XCHRX ALCO INTERNATIONAL LTD. v. AKAI ELECTRONIC CO. LTD.

HCA3584/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.3584 OF 2000

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J U D G M E N T

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1. This is an appeal against the order of Master Jones given on 4 July 2000 ordering the judgment be entered for the plaintiff against the defendant for the sum of US$194,040, or is equivalent in Hong Kong Dollars at the time of payment with interests and costs.

2. Before dealing with the appeal itself, I need to deal with one preliminary matter. The hearing before Master Jones was pursuant to an application by the plaintiff for summary judgment in this case under O.14. The O.14 summons was issued by the plaintiff on 23 May 2000. In support of that application for summary judgment, the plaintiff had filed an affirmation of Tao Ming Yiu on the same day. In opposition to the plaintiff's application for summary judgment, the defendant filed an affirmation of Toshimi Ikeda on 9 June 2000. On 21 June 2000, Master Poon gave directions, giving the plaintiff leave to file evidence in reply to the defendant's evidence and, at the same time, directing that no further evidence be filed and served without the leave of the court.

3. At the hearing before Master Jones on 4 July, the defendant made an oral application for an adjournment in order to file a further affirmation. This application by the defendant for an adjournment to file further affirmation was refused by Master Jones, who then proceeded to hear the application for summary judgment, and, thereafter gave judgment to the plaintiff.

4. On 17 July 2000, the defendant lodged its Notice of Appeal against the order of Master Jones giving summary judgment to the plaintiff. There was no appeal against the refusal of Master Jones to grant an adjournment to the defendant for the purpose of filing further affirmations. On 25 August 2000, after the Notice of Appeal had been lodged by the defendant, the defendant filed a second affirmation of Toshimi Ikeda. One day before the hearing of the appeal, namely on 28 August 2000, the defendant issued a summons for leave to adduce the second affirmation of Toshimi Ikeda. This application is opposed by the plaintiff.

5. At the hearing before me, Mr Mok who appears for the defendant, very sensibly and properly did not press on with the application for the new evidence, particularly when it was indicated by the plaintiff that if leave was granted to the defendant in respect of the second affirmation of Mr Ikeda, the plaintiff would require an adjournment to file further affidavit in answer thereto. This is because in paragraphs 5 and 6 of the second affirmation of Mr Ikeda, a completely different defence to that relied upon by the defendant at the hearing before the Master was raised.

6. I should add that even if the defendant had pressed on with this application, I would not have seen fit to exercise my discretion to grant them the leave that they sought in adducing this new evidence, there being no explanation given for this new evidence (see Core Resources (Far East) Ltd v. Sky Finders Ltd [1992] 1 HKLR 193 at 197 to 198 per Kaplan J). Furthermore, the Master had already exercised his discretion in this matter when he refused the defendant an adjournment to file further evidence, there being no appeal against that order of the Master (see Jindal Exports Ltd v. Waco Trading Co. Ltd [2000] 2 HKC 46 at p.48 per Deputy Judge Chu). Accordingly, I shall deal with the appeal on the evidence as it was at the hearing before Master Jones.

The appeal proper

7. The plaintiff's claim against the defendant is for US$194,040, being the total price in respect of four invoices for goods sold and delivered by the plaintiff to the defendant. It is common ground between the parties that the goods, the subject matter of these four invoices, had been delivered by the plaintiff to the defendant, and that this total amount of US$194,040 is due and owing by the defendant.

8. The defence pleaded in this case by the defendant is a defence of set-off based on the defendant's counterclaim for damages arising from five other transactions between the parties. These five other transactions involved purchase orders 0639, 0640, 1196, 1132 and 1210.

