XCHRX OHTEC (HONG KONG) CO. LTD. v. NERVAL LTD.

HCA 14589/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 14589 OF 1998

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REASONS FOR DECISION

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1. This is an appeal against the refusal of the Master to set aside an interlocutory judgment with damages to be assessed which judgment, as the parties agreed, is a regular judgment.

2. The Plaintiff's claim against the Defendant arose out of a contract between the parties under which the Defendant agreed to purchase a significant number of units of video phones and become the sole distributors of such video phones.

3. It is the Plaintiff's case that the Defendant, in breach of the terms of the contract, had failed to properly open and/or amend the requisite Letters of Credit for the payment for part of the goods. The Plaintiff's claim originally was for more than US$55 million as damages for breach of contract.

4. It is, perhaps, necessary to set out the events leading to this appeal.

5. The writ was filed on 4th November 1998. The Defendant applied for and was granted an extension of time to file the Defence and Counterclaim within 21 days from 19th November 1998. No Defence and Counterclaim was filed within the stipulated time and interlocutory judgment against Defendant was granted in favour of the Plaintiff on 12 December 1998 with damages and interest to be assessed.

6. In fact, on 9th December 1998, the Defendant had again applied for an extension of time to file the Defence and Counterclaim which application was originally fixed for hearing on 14th December 1998. As the interlocutory judgment had been granted on 12th December 1998, the application for further extension of time was adjourned to be heard together with the application to set aside the default judgment.

7. The application to set aside the default judgment was taken out on 21st December 1998 which application was then scheduled to be heard on 8th January 1999.

8. Before the hearing on 8th January 1999, the parties intended to sign a consent summons agreeing to adjourn the hearing to a day to be fixed in consultation of counsel's diary. But there was some misunderstanding, if it is the correct words to describe it, as to whether the terms of the consent summons had been agreed by the parties.

9. On 8th January 1999 when the summons was scheduled to be heard, Master Lok dismissed the Defendant's summons. At that hearing, the Defendant had not appeared before Master Lok. Apparently, the consent summons was not approved by the Master and the parties were asked to attend Court. Only the Plaintiff appeared.

10. The Defendant having had its application dismissed on 8th January 1999, took out a fresh summons on the same day seeking identical relief as the summons dated 21st December 1998. When that application went before Master Kwan on 6th May 1999, the Master again dismissed the Defendant's application. The record shows that Master Kwan also dismissed the Defendant's oral application for leave to restore the summons dated 21st December 1999.

11. The present appeal is an appeal against the Order of Master Lok on 8th January 1999, and the Order of Master Kwan on 6th May 1999. The Defendant asks for the setting aside of the interlocutory judgment dated 12th December 1998 and seeks further extension of time to file the Defence and Counterclaim. The Defendant asserts that it has a meritorious defence.

12. It is perhaps unfortunate, for the Defendant at least, for this matter to be allowed to reach the stage as it is. I do not wish to appoint any accusing finger at any party. There are perhaps elements of inadvertence, oversight or misunderstanding on the party of the legal representatives.

13. But I think so far as this application is concerned, we should concentrate on the issue of the merit of the case as counsel seem to agree.

14. Unfortunately when Master Kwan dealt with this particular matter on 6th May 1999, she did not consider appropriate to deal with the merit of the case. She simply, as I was told, dismissed the Defendant's application on what she considered to be the procedural irregularity on the part of the Defendant.

15. If the Defendant can demonstrate a defence with reasonable prospect of success or if there are issues that the court should try, I think the Defendant should be allowed to defend the matter even though the judgment obtained by the Plaintiff is a regular one. The authorities submitted by counsel support such an approach.

16. It is the Defendant's case that at all material times the Plaintiff was represented by its agent, the Interpat Limited and that the Plaintiff had either by itself or through Interpat warranted to the Defendant on certain matters, namely:-

(1) Kyushu Matsushita Electric Co. Ltd. (KME Ltd.) would not market other video phones similar to the Nerval video phones in question, particularly, a Viet Pro 150 model during the period when the Defendant was appointed the sole distributor of the Nerval phone.

(2) Nerval video phone would be of certain required quality and that they would comply both with the ITU-H 324 standard and the technical requirement imposed by the Telecommunication Authority of the People's Republic of China.

17. The Defendant, in the proposed defence contends that the Plaintiff was be in breach of the aforesaid warranties and that the video phones supplied by the Plaintiff were also not reasonably fit for the intended purpose, namely for use and sale in the People's Republic of China. Such conduct, so the Defendant claims constituted a breach of the collateral contract.

18. In support of such claim, the Defendant also relies on the failure on the part of the Plaintiff to provide the technical support that the Defendant required and asked for.

19. The Defendant suggests that the Plaintiff had failed to rectify the defects in the video phones and by such failure, the Plaintiff had committed a repudiatory breach of the contract between the parties.

