XCHRX SANDEX INVESTMENT LTD. v. MARLANE INTERNATIONAL LTD.

DCCJ15587/2000

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 15587 OF 2000

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Judgment

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1. In this action, the Plaintiff sues the Defendant for the price of goods sold and delivered and services rendered to the Defendant. The total amount claimed is $413,823.30 being the aggregate of sums in a large number of invoices as listed in the Statement of Claim. The Plaintiff acknowledges that $73,566.83 has been paid by the Defendant towards satisfaction. Hence the net outstanding claimed by the Plaintiff is $340,256.47 and the Plaintiff applies for summary judgment.

2. The Defendant raises three matters in opposition to summary judgment. First, the Defendant alleges that the amounts due under two invoices are not that as claimed by the Plaintiff. Specifically, the Defendant by affirmation in opposition says that the amount of $3,292.50 under Invoice No. ST009835 is not due because it related to the cessation of business of the Plaintiff. In regard to Invoice No. ST009836, the Defendant by affirmation says that $11,625.00 ought to be taken off as unjustified.

3. Secondly, the Defendant contends that is a customary 2% discount allowed on all invoiced amounts. Hence the outstanding amount claimed should be reduced by 2%. However, this issue was abandoned by the Defendant during the course of the hearing before me.

4. Thirdly, the Defendant asserts by affirmation that

"5. As a result of the bad quality and/or late delivery of the Plaintiff's products, the Defendant received complaints from its customers and a series of debit note were issued to the Plaintiff which up to this day remains unsettled. The particulars are as follows :-

Debit Note No. 146	HK$15,000.00
Debit Note No. 148	HK$8,116.50
Debit Note No. 149	HK$1,581.00
Debit Note No. 150	HK$4,434.11
Debit Note No. 151	HK$6,336.00
Debit Note No. 152	HK$2,729.00
Debit Note No. 153	HK$285,641.00
Total:	HK$323,837.61"

And the Defendant counterclaims this $323,837.61 and set off against the Plaintiff's claim.

5. Mr. Au for the Plaintiff contends that there is no evidence to support the dispute over Invoices ST009835 and ST009836. Nothing can be further from the truth. The affirmation filed on behalf of the Defendant and remarks written across the copy invoices exhibited to the affirmation is evidence. There is nothing inherently unbelievable in such challenges raised by the Defendant. Mr. Au also asserts that evidence is not admissible to challenge the invoices because of the Parol Evidence Rule. Clearly the Parol Evidence Rule does not apply in such circumstances. In conclusion, I have no difficulty at all in holding that the amounts disputed, i.e. $3,292.50 under ST009835 and $11,625.00 under ST009836 should go for trial.

The principles on set off and summary judgment

6. There can be no serious dispute as to the applicable principles for a case like the instant one. In Shenzhen Baoming Ceramics Co. v. Companion-China Ltd. [2000] 2 HKC 790 at 796-797, Keith JA observed :-

"What order, then, should be made in these circumstances? The law in this area has been usefully summarised in the Supreme Court Practice 1999 Vol 1 at p 179 as follows:

An analysis of the authorities as to what order should be made where the defendant raises a set-off or counterclaim shows that there are four different classes or groups of such orders, namely:

(a) where the defendant can show an arguable set-off, whether equitable or otherwise, he is entitled to defend to the extent of the set-off and the court has no discretion;

(b) where the defendant sets up a bona fide counterclaim arising out of the same subject matter as the action and connected with the grounds of defence, the order should not be for judgment on the claim, subject to a stay pending trial of the counterclaim, but should be for unconditional leave to defend, even if the defendant admits the whole or part of the claim;

(c) where there is no defence to the claim but a plausible counterclaim of not less than the claim is set up, judgment should be for the plaintiff on the claim with costs, stayed until trial of the counterclaim;

(d) where the counterclaim arises out of a separate and distinct transaction or is wholly foreign to the claim, judgment should be for the plaintiff with costs without a stay;

the lack of clarity between classes (b), (c) and (d) gives the court freedom to respond to the perceived justice of the individual case (United Overseas Ltd v. Peter Robinson Ltd, March 26, 1991, CA Transcript 91/0297, per Bingham LJ).

