KARPEX (HK) LTD v. YASMINE PRINTING (CHINA) LTD

CACV 124/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 124 OF 2006

(ON APPEAL FROM DCCJ NO. 3902 OF 2004

and DCCJ NO. 4102 OF 2004 (consolidated))

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DCCJ 3902/2004

BETWEEN

and

DCCJ 4102/2004

(Consolidated by the Order of Master K.W. Wong dated 21^st August 2004)

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REASONS FOR JUDGMENT

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Hon Cheung JA (giving judgment of the court) :

1. This is an appeal by Yasmine Printing (China) Limited (‘the defendant’) against the decision of H H Judge C B Chan in which the judge dismissed the defendant’s application for summary judgment on its counterclaim against Karpex (HK) Limited (‘the plaintiff’).  The defendant also appeals against the refusal by the judge to order the plaintiff to provide security for costs of the action.  A single judge of this Court granted leave to appeal.  We allowed the appeal and these are our reasons. 

The summary judgment

The claim

2. The defendant is a printer and manufacturer of paper products.  By a quotation dated 12 December 2003 and accepted by the plaintiff on 18 December 2003 (‘the first quotation’) the plaintiff ordered 3,000 sets of paper boxes from the defendant at the price of HK$18,000.

3. The defendant delivered the boxes to the plaintiff.  The plaintiff complained that the boxes were defective.  It alleged that the boxes were not of merchantable quality and fit for the purpose in that the boxes split open at the sides rendering them unsuitable for display and also adversely affecting the performance of the plaintiff under the contract with its customer. 

It sued the defendant for the sum of $495,000 by way of damages.

The counterclaim

4. The defendant denied the allegation and raised a counterclaim for the sum of HK$47,000.  The counterclaim was in respect of another quotation which was dated 7 January 2004 and confirmed by the plaintiff on the same day (‘the second quotation’).  By the second quotation the parties agreed that the defendant would manufacture 10,000 sets of boxes for the plaintiff.  The 10,000 boxes were delivered to the plaintiff on 14 January 2004.  They were accepted by the plaintiff who had failed to pay the contract price of HK$47,000. 

5. The defendant had in fact sued the plaintiff for the sum of HK$47,000 in the Small Claims Tribunal (‘the Tribunal’) in April 2004 before the plaintiff brought its claim for HK$495,000 against the defendant on 28 July 2004.  The defendant’s claim in the Tribunal was then transferred to the District Court and both claims were consolidated.

6. The plaintiff admitted that it had placed the second quotation with the defendant, however, it did not admit the defendant’s case on the delivery and acceptance of the boxes or its refusal to pay the HK$47,000.  Para. 10 of the reply pleaded that

‘... even if, which is denied, the plaintiff is owing to the defendant in the sum of HK$47,000.00, the plaintiff will seek to set off as much of its claim in the statement of claim as will be sufficient to satisfy the defendant’s counterclaim.’ 

Set-off

7. The defendant applied for judgment on the counterclaim of HK$47,000.  In refusing judgment the judge relied on Hong Kong Civil Procedure 2004 page 167 (now 2006 edition, para. 14/4/14) where it was stated that

‘    where the defendant can show an arguable set-off, whether applicable or otherwise, he is entitled to leave the defence to the extent of the set-off and the court had no discretion.’

8. The judge held that the plaintiff had raised an arguable set-off which should be tried because there was prima facie evidence that the amount of the set-off exceeds the amount of the counterclaim.

The three categories

9. Set-off is a well-recognized defence (Order 18 Rule 17).  It is not the form of pleading, but the true nature of what is pleaded, that determines whether what is pleaded is or is not a set-off : Hanak v. Green [1958] 2 Q.B. 9 at 26.

10. It is important to bear in mind the nature of a set-off.  The position is summarised in BICC Plc v. Burndy Corp [1985] 1 All ER 417 at 424-425 :

‘1) The first is set-off at law, or legal set-off as it is sometimes called, of mutual debts under the Statutes of Set-off, where the claims on both sides have to be liquidated debts or money demands which can be ascertained with certainty at the time of pleading......

2) The second form of set-off arose as explained by Parke B in Mondel v Steel (1841) 8 M & W 858, [1835-42] All ER Rep 511 and was a development of the common law: where an action was brought for an agreed price of a specific chattel sold with a warranty or a work which was to be performed according to contract, the defendant was allowed to plead by way of defence in reduction of the claim that the chattel, by reason of non-compliance with the warranty, or the work in consequence of the non-performance of the contract, was diminished in value.

3) The third form of set-off, often referred to as equitable set-off, arose in cases in which a court of equity would have regarded the cross-claims as entitling the defendant to be protected in one way or another against the plaintiff’s claims; these were particularly cases where the cross-claim was related to the subject matter of the claim and there were factors which would have rendered it unjust in the eyes of equity that the claim should be enforced without regard to the cross-claim.

For ease of reading, I have numbered the three types of set-off.

The plaintiff’s case on set-off

11. It is clear from the plaintiff’s pleaded case that its complaint is in respect of the alleged defects of the goods under the first quotation.  The alleged set-off is in respect of damages that arose from the defective goods under the first quotation.  It has not been alleged that the goods delivered under the second quotation were defective or that the plaintiff had suffered damage as a result of such defective goods.  This is made clear by the paragraph 17 of the second affirmation of Li Chi Shing Benjamin filed on behalf of the plaintiff where he stated that

‘ As a result of the defects in the 1^st Order (i.e. the first quotation) the plaintiff had suffered loss and damage in the estimated sum of $495,000.....  I have been advised and verily believe that the plaintiff is entitled to set-off (the sum of $47,000 ) from the plaintiff’s loss and damage.’

