XCHRX SEIKOSHA CO. LTD. and Another v. IDS (CHINA) LTD. and Another

1996, No.A1652

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D G M E N T

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1. This is an application for summary judgment by the plaintiffs, companies incorporated in Japan. They, at all material times, manufactured dotmatrix printers and they supplied these printers to the 1^st defendant who then sold them in mainland China. The 1st defendant is a company incorporated in Hong Kong. The 2^nd defendant is the 1st defendant's managing director, and according to the plaintiffs, the beneficial owner of all the shares in the 1st defendant's company.

The Plaintiffs' Case

2. The plaintiffs' case is that by June 1995 there was owing to the 1^st plaintiff by the 1^st defendant the sum of (40,055,221 for goods purchased by the 1^st defendant, and that by an agreement dated 21^st June 1995, ("the agreement"), the 1^st defendant agreed that that was the sum due to the 1st plaintiff, and the 1^st plaintiff agreed to accept a reduced sum of (40 million in settlement of the indebtedness of the 1^st defendant, to be paid according to a schedule of payments set out in that agreement. The schedule specified monthly payments from July 1995 to April 1996. But the agreement further provided that if the 1^st defendant defaulted upon any such instalment, the whole of the outstanding amount of the original indebtedness, plus 14% per annum interest, would forthwith become payable.

3. In consideration of the 1^st plaintiff not issuing proceedings immediately for the original amount, the 2^nd defendant agreed to guarantee :-

(1) the payment to the 1^st plaintiff of the amount outstanding under the agreement, within seven days of written notice to the 2^nd defendant, and that

(2) if payment was not received by the plaintiff from the 1^st defendant of the reduced amount, the whole of the balance due under the original amount was to be paid by the 2^nd defendant.

4. It was further provided that the agreement was to be covered by the laws of Hong Kong.

5. In the event - and this is not disputed - (2,000,000 was paid by the 1^st defendant in August 1995 and (2,000,000 paid in October 1995. No other payments under the agreement have been made. Therefore, the amount outstanding under the terms of the agreement, including interest, is (36,747,990.

6. The plaintiffs issued proceedings in February 1996, and the O.14 summons was issued in October 1996.

7. The 2^nd plaintiff comes into the picture because in March 1996 the benefit of all agreements and creditors of the 1^st plaintiff were assigned to the 2^nd plaintiff. It will be convenient, even though not precise, to refer to the 1st plaintiff in this judgment merely as "the plaintiff" because for practical purposes, the 2^nd plaintiff plays very little, or no, active part in the facts of this case.

The Defendants' Case

8. There is before me an affirmation made by the 2^nd defendant in opposition to the application. He says that the 1^st defendant are distributors in China of the printers manufactured by the plaintiff and that "to all intents and purposes" were the sole distributors of the plaintiff's machines. He says that the plaintiffs are, for the following reasons, not entitled to any sums claimed.

(1) Illegality

9. It is contended that not only was the plaintiff keen to penetrate the China market with its products, but that it also actively assisted the 1^st defendant in the promotion and sale of the printers in China. It is said that the plaintiff realised, as did the defendants, that the goods could not be shipped directly to China from Japan "because of the high import tax or duty on such goods", (the clear implication being that prices would not then be competitive), and that accordingly it was agreed that the goods would be shipped to Hong Kong from where the 1^st defendant would forward them to China through certain freight forwarders who would be able to avoid or minimize the payment of import taxes "through their own means". The argument goes that the true place of performance of the contract between the plaintiff and the defendants was China, and that the performance of the contract envisaged breach of Chinese laws and the avoidance of taxes and duties, so that it, and the consequential agreement at issue in this case, ought not to be enforced because of illegality, and that it would be contrary to public policy to do so.