The defendant's counterclaim does not come within category (a) or category (b). Accordingly, there is no defence to the plaintiff's claim for $1,859,755.88 plus interest, and there must be judgment for the plaintiff for that sum. The issue is whether the defendant's counterclaim comes within category (c) or category (d). In our view, it comes within category (c). Both the settlement agreement and the third agreement arose out of orders given to the plaintiff for ceramic tiles pursuant to an ongoing trading relationship. In our judgment, it would be unjust to require the defendant in such a relationship to pay a sum which represents a compromise as to the balance of the purchase price of goods to which the original agreement related before the determination of the seller's liability to compensate the buyer for losses alleged to have been incurred as a result of sub-standard goods being delivered under the third agreement."

7. An authoritative summary of the law regarding to set-off is contained in Axel Johnson A.B. v. Mineral Group A.G. [1992] 1 WLR 270 per Legatt L.J. The current position is that :-

- Legal Set-off for liquidated debts, even if unconnected

- Equitable set-off for unliquidated debts which are connected

- No-set-off for debts which are unconnected and unliquidated

The above principle has been applied in a recent case in Hong Kong : Alco International Ltd. v. Akai Electronics Co. Ltd. [2000]3 HKC 724, a case with facts almost identical to those of the present.

The nature of the counterclaim

8. The Defendant has not raised any issue in relation to the invoices except the specific two dealt with hereinbefore. Hence there is no real substantive defence to the claim by the Plaintiff. What remain to be considered is the nature of the items counterclaimed.

9. In brief, each of the debit notes relates to claim for loss due to sub-standard or late delivery of goods supplied by the Plaintiff. It is basic common sense that claims (counterclaims in this case) for loss due to sub-standard quality or late delivery can only be for damages to be assessed even though the Defendant has quantified them. Because the counterclaims are not for liquidated debts, there cannot be legal set-off.

10. It may be argued that, because the debit notes were all issued in 1998 and the Plaintiff has adduced no evidence to show controversy over such debit notes, the Plaintiff may be taken to have accepted the debits and thus the debits can be treated as liquidated debts. However the Plaintiff now disputes these debits. So question arises as to whether the debits have been accepted by the Plaintiff as a matter of fact or law. Such question obviously requires trial with hearing of evidence on the conduct of the parties (in particular the Plaintiff) vis-a-vis each of the debit notes.

11. Still on the debit notes. The Defendant asserts that each of them relates to goods supplied under some of the invoices the basis of the Plaintiff's claim. Hence, it is said, the Defendant seeks equitable set-off. However, the documents exhibited pertaining to the debit notes do not show immediately the connection with the goods supplied under the invoices. Indeed the Plaintiff contends that there is no connection for equitable set-off. Thus, it is inevitable that the Defendant has to call witnesses to show the alleged connection. In short, equitable set-off is not available to the Defendant on purely affirmation evidence before the court.

12. In the premises, since neither legal set-off nor equitable set-off can be supported, there must be judgment for the Plaintiff for the amount of $(340,256.47 - 3,292.50 - 11,625.00) = $325,338.97.

13. Nonetheless, the counterclaims by the Defendant for sub-standard quality and late delivery are supported by documentary evidence of claims by purchasers against the Defendant. The counterclaims are at the very least plausible. Thus the matter boils down to case(c) alluded to by Keith JA whereby although there is judgment for the Plaintiff stay of execution ought to be ordered.

14. In exercising the discretion to order stay of execution, I also bear in mind the allegation by the Defendant that for a considerable part of the material time one Mr. Sung was shareholder and director of both the Plaintiff and the Defendant and he ran both companies. Mr. Sung allegedly co-ordinated the businesses between the Plaintiff and the Defendant. Now, the implications of Mr. Sung's alleged role in the Plaintiff and in the Defendant have not been firmly or properly pleaded. Affirmation evidence from the Plaintiff admits that Mr. Sung invested in both companies but he had no management role in the Defendant. Nevertheless, it is open to the Defendant to plead in such a way as to implicate Mr. Sung on matters germaine to the debit notes or the accounts between the Plaintiff and the Defendant.

15. Last but not the least, there is ample evidence from the Plaintiff that the Plaintiff and the Defendant had substantial trading relationship with each other and that there may well be a kind of running account between the Plaintiff and the Defendant.

16. In the light of all the circumstances aforesaid, this is a strong case for stay of execution until trial of the Defendant's counterclaims.

Order

17. Accordingly, I gave partial judgment for the Plaintiff for $325,338.97 with interest and costs. Leave to the Defendant to file and serve Counterclaim in due course. Stay of execution of judgment until trial of the Counterclaim to be filed and served by the Defendant. Unconditional leave to the Defendant to defend the balance of the claim by the Plaintiff.