KARPEX (HK) LTD v. YASMINE PRINTING (CHINA) LTD

DCCJ 3902/2004
(Leading Action)

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 3902 OF 2004

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DCCJ 4102/2004

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 4102 OF 2004

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BETWEEN

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[Consolidated by Order of Master K.W. Wong dated 21^st August 2004]

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DECISION

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1.  In this Decision reference to Plaintiff refers to the Plaintiff in DCCJ3902 of 2004 and reference to the Defendant refers to the Defendant in the same action who is also the Plaintiff in the DCCJ4102 of 2004.   In this consolidated action the Defendant by this Summons applies for summary judgment on its counterclaim in the sum of $47,000 under O14 of the RDC and security for costs in the sum of $155,300 pursuant to section 357 of the Companies Ordinance and/or O. 23 of the RDC.

Background

2.  In the consolidated action, the Plaintiff claims against the Defendant for loss and damage arising out of defective goods manufactured and supplied by the Defendant to the Plaintiff in December 2003 (“the 1^st Order”).  The goods in question were 3,000 sets of window colour gift boxes that were to carry bottles of bird’s nests.  The Defendant filed a Defence and Counterclaim.  On the Counterclaim, the Defendant claims against the Plaintiff the price of the same type of gift boxes ordered on 7 January 2004 for $47,000 (“the 2^nd Order”).  The Defendant pleaded in Defence that the Quotation which evidences the contract between the Plaintiff and the Defendant contains a clause 5 in the Remark thereof which state that “should there be any problem with [the Boxes] [the Plaintiff] should notify [the Defendant] of the same in writing within 7 days after the receipt of [the Boxes] by [the Plaintiff], failing which everything should be taken as in order”.  Defence pleads that the Plaintiff had failed to notify the Defendant of any defect in the Boxes within the stipulated time and further placed the 2nd Order on 7^th January 2004 aforesaid.   

3.  In the Reply and Defence to Counterclaim, the Plaintiff pleads that it seeks to set off as much of its claim in the Statement of Claim as will be sufficient to satisfy the Defendant’s Counterclaim

The Counterclaim

4.  The Defendant’s Counsel submits that there is no defence to the Counterclaim because it is common ground that the Plaintiff has never rejected or returned the 10,000 sets of boxes or any part of the same.  The Plaintiff however refused to pay the price of $47,000.

5.  The Defendant’s Counsel relies on section 37 (1), (4) and (5) of the SOGO.   Section 37(4) states,

“(4) The buyer is also deemed to have accepted the goods when after the lapse of a reasonable time he retains the goods without intimating to the seller that he has rejected the goods.   ”

6.  It is a fact that the Plaintiff had never rejected the goods and he has retained the goods in the 2^nd Order since its delivery on 14^th January 2004.   

7.  The Defendant’s Counsel submits that the Defendant is entitled to the counterclaim and here is no defence to the counterclaim.

The Defence of Set-Off to the Counterclaim

8.  The Plaintiff’s Counsel submits that it has a right of set-off against the amount in the Counterclaim as pleaded in the Statement of Claim in DCCJ3902 of 2004.   In this Statement of Claim the Plaintiff pleads in relation to the 1^st Order that relying on the skills and judgment of the Defendant, the Plaintiff, through its authorized packaging party known as “New Life Psychiatric Rehabilitation Association”, received the Boxes from the Defendant and settled the invoice for the Contract on 9^th January 2004.

9.  The Plaintiff pleaded an implied term under the contract in the 1^st Order that the Boxes had to be made of merchantable quality and fit for its purpose.   The Defendant breached the implied term in not ensuring that adhesion of the edges of Boxes had been done properly so that after delivery of the Boxes to the Plaintiff, the Boxes started to split open at the sides, rendering them unsuitable for display in the shops of the Plaintiff’s retailer who displayed them for the Plaintiff.  This adversely affected the Plaintiff’s performance of its contract with such retailer.

10.  The Defendant’s Counsel submits that Remark 5 in the Quotation of the 1^st and 2^nd Orders contained the clause which stated that the Plaintiff should notify the Defendant of any problem with the Boxes within 7 days after the receipt of the Boxes by the Plaintiff failing which everything should be taken as in order.   The Defendant’s Counsel submitted that the Plaintiff had failed to notify the Defendant of any problem within the period stipulated.  Hence the Plaintiff is deemed to have found that the Boxes were in order.  

