ELEC VISION INC. v. ACHIEVER INDUSTRIES LTD.

HCA4659/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. HCA4659 OF 2001

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J U D G M E N T

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1. This is an appeal from an order of Master de Souza dismissing the defendant's application for the plaintiff to provide security for costs under Order 23, Rule 1, of the Rules of the High Court. The plaintiff is a Taiwan company and is therefore a foreign plaintiff within the meaning of Order 23, Rule 1. There is no dispute about that with the effect that the plaintiff is amenable to the order sought by the defendant.

2. I propose to start by giving a brief indication of the nature of the claim.

3. The plaintiff manufactures and supplies electronic components which are then built into various hi-tech products. The defendant is a Hong Kong company manufacturing, amongst other products, digital cameras. In about October 2000, the defendant ordered from the plaintiff 51,500 mother boards for digital cameras, these being part of the hardware going into the manufacture of this type of camera. The gross price was US$916,700. This therefore was a substantial order, particularly for the defendants who are in a fairly modest way of business, employing about 70 people.

4. This order was completed, delivered and paid for without complaint by either party. There was then a further order placed by the defendant with the plaintiff in November 2000 for 50,000 of the same product. The contract price was US$860,000. By mid-November 2000, 3,100 parts of this order were delivered and paid for by the defendant. The balance of 46,900 was delivered in March 2001, it having been ready for delivery since December 2000.

5. Notwithstanding delivery, the defendant refuses to pay alleging defects which are said to be so serious as to justify their having rejected the consignment which rejection has been communicated to the plaintiff in writing. The plaintiff now sues for the price and interest, the amount claimed being US$773,850 plus interest.

6. The defendant in its defence pleads a breach of contract based on the supply of a defective product and counterclaims for its loss of profit on the sales of digital cameras with damages to be assessed. This, therefore, is what the case is about.

7. The defendant says this must be a classic case for ordering security, involving, as it does, an overseas plaintiff. The plaintiff resists the application on the broadest possible grounds which I will need to consider individually.

8. Firstly, Miss Chan who appears for it, submits that its case on the merits is so strong that even at this stage I should have regard to this factor and for this reason alone refuse security. Secondly, if she fails on this, she submits that an order for security would have the effect of stifling her claim and that on good and well-established authority that is enough to defeat the application. Thirdly, that the plaintiff's impecuniosity has been caused by the defendant by virtue of its failure to discharge its lawful debt to the plaintiff which provides an additional ground for refusing the order sought and that this amounts to an offensive application in which the defendant, having failed to pay what is due to the plaintiff, has forced it into financial difficulties and when it sues to get what is owing to it, now seeks to stifle the action. Fourthly, where the defendant still has possession of this valuable consignment of mother boards, that this must amount to more than ample security in itself. Lastly, if all else fails, Miss Chan says that the HK$1 million security asked for is an oppressive amount. She seeks to reduce it to a much more modest sum.

9. I have been referred to many cases in support of both sides of the argument. It would be profitless to refer to all of them, particularly where so many have turned on their own facts. The principles are to be found in the leading authorities in Hong Kong and in England. I start with The Alfa [1991] 2 Lloyd's Law Reports 52, a decision of the Court of Appeal in England. At page 54, Donaldson MR put the matter in this way:

"The basic principle underlying RSC Order 23, Rule 1(1)(a), is that it is prima facie unjust that a foreign plaintiff who, by virtue of his foreign residence, is more or less immune to the consequences of an order for costs against him should be allowed to proceed without making funds available within the jurisdiction against which such an order can be executed. As Sir Nicholas Browne-Wilkinson put it in a passage in his judgment in Porzelack KG v Porzelack (UK) Limited [1987] 1 WLR 420 at 422, which was cited by Bingham LJ with approval in Slazenger's case (see 1988 1 WLR 221): the purpose of ordering security for costs against a plaintiff ordinarily resident outside the jurisdiction is to ensure that a successful defendant will have a fund available within the jurisdiction of this court against which it can enforce the judgment or costs."