(2) Duress

10. The 2^nd defendant then says that the June agreement was signed under duress. The 1^st defendant was reluctant to make the original payments because the goods which had been supplied by the plaintiff had been defective, and there had also been a deterioration of spare parts which had been supplied by the plaintiff, and that the "back up" service was poor. But he says that he was put under great pressure by the plaintiff to sign the agreement because the plaintiff's sales manager made it clear to him that if payment was not made, the plaintiff would stop sending to the 1st defendant spare parts for its use in the China market. This was a particularly daunting prospect for the 1st defendant, it is said, because the 1st defendant was also under pressure because of numerous complaints in respect of products earlier supplied; the clear implication being that the spare parts were needed for the repair, or in consequence, of defective goods previously supplied by the plaintiff. Accordingly, and also because he was not aware that the agreement to sell and buy the goods were avoidable through illegality, he entered upon the June agreement on behalf of the 1^st defendant, and as guarantor.

(3) Set-off

11. Then there is a claim for loss and damage allegedly suffered because of the supply of defective goods, and it is intended to utilize this in set-off of the claim. It is said that goods would often arrive from the plaintiff damaged because packing was poor, and this happened despite the fact that the defendants raised the problem frequently with the plaintiff. Then, he says, that the goods were often defective, and he particularises some of the defects. He thinks this may have had something to do with the fact, which he alleges, that the (first) plaintiff's business was being wound up and suggests that it ceased operation in about March 1994 and transferred its function to the 2^nd plaintiff. He then asserts that as a result of these breaches by the plaintiffs his firm, the 1^st defendant, had suffered loss and damage in excess of US$400,000. That is a sum now equal to something in the region of (48 million. He provides no particulars of that damage and loss. His affirmation was made in May 1996, and still no particulars are supplied.

(4) Dumping

12. The 1st defendant contends that as it was the sole distributor for China, the plaintiff acted against its understanding and knowledge of that fact and in a manner calculated to cause loss to the 1^st defendant in that in March 1996 the plaintiff dumped 5,000 printers on the Chinese market at about one third the price at which they were selling goods to the 1^st defendant, and that in consequence the 1^st defendant has not been able to sell in the market so that it is left with something in the order of 1,400 pieces unsold. Quite how this fits into the defence or counterclaim is not made clear.

The Plaintiff's Response

13. To summarize the plaintiff's response very broadly, the plaintiff says that the relationship between the plaintiff and the 1^st defendant was that of manufacturer and distributor. The plaintiff merely permitted the 1^st defendant to distribute its printers in China. The sale to China was a matter for the 1^st defendant, which it did at its own risk and on its own account. Promotion and sales of the printer into China was a matter for the 1^st defendant, although the plaintiff offered promotional assistance. There is no distributorship agreement between them, let alone a sole distributorship. The indebtedness between them, says the plaintiff, was simply for goods sold, and no more. The plaintiff seems however to acknowledge, albeit obliquely, that there was some quality problem with the goods it sold, for in an affirmation it is said that "the plaintiff took all appropriate action to rectify problems with its printers," adding that at no time during the repayment negotiations resulting in the June 1995 agreement did the defendants raise these matters. As for the supply of 5,000 printers to China, the plaintiff says that it sold these to other distributors in 1996, long after they stopped selling to the 1^st defendant, which was in the Autumn of 1993. Because of the 1st defendant's failure to pay for goods which had been supplied, the plaintiff was left with printers which had been intended for the 1st defendant and which it had then to sell elsewhere. The illegality issue is said to be irrelevant; and as for the allegation of duress, the plaintiff says that the "threat" not to deliver spare parts was perfectly legitimate, given the 1^st defendant's failure to pay for the printers, that not every form of pressure constitutes economic duress such as will render the contract voidable, and that in any event the 1st defendant has affirmed the contract.

The principles

14. It is for the defendants to show that there is a triable issue, and in this regard that the 2^nd defendant's evidence is reasonably capable of belief. It must be clear before this form of summary relief is granted that there is no substantial question to be tried. So too it is trite that the mere assertion in an affirmation of a suggested fact is not in itself enough. The defendant must satisfy the court that his evidence is reasonably capable of belief. In this case, given the nature of the claim and the history of it, I bear in mind in particular the underlying policy of this form of procedure referred to in Man Earn Ltd. v. Wing Ting Fong [1996] 1 HKC 225, namely, that it is to prevent a defendant from delaying payment in cases where there is clearly no defence; but I bear in mind also the stricture to which the Court of Appeal there referred, taken from Codd v. Delap (1905) 92 LT 510, that O.14 ought not to be applied unless it was obvious that the defence put forward was "frivolous and practically moonshine", as well as the reference in Ng Shou Chun v. Hung Chun San [1994] 1 HKC 155 that the procedure is not intended for a mini trial on the affirmations, and that the issue in such cases as these is not whether the defendant's assertions are to be believed, but rather whether they are believable.

