CEP LTD v. 无錫市佳誠太阳能科技有限公司

HCCL 12/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO 12 OF 2012

(Transferred from High Court Action No. 181 of 2011)

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D E C I S I O N

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1. This is the defendant’s application made on 1 November 2012 for security for costs against the plaintiff under O 23 r 1 of the Rules of the High Court.

2. The relevant part of O 23 r 1, provides:

“1(i) Where, on the application of a defendant to an action or other proceeding in the Court of First Instance, it appears to the Court-

(a) that the plaintiff is ordinarily resident out of the jurisdiction, or

...

then if, having regard to all the circumstances of the case, the Court thinks it just to do so, it may order the plaintiff to give such security for the defendant's costs of the action or other proceeding as it thinks just.”

3. The plaintiff is a company domiciled outside Hong Kong.  It operates in various places, including Beijing.  There is no evidence that it has any asset in Hong Kong. 

4. The plaintiff opposes the application on the ground that it has a high degree of probability of success at the trial.  In the light of this ground of opposition, I think it is useful for me to repeat the matters of principle that guide the resolution of such application.  They are restated by Barnabas Fung J in para 18 of his decision in Wison (Shanghai) Chemical Engineering Co Ltd v Simmons and Simmons [2008] 2 HKLRD 72:

“18. It is trite that an order of any security for costs is in the discretion of the court, and the court may consider the merits of the plaintiff's claim. If the case of the plaintiff is genuine and strong, no order for security would be granted. On the other hand, an order for security would usually be granted if the plaintiff cannot clearly demonstrate that it has a high degree of probability of success at trial. However, that is not to say that every application for security for costs should be made the occasion for a detailed examination of the merits of the case. It is not the function of the court, when faced with an application for security for costs, to make a "preliminary run" at deciding the ultimate success or failure of the claim. Parties should not attempt to go into the merits of the case unless it can be clearly demonstrated one way or another that there is a high degree of probability of success or failure.”

(See also Hong Kong Civil Procedure 2013 Vol 1 para 23/3/3.)

The background

5. The plaintiff and the defendant entered into an agreement dated 27 April 2010 for the sale by the defendant to the plaintiff of 7.056 megawatts (“MW”) of multi-crystalline solar modules at the unit price of €1.35 or a total price of €9,525,600.  The unit price was increased to €1.40 by a supplemental agreement dated 22 June 2010.  There is a dispute on the validity of the supplemental agreement in this action, but it is not a matter relevant to this application for security.

6. Clauses 7(a) and 14 of the agreement are relevant to this application.  They are also of core importance in the action. They provide:

“7: Payment.

a. The 5% of total contracted value will be paid by T/T within 7 working days after the contract is signed by both seller and buyer. The 95% of each delivery will be paid by the irrevocable documentary Letter of Credit (L/C). The original L/C should be issued latest 20 days prior to the partial delivery. All the terms of the L/C should be confirmed in writing by the Seller finally before the Buyer applies to the bank for the issuance of L/C; any delay will affect shipping date accordingly. The L/C is valid 12 months upon the issuance.

14: Damages limitation.

Except as otherwise set forth in this agreement, neither seller nor buyer, or its or their direct or indirect subsidiaries, shall be liable for any loss, damage, or injury resulting from delay in delivery of the products, or for any failure to perform which is due to circumstances beyond its control. In no event shall seller or buyer, or its or their direct or indirect subsidiaries, be liable for any direct damages other than those described in sections, 12, 16, or any indirect, incidental, consequential, punitive or special damages, including without limitation lost revenue, lost profits, and lost business opportunities, even if it has been advised of the possibility of such damages.  These limitations shall apply notwithstanding any failure of essential purpose of the limited remedy set forth above.”

7. Clause 14 refers to clauses 12 and 16 as provisions of direct damages that the defendant should be responsible, but clause 12 in fact dealt with the rights of termination by the parties, whilst clause 16 provided that the agreement should be interpreted in accordance with the plain English meaning of its terms.

8. After entering into the agreement, the plaintiff duly paid the defendant the 5 per cent deposit on 7 May 2010. 

9. The plaintiff then entered into a sub-sale agreement with Sorgenia Solar SRL (“Sorgenia”) on 16 June 2010 sub-selling 6 MWs of the modules to Sorgenia at a higher unit price. 

The Dispute

10. Sorgenia then procured letters of credit (“L/Cs”) in favour of the plaintiff to pay for the modules under the sub-sale agreement.  The plaintiff then applied to its banker to transfer an L/C to the defendant.  The transferred L/C was advised by the plaintiff to the defendant on 5 July.  It was, however, rejected by the defendant on 6 July. The ground of rejection, as shown in the contemporaneous email exchange, was that the defendant had never accepted any transferable L/C.

11. The plaintiff’s immediate reaction was to promise to provide a direct L/C to the defendant.  The defendant however advised that the plaintiff should first provide a draft L/C, then the defendant would advise the plaintiff of the delivery schedule, the quantity to be delivered, and the shipment.  The plaintiff should only procure the issuance of the L/C after having been given such information.  This advice of the defendant, of course, put the plaintiff in difficulty, as the plaintiff had a schedule of delivery in the sub-sale contract to fulfil.

