MICHELLE ELECTRICAL SUPPLIES (HK) LTD v. M & V ENGINEERING (E & M) LTD

DCCJ 3070/2006

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 3070 OF 2006

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Reasons for Decision

Introduction

1. The Plaintiff applies for summary judgment against the Defendant for the unpaid price of goods sold and delivered in the sum of $240,880.04. It was admitted by the Defendant that the goods in question, comprised mainly of specified kinds of cables, were sold and delivered. The goods were sold under the master contract PO-336-06 and the contract PO-PHP-14, and  were delivered under 19 invoices dated between March and May 2006.

The Disputes

2. The Writ was issued on 21 June 2006. At first, the Plaintiff admitted that the invoices relating to Items 10 to 19, as specified in the Statement of Claim, in the total sum of $34,571.20 were not due as at the date of the issue of the Writ (para.3 of the Reply to the Amended Defence and Counterclaim at p.A-25). Later it was conceded by the Plaintiff that out of the 19 invoices as stated in para.1 of the Statement of Claim, only 5 of them, namely, DO20060400501, DO20060500063, DO20060600159, DO20060500167 and DO20060500226, totalled $13,398.82, were still within the 60-day credit period when the Writ was issued. Hence, Counsel for the Plaintiff submitted that the total sum at stake as of the date the Writ is $227,481.22.

3. The Defendant did not dispute that the goods were sold and delivered. Neither did the Defendant have any complaints as to the goods. However, it resisted the present application on the basis that there is an equitable set-off and a counter-claim for a total sum of $367,191.38 as particularised at para.19 of the Re-Amended Defence and Re-Amended Counterclaim (p.192 in the bundle).  The Defendant argued that there was a variation of the master contract PO-336-06 in that there existed one so-called ‘May Contract’ in respect of another contract under the reference  PO-336-09 and the Conduit Contract. The Defendant claimed that they have the defence of set-off and a counterclaim that would exceed the value of the Plaintiff’s claim.

4. As can be seen, the alleged breach of the Conduit Contract involved a small sum of $2,985.44 only. Such an assertion was only raised in the proposed Re-Amended Defence and Counterclaim. There is no dispute that in PO-336-06, it was stipulated that “all delivery must be completed on or before the end of March 2006, later than the previous period, the price will be negotiated.” (p.B-22 of the Bundle). There existed a “plus or minus 15% variation” term in the contract. The Plaintiff is prepared to admit that the Defendant has an arguable case in respect of two items in the Order because of the 15% upward variation, that is, 3,500m under Request 4A and 3,000m under Request 6A (p.186 in the bundle).

5. In the present case, the Defendant claimed that the goods so ordered under PO-336-06 and PO-336-09 were used for the St Paul’s projects. The Defendant claimed that the Plaintiff had failed to supply some of the cables to the Defendant at the old unit price as agreed in PO-336-06. The claims hence turn on same or very similar findings of fact. The Plaintiff accepted that of the 6 requests as pleaded in para.6 of the Amended Defence and Counterclaim, 3 of them were made after 31 March 2006. As such, given the ‘15% plus or minus’ margin, the Plaintiff conceded that it has failed to deliver a total of 13,500 meters of 1.5mm2 cable and 6,500 meters of 4mm2 cable. For the 4mm2 cable, the Plaintiff claimed that the maximum quantity that the Defendant could request should be 34,500 meters as the original purchase order was 30,000 meters.

6. The Plaintiff claimed that PO-336-06 was terminated on 31 March 2006, and transactions after April 2006 were made separately even though the same PO number was used in the invoices (see invoices dated  20 April 2006 at p.136 in the bundle). In this connection, the Defendant argued that PO-336-06 was not terminated by the end of March 2006, and the Defendant was only notified of the termination of that Purchase Order till 28 April 2006 (para 26 at p.73 in Bundle A).

7.  The Defendant also alleged that on or about 22 April 2006, the Plaintiff and the Defendant had agreed to vary the Purchase Order to the extent that the Plaintiff would supply certain quantity of cables as evidenced at the fax document at p.160 in the bundle. The Plaintiff however complained that the Defendant was providing misleading information since the faxed document as provided by the Defendant (at p.160) differs from the copy of the document at p.36 as provided by the Plaintiff. Copy of the faxed document (at p.38 or p.160) shows that receipt of the fax was at 11:01 am on 22 April 2006. But there are 2 dates on another copy of the faxed document (at p.36) with the latest date being 28 April 2006. In this version of faxed document (at p.36), there was a remark column saying in gist that there was no need to make further delivery of the quantity of goods under previous orders if that had not been done; and it was sufficient to deliver the quantity of cables as mentioned above. Whilst there is no conclusive evidence to suggest that someone has fabricated the fax document at p.38 (identical copy at p.160) and for what purpose, I accept the Plaintiff’s version of facts in that the variation of the Purchase Order was not accepted by the Plaintiff, and there was no agreement as to the variations of PO-336-06.

