RICKEED INDUSTRIES LTD AND ANOTHER v. HONG KONG TOHKOH COMPANY LTD

CACV 72/2022

[2023] HKCA 231

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 72 OF 2022

(ON APPEAL FROM HCA 2280 OF 2015)

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J U D G M E N T

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Hon Barma JA (giving the Judgment of the Court):

1.  This is the defendant’s renewed application, by a Summons filed on 26 September 2022 (“the Summons”), seeking a stay of execution of the judgment of DHCJ P Fung SC (“the Deputy Judge”) dated 13 January 2022 (“the Judgment”) (see [2022] HKCFI 106) pending the determination of its appeal against the Judgment, pursuant to RHC Order 59 rule 13. By the Judgment, the defendant was ordered to pay damages to the plaintiffs in the amount of RMB5,022,268.87, together with interest on such damages at the rate of 1% above HSBC’s best lending rate, from the date of the writ in these proceedings until payment.

2.  After the Judgment was handed down, the defendant lodged its Notice of Appeal on 10 February 2022, and the plaintiffs filed a Respondent’s Notice on 2 March 2022. Having lodged the Notice of Appeal, the defendant applied for a stay of execution of the Judgment. 

3.  That application was heard by Au-Yeung J (“the Judge”) and by her Decision dated 8 August 2022 (see [2022] HKCFI 2458) (“the Stay Refusal Decision”), she refused the application, and ordered that the plaintiffs’ costs (which she summarily assessed in the sum of HK$100,000) be paid by the defendant.  The defendant was subsequently ordered by the Judge on 26 September 2022 (upon a joint application by the parties) to pay the sum of HK$100,000 into court pending the determination of the renewed stay application by this court.

4.  On 15 June 2022, pursuant to an order of G Lam JA on 7 June 2022, the defendant has also paid into court a sum of HK$300,000 as security for the plaintiffs’ costs of the appeal.  The parties have also (on 15 August 2022) filed a Joint Checklist for the appeal, the hearing date of which has not yet been fixed.

5.  The Summons is supported by the 2^nd Affirmation of Robert Osborne Lee and the Affirmation of Manabu Ikegami (“Ikegami 1^st”) both filed on 26 September 2022.  The application is opposed by the plaintiffs, who filed the Affirmation of Yau Yuen Mei on 21 October 2022.  The defendant thereafter filed the 3^rd Affirmation of Robert Osborne Lee on 3 November 2022 in response.

6.  Mr Colin Wright (appearing with Ms Jacqueline KK Chan) for the defendant lodged written submissions in support of the Summons on 18 November 2022.  Written submissions in opposition dated 30 November 2022 were lodged for the plaintiffs by Ms Queenie WS Ng (appearing with Mr Kev LH Wan).  Thereafter, reply submissions on behalf of the defendant were filed on 9 December 2022.

The Deputy Judge’s Judgment

7.  In the court below, the Deputy Judge presided over the trial of the plaintiffs’ claim by an Amended Writ of Summons re-filed on 30 December 2015 seeking damages for allegedly defective goods sold to them by the defendant.  The defendant brought a counterclaim against the plaintiffs for (among other things) damages for breach of an undertaking, but this was abandoned at the beginning of the trial.

8.  The background to this matter and the parties’ respective positions were set out by the Deputy Judge at [3] to [14] of the Judgment.  For the purposes of this application, it suffices to highlight the following:

(1)  the 1^st and 2^nd plaintiffs are respectively companies incorporated in Hong Kong and the mainland, and are both owned by a Taiwanese company, Gredmann Taiwan Ltd.  They collectively carry on the business of purchasing and trading in certain industrial / sheet materials (in this case, acrylic sheets);

(2)  the defendant is a company incorporated in Hong Kong, which is owned by a Japanese company, Tohkoh Jushi Company Limited (“Tohkoh Japan”).  It carries on the business of selling acrylic sheet materials manufactured in Japan;

(3)  the way in which sales by the defendant to its customers took place was that when an order was received by the defendant, it would be passed on to Tohkoh Japan (who would make arrangements for the production of the orders), with the finished products being shipped directly from the manufacturer to the defendant’s customers;