10. The other authority which states the principle and is of particular assistance because it indicates the status of the merits of the particular action before the court is the judgment of Browne-Wilkinson VC in Porzelack KG v Porzelack (UK) Limited [1987] 1 WLR 420 where at 423B to F the following appears:

"Under RSC Order 23, Rule 1(1)(a), it seems to me that I have an entirely general discretion either to award or refuse security, having regard to all the circumstances of the case. However, it is clear on the authorities that if other matters are equal, it is normally just to exercise that discretion by ordering security against a non-resident plaintiff. The question is what in all the circumstances of the case is the just answer. The matters urged before me have spread over a fairly wide field. First, there have been attempts to go into the likelihood of the plaintiff winning the case or the defendant winning the case, presumably following the note in the Supreme Court Practice 1985 P384 under rubric 23/1-3/2 which says: "A major matter for consideration is the likelihood of the plaintiff succeeding." This is the second occasion recently on which I have had a major hearing on security for costs in which the parties have sought to investigate in considerable detail the likelihood or otherwise of success in the action. I do not think that is a right course to adopt on an application for security for costs. The decision is necessarily made at an interlocutory stage on inadequate material and without any hearing of the evidence. A detailed examination of the possibilities of success or failure merely blows the case up into a large interlocutory hearing involving great expenditure of both money and time. Undoubtedly, if it can clearly be demonstrated that the plaintiff is likely to succeed in the sense that there is a very high probability of success, then that is a matter which can properly be weighed in the balance. Similarly, if it can be shown that there is a very high probability that the defendant will succeed, that is a matter that can be weighed but for myself I deplore the attempt to go into the merits of the case unless it can clearly be demonstrated one way or another that there is a high degree of probability of success or failure."

11. From this decision, I turn to consider the merits upon which so much reliance is placed by Miss Chan to defeat the application. Has she shown that there is a very high probability of success on the part of the plaintiff? I apprehend that the task is an onerous one but clearly less so than on an application for summary judgment. She has taken me through the available evidence and, in particular, the contemporaneous correspondence, the affirmations and the pleadings. What her submission comes to, and I do not believe I do it an injustice by summarising it in this way, is that the first large order went through and was paid for without incident. A part of the consignment that was the subject of this action went the same way. Then the bulk was delivered without any hint of complaint and that when the moment to pay up arrived, spurious reasons have been put up to justify non-payment.

12. Even after a considerable lapse of time when payment was overdue, the defendant was given further consideration and then only after about four months had gone did the defendant start to allege defects of an inconsistent nature on occasions relating to computer software and later referring to the hardware, the mother boards themselves.

13. Mr Khaw for the defendant says that this is an unfair analysis. The delay was inevitable because the defendant had to conduct tests on the cameras incorporating and including the parts sold to them by the plaintiff and it was only then that these defects emerged. These complaints are entirely genuine. The parts had to be rejected because they could not be used and the defendant has suffered losses as a result. The defence and counterclaim is an authentic pleading with defects properly particularised.

14. The evidence shows that the plaintiff itself had sent technical staff to do tests on these parts. This is a genuine dispute on quality which I cannot and should not attempt to resolve on the present material. Such an evaluation can only be done in the conventional way at trial.

15. I agree with Mr Khaw's analysis. Despite her best efforts, Miss Chan has been unable to demonstrate a "very high probability" that her client will succeed. I will therefore leave out of account the merits in deciding this application.

16. I now come to the second limb of Miss Chan's argument.

17. Has she demonstrated that an order for security would stifle her client's claim? The law is clear that, "If the plaintiff is impecunious and an order for security for costs may stifle his claim, that may very well be a powerful reason for not ordering security". See Bingham LJ (as he then was) in Thune v London Properties Limited [1991] WLR 562 at 573.

