XCHRX L. REX PRINTING CO. LTD. v. TODTRI PRODUCTIONS LTD.

HCA 10270/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 10270 OF 2000

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REASONS FOR JUDGMENT

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1. On 28 November 2001 I dismissed the defendant's appeal with costs and indicated that I would give my reasons in writing. This I now do.

2. This is an appeal by the defendant from the decision of Master Cannon given on 3 September 2001 ordering conditional leave to defend the plaintiff's claim on the condition that there be payment of US$380,518.68 into court within 21 days from 3 September 2001.

3. The plaintiff's claim against the defendant is a simple one. The plaintiff provided materials and services for the printing of books which have been received by the defendant or by its customers. It is accepted by Mr. Wong, counsel for the defendant, that the amount owing by the defendant to the plaintiff is the sum of US$380,518.68 as claimed by the plaintiff for such materials and services provided to the defendant by the plaintiff from May 1998 to November 1998. The defendant, however, seeks to raise a defence of set-off and counterclaim. Three matters are raised and they relate to :

(1) The Maxi-livres Profance ("MLP") consignment;

(2) The LIDL consignment; and

(3) The Universal International Pty Ltd. ("UI") order.

The MLP consignment

4. This related to a consignment of books to be delivered to MLP which was a customer of the defendant. It was alleged by the defendant that in breach of its obligations the plaintiff failed to deliver a certificate of origin and an insurance certificate together with the shipment of the goods and because of the late delivery of the said documents the defendant suffered loss and damage. As was pointed out by Mr. Lam, counsel for the plaintiff, there can be no doubt that in the defence and counterclaim and in the 1st affidavit of Robert Tod ("Tod") of the defendant, the defendant was complaining that in respect of a consignment of books for MLP which had arrived in Antwerp on 14 August 1998, the certificate of origin and the insurance certificate only arrived much later on 5 October 1998 and because of this the goods were kept in a warehouse. This resulted in demurrage or storage charges in the sum of FF 13,091 for the delay. However, after the plaintiff filed its evidence, it became clear that the defendant could no longer maintain that the certificate of origin and the insurance certificate which was delivered on 5th October 1998 was in relation to the MDL consignment which had arrived in Antwerp on 14 August 1998. It was amply demonstrated by Mr. Lam that there were 2 consignments of books to MLP, one consisting of the animal series and the other consisting of the architecture series. The shipment to Antwerp which had arrived on 14 August 1998 was in relation to the animal series only and not the architecture series. However, the certificate of origin and the insurance certificate delivered on 5 October 1998 was in relation only to the consignment for the architecture series. This had nothing to do with the shipment to Antwerp which had arrived on 14 August 1998. Faced with the plaintiff's evidence, Tod tried to salvage the situation by alleging in his 2nd affidavit that there was a delay until 25 September 1998 in MLP taking delivery of the consignment that had arrived in Antwerp on 14 August 1998 because of the fault of the plaintiff. In para. 6 of his 2nd affidavit he stated that :

"I was informed by Opal (which has since closed down for business) and verily believe that the delay was caused by the Defendant failing to deliver the correct letter of credit documentation to Opal".

5. Opal was a reference to Opal Trade Corp. an intermediary in the MLP transaction. I would observe first, that this is hearsay evidence and the deponent does not even identify the person to whom he spoke in Opal. Secondly, no particulars are given at all of what the "correct letter of credit documentation" was or should have been. The threshold onus is on the defendant to show a triable issue and in doing so the defendant has to condescend to particulars. This the defendant has failed to do and in my judgment no triable issue is raised.

6. The defence and counterclaim also claims loss of business opportunities in excess of US$1,000,000 to be assessed. This is purely speculative and appears to be a figure plucked out from the air. There is no credible evidence to support this. It was said that the late delivery of the documents damaged the business relationship the defendant had with MLP resulting in a drop of business volume from sales figures of US$987,576 in 1998 to US$58,380 in 2000 as stated by Tod. Reliance was also placed on the expert report of the defendant's auditors but much of what the expert says is not proper expert evidence. There is no disclosure of all the material and information that he relied on. The expert draws a conclusion that the defendant suffered loss and damage in excess of US$400,000 as a result of the plaintiff's conduct and quite obviously this is based on what he had been told by the client. I am unable to attach any weight to this.