(4)  the dealings between the plaintiffs and the defendant began in late 2010 and lasted until early 2014;

(5)  at trial, the plaintiffs’ case was that:

(i)     acrylic sheets supplied by the defendant under various purchase orders have always been, to varying degrees, defective;

(ii)    the acrylic sheets supplied by the defendant which form the subject matter of these proceedings (as well as the replacement sheets supplied by the defendant in respect of some of these sheets) were substantially defective;

(iii)   by reason of the defects, the plaintiffs and their sub-purchasers have had to sell the acrylic sheets in the market at reduced value, resulting in loss;

(iv)   the defects in the sheets were not due to the plaintiffs’ misconduct, mishandling or improper storage, but were defects inherent in the sheets at the time of delivery;

(6)  the defendant’s position, however, was that as a general dealer (and not the manufacturer) of acrylic sheets, it did not provide any warranties to the plaintiffs as to the quality or fitness for purpose of the sheets sold.  They also contended that due to of the lapse of time and delay in the plaintiffs’ complaints of defects, they could no longer reject the goods.  On quantum, the defendant’s case was that the plaintiffs had failed to prove their loss and/or had failed to mitigate the damage claimed to have been suffered.

9.  At the hearing of the trial, the Deputy Judge had the benefit of evidence from lay witnesses called by both sides, which he considered in detail together with documentary evidence of the contemporaneous correspondence (see [18] to [68] of the Judgment).  There was also evidence from a joint expert on the cause of damage to a sample of the acrylic sheets supplied by the defendant to the plaintiffs (discussed at [69] to [71] of the Judgment).

10.  On liability, the Deputy Judge’s key findings were that:

(1)  it had not been agreed between the plaintiffs and the defendant that the defendant would not give any warranty as to the quality of the goods to be sold (see [82] of the Judgment);

(2)  on the evidence, including in particular admissions contained in various emails sent by the defendant’s representatives to the plaintiffs, there was a pattern of defects in the acrylic sheets sold by the defendant to the plaintiffs during their trading relationship (see [84] of the Judgment);

(3)  based on (but not limited to) the expert evidence, the majority of the acrylic sheets delivered by the defendant to the plaintiffs under purchase orders dated 15 December 2011 and 27 March 2012 (respectively for 30,000 pieces and 20,000 pieces (as well as an additional 17,600 replacement pieces) of acrylic sheets) were defective (see [85] to [86] and [100] of the Judgment);

(4)  the defendant had failed to prove any mishandling or improper storage of the acrylic sheets by the plaintiffs;

(5)  as to the delay in making the plaintiffs’ complaints, since the plaintiffs were in the business of resale of acrylic sheets, it was natural for them to only have learnt of the defects upon complaints raised by their customers, and, on the facts, the plaintiffs notified the defendant of the defects “very soon” after such notification by their own customers (see [93] to [95] of the Judgment);

(6)  in the circumstances, the defendant was in breach of its obligations under the relevant purchase orders (these being the conditions implied pursuant to sections 16(2) and (3) of the Sale of Goods Ordinance, Cap 26) (“SOGO”) by supplying defective goods to the plaintiffs which were not of merchantable quality or suitable for the purposes of the plaintiffs, thus rendering the defendant liable to the plaintiffs in damages;

(7)  as to quantum, the evidence of quantification of loss was set out in a witness statement of one of the plaintiffs’ witnesses, which was reproduced by the Deputy Judge at [107] of the Judgment (with a minor revision as stated in [110] of the Judgment);

(8)  the plaintiffs’ overall loss was RMB5,022,268.87, a sum which was, according to the Deputy Judge, not “seriously challenged” by the defendant.  The Deputy Judge also noted that the defendant had not sought to cross-examine the plaintiffs’ witness on the amount claimed, and had not adduced any positive evidence to suggest a failure to mitigate loss by the plaintiffs.