12. The defendant’s rejection of the transferred L/C also seemed to have been motivated not by the L/C being a transferred one, but by extraneous considerations.  Shortly before the rejection of the transferred L/C, the plaintiff was trying to clinch a deal between the defendant and an Italian company, Energitica Solare SpA (“Energitica”) for the sale by the defendant of 8.5 MW modules to Energitica.  The negotiation of the deal however broke down on 4 July.  The contemporaneous email emanating from the defendant showed that if Energitica should enter into the 8.5 megawatt deal on the terms dictated by the defendant (page B144) or the plaintiff would agree to increase the unit price of the modules from €1.40 to €1.50 (page B143), then the defendant would make delivery as previously agreed.

13. However, on the wording of clause 7(a) of the agreement as quoted above, the defendant appeared to be entitled to do what it did (as referred to in para. 11 above). 

14. Eventually, the plaintiff chose to arrange for the sale and sub-sale to be replaced by a direct sale of the modules by the defendant to Sorgenia at the unit price of €1.50.

15. The plaintiff now claims its loss of profit from the transaction and future loss of business from Sorgenia.  The quantum of the claim is around HK$30 million.

The defence

16. The defendant relies on clause 7(a) of the agreement.  It pleaded in the defence that the transferred L/C was not acceptable to it.  It further pleaded by way of amendment to the defence that the plaintiff had not advised it of the terms of the L/C before issue and the defendant had not agreed to the transferred L/C.  It further put in by way of amendment a number of other technical grounds by reference to the terms of the transferred L/C but which had not been mentioned in the contemporaneous emails.

17. The second ground of defence is to rely on the protection given by the limitation of damages clause No. 14 of the agreement. 

The reply

18. The plaintiff in its reply filed on 24 November 2011.  It pleaded in response to the first ground of defence that there was a visit by the representatives of the plaintiff and Sorgenia to the defendant’s factory on about 24 or 25 June 2010.  A director of the plaintiff, Mr Cicero, had during the visit orally advised the then sales manager of the defendant, Mr Zhang, that an L/C would be issued by Sorgenia to the plaintiff and then transferred by the plaintiff to the defendant, to which communication Mr Zhang acknowledged and raised no objection.

19. This matter of fact is agreed to by Mr Zhang in a witness statement he made for the plaintiff and intended to be used at the trial of this action.  Mr Zhang’s statement is corroborated by one Mr Mingoli, the plant manager and head of production and logistics of Sorgenia.  Mr Mingoli took part in the visit to the defendant’s factory.  He made his corroboration to Mr Zhang also in a witness statement intended to be used at the trial of this action.

20. The plaintiff further pleaded that the transferred L/C advised to the defendant by email on 5 July confirmed what was communicated by the plaintiff orally at the factory visit.  The implication was that the defendant was not entitled to insist on strict observance of clause 7(a) and the plaintiff had not breached this clause in providing the transferred L/C after the defendant had made no objection to the same in the oral communication at the factory visit.

21. The defendant’s representative, Dr Li Panjian, Paul, under whom Mr Zhang worked at the material time, made a witness statement and denied that there was any mention about the nature of the L/C either during the factory visit or at any other time before the transferred L/C was advised to the defendant on 5 July.

22. Mr Chain, counsel for the plaintiff, submitted that the contemporaneous emails show that Mr Li was not present at the factory visit.

The amended reply

23. The plaintiff filed an amended reply on 28 December 2012 to deal with the additional technical irregularities about the transferred credit as raised by the defendant in the amended defence.  The plaintiff in the amendment enlarged the alleged oral communication at the factory visit to an allegation that Mr Cicero of the plaintiff had in fact handed over to Mr Zhang hard copies of the original L/Cs procured by Sorgenia and then made the oral communication to Mr Zhang.

24. The plaintiff further pleaded that Mr Zhang had, subsequent to the factory visit, expressed in telephone communications on several occasions that the payment arrangements were satisfactory.  However, the defendant suddenly objected to the transferred credit on 6 July.  The plaintiff then pleaded that the defendant had by conduct represented to the plaintiff that it would not require the plaintiff to comply with the L/C technicalities under the agreement.  It was then barred from doing so by the doctrines of waiver by election and/or promissory estoppel.

Summonses to adduce further evidence and re-amend the amended reply

25. This factual assertion that hard copies of the L/Cs procured by Sorgenia had been handed over by Cicero to Zhang is purportedly confirmed by two supplemental witness statements made by Cicero and Mingoli.  The plaintiff has issued a summons on 25 January 2013 for leave to adduce at the trial these supplemental witness statements and another statement by another director of the plaintiff.

