PACIFIC SMART (HK) LTD v. DYNAMIC INDUSTRIES CO LTD

HCA 2438/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2438 OF 2004

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J U D G M E N T

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Introduction

1.  This is an appeal from an Order 14 judgment by Master Lung dated 17 March 2005 in the sum of $7,277,031.71, made in the Defendant’s favour on part of its counterclaim in this action.  The judgment relates to 21 post-dated cheques given by the Plaintiff to the Defendant which were subsequently counter-manded by the Plaintiff and therefore not payable upon presentation by the Defendant.

2.  It is clear that before the matters which have given rise to this dispute, the parties had an active trading relationship.  The Plaintiff is a toy trading company selling toys and other amusement related products to customers in Europe and North America.  Their business is substantial.  The Defendant is a manufacturer of such items.

3.  The claim divides itself into three parts, each relating to orders manufactured by the Defendant for the Plaintiff which the Plaintiff sold to three of its customers.  One to a North American company called Dynatech Action Inc., another to Nikko Europe B.V., a Dutch company and the third to Majorette a customer in Spain.  The orders for Dynatech and Nikko relate to a product known as a Blade Racer which is an electric motor-racing set and the third, for Majorette, relates to voice radio controlled cars, which can be conveniently abbreviated as VRC’s.  Put simply, and sufficiently for the purposes of this appeal, the Plaintiff complains that the Blade Racer sets as manufactured and delivered by the Defendant were so seriously defective that Dynatech and Nikko, who sold these on to other retailers and/or directly to end-users, have been inundated with calls from dissatisfied customers so that they have had to take many of these back.  In some cases, as much as 80% of the product has turned out to be defective.  The upshot of this is that the Plaintiff is now in trouble with these two customers and will face claims for compensation, either in the form of damages claims or, for the return of monies paid to it by the customers and reimbursement of transport costs and the like.

4.  In respect of the VRC’s, the case is different in that it is said that there has been late delivery of the product for which time was allegedly of the essence.

5.  In these circumstances, the Plaintiff has issued its writ dated 25 October 2004, which it has since amended, to make a variety of claims for amounts to be assessed by way of damages (in some cases with an estimated amount being provided) as well as, in some cases, for specified amounts of damages.  By its amendment, it also claims a declaration that it is entitled to an indemnity for any amounts that it may be found liable to pay to its customers and/or retailers because of its supply to them of the allegedly defective Blade Racers.

6.  Pursuant to its agreement with the Defendant for the supply of these products, it agreed to pay by means of post-dated cheques, 21 of which it counter-manded.  By its defence and counterclaim, the Defendant has, inter alia, denied the allegations of defective manufacture, denied that it is in breach of contract and has counterclaimed on the counter-manded cheques.  This therefore is how the matter, in broad terms, lies on the pleadings.

7.  The Order 14 application was taken out on the prayer of the counterclaim by the Defendant which relates to the counter-manded cheques, to which the Master held that there was no defence and therefore entered judgment.

The arguments on the appeal

8.  Mr Sit, who appears for the Plaintiff, appreciates the difficulty that his client stands in having regard to the fact that the Defendant is suing on the cheques.  With this in mind it is helpful to deal with the position in law before any further enquiry into the evidence, which before me, is voluminous very much at the behest of the Plaintiff.  Given the catalogue of allegedly complained about and rejected Blade Racers from Dynatech and Nikko, as well as the delayed delivery of the VRC’s, Mr Sit submits that these matters amount to a total failure of consideration which would afford a good defence to any action on a cheque or bill of exchange.  This is trite, but it is helpful to briefly relate here the status of an action on a cheque.  In Fielding & Platt Limited v Najjar (1969) 1 WLR 357 at 361B Denning M.R. said:

“We have repeatedly said in this court that a bill of exchange or a promissory note is to be treated as cash.  It is to be honoured unless there is some good reason to the contrary.”

In Nova (Jersey) Knit Limited v Kammgorn Spinnerei (1977) 1 WLR 713, Lord Russell of Killowen analyzed the position in the following way at 732G;

“It is in my opinion well established that a claim for unliquidated damages under a contract for sale is no defence to a claim under a bill of exchange accepted by the purchaser: nor is it available as set-off or counterclaim.  This is a deep rooted concept of English commercial law.  A vendor and purchaser who agree upon payment by acceptance of bills of exchange do so not simply upon the basis that credit is given to the purchaser so that the vendor must in due course sue for the price under the contract of sale.  The bill is itself a contract separate from the contract of sale.  Its purpose is not merely to serve as a negotiable instrument, it is also to avoid postponement of the purchaser’s liability to the vendor himself, a postponement grounded upon some allegation of failure in some respect by the vendor under the underlying contract, unless it be total or quantified partial failure of consideration.”

