XCHRX INTERSIL CHINA LTD. v. MEANS COME LTD.

HCA 9990/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 9990 OF 2000

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J U D G M E N T

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1. The plaintiff's claim against the defendant is for the sum of US$1,231,815.00 or its equivalent in HK$ in the amount of HK$9,608,157.00 together with interest and costs.

2. The plaintiff's claim is in respect of goods sold and delivered namely, semiconductors that the defendant purchased for resale to its customers as the plaintiff's non-exclusive distributor for China. The claim is in respect of goods which were supplied by the plaintiff to the defendant from September 1998 to December 1999. On the plaintiff's application for summary judgment Master Wong on 18 April 2001 ordered that final judgment be entered for the plaintiff for the sum claimed with interest and costs but he also ordered that execution on the judgment be stayed until trial of the defendant's counterclaim. The plaintiff appeals against that order seeking immediate payment of its claim. The defendant cross appeals seeking a dismissal of the plaintiff's application for summary judgment.

3. On the evidence before the court it is accepted by the defendant that it owes the plaintiff the amounts claimed. Indeed, Jason Lu in his 1st affidavit in para. 9 accepts that up to the beginning of May 2000 the total outstanding price of goods due and payable by the defendant to the plaintiff was to the extent of about US$1.2 m. This is also acknowledged by the president of the defendant in her letter to the plaintiff's solicitors dated 1 November 2000.

4. Mr Struthers in para. 3 of his 1st affidavit set out the payment history from December 1999 to March 2000 of the debts owed by the defendant to the plaintiff. This shows that despite making promises to honour repayment schedules agreed with the plaintiff, the defendant failed to honour the repayment schedules that were agreed. Because of the defendant's failure to make timely payments, the defendant was no longer allowed unrestricted access to the plaintiff's website as it previously had. The defendant could no longer request for product availability and obtain confirmed delivery dates from the plaintiff's website as before. This was because the defendant's account with the plaintiff was put on "credit hold". Simply put, the plaintiff was no longer extending credit to the defendant. In view of the past history of default by the defendant in payments, that is hardly surprising. By April 2000 the plaintiff turned over the account to a debt collection agency NCO Financial System Inc ("NCO").

5. It is important to bear in mind that what the defendant owed to the plaintiff for the outstanding price of goods were all in respect of goods sold and delivered up to December 1999 which was well before 15 May 2000. The defendant seeks to rely on an agreement which it says it reached with the plaintiff on 15 May 2000. This is pleaded in para. 5(c) of the defence and counterclaim as follows :

"On or about 15 May 2000 it was agreed between Mr. Jason Z.Y. Lu, the Executive Vice President of the Defendant, and Mr. Michael Struthers, the Credit & Collection Manager of the Plaintiff, duly authorised by the Plaintiff to act on its behalf, that if the Defendant would make minimum payments of US$100,000.00 per month to clear the outstanding price of semiconductors due and payable to the Plaintiff, to pay cash on delivery for semiconductors already ordered but put on hold by the Plaintiff, and to pay cash on delivery for new orders, the Defendant would be permitted to resume unrestricted access to the Website, and obtain confirmation of price and deliveries of semiconductors, and the Plaintiff would confirm deliveries and duly deliver the same to the Defendant as confirmed (the "Credit Agreement").

6. In para. 13 of his 1st affidavit, however, Jason Lu of the defendant stated that Mr Struthers confirmed the agreement in writing in its fax to Mr Nunez of NCO. The fax which has been produced in evidence stated :

"Per our telephone conversation of this morning, May 15, please let this letter serve as notice that Intersil will authorize release of credit holds on product required by Means Come Limited, dependent on Means Come Limited meeting the following minimum requirements :

1) Minimum monthly payment of $100,000 to be applied to past due.

2) Full payment of cash in advance for any product requested and released from credit hold."