11.  Accordingly, the Deputy Judge found for the plaintiffs and (i) ordered the defendant to pay damages in the sum of RMB5,022,268.87 with interest at the rate of 1% above the HSBC Best Lending Rate from time to time from the date of the writ until the date of the Judgment; (ii) dismissed the defendant’s counterclaim; and (iii) ordered the defendant to pay the plaintiffs’ costs of the action and of the counterclaim.

The Judge’s Stay Refusal Decision

12.  As noted above, after the defendant filed its Notice of Appeal (appealing against both liability and quantum), it applied to the Judge for a stay of execution of the Deputy Judge’s Judgment pending appeal.  The Judge determined that application on paper and rejected it for the reasons which she gave in the Stay Refusal Decision.

13.  Although the grounds of appeal against liability are extensive, the Judge correctly observed that they were for the most part complaints about the Deputy Judge’s findings on issues 3 to 5 in the parties’ Agreed List of Issues at trial.  The Judge summarised these grounds, which primarily targeted the findings of fact or inferences of facts made by the Deputy Judge, as (a) the complaint that the Deputy Judge’s found that the goods were defective without evidence in support (“the Defectiveness Ground”); and (b) the complaint that the Deputy Judge failed to have regard to the plaintiffs’ burden of proof to show that defects in the goods were present before risk passed and misdirected himself that the defendant had the burden of proving that the defects were caused by something that occurred whilst the goods were in transit (“the Burden of Proof Ground”) (see [7] to [9] of the Stay Refusal Decision).

14.  As to quantum, the grounds of appeal were that (a) the Deputy Judge should have but failed to calculate the plaintiffs’ recoverable loss in accordance with section 55(3) of the SOGO, (b) the Deputy Judge failed to have regard to the fact that the plaintiffs had not proved that the goods used in the calculation of damages were the goods delivered by the Defendants and (c) that the plaintiffs elected not to call expert evidence to establish that the diminution in value of the goods arose from breach of the contractual warranty (see [16] to [17] of the Stay Refusal Decision).

15.  The Judge came to the view that while all the grounds of appeal (whether against liability or quantum) were arguable, they could not be said to be so strong as to justify the grant of a stay without more (see [7] to [19] of the Stay Refusal Decision).

16.  The Judge went on to conclude that the defendant had failed to demonstrate that the appeal would be rendered nugatory without a stay, as it appeared to her that the defendant had had the means to repay certain debts owed to its parent company, Tohkoh Japan, to pay legal fees to its own lawyers, and to provide security for costs of the appeal from its own resources.  Further, the defendant (when the matter was before the Judge) rejected the plaintiffs’ offer to accept payment of the judgment sum into court.

17.  The Judge accordingly dismissed the defendant’s application for a stay of execution.

Legal principles

18.  The principles on the granting of a stay of execution pending appeal are well-settled, and have been set out in the judgment of Ma J (as he then was) in Star Play Development Ltd v Bess Fashion Management Co Ltd [2007] 5 HKC 84 and repeated by this court (Cheung CJHC and Macrae JA, as they then were) in SNE Engineering Co Ltd v Chim Kee Machinery Co Ltd, unrep., CACV 101/2016, 15 July 2016. 

19.  An appeal does not operate as a stay of execution of the decision below.  Unless an appellant can justify a stay by demonstrating that good reasons for granting one exist, a stay will not be ordered.  The existence of a strong appeal will usually by itself constitute a good reason for granting a stay, whereas the existence of a merely arguable appeal (i.e. one with reasonable, but not strong, prospects of success) does not by itself amount to sufficient reason for a stay. 

20.  Where there exists only an arguable appeal (and not a strong one), the appellant must show additional good reasons to justify a stay, such as that the appeal would be rendered nugatory if a stay were not granted.

21.  For the purpose of a stay application, the court is only required to form a preliminary view on the merits.  It would be impractical and undesirable for the court to go deeply into the strength of the appeal, and the court should refrain from embarking upon detailed discussion and analysis of the grounds of appeal.  See Ming Hsieh v Xu Zhe & ors [2018] HKCA 390 at [9], per Kwan JA (as she then was).

22.  Ultimately, the court carries out a balancing exercise and uses its common sense, but bearing in mind at all times the starting point that the successful party is not to be deprived of the fruits of his success.

