LINDE HKO LTD v. HARVEST WISE GASES (H.K.) CO LTD AND OTHERS

HCA 2373/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 2373 OF 2014

____________________

________________

________________

DECISION
________________

1.  This was the application by Linde HKO Limited (“the plaintiff”) by summons dated 2 April 2015 for an order for final judgment pursuant to Order 14, rule 1 of the Rules of the High Court in respect of its claim against the defendants for conversion.

BACKGROUND FACTS

2.  The plaintiff is a manufacturer and distributor of compressed gases in Hong Kong and as such it is obliged to comply with the legislation including the Dangerous Goods Ordinance, Cap 295 and the Gas Safety Ordinance, Cap 51.

3.  The plaintiff supplies its compressed gases in its own gas cylinders (“HKO cylinders”). In its ordinary course of business it would only deal with end users and authorised dealers who have agreed in writing to abide by the plaintiff’s standard terms set out in its conditions of sale (“the conditions”) drawn to facilitate compliance with the statutory controls.

4.  The conditions stipulate, inter alia, that HKO cylinders are the property of the plaintiff, that they are supplied for the customer’s sole use in Hong Kong and must be returned to the plaintiff upon termination of the contract in good condition at the customer’s expense (clause 19.2), that the customer shall not refill or allow the refilling of HKO cylinders other than by the plaintiff or allow the same to be used otherwise than for storage, transport or use of gas supplied by the plaintiff (clause 22.2) and that upon any breach of the conditions the HKO cylinders become immediately returnable to the plaintiff (clause 22.7(iii)).

5.  The HKO cylinders are specially manufactured for the plaintiff and bear several distinctive features including a trapezoid label bearing the plaintiff’s trademarks, its name and address and a specifically designed valve engraved with the characters “HKO” is fixed at the mouth of the cylinders.

6.  The 1^st defendant carries on the business of refilling and selling industrial gases in Hong Kong. The refilling is carried out in facilities in the PRC.  The 2^nd and 3^rd defendants who are husband and wife are directors and shareholders of the 1^st defendant.

7.  On 20 November 2014, the plaintiff obtained an ex parte injunction (continued on 28 November 2014 until further order of the court) against the defendants, inter alia, for delivery up of all HKO cylinders in their possession and/or control as well as all HKO cylinders which will come into their possession and/or control.

8.  The injunction was granted in circumstances where on various dates in August 2014 surveillance agents retained by the plaintiff had observed gas cylinders being stored in the cargo area of a yard in Tuen Mun (“the TTT yard”).  There was a container truck believed to have carried a considerable number of gas cylinders including refilled HKO cylinders from the PRC and stored in the TTT yard pending distribution to end customers.  The defendants’ vehicles filled with cylinders including HKO cylinders were also seen leaving the TTT yard, delivering them to end users in Hong Kong in exchange for empty ones that were transported back to the TTT yard.

9.  On 22 November 2014 a writ indorsed with the statement of claim was served on the defendants alleging conversion, infringement of trademarks and unlawful interference with contractual relations.  The present application is for final judgment for conversion.

10.  Upon the execution of the injunction on 22 November 2014 at the TTT yard the plaintiff seized 276 HKO cylinders.  The defendants voluntarily delivered up another 13 to the plaintiff on 11 December 2014.  As a result of the injunction a total of 289 HKO cylinders have been recovered from the defendants.

11.  Prior to the hearing, the plaintiff ‘amended’ the relief it seeks from the court by limiting the declaration and final order for delivery up of HKO cylinders to those recovered through the execution of the injunction and now in its possession.  While no formal application as such was made for the amendment, the hearing had proceeded on the basis of the amended relief.

12.  The relief now sought is the following:

(a) a declaration that the 289 HKO cylinders as delivered up by the defendants pursuant to the injunction are the property of the plaintiff;

(b) a final order for delivery up of the 289 HKO cylinders seized pursuant to the injunction;

(c) a permanent injunction to restrain the defendants, their agents, servants, nominees, representatives or otherwise from in any way taking possession, using, filling, conveying, storing or otherwise dealing with HKO cylinders;

(d) damages for conversion to be assessed; and

(e) costs of the application.

THE PLAINTIFF’S CASE

13.  In outline the plaintiff’s case is that the defendant, by taking possession of the plaintiff’s property without authority and asserting some right or dominion over the cylinders or dealing with them in a manner inconsistent with or adverse to the plaintiff’s right as the true owner, is liable for conversion.

