ICI SWIRE PAINTS LTD v. TECHI MOTOR ENGINEERING & TRADING CO

HCA7251/1995

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.7251 OF 1995

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J U D G M E N T (No.2)

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1. This judgment number 2 is concerned with the question of costs in the five-day trial before me in November 1998 and the 12-day trial of assessing damages before Master Rimsky Yuen in May and June 2002. It also concerned with the question of interest on the judgment in the claim and the counterclaim. The detail background is in my judgment of 30 November 1998 and the judgment of Master Yuen on 29 January 2003. I shall state shortly herein below the relevant background.

Background

2. The plaintiff in the action herein claimed for a sum of $3,548,007.80 for goods sold and delivered to the defendant but the defendant conceded the claim on the first day of the trial on 10 November 1998. The trial before me, lasted for five days, was only concerned with the defendant's counterclaim for breach of the same contract of sale of goods for the year 1994. In my previous judgment I found that the plaintiff in or about May 1994 unilaterally and therefore wrongfully terminated the Sales Agreement for the whole year of 1994 and refused to supply the defendant with the plaintiff's products from June 1994 onwards for the Mainland China market.

3. After a lengthy and hotly contested trial on the amount of damages Master Yuen assessed the amount at $2,938,743.04 for the plaintiff's breach of the sales agreement, leaving the sum of $609,264.76 due and owing from the defendant to the plaintiff. Both sides apparently agreed that the defendant's counterclaim amounted to an equitable set-off since the subject matter of the counterclaim for breach of the sales agreement is the same sales agreement upon which goods were sold and delivered by the plaintiff to the defendant. This is clearly within the definition of equitable set-off, set out in Bank of Boston Connecticut v. European Grain & Shipping [1989] AC 1056, House of Lord, at 1110-1111 :

"An equitable set-off may arise if there is a cross-claim flowing out of and inseparably connected with the dealings and transactions which also give rise to the claim."

4. Whether it is an equitable set-off or whether there should be two separate judgments for the claim and the counterclaim is not directly relevant to the consideration of costs of the trial. Clearly the trial which lasted for five days concerned with the counterclaim only when the defendant at the outset of the trial conceded the amount due and owing arising out of goods sold and delivered pursuant to the sales agreement. The plaintiff in its defence to the defendant's counterclaim alleged that the 1994 Sales Agreement was terminated by mutual agreement. However this is what I have found in my judgment at pp.14-16 :

" The Plaintiff has offered no evidence to explain why the Defendant could have been in difficulty in collecting payments in China. However, assuming there was such difficulties, there is no reason why the Defendant would, as a long time business associate of ICI, suddenly want to cut off all trading relationship with ICI and thus putting himself in even greater difficulty to the cash flow problem. Mr C.C. Cheung, however, did inadvertently, in the words of Counsel for the Defendant, 'let the cat out'. He stated that after discussing with the Defendant who told him that he could not reduce the credit limit, it was he who informed Mr Barry Cheung in late May 1994 that ICI would not supply its products to the Defendant anymore. This led to the complete cessation of supply beginning in June 1994. In fact Mr C.C. Cheung himself used the vivid Chinese expression that he decided to 'turn off the tap'.

As an experienced business executive and by the adoption of that very expression, Mr C.C. Cheung clearly realised the drastic effect of a sudden 'turning off the tap' might have on a trader's business. The Defendant relied heavily on the continuous flow of supply to secure reciprocal repayments from the second line dealers onwards. Mr C.C. Cheung's action clearly was intended to put a squeeze on the Defendant. But since Mr C. C. Cheung himself admitted that the Defendant had over the years been a satisfactory customer, one cannot but wonder why he would suddenly want to take such drastic measure. He was clearly putting great commercial pressure on the Defendant. The measure, however, was totally out of proportion with the alleged problem about credit limit and credit period, particularly in view of the fact that even by 1 July 1994, the Defendant was still settling his outstanding accounts as usual. One cannot help but conclude that the pressure exerted on the Defendant was made in order that the Defendant would cease trading in PPG products. Since the Defendant replied that he would have lost a few million Hong Kong dollar if he ceased to trade in PPG products under Fanex Limited, Mr C.C. Cheung decided that he, for the benefit of ICI, would cease supplying him with the goods. I must add here that Mr C.C. Cheung gave me the impression that he was over-zealous to prevent ICI from suffering should 'Techi Motors' and 'Paints' suddenly go buzz. However his worry was out of proportion with the business reality that the business volumes had (since his departure in 1990) increased several folds and a different payment scheme was already in operation.

Conclusion

In conclusion, I find that it is clearly an unilaterally action made by Mr C.C. Cheung for and on behalf of ICI, the Plaintiff, and the termination was not by mutual consent. Accordingly, the Plaintiff was in breach of both the 1994 Sales Agreement and the Authorised Dealer Appointment, and the Defendant is entitled to judgment on the Counterclaim.

Costs

5. Since the defendant was successful in the trial on the counterclaim I agreed with Mr Simon Chiu, counsel for the defendant, that the plaintiff should only be entitled to the costs of the action up to the first day of the trial whereas the defendant is entitled to the costs of the counterclaim, to be taxed on the basis that the counterclaim was the only matter litigated in the trial.