Analysis

15. There is much that may be said about the defendants' case in terms of the lack of particulars and the lack of evidential support for what is contended by the 2^nd defendant. There is, for example, even now, no breakdown of the loss and damage allegedly suffered (though Miss Wong suggests that the 2^nd defendant's affirmation shows very broadly how the figure of US$400,000 is arrived at); the allegation of illegality does not specify what law has been breached, or in what manner; and there is a lack of any evidence of complaints by the defendants or their customers about defects in the goods or about the alleged duress, at least no complaint save that constituted by the 2^nd defendant's affirmation. But that is not necessarily to say that they are not capable of belief :

(1) The allegation of illegality

16. Scant though the particulars of the illegality are, all the plaintiff says about them in its affirmation is that they are irrelevant. One might have expected something more than that, particularly since the allegation - although lacking in particularity and precision - is not in itself inherently incredible. Mr Chan says, in response to that suggestion, that there is nothing for the plaintiff to deny. All that the affirmation of the 2^nd defendant says is that it was agreed that the goods were to be shipped to Hong Kong where the 1^st defendant would forward them to China through certain freight forwarders who would be able to avoid or minimize the payment of import taxes. That is not an allegation of illegality, says Mr Chan. There is no allegation of evasion of duties or taxes, but only of avoidance. In any event, he adds, whatever the defendants did in this regard cannot lie at the door of the plaintiff, for whatever the 2^nd defendant chose to do with the goods once they were sold to the 1^st defendant had nothing to do with the plaintiff. There is furthermore no express contention, he says, that the plaintiff knew that the 1^st defendant was in breach of any law of China; all that is said is that the 2^nd defendant "believes that the performance as envisaged by the plaintiffs and the 1^st defendant from the commencement of their trading relationship involves the breach of Chinese laws and the avoidance of duties or taxes".

17. Although it is true that there is no identity of the law that has been breached or the method adopted in breaching it, it is not difficult to infer (indeed, there is an express assertion that Chinese law was breached) from the 2^nd defendant's affirmation an allegation of an unlawful device to which the plaintiff was party, in that the plaintiff was keen, it is said, for its product to penetrate the market, that the goods supplied by the plaintiff were intended by it to achieve that objective, that the objective could not economically be attained without utilising such a device, and that the plaintiff actively assisted in the marketing of the goods, and that the plaintiff was aware that the device was necessary to make that marketing and those sales economical. Miss Wong takes me to Dicey and Morris, "The Conflict of Laws", 11th Edn. page 1223 where the following proposition is put :-

"But if it is the essential purpose of the contract to perform an illegal act in a foreign country, it will be invalid, although the parties might have carried out their share in the contract without themselves performing in that country an act in contravention of its laws."

It is said that the plaintiff was part of a joint enterprise or venture, the essential purpose of which was to perform an illegal act in a foreign country. The purpose from which the plaintiff was to benefit was to supply the goods to the 1^st defendant, but the 1st defendant goes further and says that it was part of a sole distributorship agreement from which the plaintiff was to benefit. It was part and parcel of a wider scheme.

18. Given the thrust of the allegation and the absence of any denial or explanation in response as to the facts, I cannot conclude that the contention is in fact not an allegation of illegality - I think such an allegation is implicit; nor can I say that the allegation is not capable of belief. Accordingly, it seems to me that this is an issue which is properly the subject of an investigation at trial. Whilst the allegation is one which gives rise to a triable issue as to the enforceability of the underlying contract, Mr Chan does not suggest that if the underlying contract may be unenforceable through illegality, nevertheless no argument as to the enforceability of the June agreement, which is the basis of this case, can be mounted.