Discussion

(i) Merits of the appeal

23.  In the parties’ written submissions to this court, they raise essentially the same arguments which had been canvassed before the Judge below.

24.  As it did below, the defendant contends that the Deputy Judge erred in his material findings of fact and law in the respects summarized by the Judge in the Stay Refusal Decision, leading him to erroneous conclusions on both liability and quantum.  The defendant’s primary position is that an unconditional stay should be granted, but in the alternative (which was not offered in the stay application in the court below), suggests a conditional stay be granted – the condition being the making of a payment into court (to achieve which the defendant would require the assistance of its parent company, Tohkoh Japan, which would be forthcoming).  The plaintiffs oppose the present application and submit that a stay should be refused, contending that there are no special factors that would justify a stay.  That said, they are also amenable to this court granting a conditional stay requiring a payment into court.

25.  Although the Notice of Appeal spans 6 pages and 28 paragraphs, the grounds of appeal were accurately summarized by the Judge as set out in [13] and [14] above.

26.  In accordance with established principle, we do not think it necessary or appropriate to embark upon a detailed discussion of the merits of the appeal. The application before us is not a dry run of the appeal, and it will suffice to express a broad preliminary view on the merits.

27.  While the existence of a strong appeal would tend to lead the court to exercise its discretion in favour of granting a stay, the threshold is a high one.  This court has held that the requisite strength of the grounds of a “strong appeal” must be such that would lead the court to conclude that “something has grievously gone wrong with the process of law in the court below”, or in other words, the appellant is “almost bound to succeed” in the appeal.  See [10] of Ming Hsieh, per Kwan JA (as she then was).  Failing this, something more needs to be demonstrated. 

28.  Having considered the Judgment and the Notice of Appeal, while we, like the Judge, would accept that the appeal is arguable, both in relation to liability and quantum, we agree with the Judge that it is not as strong as it needs to be to justify the granting of a stay without more.

(ii) Would the appeal be rendered nugatory without a stay

29.  On the issue of whether the appeal would be rendered nugatory without a stay, Mr Wright for the defendant submitted that the “unchallenged evidence” is that execution of the Judgment would put the defendant in a state of financial ruin from which it would not be able to recover.  But this submission immediately runs into difficulty, as it is the defendant’s own evidence in support of this application that notwithstanding its own apparent inability to pay the judgment sum, its parent company would be prepared to make additional funds available to the defendant should the court grant a stay conditional upon a payment into court which exceeds the assets of the defendant (see [23] of Ikegami 1^st). 

30.  Even if it is accepted that the defendant is unable to make payment of the judgment sum and that it did not itself contribute to its difficulties in doing so by repaying part of its debt to its parent (or paying its own legal costs rather than any part of the Judgment debt), it appears that Tohkoh Japan is prepared to assist the defendant to the extent necessary to make a payment into court if that is required, and there is nothing to suggest that Tohkoh Japan itself does not have the financial ability to do so.

31.  This is relevant because in assessing a party’s financial ability as a relevant factor in this sort of application, the court looks not only at whether the party in question itself has the ability to raise the necessary funds, but also whether money can be raised by its backers or other interested persons.  See Contract Facilities Limited v Estates of Rees (Deceased) & ors [2003] EWCA Civ 465 at [10]; Hearst Holdings Inc. & anor v A.V.E.L.A. Inc. & ors [2014] EWCA Civ 1316 at [51].  In the present case, in light of the defendant’s evidence that the necessary funds for a payment into court as a condition of a stay could be provided by Tohkoh Japan, we are of the view that there would not be any prejudice caused or risk of injustice to the defendant if an unconditional stay was refused.

(iii) Balance of justice and the court’s discretion in granting a stay

32.  Although it might be said that in these circumstances a stay could simply be refused, the court retains the discretion to grant a stay subject to appropriate conditions if the balance of justice so dictates. 

