PRINCETON TECHNOLOGY CORPORATION v. VECTOR ELECTRONIC CO. LTD.

CACV 288/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 288 OF 1999

(ON APPEAL FROM HCA NO. 4717 OF 1998)

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J U D G M E N T

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Keith JA:

Introduction

1. In this action, the Plaintiff obtained summary judgment against the Defendant under Ord. 14 for the sum of US$71,514.00 or its Hong Kong equivalent. The Defendant sought a stay of execution of this judgment pending the trial of a counterclaim which it had against the Plaintiff. Master Poon refused to stay the execution of the judgment. The Defendant appealed. Godfrey JA (sitting as an additional judge of Court of First Instance) allowed the appeal and stayed the execution of the judgment pending the trial of the counterclaim. The Plaintiff now appeals, contending that execution of the judgment should not be stayed.

The claim and counterclaim

2. The Plaintiff is a company incorporated in Taiwan. It manufactures integrated circuits for use in computers and electronic appliances. It appointed the Defendant as the distributor of its products in Hong Kong and China for the year 1997. The agreement under which that appointment was made was described as an "agency agreement", though it may have been more accurate to describe it as a "distributorship agreement", because under the agreement the Defendant would purchase the circuits from the Plaintiff as principal in its own name and then sell the circuits to its customers. Indeed, the Defendant agreed to order a minimum number of circuits from the Plaintiff during the period of the distributorship agreement. However, a number of the circuits which the Defendant purchased from the Plaintiff were not paid for in full. Accordingly, the Plaintiff's claim, for which it obtained summary judgment, was a claim for the balance of the price of the circuits which had been sold and delivered to the Defendant.

3. The thrust of the Defendant's counterclaim has shifted in the course of the proceedings when one analyses the pleadings, though it is apparent from the evidence which has been filed that its case on the facts has been the same throughout. On the occasion when Master Poon entered summary judgment for the Plaintiff, he gave the Defendant leave to re-amend its Defence and Counterclaim, and that counterclaim reveals that it has three elements to it:

(i) The Defendant contends that the Plaintiff failed to deliver other circuits which the Defendant had ordered. The Defendant therefore counterclaims the loss of the profits which it would have made on the resale of those circuits. That loss is said to amount to US$18,660.00.

(ii) The Defendant contends that a large number of the circuits delivered by the Plaintiff were defective and of an inferior quality. The Defendant was only able to sell them by reducing their price, and the Defendant therefore counterclaims the difference between (a) the price which it sold the circuits for, and (b) the price which it would have sold the circuits for if they had been up to the contractual standard. The amount counterclaimed under this head of loss is HK$356,530.00.

(iii) The Defendant contends that the Plaintiff was obliged to renew the distributorship agreement in view of the number of orders which had been placed with the Plaintiff during 1997. The Plaintiff did not do so. Following negotiations, it was agreed that the Plaintiff would pay commission to the Defendant for those of the Plaintiff's circuits which were sold to the Defendant's customers in 1998, provided that the Defendant complied with certain conditions. Those conditions were satisfied, but the Plaintiff did not pay the commission to the Defendant. The amount of the commission which the Plaintiff has failed to pay has not yet been identified by the Defendant.

The connection between the claim and the counterclaim

4. The law in this area has been usefully summarised in the Supreme Court Practice 1999, Vol. 1, at p.179 as follows:

"An analysis of the authorities as to what orders should be made where the defendant raises a set-off or counterclaim shows that there are four different classes or groups of such orders, namely:

(a) where the defendant can show an arguable set-off, whether equitable or otherwise, he is entitled to leave to defend to the extent of the set-off and the court has no discretion;

(b) where the defendant sets up a bona fide counterclaim arising out of the same subject matter as the action and connected with the grounds of defence, the order should not be for judgment on the claim, subject to a stay pending trial of the counterclaim, but should be for unconditional leave to defend, even if the defendant admits the whole or part of the claim;

(c) where there is no defence to the claim but a plausible counterclaim of not less than the claim is set up, judgment should be for the plaintiff on the claim with costs, stayed until trial of the counterclaim;

(d) where the counterclaim arises out of a separate and distinct transaction or is wholly foreign to the claim, judgment should be for the plaintiff with costs without a stay; the lack of clarity between classes (b), (c) and (d) gives the court freedom to respond to the perceived justice of the individual case (United Overseas Ltd. v. Peter Robinson Ltd., March 26, 1991, CA Transcript 91/0297, per Bingham L.J.)."

