XCHRX SELWOOD LTD v. ICE FAR EAST (HK) LTD

HCA 4403/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 4403 OF 2001

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J U D G M E N T

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1. The Plaintiff claimed against the Defendant for the unpaid price of goods sold and delivered in the sum of ￡19,321.51. The action was commenced in the District Court. The Plaintiff made an application for summary judgment. By an order of Judge Z E Li made on 17 September 2001, the action was transferred to the High Court. Judge Li also directed that the application for summary judgment be heard by a Judge, hence the matter came before me on 16 November 2001.

2. The Defendant did not dispute that the goods were sold and delivered. Neither did it have any complaints as to the goods. However, it resisted the claim on the basis that there was a breach of the Distributorship Agreement ["the Agreement"] made between the Plaintiff and the Defendant on 10 September 1996. The Defendant said it was entitled to set-off the damages suffered by it against the claim of the Plaintiff. The Defendant further said that because the breach of the Agreement was discovered by the Defendant prior to the due dates for payment of the price, it was entitled to withhold payment.

3. Insofar as it is suggested that there was a contractual entitlement to withhold payment, I do not think there is any express term to that effect. In the Further Particulars supplied by the Defendant on 5 June 2001, it was pleaded that there was an implied term arising from the distributor relationship that the orders were placed by the Defendant to the Plaintiff on condition that the Defendant remained as exclusive distributor. By a letter dated 8 September 2000, the Plaintiff gave the Defendant 3 months' notice for the termination of the Agreement. I do not think that the Defendant went so far as saying that there was also any implied condition for withholding payments upon the notice for termination of the Agreement. That clearly cannot be right. On the pleadings, it is not pleaded as the Defence case that there was an implied condition as to the withholding of payments when there was breach by the Plaintiff under the Agreement. I also see no basis for holding such implied condition existed. In my judgment, if the Defendant were to succeed on its defence of set-off, it must arise from the general law as to equitable set-off but not otherwise.

4. The alleged breach of the Plaintiff relied upon by the Defendant was the supply of goods by the Plaintiff to other traders within the exclusive territory of the Defendant whilst the Agreement was still in force. The Defendant also said that the Plaintiff failed to supply goods under some orders placed after the notice of termination. For the purpose of the Order 14 proceedings, there was no dispute that the Defendant was given the right of exclusive distributorship under the Agreement. The Plaintiff said however that the alleged breach was not raised bona fide and the Defendant has not satisfied the threshold burden in establishing the same in an Order 14 context. Further, the Plaintiff said that set-off was not available in any event because the sale of goods did not have a sufficiently close connection with the alleged breach to justify equitable set-off.

5. I shall first deal with the second point, viz. whether equitable set-off is available on the facts of the present case. To consider that, it is necessary for me to go into the details about the alleged breach of the Plaintiff. Regarding the supply of goods to other traders, the only specific instance referred to in the evidence of the Defendant was a sale of some pumps to a company called Tower Mark Limited in September 2000. Apart from that the Defendant said that in October 2000, it discovered that the Plaintiff sold at least 30 pumps directly into Hong Kong. No particulars were given as to who was the purchaser of these pumps. Regarding the alleged failure of the Plaintiff to supply the goods, that was in respect of orders placed by the Defendant on 16 November 2000.

6. There was no direct relationship between these transactions and the claims of the Plaintiff. The Plaintiff's claim made up of the following transactions,

Purchase Order & Date	Invoice & Date
FA-448 (29.7.2000)	451MIOH06525 (1.8.2000)
FA-449 (2.8.2000)	451MIOH06547 (4.8.2000)
FA-438 (6.7.2000)	451MIOH 06548 (8.8.2000)
462 (26.9.2000)	451MIOH 06932 (5.10.2000)

7. In considering whether a case of equitable set-off could be made out in the context of an Order 14 application, Simon Brown LJ in Esso Petroleum v. Milton [1997] 1 WLR 938 laid down that the proper approach was either to reach a clear and final conclusion on the point or to direct a preliminary hearing thereof. At p.945, His Lordship said,

