defendant made a further part payment of JP¥13,889,918 to the plaintiff.  Of this amount, JP¥11,300,000 was in part payment of the outstanding purchase price under the Sales Contract and JP¥2,588,918 being for payment of interest accrued for the period from 22 April to 31 August 2007.

14. The effect of this last part payment by the 1^st defendant reduced the outstanding purchase price under the Sales Contract to JP¥214,700,000, and reduced the outstanding interest to JP¥2,695,389 by 4 September 2007.

15. By a Settlement Agreement in writing dated 15 November 2007 (“the Settlement Agreement”) the 1^st defendant agreed (inter alia) that the amounts in paragraph 14 above, both as to outstanding purchase price and outstanding interest, was owed to the plaintiff by the 1^st defendant.  The Settlement Agreement was signed by the 3^rd defendant on behalf of the 1^st defendant in his capacity as a director of the 1^st defendant.

16. Thereafter, 2 further payments each of JP¥11,300,000 were made by the 1^st defendant to the plaintiff on 9 October and 12 November 2007.

17. As at 8 July 2008, when the Writ herein was issued, the plaintiff’s statement of accounts showed an outstanding purchase price of JP¥192,000,000 and outstanding interest of JP¥11,566,973 owed to it by the 1^st defendant in respect of the Sales Contract.

18. These are the amounts which the plaintiff now claims against the 1^st defendant in respect of the Sales Contract and Settlement Agreement and against the 2^nd to 5^th defendants as guarantors under the Guarantee given by them.

Plaintiff’s application for summary judgment

19. The present application for summary judgment is made only against the 1^st, 3^rd and 4^th defendants since judgment in default has already been obtained by the plaintiff against the 2^nd and 5^th defendants.

20. In making the application for summary judgment, the plaintiff says that the 1^st, 3^rd and 4^th defendants have no good defence to the claim by the plaintiff.

21. The plaintiff’s claim against the 1^st defendant (for breach of the Sales Contract and the Settlement Agreement) and the claim against the 3^rd and 4^th defendants (sued on their Guarantee) are put on different basis.  Therefore different considerations apply where the 1^st, 3^rd and 4^th defendants are concerned.

22. As such I shall deal with each of the 1^st, 3^rd and 4^th defendants separately in this judgment.

The 1^st defendant

23. At the start of the hearing, Mr Yip who appeared for both the 1^st and 4^th defendants indicated to the court that he will be making no submission on behalf of the 1^st defendant in so far as the application for summary judgment is concerned although he has no instructions to consent to any order sought against the 1^st defendant.

24. However, after hearing the submission of counsel for the 3^rd defendant, Mr Yip indicated that if the court were to accept the submission of the 3^rd defendant that there should only be interlocutory judgment against the 3^rd defendant with damages to be assessed because there is a possible argument that the plaintiff had failed to mitigate its loss in that the plaintiff failed to repossess and re-sell the goods pursuant to the retention of title clause under the Sales Contract, then the same consideration should also apply in the case of the 1^st defendant.

25. I am unable to accept this submission by Mr Yip in respect of the 1^st defendant for the following reasons.

26. There is no dispute that it was the 1^st defendant who had transferred or caused to be transferred to its associated company, Superior Wuxi, the Goods.  Superior Wuxi then pledged the Goods with the Bank of China as security for a loan.  When the loan was not repaid to the Bank of China, it sought a court order in PRC to auction off the Goods in satisfaction of the loan repayment.

27. Admittedly, there was a retention of title clause in the Sales Contract to the effect that the goods shall remain the property of the plaintiff until the purchase price under the Sales Contract had been paid off.

28. However, I am of the view that the 1^st defendant cannot now be heard to say that the plaintiff failed to mitigate its loss because it failed to have recourse to the retention of title clause in the Sales Contract when it was due to the wrongful act of the 1^st defendant in parting with possession of the Goods to Superior Wuxi thereby enabling Superior Wuxi to pledge the Goods to the Bank of China as security for a loan.

29. The 1^st defendant simply cannot take advantage of its own wrongful act given the circumstances of this case.

30. There being no dispute by the 1^st defendant that by the Settlement Agreement it had accepted the amounts of the outstanding purchase price and outstanding interest stated therein, and no dispute by the 1^st defendant as to the statement of accounts as at the date of the Writ as to the amounts of the purchase price and interest outstanding, there will be summary judgment against the 1^st defendant for the amounts now claimed by the plaintiff.

The 3^rd defendant

31. In the case of the 3^rd defendant, the plaintiff seeks summary judgment against the 3^rd defendant in the amount of JP¥192,100,000.  That is opposed by the 3^rd defendant.  The 3^rd defendant does not dispute that he is liable to the plaintiff under the Guarantee, but submits that there should only be interlocutory judgment to the plaintiff with damages to be assessed, the reason being that the plaintiff’s claim under the Guarantee is a claim for unliquidated damages since the 3^rd defendant only guaranteed to pay “all monies or liabilities owing by the purchaser” under the Guarantee.