12. The so-called set-off relied upon by the plaintiff does not fall within the first two categories of set-off : there were no mutual debts and any breach of warranty only arose under the first quotation.  Neither does it fall under the third category.  Although in both transactions the defendant had manufactured boxes for the plaintiff it cannot be said that the second quotation was so closely connected with the first quotation that it is unjust to enforce the counterclaim of HK$47,000 without regard to the plaintiff’s claim of HK$495,000.  They were two separate commercial transactions that took place at different times.  The terms were different.

The Counterclaim

13. In the circumstances what the plaintiff had pleaded was not in the nature of a set-off against the sum of HK$47,000.  It was no more and no less than a counterclaim which is not connected to the subject matter of the second quotation. 

14. The principle is clear that if the counterclaim arises out of a separate and distinct transaction, the proper order on an Order 14 application should be for judgment to be entered for the plaintiff with costs without a stay pending the determination of the counterclaim (see para. 14/4/14 Hong Kong Civil Procedure).  This is precisely what has happened in the present case.  In respect of the sum of HK$47,000 there really is nothing to be tried and there is nothing unjust if the judgment is not stayed. 

15. I would refrain at this stage from expressing any view on the nature of the plaintiff’s claim but it does appear to be hugely overestimated. 

16. Accordingly, there should be judgment for the defendant on the counterclaim.

Security for costs

17. The defendant also applied for security for costs against the plaintiff.  The plaintiff is a limited company with a paid-up capital of HK$100.  The registered office of the plaintiff is a residential address in Tuen Mun, New Territories.  According to the letters sent by the plaintiff its address is located on the 21^st floor, 12 Hau Fook Street, Tsimshatshui, Kowloon.  A representative of the defendant had visited that address.  It did not have any signboard of the plaintiff.  Instead another company was operating at that address.  The basis of the application for security was on the ground that the plaintiff is a limited comapny and is impecunious. 

18. On 8 July 2004, while the defendant’s case was still in the Tribunal, the Tribunal had ordered the plaintiff to pay security in the sum of HK$47,000.  By a letter dated 14 July 2004 the plaintiff informed the Tribunal that if it was required to pay the security, it would face another financial difficulty and would not be able to pay the salaries, suppliers and the daily running cost for the company.  By a further letter dated 22 July 2004 the plaintiff informed the Tribunal that the plaintiff was relying on a personal bank loan of their directors. 

19. The plaintiff claimed that the address in Tsimshatshui is its business address.  It, however, did not respond to the defendant’s evidence that another company was observed to be operating at that address.  In opposing the defendant’s application for security, the plaintiff merely stated that

‘ in the event the defendant succeeds in defending the plaintiff’s claim, the plaintiff would be able to pay the costs of the defendant.’ 

20. It did not disclose its financial position at all.  It further stated that when it wrote to the Tribunal its business was still ‘embryonic’ and much of the daily running of the business was financed by directors’ loans.  However, the financial position has since been improved. 

21. In my view, the evidence relied upon by the defendant clearly is sufficient to draw an inference that the plaintiff would not be able to pay for the costs of the action.  The plaintiff has not adduced any credible evidence that it is able to do so. 

22. This, of course, is not the end of the matter because the court still has to consider whether security should be ordered considering the circumstances of the case. 

23. The plaintiff relied on the case of B J Crabtree (Insulation) Limited v. GPT Communication Systems Limited 59 Build LR 43.  In that case the plaintiff was a small limited company employed by the defendant to remove asbestos from its premises.  The contract price was £27,000. The plaintiff claimed £78,000 against the defendant being variations to the work.  The defendant counterclaimed damages of £105,000 for the costs of rectifying defective work and completing incomplete work.  The defendant asked for security for costs against the plaintiff. 

24. The English Court of Appeal held that security for costs should not be ordered because according to Bingham LJ :

‘ that these two claims -- the claim by the plaintiffs and the cross-claim by the defendants -- raise essentially the same issues and are going to be fully litigated anyway so far as one can tell.’

25. And according to Parker LJ :

‘ Here the situation is that, if the money is not paid into court and the plaintiff’s claim is therefore stayed; the defendant will still raise issues on the counterclaim which are precisely the same as the issues which he would raise on the claim.  In the result, findings might be made on the counterclaim which clearly showed that the plaintiff’s claim which had been stayed was a good and sound claim.  The result would then be that the stay would be lifted and there would then be judgment for the plaintiff on the claim (notwithstanding the fact that he had not paid the money into court) with appropriate orders as to costs.  This being the situation, it appears to me that the only effect of the application for security will be that, if the money is not paid in, the defendant has the right to begin rather than the plaintiff.  That seems to me to be nothing less than the use of the rule to obtain some tactical advantage rather than to obtain protection.’

26. The situation is, of course, different in this case.  There is nothing to litigate on the counterclaim.  Whatever costs to be incurred will be incurred solely by reason of the plaintiff’s claim of HK$495,000.  While the court should ensure that security for costs is not used as an instrument of oppression to stifle a genuine claim, there is nothing unjust in this case for the security for costs to be imposed. 

27. As to the amount of the security, the sum of HK$100,000 is appropriate for costs until the conclusion of trial.  We ordered this amount to be paid into court within 42 days.  The claim is stayed pending the payment into court.  In default of payment the plaintiff’s claim is dismissed with costs to the defendant.

Conclusion

28. The defendant’s appeal on summary judgment and on security for costs were accordingly allowed with the orders as indicated.  The defendant is entitled to the costs of the appeal and also the costs below save that the defendant is only entitled to half of the costs of the hearing of 25 August 2005 before the judge in respect of the summary judgment application.