LEE YING WAH v. YUEN TO TONY AND ANOTHER

HCA 976/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 976 OF 2001

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REASONS FOR DECISION

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1. This is an appeal against the summary judgment granted by Master Rogers on 12 December 2001. The Master granted judgment in the sum of HK$2,172,113.55 and US$483,436.79 in favour of the Plaintiff together with interest. Unconditional leave to defend was given to the Defendants as to the balance of the claim in the sum of US$240,000.00.

2. By a Notice of Appeal dated 17 December 2001, the Defendants sought to have the judgment set aside and ask for leave to defend as to the whole of the Plaintiff's claim.

3. The claim arose from goods sold and delivered to the Defendants by one Nanhai Hua Hong Copper Aluminium Factory ("Hua Hong"). The Plaintiffs said that the price for 28 transactions since August 2000 remained outstanding. By two assignments dated 24 February 2001, Hua Hong assigned its rights in respect of those unpaid transactions to the 1st Plaintiff.

4. In the course of the hearing of the appeal on 3 January 2002, the 1st Plaintiff renewed an earlier application before the Master for joinder of Hua Hong as co-plaintiff. For reasons set out in my Ruling of 3 January 2002, in the very special circumstances of this case, I allowed the application. Hence Hua Hong became the 2nd Plaintiff in the present action and an alternative claim is put forward on behalf of Hua Hong in the event that the assignments were held to be ineffective as a matter of law.

5. It is to be noted that even after the amendments, the claims of the Plaintiffs are still framed in respect of specific transactions instead of a net balance in the running account between the parties. This is significant because the Defendants' position is that although the Defendants might well be indebted to the 2nd Plaintiff in respect of other transactions, they had fully paid the 2nd Plaintiff in respect of these specific transactions set out in the Re-Amended Statement of Claim. That may not be a very meritorious position to take, but it is a defence open to the Defendants because of the manner in which the Plaintiffs' case is put forward in the pleadings. Hence, I have to ask whether that assertion of the Defendants is credible and if I conclude that it is credible, the Defendants should have leave to defend.

6. Before I deal with the submissions of the parties, it is necessary for me to consider the effects, if any, of the Clayton's case (1816) 1 Mer 572 in the present context: Mr Wong (solicitor for the Defendant) relied on the authority of Bodenham v. Purch as (1818) 2 B & Ald 39. That was just an instance in the application of the Clayton's case. It is perhaps better, when we are examining the nature and effect of the rule, to refer to its origin. It has to be remembered that Clayton's case was about the appropriation of payments in the case of a banking account. There was a running account with credits and debits from time to time. Grant MR said at p.608-609:

" ... This is the case of a banking account, where all the sums paid in form one blended fund, the parts of which have no longer any distinct existence. ... In such a case, there is no room for any other appropriation than that which arises from the order in which the receipts and payments take place, and are carried into the account. Presumably, it is the sum first paid in, that in first drawn out. It is the first item on the debit side of the account, that is discharged, or reduced, by the first item on the credit side. The appropriation is made by the very act of setting the two items against each other. ... When there has been a continuation of dealings, in what way can it be ascertained whether the specific balance due on a given day has, or has not, been discharged, but by examining whether payments to the amount of that balance appear by the account to have been made? You are not to take the account backwards, and strike the balance at the head, instead of the foot, of it."

7. The rule is also applicable to appropriation of payments between a trader and his customer if there is a running account arrangement, (see Cory Brothers v. Owners of "Mecca" [1897] AC 286). However, the rule is not an invariable one. Lord Machaghten cited in Cory Bros with approval the following remarks of Jessel MR in Re Hallett's Estate (1880) 13 Ch D 696 at 728,

" It is a very convenient rule, and I have nothing to say against it unless there is evidence either of agreement to the contrary or of circumstances from which a contrary intention must be presumed, and then of course that which is a mere presumption of law gives way to those other considerations."

See also Chitty on Contracts, 28th Edition, Volume 1, paragraph 22-066.

8. For present purpose, four points need to be stated.

(a) Since the Clayton's rule is a rule of appropriation, the reference to the blending of the funds into one account should only be taken as a description of how the account is kept. It does not follow therefrom, as apparently contended by Mr Wong, that all these transactions are transformed legally into a single debt so that each individual sum due loses its separate identity. If Mr Wong is right, there is in fact no need to be bothered about the question of appropriation. It is just a question of arithmetic calculations to work out the net balance. The essence of the rule was that the first item on the debit side being discharged first. It would not be meaningful unless each item retains its separate existence.

(b) The rule is only a presumption in cases of running account. It would not be applicable if circumstances show that the parties intended otherwise.