32. The 3^rd defendant further submits that the plaintiff has an obligation to mitigate its loss and in the present case there are disputed issues of fact in relation to whether the plaintiff has acted reasonably in not taking steps to recover the Goods in the PRC pursuant to the title retention clause under the Sales Contract or to claim the proceeds of sale after the Goods had been auctioned.

33. The disputed issues of fact can be summarized as follows :

(a)  the plaintiff says that the Bank of China had a security or mortgage over (inter alia) the Goods which had been mortgaged to it by Superior Wuxi;

(b) the plaintiff obtained legal opinion in the PRC saying there is no evidence that the Bank of China was not a bona fide purchaser so its security will be recognized;

(c) even if the rights of Bank of China are recognized, there is still the unresolved issue whether the plaintiff has good title to the Goods and the priority of the conflicting claims between it and the Bank of China since there is no evidence to show that the recognition of Bank of China’s claim will extinguish any claim by the plaintiff to the Goods;

(d) even if the claim of Bank of China has priority over that of the plaintiff to the Goods, presumably the claim of the Bank of China is only to the extent of Superior Wuxi’s indebtedness under the loan.  In the absence of any evidence as to the size of the claim by Bank of China, it cannot be known if after settlement of the Bank of China’s claim whether there will be any balance of proceeds left over from the auction (which realized RMB 16 million) to satisfy partly or wholly the plaintiff’s claim; and

(e)  whether it would be unreasonable for the plaintiff not to have made any claim from the balance of proceeds or how much the plaintiff might have recovered if it had made such a claim.

34. It is submitted by the 3^rd defendant that these issues of fact can only be resolved upon evidence being adduced for damages to be assessed.

35. On the other hand, it was submitted by the plaintiff that while there is a general rule that an innocent party should act immediately upon a breach of contract to mitigate its own loss, that is only possible, given the circumstances of this case, if the plaintiff had possession of the Goods, which it did not at the material time.

36. It was also contended by the plaintiff that any suggestion that the plaintiff could have issued proceedings in the PRC to sue Superior Wuxi to recover the Goods was not a commercially viable course as advised by the plaintiff’s legal advisers in the PRC.

37. It is also trite law that the plaintiff’s duty to mitigate its loss did not go as far as to involve an obligation to issue and pursue complicated legal proceedings in the PRC against the Bank of China, which would have been necessary before the plaintiff could recover the Goods.

38. On the facts of this case therefore, says the plaintiff, it was practically impossible for the plaintiff to repossess the Goods transferred by the 1^st defendant to Superior Wuxi, who in turn mortgaged same with the Bank of China and which was then auctioned off by the PRC court in the liquidation of Superior Wuxi.

39. In coming to my decision, the fact that the above matters were raised and argued by the plaintiff in this hearing indicate that the plaintiff has a duty to mitigate its loss.  However, the real question that has to be decided is how far that duty of the plaintiff to mitigate extends and whether the plaintiff has acted reasonably in the overall circumstances of this case.

40. To resolve that question would involve a determination of both the facts and the law.  It cannot be right for the court to determine the matter including the disputed facts until it has heard all the relevant evidence at trial.

41. Accordingly, there will be interlocutory judgment in favour of the plaintiff against the 3^rd defendant with damages to be assessed.

The 4^th defendant

42. I turn now to deal with the 4^th defendant.

43. The 4^th defendant relies on two defences to the plaintiff’s claim against him on the Guarantee, namely :

(a)  past consideration; and

(b) material variation.

44. In respect of the past consideration defence, it was submitted by the 4^th defendant that the date of the Sales Contract was 18 August 2005 while it is common ground between the parties that the Guarantee was signed and dated 19 August 2005, albeit that there is also the date of  “12^th day of August 2005” which appears at the end of the document before the signatures.

45. The consideration for the Guarantee was stated as being “IN CONSIDERATION of you agreeing at our request to sell to Superior Precision Engineering Co. Ltd … 12 sets of Toshiba Machines” which is accepted to be the Goods under the Sales Contract.

46. In the circumstances, it was submitted that the consideration for the Guarantee must be past consideration since the Sales Contract had already been signed the day before the Guarantee was entered into by the four guarantors, including the 4^th defendant.

47. If the Guarantee was in fact signed and witnessed on 12 August 2005, then the defence of past consideration falls away automatically.

48. But even if the Guarantee was entered into by the guarantors on 19 August 2005, I am unable to accept the submission made by the 4^th defendant as to the defence of past consideration in respect of the guarantee given by him for the following reason.

49. Clause 2 of the Sales Contract provides as follows :

“Subject Clause Personal Guarantee Acceptable to Seller.”

50. While it can be said that Clause 2 was not elegantly worded, it seems clear enough from it that the Sales Contract was made conditional upon personal guarantees being given which would be acceptable to the seller (i.e. the plaintiff).