33.  As to this, Mr Wright submits that there is an appreciable risk that the defendant would have difficulty recovering any amount paid to the plaintiffs should the defendant’s appeal ultimately succeed, because the plaintiffs are owned by a Taiwanese company and the 2^nd plaintiff is incorporated in the mainland.  He contends that by reason of this, without a stay, there would be a real risk that any sums received by the plaintiffs would be taken out of the jurisdiction with “consequent serious problems of recovery after a successful appeal”.  Along similar lines, Ms Ng submits that in the event there is an unconditional stay but the appeal is ultimately dismissed, the defendant’s self-confessed impecuniosity would mean that the plaintiffs would risk not only incurring more legal costs in the appeal but also that they might be left with an empty judgment.  She therefore submits that if a stay were to be granted, it should be subject to a condition that the defendant pays into court a sum representing the Judgment debt plus interest, as well as costs in the proceedings below, totalling some HK$11,207,099.76.

34.  Each party therefore shares the same concern, that there is a risk that they would not be paid (or repaid) the judgment sum should the appeal be determined in their favour, and both parties adopt the (fall back) position of being amenable to the grant of a stay which is conditional upon a payment into court.

35.  Having considered the parties’ submissions, we are satisfied that the balance of justice in this case lies in favour of the grant of a stay of execution of the Deputy Judge’s Judgment (subject to the qualification mentioned in [37] below), subject to a condition requiring a substantial payment into court to be made by the defendant.  In this way, the plaintiffs will be substantially protected against the risk of an empty judgment, while the defendant will be protected against being unable to recover amounts paid over to the plaintiff if its appeal should succeed. 

36.  In our view, the appropriate condition to be imposed would be that the defendant do pay into court a sum of RMB6,500,000 representing the judgment sum of RMB5,022,268.87 plus interest (albeit not the full amount of interest which will by now have accrued) within 28 days from the date of this decision.  We regard this as a fair balance between the interests of the parties.

37.  We would, however, clarify that the stay of execution does not extend to that part of the Deputy Judge’s order dismissing the defendant’s counterclaim.  The counterclaim was not pursued at trial, and although the Notice of Appeal seeks an order that the Judgment (presumably in its entirety) be set aside, the grounds of appeal do not suggest that there is any issue taken with the Deputy Judge’s dismissal of its counterclaim.

38.  As to the Deputy Judge’s costs order below (by which costs of the entire action including the counterclaim were awarded to the plaintiffs, to be taxed on the party and party basis), the modern approach is for the court to decide, as a matter of discretion, whether to grant a stay of the costs order along with the substantive parts of the order in the court below.  There is no hard and fast rule in this regard (see HKCP 2023 at [59/13/5]).  In our view, given the existence of an arguable appeal, it would be appropriate for the stay to extend to the costs order made by the Deputy Judge.  So far as the stay of the costs order is concerned, we do not think it necessary to separate the costs of the counterclaim from the costs of the main action as we think it impractical and not cost-effective to permit the possibility that the costs of the counterclaim should be dealt with separately from the costs of the main action at likely further cost and effort, particularly when such costs should be relatively minor in the overall scheme of things.  In saying this, we do not envisage that the part of the costs order dealing with the counterclaim will be varied on appeal, even if the appeal on the main action is successful, given what we have noted in [37] above.

(iv) Disposition and Costs

39.  For the foregoing reasons, in the exercise of our discretion, we grant a stay of execution of the Judgment (save in relation to the dismissal of the Counterclaim) and the Costs Order, both made by the Deputy Judge on 13 January 2022, on condition that the defendant do pay into court the sum of RMB6,500,000 within 28 days of the date of this judgment.  In the event that the payment in is not made, the stay shall automatically lapse.

40.  As to the costs of this application, the usual order where a stay is granted is for costs to be made costs in the appeal, unless there exists some other reason as to why the norm should be departed from (see HKCP 2023 at [59/13/8]). In the present case, a stay has been granted subject to a payment into court.  As neither party has been wholly successful in relation to the extent of such payment in (the plaintiffs seeking a payment in to cover the judgment sum, interest and costs, and the defendant contending for a much lower level of payment in – substantially less than the judgment sum), we think it would be appropriate to make an order nisi that the costs of this application before us should be costs in the appeal.