Categories (a) and (b) need not concern us because there has never been an appeal by the Defendant from that part of Master Poon's order entering summary judgment for the Plaintiff. The issue is whether the Defendant's counterclaim falls within category (c) or category (d). The judge must be treated as having assigned the counterclaim to category (c) because he said:

"In my judgment, the claim and counterclaim do have a close connection - the issue between the parties really is whether the goods supplied were or were not defective. And I see no good reason to doubt the bona fides of the defendant's counterclaim although it may not yet have been fully or sufficiently particularised."

To the extent that the judge was saying that the only issue between the parties related to whether the circuits were defective or of an inferior quality, he was mistaken because there were two other significant elements of the counterclaim as well.

5. The circuits to which the Plaintiff's claim relates were not the circuits to which any of the three elements of the counterclaim relates. That would have been a sufficient reason for not assigning the counterclaim to category (b), but it is not in my view by itself a sufficient reason for assigning the counterclaim to category (d) as opposed to category (c). The fact is that the circuits to which the claim relates and the circuits to which the first two elements of the counterclaim relate were circuits which had been ordered by the Defendant in the course of a trading relationship between the Plaintiff and the Defendant whose terms were governed by the distributorship agreement. And the circuits to which the third element of the counterclaim relates were circuits which had been sold to the Defendant's customers as a result of an alleged compromise over the non-renewal of the distributorship agreement which had governed the parties' trading. The fact that both the Plaintiff's claim and all three elements of the counterclaim arose out of purchase orders given to the Plaintiff pursuant to a trading relationship governed by, and under the umbrella of, a formal distributorship agreement which required the Defendant to order a minimum number of circuits from the Plaintiff constitutes in my opinion a sufficient connection between the Plaintiff's claim and the three elements of the counterclaim so as to bring the counterclaim within category (c). In my view, it would be unjust to require the buyer in an ongoing trading relationship to pay the balance of the purchase price of goods which were not sub-standard before the determination of the seller's liability to compensate the buyer for the various heads of loss alleged by the buyer in the present case.

The merits of the counterclaim

6. Mr Richard Khaw for the Plaintiff, in a careful and concise submission, alternatively contends that the judge was wrong not to doubt the Defendant's bona fides. He accepts that he has to show that the counterclaim is incapable of being established at the trial of the action. It is, I think, sufficient for me to state that, having read the evidence filed in connection with the original hearing before Master Poon and the subsequent hearing before Godfrey JA, it is difficult to categorise any of the elements of the Defendant's counterclaim as a sham and therefore incapable of being established at the trial of the action, even though (a) there may be powerful reasons for saying that the Defendant cancelled some of the purchase orders to which the first element of the counterclaim relates, and (b) no particulars have yet been given of the respects in which the circuits to which the second element of the counterclaim relates were defective or of an inferior quality.

Conclusion

7. For these reasons, therefore, I would dismiss this appeal.

Ribeiro J:

8. I agree and only would add a few words. Whether any counterclaim is sufficiently connected to the original claim is a question of degree. It is clear that such a decision is a matter within the judge's discretion, see Anglian Building Products Ltd v W & C French (Construction) Ltd (1986) 16 BLR 1. It has been held that in exercising his discretion, the judge should consider whether the closeness is such as to make it "fair and sensible" or "just and equitable" that execution should be stayed, see A B Contractors Ltd v Flaherty Brothers Ltd (1978) 16 BLR 8.

9. Godfrey JA considered that in the circumstances, sufficient closeness had been established and additionally, it appears that he also took into account the fact that the Plaintiff is a Taiwanese Corporation without any presence or assets in Hong Kong. Not only do I see no reason to interfere with his exercise of discretion, I find myself in entire agreement with his decision.

10. On the allegations as they stand, the claim and the counterclaims for non-delivery and for defective goods all concern contracts of sale made in consequence of and pursuant to the same trading and agency or commission relationship between the parties which is governed by an umbrella "agency agreement" entered into to provide the framework for such transactions. The counterclaim as to commission also allegedly arises out of such a continuing trading relationship.

11. It was also suggested that the Court should have regard to the alleged weaknesses in the counterclaim as a basis for doubting its bona fides and refusing a stay. While the Court does have power to consider the merits of a counterclaim in this manner, a very high threshold must be crossed for a counterclaim to be disregarded on this ground. I do not consider that the counterclaim in the present case falls into such category.

12. I would therefore also dismiss this appeal.