9. Dealing firstly with purchase orders 0639 and 0640 first. The defence case is that these two purchase orders were issued by the defendant on 16 July 1999 for 2,000 sets of portable discman players for delivery by sea on 31 August 1999 and 10,000 sets of the same goods for delivery by sea on 30 September 1999. By its Order Confirmation in respect thereto, the plaintiff varied the date for delivery to "on/about 31 August 1999" and "on/about 30 September 1999" respectively. The relevant Letters of Credit were issued in favour of the plaintiff by early August 1999. However, these 12,000 units of portable discman were only delivered on 15 November 1999. Because of the delay, they had to be delivered by air. By reason of the airfreight as opposed to delivery by sea, the defendant incurred extra expenses of US$52,095. The defendant also sought to claim general damages against the plaintiff for such delay pending any claim that they may have to meet from their ultimate buyer.

10. In so far as purchase order 1196 is concerned, the defendant's case is that it issued this purchase order on 23 December 1999 for 1,200 units of QX-20(E) micro system and 630 units of QX-30(E) micro system. The delivery term was "FOB Hong Kong" for delivery by sea on 28 February 2000 and payment term was "draft at 120 days after shipment date". On 20 January 2000, the plaintiff by e-mail requested a change in the payment term to "LC at Sight". This was agreed to by the defendant on 21 January who on the same day, issued shipping instructions for delivery to be made on 28 February 2000. On 25 February, i.e. three days before the shipment date, the plaintiff was advised by the Hong Kong Chinese Bank of the transfer to the plaintiff of a Letter of Credit from the defendant's ultimate buyer, covering the amount of this purchase order. The plaintiff failed to make any delivery in respect of this purchase order nor did it notify the defendant of any cancellation. The defendant claims for damages for non-delivery.

11. In respect of purchase orders 1132 and 1210, the defendant's case is that it issued these two purchase orders on 23 November 1999 and 6 January 1999 respectively. These two purchase orders were for 300 units and 220 units respectively of QX-30(Y2) micro system to be delivered by sea on 31 January 2000, FOB Hong Kong. In respect of both these purchase orders, the plaintiff issued a revised Order Confirmation on 11 January 2000 varying the shipment date to "on/about 31 January 2000". On 2 March 2000, the Hong Kong Chinese Bank advised the plaintiff of a transfer to the plaintiff of a Letter of Credit issued by the defendant's ultimate buyer to the extent of an amount covering the contract sum in respect of both purchase orders. The plaintiff, however, failed to make any delivery pursuant to these two purchase orders nor did it inform the defendant of any cancellation. The defendant therefore claims against the plaintiff for damages for non-delivery.

12. The plaintiff disputes these claims by the defendant in respect of the above three transactions involving these five purchase orders. Without going into any detail, it is sufficient to say for present purposes that the defendant has made out an arguable case in respect of its claim against the plaintiff on these three transactions, but that there are factual disputes raised by the plaintiff which must necessarily be resolved at trial.

13. For the immediate purpose of this appeal, the bone of contention between the parties is whether or not the defendant is entitled to set off its alleged cross claims against the plaintiff's claim for US$194,040.

The law

14. In so far as a legal set-off is concerned, a clear statement of that law can be found in the words of Staughton LJ in the case of Axel Johnson Petroleum A.B. v. M.G. Mineral Group A.G. [1992] 1 WLR 270, at 275, where he said :

" Where A has a claim against B and B has a claim against A, the ideal solution would be that both claims should be tried and determined immediately and judgment for one sum given as appropriate. But legal proceedings take time. If one of the claims is disputed there must inevitably be delayed until that claim is decided. Who is to suffer from that delay? Should it be the party whose claim is disputed, in that he has to pay an undisputed claim forthwith and suffer the misfortune of a negative cashflow, until a decision has been reached upon his claim, when it may be that his bank account is restored to health? Or should the party with the undisputed claim have to wait for his money meanwhile?

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At present the law as to set-off does not correspond with either of those solutions. Its historical development has led to results which appear to lack logic and sense. Legal set-off is available if both claims are for liquidated sums. Thus if a plaintiff has a claim for unliquidated damages, the defendant cannot at law seek to set off a liquidated claim. I can see no sense in that today. This rule was mitigated by the Court of Chancery through the doctrine of equitable set-off which is available in broad terms if there is a sufficient degree of connection between the two transactions, whether or not either or both claims are unliquidated. ...."

