張家港市博雅貿易有限公司 v. ASD (HK) LTD

DCCJ 2507/2014

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 2507 OF 2014

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JUDGMENT

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1.  This is an application for summary judgment under Order 14 rule 1 of the rules of the District Court.

2.  It is noted that the court should not embark on a mini trial on affidavits, on the other hand, has to decide whether the defendant’s assertions are believable.

3.  The plaintiff claims the balance of the purchase price for the goods sold and delivered to the defendant in respect of two batches of goods together with loss of tax refund in the sum of US$14,805,41 and interest in the sum of US$10,340,00.  Particulars of the sale of goods are as follows:-

A. The goods delivered to Brazil in October 2013 for the balance of US$77,940.63 (“the Brazilian Purchase Orders”); and

B. The goods delivered to Peru in January 2014 for the balance of US$36,765.30 (“the Peruvian Purchase Orders”.  It is also called the “Subsequent Peruvian Purchase Orders”).

4.  Mr Chain, counsel for the defendant, submitted that:-

“On the defence of equitable set-off for the Brazilian Purchase Orders

(i) Each of the 5 Brazilian purchase orders contains on their face a photograph of a long-sleeve shirt.

(ii) As explained at paragraphs 7 and 10 of Anil’s affirmation, the director of the defendant, these photographs were of the original samples provided by the Brazilian Customer to the defendant, which the defendant forwarded to the plaintiff. Pre-shipment samples were then produced by the defendant which conformed with these original samples.

(iii) There is ample documentary evidence (emails from the Brazilian Customer, professional inspection report) to show that the shirts that were ultimately delivered under the Brazilian Purchase Orders had the Sleeve Length Defect, in that the sleeves were significantly shorter.

(iv) In reply, the plaintiff does not seriously dispute that the sleeve lengths were of a shorter length. Rather, what the plaintiff states is that Cary Chu agreed on behalf of the defendant for modifications to be made to the sleeve lengths. However, it is telling that there is not one shred of documentary evidence which shows that Cary Chu agreed to such a modification. According to the plaintiff, this was all agreed orally. This oral assertion is obviously not accepted by the defendant, and obviously both Zhang and Cary Chu will be cross-examined at trial on this point.

(v) The court need not make any decision as to the relative merits of the parties’ respective cases. For present purposes, it suffices to say that at the end of the day there is every possibility that at trial the court may choose to disbelieve Zhang and Cary Chu’s evidence in this regard.

(vi) There is a reasonable explanation set out at paragraph 13 of Anil’s Affirmation evidencing the defendant’s consequential loss from the Sleeve Length Defect.

(vii) As the loss which the defendant is counterclaiming on the Brazilian Purchase Orders arose directly out of the same orders which the Plaintiff is claiming for outstanding purchase price, it is clear that the necessary degree of closeness for equitable set-off can be established on this part of the Defendant’s defence.”

5.  For the Brazilian Purchase Orders, I agree with Mr Chain that there was dispute as to whether the goods were defective.  The defendant provided some e-mails from Customers complaining the quality of the goods and asked for a discount of US$27,000, which according to the defendant, was reduced to US$20,000 after negotiation.  There was also an inspection report produced.  I am satisfied that summary judgment is not appropriate for the Brazilian Purchase Orders.

6.  For the Peruvian Purchase Orders, I order that leave be granted on condition that the defendant pays the sum of HK$286,769.34 (US$36,765.30 x 7.8 = 286,769.34) into the court within 28 days from the date hereof.

The Fraud Exclusion for Summary Judgment Applications

7.  The first argument of the defendant to resist the application is that the court has no jurisdiction to deal with the application.  The fraud exclusion under O 14 r 1(2)(b) provides that summary judgment is not available in “an action which includes a claim by the plaintiff based on an allegation of fraud.”

8.  Under paragraph 14/1/1 of the Hong Kong Civil Procedure 2015, it is stated that “in considering whether an action includes a claim in respect of which an underlying allegation constitutes an allegation of fraud, the court should have regard to the pleadings as a whole: Menford Electronic Art & Computer Design Co Ltd v Wong Wang Tat Victor (unrep., CACV 18/2013, May 14, 2014, (20)”.