7. An important matter to bear in mind is that the defendant confirmed to the plaintiff's auditors, Ernst & Young, that it owed the plaintiff the sum of US$385,518.68 as of 31 December 1999. This was by the letter from the defendant addressed to Ernst & Young dated 8 May 2000. Nowhere in the audit confirmation was there any suggestion or hint of any counterclaim by the defendant against the plaintiff. Tod denies in his 1st affidavit that the letter was intended to be an express admission of indebtedness to the plaintiff. Mr. Wong in his skeleton submissions even went so far as to suggest that Tod was coerced into writing that letter. On the evidence before me it was fanciful to suggest that there was any coercion and that suggestion is simply incredible. Mr. Wong rightly did not persist with this in his oral arguments. It must be recognised that Tod, however, in his evidence did not deny the truth of the contents of the letter that he wrote to the auditors. Surely as an experienced businessman who has been dealing with auditors, he must know what an audit confirmation is and he provided the same to the plaintiff's auditors at the defendant's request without any qualification.

The LIDL consignment

8. The defence raised is that the plaintiff delivered a consignment of books for LIDL in France late. It is pleaded in the defence and counterclaim that the consignment should have been shipped on 15 August 1998 for delivery to LIDL on or before 1 September 1998 but that the plaintiff wrongfully delivered the same only on 19th October 1998. As a result of this the defendant alleged that FF 41,370 was deducted by the customer from the purchase price payable to the defendant and the defendant has suffered this loss. It is pleaded by the defendant that it suffered further loss being loss of business opportunities in excess of US$1,500,000. This again is speculative and appears to be a figure plucked out from the air.

9. The defendant's case is that the contractual date for delivery was 15 August 1998 as stated in the purchase order for the consignment but that the goods were delivered about two months late. The plaintiff's case is that the date stated in the purchase order was not a final delivery date but a preliminary date stated by the defendant but which had not been agreed by the plaintiff. It was pointed out that the purchase order was not signed by the plaintiff. It was also pointed out by Mr. Lam that although dates for delivery were stated by the defendant in purchase orders there were instances when notwithstanding that a date for delivery had been inserted by the defendant in a purchase order, it was agreed to ship the consignments at a later date. By way of example I was referred to the purchase order dated May 5 1998 where the date of delivery was stated to be end June. However, by a later document dated 28 July 1998 from the defendant the delivery date was stated to be August 21 1998. This tends to support the plaintiff's contention that the date of delivery in the purchase order was not the agreed final delivery date .

10. More importantly, in the letter dated 24 July 1998 from the defendant to the plaintiff the defendant wrote, inter alia, that in relation to the LIDL consignment :

"DO NOT START PRINTING FOR THEM UNTIL YOU RECEIVE APPROVAL FROM ME - I am still waiting to receive the signed order from LIDL".

By a later letter dated 6 August 1998 from the defendant to the plaintiff the defendant was asked to go ahead and print the books for LIDL but did not specify a delivery date. These letters go to show that the delivery date of 15 August 1998 in the purchase order was not a final delivery date agreed between the parties. As the plaintiff was only asked to go ahead and print the books for LIDL on 6 August 1998 the defendant must have known that time would be needed to print the books and ship them to France. It is for the defendant to show that there was a fixed delivery date which was agreed between the parties and that the defendant was late in delivery.

11. Apart from the liquidated claim of FF 41,370, there is a claim for unliquidated damages. I have already said that the claim for damages in excess of US$1,500,000 is speculative and no credible evidence is put forward in support thereof. In the expert report the defendant's auditors say that it was anticipated that the order value for the year following the late delivery to LIDL could have exceeded US$1,000,000. This is speculative and unparticularised. It seems to me that the expert is again simply stating what he has been told by the client and I attach no weight to this.

12. As mentioned above, an important matter to bear in mind is the audit confirmation given by the defendant. By the audit confirmation signed by Tod the defendant confirmed the amount owing to the plaintiff by the defendant and no mention was made at all of any sums owing to the defendant by the plaintiff under any of the alleged counterclaims.

13. It seems to me that the defence raised is shadowy and the Master was correct in imposing a condition for leave to defend.

