HCA2277/2009
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
ACTION NO.2277 OF 2009
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BETWEEN
Princess Yachts International PLC
1st Plaintiff
Long Asia (HK) Limited
2nd Plaintiff
and
Master Yachts Company Limited
1st Defendant
Lam Ching Wah
2nd Defendant
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Before : Hon Yam J in Chambers
Date of Hearing : 9 December 2009
Date of Handing Down Judgment : 17 December 2009
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JUDGMENT
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1. The 1st plaintiff is a maker of luxury yachts and the 1st defendant is in the business of selling luxury yachts to Hong Kong customers. This hearing is mainly concerned with the yacht, Princess Yacht V65, Hull Number V65571 (“the V65”). From the affidavit of Mr Douglas Culverwell, Senior Sales Manager of the 1st plaintiff, the history regarding the V65 is this : In November 2008 the 1st plaintiff sold the V65 to the 1st defendant, who then sold on to a customer. The V65 was rejected by the customer for quality issue, and the 1st defendant agreed to take the V65 back.
2. Around the same period, the 1st plaintiff knew that the 1st defendant was in some financial difficulty. The 1st defendant ordered some vessels from the 1st plaintiff but the down payments as required under the terms of the distributorship Agreement were not paid by the 1st defendant. To aid the cash flow of the 1st defendant, the 1st plaintiff proposed that they would raise a credit note for £800,000 in consideration of the 1st defendant passing the legal title of the V65 to the 1st plaintiff.
3. The proposal concerning the transfer of the V65 is said to be discussed in the London Boat Show. The exact mechanism of the transfer was agreed via letter sent from the 1st plaintiff to the 1st defendant on 15 January 2009. The letter reads :
“This letter is to confirm our agreement to the following :
…
5. [The V65] will be used (under the [1st defendant’s] control and management) for occasional periods throughout 2009 but no more than a total of 30 days by your customer who will be purchasing a new Princess V85 for completion and delivery in December 2009. The order for this V85 will be placed with us together with a 20% initial stage payment and full specification before end of January 2009. …”
It is useful to note here that the customer of a V85 mentioned above turned out to be the 2nd defendant, Mr Lam.
4. The letter on 15 January 2009 was later codified into a contract entitled “Credit Back Transfer Agreement” (“CBTA”) signed on 17 February 2009. Clause 1.3 reads :
“[The V65], whilst under the ownership of [the 1st plaintiff], will remain under the control and management of [the 1st defendant] until the end of 2009 by which time, or earlier, [the 1st defendant] is obliged to repay to [the 1st plaintiff] the £800,000.00 credit and re-transfer ownership of [the V65] from [the 1st plaintiff] to [the 1st defendant]. [The 1st defendant] will remain responsible for the security and upkeep of [the V65] throughout.”
5. Pausing at this stage, it is pertinent to ask why the 1st plaintiff would allow the 1st defendant to remain in control of a luxury boat when the ownership has already passed to the 1st plaintiff, through the shelf company, the 2nd plaintiff. Mr Culverwell explained that there were two reasons behind such an arrangement. The first reason is that the 1st plaintiff wants the 1st defendant to market the ship and sell it to obtain enough money to repay the £800,000 loan. The second reason is that the 1st plaintiff wanted to let the prospective buyer of the Princess Yacht V85 (“the V85”) to use the V65 while the V85 is being made. Mr Gilbert Collins, solicitor for the plaintiffs, termed such an arrangement as a “sweetener”, which I think it means that the sale of the V85 became more attractive because of this arrangement.
6. At or around the same time, the 1st defendant contracted with the 2nd defendant for the sale of the V85. Although the contract does not have any title, for the purpose of this hearing it has been termed as “Sales and Charter Agreement” (“SCA”). Clause 4 of the contract stipulates that :
“4) Seller should provide a Princess V65 (year 2008) for free rental to buyer immediately upon receiving 30% down payment from buyer. This V65 will be returned to seller only after reasonable quality acceptance of the new boat V85. Should the new boat V85 has quality defects and couldn’t be fixed by seller within 3 months after buyer’s official notification, seller should immediately and unconditionally return any down payment received from buyer. Buyer shall maintain reasonable care of the said V65 and carry out maintenance schedule as prescribed on owner’s handbook.”
