XPOLY RECYCLING LTD v. GOLD LEADER ENTERPRISES LTD

DCCJ 5241/2008

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 5241 OF 2008

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D E C I S I O N

1.  The dispute arose out of the sale of goods, namely plastic scrap, in late 2008 between Xpoly, the Plaintiff and seller, and Gold Leader, the Defendant and buyer. Xpoly is an UK company in the business of supplying recovered plastic waste. Gold Leader is a Hong Kong company in the business of importing, recycling and sale of waste materials.

2.  After the close of pleadings, Gold Leader applied for security for costs against Xpoly on the basis that the latter is ordinarily resident out of the jurisdiction and/or that it will be unable to fulfil an adverse costs order if Gold Leader succeeds in this action.  This was followed by Xpoly’s application for summary judgment on the basis that Gold Leader has no defence to its claim.

3.  On 15 July 2010, the Master ordered that judgment be entered against Gold Leader for damages to be assessed.  The application for security for costs was dismissed.  Gold Leader was ordered to pay Xpoly’s costs of both applications with certificate for counsel, summarily assessed at the sum of HK$52,328, forthwith.

4.  On 2 July 2010, Gold Leader filed separate notices of appeal against the Master’s decision in respect of the summary judgment and the security for costs respectively.  The appeal is effectively a re-hearing of the parties’ respective applications before the Master.

The appeal

5.  Xpoly is an UK company and has no real presence or readily available assets in Hong Kong.  Gold Leader is prima facie entitled to seek security for costs against Xpoly in the circumstances: see O.23 of the Rules of the District Court; section 357 of the Companies Ordinance, Cap.32.  There is no real dispute to that extent.

6.  What Xpoly contends is that Gold Leader has no defence to its claim.  Alternatively, it is highly likely the claim will succeed.  In the circumstances, the court should exercise discretion against ordering security for costs: see Hong Kong Civil Procedure 2010, Vol.1 at 23/3/3.  There is also challenge as to the reasonableness of the amount of security sought.

7.  Proving the claim is always the plaintiff’s burden.  However the defendant must condescend upon particulars.  The question is whether the matters raised by the defendant amounts to a credible defence or the case should nevertheless be tried for some other reason: see O.14, r.3 of the Rules.  In deciding the question, the court is not expected to embark on a mini-trial trial on the affidavits: see Ng Shou Chun v Hung Chun San [1994] 1 HKC 155; Hong Kong Civil Procedure 2010, Vol.1 at 14/4/1 to 14/4/12.

Background

8.  The agreement between the parties is evidenced by the Sales Order Contract Proforma Invoice dated 22 July 2008, which was issued by Xpoly and confirmed by Gold Leader (“the Agreement”).  The document contained, amongst others, the following terms:

(1) Description of cargo: waste plastic – mixed shredded plastics of European/Scandinavian origin;

(2) Quantity: approximately 250 metric tonnes (MT) to be delivered in 10 or 11 40-feet containers;

(3) Purchase price: US$285 per MT and approximately US$71,250 in total;

(4) Payment terms: 30% advance payment to be made against the Proforma Invoice and 70% balance payable upon supply of non-negotiable shipping documents.

9.  Pursuant to the Agreement, Xpoly procured the shipment of 246.56 MT of plastic scrap from Europe to Gold Leader and issued the Commercial Invoice dated 26 September 2008 for the total price of US$70,269.60.  Gold Leader duly paid the 30% deposit in the sum of US$21,375.

10.  90% of the plastic scrap was shipped in 9 containers by one vessel embarking on or about 28 September 2008 while the remaining 10% could not be accommodated in the same vessel and was arranged to be shipped by another vessel subsequently.

11.  Pursuant to the Agreement, Xpoly submitted the shipping documents to Gold Leader with a view to receiving the 70% balance of the contract price in the sum of US$48,894.60.

12.  Before the first shipment of plastic scrap arrived at Hong Kong, Gold Leader informed Xpoly by email on 24 October 2008 that it had to “give up the order” due to the current financial circumstances beyond its control.  Xpoly was requested to find another buyer for the plastic scrap.

13.  The parties then started negotiating the variation of the payment terms.  The first shipment of plastic scrap arrived on or about 28 October 2008.  Eventually on 31 October 2008, Xpoly agreed to release the arrived cargo and to give a 15% discount on condition that Gold Leader would pay another 30% of the contract price in the sum of US$21,375 on that day and the balance of the discounted price in 3 weeks, i.e., by 21 November 2008.