14.  Specifically, transporting empty cylinders to the PRC for the purpose of their being refilled by a third party, transporting the filled cylinders back to the TTT yard, storing and/or delivering the same to end users are ‘dealings’ adverse to the plaintiff’s proprietary rights and the right of possession or immediate possession insofar as they concern or affect HKO cylinders.

THE DEFENCE

15.  The defendants do not deny that 289 HKO cylinders were found in their possession and delivered up pursuant to the execution of the injunction.  Nor do they challenge the type of ‘dealings’ described in the surveillance reports and referred to in §8 above.  The primary defence of the defendants was one of promissory estoppel which will be considered first.

Promissory estoppel

16.  The defendants accept that the plaintiff is a market leader in Hong Kong for the supply of industrial and special gases and has dominated the market for many years.  The defence is grounded on the existence of an alleged “common practice” and “mutual understanding” of participants in the “industry”.  It is clear from §5 of the 3^rd defendant’s 3^rd affirmation dated 18 May 2015 (“Pang 3”) that the term “industry” is a reference to “the gas distribution and supply industry”.  Since the plaintiff’s dominant market position in that industry for many years is accepted, implicit in the defence is that the plaintiff itself was a party to the “common practice” and “mutual understanding” said to exist.

17.  In §6 of Pang 3, the 3^rd defendant rendered an account of how the industry “and also the 1^st defendant” operated pre‑1997.  It was said that the industry gas suppliers would supply gases in gas cylinders to end users using either gas cylinders provided by the gas suppliers themselves or by the end user.  If the gas supplier supplies the gas in the gas supplier’s cylinder, the end user would be required to pay a deposit ranging from $1,600 to $2,000 which would cover the cost of the cylinder and a monthly rental ranging from $60 to $80 per month.  The deposit is returned upon re‑delivery of the gas cylinder.

18.  Pausing there, it should be noted that according to the 3^rd defendant’s 1^st affirmation dated 10 December 2014 the 1^st defendant was only incorporated/commenced business in 2010 when it took over the prior sole proprietorship business of the 3^rd defendant who had found himself in financial difficulties.  The 3^rd defendant’s father who used to carry on business as a sole proprietor was a customer of the plaintiff and the 3^rd defendant had assisted in his father’s business.

19.  In those circumstances, I make the following observations.  First, given its date of incorporation, the 1^st defendant itself could not have been part of the industry in the pre‑1997 period.  Second, given the acceptance of the plaintiff’s dominant market position, the assertion that the 1^st defendant became one of the main competitors to the plaintiff presumably sometime after its incorporation in 2010 is not independently verified.  Third, as the plaintiff’s customer, the 3^rd defendant’s father would have had knowledge of the conditions.  The 3^rd defendant had assisted in his father’s business and so would also have had knowledge of the conditions.

20.  Be that as it may, §§ 7‑11 of Pang 3 went on to deal with what is said to be the “common practice” and “mutual understanding” of participants in the industry since 1997.  It is necessary to set them out in full:

“The Ownership of the Subject HKO cylinders

7. It is now a common practice within the industry since at least 1997 that the End User Customers may refill the gas cylinders from gas suppliers, other than the plaintiff (and its contracted customers, authorized distributors/dealers) who had dominated the market for many years, for a lower refilling cost and for a more efficient and convenient service.

8. Further, there is mutual understanding between the gas suppliers (including the plaintiff, its contracted customers and authorized distributors/dealers) and End User Customers, and it is also a common practice within the industry, that the deposit for each of the gas cylinder is in fact the actual cost or value (usually the deposit is higher than the actual value) of the gas cylinder paid by the End User Customers in purchasing and permanently keeping the said gas cylinder. The gas suppliers (including the plaintiff, its contracted customers and authorized distributors/ dealers) will simply forfeit the deposit and treat it as the purchase price of the gas cylinder without chasing the gas cylinder back from the End User Customers. Usually the amount of deposit is higher than the actual cost or value of the gas cylinder and hence the gas suppliers (including the plaintiff, its contracted customers and authorized distributors/dealers) can actually make a profit out of it.

9. The reason behind is simple. Once an End User Customer has been keeping a rented gas cylinder for over 18 months, the total monthly rent that he is required to pay to the gas supplier would almost equal to the amount of the deposit he has already paid or is obliged to pay. It would be non‑sense for an End User Customer to return the gas cylinder to the gas suppliers (including the plaintiff, its contracted customers and authorized distributors/dealers) and pay for collection charges/ transport expenses as well as the balance of the total monthly rent that he owes to that gas supplier. Instead, the End User Customer will keep the gas cylinder and may refill it from other gas suppliers. For those End User Customers who have been keeping certain gas cylinders for years but no longer need them now, the End User Customer may even surrender the gas cylinders to other gas suppliers for a discounted price.