(2) The allegation about defective goods

19. Despite, again, the complete lack of particulars of damage, even at this very late stage, and the lack of any evidence of complaints from customers, the plaintiff concedes in its affirmation that there were problems with the equipment sold to the 1^st defendant. What is said is this :-

"With regard to Mr Hausjah's allegation of poor quality of our printers, the plaintiff took all appropriate action to rectify problems with its printers. All quality problems could have been dealt with under the relevant contractual provisions and law at the relevant time. At no time did the defendants make such allegations in the repayment negotiations."

The plaintiffs do not answer the exact allegations that are made, namely, that goods were often damaged, and that packing of the goods was inadequate; nor do they answer the allegations which specify the nature of the defects; nor that the problems became progressively worse; although it can obviously be suggested that there is implicit in the phrase "appropriate action" the answer that all damaged goods were replaced and defects rectified, or that the 1st defendant was compensated in some way. It is true that there is no evidence of complaints by the 1^st defendant at the time of the 1995 agreement, or, for that matter, since the goods were supplied in 1993, or in response to letters of demand by the plaintiff; and these factors seriously undermine the strength of the defendants' case. But it does not in my judgment warrant shutting the defendants out from raising a defence by way of set-off. I cannot say that there is no counterclaim capable of belief.

(3) Duress

20. It is noteworthy that there is no express denial by the plaintiffs of the allegation that a threat was made to stop delivering spare parts if payment was not effected. Whilst I see that the plaintiffs say in their affirmation in reply that they stopped supplying the defendants with printers in 1993 because of defaults in payment by the 1^st defendant, that is in answer to another issue. What Mr Chan says is that the pressure alleged to have been applied, if it was, was normal and legitimate commercial pressure; legitimate in that it was perfectly standard and acceptable, indeed to be expected, for a supplier to suspend or threaten to suspend supply of goods if payment due for earlier quantities supplied has not been made. He contends that it is not every form of commercial pressure that constitutes economic duress such as will render a contract voidable; nor does the mere fact that one party is in a more dominant bargaining position of itself take one down that particular road. For that proposition, he relies on Pao On and others v. Lau Yiu Long and others [1980] AC 614.

21. Some of the considerations to which a court will have regard in determining whether there existed factors which vitiated consent are rehearsed in the judgment in that case, at page 635 :-

"In determining whether there was a coercion of will such that there was no true consent, it is material to inquire whether the person alleged to have been coerced did or did not protest; whether, at the time he was allegedly coerced into making the contract, he did or did not have an alternative course open to him such as an adequate legal remedy; whether he was independently advised; and whether after entering the contract he took steps to avoid it."

22. Applying these tests, the defendants' case on duress appears weak. There is no evidence of protest at the time or indeed thereafter; even none upon receipt of letters of demand from the plaintiff's solicitors. Miss Wong emphasizes the evidence, which is not denied, that at the time of the agreement "numerous complaints were being received by the 1^st defendant" so that spare parts were much in need; the actual or implied admission by the plaintiff that there had been problems with the plaintiff's goods; and the evidence of the 2^nd defendant that he was asked to travel to Hong Kong and required to execute the agreement on the spot, at a time when he acted without legal advice.

23. It seems to me that whilst the indicia to which a court will have regard when called upon to determine the issue of duress are prima facie weighed much against the defendants, I cannot say on the affirmations alone whether in all the circumstances there was or was not coercion tantamount to economic duress. It is a matter which needs to be determined in the normal way, upon full and tested evidence.

24. But the point does not end there, for Mr Chan argues that in any event the defendants have affirmed the contract. To this end, he points to the evidence that the agreement was made in June 1995, that instalment payments under the agreement were made until October 1995, and that there was no protest and no allegation of duress until the 2^nd defendant made his affirmation in May 1996. He invites my attention to the application of the relevant principles in North Ocean Shipping Co. Ltd. v. Hyundai Construction Co. Ltd. [1979] 1 QB 705.