7. There were some disputes as to the exact date of when the CBTA and SCA were entered. There was also a dispute as to whether the 1st plaintiff knew of the SCA arrangement and the identity of the “customer” under the CBTA. These disputes are immaterial to this hearing.
8. The 1st plaintiff alleges that the 1st defendant was in breach of the CBTA by allowing the 2nd defendant to not just use the V65 (as stipulated in the CBTA), but also to remain in control and management of the V65 over several months instead of no more than 30 days.
9. On 11 November 2009, the plaintiffs made an ex parte application before Deputy High Court Judge Louis Chan for an injunction to restrain the 1st defendant from removing the V65 mooring at A38, Gold Coast Marina, Tuen Mun. Mr Lam (now the 2nd defendant), who was in possession of the V65 at that time, was also ordered to be restrained from removing the V65. That application was granted.
10. On 20 November 2009, the plaintiffs applied for an interlocutory injunction before me to restrain the 1st defendant and Mr Lam from disposing of the V65 or diminishing the value of the V65 or removing the V65 from mooring at A38, Gold Coast Marina, Tuen Mun and to order them to deliver up forthwith to the care and control of the plaintiffs until 9 December 2009 or until further order. I granted that application.
11. On 9 December 2009, the plaintiffs, by their Amended Inter Partes summons applied for a continuation of the Order made on 20 November 2009. Mr Lam appeared in this hearing as an applicant and opposed to the plaintiffs’ application. At the outset of this hearing I have asked Mr Wilfred Tsui, counsel for the applicant whether the applicant should be joined as the 2nd defendant. All parties before me agreed that this should be the case. I therefore made the order accordingly.
12. Mr Payne appeared for the 1st defendant for the first time in this action. He submitted on behalf of the 1st defendant that it would not object to the Amended Inter Partes Summons on the condition that the plaintiffs should give the 1st defendant seven days notice before moving the V65 out of Hong Kong.
13. Mr Tsui, counsel for the 2nd defendant, however opposed the plaintiffs’ application on three grounds of opposition. The first ground is that the 1st plaintiff was guilty of material non-disclosure in the ex parte hearing for interlocutory injunction. The second ground is that the SCA made the 2nd defendant a pledgee of the V65 so that the 2nd defendant has a right to possession. The third ground is that the balance of convenience is in favour of the 2nd defendant. I shall deal with the allegation of pledge first.
Pledge
14. Can clause 4 of the SCA, quoted above, give rise to a pledge? Mr Collins, for the plaintiffs submitted that it cannot. His submitted that no power of sale had been conferred to the 2nd defendant under the SCA. Thus it is inconsistent with an intention of a pledge. Mr Tsui rejected this submission and relied on The Odessa [1916] 1 AC 145 for the proposition that a power of sale needs not be written into the contract.
15. I do not think The Odessa can assist the 2nd defendant in any way. The background of the case was set in a period when Great Britain was at war with Germany. The Crown was entitled to seize the property of the enemies as prize. The issue was whether the property of the cargo had been affected by the pledge of the cargo. It was held that the pledge did not affect the property of the cargo and that the property belonged to a German subject and thus was liable to confiscation by the Crown.
16. The Odessa was instrumental to the development of the law regarding pledges, but it does not assist the 2nd defendant because the existence of a pledge was not disputed in that case. All that Lord Mersey said, obiter dicta , was that to every pledge there is a power of sale. But for this dictum to apply there should be a pledge in the first place. The existence of a pledge was not disputed in that case.
17. How can one ascertain whether a pledge has been formed in the contract? On my review of textbooks, most of which had not been cited to me, I have found three propositions as to the formation of pledge.
18. The first proposition is that all that is required is a contract, and a bailment of the chattel as a security for a debt . (Halsbury’s Law of Hong Kong , 4th edn, [280.006]; Chitty on Contracts , 30th edn, Volume II, 33-118). The proposition is founded on Coggs v Bernard (1703) 2 Ld Raym 909 where Sir John Holt CJ at 913 described a pledge as :
“… when goods or chattels are delivered to another as a pawn to be a security to him for money borrowed of him by the bailor; and this is called in Latin vadium , and in English a pawn or a pledge.”