10. In light of the above, I verily believe that the ownership of a large quantity of gas cylinders is deemed to be transferred from the gas suppliers to the End User Customers. I also believe that the same common practice applies between the plaintiff and its contracted customers and authorized distributors/dealers who would not be willing to pay for the deposit as well as monthly rent for keeping a large and constant quantity of gas cylinders for running their business throughout so many years.

11.     As a matter of fact, all the Subject HKO cylinders (probably including the one purchased by the 2^nd defendant as mentioned below) were received by the defendants by exchanging their own gas cylinders containing gas sold to their End User Customers.”

21.  The common practice/mutual understanding allegedly came into existence after 1997 but the precise date when it became the ‘industry norm’ was not specified.  The implications arising from the common practice/mutual understanding described in §§8‑10 of Pang 3 appear to involve the following:

(1) The deposit required for the cylinder is at least equal to the actual cost of the cylinder to the gas supplier.

(2) End users may ‘purchase’ a cylinder and retain the same permanently by having its deposit forfeited: conversely gas suppliers will not seek the return of a cylinder but simply forfeit the deposit upon its non‑return treating it as a sale.

(3) An end user may refill a cylinder so acquired with gas obtained from suppliers other than the original supplier of the cylinder. 

22.  But the meaning of the common practice mentioned in §7 of Pang 3 is unclear.  Plainly the refilling of cylinders “for a lower refilling cost” would not have been carried out by the plaintiff.  It necessarily follows that the plaintiff would not have been a party to the practice alleged.  Nevertheless it remains unclear whether what is being said is that all gas cylinders including HKO cylinders would be used by gas suppliers (other than the plaintiff) for refilling purposes or only cylinders that are not HKO cylinders would be so used.

23.  The following matters are worth highlighting at this point:

(1) Plainly the plaintiff could not have participated in the common practice alleged in §7 of Pang 3 whichever way one reads that paragraph as the practice was entirely inimical to the plaintiff’s commercial interests.  It would not have made any business sense for the plaintiff to allow HKO cylinders to be refilled by others.

(2) If the plaintiff as the dominant market player did not share this practice, how could it be considered a trade or common practice?

(3) The same observations apply to the common practice and mutual understanding set out in §8 of Pang 3.

(4) The ‘rationale’ for the common practice and mutual understanding set out in §9 is only seen from the perspective of end users who might be interested in sourcing a cheaper alternative.  It could not be elevated to being the rationale for the existence of the alleged common practice and mutual understanding of the industry as a whole.

(5) In §6 of the 3^rd defendant’s 1^st affirmation dated 10 December 2014, four other gas suppliers in Hong Kong are named in addition to the 1^st defendant that allegedly engaged in the practice of using each other’s gas cylinders interchangeably. There is no evidence that the named companies are and constitute the only or even major participants in the industry.

(6) It is relevant to note that Alma Welding Equipment Company Ltd (“Alma”) is one of those companies named: see §28 below.

(7) Other than the 3^rd defendant’s assertions, there is no independent evidence from other industry participants in support of the alleged common practice/mutual understanding.

24.  The 3^rd defendant’s case is put in this way in Mr Lam’s written submissions:

“32. (a) [The plaintiff] had, by its conduct, freely made to the others (i.e., its customers, authorized dealers and others in the gas supply industry including [the defendants]) a clear and unequivocal promise or assurance that it would not enforce its strict legal rights under the Conditions of Sale, in relation to the gas cylinders that [the plaintiff] provided for the customer’s/dealer’s use;

…”

It is therefore evident that the ‘conduct’ relied on is an integral part of the alleged common practice/mutual understanding.

25.  Mr Lam placed reliance on the following matters:

(1) The fact that in §19.3 of the conditions the plaintiff contemplated the possibility of the plaintiff filling cylinders other than HKO cylinders under certain conditions.

(2) The absence of evidence that the plaintiff had taken any action over the years against its customers or dealers to enforce the conditions in relation to its rights over the HKO cylinders.

(3) The plaintiff’s inability to match up approximately 50% of the 289 cylinders recovered with certificates issued by the Fire Services Department currently kept by the plaintiff.  That was indicative of its “loose practice” in record keeping as to the whereabouts of HKO cylinders, rendering it doubtful if a proper register of HKO cylinders exists.

