GRIDWAY KNITTERS LTD v. TAK LAM HONG LTD

IN THE COURT OF APPEAL

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J U D G M E N T

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Fuad, V.-P.:

1. This is a defendant's appeal from an order of Godfrey J. made on 12 July 1988 whereby he allowed an appeal from the order of Master O'Donnell who had struck out the plaintiff's statement of claim as an abuse of the process of the Court.

2. The plaintiff, Gridway Knitters Ltd. ("Gridway") manufactures clothes in Hong Kong. By an agreement in writing dated 2 July 1987 they bought a quantity of woollen hosiery yarn from the defendant, Tak Lam Hong Ltd. ("TLH"). Payment was to by "By 45 days post-dated cheque against delivery". Gridway's cheque in payment, dated 22 August 1987, for $65,835 was dishonoured upon presentation.

3. TLH issued a writ against Gridway on 14 September 1987 indorsed with a statement of claim by which they claimed the sum due under the cheque, with interest ("the first action"). They duly applied for summary judgment under RSC 0.14.Gridway sought to show cause against the application, seeking unconditional leave to defend.

4. The claims Gridway wished to assert against TLH were put forward in an affirmation made by their accountant, which can be summarised as follows: he averred that the parties had agreed that the cheque would not be presented unless and until Gridway had given their consent orally or in writing. No such consent had ever been given. TLH had been informed before the date the cheque was due to be presented that the yarn did not correspond with the specifications and had undertaken not to present the cheque until the dispute between the parties had been resolved. There was also the following rather strange assertion in paragraph 4:

"Before the agreement was made, it was agreed by the plaintiff and the Defendant that it was a condition precedent of the payment of the purchase price that the yarn should correspond with the specification and that it should be free from defect, and that payment of purchase price on the part of the purchaser can be validly withdrawn without any liability on the part of the Defendant upon prior notification to the Plaintiff at any date before the Plaintiff present the said cheque for payment."

5. The affirmation went on to state that there was an express or implied condition that the yarn would be reasonably fit for the purpose of dyeing and then making up the yarn into clothing, and TLH had warranted that the yarn would strictly match the specifications. The yarn supplied did not correspond with the specifications given and was not fit for the purpose intended; one lot was a different colour and the size of the yarn had different dimensions. The yarn was therefore worthless or less valuable. The goods made up from the yarn had been rejected by their customers and they had to be sold at lower prices than they should have fetched. In addition one particular contract worth $144,711 had been lost. It was also asserted in the alternative that the consideration for the cheque had wholly failed.

6. When the O.14 proceedings came before Master Jones 9 November 1987 he gave Gridway leave to defend on condition that they paid $55,835 (the amount due on the dishonoured cheque) into Court within 21 days. The condition was not met and final judgment for - $65,835 with interest and costs was entered against Gridway on 1 December. After a writ of fi. fa. had been issued, Gridway paid TLH the amount due under the judgment; with interest and agreed costs, on 12 December.

7. The next thing that happened was that on 13 April 1988 Gridway brought the action againstTLH with which this appeal is concerned ("the second action"). The material facts pleaded in the statement of claim with which the writ was indorsed closely followed those in the affirmation made by Gridway's accountant in the 0.14 proceedings relating to the first action, save that the assertions regarding the conditions precedent to the payment of the purchase price and the presentation of the cheque were dropped. They claimed the repayment of the sum of $65,835 paid under the cheque and the amount they lost ($144,711) as a result of the order cancelled by one of their customers.

8. On the application of TLH, on 24 May 1988, Master O'Donnell struck out Gridway's statement of claim under 0.18, r.19 and the Inherent jurisdiction on the ground that it was an abuse of the processof the Court. Before him there was another affirmation made by Gridway's accountant explaining that they had intended to appeal against the order made by Master Jones but their managing director had been away on leave and the time for appeal had run out.

9. Gridway appealed to the judge in Chambers. In his judgment dated 12 July which is the subject of the present appeal, the judge reviewed the facts and, citing SCF Finance Co. Ltd. v. Masri (No.3) [1987] l All ER 194 (the case is also reported in [1987] 1 QB 1028 and the passage relied upon by the judge is at p.1048), applied the principle re-stated in that case. His-formulation, which was a paraphrase of the words of Ralph Gibson L.J. at p.208 f to g of the All ER report was as follows:

"If a party puts forward a positive case, as the basis of asking the Court to make the order which that party seeks and then accepts (in the case of a defendant) that his defence must be dismissed, or that he must submit to an order giving him only conditional leave to defend on an application for summary judgment, then he must, save exceptional circumstances, lose the right to raise again that case against the other party to the proceedings."