26. The plaintiff has issued another summons on the same day for leave to re-amend its amended reply.  The proposed re-amendment further pleads that as a result of the factory visit on 24/25 June and an agreement made between the parties thereat to reschedule the delivery of the goods, one of the original L/Cs procured by Sorgenia had become obsolete and was then cancelled, whilst another L/C had to be amended to absorb the payment intended by the obsolete L/C.  Zhang was kept updated and fully informed of these amendments, and he expressed no objection.  When the defendant rejected the transferred L/C, it repudiated the agreement.

Discovery by the defendant

27. Apart from relying on the supplemental witness statements intended to be filed, Mr Chain for the plaintiff further referred to the fact that the defendant had disclosed in discovery the hard copies of the original L/Cs including the obsolete one.  Counsel submitted that these copy L/Cs, and in particular the obsolete one, must have been given to Zhang of the defendant at the factory visit, otherwise the copy of the obsolete L/C would not have been given.  The reason being that it had to be cancelled after the discussion on rescheduling of delivery at the factory visit and there was no point in giving the defendant a copy of the cancelled L/C or the L/C to be cancelled afterwards.

28. This submission certainly has merit, but it was only made for the first time in counsel’s skeleton submissions.  I do not think there is any opportunity for the defendant’s management and in particular Dr Paul Li to respond to it. 

Contemporaneous e-mail not mentioned defendant given hard copy L/C

29. Mr Chan, counsel for the defendant, also submitted emphatically that in none of the emails exchanged between the date of the factory visit and the advice of the transferred L/C on 5 July was there any mention of the hard copy credits having been provided to the defendant or about any amendment to the credits.

30. There were indeed many emails exchanged between the parties during the period referred to by Mr Chan, but the emails were all on the deal that the defendant was negotiating with Energitica.

Decision on the first ground

31. Looking at the matter in the round, I am not in a position to say that there is a high degree of probability of success or failure on either side on this issue of waiver/promissory estoppel.  Having come to this conclusion, I should allow the defendant’s application for security as the plaintiff’s failure on this point at the trial will mean its defeat in the action.

Decision on the second ground

32. However, I would also consider the defendant’s next ground of defence which it pleaded by relying on clause 14 of the agreement.  The plaintiff in its amended reply pleaded that this clause, if it is a valid limitation of damages clause, was inapplicable to the defendant’s breach of the agreement. 

33. Mr Chain, in his skeleton submissions, referred to clauses 12 and 16 of the agreement.  He submitted that these two clauses are not provisions for direct damages as clause 14 seemed to indicate.  Hence, clause 14 would have the effect of limiting recovery of all damages, direct or indirect, and such result is unintelligible.  He then relied on the contra proferentum rule and submitted that the defendant’s reliance on this clause was tenuous. 

34. Mr Chan, however, submitted that if clauses 12 and 16 are unintelligible or ambiguous, then these clauses may be problematic. That, however, would not affect the clear meaning of clause 14.

35. After considering the arguments from both sides, I again come to the view that neither side can say that it has a high degree of probability of success on this issue.  I think the meaning, force and effect, if any, of this clause should be canvassed and considered more deeply at the trial.  This conclusion again leads to the allowing of the defendant’s application for security.

Quantum of security

36. The defendant seeks a sum of HK$1,937,400 as security.  That is for a six-day hearing with the defendant being represented by senior and junior counsel.  Bearing in mind the quantum of the claim being at about HK$30 million, I think it is justifiable for the defendant to be represented by senior and junior counsel.  However, the defendant has only one witness and there is only one lever arch file of documents other than the pleadings and witness statements.  I would consider a global sum of HK$1.5 million as a reasonable amount of security.

Orders

37. I now deal with the three summonses.  For the summons to re-amend the amended reply, I grant the plaintiff leave to effect the re-amendment as shown in the draft annexed to the summons, and dispense with its service.  I also make a costs order nisi that the plaintiff do pay the defendant the costs of and occasioned by the re-amendment.  Since Mr Chan for the defendant has not asked for leave to file a rejoinder, I will not grant leave for it to do so, though it would not be barred from seeking such leave in future.

38. Regarding the plaintiff’s summons to adduce further witness statements, I grant leave to the plaintiff to do so and direct that service of such further witness statements be dispensed with.

39. Mr Chan for the defendant seemed to indicate that the defendant would want to respond to these statements.  I therefore grant leave for it to file supplemental witness statements in response, if any, within 21 days subject to the stay by the order of security for costs.

40. I also make a costs order nisi that the plaintiff do pay the defendant the costs of this summons.

41. Regarding the defendant’s summons for security for costs, I order that the plaintiff do within 28 days provide security for the defendant’s costs of the action to cover the period up to and including the trial of this action and any interlocutory applications during the period in the sum of HK$1.5 million by way of payment into court or by such other means as the parties may agree.

42. Pending the provision of the said security, the action be stayed.  If the plaintiff should fail to provide the security within the time stipulated, the action be dismissed with costs to the defendant without any further order. 

43. I further make a costs order nisi that the costs of this summons be in the cause save and except that the plaintiff do pay the defendant the costs of today in any event.