11.  The Plaintiff’s Counsel referred to Section 11(3) of the Control of Exemption Clauses Ordinance and submitted that the liability under section 16 of the SOGO could only be excluded or restricted by reference to a contract term only in so far as the term satisfies the requirements of reasonableness.   The Plaintiff’s Counsel also submitted that the defect complained of could not have been discovered as soon as they were delivered or within 7 days of receipt of the goods as such defects were latent defects.   She submits that the exemption clause is not reasonable.

12.  The Defendant’s Counsel submits that there is no evidence of the damages pleaded by the Plaintiff in the Statement of Claim.    It would seem that there is evidence of the return of goods by Watson’s, and there is a Debit Note in the sum of $68,260.50 at page 95 of the BD.   This prima facie shows damages which exceed the amount claimed in the Counterclaim.  

13.  The Plaintiff’s Counsel submits that the Plaintiff’s claim for damages amounted to an equitable set-off of an unliquidated claim.   The counterclaim is closely connected with the transaction that gives rise to the claim and also that the relationship between the respective claims is such that it would manifestly be unjust to allow one to be enforced without regard to the other.  

14.  She referred to Hong Kong Civil Procedure 2004 at page 167 thereof where reference is made to 4 different classes or groups of orders to be made where the defendant raises a set-off or counterclaim.   The first of this states:

“1.  where the defendant can show an arguable set-off, whether equitable or otherwise, he is entitled to leave to defend to the extent of the set-off and the court had no discretion.” 

15.  In my view, having considered the arguments aforesaid and the evidence, it seems clear that the Plaintiff has raised an arguable set-off which should be tried.   There is prima facie evidence that the amount of the set-off exceeds the amount of the counterclaim.  The Plaintiff should be given leave to defend the Defendant’s Counterclaim.

16.  I therefore grant leave to the Plaintiff to defend the Counterclaim.

Security For Costs

17.  The provision relied on for the application for security for costs is Section 357 of the Companies Ordinance which states:

“Where a limited company is plaintiff in any action or other legal proceeding, any judge having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the company will be unable to pay the costs of the defendant if successful in his defence, require sufficient security to be given for those costs, and may stay all proceedings until the security is given.”

18.  The facts relied on in relation to the assertion that the Plaintiff will be unable to pay the costs of the Defendant is successful, are:

(a)	The admission of the Plaintiff in the letter dated 14 July 2004 to the Small Claims Tribunal that they have accumulated serious losses on the Chinese New Year Gift Box Bird’s Nest sales.   The Plaintiff will face another financial difficulty and will not be able to pay salaries, supplies and the daily running cost for the company if they pay the security for costs ordered by the Adjudicator in the sum of HK$47,000.
(b)	The admission in the letter of their Director that the Plaintiff’s company is fully supported by the Director’s loan.
(c)	The Plaintiff’s has a paid-up capital of only HK$100.

19.  The Plaintiff’s Counsel refers to the facts relied on by the Defendant for the application for security and states that they were facts that date back in 2003 and 2004 and are no longer current when the Plaintiff took out this application on 3 May 2005.    She submits that for the purpose of an application for security for costs, the relevant time is the date of the application: Re Greater Beijing Region Expressways Ltd (No. 3), Le Pichon J. [2000] 3HKC 608 at 624H.  Further, whether the company would be unable to meet its debts when an order for costs was made against it is to be answered when the application was made to the Court for an order: Re Unisoft Group Ltd. (No. 2) [1993] BCLC 532 (at page 3 of the judgment).

20.  The Plaintiff’s Counsel submits that the information relied on in respect of (a) and (b) above does not depict the current situation.   The Plaintiff’s supporting affidavit states that the situation has improved greatly since then.   Mr. Benjamin Li Chi Shing (“Mr. Li”) the Director of the Plaintiff states in his affirmation dated 20 May 2005 that the Plaintiff’s situation has changed since he wrote about the financial circumstances of his company which is referred to by the Defendant in this application.   He says that his company is now an established company trading in nutritional food products under the brand name of “Lifeforce”.  His company has now reached distributorship deals with certain major retailers and has sponsored health programme in Metro Radio and with Watsons.  The financial situation of the Plaintiff has improved a lot with marked growth in sales. He asserts that in the event of the Defendant succeeding in defending the Plaintiff’s claim, the Plaintiff would be able to pay the costs of the Defendant.  

21.  Other factors relied on by the Defendant’s Counsel are:

(1)	The registered office is a residential address.
(2)	The Plaintiff’s correspondence refers to another address namely 12 Hau Fook Street, Tsim Sha Tsui.  Ms. Yeung of the Defendant attended the Plaintiff’s address at 12 Hau Fook Street aforesaid on 13 December 2003 at the request of Miss Chow of the Plaintiff.  She found there was no signboard of the Plaintiff there.

