SHENZHEN SEA STAR TECHNOLOGY CO.,LTD v. PERCEPTION DIGITAL LTD AND ANOTHER

HCA 2208/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2208 OF 2013

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D E C I S I O N
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Introduction

1. This is the plaintiff’s application for summary judgment or interim payment pursuant to Order 14 of the Rules of the High Court against the two defendants.

The facts

2. The 1^st and 2^nd defendants (respectively, “PDL” and “PDT” and collectively “Perception Digital”) were suppliers of multimedia products for Philips and Apple.  The plaintiff (“Sea Star”) was a manufacturer and supplier of electronic goods to the defendants under a master supply agreement dated 26 March 2008 (the “MSA”).  Given the long term and on-going nature of the relationship under the agreement, the MSA contained elaborate provisions setting out the parties’ mutual obligations during the currency of the agreement and “end of life” (“EOL”) arrangements when bringing about the termination of the agreement.  Under the MSA, Perception Digital shall give a rolling forecast several months ahead and commit to order stated quantifies in immediate weeks; Sea Star shall manage its inventory continually reducing costs; and Perception Digital shall be partly responsible for providing some components as well as for obsolete inventory, non-moving inventory and long lead time items.  Clause 15 of the MSA is a payment clause which sets out the payment procedure including presentation of invoices by Sea Star, approval or reconciliation by Perception Digital and payment within 75 days.  Clause 8 is an EOL clause under which Perception Digital shall give Sea Star three months’ notice to terminate the MSA and thereupon the parties shall communicate on a weekly basis to ensure fulfilment of the remaining orders and winding down inventories etc.   

3. All went well until 6 June 2013 when Perception Digital gave notice under the EOL clause.  The approval or reconciliation process became more difficult and disputes arose.  Since the end of August 2013, the parties have been discussing on figures.  Sea Star alleges Perception Digital of non-payment, while Perception Digital alleges Sea Star of steadfastly refusing to provide proper information and documentation for approval or reconciliation.  It further alleges Sea Star of exploiting Perception Digital’s obligation to fulfil three remaining orders for Philips and Apple and holding it at ransom by pressuring it to enter into some interim arrangements, whereby it extracted certain payments from Perception Digital; and worst of all, it failed to fulfil the three remaining orders causing serious loss to Perception Digital. 

4. First, on 3 September 2013, Sea Star demanded that all remaining orders be processed on cash on delivery basis.  In order to show sincerity in resolving the dispute over approving or reconciling the amount payable in August and to ensure the timely delivery of three special remaining orders, viz, Philips’ WK 36 Shipment and WK 37 Shipment and Apple’s GSA Shipment, Perception Digital agreed to the demand on the following day (the “COD Agreement”).  It even offered to pre-pay on condition that delivery be made within one day after payment, which Sea Star agreed.  On 5 September 2013, Perception Digital remitted the sum of US$157,241.96 to Sea Star in full payment of the three remaining orders.  The remittance form expressly stated that the remittance was for the three remaining orders.  But Sea Star did not deliver the goods and demanded payment of the invoices which it alleged were outstanding for the month of August.

5. Second, on 27 September 2013, after a series of negotiations, as Perception Digital was eager to salvage its relationship with Philips it agreed on a temporary interim arrangement (the “Temporary Agreement”). The arrangement was for Perception Digital to pay US$376,000 on 27 September 2013, thereupon Sea Star would deliver the GSA Shipment; and for Perception Digital to pay US$354,000 on 4 October 2013, thereupon Sea Star would deliver the WK 36 Shipment and WK 37 Shipment.  Perception Digital made the first payment on time and Sea Star delivered the GSA Shipment.  The second payment was made by two instalments on 7 and 8 October 2013.  Sea Star did not deliver.

6. On 7 October 2013, Philips terminated its relationship with Perception Digital and switched its orders to Shenzhen Sang Fei Consumer Communications, which Perception Digital alleges is the result of Sea Star’s failure to supply the WK 36 Shipment and WK 37 Shipment.

7. On 8 October 2013, the parties entered into final negotiations.  Sea Star emailed Perception Digital some summaries of invoices claiming an amount of US$4,123,635.13.  But the summaries lacked supporting information and documentation and failed to take into account delivery and quality issues.