"Before turning to address them it is important to make plain the court's proper approach to such issues upon an interlocutory appeal of this nature. At first blush it might appear (and perhaps to the judge below did appear) sufficient for the defendant's purposes to raise an arguable case in response. On reflection, however, and guided in particular by certain observations of Lord Donaldson of Lymington M.R. in Stewart Gill Ltd. v. Horatio Myer & Co. Ltd. [1992] Q.B. 600, it is surely plain that we have no option but to reach a clear and final conclusion upon each of the three points, no option that is apart from ordering a future preliminary hearing were it necessary for further evidence to be adduced on some particular issue.

Gill was a case on the third point concerning the fairness of an express contractual provision excluding the right of set-off. The defendants there accepted that if the clause could survive the impact of the Unfair Contract Terms Act 1977, the plaintiffs were entitled to summary judgment. Lord Donaldson M.R. said, at p. 604:

"such a clause, if it is to be effective at all, can only take effect either upon an application for summary judgment under R.S.C., Ord. 14 or on the subsequent hearing of a preliminary point as to its reasonableness. To give unconditional leave to defend without ordering the hearing of a preliminary point is in effect to render the clause nugatory, since by the end of a final hearing it would not matter whether there was a set-off or separate judgments on claim and counterclaim. He [the judge below] should therefore have reached a decision on its reasonableness in the light of such evidence as he had."

In my judgment the same reasoning must apply equally to the direct debit argument and the sufficient connection argument." (see also p.950H and p.954G)

8. In the present case, Mr Haddon-Cave relied on the following factors as showing a close connection between the counterclaim and the claim. He submitted that the transactions arose under the umbrella of the Agreement and the parties were the same and the goods were the same kind of goods. They were all dealings during the currency of the Agreement. He emphasized that the transactions could not be viewed as a one-off sale and purchase. These are all matters on which there is no dispute as to facts. Adopting the approach of Simon Brown LJ, I should reach a final conclusion on the issue.

9. In Federal Commerce & Navigation v. Molena Alpha [1978] QB 927, Lord Denning MR set out the test for equitable set-off as follows (at p.974-5),

"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."

10. After citing this dicta of Lord Denning, Simon Brown LJ in Esso Petroleum v. Milton [1997] 1 WLR 938 formulated the test at p.950D as follows,

"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."

11. In Esso Petroleum, the court was dealing with a defendant who withheld payment for petrol supplied by the plaintiff on the ground that the plaintiff acted in breach of an implied term of the licence agreements between them. The Court of Appeal held that the claim and the counterclaim were not sufficiently connected to give rise to any set-off. The observations of Simon Brown LJ at p.951 are particularly relevant in the present context,

"What then is the connection between the counterclaim here and the transaction giving rise to Esso's claim, and would it be unjust to allow the latter to be enforced without taking account of the former? As to the first limb of that question, Mr. Soole submits that the connection is a close one in that both claims arise out of a single agreement, that under which Esso agree to sell and the defendant to buy all the fuel he needs; the licensee's request for fuel, he submits, triggers the operation of the agreement which sets out the terms on which the fuel is sold. As to the justice of the case, Mr. Soole invokes broad principles of equity and submits that, assuming this counterclaim were soundly based, it is Esso who have acted unfairly and imposed hardship on their licensee: Shell U.K. Ltd. v. Lostock Garage Ltd. [1976] 1 W.L.R. 1187 is relied on by analogy.

It is upon this critical aspect of the case that in my judgment Mr. Soole's arguments, admirably presented though they were, fail. True it is, as he submits, that the terms of the licence agreement govern each fuel delivery. But that is not to say that there exists a close connection between each individual delivery and a subsequent claim based on a repudiatory breach of the overall agreement, still less that it would be unjust to allow Esso to recover payment for fuel sales without their taking into account the defendant's claim for future losses." (p.951A to D)

And further down at p.951E to G,

"At the point when those deliveries were made, there was no cross-claim at all in existence and no loss yet suffered by the defendant. 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. The defendant disavows any calculated plan to create at Esso's expense a war-chest out of which to fund his counterclaim. Let that be assumed-although I confess to some scepticism on the point, not least bearing in mind his own evidence as to the final deliveries. To my mind that still cannot make it just to allow him to achieve precisely that result by what was clearly at the time an unlawful withholding of payment."