22.  The Plaintiff’s Counsel submits that reliance appears to have been placed by the Defendant on O 23 r. 1 (1)(c), and (1)(d) of the RDC.  This is because of the assertion of the Defendant that the annual returns of the Plaintiff for the years 2002 and 2003 respectively show that the registered office address is a residential address.   On the other hand, the Plaintiff’s correspondence uses a different address namely, 12 Hau Fook Street in Tsim Sha Tsui.   The Defendant’s evidence shows that on a visit by Ms. Yeung Kit Yi of the Defendant, it was found that that same residential address did not have the business signboard of the Plaintiff and she found that another company was operating there.   The Plaintiff’s evidence shows that the address at 12 Hau Fook Street is the business address where the Plaintiff trades and that same address was also stated in the Business Registration Certificate of the Plaintiff.    Mr. Li of the Plaintiff states in his affirmation that the registered office address should be the address for receipt of legal process and communications and this remains unchanged.   There is no evidence of change in the address on the Writ.   It seems to me that the facts aforesaid do not fall strictly within Order 23 Rule 1(1) (c) or (d) of the RDC as there is no change in the address stated in the Writ.   There is no evidence that the address on the Writ is incorrectly stated.  The evidence does not show that the Plaintiff has changed its address in the course of the proceedings with a view to evading the consequences of the litigation.    However there is no concrete evidence from the Plaintiff, which shows the financial position of the Plaintiff as at date of this application, such as accounts or other evidence of the financial position of the Plaintiff.  Further, the facts related to the registered office being in a residential address and the evidence adduced by the Defendant related to the correspondence address, which the Plaintiff stated was the place of business of the Plaintiff show that the Plaintiff’s business appears to be run on a tight budget.  It is highly likely that the Plaintiff’s company is not asset rich as can be seen in the fact that the paid-up capital is only $100.   There is no concrete evidence that the financial situation of the Plaintiff company has changed drastically since July 2004.  I find that the Defendant has established that there is reason to believe that the company will be unable to pay the costs of the defendant if successful.

23.  The Plaintiff’s Counsel has referred me to one authority BJ Crabtree (Insulation) Ltd v. GPT Communication Systems Ltd 59 Build LR 43.   She submits that the costs of the Defendant for the purpose of defending the Plaintiff’s claim might equally be the costs necessary to prosecute its counterclaim since the Plaintiff’s case the Plaintiff’s case on both the 1^st and 2^nd Order is that the goods manufactured and supplied by the Defendant were of unmerchantable quality.   In the cited authority, in the about the middle of the judgment of Bingham LJ, it is stated,

“the question whether any order should be made is a discretionary question even under section 726, and it is a discretion to be exercised in the interests of justice having regard to the peculiar features of the case before the court.  It cannot be too firmly emphasised that there can be no rule of thumb as to the grant or refusal of an order for security in these circumstances.”

24.  In the passage, which is relied on by the Plaintiff’s Counsel about two pages down from the earlier passage, it is stated,

“It is, however, necessary as I think, to consider what the effect of an order for security in this case would be if security were not given.  It would have the effect, as the defendants acknowledge, of preventing the plaintiffs pursuing their claim.  It would, however, leave the defendants free to pursue their counterclaim.  The plaintiffs could then defend themselves against the counterclaim although their own claim was stayed.  It seems quite clear and, indeed, was not I think in controversy –that in the course of defending the counterclaim all the same matters would be canvassed as would be canvassed if the plaintiffs were to pursue their claim, but on that basis they would defend the claim and advance their own in a somewhat hobbled manner, and would be conducting the litigation (to change the metaphor) with one hand tied behind their back.  I have to say that does not appeal to me on the facts of this case as a just or attractive way to oblige a party to conduct its litigation.”

25.  On the basis of the aforesaid reasoning the Court of Appeal in that case refused to grant security to the defendant.  

26.  In this case, the same situation would arise were the Plaintiff unable to pay the security for costs ordered.   The Defendant would proceed with the Counterclaim leaving the plaintiff to defend.  The Plaintiff’s hands would be tied in prosecuting its claim for damages whist it has to defend the Counterclaim on the same facts as its claim for damages.  

27.  For the reason aforesaid, I make the following order,

The Defendant’s application for summary judgment in respect of the Counterclaim and for Security for Costs be dismissed.   I grant an order nisi for costs of the application to the Plaintiff to be taxed if not agreed with Certificate for Counsel.