9.  Mr Chain submitted that “the plaintiff in attacking the defendant’s defence of set-off had chosen to plead allegations of dishonesty and fabrication – it is expressly pleaded that the defendant “made up wild allegations” (paragraphs16, 28.5 of the Reply) and that the defendant advanced allegations which “bear all hall marks of recent fabrication” (paragraph 29(i) of the Reply).  Such accusations of fabrication have been repeated at paragraphs 22, 53 of plaintiff’s skeleton and at various places in the plaintiff’s affirmations.  The fact that the plaintiff has expressly pleaded allegations of dishonesty and fabrication to attack the defendant’s defence of set-off means that the court has no jurisdiction to grant summary judgment in the present case due to the fraud exclusion under RDC O 14 r 1(2)(b).”

10.  Mr Yeung, counsel for the plaintiff, submitted that the plaintiff never pleaded fraud or dishonesty, and under the rules, fraud needs to be specifically pleaded.

11.  The wordings of paragraph 16 of the Reply are: “the plaintiff avers that the defendant made up wild allegations in its Defence and Counterclaim which are totally unfounded and that the plaintiff is entitled to have judgment……” Paragraphs 28.5 and 40 just repeat them, in effect.

12.  Mr Yeung further submitted that the adjective “wild” when used to describe an allegation, mean “not carefully planned, not sensible or accurate”.

13.  I agree with Mr Yeung that no fraud and dishonesty was pleaded.  The use of the words “make up wild allegations” and the wordings in paragraph 29 of the Reply “the allegations of the plaintiff’s breach bear all the hall marks of recent fabrication” only mean that the allegations should not be believed.  The cause of action in this case is goods sold and delivered, and the defence is defective goods and setting off.  The wordings were only used rhetorically to say that such allegations were unfound and not to be believed.  The making of an allegation of deliberate dishonesty should not be inferred in this case.  Not much weight should be given to the overzealous comments and emotive language in the 2nd affirmation of Cary Chu.  I find that the defendant’s argument on order 14 rule 1(2) (b) fails.

14.  The major issue in dispute for the Peruvian Purchase Orders is whether there is Composition Defect in the Earlier Peruvian order so as to enable the defendant to establish an equitable set off to resist the plaintiff’s application for summary judgment in respect of the Subsequent Peruvian Order.

15.  The Composition Defect is that according to the purchase orders, the composition of the goods should be 60 % cotton and 40 % polyester.  It is alleged by the defendant that the goods delivered in the Earlier Peruvian Purchase Orders were of 90 + % polyester.  It seems there was no such complaint relating to the Subsequent Peruvian Purchase Orders as the defendant did not rely on defective goods of the Subsequent Peruvian Purchase Orders.

16.  The chronology for the Peruvian Purchase Orders is as follows:-

4/9/2013	shipment for the Earlier Peruvian Purchase Orders, the price of the Order was US$189,884.
16/9/2013	plaintiff was fully paid for the Earlier Peruvian Purchase Orders
30/9/2013	defendant placed the Subsequent Peruvian Purchase Orders to the plaintiff
29/11/2013	date of the test report conducted by the Peruvian Customer showing that the fiber content of the Earlier Peruvian Purchase Orders was 100% polyester
10/12/2013	date of the report conducted by the defendant showing that fiber contents of the samples ranged from 91 to 96 %
27/1/2014	shipment of the goods under the Subsequent Peruvian Purchase Orders

17.  According to the payment terms between the defendant and his customer, payment should be made by “L/C 30 days”.

18.  According to paragraph 8 (iii) of the 2^nd affirmation of Cary Chu, he was told by Anil that the defendant had received the purchase price; such allegation was not disputed by the defendant.  According to paragraph 21 (ii) of the affirmation of Anil, the Peruvian Customer demanded for a full refund of US$189,884, that is the purchase price of the Earlier Peruvian Purchase Order.  Given the mode of payment, it seems that the price of the Subsequent Peruvian Purchase Orders was fully paid, there was no return of goods, and the Peruvian Customer did not ask for the refund of the purchase price in respect of the Subsequent Peruvian Purchase Order.

19.  Mr Chain submitted in paragraph 25 of his submission that:-

“On the defence of equitable set-off for the Subsequent Peruvian Purchase Orders (see paragraphs 17-30 of the Defence):-

(i) The Defendant counterclaims on the Earlier Peruvian Purchase Order. As explained at paragraphs14-19 of Anil’s Affirmation, the Earlier Peruvian Purchase Order is closely connected to the Subsequent Peruvian Purchase Orders because (1) it was known to the Plaintiff they were for the same (and only) Peruvian Customer of the Defendant; (2) they were for the exact same type of product under the exact same brand; (3) they are very close to each other in time as the Subsequent Peruvian Purchase Orders were made shortly (less than one month) after delivery was completed under the Earlier Peruvian Purchase Order.