The second proposition is that instead of “security for a debt”, pledge can also be a security for the performance of some other obligations (Interests in Goods , 2nd edn, page 621) :
“[Pledge] arises whenever one person (the pledger or pawner) transfers the possession of goods actually, constructively, or symbolically to another as security for the payment of a debt or for the performance of some other obligation .” [E mphasis supplied ]
19. The learned authors of Interests in Goods , Prof. Palmer and Prof. McKendrick, cited Australia and New Zealand Banking Group v Curlett, Cannon and Galbell Pty Ltd (1992) 10 A.C.L.C. 1292 (“the CCG case”) for the proposition that a pledge can be founded as a security for some other obligation. Ormiston J, after referring to the analysis by Mr Justice Story of the United States Supreme Court said :
“Despite the lack of recent authority there seems no reason to doubt the correctness of the width of Story's proposition. I therefore do not accept that a pledge should be limited to those securities created by the deposit of goods as security for the advance on moneys or in consideration of a debt.”
20. Immediately after citing the CCG case, the learned authors also cited Re Crosslett (Contractors) Ltd [1997] 4 All ER 115, in which Millett LJ stated the law in England at that time in terms of the first proposition at p.125 :
“… A pledge and a contractual lien both depend on the delivery of possession to the creditor. The difference between them is that in the case of a pledge the owner delivers possession to the creditor as security, whereas in the case of a lien the creditor retains possession of goods previously delivered to him for some other purpose.”
21. The third proposition, which is similar to the one submitted by the 1st plaintiff, can be found in Commercial Law (Goode, 3rd edn), at p.618 :
“… But the delivery of possession does not necessarily signify the existence of a pledge; it may equally be referable to an intention to create an equitable mortgage or charge. The capacity in which the creditor holds possession depends on the agreement of the parties. Is he intended merely to have possession, with a right of sale in the event of the debtor’s default, or is he to be a security owner (mortgagee) or chargee?”
22. Which proposition should this court adopt? I will deal with the third proposition first. The third proposition seems to suggest that for a pledge to be found, the pledgor must intend to give the pledgee a power of sale. However I am unable to find any authority to support this proposition. In fact, in p.584 of the same text, the learned author said :
“The earliest form of security was the pledge, in which the creditor took possession of the debtor’s asset as security until payment of the debt.”
There was no mention of any power of sale in p.584 and I am satisfied that what the learned author said in p.618 really meant this : If a debtor intends to create a pledge, he may have in his mind the conferral of a power of sale on the creditor because it is the very nature of pledge that a creditor should be able to sell the chattel in case of default.
23. Therefore I do not think that the third proposition regarding the requirement of a pledge is valid. The contract which gives rise to a pledge does not have to give the creditor any “power of sale”.
24. I turn now to the second proposition founded on the CCG case. While in principle there is no reason why a chattel cannot be pledged for the performance of non-monetary obligation, I am not prepared to widen the scope of pledge as Ormiston J did in the CCG case. The primary reason is business expectation. I cannot find any Hong Kong case which supports the extension of pledge to “the performance of other obligations”. Halsbury’s Law of Hong Kong still adopts the definition of pledge in Coggs v Bernard (the first proposition) and I believe that definition reflects what ordinary business people in Hong Kong consider as pledge.
25. If the scope of pledges is suddenly widened to include other obligations, then a bailor may suddenly become a pledgor overnight. I will illustrate this point with an example : C is a famous singer and D is in the business of organising concerts. C agrees to hold 10 concerts and D agreed to provide the necessary support. They agree to split all income generated by the concerts equally. 100 days before the first concert begin, and that was before any ticket was sold, C delivered a gold bracelet to D for use in the concerts.
26. Under the first proposition, since there was no debt between C and D on the date of delivery, the question of pledge does not arise (in the CCG case it was held that a pledge can be a security for a future debt , but I do not consider that that can be applied to the first proposition). Under the second proposition, it is at least open to D to argue that the chattel was “pledged” for the performance of an obligation by C (singing on stage). This example shows how an extension of the well-established law on pledges can affect the position of bailors.
27. Accordingly, I hold that pledges should not be extended to other obligations. I am satisfied that even if I am wrong on this point and that pledges do extend to other obligation, the 2nd defendant must also fail.