10. Godfrey, J. went on to say that the question must always be: What was the issue, decided at the earlier hearing, which is alleged to prevent a plaintiff from instituting the proceedings to which objection is taken? In the present case, while it was true that Gridway could have raised, by way of counterclaim in the first action, their allegation that TLH was liable to them for damages for breach of contract, and that, in the affirmation in opposition to TLH's application for summary judgment, Gridway had chosen to ventilate their complaints in that respect against TLH, the issue which fell to be decided in the first action was, and was only, whether or not Gridway was liable on the dishonoured cheque.

11. No doubt, observed the judge having seen by the time the matter came before the Master that there was little choice open to them, Gridway had accepted the order under which they were given conditional leave to defend. No sort of hearing had taken place, or could have taken place, in relation to the Gridway's claim for damages for breach of contract. That was not a matter then in issue. In so far, however as Gridway had advanced a case suggesting that there had been a total failure of consideration by way of defence in the first action, he entertained no doubt that it would be an abuse of the process of the Court to allow Gridway to raise that issue again in the present or any other proceedings.

12. The judge concluded by saying that as for the nest of the statement of claim, it would, in his view, be unjust and unreasonable to shut Gridway out from their claim for damages for breach of contract in the circumstances he had mentioned. The present claim for damages was not an abuse of the process of the Court, and at the very lowest, he was certainly not convinced that it was plain and obvious that it was so. In those circumstances, he did not propose to drive Gridway away from the seat of judgment, as it was sometimes put. He would allow the appeal and reverse the order of the Master so that the statement of claim would stand, save for the deletion of the paragraph averring a total failure of consideration for the cheque.

13. I will now summarise TLH's grounds of appeal. They attack the exercise of the judge's discretion and assert that:

(a) he was wrong in holding that Gridway had not put forward a positive case - they had set up a defence of a total failure of consideration as well as one based upon breaches of the two conditions precedent;

(b) he had failed adequately to consider the effect of the order of Master Jones in the first action and therefore had erred in holding that the only issue in that action was liability on the dishonoured cheque;

(c) there were no special circumstances to defeat the plea of res judicata in its wider sense.

14. Mr. Denis Chang, Q.C. who did not appear before Godfrey, J., summarised TLH's case most helpfully in his skeleton argument, in this way. The positive defences raised on the claim based on the dishonoured cheque involved, amongst other things, proving that the goods were defective. Whether the goods were defective or not therefore was something which had been made a specific issue in the case. Therefore, when judgment was obtained by Gridway against TLH an end to all matters in the litigation had been achieved. Gridway was therefore estopped by res judicata from raising the issue of defective goods in the fresh action. The judge had been wrong in law and had exercised his discretion wrongly by not striking out the fresh claim.

15. Mr. Chang went on to point out that this was not a case where the drawer of a cheque had simply paid up when faced with the claim on the dishonoured cheque. Gridway in the first action had put forward positive defences which enabled them to delay paying up on the cheque. They had used the defences they had put forward to obtain an order from the Court giving them leave to defend and had thus invoked the Court's process. Having put forward a positive case as the basis of asking the Court to make the order sought (and thus putting the issue of defective goods in the litigation) Gridway must take the risk of being estopped from raising the same issue again if the other party subsequently succeeded in obtaining final judgment in the case.

16. The leading authority on the doctrine of issue estoppel is, I think, the decision of the Privy Council in a case from Hong Kong: Yat Tung Investment Co. Ltd. v. Dao Heng Bank Ltd., [1975] AC 581. Lord Kilbrandon delivered the judgment of the Board, and at p.590 described Henderson v. Henderson (1843) 3 Hare 100 as the locus classicus on this aspect o res judicata. He cited the following passage from the judgment of Wigram V.C. in that case:

"... where a given matter becomes the subject of litigation in, and of adjudication by, a court of competent jurisdiction, the court requires the parties to that litigation to bring forward their whole case, and will not (except under special circumstances) permit the same parities to open the same subject of litigation in respect of the matter which might have been brought forward as part of the subject in contest, but which was not brought forward, only because they have, from negligence, inadvertence, or even accident, omitted part of their case. The plea of res judicata applies, except in special cases, not only to points upon which the court was actually required by the parties to form an opinion and pronounce a judgment, but to every point which properly belonged to the subject of litigation, and which the parties, exercising reasonable diligence, might have brought forward at the time."

