LO WING KEI ALEX t/a WANG WAH DEVELOPMENT CO. v. ZEE MEY FONG t/a YU WOO CO.

1998, No. 195
(Civil)

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

(On appeal from HCA5572 of 1997)

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J U D G M E N T

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Rogers, J.A. :

Introduction

1. This is an appeal from a judgment of Stock, J. given on 9th July 1998 on an appeal on an Order 14 application from the Master. Both the Master and the Judge gave judgment for the Plaintiff against the Defendant. The Defendant appeals to this Court.

2. The facts of the case arise out of a contract for the sale of 120,000 yards of linen. The contract price was US$3.03 per yard. There is no dispute that the linen was delivered in two lots, one of 63,440 yards and the other was 56,680 yards.

3. The dispute between the parties turns upon the question of how the contract is formed. The Plaintiff's case put simply is that it was a contract in writing : It so happened to be made on a standard form of the Defendant which was modified to be used not as one of the Defendant's sales contracts but as one of the Defendant's purchase contracts. The Defendant, on the other hand, says that the contract was made orally, although there was a record made on the particular day, namely 22nd November 1996 : the written document was not intended to be a contract but was merely intended to be a record to be shown to the Plaintiff's own sellers to satisfy them that the Plaintiff had itself found a buyer. There is no dispute between the parties that the Defendant itself was not going to use the linen but was going to on-sell it to another trader and indeed that sub-purchaser itself was going to on-sell it to a party in the People's Republic of China who would use it for manufacturing.

4. The written terms on the reverse of the Defendant's standard form include this Clause 13 :-

"13. The Buyers approve of all goods provided they make no written claims within one week after arrival of same. No claims will be entertained by the Sellers after the goods has been removed from the place of delivery or/and exported by the Sellers, or cut or through any process."

5. The first observation which the Defendant makes is that such a Clause would be unsuitable for a local sale. Furthermore, the terms of the written document provide for the quantity, price, packing description, total contract value but importantly that the contract was to be CIF and the payment by TT.

6. The Defendant, on the other hand, says that the oral contract was the same as to the quantity and the nature of the goods and the price and that goods were to be delivered by 15th December 1996. Next, and this is in contrast to the terms in the written document, that the Defendant shall make a down-payment to the Plaintiff before delivery and, importantly, that the Defendant shall pay the balance of the price to the Plaintiff only after the goods were confirmed to be of acceptable quality by the sub-buyer after the requisite dyeing process had been carried out by the manufacturer in the People's Republic of China.

7. The dispute between the parties is therefore clearly defined. The Judge came to the conclusion, however, that the Defendant's case was not believable. He did so entirely on the written material, namely the affidavits and the exhibits which are before us. He was therefore in no better position, nor was the Master, than we are to assess the same.

8. The Judge gave six reasons as to why he considered the Defendant's case to be unbelievable. Mr. Li, on behalf of the Defendant, says that no doubt the points made by the Judge are strong points but he says that they are not matters which rendered his case totally unbelievable. They may constitute difficulties which a Defendant would have to face if there should be a trial.

9. The first point at page 7 in the judgment was that substantial payments had been made by the Defendant to the Plaintiff well after the arrival of the goods in Hong Kong and after the Cargo Receipt was issued and after the Defendant had taken a sample of the goods. The actual chronology of the payment is that the Defendant made a first payment of $150,000 by cheque which is dated 11th December 1996. Interestingly, written on the side of that cheque is a notation by the Plaintiff which says "Received provisionally from Yu Woo Company No. 2836. Deposit of $150,000 to be deducted from purchase price." That was a payment which the Defendant says was entirely consistent with what they say was the oral contract and inconsistent with the terms of the written document which required the payment to be made by TT.

10. There were two subsequent payments which were made towards this contract by the Defendant. One was by a cheque or transfer which was made on or about the 24th December of $150,000 and the other was a transfer by Letter of Credit of $450,000 which was effected on the 23rd December. The Defendant says that those payments were made at the request of the Plaintiff because the Plaintiff had complained that it was short of funds and urgently needed the funds. The Defendant says that it was under no liability to make the payment because the Condition which I have recited which would trigger the full payment for the goods had not yet been complied with. The Defendant avers that the payments were not made to acknowledge the acceptability of the goods but simply to accommodate the Plaintiff.

11. Strange though this is, it is clear from the chronology that as a practical matter, the Defendant would not have been in a position to examine the linen and certainly not the quantity which it was purchased. It may indeed have taken 2 yards of material from the godown on or about the 5th December as is demonstrated by a godown warrant. But that, in itself, cannot constitute a proper inspection of the total quantity.

12. The next point was in relation to the suggestion that the parties reduced matters to writing to show to the Plaintiff's supplier but did not reduce matters to writing for their own benefit. The Judge said that in the context of this particular case, that was also "inherently unlikely".

