VIA INTERNATIONAL LTD v. KARREX (HONG KONG) LTD

DCCJ 3315/2005

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 3315 OF 2005

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DECISION

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1.  This is an application by the defendant, pursuant to O.19 r.9 of the Rules of District Court, for an order setting aside a default judgment dated 16/8/2005 and to stay the execution of a Garnishee Order: Notice to Show Cause dated 27/8/2005.

Background:

2.  The Writ and Statement of Claim were served on the defendant on 13/7/2005. Notice of intention to enter judgment was served on the defendant’s solicitors on 2/8/2005. Mistaking that time did not run during the High Court’s summer vacation period, the defendant’s solicitors failed to file statement of defence by its due date. Default judgment was entered on 16/8/2005 and Garnishee Order: Notice to Show Cause was issued on 27/8/2005.

3.  On 7/9/2005 defendant’s solicitors received a copy of the default judgment and on 24/9/2005 this summons was filed.

The Claim:

4.  The plaintiff’s claim was for balance of purchase price in the sum of US$11,056 for 21,600 sets of DVD 10-Video, manufactured and delivered to the defendant.

The Proposed Defence:

5.  The defendant admitted that the claimed sum is due and payable to the plaintiff, but alleged the plaintiff was in breach of contract, the defendant suffered damages and the defendant is entitled to counterclaim and setoff its damages against the plaintiff’s claim.

The Law:

6.  The defendant’s solicitors admitted that the default judgment was regular, therefore the applicable law are:

(W)hether the defendant has shown a defence on the merits on which the court should pay heed, not as a rule of law, but as a matter of common sense, since there is no point in setting aside a judgment if the defendant has no defence, and because, if the defendant can show merits, the court will not prima facie desire to let a judgment pass on which there has been no proper adjudication. [Para 13/9/13 Hong Kong Civil Procedure 2006].

It is not sufficient to show a merely “arguable” defence that would justify leave to defend under O.14. The defendant must show that he has “a real prospect of success”. To do so, he must satisfy the court that his case and the evidence that he adduced in support of it is potentially creditable and carries some degree of conviction. Thus, the court must form a provisional view of the probable outcome of the action. [Para 13/9/15 Hong Kong Civil Procedure 2006].

7.  The burden is therefore on the defendant to show a meritorious defence.

The Defendant’s Case:

8.  The defendant alleged that in or around July 2004, KB Asia, a related company, contracted with Prism Leisure Corporation PLC to supply a quantity of DVDs and DVD players to Prism. The defendant then entered into agreement with KB Asia to supply the DVDs and in or about early August 2004, the defendant contracted with the plaintiff for manufacturing of the DVDs (the “Contract”).

9.  In or about August 2004, the defendant also contracted with Goodwill Magnetic Limited to package several DVDs together with a single DVD player for shipment by KB Asia to Prism.

10.  The Contract was evidenced by four purchase orders issued by the defendant. The defendant alleged the plaintiff was in breach of the Contract as follows:

Late delivery

11.  Delivery dates of the DVDs were expressly stated on the purchase orders. The plaintiff failed to deliver the DVDs on the scheduled delivery dates. The contractual and actual delivery dates were:

PO number	Contractual delivery date	Actual delivery date
0400355	2/9/2004 amended to 6/9/2004	17/9/2004
0400356	6/9/2004 amended to 30/9/2004	2/10/2004
0400357	20/9/2004	In 4 different deliveries on 14/10 2004, 18/10/2004, 22/10/2004 & 23/10/2004
0400358	23/9/2004	8/10/2004

12.  As a result of the delay, the defendant suffered damages as follows:

i.      Storage costs for the DVD players, charged by Goodwill, in the sum of HK$40,000.

ii.      Overtime labour charges in the sum of HK$26,000.

iii.      Additional freight charges in the sum of HK$97,255.

The defendant wishes to counterclaim HK$163,255 against the plaintiff.

Transparent DVDs cases

13.  Two of the purchase orders required the DVDs be packaged in semi-transparent polypropylene cases, but the plaintiff packed them in fully transparent polypropylene cases instead.

14.  As a result of this mistake, KB Asia reduced the price it charged Prism by US$16,080. The plaintiff only gave US$6,030 credit to the defendant and the defendant wishes to counterclaim US$10,050 against the plaintiff. 

The Plaintiff’s case:

Late Delivery

15.  The plaintiff alleged it was not in breach because the parties never had a “set in stone” delivery date. On their quotation dated 3/8/2004, the plaintiff informed the defendant they would require 3 to 4 weeks after samples are approved, before they can make delivery.

16.  Although there were a series of negotiations between the parties, the parties did not arrive at a binding contract until 30/8/2004, when the defendant sent their purchase orders to the plaintiff. The defendant knew that the delivery dates stated on their purchaser orders were not realistic and these were not treated so by the parties. The plaintiff agreed to proceed with production as fast as possible to accommodate the defendant.

Transparent DVDs cases

17.  Whilst the plaintiff admitted that they made a mistake and supplied some of the DVDs with clear cases instead of semi-transparent cases, the plaintiff alleged that parties had already agreed to terms of settlement on this issue. The parties agreed to reduce the price of the affected DVDs from US$0.84 per unit to US$0.81 per unit. The plaintiff gave the appropriate discounts to the defendant on their invoice. There is no merit in the defendant’s counterclaim for damages on this ground.

