XCHRX UNION COMPUTER LTD. v. PERSONAL COMPUTER INTERNATIONAL LTD.

HCA 20536/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CIVIL JURISDICTION

ACTION NO. 20536 OF 1998

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D E C I S I O N

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Background:

1. Prior to 1995, the plaintiff had engaged the services of the defendant's predecessor company, VTEC, to assemble computer add-on cards. Under those arrangements, the plaintiff provided the necessary materials and VTEC provided additional parts and labour. The assembly work was performed by a joint venture factory owned by VTEC and a PRC partner in China (hereinafter called the "Chinese factory"). The defendant was incorporated in 1997 and replaced VTEC in its business with the plaintiff under similar arrangements.

2. By November 1998, the defendant alleged that outstanding assembling and material charges amounting to $4.8 million was due to the defendant. There is no dispute that at the same time, 51,000 sets of materials for assembling into computer add-on cards had been sent to the defendant for assembling, 19,248 sets of RMA goods and 6,978 sets of defective goods had been returned to the defendant for repair, and 1,579,911 items of materials for assembly purposes belonging to the plaintiff had been sent to the defendant. All these goods and materials had been sent to the Chinese factory. Despite repeated demands, these four lots of goods were not returned to the plaintiff. On 1.12.1998, the plaintiff issued a writ, without a statement of claim, demanding return of these goods. On 5.12.1998, the defendant commenced a separate action, HCA 20815 of 1998, to recover the outstanding assembling and material charges. The plaintiff's statement of claim was not filed until 29.1.1999. The plaintiff now seeks interlocutory judgment on liability and to strike out the defendant's defence and counterclaim.

The Plaintiff's Claim:

3. The defendant does not dispute that it received the four lots of goods from the plaintiff. Its defence is that under its oral agreement with the plaintiff, the Chinese factory was to perform assembly work exclusively for the plaintiff and for that purpose the Chinese factory had to increase its manpower from 50 to 150. In return, the plaintiff agreed to pay the defendant punctually and to take all steps to comply with requirements of the PRC authorities. As the plaintiff was in arrears, the defendant did not pay the Chinese factory which could not obtain the necessary certificates for sales verification from the Chinese National Foreign Exchange Control Office to enable the goods to be exported to Hong Kong. For the period from March to October 1998, a total outstanding remittance of RMB3,880,500 was demanded by the Chinese National Foreign Exchange Control Office. In the meantime, the Chinese factory became insolvent and the goods were sold by the Chinese factory or seized by its creditors and the PRC authority.

4. Mr. Chong, on behalf of the plaintiff, submitted that the plaintiff's claim is based on bailment and vicarious performance against the defendant and not its sub-contractor, the Chinese factory. He submitted that an action against a bailee, i.e. the defendant, can be regarded as an action on its own, sui generis, arising out of the possession had by the bailee of the goods. He further submitted that under the principle of vicarious performance, while the defendant was free to subcontract the assembly and repair work to the Chinese factory, it remained liable for any breach of its contract with the plaintiff.

5. The allegation about the oral agreement was not contested by the plaintiff. Mr. Chong submitted that that agreement was irrelevant as the plaintiff's claim is based on bailment. He relied on Halsbury's Law of England, 4th edition, Vol. 2, para. 1801 for his proposition. I do not think the learned writers of Halsbury should be taken as to mean that all actions in bailment can be regarded as an action on their own independent of the underlying contract. This is made amply clear by Lord Denning M.R.'s dictum in Building and Civil Engineering Holidays Scheme Management Ltd. v. Post Office, [1965] 1 All E.R. 163, which was relied upon by the learned authors of Halsbury. At page 167, Lord Denning held:

"At common law, bailment is often associated with a contract, but this is not always the case; see R. v. McDonald [1881-85] All E.R. Rep. 1063 at 1064, Meux v. Great Eastern Ry. Co. [1895-99] All E.R. Rep. 710. An action against a bailee can often be put, not as an action in contract, nor in tort, but as an action on its own, sui generis, arising out of the possession had by the bailee of the goods; ............. Suffice it to say at the present day that if goods, which have been delivered to a bailee, are lost or damaged whilst in his custody, he is liable to the person damnified (who may be the owner or the bailor) unless the bailee proves that the loss or damage is not due to any fault on his part: see Coldman v. Hill [1918-19] All E.R. 434 at 441, per Scrutton, L.J."