15. In so far as an equitable set-off is concerned, a statement of law can be found in the words of Simon Brown LJ in the case of Esso Petroleum Co. Ltd v. Milton [1997] 1 WLR 938, at 950, where he said :

"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."

16. There is no dispute between the parties as to the law. The dispute between them in so far as this appeal is concerned lies in the application of these principles to the facts of the present case.

The defendant's contention

17. It was submitted on behalf of the defendant that the additional amount of US$52,095 expended by the defendant due to the fact that the goods in respect of purchase orders 0639 and 0640 had to be airfreighted because of the plaintiff's delay can be set off in law since that is a liquidated amount and, as such, it is not necessary to show that there was a sufficiently close connection with the plaintiff's claim. Along the same lines, it is also submitted that the defendant's claim for loss of profits in the sum of US$20,922 in respect of purchase order 1196 and also the defendant's claim for loss of profits in the amount of US$4,680 in respect of purchase orders 1132 and 1210 may also be set off in law.

18. The defendant also submits that there is a sufficiently close connection between the plaintiff's claim and the defendant's counterclaim, such that it would be fair and just to allow the defendant to raise the defence of set-off against the plaintiff's claim and, accordingly, the defendant should be given unconditional leave to defend, alternatively, that there should be a stay of execution on any judgment given to the plaintiff pending the trial of the defendant's counterclaim.

19. The following factors are relied on by the defendant as showing a sufficiently close connection between the plaintiff's claim and the defendant's counterclaim. Firstly, the established course of dealing and long standing trading relationship between the parties since 1998. Secondly, not only the same relationship of seller and buyer which existed between them, but that some of the invoices of the plaintiff's claim as well as some of the purchase orders sued on by the defendant relates to the same type of goods, namely, QX-20 and QX-30 micro systems. Thirdly, it was submitted by the defendant that the parties had treated the various purchase orders as a group, in that, some old stocks, which had been produced by the plaintiff in respect of earlier purchase orders but which had not been taken delivery off by the defendant and therefore kept in the plaintiff's warehouse, had been used by the plaintiff to make up some of the goods ordered under these five purchase orders now sued on by the defendant. In particular, this refers to 150 units of QX-20(E) micro system under the purchase order 1196. Fourthly, the defendant relies on the fact that the plaintiff saw fit to make changes to payment terms from time to time not in relation to single or individual orders but rather in respect of a number of different orders, all in one letter.

20. In this respect, the defendant seek to rely on the decision by the English Court of Appeal in the case of Khan v. Mayor & Burgesses of the London Borough of Islington, reported in the Times, 6 July 1999, as authority to support its argument that if the claim and the cross-claim arise out of the same relationship between the parties and the same subject matter, then a sufficiently close connection would have been shown. The defendant also seeks to rely on the decision by Cheung J in the case of Pollard Construction Co. Ltd v. Yung Yat Fan [1999] 3 HKC 109, where the claim and cross-claim arose out of respectively, on the one hand, two loan agreements and on the other hand a construction contract. There it was held by Cheung J that the loan agreement and the construction contract were clearly so closely connected that it would be unjust to disregard the cross-claim.

Decision

21. In so far as a legal set-off is concerned, I am in agreement with Mr Mok that the defendant's claim for US$52,095 being additional expenses incurred by the defendant for airfreighting the goods, the subject of matter of purchase orders 0639 and 0640, is a claim for a liquidated debt. As such, the defendant is entitled to set off in law against the plaintiff's claim.

22. As for the defendant's claim for loss of profits in the amount of US$20,922 in respect of purchase order 1196 and also for loss of profits of US$4,680 in respect of purchase orders 1132 and 1210, the amount of loss of profit in these two transactions, although quantified by the defendant, are not liquidated claims but must be assessed by the court. As such, the defendant is not entitled to a legal set-off in respect of them.