28. This is because clause 4 of the SCA quoted above provides that the V65 is provided “for free rental”. The clause also provides that if the V85 is defective, the 1st defendant should return the “down payment” to the 2nd defendant. This clause is silent on the situation where the 1st defendant is unable to deliver the V85. It does not say the V65 is given to the 2nd defendant as security for the deposit paid by him. It does not say at what time the 2nd defendant can exercise its power of sale and the method of dealing with the deficit/surplus from the sale of the V65 after setting off the part payment. If the parties had contemplated a “pledge” of whatever form, they would have at least added the above clauses. However instead of adding those clauses it just stipulates that the 1st defendant should “return” the part payment.
29. While the absence of these clauses is not fatal to a finding of pledges, it is certainly an indication to the parties’ intention. Accordingly I hold that the 2nd defendant has no chance of success under the second proposition.
30. The last issue is whether the 2nd defendant can succeed on the first proposition. I hold that he cannot. The first reason is that the part payment was not treated as a debt by both parties under clause 4 of the SCA. The second reason is that if the parties intended to create a pledge they would have added those clauses above. Accordingly, the 2nd defendant also cannot succeed on the first proposition.
31. I hold that the 2nd defendant is not a pledgee under the SCA and therefore he has no right to possession of the V65.
Material non-disclosure
32. I turn now to the first ground of opposition submitted by Mr Tsui. The main thrust of this ground is that in the ex parte application the plaintiffs said in their skeleton that the purpose of the ex parte injunction was to prevent the dissipation of the V65 as an asset, and the injunction was granted on that basis. However they failed to disclose that they were in the process of concluding a deal to sell the V65 and needed to take possession of it in preparation for the sale.
33. I cannot see how this could constitute material non-disclosure. The first reason is that the 1st plaintiff is clearly in the business of selling yachts. Surely the 1st plaintiff would want to take possession of the ship for the purpose of selling it, so the court must have this in mind when considering its application. The second reason is that the purpose behind the plaintiffs’ application needs not be considered. If the outcome of this application depends on the purpose behind, then a weird situation may occur where the application is refused if the V65 is to be sold but granted if the V65 is to be held by the 1st plaintiff, alongside its many other yachts, for no good purpose other than seeing its value dwindling away.
34. Accordingly this ground of opposition must fail.
Balance of convenience
35. Mr Tsui submitted that the balance of convenience is in favour of the 2nd defendant because his loss cannot be repaired by damages. The loss which Mr Tsui refers to is “in terms of [the 2nd defendant’s] social status of not being able to show his family and friends that he has a high class luxury yacht at his disposal” (para.33 of his skeleton). Mr Tsui further submitted at the hearing that luxury yacht of this class cannot be easily hired in Hong Kong.
36. Mr Collins challenged the difficulty of finding a high-class luxury yacht in Hong Kong. Mr Collins said that for the right price it is still possible to find such a yacht in Hong Kong and that the 1st plaintiff is fully prepared to pay damages for such costs if liability can be established.
37. I agree with Mr Collins and I would add that even if Mr Lam cannot find a suitable yacht in Hong Kong, he can still search for it in the nearby region. Thus damages is an adequate remedy for Mr Lam.
38. In any event, since I have decided that the 2nd defendant is not a pledgee under the SCA, the 2nd defendant does not have any right to possession in the first place, so it is not open to him to argue that he should have possession of the V65 now to save his social status.
39. I also note that clause 4 of the SCA provides “Seller should provide a Princess V65”. Thus his contractual right under the SCA can be satisfied by any Princess Yacht V65 and not just the one with hull number V65771.
Conclusion
40. I have had the benefit of the textbooks cited above and the very helpful analysis by Ormiston J in the CCG case and decided that the law regarding pledges is accurately stated in Coggs v Bernard . The 2nd defendant was not a pledgee under the SCA because there was no debt under the contract and the absence of the usual clauses indicates the lack of intention to create a pledge.
41. Further there was no material non-disclosure by the plaintiffs and the balance of convenience is in favour of the owner of the V65.
42. I would order in terms of the Amended Inter Partes summons with the additional order that the plaintiffs shall give 7-day notice to the 1st defendant before removing the V65 from Hong Kong.
43. Cost of this application be in the cause.
(D. Yam)
Mr Gilbert Collins of Messrs Boase, Cohen & Collins, for the Plaintiffs
Mr G. Payne of Messrs Tanner De Witt, for the 1st Defendant
Mr Wilfred Tsui, instructed by Messrs Li, Wong, Lam & W.I. Cheung, for the 2nd Defendant