14.  Xpoly proceeded to authorise the release of the cargo in Hong Kong.  Since 2 November 2008, Xpoly had been ascertaining from Gold Leader whether the latter had take delivery of the cargo and arranged the second payment as agreed.

15.  On 4 November 2008, Gold Leader gave the following reply:

“Those cargo was not the same content as what we ordered, you may come and see during your trip to Hong Kong next week. Please arrange pick up for those cargo for you failed to give us the stock with the agreed quality. We are now taking photos for those cargo and will email to you soon.”

[Emphasis added]

16.  On 6 November 2008, Xpoly indicated that its director, Sandhu, would come to Hong Kong a few days later when he would want to see the containers.  Xpoly specifically requested that the contents of the containers should not be moved before then.

17.  Inspection took place on 9 November 2008, but the exact manner in which this was conducted is a matter in disputed.

18.  The parties had a meeting at the office of Gold Leader on 11 November 2008 when Sandhu collected payment by 2 cheques for US$5,000 each drawn by Gold Leader but post-dated to 12 December 2008 and 12 January 2009 respectively.

19.  2 days later, on 13 November 2008, Gold Leader wrote to Xpoly as follows:

“…… we received totally 9 containers from you.

However, we find that the product quality is not up to our standard and decide to return the goods to you. After negotiation, we mutually agreed to adjust the invoice amount from US$20,000 to US$10,000. As we have already paid US$10,000 on 11 November 2008, please sign and return the agreement as soon as possible.

Your understanding [and] cooperation in this regard will be much appreciated.”

20.  The agreement that Gold Leader referred to was a written document dated 11 November 2008, which says:

“We agreed the price of 9 containers 223.04T plastic scrap is @USD140.50/T, the total amount is USD31,337.12., deduct the advance payment USD21,375.00 (paid on 25/8), so we have to paid the balance is USD10,000.00. (i. USD5,000 – 12/12/2008’, ii USD5,000 – 12/1/2009)

Pls revised and fax your COMMERCIAL INVOICE to our company.

Pls confirm this agreement, sign and chop.”

21.  The above background is evidenced by the contemporaneous documents and email correspondence.

22.  The above written agreement dated 11 November 2008 was also never signed.  Gold Leader admitted that it had countermanded the cheques.  Except for the 30% of the price in the sum of US$21,375, Xpoly has not received any further payment by Gold Leader.

Gold Leader’s case

23.  Gold Leader’s pleaded case is as follows:

(1) This was a sale by sample. On 4 November 2008, it was found that the plastic scrap did not correspond to the sample. They were neither reasonably fit for its purpose nor of merchantable quality.

(2) After a joint inspection on 9 November 2008, the parties reached an oral agreement whereby Gold Leader would accept the scrap upon the payment of another US$10,000 to Xpoly.

(3) Pursuant to the oral agreement, the written settlement agreement dated 11 November 2008 and the 2 post-dated cheques for US$5,000 each were prepared for the meeting on 11 November 2008.

(4) During a meeting on 11 November 2008, Sandhu took away the 2 cheques but did not sign the settlement agreement. Xpoly also failed or refused to revise its commercial invoice.

(5) Xpoly had evinced an intention not to be bound by the oral agreement (and all previous agreements). By letter dated 19 November 2008, Gold Leader accepted Xpoly’s repudiation.

(6) Gold Leader now claims for: (a) return of the sum of US$21,375 paid for total failure of consideration; and (b) damages including the cost of transferring the plastic scrap to local containers and continuing warehousing charges from 2 November 2008.

Xpoly’s case

24.  Xpoly’s pleaded case is as follows:

(1) By not making the second payment of US$21,375 and the payment of the balance as agreed in October 2008, Gold Leader has failed to satisfy the pre-condition of the agreement to discount and to vary payment terms. The agreed discount was therefore not binding and Xpoly is entitled to claim on the basis of the Agreement.

(2) This was not a sale by sample. In any event, the alleged defect in quality of the plastic scrap is denied.

(3) The alleged oral settlement agreement is denied.

(4) Gold Leader was in repudiatory breach of the Agreement, which Xpoly accepted by its solicitors’ letter dated 13 November 2008.

(5) Xpoly now claims the balance of the price of the plastic scrap in the sum of US$48,864.60 and damages.

O.14 application

Sale by sample

25.  Xpoly first pleaded that the agreement between the parties is evidenced by Gold Leader’s commercial invoice issued in September 2008.  Mr Yip for Gold Leader suggested that Xpoly refrained from referring to its Sales Order Contract Proforma Invoice in order to hide the fact that this was a sale by sample.  In my view, such speculation leads nowhere in view of Xpoly’s subsequent pleading and discovery of the documents.

