XCHRX JACKIN OPTICAL MARKETING CO. LTD. v. UNIVERSE LASER & VIDEO CO. LTD.

HCA 16746 of 1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 16746 OF 1998

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J U D G M E N T

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1. This is an application by the Plaintiff for summary judgment against the Defendant in respect of goods in the form of VCDs supplied by Plaintiff to the Defendant and particularised at p. 8 of the bundle in the Statement of Claim, totalling the sum of $1,346,000.00. It is not in dispute at the hearing that the Defendant had not paid for the goods. The Defendant alleges that the Defendant is entitled to set-off and counterclaim in respect of 5 heads of Counterclaim.

2. The relationship between the Plaintiff and the Defendant is that at the material time, the Plaintiff was a manufacturer of VCDs and the Defendant who has the necessary export licence in relation to various titles of VCDs placed orders with the Plaintiff from time to time for the supply of appropriate titles in appropriate quantities.

3. At the hearing before me, the Defendant raised 5 heads of Counterclaim and these have been clearly set out in the helpful skeleton argument of Mr. Shieh . For the sake of convenience I will describe the 1st head of the Counterclaim as being for non-delivery of VCDs covered by two orders in April 1998. The 2nd head of Counterclaim is in respect of alleged watermark defective goods which had been supplied by the Plaintiff to the Defendant and the Counterclaim under that head is quantified at the figure of $139,061.90. The 3rd head of Counterclaim is the breach of an alleged oral agreement whereby the Plaintiff had agreed to set aside production capacity of 1 million discs per month for the Defendant. The 4th head of Counterclaim is that the Plaintiff had failed to return some 600 Stampers to the Defendant and the 5th head of Counterclaim is that the Plaintiff had failed to return master discs and centre labels to the Defendant.

4. It is to be noted that in relation to the 3rd, 4th and 5th heads of Counterclaim that no sum for damages had been specified unlike the amount specified under the 1st head for non-delivery of $2,057,000.00 and the amount specified under the 2nd head for defective goods of $139,061.00.

5. Before I proceed to describe and analyse in some detail the various heads of the Counterclaim, I should first mention that a fundamental part of the Plaintiff's case against the Defence and Counterclaim is that the Defendant has failed to show a sufficient connection between the subject matter of the Counterclaim and the subject matter of the claim.

6. It is not in dispute between the parties that an equitable set-off is what is involved here and to enable that to be enforced, it is necessary first to establish that the Counterclaim is at least closely connected with the same transaction as that giving rise to the claim, and that the relationship between the respective claim and Counterclaim is such that it would be manifestly unjust to allow one to be enforced without regard to the other. In the case of Esso Petroleum v. Newton [1997] 1 WLR 938, Simon Brown L.J. said at 950E:

"For equitable set-off to apply, it must therefore be established first that a counterclaim, at least, is closely connected with the same transaction as that giving rise to the claim and second that the relationship between the respective claims is such that it would be manifestly unjust to allow one to be enforced without regard to the other."

7. Earlier on in a passage from 950B onwards, Simon Brown L.J. referred to the judgment of Lord Denning in Federal Commerce v Molena and in particular he set out the following words of Lord Denning;-

".... and it is only cross claim which goes directly to impeach the Plaintiff's demand, that is so closely connected with the demand that it would be manifestly unjust to allow him to enforce payment without regard to the cross-claim..."

8. The difference between the parties at the hearing seems to be both on the matter of law as well as on the matter of the application of the law. As far as I am concerned, notwithstanding the reference by Ms. Tsui to the case of Hanak v Green, it seems to me that we have moved on considerably from that case and that Esso Petroleum v Newton seems to have laid down the guiding principle. What is difficult however is the application of the principle and in particular what should be the close connection between the Counterclaim and the claim so as to call into operation the principle of equitable set-off. I would be dealing with this aspect when I come to consider each head of the Counterclaim.

9. The broad submission of Mr. Shieh for the Plaintiff is that in order for the defence of the five heads of Counterclaim to succeed, it is incumbent upon the Defendant to show that in relation to each head of Counterclaim;-

(1) that it is a credible case of Counterclaim;

(2) that it is in respect of a claim for a quantum sufficiently specific and large as to off-set the quantum of the Plaintiff's claim and

(3) that each head of the Counterclaim must have a close connection with the transaction giving rise to the Plaintiff's claim.

10. It is convenient to deal first with the 1st Counterclaim because this is the largest amount alleged by way of Counterclaim of the Defendant and also because it seems to be the most substantive point raised by the Defendant. The case of the Defendant on the non-delivery of the goods under the 1st Counterclaim is that there were two orders placed by the Defendant to the Plaintiff, one on 8th and one on 9th of April. These can be found on at p. 215 and 216. There is no dispute that these orders were placed nor is there any dispute that these orders were accepted by the Plaintiff on 15th April 1998. What had been disputed is whether these goods had been non-delivered to the Defendant because the Plaintiff for one reason or another had not produced them or could not produce them and therefore did not deliver them or whether as the Plaintiff contended that the Plaintiff had produced them, had moved them and transported them from the Plaintiff's warehouse to the Defendant and attempt was made to deliver them but was rejected by the Defendant who refused to accept delivery of the goods under the two orders in question.