6. It is also significant to note here that but for the breach of contract by the plaintiff there would have been no litigation at all, whether on the claim or counterclaim. The situation was brought about entirely by the initial fault of the plaintiff. The defendant did not pocket the money which belonged to the plaintiff and did not refuse to pay for the goods sold and delivered. Instead the defendant was unable to pay the plaintiff because the plaintiff deliberately and wrongfully "turned off the tap" and left the defendant out of pocket from his own buyers. Accordingly it is significant here that the failure of the defendant in repaying the plaintiff was substantially brought about by the plaintiff's own fault in having over the years encouraged the defendant to expand his dealership by extending and expanding credit limit and credit period to him, but abruptly cut off his supply in May 1994 which the plaintiff well knew would cause loss and seriously affect the defendant's ability to repay. This is the ultimate cause which led to the claim and the counterclaim. Although the defendant did not admit the main claim in the pleading, nevertheless the defendant did admit the case of the plaintiff on the first day of the trial.

7. Thus this case falls squarely within the class of cases mentioned in N.V. Amsterdamsche Lucifersfabrieken v. H & H Trading Agencies Ltd [1940] 1 All ER 589. In substance only the counterclaim of the defendant was being litigated in the trial and in the assessment of damages.

8. In N.V. Amsterdamsche, the claim was admitted in pleading and the defendant counterclaimed for about ￡72 and succeeded for ￡55, a sum which was less than the claim of the plaintiff. The court nevertheless held that the plaintiff was entitled to costs of setting down and obtaining leave to proceed, but the defendant's costs of the counterclaim should be taxed on the basis that he was successful on the only matter litigated.

9. On the other hand in Nicholson v. Little [1956] 1 WLR 829, the Court of Appeal upheld the exercise of discretion by the county court to depart from the cost order awarded in the Amsterdamsche case. But this departure was made for a good reason. In that case the court found that the "initial fault" that brought about the litigation was the wrongful retention of the owner's money by the surveyor.

10. But here we have a reverse situation. Here there would have been no litigation at all but for the breach of contract by the plaintiff whether on the claim or the counterclaim. The situation was brought about entirely by the initial fault of the plaintiff. Thus justice demands that the plaintiff should pay the defendant for the trial of the counterclaim.

11. In respect of the assessment of damages, it is quite clear from the judgment of the learned Master that the amount contended by the plaintiff was well short of the sum eventually assessed. The defendant would have no alternative but to have the amount of damages to be assessed by the Master without any offer from the plaintiff equalled to or in anyway approaching the sum eventually assessed by the learned Master. I consider that the defendant is also entitled to the costs of the assessment before the learned Master.

Interest

12. After the plaintiff refused to supply goods to the defendant in May 1994 the parties entered into two successive settlement agreements in July 1994 and September 1994. No payment of interest was mentioned under those agreements. After the 1st settlement agreement a sum of about $7.3 million was left outstanding. The plaintiff admitted in his pleadings that between September 1994 and May 1995, the defendant paid the plaintiff the total of sum of $3.85 million and after the last payment by the defendant in May 1995, the sum of $3.548 million was left outstanding which was the sum claimed in the action. It was not until the issuance of the writ that the plaintiff formally accepted the repudiation of the 2nd settlement agreement before which the defendant could still have settled the 2nd settlement agreement by paying the aforesaid sum of $3.548 million with no interest.

13. The question to ask in deciding the question of interest is when was the time when the money in the balance sum of $609,264.76 ought to have been paid to the plaintiff.

14. The interest on the judgment sum of $3.548 million should only commence from the date of the writ which was issued on 21 July 1995. But there is the interest of the counterclaim to take into account, which is an equitable set-off. The interest on the counterclaim must be set-off against the interest on the claim to the same amount as agreed by the parties according to a passage in Derham, The Law of Set-Off, 3rd ed., 2003 at para.4.42 :

"If the debtor has a valid claim for an equitable setoff, the principal sum upon which interest is payable is reduced to the extent of the value of the cross-demand during the period while circumstances exist which support an equitable set-off."

15. The cause of the action in the counterclaim arose in May 1994 when the plaintiff was in breach of the sales agreement. The accrual of loss as a result of the breach, however, is a continuous process in the months following thereafter. By the end of December 1994, the defendant was out of pocket to the extent of $2,938,743.04 as assessed by the learned Master.

16. Part of the losses would have been sustained by the defendant in the months of June to December 1994, whereas some of the lost profit would have required time to collect which might be as long as 180 days as submitted by counsel for the plaintiff i.e. in the months of January to June 1995. Thus I accept the submission of counsel for the defendant that the defendant is entitled to have interest on the counterclaim calculated from 1 January 1995 onwards as a medium date between June 1994 and June 1995. After the issuance of the writ on 21 July 1995, interest on the counterclaim should set-off the interest of the claim to the same amount. In effect from 21 July 1995 onwards, only the sum of $609,264.76 on the plaintiff's claim would attract interest at 1% above the best lending rate.

17. Since the parties have by consent agreed that no final judgment should be entered by Master Yuen and that the matter should be reserved to this court, it is only right that the pre-judgment interest should be maintained until final judgment is entered herein and thereafter the usual judgment rate should apply until payment.

Conclusion

18. In the end I will make the following order :

(1) Judgment for the plaintiff in the sum of $609,264.76 together with interest from date of the writ at 1% above the prime lending rate until the date of judgment today.

(2) Costs of the action be to the plaintiff until the first day of the trial whereas costs of the counterclaim be to the defendant to be taxed on the basis that the counterclaim was the only matter litigated in the trial before me and the assessment hearing before the Master.