(4) The experience of the 2^nd defendant in April 2010 when purchasing a cylinder of gas from one of the plaintiff’s authorised dealers spoke to the “loose practice”: apart from paying a deposit of $2,000 for the cylinder the 2^nd defendant was not asked to pay the annual rental in advance; she was not asked to sign any conditions of sale or provide an address at which she could be contacted but only her mobile number.

26.  I do not consider for one moment that the matters referred to in the preceding paragraph taken individually or as a whole could amount to any promise or assurance on the part of the plaintiff that it would not enforce the conditions. Nor do I accept that they show that non‑enforcement of the conditions became part of the alleged common practice or mutual understanding.  Instead of adducing evidence to establish its case positively, the defendants are seeking to put the burden on the plaintiff to prove the contrary.  That cannot be the correct approach.

27.  Apart from the defendants’ assertions which are necessarily self-serving, there is no independent support of the existence of the alleged common practice and mutual understanding.  Further, the plaintiff’s evidence relating to its deposit policy explained in §12 of the 4^th affirmation of Poon Ka Yeung does not lend any support to the defendants’ allegation of the existence of a common practice/mutual understanding.  

28.  Absent clear evidence that the plaintiff itself was a participant in the alleged common practice/mutual understanding, it could not have become the industry norm.  In that connection, Alma (named in §23(6) above as one of the suppliers engaging in the so‑called common practice) was one of the defendants in separate proceedings (HCA 2371/2014) heard shortly before the hearing of the present case.  Significantly, Alma and the 1^st defendant (its shareholder and director) submitted to final judgment in respect of the plaintiff’s claim for conversion on 1 April 2015 and the summons in HCA 2371 is only against the 3^rd defendant in those proceedings.

29.  In my view the defence of promissory estoppel is not credible.  It is “moonshine”.

Other defences

30.  Mr Lam also raised a number of other points in defence.  They will be considered in turn.

(a) Failure to establish immediate right of possession

31.  While the defendants have not shown that the plaintiff has lost ownership of HKO cylinders through ‘deemed’ sales under the so‑called common practice/mutual understanding, the defendants submitted that in the context of a claim for conversion, ownership is irrelevant and what the plaintiff must show is that it has an immediate right of possession of the HKO cylinders.

32.  As I understand the submission, it was submitted that the plaintiff has not shown that it has an immediate right of possession because the defendants had collected the 289 HKO cylinders in question from their customers and the defendants were sub‑bailees holding the same on behalf of their customers.

33.  But if the defendants’ customers were acting in breach of the conditions which they undoubtedly were in parting with the possession of empty cylinders for the purpose of getting them refilled by unauthorised third parties instead of returning them to the plaintiff, their right of possession would have been lost upon breach (see clauses 22.2 and 22.7(iii) of the conditions and §4 above).  The defendants would be in no better position.  The immediate right of possession would revert to the plaintiff as owner upon breach: North General Wagon & Finance Co Ld v Graham [1950] 2 KB 7 CA, and Union Transport Finance Ltd v British Car Auctions Ltd [1978] 2 All ER 385 CA.

34.  Whether or not the defendants were aware of their customers’ breach of the conditions is irrelevant.  Vis‑a‑vis the plaintiff as owner, the defendants cannot show a better right of possession.

35.  For those reasons, I reject the submission that the plaintiff did not have or cannot establish the right to immediate possession at the time of conversion.

(b) Absence of demand

36.  Another point taken by Mr Lam was the absence of any demand.  It was submitted that mere unpermitted possession of another’s property is not as such a conversion of it.

37.  The defendants relied on certain passages in the judgment of Allsop P in Bunnings Group Ltd v Chep Australia Ltd [2011] NSWCA 342 at §§117‑118 and 121.  But it is important to bear in mind the context of those statements since the facts of that case are materially different from the present case. Critically, that case was not based on a conclusion that Bunnings received pallets from suppliers/transporters without contractual authority or otherwise wrongfully (see Bunnings at §19).  In that case there was implied authority for the detention of the relevant chattels. It is in those circumstances that a demand and an unreasonable refusal to comply with the demand were required.

38.  It is not the ratio of Bunnings that conversion is not made out unless there has been a prior demand in every case.  A demand is required only where the act of conversion concerns the unlawful retention of the property of another.

39.  Indeed, in Marcq v Christie Manson & Woods Ltd [2004] QB 286, Tuckey LJ (at §35) cited the following passage from Millet J in Barclays Mercantile Business Finance Ltd v Sibec Developments Ltd [1992] 1 WLR 1253, 1257‑1258:

“ Demand is not an essential precondition of the tort: what is required is an overt act of withholding possession of the chattel from the true owner. Such an act may consist of a refusal to deliver up the chattel on demand, but it may be demonstrated by other conduct, for example, by asserting a lien. Some positive act of withholding, however, is required; so that, absent any positive conduct on the part of the defendant, the plaintiff can establish a cause of action in conversion only by making a demand.”