(c) In a case when the Clayton's rule is not applicable, when a debtor makes payment without specifying which debt he is paying, the creditor is entitled to appropriate the payment in the manner he deems fit. Once an appropriation has been made, the creditor could not seek to vary it afterwards. (see Chitty on Contracts, 28th Edition, paragraphs 22-059 to 22-061; Halsbury's Law of England, 4th Edition, Re-issue, Volume 3 (1), paragraph 196)

(d) All the above is subject to the primary right of the debtor to appropriate.

9. It follows from paragraph 8(a) above that I reject Mr Wong's argument that the assignments were invalid as a matter of law because of the blending of the transactions into one account. Hence, if I were to grant judgment to the Plaintiffs, I should grant judgment in favour of the 1st Plaintiff rather than the 2nd Plaintiff.

10. In the present context, it is not clear to me whether it is the Defendants' case that they had exercised the right of appropriation. Mr Wong argued the case on the basis that these debts had been settled by payments made by the Defendants. However his submissions focused on how the payments were made. A feature common to his submission as well as the evidence filed on behalf of the Defendants is the absence of any clear statements as to how the Defendants could point to these payments as payments for the transactions now set out in the Re-Amended Statement of Claim. There is only a general paragraph pertaining to this issue. This could be found in paragraph 7 of the affirmation of Wong Wing Sze of 10 September 2001, the material part I quote as follows:

" The Plaintiff's purported claim is unfound and without basis as the price of the goods in question has been duly paid by the Defendants pursuant to the specific directions of Nanhai as follows:-

(a) There have been continuous business dealings between Nanhai and the Defendants since or about 1996;

(b) The practice between Nanhai and the Defendants was that the Defendant would provide Nanhai's with costs on account for the goods of different orders. The final accounts for the goods delivered by the Defendants under the orders by Nanhai to the Defendants under the orders would be finalised after the goods had been shipped.

(c) The price for the Purchase Orders pleaded in the draft Amended Statement of Claim has been settled in the following manner: -

[Particulars of payments were then set out.]."

11. The Plaintiffs' case is that the goods were supplied on credit without any payment on account. The Defendants would make lump sum payments from time to time without designating the same on payment for a particular batch of goods. Such payments were reflected in the monthly statement of accounts sent by the 2nd Plaintiff to the Defendants in the course of trade. The contents of those statements had been confirmed by the Defendants by putting their chop thereon.

12. The Plaintiffs explained how those payments had been appropriated as reflected in the monthly statements. Basically some were appropriated for settlement of old debts which had been brought forward (the figures were HK$5,544,491.60 and US$446,549.90) and a sum of US$240,000.00 were applied for partial settlement of some identified transactions. Hence, despite some payments by the Defendants, the transactions set out in the Re-Amended Statement of Claim remained unpaid. For details, reference could be made to paragraphs 19 and 20 of the second affirmation of Li Bing Hong filed on 26 October 2001. In respect of the settlement of debts which had been brought forward, that was the application of the Clayton's rule. In respect of the settlement of subsequent identified transactions, the Plaintiffs said that the 2nd Plaintiff had exercised its right of appropriation.

13. The Master granted unconditional leave to the Defendants to defend regarding the US$240,000.00. Mr Lee, counsel for the Plaintiffs, informed me at the hearing on 28 February 2002 that he conceded that there is an arguable case that the said US$240,000.00 is also subject to the Clayton's rule and therefore he would not challenge the unconditional leave to defend granted by the Master in respect of that sum.

14. Hence, the crucial issue in this appeal can be stated as follows: on the material before me, whether the Defendants showed a believable case that the payments referred to by the Defendants had been appropriated by them to the specific transactions set out in the Re-Amended Statement of Claim. If there was no appropriation by the Defendants, the 2nd Plaintiff was entitled to appropriate such payments to the old debts which had been brought forward, whether by application of the Clayton's rule or otherwise. The monthly statements clearly showed that such appropriation had been made by the 2nd Plaintiff. Hence, if the aforesaid issue is resolved against the Defendants, the Master's decision must, subject to a procedural point which I shall have to deal with later, be correct.

15. In considering that issue, I have to apply the well established standard in Order 14 applications. It is not necessary for me to elaborate on that, the relevant principles were set out in the often cited Court of Appeal decisions in Ng Shou Chun v. Hung Chun Sau [1994] 1 HKC 155 and Man Earn Limited v. Wing Ting Fong [1996] 1 HKC 225.

16. It is trite law that bare assertions in affirmation do not, ipso facto, discharge the threshold burden placed on a defendant in an Order 14 application. The court has to look at the whole situation and take into account of all the material placed before it. (See Banque de Paris v. Costa de Naray [1986] 1 Ll Rep 21 at 23; Microsoft Corporation v. Electro-Wide Limited [1997] FSR 580 at 593).