11. There is no dispute that in relation to the time when the Plaintiff says the goods under the two orders were transported for delivery to the Defendant, there were also goods under a third order which were transported and successfully delivered to the Defendant. The contract in relation to that third order could be found on at p. 194 and the delivery order at p. 195 showing a total of 26 cartons delivered. The Plaintiff's case is that the goods under the 1st and 2nd order had been manufactured and they have the necessary evidence placed before the Court on that. They had moreover the evidence from Mr. Wong Yiu Kei in charge of the warehouse who was also at the relevant time the Plant Manager on the matter of production, storage and delivery of the goods under the two relevant orders. But more importantly the Plaintiff also produced to the court the evidence of the owner of transportation company, Mr. Sin Kwok Leung who was responsible for delivering the goods under the three orders to the Defendant on the 25th April.

12. Produced to the Court further was what to my mind an extremely important contemporaneous document. This can be found at p. 112 and it is the transportation company's contemporaneous documentation in relation to the transportation of 246 cartons of the goods to the Cable Warehouse of the Defendant. This documentation shows 246 cartons which corresponds to the delivery orders for the first two orders, that is at. p. 113 and 114 in relation to 100 cartons and 120 cartons and therefore they add up together with the delivery order of the 3rd Order of 26 cartons to a total of 246 cartons. From me this contemporaneous document seems to show powerfully that not only that there was production of the goods in question but there was the transportation on that day to the Defendant's warehouse. The Defendant said that it had not received the goods under the 2 orders. However, there was no evidence of the Defendant from the ground to challenge the evidence I described earlier, both documentary as well as affidavit from the Plaintiff that these goods where produced, were transported and were unsuccessfully delivered because the warehouse of the Defendant accepted one that is the goods under third order, namely the 26 cartons but not the goods under the first and second order, namely the 220 cartons.

13. It seems to me that the case of the Defendant in the light of this evidence is highly incredible. The matter, however, does not stop there because it is also the further evidence of Deloittes showing that the goods were in existence in early July. There are also the carpark tickets of the two warehouses. The matter however does not just stop on the question of whether the Defendant's story of non-delivery is incredible. The matter goes a little bit further because the Defendant's version is that they had purchased these goods from the Plaintiff and there was no reason for them not to take delivery of these good because they stood to make a substantial profit from a contract that they alleged have been made with a company called Amaze on 9th April, namely a week before the Plaintiff accepted those orders in question from the Defendant. Reliance was placed by the Defendant on a purported letter of a contract order from Amaze for that quantity of the goods at a price of $40.00 per film or $20.00 per disc. There is considerable contradictory evidence by the parties as to whether $40.00 is excessive or not. There is further considerable evidence as to whether Amaze was a bona fide company, was the sort of company that could be in the sort of business to be ordering these quantity of goods from the Defendant at that kind of price. What however is to be noted is that if there is any genuineness in the alleged order of Amaze given to the Defendant on 9th April at $40.00, then it would have been quite easy for the Defendant to produce the necessary documentation in answer to the strong challenge in correspondence by the Plaintiff's solicitors that $40.00 was a grossly excessive figure for any purported sale by the Defendant to Amaze. I think Mr. Shieh's is justified in the criticism of the incredible story of the Amaze contract.

14. The amazement about Amaze, according to Mr. Shieh does not stop there. He also refers to the conflicting story about $250,000.00 whether paid in cash or transferred to a bank account. There is no documentary evidence to support this. Then there is also the unsatisfactory aspect about no documentary evidence of Amaze chasing the Defendant in relation to what Amaze might have lost by way of damages which Amaze's customers were chasing after Amaze. There is a short letter in the bundle at p. 230 about double compensation. But notwithstanding that there was an alleged loss suffered by Defendant it seems that the Defendant had taken no step whether by correspondence or by action vis-à-vis the Plaintiff in respect of the alleged loss of some $2 million and it is clear that in July the Defendant had paid out to the Plaintiff the last of the two cheques which total over two million dollars. If there was any genuineness in the alleged loss suffered arising out of the non-delivery of the goods under the 2 orders in question, there would have been correspondence by the Defendant to the Plaintiff (there have been examples of correspondence in relation to other matters such as the defective goods) as well as actions taken by the Defendant in relation to the payment of the cheques to the Plaintiff.

15. I therefore conclude that the Defendant had failed to discharge the burden cast upon the Defendant not only to condescend upon particulars but to put before the court sufficient material credible in the circumstances as to raise a trialable defence. So upon on the basis of that alone, the defence under the 1st head of Counterclaim must fail. But the matter however does not stop there because the Plaintiff rightly also points out that the normal quantum of loss should be that between the price of the goods contracted to be sold and the market price. There is no evidence put before the court that there was no market price or what the market price was. In fact the claim of the Defendant seems to be put on the basis of the difference between $40.00 and the contract price with Amaze. So for me the quantification is also not satisfactory.