8. The Defendant counterclaimed that because of the non-delivery of the goods by the Plaintiff by 30 June 2006, the Defendant has suffered loss and damages to the sum of $302,027.80 as particularised in para.11 of the Amended Defence and Counterclaim (p.21 in the bundle). The damage was changed to a sum of $367,191.38 being a set-off or counterclaim as particularised at para.19 and 20 of the proposed Re-amended Defence and Re-Amended Counterclaim (at pp.192 to 194). The Defendant claimed that the said sum should be taken as a set-off against the price due to the Plaintiff. Alternatively, the Defendant submitted that the said sum of $302,027.80 (or $367,191.38) should be taken as a counterclaim.

9. As to the amount of the set-off and/or counterclaim, the Plaintiff queried the genuineness of the so-called ‘market price’ of the cable quoted by the Defendant. The ‘market price’ of the said goods so quoted was more than double the contract price. The Plaintiff disputed the difference in the market price. It was accepted by the Plaintiff that the market price of certain cables, in particular that of 1.5mm2 and 4mm2, did rise in April 2006, but the extent of the increase was disputed.  It is to be noted that the Defendant did not provide any proof of payments for the purchase of the cables at the so-called market price.

10. The Plaintiff claimed further that under the heading of ‘validity  quotation’ in clause 3(b) of the quotation (p.168 in the bundle), it stated that “all delivery must be completed on or before the end of May 2006, later than the previous period, the prices will be negotiated”. Hence the agreement had been terminated by the end of May 2006. The Defendant however, argued that that was not the case and the Plaintiff was in breach of the contract by failing to deliver the goods by 30 June 2006.

The legal position

11. It is trite law that-

“

The underlying policy of the summary procedure is to prevent a defendant from delaying the plaintiff from obtaining judgment in case in which the defendant clearly has no defence to the plaintiff’s claim. … Order 14 proceedings for summary judgment when there is no defence to a claim are an important feature of the legal process. It enables plaintiffs in cases where there is no defence to obtain expeditious summary judgment to avoid unnecessary delay. When applied for, it is for the defendant to show that there is a triable issue or an arguable defence if he is to be allowed his day in court. … The machinery of O.14 works on the basis that if the plaintiff’s application is properly constituted, he is prima facie entitled to judgment unless the defendant shows cause to the contrary or the application is dismissed.”: Hong Kong Civil Procedure 2007 Vol 1 para.14/4/1 at p.174.

12. I am satisfied that the present application comes within the ambit of the Order and that the Plaintiff has satisfied the preliminary requirements for proceedings under Order 14. I have to consider if the Defendant can show cause against the Plaintiff’s application on the grounds that the Defendant has a good defence to the claim on the merits or there are reasonable grounds of a bona fide defence.  

13. The Defendant submitted that the invoices relating to Items 10 to 19 in the total sum of $34,571.20 are not due as at the date of the issue of the Writ. I am satisfied that this would be the position, having considered the payment patterns by the Defendant on the previous occasions. Accordingly, the amount that could be claimed by the Plaintiff in this Writ would be $206,308.84 (i.e. $240,880.04 - $34,571.20).

14. Para.14/4/14 of the Hong Kong Civil Procedure 2007 states that:-

“	… where the defendant raises a set-off or counterclaim … there are four different classes or groups of such orders, namely :-
	1.	where the defendant can show an arguable set-off, whether equitable or otherwise, he is entitled to leave to defend to the extent of the set-off and the court had no discretion;
	2.	where the defendant sets up a bona fide counterclaim arising out of the same subject matter as the action and connected with the grounds of defence, the order should not be for judgment on the claim, subject to a stay pending trial of the counterclaim, but should be for unconditional leave to defend, even if the defendant admits the whole or part of the claim;
	3.	where there is no defence to the claim but a plausible counterclaim of not less than the claim is set up, judgment should be for the Plaintiff with costs, stayed until trial of the counterclaim;
	4.	where the counterclaim arises out of a separate and distinct transaction or is wholly foreign to the claim, judgment should be for the Plaintiff with costs without a stay.”

15. In Federal Commerce & Navigation v Molena Alpha [1978] QB 927 at p.974-5, Lord Denning MR set out the test for equitable set-off as follows:

“

It is not every cross-claim which can be deducted. It is only cross-claims that arise out of the same transaction or are closely connected with it. And it is only cross-claims which go directly to impeach the Plaintiff’s demands, that is, so closely connected with his demands that it would be manifestly unjust to allow him to enforce payment without taking into account the cross-claims.”