(c) Summary judgment is inappropriate

40.  The defendants sought to draw an analogy with Bunnings but seeking to draw analogies when the facts are materially different is of no assistance.  Apart from the critical difference already mentioned in §37 above, there are other differences, for example, the goods (ie the pallets) in Bunnings were not uniquely identifiable, and hirers were authorised to transfer possession to third parties.  All hirings in that case were bailments at will.  Those matters are part of the relevant background and hence material in the determination of whether the acts or dealings amounted to asserting dominion over the goods repugnant to the proprietary rights of the true owner.

41.  Whether summary judgment is appropriate in any particular case must depend on its own facts and in particular whether triable issues are shown to exist.  Bunnings itself was an appeal after a trial and I cannot see in what way that case is relevant to Mr Lam’s submission that summary procedure is inappropriate in the present case.

Conversion

42.  I turn to consider whether the tort of conversion has been made out on the facts before the court.

43.  As already noted, the present case is not one of unlawful detention but a ‘dealing’ with HKO cylinders that is inconsistent with the rights of the plaintiff.  It is not controversial that the HKO cylinders in question for transporting to the PRC for the purpose of refilling the empty cylinders by entities not authorised by the plaintiff.  Those acts or dealings were part and parcel of the defendants’ business in refilling gas cylinders received from customers including HKO cylinders, using those cylinders as receptacles for gases they were selling to their customers. Their modus operandi was to deliver filled cylinders in exchange for empty ones.

44.  In that connection, the decision of the High Court of Australia in Penfolds Wines Pty Ltd v Elliott (1946) 74 CLR 204 a decision that featured prominently in Bunnings is pertinent.

45.  Penfolds sold its wines in bottles the ownership of which it retained.  Its name was embossed on the bottles with an intimation that they were Penfolds’ property. The defendant sold bulk wine to customers who provided the empty bottles. Among the empty bottles left with the defendant and filled by him were two of Penfolds’ bottles.  Four of the five judges considered that the filling of Penfolds’ bottles amounted to conversion on the basis that such a user was inconsistent with Penfolds’ right of property in the bottles while Dixon J dissented. 

46.  But as noted in Bunnings (at§129), his statement of principle concerning the character of dealing amounting to conversion was not discordant with that expressed by the other judges in Penfolds.  In Allsop P’s view (§143), the differences between the judges in Penfolds were of the assessment of the quality and character of the acts not as expression of operative principle.

47.  Headnote (2) to Bunnings states the essential elements of the tort of conversion: they “involve an intentional act or dealing with goods inconsistent with, or repugnant to, the rights of the owner of those goods, including possession and any right of possession.  Such an act or dealing will amount to such an infringement of the possessory or proprietary rights of the owner if it is an intended act of dominion or assertion of rights over the goods.”

48.  The defendants’ dealings with HKO cylinders and the modus operandi of their business of supplying gases are summarised in §§8 and 43 above.  The effect of those dealings is that the defendants were making use of HKO cylinders to which they had no right of possession by filling them in the PRC and using them as receptacles for the gases sold to their customers.  

49.  On any view of the matter, HKO cylinders were being used by the defendants for the purpose for which they would have used their own gas cylinders.  Such a user goes well beyond any ministerial acts such as storage or carriage and, in my view, amounts to conversion.

CONCLUSION

50.  Mr Lam raised objections to certain of the relief now sought set out in §12 above.  It was said that a declaration of ownership is not essential to a cause of action in conversion and a declaration serves no purpose.  In this regard, Mr Lam appears to have overlooked that it is part of the defence case that the plaintiff has lost the right of ownership in respect of the subject cylinders by reason of the alleged common practice/mutual misunderstanding and therefore cannot establish its immediate right of possession in respect of the HKO cylinders.

51.  Mr Lam also objected to paragraph (b) of the relief for a final order for delivery up of the 289 HKO cylinders on the basis that it was unnecessary given that those cylinders are now in the plaintiff's possession.  But the plaintiff’s current possession flows from the interim injunction pending further order of the court.  It now seeks a final order to which I can see no valid objection.

52.  Accordingly, I will make an order in terms of the relief set out in §§12(a) to (d) above.  I also make an order nisi of costs in favour of the plaintiff, to be taxed if not agreed.