25. Miss Wong in response seeks to distinguish the essential facts of this case from those in North Ocean Shipping in two ways : first, she points out that in North Ocean Shipping, the shipowners continued to make payments without protest after the duress had ceased to operate and, secondly, that payments in this case ceased after only two instalments. One cannot assume, she says, that the impact of duress, that the threat to suspend supply of spare parts, was not still operating by October 1995, when the second of the two instalments was paid. The problem with this assertion is that there is no evidence from the defendants which explains the absence of protest after the event, or the reason for the haphazard and sparsely spread payment of instalments. Still, I cannot say at this stage that the issue will inevitably be concluded in favour of the plaintiffs.

Leave to the 1st Defendant

26. It follows that I am not prepared at this stage to say that there is no triable defence capable of belief. Leave to the 1^st defendant to defend should therefore be given. Whether that should be unconditional or conditional leave is a matter to which I shall shortly turn.

The 2^ndDefendant

27. Does the decision to grant leave to the 1^st defendant carry through, as it were, for the benefit of the 2^nd defendant? In relation to the defence of set-off (arising from the suggested counterclaim) which is put forward by the 1^st defendant, Mr Chan contends that where a guarantee, on its true construction, requires the guarantor to pay a particular amount in respect of the accounting position between principal debtor and creditor, the guarantor cannot rely on the debtor's right of set-off. For this proposition he relies on Hyundai Shipbuilding and Heavy Industries v. Pournaras [1978] 2 Ll.L.R. 502.

28. The general principle to which reference is made by Roskill LJ at page 508 is that :

"On being sued by the creditor for payment of the debt guaranteed, a surety may avail himself of any right to set-off or counterclaim which the principal debtor possesses against the creditor, and any division of the High Court can give effect to it or to any equitable defence raised." (taken from Halsbury's Laws of England, 4^th Edition)

29. But that will not always be the case, for the factual matrix may be such, as it was in Pournaras, as to demonstrate that the objective, as it must have been known to the parties, was to secure an unconditional guarantee under which full payment would not depend on anything other than the primary creditor's default. The factual matrix here, says Mr Chan, is of this latter kind, for the sums owed were agreed, and were in respect of goods already purchased, and the 2^nd defendant, who knew as well as anyone else the true facts and background, entered upon an unconditional guarantee for a known and fixed sum. The argument is attractive and may well succeed. It is however an argument which it is not necessary for me now to determine, for the issue does not avail the plaintiff as against the 2^nd defendant in respect of other defences raised.

Conditional or Unconditional Leave

30. Accordingly, the defendants shall have leave to defend. But in my judgment that leave should be conditional on the payment into court of the full sum claimed. I think that there is good ground for believing that the defences advanced are sham defences. There are several indicia in support of this conclusion. There is no reference in the agreement to any on-going dispute. There is no correspondence produced in support of the contention of an on-going dispute or of the need for spare parts, nor any written evidence of complaints from customers. The allegation of illegality is vague. There is no complaint about the alleged duress after the event until May 1996, after proceedings were instituted; and none of the allegations in the affirmation of the 2^nd defendant is made in direct response to letters of demand from the plaintiff's solicitors. No particulars are provided quantifying the alleged loss and damage. So whilst, for reasons I have given, I do not think it can be said that the defences alleged are not capable of belief, there is much to lead one to conclude that the defences put forward are shadowy, and with little substance.

31. It is in my judgment appropriate to order that each defendant pays approximately half the alleged judgment debt into court, as a condition of defending this action. I have inquired from Miss Wong about the defendants' financial positions, but she was not in a position to provide information. There is no suggestion however that either defendant is not in a position to pay.

The Result

32. I shall accordingly order that unless within 28 days, there is paid into court by either defendant, or by the defendants jointly, the total sum of (36,747,990. The plaintiffs may enter final judgment against the defendants for the amount endorsed on the writ with interest thereon at prime plus one from the date of the writ to judgment, and thereafter at the judgment rate, and costs.

33. I shall also make an order nisi that the costs of this application be costs in the cause.