16. In Esso Petroleum v Milton [1997] 1 WLR 938, the Court ruled that “For equitable set-off to apply it must therefore be established, first that the counterclaim is at least closely connected with the same transaction as that giving rise to the claim, and second that the relationship between the respective claims is such that it would be manifestly unjust to allow one to be enforced without regard to the other.”

17. In Selwood Ltd v Ice Far East (HK) Ltd HCA 4403 of 2001, Deputy Judge Lam (as he then was) by applying similar principles, held:-

“

the mere fact the sale took place under the umbrella of the Agreement is not by itself sufficient to allow set-off. Nor is it sufficient that the transactions arise out of a single trading relationship. The crucial question is whether the counterclaim impeached the Plaintiff’s demand so that it would manifestly be unjust to allow him to recover without any set-off. The consideration for the price was the goods sold and delivered. … There was no suggestion that because of the alleged breach of the Agreement by the Plaintiff, the Defendant could not sell or otherwise make use of the goods. I therefore see nothing unjust to allow the Plaintiff to recover the price thereof without waiting for the resolution of the counterclaim.”

18. It must be borne in mind that for an application under Order 14, the court must not embark on a mini trial on affidavit: per P Chan J (as he then was) in Mass International Ltd v Hillis Industries Ltd & another [1996] 1 HKC 434 at 439.

19. In para.14/4/9 at p.178 of Hong Kong Civil Procedure 2007, it is stated that the mere assertion in an affidavit of a given situation does not, ipso facto, provide leave to defend, since the defendant must satisfy the court that he has a fair or reasonable probability of showing a real or bona fide defence, that is, his evidence is reasonably capable of belief. The issue is not whether the defendant’s assertions are to be believed, it is whether those assertions are believable. On the other hand, a complete defence need not be shown. As a matter of law, in certain circumstances, a counterclaim does not provide a set-off and therefore should be disregarded when summary judgment on the claim is sought.

20. The Plaintiff accepted that the Defendant has an equitable set-off in respect of 2 items in PO-336-06, namely, item (1) and (3a) in the Re- amended Defence and re-amended Counterclaim (p.182 in the bundle). However, the Plaintiff argued that the cost of the cable in question under Items (1) and (3a) , viz 13,500m of 1.5mm2 cable and 4,500m of 4mm2 cable, should be $3,067.20 and $3,627 respectively. It was submitted by the Plaintiff that even if the Defendant’s counterclaim is accepted, the total amount of counterclaim under Items (1) and (3a) together with the conduits (in the sum of $2,985.44) should be $9,679.64, not $79,879.64 as claimed by the Defendant. The Plaintiff also accepted that $13,398.82, that is the last 5 invoices in the Statement of Claim, were not due on the date when the Writ of Summons was issued.

21. Although I have reservation as to the figures of set-off or the counterclaim as particularised in the proposed Re-Amended Defence and Re-amended Counterclaim, it is my judgment that there exists an arguable equitable set-off and the counterclaim can be taken as closely connected with the same transaction as that giving rise to the claim. There exists argument as to whether the sums of money in the total sum of $21,173.38 under Invoices 10 to 14 as stated in the Statement of Claim were due or not when the Writ was issued. As mentioned above, the Plaintiff’s claim should be reduced to $206,308.84. The Plaintiff accepts that there are valid counterclaims in respect of items (1), (3a) and (7) to (9) even though they disputed the figures arriving at by the Defendant.

22. The legal threshold for granting unconditional leave to defend an Order 14 application is not high as Order 14 is not intended to be a mini-trial of the action on affidavits.  There is no need for the Defendant to show a complete defence. It is sufficient to show that there is a triable issue or question. As said by the Court of Appeal in Ng Shou Chun v Hung Chun San [1994] 1 HKC 155,

“	In an application under O14 or O 86 RSC it is not a proper course for the court to embark on a mini-trial of the action on affidavit evidence. In future, it is sufficient for the court to ask itself whether the defendant’s assertions are believable, not whether they are to be believed.”

23. In the present case, some of the counterclaims and set-off are accepted by the Plaintiff, even though the figures are disputed. Out of the total sum of $240,880.04 as claimed in the Statement of Claims dated 21 June 2006, Counsel for the Plaintiff  has made certain concessions as to the validity of a set-off or counterclaim. In my judgment, the defence put forward by the Defendant is an arguable one, which might well be believable. It is not necessary for me to say, for the purpose of the present proceedings, whether they are to be believed.

Order

24. I am satisfied that it is proper in this case to grant the Defendant an unconditional leave to defend, with liberty to parties to seek directions in pursuance of Order 14 Rule 6.

Costs

25. On this application, there be an Order nisi that the costs of this application be in the cause, with certificate for counsel. Unless there is an application to vary this Order Nisi, it shall become absolute in 14 days from the date of this judgment.