8. On 11 October 2013, the parties met and discussed a basis to proceed.  Perception Digital alleges that the parties agreed on US$3,723,670.23 as a rough working figure subject to reconciliation and confirmation and subject to contract.  Shortly after, Perception Digital alleged that Sea Star had all along meant to act in breach of the MSA, the COD Agreement and the Temporary Agreement and had not meant to engage in the necessary approval or reconciliation process.  The negotiations broke down.

9. By these proceedings, Sea Stars claims for outstanding purchase monies for goods sold and delivered to the defendants from May to October 2013.  MSA’s defences are (1) the invoices claimed by Sea Stars have not been approved or reconciled; (2) Perception Digital has not proved the invoices; (3) Perception Digital has substantial set-offs; and (4) Sea Star cannot prove that PDL is jointly liable for PDT’s orders.

The applicable legal principles

10. The principles applicable to summary judgment are well-established and can be summarised as follows.

11. First, it is for the defendant to show there is a triable issue or an arguable defence: see Hong Kong Civil Procedure 2014[1].  Summary judgment is for clear cases.  It is not appropriate where there is any serious dispute as to matters of fact or any difficult question of law: see Hong Kong Civil Procedure 2014[2]. In considering whether there are triable issue, the court will not take the alleged defence on its face value but will test it against the evidence disclosed in the affidavit including matters such as contemporaneous documents and inherent probability of the defence, but shall not conduct a mini-trial on complicated factual issues: see Paul Y Management Ltd v Eternal Unity Development Ltd[3]. In Re Safe Rich Industries Ltd[4] Bokhary JA, as he then was said:

“The test at the summary stage is indeed as simple as whether the defendant’s assertions are believable. But it must be recognized – because failure to recognize it would create a debt-dodger’s charter – that whether the defendant’s assertions are believable is a question to be answered not by taking those assertions in isolation but rather by taking them in the context of so much of the background as [is] either undisputed or beyond reasonable dispute.”

Where the circumstances are such as to require close investigation, there ought to be a trial.  Summary judgment would be inappropriate: see Hong Kong Civil Procedure 2014[5] and Miles v Bulls[6].

12. Second, where a defence, though arguable, can be described as shadowy, the court may order conditional leave to defend: see Hong Kong Civil Procedure 2014[7].

13. Third, if a counterclaim and set-off is raised, that can be a basis for granting unconditional leave to defend up to the amount of set-off claimed.  This is regardless of whether the amount is ascertained, and whether the set-off has been pleaded as a counterclaim or not.  However, the court must assess whether the counterclaim is credible or believable: see Hong Kong Civil Procedure 2014[8]; Ling Dai Hong v 汪裕祖[9] 

14. Fourth, whether to order interim payment is an exercise of the court’s discretion.  The test is essentially the same as that for granting conditional leave to defend, namely whether the defences and/or counterclaims raised can be said to be shadowy: see Hollywood Palace Co Ltd v Trans-Global Hong Kong Investment Ltd[10].

Sea Star’s claim

15. Sea Star’s claim is made up of two parts.  It claims a liquidated sum of US$2,270,358.28, covering those invoices which it says had become payable as at the date of the writ (“the first sum claimed”) and a claim for damages of US$652,713.80, covering invoices which had not yet become payable as at the date of the writ (“the second sum claimed”).  The first sum claimed is based on an action for contract sum.  The second sum claimed is based on anticipatory breach of contract by Perception Digital.  Sea Star argues that by persistently failing to pay any purchase monies for goods delivered as far back as May 2013, Perception Digital had evinced an intention no longer to be bound by the MSA and would not pay the outstanding monies for any invoices not yet due, which Sea Star accepted by commencing these proceedings. 

16. Perception Digital identified 33 invoices in the amount of US$248,991.83 which it says were incorrect and some debit notes in the amount of US$6,780.51, which it says were not taken into account by Sea Star.  To get this dispute out of the way, Sea Star is prepared to accept a deduction of the above amounts in the total sum of US$255,772.34 for the purpose of seeking summary judgment or interim payment.

Defence (1) – No approval or reconciliation of invoices

17. Perception Digital relies on clause 15 of the MSA which provided for a procedure of approval or reconciliation of the invoices before they became due and payable.  Its case is that this process would begin after the invoices have been issued and as the invoices which Sea Star is now claiming have not been reconciled and approved, they are not yet payable.  Sea Stars argues that the process precedes the issue of invoices, but with its sending delivery receipts and reconciliation statements to Perception Digital.  Mr Li, counsel for Perception Digital, submits that the procedure suggested by Sea Star is incredible as the sequence of the steps is inconsistent with clause 15; Sea Star has not produced any reconciliation statements for the invoices it is now claiming; and the correspondence shows that in respect of the amounts which Sea Star is claiming Perception Digital has all along insisted and Sea Star has all along acknowledged that they were yet to be reconciled and confirmed.  Mr Li submits that there is a serious dispute and Sea Star cannot seek summary judgment.

