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

CACV 328/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 328 OF 2007

(ON APPEAL FROM dccj nO. 3070 OF 2006)

_______________________

______________________

_____________________________

Reasons for judgment

_____________________________

Hon Yeung JA (giving the Reasons for Judgment of the Court):

Introduction

1.  In a decision handed down on 3 August 2007, Judge Stanley Chan (“the judge”) in the District Court, on an application by the plaintiff for summary judgment, granted unconditional leave to the defendant to defend, and ordered that costs of the application be in the cause of the action.

2.  With the leave of the judge, the plaintiff appealed against the decision and sought summary judgment, or alternatively an order that the defendant should only have leave to defend conditional upon payment into court.

3.  On 27 February 2008, we set aside the judge’s order and granted conditional leave to defend. We indicated that we would hand down our reasons in writing, and this we now do.

The Plaintiff’s Claim

4.  The plaintiff’s claim, originally in the sum of $240,880.04 for cables sold and delivered under the master contract PO-336-06 (“the main contract”) and contract PO-PHP-14, in 19 invoices between March and May 2006, was reduced to $227,481.22, being the aggregate of the first 14 invoices. The plaintiff had conceded on about $21,000.00 under some of the invoices, as they might not yet be due when the Writ was issued.

5.  The figure was further reduced to $220,78.02 to reflect the plaintiff’s concession over a “plus or minus 15% upward variation” term in the main contract.

6.  There was no dispute that the goods, sold and delivered under the invoices, had been accepted without any complaint and that they had not been paid for.

The Set off/Counterclaim

7.  The defendant sought to set off the plaintiff’s claim on a number of counterclaims for an amount totalling over $350,000.00.

8.  The defendant, in his Re-amended Defence and Counterclaim, argued that there was a variation of the main contract by way of a “May Contract” relating to another contract PO-336-09, and a “Conduit Contract”.

9.  It was the defendant’s case that under the main contract, the defendant was entitled to an upward adjustment of 15% of the agreed quantity. The defendant further alleged that the plaintiff had failed and/or refused to supply cables under the May Contract at the old unit price.

10.  The defendant suggested that there was a variation agreement reached on or about 22 April 2006 as evidenced, inter alias, in a fax document, under which the plaintiff agreed to supply more cables. The defendant claimed that the plaintiff failed to honour the agreement by delivering the cables by 30 June 2006.

11.  The set off/counterclaim of $350,000 represented damages purportedly suffered by the defendant, with reference to the market price (which doubled or tripled the contract price), arising out of the alleged short/non supply of cables. There was however no indication that the defendant had paid the market price for the purchase of any replacement cables.

12.  The plaintiff, on the other hand, argued that the main contract had been terminated by the end of March 2006 and that the price of goods ordered and/or delivered thereafter would be subject to further negotiation as evidenced by letters from the defendant’s solicitors. As there was no agreement reached, the plaintiff was not obliged to supply cable under the May Contract.

13.  The suggestion was that transactions after April 2006 were under separate contract even though the same PO number was used in the invoices, and that as the price, which was the essential term of the contract, had not been agreed, the proposed contract could not be enforced.

14.  In the circumstances, it was the plaintiff’s case that the defendant was not entitled to the supply of further cables under the old unit price other than the 15% upward adjustment for which the plaintiff had made concession.

15.  Mr Chain, counsel for the plaintiff, further submitted that even if the contract was enforceable, the need to negotiate the price meant that the defendant would not be able to prove any damages.

The Judge’s Findings

16.  The judge placed little reliance on the alleged breach of the Conduit Contract, which concerned a small sum of only $3,000. The judge rejected the suggestion of a variation of the main contract, pointing out the discrepancies in the document provided by the defendant, which gave rise to suspicions of its veracity, although the judge was not prepared to make an express finding that the document was a fabricated one.

17.  The judge pointed out the fact that the market price quoted by the defendant more than doubled that under the main contract and that the defendant produced no evidence to show that it did pay the “market price” to purchase any replacement cables.

18.  The judge further pointed out that under the quotation issued prior to the execution of the main contract, it was stipulated that: “all delivery must be completed on or before the end of March 2006”.

19.  The judge did not deal with the issue of whether the May Contract was valid when there was no agreement on the price.

20.  Nevertheless, having referred to the established legal principles, the judge granted unconditional leave to the defendant to defend on the basis that the plaintiff had made concessions on part of its set off/counterclaim.

21.  The judge took the view that the figures of the defendant’s claim for set off/counterclaim had to be properly examined in the light of the plaintiff’s concession, in particular the question of whether the $21,000.00 under some of the invoices was due or not. The judge took the view that the plaintiff’s claim should be limited to about $206,000.00.

Discussion

22.  It was neither necessary nor desirable for this court to express too strong or definite a view on the merits of the case. However, the defendant’s set off/counterclaim rested principally on the alleged variation of the main contract, which the judge had rejected or at least had cast doubt upon.

23.  On the materials before the judge, materials that Mr Chain had carefully taken us through, the judge’s conclusion appeared to be justified.

24.  The fact that the defendant’s set off and counterclaim was based on a market price which more than doubled the contract price within a short time when there was no evidence that the defendant had paid for such “market price” also cast grave suspicion on the veracity of the defendant’s case.

25.  Even if the defendant’s claim that the May Contract was enforceable, we doubted if it would be in a position to prove its alleged damages when the price was subject to negotiation, as appeared to have been conceded by the defendant’s solicitors.

26.  Whilst the plaintiff’s claim might be reduced because of the plaintiff’s concession and that the extent of the possible set off/counterclaim would have to be properly assessed, those matters did not justify the granting of unconditional leave to defend when the judge rejected the alleged variation of the main contract and cast doubt on the defendant’s claimed damages based on the alleged “market price”.

27.  We were mindful of what is stated in the Hong Kong Civil Procedure 14/4/14:

“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;

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 on the claim with costs, stayed until trial of the counterclaim.”

28.  Other than those based on the alleged variation of the contract, the defendant’s possible set off/counterclaim, even if proved, was confined to a sum much less than the plaintiff’s claim. The plaintiff had conceded that its claim should be reduced just over $220,000.00.

29.  Whilst the full extent of the plaintiff’s claim, in the light of its concession, would have to be assessed, the defendant’s set off/counterclaim had been substantially rejected by the judge, and in our view, should at least be viewed with circumspection.

30.  We were satisfied that there was a real doubt about the defendant’s good faith and we were persuaded that the defendant should not be entitled to unconditional leave to defend.

31.  It was, in our view, a proper exercise of discretion to order conditional leave to defend.

32.  We therefore set aside the order of the judge and in its place, we ordered:

1.  Leave to the defendant to defend on the payment into court of $220,000.00 within 21 days from the day of this order, failing which there will be judgment for the plaintiff against the defendant with damages to be assessed by the Master with costs, and the set off/counterclaim be dismissed with costs;

2.  If the defendant complies with the aforesaid order, costs of the hearing before the judge to be the plaintiff’s costs in the cause; and

3.  The costs of the appeal will also be the plaintiff’s costs in the cause.