12. Hence, the mere fact that the sale took place under the umbrella of the Agreement is not by itself sufficient to allow set-off. Nor is it sufficient that the transactions arise out of a single trading relationship. The crucial question is whether the counterclaim impeach the Plaintiff's demand so that it would manifestly be unjust to allow him to recover without any set-off. The consideration for the price was the goods sold and delivered. There was no suggestion that the goods were rejected or that they were defective. For all I know, the Defendant could have already resold the same and received payments although I need not speculate on that. There was no suggestion that because of the alleged breach of the Agreement by the Plaintiff, the Defendant could not sell or otherwise make use of the goods. I therefore see nothing unjust to allow the Plaintiff to recover the price thereof without waiting for the resolution of the counterclaim. I therefore hold that even taking the Defence case to its highest, there cannot be any equitable set-off. This is in fact in line with how the Defendant perceived its case. In a letter dated 7 November 2000, despite its knowledge as to the alleged breach of the Plaintiff, the Defendant indicated to the Plaintiff that it was able and willing to pay the outstanding price.

13. Having reached that conclusion, it is unnecessary for me to deal with the submission of Mr Yuen regarding the bona fide of the Counterclaim. I would only say that there is indeed much force in his submission that the evidence of the Defendant did not meet the threshold burden. The evidence regarding the sale to Tower Mark Limited had clearly been rebutted by evidence adduced by the Plaintiff. Mr Haddon-Cave has to made his submission on the basis that the goods were obtained by Tower Mark from a Singaporean supplier with the connivance of the Plaintiff (instead of a case of direct sale from the Plaintiff to Tower Mark as pleaded in Paragraph 5(4) of the Defence). I cannot find any evidence of connivance on the part of the Plaintiff and it is simply too tenuous to draw such an inference from Paragraph 5 of the Affirmation of Mark Simpson. As to the sales of the other 30 pumps, the allegation of the Defendant is wholly unparticularised and is no more than a bare assertion. Without setting out any basis for the same, the Defendant could not expect the court to pay much regard to this kind of statement even in an Order 14 context especially when the assertion was vigorously contested.

14. Mr Haddon-Cave invited me to consider that it was difficult for the Defendant to give detail particulars since the matter could not be pursued without discovery from the Plaintiff. He relied on the "some other reason" limb in Order 14 Rule 3(1). I am not satisfied that this case falls within that limb. As Mr Yuen pointed out, this limb is not intended to allow a defendant to have leave to defend by pleading an unsubstantiated defence with a hope to fish out some evidence by discovery at a later stage.

15. On the refusal of the Plaintiff to supply goods, bearing in mind the non-payment of the Defendant, the Plaintiff was entitled to suspend further supply pursuant to Clause 7(6) and (7) of the Agreement. It does not matter that the Defendant offered cash before delivery regarding one of the orders in a letter dated 18 November 2000.

16. I therefore have great reservation as to the evidence regarding the Counterclaim. However, I would rest my decision primarily on the conclusion as to non-availability of equitable set-off. I will grant judgment to the Plaintiff in respect of its claim in the sum of ￡19,321.51 with interest at 8% from date of writ to date of judgment. I do not grant interest at the judgment rate for this period because the current judgment rate is higher than commercial rate. Mr Yuen asked for costs on indemnity basis. I do not think this case merit the same. I will stick to the usual order, viz. costs paid by the Defendant to the Plaintiff forthwith, such costs to be taxed on party to party basis if not agreed.

Mr Francis Haddon-Cave, instructed by Messrs George Tung, Jimmy Ng & Valent Tse, for the Defendant