13. I would draw attention here to the use of the expression "inherently unlikely". I do so for this reason that it is trite law that final judgment on a summary judgment application should only be given if the Defendant's case is unbelievable. The question as to whether it is "inherently unlikely" may go as to whether leave to defend should be given on conditions but, as submitted by Mr. Li, the Defendant should not be driven from the judgment seat, simply because the facts which it puts forward are "inherently unlikely".

14. In my view, the Judge was justified in saying that the facts put forward do give rise to very serious problems but I would not dismiss, out of hand, the Defendant's case as to the formation of the contract.

15. The next point is a point which I have found troubling. The Judge said that there was no evidence at all from the sub-buyer of any defect in the goods or evidence in writing of any complaints by them to the Defendant. Indeed, the whole question of defects in the goods appears to be extremely troublesome. There seems to be established the fact that the Defendant did indeed complain, probably by telephone, but certainly orally soon after the goods were delivered. The early correspondence from the Plaintiff's solicitors acknowledges such complaint by the Defendant as to the quality of the goods. The Defendant says that it received a fax from its sub-buyer complaining of the quality of the goods. However, that fax was destroyed and is not available. There is no evidence from the sub-buyer. The Defendant says that it has never been paid for the goods as a result of the defects in quality. It is extremely strange that now nearly two years after the goods were delivered, there is nothing more than I have outlined in relation to the quality of the goods save for one inspection made by a testing company in Hong Kong after the action was commenced in December of last year.

16. The test report produced by that company is, to my mind, not in itself satisfactory. It does indicate that there were two holes, but what those holes actually were, is not clear because the report merely says that they were "structural yarn breakage effect(s) which could be visually inspected". Whether these two holes in the sample of fabric, the size of which is not clear, constituted defects in the fabric which made the fabric unacceptable it is impossible to say.

17. On this aspect, therefore, I am troubled about the presentation of the Defendant's case but again, I am not prepared to rule out the Defendant's case entirely. I do however find this aspect particularly suspicious. What I have said in respect of the third point referred to by the Judge also covers the fourth which was that there were no written complaints.

18. The Judge then refers to the fact it was beyond dispute that the Defendant was permitted to take yards of cloth from the godown on the 5th December and 19 days later issued a document acknowledging receipt in good order in respect of some of the goods. I have already pointed out that there were only 2 yards of material which were taken. As a practical matter, I find it difficult to place overwhelming reliance upon the acknowledgment of the goods being in good order because I find it difficult to conceive that the Defendant could have inspected the quantity of linen which was delivered on that occasion in time for it to make a meaningful acknowledgment as to the quality.

19. The final matter was that in the original Defence as filed, the Defendant merely denied all the Plaintiff's allegations. This, in fact, was a matter what I would term "gamesmanship" by the Defendant which, to a certain extent, succeeded. The Defendant was taking the point that the Plaintiff had sued as a firm but was not entitled to do so because the Plaintiff was in fact a sole proprietorship. In the result, this tactic caused the Plaintiff to amend its name and nomenclature, both in the writ and the Statement of Claim. Whilst I would not wish to be taken as in any way encouraging such gamesmanship which should really be dealt with by a letter, I do not think in the circumstances of this case it should be taken as indicating a lack of a bona fide defence.

20. As is said in the White Book, although the Plaintiff is permitted to answer the Defendant's evidence, the case cannot be tried on affidavits and if the Defendant's affidavit discloses a defence based on disputed facts, it is generally useless for the Plaintiff to reply: see notes 14/3-4/6. In my view, I would only add that parties should be discouraged from lengthy Order 14 proceedings. Order 14 proceedings are there for clear cases where there is no dispute. It is extremely difficult, in my view, to show that a Defendant's case is totally unbelievable on the facts and in this case, I have reached the clear conclusion that although I consider the Defendant's case shadowy and with inherent difficulties, some of which I have outlined, it should not be treated as being totally unbelievable.

21. In my view, the Defendant should be allowed to defend this case but only on terms. Those terms should be stringent terms. The terms which I would propose would be that substantially the claim which the Plaintiff is making should be secured, either by a payment into court or by some other form of security such as a bank guarantee.

22. I would therefore propose that this appeal be allowed, the Defendant be given leave to defend the case conditionally upon a payment into court or the provision of a bank guarantee in the sum of $2 m.

Liu, J.A.:

23. For the reasons given by My Lord, Rogers, JA, I agree that the appeal be allowed, the orders made by the Judge and the Master be set aside, and conditional leave be granted in terms as proposed by Rogers, JA.

Nazareth, V.-P.:

24. I also agree with Rogers, J.A., including his observations and the orders he would make.