DENADA LTD v. TECULTURE CONSULTANCY

DCCJ 685/2019

[2021] HKDC 146

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 685 OF 2019

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J U D G M E N T

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1.  The plaintiff brought this action to claim damages arising from the alleged repudiation of the defendant of a written contract dated 1 September 2018. The plaintiff complains that the defendant failed to place any order for a special hard disk (“the Miner”) pursuant to the contract.

2.  The defendant is on record represented by Messrs Franki Ho & Associates (“the Firm”).  Mr Cheung, who is a solicitor of the Firm, appears on the first day of the trial and informed the court that the Firm had no instruction to act for the defendant in the trial. Indeed, the defendant tried to file a notice to act in person in December 2020 but in vain.  The notice was found to be defective and was returned to the defendant by the Registry.  Since Mr Lam who is the sole director of the defendant, has been out of town, according to Mr Cheung, he was unable to rectify the defect and hence the Firm remains to be the solicitors for the defendant.  Mr Cheung confirms that the defendant has full knowledge of the trial but has given no instruction to the firm at all.  There is no reason why this court should not proceed with the trial in its absence. 

The Plaintiff’s Claim

3.  The principal allegations in the Amended Statement of Claim are as follows:  both parties are locally incorporated companies. The plaintiff carries on its business as a supplier of data storage equipment. 

4.  On 1 September 2018, Mr Alfred Lam, the managing director of the plaintiff, entered into the contract with the defendant on behalf of the plaintiff whereby the plaintiff agreed to sell and the defendant agreed to buy a minimum of 100 units of the Miners at the unit price of HK$39,450.00 on or before 30 November 2018 (the “Contract”).

5.  There is an express provision in the Contract, namely, clause 4, that in the event that the defendant fails to place any order of the Miners below the minimum number of units, the defendant is liable to pay “Minimum Order Quantity Compensation” (“MOQ Compensation”) to the plaintiff.  The MOQ Compensation is to be calculated in the following manner:

(100 units - Quantity purchased) x HK$39,450.

6.  To perform the Contract, the plaintiff entered into a written contract with its supplier. 

7.  However, the defendant failed to place any order pursuant to the Contract on or before 30 November 2018 or at all. 

8.  Despite the demand letters dated 3 December 2018, 14 December 2018 and 2 January 2019, the defendant has failed to pay the plaintiff anything. 

9.  The plaintiff claims that the MOQ Compensation in the amount of HK$3,945,000 is payable by the defendant pursuant to the Contract. The plaintiff agrees to abandon the amount in excess of the monetary jurisdiction limit of the District Court and now claims HK$3 million only against the defendant. 

10.  Alternatively, the plaintiff claims damages in the sum of around HK$2 million for the loss and damage it has suffered. 

11.  The defendant has filed its Amended Defence. Basically, two issues are taken.  First, it is alleged that Mr Kong, who signed the Contract purportedly on behalf of the defendant, had no authority to do so.  Mr Kong was only a freelance consultant with the title of Operations Director only. 

12.  Ms Lu was the sole director of the defendant at the material time. 

13.  Second, it is alleged that clause 4 of the Contract, which provides for the MOQ Compensation, is a penalty provision and so it is not enforceable.  It is averred that it is not a genuine pre-estimate of damages. 

14.  In the Reply, the plaintiff alleges that Mr Kong did have the actual authority to conclude the Contract on behalf of the defendant.  Alternatively, Mr Kong had the apparent authority to act for the defendant at the material time. 

15.  On the penalty issue, the plaintiff makes the following averments: 

(a)     In the course of the negotiation leading to the conclusion of the Contract, Mr Kong initially indicated to Mr Lam that the defendant would commit to purchase 300 pieces of the Miners. 

(b)     The Contract also provides for the 3-month lock-up period for the quotations of the Miner.  It was also a consideration in exchange for the provision of more time for the parties to proceed with the subscription of the Miner, in view of the nature and the nature of cryptocurrency mining and transactions and, inter alia, and in particular the volatile nature of the unit prices of cryptocurrencies.

(c)     The Miners are tailor-made for the defendant as it is specifically designed to maximize the optimal performance of cryptocurrency mining.

(d)     The specifications as required by the defendant is not common among domestic users and would require inquiries and placing of orders well in advance.  Therefore, there is no readily available market to resell the Miners and it is normally required for the purchase to provide a commitment as to the minimum quantity of the Miner that the purchaser intends to purchase. 

16.  Now I turn to the evidence.  Mr Alfred Lam is the sole witness of the plaintiff.  In the witness box, he adopted the contents of his witness statements as his evidence, which is not challenged. His evidence supports the allegations in the Amended Statement of Claim and the Reply and is not contradicted by any contemporaneous documents.  Nor does it appear to have any inherent improbabilities. Indeed, it is, by and large, supported by documentary evidence. I see no reason why I should not accept his evidence in its entirety. 

17.  Mr Alfred Lam explains that the Miner to be supplied under the Contract is an IPFS data storage equipment which is specifically designed for the purpose of mining of cryptocurrency or cryptocurrencies.  It is not a usual product available off the shelf. 

18.  It is noteworthy that Mr Alfred Lam produced a screenshot of certain text messages exchanged between Mr Kong, Ms Lu and him on 31 August 2018 in respect of the Contract.