18. I have been referred to many authorities to the same effect, particularly the Hong Kong Court of Appeal decision in "The Silver Dawn" [1992] Civil Appeal 171. In Flendr Werft v Aegean Maritime [1992] Lloyd's Law Reports 27 at 29, Saville J (as he then was) identified the test to be applied in deciding whether a plaintiff had no funds with which to provide security.

"Mr Warmington's second submission was that since the claimants have no assets, an order for security would stifle or might well stifle the claims and that as a matter of justice the court should not order security in those circumstances. In my judgment, this argument contains a non sequitur. It does not follow from the fact that a company has no assets that it will not be able to provide security for costs. For fiscal and other reasons, a great deal of international business is conducted through offshore or shell companies with no or no apparent assets but with legal or beneficial owners of financial backers well able to provide the necessary funds for the business, including, where necessary, the investment needed for litigating or arbitrating claims made by those companies. To my mind, particularly where commercial entities are involved, any argument that an order for security will stifle a claim is likely to fail in limine unless the court is persuaded that in truth it is at least more likely than not that funds are not available from any source to provide or support security. Unless the court can be so persuaded, the suggestion of potential injustice will not ex hypothesi be demonstrated."

19. The judgment of Godfrey JA in The Silver Dawn, page 8 of the report, in which he agreed with Litton JA is to the same effect.

"The principle applicable appears to me to be as follows: where a plaintiff outside the jurisdiction of the court resists the making of an order for security for costs against him on the ground of his impecuniosity, he must be prepared to prove that the effect of an order against him would be to stifle his action so that it would be a denial of justice for the court to make the order. It does not follow from the mere fact that a man has no capital of his own that he is unable to provide security for the costs of his action. He may have friends, he may have business associates, he may have relatives, all of whom can help him in his hour of need, as Brandon LJ pointed out in the Court of Appeal in MV Yorke Motors v Edwards [1982] 1 WLR 444. So the court must in every case, as this, decide whether on the totality of the evidence it ought to be inferred that it would really be impossible for the plaintiff to provide or procure the provision of the sum in which security would otherwise be ordered."

20. What is the plaintiff's evidence of impecuniosity? This comes largely from Mr Lin's affirmation, page 50-51 of the court's bundle.

"30. However, because of the non-payment of goods by the defendant in the suit claim in 2001, the plaintiff had to stop producing the defendant's orders as well as the requests placed with the plaintiff as it makes no commercial sense to deliver further goods to the defendant who did not pay the outstanding invoices and kept the plaintiff's goods.

31. Consequently, since early 2001 the plaintiff has been stuck with large stock, the price of which has been dropping steadily. Produced and shown before me is a copy of email from myself to Jimmy Chen, the chairman and chief executive officer of the defendant, dated 28 May 2001 marked LRJ11. In the said exhibit, the stock problem caused by the defendant is clearly stated.

32. The plaintiff suffered much financial loss in 2001 as a result of the non-payment by the defendant which for the reasons aforesaid led to the aforesaid loss in the stock, as well as the loss on the already placed but not delivered orders from the defendant.

33. The compounded effect is devastating to the plaintiff whose business depends so very heavily on the defendant prior to the defendant's breach of the suit contract. The plaintiff's net profit plummeted from HK$1.17 in 2000 to a loss of HK$52 million in 2001. Produced and shown before me is a copy of the audited report of the plaintiff prepared by Arthur Andersen for years 2000 and 2001 marked as Exhibit LRJ12.

34. In the present circumstances the plaintiff could not afford to remove cash from its operation to finance its litigation even though it is plain that the plaintiff has a very meritorious claim against the defendant because the plaintiff needs to maintain a reasonable cash flow to survive the difficulties created by and the aforesaid consequential damages resulted from the defendant's breach of the suit contract."