It will be seen rightaway that the above in no way confirms the alleged agreement set out by the defendant. It simply stated that the plaintiff would authorize release of credit holds on goods required by the defendant. This was dependent on the defendant meeting two minimum requirements. The first was that the defendant had to pay a minimum monthly sum of US$100,000 for the past debts and the second was that it had to make full payment of cash in advance for products it required. Both requirements had to be met before the plaintiff would authorise release of credit holds on products required by the defendant. Cash in advance is, of course, very different from cash on delivery or COD as alleged by the defendant. Nowhere is it stated in the said fax that payment was to be on the basis of cash on delivery. Also, nowhere is it stated in the said fax that the defendant would be allowed free access to the plaintiff's website or that it would be able to obtain confirmed delivery dates by using the plaintiff's website. It is clear that by asking for full payment in advance the plaintiff was not prepared to extend any credit to the defendant. There was no agreement or indication in the said fax that the defendant would be granted any credit at all. If, however, the defendant were able to obtain confirmed delivery dates this would mean in effect that the plaintiff would be obliged to ship the confirmed orders before receiving any advance payment and in this way would thereby be extending credit to the defendant. But the plaintiff was clearly not prepared to do that as it is clear from the fax of Mr. Struthers to Mr Nunez of 15 May 2000.

7. Even if there was an agreement made between the plaintiff and the defendant on 15 May 2000, on the contemporaneous documentation it was not the agreement as suggested by the defendant and as pleaded in para. 5(c) of the defence and counterclaim. The defendant's assertions are, in my view, unbelievable in the light of the contemporaneous documentary evidence, in particular the said fax of Mr Struthers of 15 May 2000.

8. It is also important to observe that even on the defendant's own assertions it had to make a minimum monthly payment of US$100,000. On the evidence the 1st payment was made on or about 1 June 2000. Quite apart from the fact that the defendant's case is that the first payment was due one month from 15 May 2000 or alternatively, the payment should commence on the first of every month commencing on 1 June 2000, it is abundantly clear from the evidence that apart from the 1st payment no further monthly payments of US$100,000 were ever made by the defendant to the plaintiff. Thus, the defendant failed to meet one of the two requirements imposed by the plaintiff in its said fax of 15 May 2000 before the plaintiff would authorise release of credit holds on products required by the defendant. As it was the defendant who failed to meet the said requirement to pay the monthly sum of US$100,000, I am not satisfied that there is a triable issue that the plaintiff is in breach of the alleged agreement of 15 May 2000.

9. Mr Jat Sew Tong, counsel for the plaintiff, has, in my view, rightly criticised the loss and damage counterclaimed as being speculative and without sufficient particulars and evidence in support thereof. Quite apart from that, the clear point to bear in mind is that the loss of profit claimed is all for loss of future profits. It had nothing to do with the goods sold and delivered up to December 1999 the subject matter of the plaintiff's claim.

10. I was informed that although set-off has not been pleaded by the defendant, the solicitors for the defendant had indicated in correspondence that it intended to seek leave to amend to plead a set-off as a defence in respect of the amounts counterclaimed. Mr Jat Sew Tong has, in my view, correctly submitted that since the cross-claim was for unliquidated sums the defendant can only rely on an equitable set-off. It was submitted that there was no sufficient connection between the plaintiff's claim and the defendant's cross-claim as to entitle the defendant to a set-off. I was referred to Esso Petroleum Co. Ltd. v. Milton [1997] 1 W.L.R. 938 at 949, where Simon Brown L.J. said :

"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 is, 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."

Simon Brown L.J. 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."

11. I accept Mr Jat Sew Tong's submission that on the evidence the defendant's alleged 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 is for goods sold and delivered well before May 2000. The counterclaim is based on a new alleged agreement made on 15 May 2000. Even if the plaintiff were in breach of the new alleged agreement, the alleged losses are future losses which is not sufficient to raise an equitable set-off of debts presently due. In my judgment the justice of the case does not require that the judgment which the plaintiff has obtained should be stayed pending determination of the counterclaim.

12. The appeal is allowed. The order of the master is varied by setting aside that part which ordered a stay of execution of the judgment until trial of the counterclaim. The cross appeal is dismissed.