19.  Ms Lu has filed her witness statement but she did not attend the trial.  I give no weight to her witness statement. 

20.  On the authority issue, I accept the evidence of Mr Alfred Lam and I am convinced particularly by the text messages showing the involvement of Ms Lu in the process.  I find on balance of probabilities that Mr Kong did have the actual authority to represent the defendant to negotiate and conclude the Contract with the plaintiff. 

21.  The remaining issue is the enforceability of the provision for the MOQ Compensation.  On this issue, Mr Wong, counsel for the plaintiff, pertinently cites three authorities to assist this court. 

22.  First, in the leading authority relating to the enforceability of provisions for liquidated damages, Dunlop Pneumatic Tyre Company Limited v New Garage & Motor Company Limited [1915] AC 79 at 87-88, Lord Dunedin stated the following:

“(a) It will be held to be penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach.

(b) It will be held to be a penalty if the breach consists only in not paying a sum of money, and the sum stipulated is a sum greater than the sum which ought to have been paid.

(c) There is a presumption (but no more) that it is penalty when ‘a single lump sum is made payable by way of compensation, on the occurrence of one or more or all of several events, some of which may occasion serious and others but trifling damage’.

On the other hand:

 (d) It is no obstacle to the sum stipulated being a genuine pre‑estimate of damage, that the consequences of the breach are such as to make precise pre‑estimation almost an impossibility.  On the contrary, that is just the situation when it is probable that pre‑estimated damage was the true bargain between the parties.” 

23.  Next, in Ip Ming Kin v Wong Siu Lan (unreported), CACV 201/2012, 28 May 2013,Kwan JA said this at paragraphs 36 to 38,

“36. There is no reason in public policy why the parties to a contract should not enter into a sensible arrangement under which each would know in advance with a reasonable degree of certainty the financial consequence in the event of a breach by the other party, and the more difficult it is to prove and assess the loss, the greater the advantages to both of fixing by the terms of the contract a readily ascertainable sum to be paid, thereby avoiding litigation, and, if this is not possible, reducing the legal costs of proving the loss. The courts should not be astute to descry a clause in a contract which stipulates a sum to be payable by the party in breach, lest they impinge on the parties’ freedom to settle for themselves the rights and liabilities following a breach of contract.

37. Because the rule about penalties is an anomaly within the law of contract, the courts are pre-disposed, where possible, to upholding contractual terms which set the level of damages for breach, especially in commercial contracts made between parties of comparable bargaining power. As Lord Woolf has said in the Philips case at 280, ‘the fact that two parties who should be well capable of protecting their respective commercial interests agreed the allegedly penal provision suggests that the formula for calculating liquidated damages is unlikely to be oppressive.’

38. The onus of showing that a contractual provision is a penalty clause lies on the party who is sued upon it.” 

24.  Lastly, Mr Wong refers to me M & J Polymers Limited v Imerys Minerals Limited [2008] 1 CLC 276.  There, the parties entered into a supply contract for chemical dispersants.  The contract had a three-year minimum term and article 5 required the buyer to order minimum quantities of products on a take or pay basis, meaning it had to pay for the minimum quantities even if they had not been ordered.  A similar penalty issue was raised.  Burton J first noted that such take or pay clauses are familiar provisions in commercial contracts but there is no previous authority as to whether they amounted to a penalty.  The judge then proceeded to decide the point de novo.

25.  In paragraph 44, Burton J said this: 

“I am satisfied therefore that, as a matter of principle, the rule against penalties may apply. However, it is certainly not the ordinary candidate for such rule, such as where, for example, a sum is specified which is found not to be a ‘genuine pre‑estimate of damage’ or a sum is stipulated as ‘in terrorem’ of the offending party (see the seminal passage in Lord Dunedin’s speech in Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1915] AC 79, 86-88. Mr Brunner submits that to impose an obligation to pay the price, albeit at the option of the innocent party, rather than to pay damages is bound to result in a sum being paid which is in excess of the innocent party's loss by virtue of non-acceptance. I am far from persuaded that that is the case, for there may be situations (and Mr Brunner was not able to argue that that might not have been the case here) in which if goods have been manufactured they are simply unsaleable, and if their storage has been costly the price may even amount to a lesser sum than might have been recoverable by way of a damages claim: or if the goods have not been manufactured the outgoings, by way of expenditure upon raw materials, staff, equipment, utilities, etc, perhaps at a time of industry downturn, may well have been expended in any event.”

26.  All these three authorities are very helpful.  The starting point must be the burden of proof of illegality, which rests on the defendant.  The defendant has adduced no evidence to discharge this burden. 

27.  Furthermore, I am persuaded by the plaintiff’s evidence and its averments in the Reply, in particular due to the rarity of the Miners and the volatility of their market price, the MOQ Compensation provision is indeed a genuine pre‑estimate of damage. 

28.  I am persuaded that this court should uphold the validity of the provision and conclude that it is not illegal and is enforceable. 

29.  For the reasons given, the plaintiff must succeed in its claim against the defendant.  I enter judgment against the defendant in the sum of HK$3 million.  I also allow interest thereon from the date of the writ to the date of the judgment at the rate of 1% over the prime and thereafter at the judgment rate until full payment. 

30.  There is no reason why costs should not follow the event.  I make an order that the defendant do pay the plaintiff its costs of this action, including any costs previously reserved, with certificate for counsel.

31.  It remains for me to thank Mr Wong for his clear and helpful submissions.