23. The rest of the defendant's cross-claim is for unliquidated damages. That being the case, the defendant can only rely on equitable set-off, if at all. However, despite the able submissions by Mr Mok, I cannot see that in the present case there is that kind of close connection between the plaintiff's claim and the defendant's counterclaim which would bring the principles of equitable set-off in to play. The kind of close connection relied on by the defendant here is that a number of purchase orders were confirmed by the plaintiff in one Order Confirmation; that goods being the subject matter of different and various purchase orders may be shipped together at the same time because those goods were due for the same destination; or even that in one single letter, the plaintiff notifies the defendant of changes to payment terms in respect of a number of purchase orders placed by the defendant; or that goods produced for an earlier purchase order but not taken delivery off by the defendant are used subsequently to fulfil a later purchase order by the same defendant. All the above matters of physically lumping together, either purchase orders in one document or of the goods physically for delivery or for shipment do not in my view constitute the kind of close connection which is required to invoke the principles of equitable set-off. The kind of close connection that is required is that which relates to the dealings, the rights, the obligations and/or the duties between the parties in those transactions being the subject matter of the plaintiff's claim and those transactions being the subject matter of the defendant's counterclaim which are relevant, such that it would be manifestly unjust to allow one to be enforced without regard to the other. At times this has been expressed as "cross-claims which go directly to impeach the plaintiff's demands" (see the judgment of Lord Denning MR in Federal Commerce and Navigation Company Limited v. Molena Alpha Inc. [1978] QB 927, at 974 to 975).

24. Indeed, it is common ground between the parties that the modus operandi pertaining between them is as follows : The defendant would firstly issue a purchase order for goods. Secondly, the purchase order is then confirmed by the plaintiff by an order confirmation. After that, the defendant would issue shipping instructions to the plaintiff pursuant to which goods are then delivered. After delivery of the goods, the plaintiff would then issue an invoice to the defendant for the goods delivered. This course of dealing between the parties clearly suggested each and every order placed by the defendant is treated separately.

25. Neither do the two cases relied on by the defendant assist them. The close connection which the court found in those two cases were quite apparent from the facts of those cases. In Khan's case, Khan was in arrears of rent to the defendant, her landlord. The defendant, on the other hand, had to pay statutory compensation to Mrs Khan for home loss since the defendant had obtained an order for possession against Mrs Khan in respect of the premises in which she was the tenant, for the purpose of redevelopment. It was also a policy of the defendant to set off home loss compensation against arrears of rent. On these facts, the court came to the conclusion that there was a close connection between the two payments, albeit different in nature. In the Pollard Construction case, the plaintiff's claim was based on a loan agreement while the defendant's counterclaim was based on a construction contract, the court came to the conclusion that there was a close connection between the two because on the facts of that case, the defendant had agreed to undertake the construction work offered to him by the plaintiff on the condition that the plaintiff made over a loan to him, which loan was to be set off by the amount of work done by the defendant for the plaintiff. Thus it was the agreement between the parties that gave rise to this close connection.

26. Accordingly, for the above reasons, the order of Master Jones is set aside. There will be partial judgment to the plaintiff in the sum of US$141,945. (This amount is calculated from the full amount of the plaintiff's claim being US$194,040 less the amount of the additional expenses of US$52,095 incurred by the defendant having to airfreight the goods in respect of purchase orders 0639 and 0640.) The defendant do have unconditional leave to defend the balance of the plaintiff's claim.

Stay of execution

27. Having found that there is no defence to the extent of the partial judgment awarded to the plaintiff, in this case, I can see no other reason for keeping the plaintiff from the fruits of their judgment. Accordingly, I decline to order a stay of execution on the amount of the partial judgment awarded to the plaintiff pending the trial of the defendant's counterclaim.

28. I shall now hear the parties as to costs.