16. Finally on the question of close connection, the Esso Petroleum point, the submission of Mr. Shieh for the Plaintiff is that the claims by the Plaintiff are in respect of orders placed in May and months thereafter whereas the subject matter of the damages for the non-delivery of the goods in respect of two April orders and that they are totally separate, not connected and therefore it is not of sufficient connection for the operation of equitable set-off. I agree.

17. Ms. Tsui submitted to me a wide formulation of connection. The way she puts it as I understand her is that so long as it is in respect of transactions between the Plaintiff and the Defendant connected with VCDs, then irrespective that in the two transactions, that is the subject matter of the counterclaim and the subject matter of the claim, they may be different in time, different in terms of subject matter and titles, they are still sufficiently close as to give rise to the operation of the equitable set-off. It is submitted that in the course of the trading relationship, there is sufficient connection between the counterclaim and the claim as to entitle the Defendant to raise the defence of equitable set-off. It seems to me that if the contention of Ms. Tsui is right, then it would destroy the foundation of the principle of Esso Petroleum. I think the Court must scrutinise each alleged counterclaim and be satisfied that the subject matter of the counterclaim impugns the Plaintiff's rights to sue and here I cannot see that kind of close connection at all. So also on that basis of lack of connection, I find that the 1st head of Counterclaim fails.

18. I now turn to the 2nd head of Counterclaim. The allegation made here is that the goods were defective in that they had watermarks. The evidence on this is unsatisfactory because it is not said that because of the watermarks the VCDs were unviewable or that their viewability was in any particular way specified grossly affected. The submission of the Plaintiff, in fact, is that there is no evidence that these goods were unsaleable or that the goods had been rejected by the Defendant's customers or what had happened to the goods at all. At the hearing, Ms. Tsui produced to the Court a table purporting to show the make-up of the loss as well as the detail breakdown of the sales of the defective goods at various prices. That is obviously not admissible because it was done after Mr. Shieh had already completed his submissions. It was unsworn, had no supporting affidavit explaining it and this is not normal way evidence is received by the court on a summary judgment application.

19. The problem with the case of the Defendant on this is that the Defendant seems to have various versions of its claim for damages. The sum of $139,000.00 is in the pleadings. The sum of $329,000 is in the demand letter at p. 198. The sum of $221,950.00 is both in Ms. Chiu's affidavit at 118 as well as in Ms. Tsui's skeleton argument. There is no satisfactory evidence of any amount which the Defendant could be said properly to have suffered loss as result of this alleged defect.

20. There is also a further problem in relation to this Counterclaim of the lack of complete identity between the subject matter of the claim and the subject matter of defective goods claim although it was pointed out at the hearing that 3 of the invoices of the Plaintiff might be connected. However, it seems to me that the material before the court are such that I am not persuaded that it gives rise to any credible case for the Defendant under this head.

21. I now turn to the remaining three heads of Counterclaim. I think I can dispose of them quickly. In relation to the 3rd head of the oral agreement of production capacity, I think the formulation of that claim in paragraph 5 or Ms. Chiu's first affidavit speaks for itself and the agreement even if it exists is incomplete and void for uncertainty as I have indicated to Ms. Tsui in the course of the hearing. There is also the further problem about the question of damages both because it is unspecified in quantum as well as arising from the nature of the alleged oral agreement where there was no obligation for the Defendant to take any specified quantity nor at any specified time which gives rise to the inference that this 3rd head of claim for damages can be said to be in a high degree speculative. This head of claim also suffered from the same vice of not being able to show that it has any connection with the Plaintiff's invoices the Plaintiff is suing on.

22. The 4th head of the Counterclaim by way of claim for stampers arose this way. The Defendant said that the Plaintiff was in possession of some 600 stampers which had been made by the Plaintiff in the course of production of the VCD discs and these stampers had not been returned to the Defendant. The Plaintiff said that it was entitled to the possession of these stampers and the Defendant said no. The difficulties of the Defendant by the way of this head of claim is that the claim is in an unspecified quantum, as well as not shown to be by the way of credible evidence to be connected sufficiently with the subject matter of claim. In the course of oral hearing, Ms. Tsui referred to some accounting exercise she had done but that is no substitute for credible evidence. In my view on the basis of the unspecified quantum alone the Counterclaim on Order 14 must fail.

23. I now turn to the final matter of the master disc and the label. This is the allegation by the Defendant that theses had not been returned by the Plaintiff to the Defendant. The Plaintiff said that the Defendant had not requested them and the Plaintiff was happy to return them. Ms. Tsui at the hearing had to concede that in relation to this claim, whatever damages that might have been suffered it would be minimal and nominal. I think on the basis of that concession alone which seems to be properly made, it would be sensible that this head of Counterclaim should be put out of its misery by being shown to have no prospect of success.

24. I therefore conclude that none of the 5 heads of Counterclaim can be the subject of any proper equitable set-off or deserving for the court to grant unconditional leave to the Defendant. The claim of the Plaintiff for Order 14 therefore succeeds. I therefore order judgment in favour of the Plaintiff in the sum as claimed in the Statement of Claim together with interest thereon at 2% above prime from the date of Writ until today. The Plaintiff is to have its costs of the action including costs of the application to be taxed if not agreed.