Findings:

18.  I will deal with the counterclaim for using transparent DVD cases first. The plaintiff admitted there was a breach but alleged parties reached final settlement for this breach. The plaintiff’s evidence was a series of emails exchanged between the parties. The relevant emails are:

i. 20/9/2004 -  Plaintiff clearly admitted to the error and offered to reduce the unit price from US$0.84 to US$0.82.

ii. 20/9/2004 -  Defendant counter-offered to reduction of the unit price to US$0.80, which offer was “subject to final confirmation from customer”.

iii. 21/9/2004 -  Plaintiff replied and renewed the US$0.82 per unit offer to settle.

iv. 21/9/2004 -  Defendant stated their customer had asked for a 5% discount which equal to a US$0.06 reduction, but the defendant was willing to accept US$0.02 cents as its loss and asked the plaintiff to reduce its price by US$0.04 (in the email these were mistakenly typed as US$0.60, US$0.20 and US$0.40 respectively).

v. 23/9/2004 -  Plaintiff replied to the defendant’s offer and stated the plaintiff had 2 choices: (1) reduced the unit price by US$0.04 per unit, which is too high for the plaintiff to accept; or (2) change the cases to semi transparent cases, but delivery would be far behind the 4/10 delivery date.

vi. 24/9/2004 -  Defendant’s reply to the plaintiff’s email of the same date. The plaintiff’s email stated “According to our telephone conversation yesterday, our conclusion for DVD case is we go ahead for production with super clear DVD case. The final price is USD0.81.” The defendant replied: “Noted. Ok.”

19.  Ms. Auyang, for the defendant, argued that “Noted. Ok” should be read with the 20/9/2004 email and be subjected to final approval by the defendant’s customer. I do not see it that way. Clearly on 20/9/2004, the defendant did not know their customer’s position with the use of clear DVD cases, but with the 21/9/2004 email, their customer’s position was clear. From that point forward, the defendant no longer needed their customer’s approval and therefore the defendant did not mention that requirement any further.

20.  The phase “Noted. Ok” must be read in conjunction with all of the prior emails and in particular the plaintiff’s original email of the same date. The plaintiff stated “According to our telephone conversation yesterday…” which meant on 23/9/2003, the parties reached a settlement agreement and the email on 24/9/2004 was merely a written confirmation of the terms. Therefore, unless the defendant disagrees, it only needed to denote its agreement and “Noted. Ok.” was clearly for that purpose.

21.  Looking at the evidence as a whole, I find the parties have reached terms of settlement on the plaintiff’s use of transparent DVD cases in breach of their Contract. The defendant is not entitled to claim damages on this ground.

22.  As far as the late deliveries are concerned, the parties’ disagreement centered on whether the Contract was concluded on 30/8/2004 when the defendant’s purchase order was sent, as alleged by the plaintiff or some time earlier in August, as alleged by the defendant. I do not agree that is the issue here. The real issue is whether the parties reached an agreed date for the delivery of the DVDs?

23.  Mr. Chan, counsel for the plaintiff, argued that in the original quotation dated 3/8/2004, the plaintiff had already made clear delivery would be 3 to 4 weeks after samples are approved. Even though the plaintiff had received some of the masters from the defendant, the plaintiff could not be expected to start work on the DVDs until they have confirmation in the form of a purchase order or a signed quotation from the defendant. The purchase orders were not received until 30/8/2004. The plaintiff never agreed to the delivery dates stated on the purchase orders and these were unrealistic and unreasonable in any event. The plaintiff could not be liable for late delivery because the parties did not have an agreed delivery date.

24.  Ms. Auyang, on the other hand argued that the parties entered into a binding agreement on 13/8/2004, when the defendant transferred US$50,000 deposit into the plaintiff’s account. Although the plaintiff argued that this US$50,000 was deposit for an earlier order for music CDs by the defendant, in view of the fact that the total contract price for the music CDs was only US$61,640, US$50,000 was totally disproportionate as a deposit for that contract.

25.  I find Ms. Auyang’s argument persuasive. Add to that the original quotation for the DVDs required a 30% deposit, the total original quotation price was US$188,990, and the required deposit would have been US$56,697, very close to the US$50,000 transferred by the defendant into the plaintiff’s account. Add to that all of the masters, except one, were send to the plaintiff before 30/8/2004, I find it highly probable that the parties have already reached an agreement when US$50,000 was transferred to the plaintiff’s account.

26.  If the parties have already reached an agreement on or about 13/8/2004, then the delivery dates specified on the purchase orders are no longer “unrealistic and unreasonable”.

27.  I have also carefully considered all of the other factors that contributed to the delay in delivery:

i. The issue with respect to copyright, which resolved itself when the defendant clearly indicated it would hold the plaintiff liable for delay;

ii. The issue with respect to defendant’s delay in approving the samples, which on close examination there was no delay;

iii. The problem with some of the masters, which the plaintiff should have discovered, if it had examined the masters when the defendant provided them;

iv. The defendant’s contract with Goodwill to start packaging the DVDs with DVD players in early September 2004, clearly indicating that the defendant anticipated DVD delivery to begin in early September 2004;

v.          For PO 0400357 and PO 0400358, as late as 24/9/2004, in the same email confirming the parties’ settlement agreement for using clear DVD cases, the plaintiff informed the defendant that delivery for PO 0400358 would be 5/10/2004 and PO 0400357 would be in two batches on 9/10/2004 and 13/10/2004. The plaintiff failed to comply with it’s own delivery dates.

28.  With the evidence before me, I am left with the impression that the defendant has “a real prospect of success” in its counterclaim for delay. Accordingly, Judgment dated 16/8/2005 is set aside.

29.  Execution of the Garnishee Order: Notice to show Cause dated 27/8/2005 should accordingly be stayed.

30.  As far as costs is concerned, although the defendant’s solicitors in his first affidavit stated the defendant was not at fault, but mistaking that time does not run in a District Court action during summer vacation for the High Court was clearly the fault of the defendant’s solicitors. Accordingly, costs for this application should be to the plaintiff in any event. Costs order is nisi for 14 days from the date of handing down the Decision, in case the defendant wants to address me further.