(ii) It is therefore at least arguable that the necessary degree of closeness for equitable set-off can be established for the Defendant’s counterclaim on the Earlier Peruvian Purchase Order.

(iii) On its face, the Earlier Peruvian Purchase Order specifies that the composition of the shirts therein should be 60% polyester and 40% cotton. Indeed, the same composition was repeated in the Plaintiff’s own invoice

(iv) There is ample documentary evidence (professional inspection reports) to show that the shirts that were ultimately delivered under the Earlier Peruvian Purchase Orders had the Composition Defect, in that the composition of the shirts was of a cheaper quality of 90%+ polyester.”

20.  According to paragraph 18 of the Affirmation of Cary Chu, the plaintiff’s witness and ex-employee of the defendant, he said that he decided not to follow the original description but insisted on using a different material, namely 10 % cotton and 90% polyester, to meet the culture of the designation port as according to what his boss had told him.

21.  In paragraph 19, he affirmed that he did so because the fabric was less wrinkled, smoother and less sticky than other samples  The choice was also made to match the requirements set by client.

22.  Notwithstanding that Mr Anil in paragraph 21(ii) of his affirmation alleged that the Peruvian Customer demanded a full refund of US$189,884 for the Earlier Peruvian Purchase Order, no document relating to such demand or complaint has been exhibited, no particulars of when the Customer made such demand was given.  It is anticipated that such demand and complaint should be in writing as what the Brazilian Customer did.

23.  The defendant was aware of the Composition Defect in around November 2013, but such defect was not relayed to the plaintiff at the material time.  The Composition Defect was not disclosed until 9 May 2015, despite repeated demand for payment before 9 May 2015.

24.  Notwithstanding the Composition Defect, the Subsequent Peruvian Purchase Order was allowed to ship in January 2014 and the Peruvian Customer paid the price in full.

25.  Fully aware of such Composition Defect in November 2013, the defendant signed a guarantee to promise the payment of the price for the Subsequent Peruvian Purchase Orders on 28 January 2014.

26.  There is no return of goods for both Earlier and Subsequent Peruvian Purchase Orders despite such allegation of Composition Defect.  It is difficult to conceive that the Customer could demand for the return of the full purchase price of US$189.884 and such request the defendant “orally acknowledged and recognized”.

27.  The incident occurred in around November 2013.  It is suspicious that the defendant arranged a face to face meeting in September 2015 to discuss the compensation with the Customer.

28.  Although there are connections between the Earlier Peruvian Purchase Order and the Subsequent Peruvian Purchase Order, it is clear that they are different transactions.  I do not find them to be closely connected to be able to set up an equitable set-off.

29.  It is also noted that the defendant relies on counterclaim for damages and loss of business.

30.  In view of the above, I find the defence shadowy and the case is almost one in which summary judgment should be ordered.  I consider it is appropriate to order that unless the defendant pays the sum of HK$286,769.34 (US$36,765.30 x 7.8 = 286,769.34) into the court within 28 days from the date hereof, judgment for the sum of US$36,765.30 be entered against the defendant.

31.  I grant unconditional leave to the defendant to defend the Brazilian Purchase Order.

Costs

32.  Paragraph 14/7/12 of the Hong Kong Civil Procedure 2015 provides that “the order for costs generally corresponds with the condition imposed, and its operation made depend upon whether or not the condition is complied with.  If the leave is conditional upon the whole debt or demand being paid into court, the usual order is that if the condition be not complied with the costs are the same as upon a judgment for the whole claim, and if the condition is complied with the costs are the same as upon unconditional leave to defend being given.  If the leave is conditional upon part only of the debt or demand being paid into court, the usual order for costs is the same as upon judgment for part of the claim”.

33.  I have heard parties’ submission on costs.  Taking into account that the plaintiff failed in the application relating to the Brazilian Purchase Order and at least partly successful relating to the Peruvian Purchase Order, I order that if the condition is complied with, the costs of the whole application be in the cause, if not, judgment be entered relating to the Peruvian Purchase Order with costs, and costs of this application relating to the Brazilian Purchase Order be in the cause.