17. Lord Kilbrandon also referred to Greenhalgh v. Mallard [1947] 2 All ER 225 and observed that there, at p.257, Somervell, L.J. had expanded the phrase "every point which properly belonged to the subject of litigation" used by Wigram, V.C. in Henderson v. Henderson, in the following words.

"... res judicata for this purpose is not confined to the issues which the court is actually asked to decide, but... it covers issues or facts which are so clearly part of the subject matter of the litigation and so clearly could have been raised that it would be an abuse of the process of the court to allow a near proceeding to be started in respect of them."

18. Many of the authorities are reviewed in the SCF Finance Co. Ltd. case relied upon by Mr. Chang and cited by Godfrey, J. in his judgment. In that case, at p.1049 of the [1487] 1 QB report, Ralph Gibson, L.J. formulated the principle of the decision in Khan v. Golecha International Ltd. [1980] 1 WLR 1482 in these words: "a litigant who has had an opportunity of proving a fact in support of his claim or defence and has chosen not to rely on it is not permitted afterwards to put it before another tribunal.''

19. In the SCF Finance Co. Ltd. case, Ralph Gibson, L.J. (at p.98) cited with approval from the judgment of Lush, J. in Ord v. Ord [1923]2 KB 432, as had Brightman, L.J. in Khan's case, at p.1489. This is what Lush J. said during the course of his judgment in Ord v, Ord, at page 439:

"The words 'res judicata' explain themselves. If the res - the thing actually and directly in dispute - has been already adjudicated upon, of course by a competent Court, it cannot be litigated again. There is a wider principle, to which I will refer in a moment, often treated as covered by the plea of res judicata, that prevents a litigant from relying on a claim or defence which he had an opportunity of putting before the Court in the earlier proceedings and which he chose not to put forward, but I am dealing for the moment with res judicata in its strict sense."

Later at page 443, Lush, J. said:

"It remains for me to deal with the other, the wider principle to which I have referred and which is often treated as falling within the plea of res judicata. The maxim 'Nemo debet bis vexari' prevents a 1itigant who has had an opportunity of proving a fact in support of his claim or defence and chosen not to rely on it from afterwards putting it before another tribunal. To do that would be unduly to harass his opponent, and if he endeavoured to do so he would be met by the objection that the judgment in the former action precluded him from raising that contention. It is not that it has been already decided, or that the record deals with it. The new fact has not been decided; it has never been in fact submitted to the tribunal and it is not really dealt with by the record. But it is, by reason of the principle I have stated, treated as if it had been

20. As to the order made by Master Jones giving Gridway conditional leave to defend, we are told that it was made by consent without any argument being heard, and counsel were not present. It may be that the giving of leave can be understood on the basis of the assertion that the parties had later agreed that the cheque would not be presented unless and until the dispute between them over the quality of the yarn had been resolved and on the averments made in paragraph 4 of the affirmation of the accountant which I have just read. However, I must say that I am by no means certain that these would have been valid defences to the first action which only concerned liability on the dishonoured cheque. But for these nebulous defences, since the yarn had not been rejected, a plea of a total failure of consideration could not have succeeded, and none of the other facts put forward when showing cause constituted a defence to the claim on the dishonoured cheque.

21. As regards the proposed counterclaim revealed by the facts stated in the affirmation, had it not been for the doubtful defence about the later agreement to delay presentation of the cheque, and the odd assertion in paragraph 4 of the accountant's affirmation, the practice reviewed in paragraph 14/3-4/14 of the White Book (1988 Edition, p.146) would have prevailed once 0.14 proceedings had been set in train. There would have been summary judgment for TLH, and without a stay of execution because there were no exceptional circumstances that would have allowed Gridway to raise, by way of counterclaim in TLH's action on the cheque, their claim for damages for breach of contract arising out of the sale agreement.