17. Apart from the assertions of Wong Wing Sze in paragraph 7 of her affirmation, Mr Wong also invited me to take into account of several instances of specific payments by the Plaintiffs. He submitted that the existence of these instances gave credence to the defence case that all payments were made in respect of specific transactions. The relevant transactions were mentioned in paragraphs 17 and 20 of the second affirmation of Li Bing Hong.

18. I accept that in assessing whether the defence case is credible, I must have regard to all the evidence. Hence if the Plaintiffs' own evidence is corroborative of the assertions by the Defendants, I have to bear that in mind. However, on the facts of the present case, I do not think the transactions referred to in paragraphs 17 and 20 of the second affirmation of Li Bing Hong take the defence case further. Paragraph 17 dealt with a batch of goods shipped in October 2000. Mr Li said that on that occasion, the payment was made directly by the ultimate purchaser Carrier Singapore (Pte) Limited, a customer of the Defendants and there was specific agreement as to that. The payment was not in accordance with the normal practice between the parties. With regard to the US$240,000.00 referred to in paragraph 20, Mr Li clearly stated in that paragraph that like other lump sum payments, the US$240,000.00 was not designated by the Defendants to any particular batch of goods. He said the Plaintiffs had appropriated that sum to several transactions identified in the monthly statements. I do not see how this could be relied upon by the Defendants as supporting their case that the Defendants had appropriated their payments to specific transactions. It is only when the Defendants did not exercise the right to make any appropriation, the 2nd Plaintiff had a right to do so (see paragraph 8 above).

19. Of course, if the defence case were not appropriation by the Defendants but appropriation by the 2nd Plaintiff, Mr Wong might have some reasons to refer to the transactions regarding the US$240,000.00. As I said, the evidence of the Defendants is rather ambiguous in this respect. It is not clear to me what were the specific directions of 2nd Plaintiff referred to in paragraph 7 of the affirmation of Miss Wong and she has not condescended into particulars. There is not a scintilla of evidence to establish the so-called "costs on account" arrangement.

20. On the other hand, the Plaintiffs have produced monthly statements confirmed by the chops of the Defendants. They appeared to be contemporaneous documents which were accepted to be accurate by both parties. According to those statements, the normal practice between the parties was the application of the Clayton's rule.

21. Further, as Mr Lee helpfully demonstrated by the charts he prepared, the payments by the Defendants manifestly failed to correspond with the transactions in question. The amounts of those payments were unable to match with the prices of the relevant transactions. The timing of the payments were inconsistent with the assertion of Miss Wong that they were costs on accounts.

22. Hence, applying the principles referred to in paragraphs 15 and 16 above, I am of the view that the Defendants failed to show an arguable defence that these payments were appropriated to the transactions in question.

23. Mr Wong submitted that the Plaintiffs' claim was 'not properly structured' and he sought to rely on the case of Billion Silver v. All Wide Investments [2000] 2 HKC 262. I have examined the implications of that decision in my judgment in Celestial (International) Securities & Investment v. William Henry Woo, HCA 9659 of 2000, 4.12.2001, see in particular paragraphs 16 and 17 thereof. On the facts of the present case, I do not find anything suspicious in the Plaintiffs' case. It is a simple case of goods sold and delivered. The monthly statements clearly showed that there were outstanding arrears in respect of these transactions. With regard to the validity of the assignments, I have resolved the same in paragraph 9 above. Billion Silver has no bearing in the present context.

24. Lastly, I have to deal with the submission by Mr Wong that the claims as set out in the Re-Amended Statement of Claim was not supported by affirmation as required by Order 14 Rule 2(1). Mr Wong accepted that the rule only requires the facts on which the claim is based to be verified. However he submitted that because no further affirmation has been filed after the re-amendment of the Statement of Claim, there is no affirmation verifying the fact that the claim of the 2nd Plaintiff is being put forward by way of alternative to the primary claim of the 1st Plaintiff.

25. In my judgment that argument is without merit. The underlying facts supporting the claims of the Plaintiffs are the supply of the goods and the non-payment of the same. These have been verified. As to the primary claim of the 1st Plaintiff, the additional fact is the assignment of the debts by the 2nd Plaintiff to the 1st Plaintiff. Again this has been verified. As to the alternative claim, it is simply a precaution taken by the Plaintiffs in view of the challenge by the Defendants to the assignments. The merit of that challenge is a question of law. Since the Plaintiffs' evidence has already verified the facts pertaining to the assignments, it must follow that if the assignments were held to be valid, the 2nd Plaintiff could not advance any claims against the Defendants. I fail to see what additional fact has to be verified by the Plaintiffs.

26. In any event, as I have held in paragraph 9 above, the proper Plaintiff in the present case is the 1st Plaintiff. There is no need to be concerned with the alternative claim.

27. For these reasons, the Master's decision is correct and the appeal must be dismissed with costs, such costs to be taxed (if not agreed) and paid forthwith.