6. Thus according to Lord Denning, M.R., bailment often arises out of contract. Where it does not, then an action against the bailee can be regarded as an action on its own. There is no dispute that the materials for production of the 51,000 computer add-on cards and the 1,579,911 pieces of other materials had been delivered to the defendant for assembling pursuant to their oral contract, while the RMA goods and the defective goods had been delivered to the defendant for repair pursuant to implied terms under that oral contract. In the circumstances, I fail to see why the plaintiff should be allowed to proceed on bailment on its own without reference to the underlying contract. The terms of that contract are clearly relevant as to the parties' rights and obligations under the bailment.

7. Mr. Chong submitted that the 51,000 computer add-on cards were made of material belonging to the plaintiff, the 1,579,911 pieces of other materials were property belonging to the plaintiff, while property in the RMA goods and the defective goods had also passed to the plaintiff when they were delivered to the plaintiff by the defendant. He also submitted that the demands by the Chinese National Foreign Exchange Control Office produced by Mr. Chan in his affirmation are not referable to these lots of goods and materials.

8. According to Mr. Chan Ka Man's affirmation, the parties had entered into some long standing and exclusive arrangements, i.e. the Chinese factory was to manufacture exclusively for the plaintiff, there shall be minimum monthly orders, the Chinese factory shall increase its the manpower to meet the plaintiff's production requirement, the plaintiff shall make prompt payment to the defendant to enable the Chinese factory to meet PRC requirements, etc. In respect of this last item, the Chinese National Foreign Exchange Control Office requires remittance of gross profit into the PRC on a monthly basis before certificates of sales verification required for export of the goods could be issued. Mr. Chan alleged that as at October 1998, a total remittance of RMB3,880,500 was outstanding and Miss Li and Miss Tang promised to pay the defendant $1,500,000 before 25.11.1998 to meet part of that remittance demanded, but failed to do so.

9. In view of these long standing arrangements, it could be argued that the individual assembly contracts are in fact instalment contracts under a standing arrangement. As such, whether the four lots of goods are referable to the demands for remittance from the Chinese National Foreign Exchange Control Office is of no significance. Furthermore, in one of the notices issued by the Chinese National Foreign Exchange Control Office dated 8.10.1998, it intimated that if remittances are not received or sales verified, the office will suspend issuing certificates of sales verification for export. This means if the outstanding remittances are not received, certificates in respect of subsequent exports will not be issued. Thus, whether the goods are referrable to the demands is immaterial.

10. Further, according to Mr. Chan's affirmation, Miss Li has on behalf of the plaintiff acknowledged the liability to make payment of $1,500,000 so as to enable the goods to be exported from China. These allegations are not contradicted by the plaintiff. On the other hand, so far as the defendant's claim for assembling and material charges in Action No. 20815 of 1998 are concerned, the plaintiff has not given any specific defence other than a general denial. These allegations are evidence that the Chinese National Foreign Exchange Control Office requires proof of remittance from outside the PRC before certificates of sales verification would be issued so as to enable the goods to be exported from the PRC, that the plaintiff was in arrears in paying assembling and material charges, and that the plaintiff has accepted liability to make certain minimum payment before the goods could be exported from the PRC. In my view, all these are important issues for the defence which ought to be tried. In view of this, I also hold that the defendant's admission of having received the goods is not conclusive of admission of liability and that the defendant has disclosed a reasonable defence.

11. The present case is unlike the simple consumer case where a consumer returns goods to the manufacturer for repairs who then shipped the goods to its sub-contractor in China for repairs and the goods became caught for tax reasons. In that kind of situation, the consumer can institute an action against the bailee manufacturer on its own. Here, the plaintiff is in the business of manufacturing and is a party to the arrangement involving the Chinese factory to manufacture exclusively for the plaintiff's purposes. On the basis of Mr. Chan's affirmation, it is fully aware of the foreign exchange complication in exporting goods from the PRC and has agreed to meet those requirements.

Defendant's Counterclaim:

12. Mr. Chong submitted that the defendant's counterclaim is in respect of damages which are too remote as they related to damages suffered by the Chinese factory which were purportedly assumed by the defendant. Whether these damages are in fact remote, depends on what was in the contemplation of the parties at the time of the contract. In the light of the uncontroverted evidence contained in Mr. Chan's affirmation (as outlined above), the damages claimed may not be too remote. The counterclaim therefore does disclose a reasonable cause of action and is neither frivolous nor vexatious and should not be struck out.

Conclusion:

13. Accordingly the application to enter judgment under Order 14 and Order 27 and to strike out the defendant's defence and counterclaim is dismissed with costs and certificate for counsel, to be taxed if not agreed.

14. By consent, this action shall be consolidated with Court of First Instance Action No. 20815 of 1998.