51. It is common ground that at the time the Sales Contract was entered into on 18 August 2005, there were no personal guarantees given or in existence.  That only came about the following day.

52. It follows therefore that if no personal guarantee was given, or if the personal guarantee given was not acceptable to the plaintiff, the plaintiff was entitled to rescind the Sales Contract on the basis that the condition under Clause 2 had not been fulfilled.

53. In other words, the continuance of the Sales Contract depended upon the condition in Clause 2 being fulfilled.  Therefore the fact that the Sales Contract pre-dating the Guarantee is neither here nor there in so far as the request by the guarantors to enter into the Sales Contract being the consideration for the giving of the Guarantee is concerned.

54. In those circumstances, I am of the view that past consideration point now taken is not a defence open to the 4^th defendant to make in the circumstances of this case.

55. I turn now to deal with the defence of material variation raised by the 4^th defendant.

56. The basis of the 4^th defendant’s contention was that :

(a)  the Sales Contract made no provision for payment of interest by the 1^st defendant in respect of the purchase price;

(b) the Guarantee signed by the 4^th defendant guaranteed the due payment of the purchase price and “all monies or liabilities owing by the Purchaser”;

(c) in November 2006, by the oral agreement made between the plaintiff and the 1^st defendant (but without the involvement of the 4^th defendant) the plaintiff and 1^st defendant agreed to extend the time for the purchase price but would attract interest at 6% p.a. until it was paid;

(d) the written Settlement Agreement dated 15 November 2007 (which was signed by the 3^rd defendant on behalf of the 1^st defendant but without the involvement of the 4^th defendant) again re-iterated interest payment by the 1^st defendant on the unpaid purchase price;

(e)  thus the oral agreement in November 2006 and the Settlement Agreement dated 15 November 2007 amounted to material variation (since no interest payment was ever contemplated for originally under the Sales Contract and the Guarantee) the effect of which would be to add to and increase the liability of the 4^th defendant for the further interest agreed between the plaintiff and the 1^st defendant; and

(f)  such material variation therefore discharged the 4^th defendant liability as a surety under the Guarantee.

57. On the other hand, the plaintiff sought to rely on Clause 7 of the Guarantee which provides :

“7. This Guarantee shall not be affected by any of the following :

(i)    any security which you may now or at any time hereafter take from the Purchaser;

(ii)   any variation, release, surrender or discharge, modification or dealing with in any manner of such security or any failure to enforce such security;

(iii)  any release of any time given or extended to the Purchaser and/or any indulgence, compromise, composition or arrangement made with the Purchaser;

(iv)  any bankruptcy liquidation or other disability or any change in the name style or constitution of the Purchaser or any other act deed or matter whereby we might as sureties have been discharged.”

58. In particular, the plaintiff relies on Clause 7(iii) above.

59. It should be noted that whilst Clause 7 and in particular sub-clause (iii) is widely worded, and it makes mention of “time given or extended to the Purchaser” as well as “any indulgence, compromise, composition or arrangement made with the Purchaser”, there is no mention in any part of Clause 7 of any additional liability which is what is complained of by the 4^th defendant by reason of the interest imposed by the oral agreement in November 2006 and by the written Settlement Agreement.  Moreover, the additional liability from the interest imposed is an added burden different in character from indulgence, compromise, composition or arrangement referred to in Clause 7(iii) of the Guarantee.

60. The plaintiff also seeks to rely on the words in Clause 5 of the Settlement Agreement which states “… and without prejudice to the Company’s rights against the Guarantors in any way whatsoever.”

61. I do not see how this can assist the plaintiff in the absence of any evidence that the 4^th defendant was a party or had agreed to the terms contained in the Settlement Agreement which was only as between the plaintiff and the 1^st defendant.

62. I am therefore of the view that, for the reasons above, the 4^th defendant has a reasonably arguable defence to the plaintiff’s claim against him and that he should be given unconditional leave to defend the plaintiff’s claim.

The order

63. The following orders will be made :

(a)  Summary judgment be entered against the 1^st defendant for JP¥192,100,000.00 and outstanding interest thereon at 6% p.a. from 29 October 2006 until date of judgment and thereafter at judgment rate. 

(b) Interlocutory judgment against the 3^rd defendant with damages to be assessed. 

(c) Unconditional leave to the 4^th defendant to defend.  

Costs

64. The following costs order nisi will be made :

(a)  The 1^st defendant do pay the plaintiff’s costs of this action against the 1^st defendant including this application (and the hearing) to be taxed if not agreed. 

(b) The 3^rd defendant do pay to the plaintiff the plaintiff’s costs of the action against the 3^rd defendant up to the order for interlocutory judgment including this Summons.  The costs of the hearing on 20 January 2000 in respect of the 3^rd defendant be costs in the cause of the assessments.  

(c) The costs of this application (including the hearing) in relation to the 4^th defendant be costs in the cause of the claim against the 4^th defendant.