21. A schedule, page 78, and the accounts at pages 101 and 102 elaborate the position. There is no doubt that the plaintiff has sustained a very marked downturn in trading fortunes. Miss Chan has shown me a bank balance with only US$28,000 in it. She submits, therefore, that there are insufficient funds to provide security. Attention is also drawn to the bad state of the Asian economy as an aggravating feature. But I am bound to say that the plaintiff appears to be a going concern but of a diminished status when compared to its good year in 2000.

22. In deciding whether an order would stifle the claim, clearly the amount likely to be ordered must be a very weighty consideration. With this in mind, I find part of the judgment of Peter Gibson LJ in Keary Developments Limited v Tarmac Construction [1995] 3 All ER 534 of much assistance. See 540G to J.

"Before the court refuses to order security on the ground that it would unfairly stifle a valid claim, the court must be satisfied that in all the circumstances it is probable that the claim would be stifled. There may be cases where this can probably inferred without direct evidence. See Trident International Trade Services Ltd v Manchester Ship Canal Company [1990] BCLC 263. In the Trident case, there was evidence to show that the company was no longer trading and that it had previously received support from another company which was a creditor of the plaintiff company and therefore had an interest in the plaintiff's claim continuing but the judge in that case did not think on the evidence that the company could be relied upon to provide further assistance to the plaintiff and that was a finding which this court held could not be challenged on appeal. However, the court should consider not only whether the plaintiff company can provide security out of its own resources to continue the litigation but also whether it can raise the amount needed from its directors, shareholders or other backers or interested persons. As this is likely to be peculiarly within the knowledge of the plaintiff company, it is for the plaintiff to satisfy the court that it would be prevented by an order for security from continuing the litigation. See Flendr Werft v Aegean Maritime Limited [1990] 2 Lloyd's Reports 27."

23. On this evidence, I am afraid that the plaintiff has failed to carry the burden of showing that the claim would be stifled by an order for security. In saying that, the amount of the order clearly must have regard to the plaintiff's financial position. It is one of the many factors which the court must weigh up in what can be a delicate and difficult balancing exercise. But this evidence has demonstrated to me that the plaintiff is a going concern and provided the amount is one which is within its capacity, then I am satisfied that its claim would not be stifled.

24. Next, I turn to oppression. I do not believe this application can be characterised as being oppressive. It is a perfectly genuine application properly brought, although, as I will demonstrate in a moment, far too ambitious in all the circumstances on the issue of quantum. Lastly, as to quantum, I consider that it is proper to have some regard to the fact that the defendant does have possession, albeit unwillingly, of the components that are the subject matter of this dispute. If it wins the action, it will be able to apply to the court to sell these components as the plaintiff's property because it would have succeeded in demonstrating that it was justified in rejecting the components and accordingly, the components will have remained in the plaintiff's ownership, in order to defray part at least of an order for costs in its favour. The components are said to be worth over HK$6 million but such components must have a limited shelf-life and be of limited application as they were tailor-made for the defendant. I will approach the value of these components very conservatively and attribute a value of HK$150,000 to them. If the plaintiff decides to remove them between now and trial, then the defendant can come to court and apply for further security in lieu of these assets.

25. But I must also go further in relation to security.

26. Addressing the modesty of the plaintiff's financial position and the defendant's interest to be protected where I have found that an order should be made, I have seen the defendant's skeleton bill. I bear in mind that the action may settle. I also bear in mind that the defendant can reapply for more security if the circumstances warrant it. I will order security of $500,000 being essentially the profit costs element. $150,000 will be attributable to the components and so the plaintiff must bring into court HK$350,000 within 42 days, pending which the action will be stayed. I will give both parties liberty to apply: the plaintiff as to further time to bring the money into court upon proper cause being shown, and the defendant for such orders as it may seek if payment is not made.

27. Lastly, as to costs, I have heard provisional argument on this issue. The defendant has succeeded but to a far smaller extent than it had

asked for. I will say that costs here and below will be costs in the cause.