This undoubtedly being the position, it is necessary for Mr Sit to raise a triable issue that the Defendant’s performance of these contracts amount to such a total failure of consideration.  Failing that the Defendant must have its judgment leaving the Plaintiff to sue on its claim.

The allegations of defective goods

9.  Mr Sit has shown me in the evidence, a variety of complaints by the Plaintiff’s customers as to the defective operation of the Blade Racer.  This evidence provides a perfectly respectable basis for saying that the Plaintiff has a case which should be allowed to go to trial, had this been an application for judgment based on an action other than one on a cheque.  Mr Coleman, for the Defendant, makes two points in this regard.  Firstly, he relies on Lord Russell’sanalysis of the situation here, which is that the bill (the cheques in this case) is a separate contract from the contract of sale.  In this regard, Lord Denning’s analogy with cash, treating the cheque as cash, is relied on.  Mr Coleman submits that the position is simply this, that it if the Defendant had been paid in cash, rather than by post-dated cheques, then the Plaintiff would have been left to sue on its claim as presently constituted.  Looked at in this way the Plaintiff must have its judgment on the counter-manded cheques leaving the Plaintiff to sue on the claim.

10.  Secondly, and even more importantly, he submits that the evidence here cannot support a plea of total failure of consideration.  The goods were shipped by the Plaintiff, or to its order, to the Plaintiff’s customers and these goods were then accepted and in some cases then sold on by them to other retailers or directly to end-users.  Such conduct cannot amount to a total failure of consideration.  The fact that the goods may or may not be defective can only provide for a claim for damages for breach of contract which is how the action is framed by the Plaintiff.  This being the case the Plaintiff must be left to its claim and the Defendant left to its judgment on the counter-manded cheques which is, as Lord Russell has indicated, a quite separate contract from the contract for the sale of the goods.

11.  In my judgment, Mr Coleman is correct in his analysis of the matter, as was the Master who entered judgment in the way that he did on the counter-manded cheques, with the result that the appeal must stand dismissed and the judgment below will therefore stand.

12.  This being my view, Mr Sit’s reliance on cases such as Walter Trading Company v Yick Cheong 109/1964 [unreported] cannot avail him having regard to the quite different factual situation in that matter, where the defective goods had been rejected immediately.  In this case, the contract has been affirmed leaving the Plaintiff to its claim in damages.  The evidence here is that the moment for rescission has long past.

13.  Another submission made by Mr Sit, which in my judgment must also fail, is that the delivery of the post-dated cheques was subject to a condition that the Blade Racers were of merchantible quality.  For that to succeed there has to be some evidence of such a term, of which there is none.  The payment schedule at page 611, by which the Defendant was to present the cheques for payment, makes no mention of such a condition nor do the invoices mention such a term.  Additionally, extrinsic evidence would not be admissible to contradict the contract constituted by the bills of exchange, which make no reference to such a condition.  This suggested line of defence to the action on the cheques must therefore also fail.

14.  Lastly, Mr Coleman has made a number of criticisms concerning the veracity of the claim itself, based on what he says is probably the true reason for the counter-manding of these cheques which is the fact that the Plaintiff was short of funds, as the exchange of e-mails shows, and the fact that the writ came completely unannounced, there being no letter or letters before action setting out the case as it is now advanced.  Whilst such matters may carry weight at the trial of the claim itself, they do not really assist at this stage where, in my judgment, the case falls to be decided on the much narrower ground that the Plaintiff has no case whatsoever on total failure of consideration nor, on any other credible defence standing on a conditional delivery of the cheques based on the Defendant providing the Plaintiff with goods of merchantible quality and/or one’s that were fit for their purpose.

15.  Given the Plaintiff’s highly arguable case that much of the consignment of Blade Runners was defective I had considered whether it would be right to perhaps enter judgment in favour of the Defendant on the cheques but stay that judgment, unconditionally or on terms, until after the trial of the action on the Plaintiff’s claim, but I have come to the conclusion that would not be right, particularly having regard to the analysis of the situation as appears in the speech of Lord Russell of Killowen in Nova (Jersey) Knit Limited (supra).

The result

16.  The appeal must therefore stand dismissed with costs.