26.  A contract of sale is one by sample if the contract says so expressly or by implication: see section 17(1) of the Sale of Goods Ordinance, Cap.26.  The basis for contending that this was a sale by sample is said to be the following provision in the Sales Order Contract Proforma Invoice:

“Spec and samples: The material offered to contain waste plastic – shredded mixed WEEE plastics of European/Scandinavian origin. Material to be as per epics offered to the customers during week, 25 2008. Moisture as standard.”

27.  The goods in question contained plastic scrap presumably in various forms and from various places in Europe/Scandinavia.  The above provision actually described the scrap as “shredded” and “mixed”.  In that case, it is difficult to understand how there could in fact be a sample by which the scrap was to be measured or with which the scrap was to be compared.

28.  Referring to the pleading and the materials in hands, one can only understand the so-called sample to mean the electronic pictures (or “e-pics”) supplied by Xpoly previously.  The electronic pictures were produced.  They depict an array of scrap in various sizes, forms and colours.  The pictures are descriptive of the kind and form of the scrap being sold; but do not render the sale as one by sample in its proper sense.

The alleged breach

29.  As mentioned above, Gold Leader had indicated its intention to “give up” the order for financial circumstance beyond its control well before the arrival of the shipment of the scrap and naturally any complaint about quality.

30.  It is Gold Leader’s burden to particularise and to prove the alleged breach.  In the first complaint contained in its email dated 4 November 2008 above, Gold Leader alleged that the cargo was “not the same content as what [it] ordered” and it was “not the agreed quality”.  Referring to the “Spec and Samples” provision of the Sales Order Contract Proforma Invoice above, one has no idea what precisely Gold Leader was complaining about.

31.  Its former solicitors subsequently explained the complaint in their letter dated 19 November 2008. It was alleged that upon the arrival of the containers, Gold Leader inspected and found the same to be “full of mud and water”.

32.  The “Spec and Samples” provision above referred to “moisture as standard”.  Gold Leader does not explain what standard moisture content is.  It does not say how the moisture content of the containers allegedly deviated from the standard. It seems unlikely that Gold Leader is suggesting that the containers were in fact full of water.

33.  When it comes to the pleading and affirmations, Gold Leader says that the cargo is “mixed with wooden scrap, paper scrap, styro foam scrap, waste IC boards, building debris, concrete scrap, fibreglass ceiling scrap and water droplets.”

34.  A few things are noted.  First, it is now clear that that Gold Leader is complaining about water droplets rather than a state full of water.  Second, there was no reference to mud, unless Gold Leader seeks to roughly equate building debris and concrete scrap with mud.  Third, all the other particulars of complaint pleaded were never mentioned before.

35.  Gold Leader produced 3 photographs.  Without Gold Leader’s assertion, there is no way one can tell whether the photographs depict the contents of the 9 containers.  There are 2 photographs apparently depicting the contents of one of the 9 containers arrived.  But one cannot fairly say that the contents in the container do not match the description of the scrap being sold as per the Sales Order Contract Proforma Invoice or the “e-pics” previously supplied.

36.  Mr Nip for Xpoly also queried the representativeness of the materials shown in the photographs produced by Gold Leader.  I think this is a valid observation.  Different from any ordinary kinds of goods, the scrap, even as depicted in the “e-pics”, had no standard size and form.  This is of particular relevance to Gold Leader’s allegation that the scrap supplied is of no merchantable quality.  The case of Gold Leader will be made out only if it is proved that the alleged extraneous materials exist in the scrap to such an extent that the overall character of the scrap being sold has changed: see Christopher Hill Ltd v Ashington Piggeries [1972] AC 441 at 503H-504A.  On the basis of the assertions and evidence adduced, Gold Leader is a long way behind substantiating that.  Gold Leader also alleges that the cargo do not fit its particular purpose.  Yet it has not adduced any evidence in respect of the alleged particular purpose and how the cargo allegedly failed to fit that.

37.  The curious thing is that despite going so far to say that the scrap supplied is virtually “worthless”, Gold Leader alleges that on 9 November 2008, it agreed to accept the cargo and to pay another sum of US$10,000 to Xpoly (“the Alleged Oral Agreement”).

The Alleged Oral Agreement

38.  According to Gold Leader, its Leung and Sandhu of Xpoly reached the Alleged Oral Agreement on 9 November 2008.  Gold Leader therefore prepared a written settlement agreement and 2 post-dated cheques for US$5,000 each for the meeting at the office of Gold Leader on 11 November 2008.  At the end of the meeting, Sandhu took the cheques but failed to sign the settlement agreement.  Subsequently, Xpoly also did not send a revised commercial invoice to Gold Leader.

