Profit Power Groups Ltd. and Another v. Healthy King Technology Co. Ltd. and Another

HCA4554/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. HCA4554 OF 2001

_______________________

_______________________

__________________

J U D G M E N T

__________________

1. These are Order 14 proceedings. On 27 May, Master Lung entered judgment in favour of the 2nd defendant on the counterclaim against the 2nd plaintiff in the sum of $583,350. The 2nd plaintiff now appeals against that order.

2. One of the matters raised in the appeal by Mr Chan, who appears for both plaintiffs, is that the 2nd defendant has no counterclaim in this action. He says that for this reason alone, the appeal must succeed. I will return to this point once I have recounted the background to the dispute which will hopefully have the effect of explaining the parties' respective positions.

3. The 1st plaintiff is a Hong Kong company. It trades on the mainland selling high technology products. The 2nd plaintiff is its subsidiary and acts as its agent. The 1st defendant is a Taiwanese company. It exports high tech products. The 2nd defendant is a director of the 1st defendant and effectively runs its business.

4. The defendants entered into an agreement to sell to the plaintiffs - I use the plural in order to deal with the matter in a general way - computer chips which can be installed into car engines to cut down pollution emissions and to enable the vehicles to run more efficiently. The plaintiffs were interested to sell these on to their customers on the mainland.

5. This all started on 16 March 2001 at a meeting in Shenzhen between the companies' representatives. Sample orders were placed by the plaintiffs in March and April. The samples were tested by an automobile testing agency at Beijing and pronounced suitable for the plaintiffs' purposes. The plaintiffs were sufficiently impressed with the product that they wished to enter into an agency agreement with the 1st defendant to sell its product on the mainland. A draft agreement was sent to the 2nd plaintiff by the 1st defendant on 12 May. Then a third order was placed by the 2nd plaintiff for 5,000 parts. The first two orders were for 50 and 200 parts in June. This order was delivered and paid for by 11 June 2001. The agency agreement was signed on 21 June 2001. So matters were set fair.

6. On 20 July 2001 8,400 parts were ordered from the 1st defendant by the plaintiffs. On 21 July 2001 a post-dated cheque for $883,350 was delivered to the defendants at Shenzhen. The order itself was delivered and arrived at Hong Kong on 31 July 2001. On 21 August 2001, the post-dated cheque became due for payment. Mr Hong of the plaintiffs asked that the cheque should not be presented for payment. This request was complied with initially but on 5 October 2001 the defendants paid in the cheque which was dishonoured. Between 6 October 2001 and 15 October 2001 the plaintiffs promised payment by letter of credit. On 13 October 2001, Mr Hong promised payment by letter of credit within two days.

7. The defendants were anxious about payment with delivery having been made by them in July. The plaintiffs then paid the 2nd defendant a cheque for $300,000, payment of this having gone through on 15 October. On the same day the defendants required payment of the outstanding balance which, as I have already indicated, was well overdue. Then on 19 October, the plaintiffs issued a writ alleging a total failure of consideration for the contract based on a test report obtained on the mainland to the effect that the chips supplied by the defendants did not comply with the contract specifications as to pollution, fuel saving and higher engine performance. This report, although dated 7 September 2001, had not become available to the plaintiffs until 19 October.

8. The plaintiffs' case is that the three requirements as to the capabilities of these chips were conditions of the contract of sale. The defendants knew that these were for resale by the plaintiff and that they could not be resold unless they were up to specification, hence a breach of condition, based on this report, entitling them to bring the contract to an end. Mr Tom Cheng for the defendants submits that this cannot possibly be believed when one examines the chronology that I have just recited. Sample chips had been rigorously tested at Beijing by an appropriate expert agency. They had been passed as up to specification. The plaintiffs were satisfied. They placed a third order for 5,000 which they paid for.

9. When one looks at the matter dispassionately it becomes clear that what has happened is that the plaintiffs are not able to pay, hence the trouble in October about the post-dated cheque and the promises about letters of credit which never materialised and then they were only able to make a partial payment. He submits that what the plaintiffs have done is to launch a cynical and disingenuous pre-emptive strike based on a highly suspicious test report and issued a writ on 19 October which, on its face, does not make sense.

10. The report itself suggests that the chips appear to have failed the pollution test but there is no mention of engine fuel consumption or engine performance which the pleading complains of so the evidence does not support the pleaded case. This is just another case of a dishonest purchaser inventing reasons said to justify non-payment. Mr Chan submits that the parties had always contracted on the basis that payment would depend on the chips getting a clean bill of health from a test laboratory. It is just most unfortunate that the test, although carried out on 7 September, was not released until 19 October. For this, the plaintiffs cannot be blamed.

11. The rule on Order 14 is well known. Judgment should not be entered unless it is demonstrated that the party against whom judgment is sought has no defence. The party being pursued must show triable issues. He must satisfy the court that he has a real and bona fide defence. (See Lord Justice Ackner (as he then was) in Banque de Paris et du Pays-Bas Suisse SA v Costa de Naray [1984] 1 Lloyds Reports 21 at 23.) But at the same time, the remarks of Lord Lindley in Codd v Delap [1905] LT 510 at 511, that "unless it is obvious that the defence put forward is frivolous and practically moonshine, Order 14 ought not to be applied" should be heeded.

12. The result here must turn on the effect of this test report. Can I merely ignore it or, at the very least, explain it away as part of a cynical ploy by the plaintiffs to get out of paying the balance that they are said to owe? The timing of this is all most unfortunate for the plaintiffs and it does give the appearance of being highly suspicious. Nevertheless, I cannot just dismiss it out of hand. Its merits will need to be tested. My judgment of this matter is that this case does show one of those "shadowy defences" contemplated by Lord Denning in Van Linn Developments v Pelios Construction [1969] 1 QB 607. The plaintiffs have just hung on by their fingertips. This report purports to come from a reputable agency in China. Its worth can only be tested at a trial in the conventional way.

13. Mr Cheng has submitted that the terms as to quality can only be considered to be warranties rather than conditions. This must also be arguable although I do not express much confidence in the plaintiffs' case. It is for this reason that they must be put on terms. The amount of Master Lung's judgment must be paid into court within 21 days, failing which there must be judgment to the 1st defendant against the 2nd plaintiff on the counterclaim. To this extent, the appeal must be allowed. This then leaves over some technical matters.

14. As this appeal is a complete re-hearing, I feel able to allow the defendants to amend their summons to seek judgment on the basis of their amended counterclaim, and this is what I had ordered at the start of the hearing. The summons will therefore be amended to reflect that. The judgment will be entered if the condition as to payment is not met in favour of the 1st defendant. Mr Chan is right in saying that it was not correct to enter judgment in favour of the 2nd defendant. He has no counterclaim. He now has by amendment but in any event the sum is due to the 1st defendant and not to the 2nd defendant so that is the order. Failing which judgment will be entered in favour of the 1st defendant against the 2nd plaintiff and to be executed forthwith and the claim herein shall stand dismissed with costs of the claim and counterclaim to the defendants against the plaintiffs.

15. Defendants' costs in the cause on the claim and the counterclaim here and below. Liberty to apply. Costs of application for stay to be costs in the cause.