22. It is, of course, clear that had Gridway submitted to judgment in the first action or had suffered summary judgment under 0.14, without seeking leave to defend, they could not have been prevented from later litigating their claim in damages for breach of contract in respect of the yarn which they say proved defective. But here Gridway sought and obtained leave to defend and then failed to take advantage of the order by not meeting the conditions imposed. When raising the condition precedent defences to the first action, they could, suppose, have used them as a vehicle for setting up their counterclaim which they could not ordinarily have done in 0.14 proceedings on a dishonoured cheque.

23. Should Godfrey, J. have held that issue estoppel had so plainly been established at the interlocutory stage as to bar the second action? It seems to me that he was perfectly right when he said at page 5 of his judgment that the only issue which fell to be decided in the action on the dishonoured cheque was whether or not thc buyer was liable to the seller on it. The exercise of a discretion was involved and each case turns on its own facts. In all the circumstances, I think it would be an affront to justice were Gridway's claim in the second action not allowed to proceed to trial. This was the judge's view. In my judgment, taking into account all that the Court's discretion could only properly exercised in one way. The case advanced by TLH was by no means a straight forward one; indeed the much more straight forward case was that on the unusual facts no issue estoppel had been shown. In my view, the judge was right in holding that at the lowest it was not a plain and obvious case for striking out. I would not interfere with his discretion.

24. For these reasons, I would dismiss the appeal.

Hunter, J.A.:

25. I agree. By its present claim the plaintiff buyer seeks to recover by way of damages what might be called "a poor quality discount" from the agreed purchase price of this yarn. The question which it now seeks to put before the Court is this: Please say whether this yarn was of good quality or of deficient quality or not and if I am right in saying it is not, what deduction I should have from the purchase price by reason of those events and what damages I should recover?

26. My Lord has already cited from the judgment of Ralph Gibson, L.J. in SCF Finance Co. Ltd. v. Masri (No.3) [1987] 1 QB 1028 at p.149 where he said this:

"A litigant who has had an opportunity of proving a fact in support of his claim or defence and has chosen not to rely do it is not permitted afterwards to put it before another tribunal."

27. Those words have no application here because the fact which the plaintiff is now seeking to put before the court was never open to him byway of defence in the first action since that was an action upon the cheque. The only available defences to that were defences which went to the whole of the consideration. The present claim goes to part of that consideration and was never an available defence in the first action at all.

28. Mr. Denis Chang Q.C. with his usual skill and persuasiveness has sought to meet that fundamental objection by seizing upon the curious paragraph 4 of the affirmation filed in the first action with the references to a condition precedent. He says that was really a defence first of total failure of consideration, or of a condition precedent, conditional delivery, and as part of that dcfence the defendant would have had to hate proved bad quality of the goods. I accept part of that premise, that in order to maintain that defence of conditional delivery (assuming without remotely accepting that necessarily was a defence at all) bad quality would have come in as part of that defence. But that is not the bad quality claim which he is now making. It was only part of a defence of condition precedent; conditional delivery. That was a very difficult defence and, therefore' one which, I am not surprised, he did not ultimately chose to pursue.

29. But if you then ask yourselves what issues were necessarily determined against him by this judgment, and assuming for this purpose that issue estoppel applies in its full rigour at this level of decision, the only answer one can gives that two issues had been decided against him: (1) the issue that there was no total failure of consideration and (2) the issue that there was no conditional delivery. The issue of bad quality in isolation which is not raised has never been touched upon, decided or determined against him at all. Therefore, if issue estoppel applies to the situation in its full rigour, in my view, it simply does not exist in this case.

30. I have two considerable caveats to that hypothesis. The first is that as this Court reminded us in Lily Cheung v. The Standard Chartered Bank, Civil Appeal No.159 of 1987, the basic application of issue estoppel is to final judgments and not to interlocutory judgments, and therefore it has to be applied to those judgments with very considerable care. Secondly, this judgment is, in my view, a default judgment because a judgment was entered on the defendant's failure to bring money into Court. If it is a default judgment, then there is powerful authority ending in the decision in Kok Hong v. Leong Cheong Kweng Mines Ltd. [1964] AC 993, a Privy Council appeal from Malaya, that issue estoppel really does not apply at all to default judgments and that the only available defence is one of res judicata in its strict sense which plainly cannot be asserted in this case.

31. For these reasons, I also agree that the appeal fails and should be dismissed.