39.  Because of that, Gold Leader considered that Xpoly was in repudiation of the Alleged Oral Agreement and, according to its pleading, also the Agreement and the Agreement as varied (in respect of the discount and payment terms) in October 2008.  Gold Leader allegedly accepted such repudiation and countermanded the 2 post-dated cheques.

40.  Mr Yip submitted that whether there was the Alleged Oral Agreement is triable.  In my view, problems with Gold Leader arise if there was such an oral agreement between the parties.

41.  First, it was pursuant to the Alleged Oral Agreement that the written agreement and the post-dated cheques for the further US$10,000 were prepared for the meeting on 11 November 2008.  In that case, it is difficult to see why and how Gold Leader allowed Sandhu, and Sandhu also managed, to collect the cheques without signing the written agreement.

42.  Second, Xpoly’s alleged repudiation was allegedly accepted by Gold Leader through its former solicitors by letter dated 19 November 2008 (above).  But that letter in fact says nothing in terms of repudiation, acceptance of repudiation or termination of the Alleged Oral Agreement.  The solicitors were then instructed merely to claim on the basis of the right to reject the cargo because it did not correspond with the description in the Sales Order Contract Proforma Invoice.

43.  Third, by pleading repudiation, Gold Leader must be saying that the Alleged Oral Agreement was already binding, rather than subject to the signing of the written agreement. When asked in court, Mr Yip confirmed that.  As such, Gold Leader was contractually bound to accept the allegedly defective cargo in consideration of Xpoly’s being bound to accept payment in a lesser sum and by 2 instalments.

44.  Terminating the Alleged Oral Agreement might discharge the parties from further performance of the agreement and entitle Gold Leader to claim for damages for consequential.  But I doubt whether Gold Leader could retract from its acceptance of the cargo and claim for total failure of consideration (on the basis that the cargo is “worthless”) as if the Alleged Oral Agreement has been rescinded.

Conclusion

45.  In his submission, Mr Yip clarified that the primary case of his client is total failure of consideration on the basis of the alleged defect in quality of the scrap supplied by Xpoly.  The claim for loss and damage as a result of repudiation and termination of the Alleged Oral Agreement is the alternative.  Nevertheless, the problems in both cases are obvious.

46.  Having said that, I decide that the dispute should still be resolved by way of trial.  My reservation about Gold Leader’s case has caused me to consider imposing condition for the defence to proceed.  Parties in the hearing were made aware of this possibility.  It is only with reluctance that I finally decide not to do so.

O.23 application

47.  In an O.23 application, merit of the case is relevant; but unless it could be clearly demonstrated one way or the other, it is but one factor to be taken into account.  Having said that, this court is indeed asked to consider whether the summary judgment should be confirmed.  As discussed above, I am just steps from confirming the summary judgment against Gold Leader.  In view of that, I agree with My Nip that the strong likelihood of success of the claim in the present case does operate against the exercise of discretion in ordering the security.

48.  For completeness, I say briefly about the amount of security, if ordered.  According to the skeleton bill of costs, the amount of Gold Leader’s costs projected was in excess of HK$620,000, consisting of the following:

(1) HK$34,654 already incurred ;

(2) HK$63,000 for the O.23 application (estimated then); and

(3) further costs up to and including the trial in the sum of HK$525,000.

49.  Mr Nip submitted that the security, if ordered, should be substantially less than the amount projected by Gold Leader.  He took exception with the items of estimated costs to be incurred.  I agree that the amount projected is more than what is reasonable security.  An amount of HK$300,000 would have sufficed for the purpose.

Costs

50.  As to the costs below, in view of the above account, I would set aside the costs order to the extent that the costs of and occasioned by the O.14 application shall be in the cause of the action.  As the appeal is allowed in part, I think it is fair to make no order as to the costs of and occasioned by the appeal.

Order

51.  The appeal is allowed in part in that: (1) the summary judgment for damages to be assessed entered on 24 June 2010 is set aside and there be leave to defend; and (2) the costs of and occasioned by the O.14 application be in the cause of the action.  The Master’s order dated 24 June 2010 in respect of the O.23 application is confirmed. Costs shall be taxed, if not agreed, with certificate for counsel.

52.  There be no order as to costs of and occasioned by the appeal.  In the absence of application within 14 days to vary, this order as to costs of the appeal shall become absolute.