KADER INDUSTRIAL CO LTD v. NGAI HING HONG PLASTIC MATERIALS LTD

HCA1534/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1534 OF 2003

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J U D G M E N T

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1. I shall deliver one judgment in the two matters that are before me. There are before me two actions. The first in time, Action 1543 of 2003 issued on 30 May 2003, is by Kader Industrial Company Limited, a well-known manufacturer of children's plastic toys, against Ngai Hing Hong Plastic Materials Limited. Ngai Hing Hong is a subsidiary of an equally well-known public company which specialises in a supply of plastic resins.

2. In that action, Kader sues Ngai Hing Hong, alleging that plastic resins supplied pursuant to two purchase orders in September 2002 were not suitable for the purpose for which they were supplied. Kader claims special damages put at US$590,000 and general damages to be determined. Ngai Hing Hong in its defence says that the goods were of merchantable quality, that the goods supplied corresponded with the samples supplied and the damages claimed are too remote.

3. By counterclaim in those proceedings, the sum of $160,000, being payment for the goods supplied on the two purchase orders, is claimed. In the second action in time, 1709 of 2003 issued on 13 May 2003, Ngai Hing Hong sues Kader for $643,900, being the total purchase price of plastic resin supplied pursuant to 18 purchase orders by Kader between 2 August 2002 and 28 October 2002.

4. Kader's defence is, first, an allegation that as far as two purchase orders totalling about $145,200, the goods were not of merchantable quality, and as to one purchase order, the unit price was lower than that claimed. Sensibly, Ngai Hing Hong, to save costs, does not pursue the difference of $4,000. There appears therefore to be no dispute as to the balance of the claim of some $480,000. However, Kader seeks to set off the damages claimed in Action 1543 against the total amount claimed in Action 1709.

5. This scenario leads to two summonses which I have had before me today. First, in Action 1709, Ngai Hing Hong seeks summary judgment pursuant to Order 14, rule 1, for $639,000 or alternatively interim payment of that sum pursuant to Order 29, rule 10. Second, Kader, in Action 1534, seeks to consolidate the two actions pursuant to Order 4, rule 9.

6. As to the application for summary judgment, the real issue between the parties is whether Kader can set off the amount claimed by way of damages in Action 1534 against the liquidated sum in Action 1709. Two substantive matters of defence are raised by Kader in 1709, but they only relate to a total sum of $145,255 arising from two of the 18 invoices subject to the writ. I do not intend to deal with those in substance because I am satisfied that the set-off ought to be allowed, except to the extent that I will later indicate.

7. Mr Zimmern claims for Kader a right of equitable set-off. The law is well stated in Hong Kong in Town Earn Industrial Ltd v Golden Globe Holdings Ltd [2003] 1 HKC 187 in the following terms. Page 191I:

"Before it is appropriate to permit a defendant to set off amounts counterclaimed, it has to be established that the set-off or counterclaim which is being maintained by a defendant relates to the same or closely connected subject matters as the claim which is being made by the plaintiff."

6. And after Mayo JA has cited an extract from Potter LJ in Bim Kemi AB v Blackburn Chemicals Ltd [2001] 2 Lloyds Report 93 at 100, he says at page 192I:

"It is apparent from this extract from the judgment that an overall view of the situation has to be considered and that no single factor is likely to be conclusive of the matter."

7. The relationship between Kader and Ngai Hing Hong is one which extends over more than five years. During that time there has been a long-established trading relationship involving primarily the supply of plastic resin, the item that is the subject of the dispute. It is Kader's case that when a particular type of resin was unavailable, on the recommendation of Ngai Hing Hong a substitute was purchased. The dispute has arisen from the alleged unsuitability of that substitute.

8. In none of the affirmations filed by Ngai Hing Hong has it been suggested that the goods supplied were other than plastic resin. Mr Chong now says that some are not and accordingly they are not so closely associated with the transaction as to give rise to a right of set-off. If such a submission is to be made, it ought to be supported by proper evidence. It was not. In fact, the submission is contrary to an assertion made by Ngai Hing Hong's solicitors in two letters, dated 17 March 2003 and 29 April 2003, in which they sought a total of $804,285, described as being "the total price of plastic materials sold and delivered".

9. It is not without significance that Mr Chong was obliged to concede that the whole of the sum claimed in 1709 could properly have been incorporated in the counterclaim in 1534. To separate the two sums into two sets of invoices was inconsistent with the way in which the parties had been dealing with the matter, and produced an unnecessarily expensive course.

10. In the circumstances, I accept Mr Zimmern's submission that the connection between the invoices is such that the test of close connection has been met. But even if there is not an inseparable connection between the contracts, it is clear that the contracts are different but closely connected contracts arising out of a long-standing relationship that has been subsequently terminated. The claim for damages by Kader is a substantial claim and is prima facie supported by technical evidence. The pleading by Ngai Hing Hong that it did not suggest alternatives, but merely supplied what was sought is, on a first reading at least, inconsistent with the assertions made by its employees in the affirmations that have been filed.

11. The claim by Kader is one that is not only not moonshine or shadowy, but seems to have a real justification. In those circumstances, taking an overall view of the situation, I am of the view that it would be manifestly unjust to allow one claim to be enforced without taking into account the other. That being my view, it is not necessary for me to consider Kader's subsidiary argument that clause 8 of the purchase orders, which provides for a right of set-off in relation to amounts owing, may also be relied upon.

12. Four of the invoices pursued in Action 1709 plainly arose after the dispute and after an email from Kader to Ngai Hing Hong on 19 September 2002 in which it was said, "We do not accept your products any more". They are invoices 131980, 132701, 132702 and 132703 in a total sum of $20,852.50. Kader, having elected to make those purchases after the dispute was known, cannot have a set-off for those sums as it is plainly not permissible for a company to establish a debt with a view to creating a set-off. The situation is entirely different where the debt exists before the dispute arises.

13. There are two invoices dated 24 September 2002. I find that those are sufficiently close in time to the email, that I will give Kader the benefit of the doubt and say that they may well result from the ongoing relationship between the parties and the precise date on which the contract was made is a matter that is yet to be proved. The application for summary judgment therefore will be dismissed except as to the sum of $20,852.50.

14. There is weight in Mr Chong's submission that the subsequent involvement of a third party in Action 1534 creates practical difficulties if the two actions were to be consolidated. However, it is clear that 1709 ought not to be heard, other than at the same time as Action 1534. Whether that will be at the same time or one immediately after the other is a matter that is best left for the trial judge.

15. The application for consolidation is refused. However, there will be an order that both actions are to be tried together by the same judge.

(Submissions on costs and form of order)

16. All costs are reserved. In Action 1534, there will be summary judgment for $20,852 and unconditional leave to defend in respect of the balance.