20. It is also the defence case that the Defendant had, pursuant to the agreement in question, opened the required Letters of Credit with reasonable conditions and terms which the Plaintiff had accepted even though those terms were not in strict compliance with the terms stipulated under the contract between the parties. The suggestion is that the Plaintiff was therefore, not entitled to seek or to insist that the Defendant was to amend such Letters of Credit at the request of the Plaintiff.

21. The Plaintiff, on the other hand, denies any agency relationship between the Plaintiff and Interpat. It is suggested that the Plaintiff originally had negotiation with Interpat and after Interpat backed out, the Defendant then stepped into the shoes of Interpat.

22. The Plaintiff agrees that they had extensive negotiation and dealings with Interpat but Interpat was not its agent but the agent of the Defendant insofar as the contract between the parties is concern.

23. The Plaintiff, however, admits that Interpat was the Plaintiff's consultant in dealings with the Defendant in connection with the contract in question but only after the contract in question was signed.

24. On the material before this Court, it is clear that Interpat in fact had played an active role in the dealings between the Plaintiff and the Defendant. The exact nature of such role is not a issue that I find myself able to resolve at this stage. If the need arises, that particular issue can only be properly sorted out at the trial. If the matter rested on this point only, I would have allowed the Defendant leave to defend the matter.

25. But having been let through the evidence pertaining to the disputes between the parties, most ably by Mr. Tong, namely the contemporaneous records including the correspondence between various parties, I am not persuaded at all that the allegations of misrepresentation, and/or defective and/or unmerchantable quality of the video phones in question are genuine. Those allegations were made at a belated stage and are inconsistent, in my view, with the conduct of the Defendant in its dealings with the Plaintiff.

26. The suggestion that the Plaintiff had warranted not to allow the marketing of other similar products, particularly the Viet Pro 150 model, in my view, defies common business sense.

27. I note that the model Viet Pro 150 though identical to the video phones in question except the brand name, would be more expensive by about 30% at the time when the contract in question was executed as demonstrated in the documents over which the parties have no dispute. Whether the subsequent devaluation of the Japanese Yen at the material time would render the market price of the Viet Pro 150 video phones cheaper so as to make it more competitive with the Nerval video phones from the Defendant's point of view is perhaps a matter of speculation.

28. The Defendant may find it difficult to compete with the Viet Pro 150 Video phones when the price of the Nerval video phones agreed with the Plaintiff was in fact in U.S. dollars.

29. I have considered the evidence containing to the dispute in question. In my view KME Ltd. would never have agreed not to market their own products including the Viet Pro 150 video phones in competition with the Nerval video phones.

30. KME Ltd. is of course famous for its "Panasonic" and "National" products and that the Nerval video phones were manufactured by KME Ltd. under the "original equipment manufacturer" arrangement under which the products will bear whatever names designated by the importers/distributors.

31. The Defendant's allegation on this aspect is incredible.

32. I am persuaded on the evidence that it was due to financial constraint or difficulty that the Defendant was not prepared to or could not amend the Letters of Credit in question to meet the requirement of the Plaintiff and that it had the desire to pull out of the contract.

33. This resulted in the Defendant making the allegation as to the alleged breach of warranties and/or misrepresentation and/or defective quality of the video phones.

34. Put it simply, I am persuaded that such allegations had not been borne out by the evidence available to this Court and were simply incredible.

35. The Defendant claims to be concerned about the marketing requirement of the People's Republic of China and that it was serious in making sure that the video phones would pass the requisite test. If such allegation is true, simple effort on its part would have achieved the purpose with the cooperation of the Plaintiff. As demonstrated on the evidence, subsequent minor modifications of the video phones in question had in fact resulted in the products successfully passing the requisite tests.

36. In any event, I am not persuaded that the failure to meet the marketing requirement must necessary mean that they were not of merchantable quality. The evidence clearly suggests that the Defendant was not eager to obtain the necessary approval from the relevant authorities of the People's Republic of China.

37. On this aspect in this case, I am also of the view that Clause 16(3) of the contract prevents the Defendant from relying on any alleged oral warranty, promises or representation not set out in the contract itself.

38. The Defendant concedes that the terms of the Letters of Credit opened by it did not meet the requirement of the contract itself.

39. The Plaintiff, in my view, was certainly entitled to insist that the Defendant do make the necessary amendment in compliance with the contract between the parties. The Defendant had not, on the evidence before me, suggested that it was entitled not to amend the Letters of Credit. It had not indicated that it would amend the Letters of Credit either. Again, in my view, the allegation pertaining to this aspect was also put forward in an attempt to avoid the consequence of the breach of the contract when it attempted to pull out of the contract in question.

40. Having considered the evidence in its entirety and counsel's submission on the matter, I am of the view that the proposed defence of the Defendant does not have any reasonable prospect of success and that there are no issue that should go to trial. That being the case, the appeal must be dismissed and I so order.