The UI order

14. It was alleged by the defendant that the plaintiff failed to promptly return lithographic films to the defendant. These films had been provided by the defendant to the plaintiff for the purpose of the printing services provided by the plaintiff to the defendant. It is important to see what the defendant's counterclaim is as pleaded. It is pleaded by para. 12 of the defence and counterclaim that on 3 August 1999 the plaintiff offered to release the films upon payment of US$30,000 and the offer was accepted by the defendant on or around 12 August 1999 ("the release agreement"). It is further pleaded in para. 13 that in reliance on the release agreement the defendant entered into a contract to supply certain titles to UI by 30 September 1999. And that in breach of the terms of the release agreement the plaintiff did not release the films until 12 November 1999 and the defendant was therefore unable to perform the UI contract thereby suffering loss and damage said to be loss of profits at US$174,000 and the loss of opportunity to earn future profits to be assessed. In the expert report it is said that the defendant lost an opportunity to generate additional sales of US174,000. The said sum is said to be additional sales and not loss of profit and this contradicts the pleaded case and the evidence of Tod in para. 16 of his first affidavit to the effect that the defendant suffered a loss of profit of US$174,000.

15. It is abundantly clear that this is a counterclaim for unliquidated damages as was accepted by Mr. Wong. The claim for damages under prayer (3) of the prayer for relief in the defence and counterclaim makes it plain that the defendant's counterclaim in respect of the UI order was under para. 13. Clearly the defendant was relying on a breach of the release agreement which, on the defendant's case, was made in August 1999.

16. Since the counterclaim is for unliquidated damages the defendant only rely on an equitable set-off by way of defence. There must be a sufficient connection between the plaintiff's claim and the plaintiff's cross-claim so as to entitle the plaintiff to a set-off. In Esso Petroleum Co. Ltd. V. Milton [1997] 1 WLR 938 Simon Brown L. J. said @ 949:

"3. The insufficient connection argument

I come finally, therefore, to the insufficient connection argument, Esso's contention that the counterclaim here does not truly impugn their entitlement to immediate payment for fuel deliveries so that no equitable set-off can in justice arise.

The modern law on equitable set-off starts with Hanak v. Green [1958] 2 Q.B. 9, the case which decided that an unliquidated counterclaim can in certain circumstances be set off against a liquidated debt ─ cases within group 3 of Morris L.J.'s analysis, at p. 23 : "in which a court of equity would have regarded the cross-claims as entitling the defendant to be protected in one way or another against the plaintiff's claim." Morris L.J., at p. 24, referred to Bankes v. Jarvis [1903]1 K.B. 549 and spoke of the "close relationship [which existed there] between the dealings and transactions which gave rise to the respective claims," and Sellers L.J., referring to the three cross-claims in Hanak v. Green itself, said, at p. 31, of one that "it arises directly under and affected the contract on which the plaintiff herself relies," and described the other two as "closely associated with and incidental to the contract... on which the plaintiff sues for breach..." Hanak v. Green did not, however, seek to deal specifically with the requisite closeness. For that one goes to Federal Commerce & Navigation Co. Ltd. v. Molena Alpha Inc. [1978] Q.B. 927, and in particular this passage from the judgment of Lord Denning M.R., at pp. 974-975 :

"We have to ask ourselves : what should we do now so as to ensure fair dealing between the parties?... This question must be asked in each case as it arises for decision : and then, from case to case, we shall build up a series of precedents to guide those who come after us. But one thing is quite clear : it is not every cross-claim which can be deducted. It is only cross-claims that arise out of the same transaction or are closely connected with it. And it is only cross-claims which go directly to impeach the plaintiff's demands, that it, so closely connected with his demands that it would be manifestly unjust to allow him to enforce payment without taking into account the cross-claim."

For equitable set-off to apply it must therefore be established, first that the counterclaim is at least closely connected with the same transaction as that giving rise to the claim, and second that the relationship between the respective claims is such that it would be manifestly unjust to allow one to be enforced without regard to the other."

He also said at 951:

"No case has been cited to us in which payment of a debt presently due has been required to await the resolution of a cross-claim for future losses. The mere fact that both claim and counterclaim arise out of a single trading relationship between the parties is in my judgment wholly insufficient to supply the close link necessary to support an equitable set-off."

17. In my judgment the defendant's counterclaim in respect of the UI order under para. 13 of the defence and counterclaim does not arise out of the same transaction and is not so closely connected with the plaintiff's claim so as to impeach the plaintiff's demands. The plaintiff's claim was for the balance payable to the plaintiff by the defendant for materials supplied and printing services for the period from May to November 1998 well before the release agreement was ever entered into. The defendant's counterclaim is based on the release agreement which was made much later in August 1999. Even if the plaintiff was in breach of the release agreement (which is denied by the plaintiff) the alleged losses are future losses which is not sufficient to raise an equitable set-off of debts already due. No triable issue is shown on this defence raised.

18. It seems to me that the Master correctly gave leave to defend on condition that the amount claimed was paid into court. For the above reasons I dismissed the appeal.