18. I do not think it is necessary to indulge in arguments about the approval or reconciliation procedure under clause 15. There was a requirement of approval or reconciliation.  For the purpose of the present dispute, it is not necessary to determine whether this process was to be commenced before the issue of invoices or afterwards.  It is clear from the correspondence that the invoices now claimed had been approved.

19. After the relationship broke down, the parties arranged for a meeting to discuss the outstanding amount.  On 9 October 2013, Sea Star wrote to Perception Digital as follows:

“Subject: PD’s AP Vs Sea Star’s AR Matching

Dear Venus, Wendy, Rabi,

Per discussion this morning, we must match your AP vs Sea Star’s AR within this week.  Zhang Wei, our Accounts Supervisor and I will visit you at your Shenzhen Office this Friday morning 10 am.  Please confirm.”

“PD” obviously refers to Perception Digital, while “AP” and “AR” obviously refer to “account payable” and “account receivable”. In that context, “matching” must mean approval and reconciliation. In fact, from the context of the subsequent emails, it is clear that was what “matching” meant. The parties had, in their good sense, started to reconcile what had been outstanding.

20. After the meeting, Rabi Lee of Perception Digital wrote to Sea Stars, quoting Zhang Wei’s (of Sea Star) message:

“Subject: Re: PD’s AP Vs Sea Star’s AR Matching

Dear all

After meeting today, we aligned and acknowledged the outstanding amounts as mentioned below.

Thanks

Rabi

Finance Director

Zhang Wei 提到 [mentioned]

Dear All,

Thanks for your joining this meeting.

Recap our meeting discussion,

Attendance :

Perception Digital: Venus Wong, Rabi Lee, Wendy Wai, Angel Chen

Sea Star: Yang Jing, Vicky Yuan, Nick Tong, Cathy Zhang, Mercury Choi, Zhang Wei

1, total USD3,723,670.23 was aligned and acknowledged as this attachment,

(USD157K advance payment has been deducted from this total amount)

2, PD will confirm the remaining USD166,879.61.  Balance Order by wk1342.2”

By this email, the parties “aligned and acknowledged” an amount of US$3,723,670.23, while another amount of US$166,879.61 was to be confirmed.

21. It is not entirely clear what the parties meant by “aligned and acknowledged”; but the meaning becomes clear in the subsequent series of email exchanges between Wendy Wai of Perception Digital and Cathy Zhang of Sea Star which ended with Wendy Wai’s email of 16 October 2013 which reads:

“Dear Cathy,

The following is the summary up to today findings:

Total amount reported by SST: USD 166879.61

PD Agreed amount: USD 47805.92 (checked USD 127747.67)

Under checking amount: USD 39131.94

If you have further information for the checked amount, please provide supporting ASAP.

Thanks

Regards,

Wendy”

It appears from this series of emails that Wendy Wai and Cathy Zhang underwent a process of checking, submitting invoices, supporting documents and reached the conclusion that of the amount of unconfirmed claim in the sum of US$166,879.61 mentioned in the email of 11 October 2013, claims in the amount of US$127747.67 had been checked and of which a sum of US$47,805.92 was agreed, ie approved or reconciled.  This suggests that the phrase “aligned and acknowledged” in the email of 11 October 2013 meant approved and reconciled. 

22. Perception Digital argues that nothing was agreed during the meeting and the email of 11 October 2013 was only an acknowledgement of a “rough working number” for discussion purpose.  This flies in the face of the email as I have now construed it.  It flies in the face of the email of 16 October 2013.  Plainly, the amount of US$3,723,670.23 mentioned in the email of 11 October 2013 was an approved or reconciled amount leaving another amount to be approved or reconciled, which Wendy Wai and Cathy Zhang eventually did as evidenced in the email of 16 October 2013. I think Perception Digital’s defence of no approval is rather shadowy.

Defence (2) – Sea Star has not proved the invoices

23. Perception Digital argues that of the 293 invoices produced by Sea Star, at least 34 invoices were shown to be false, incorrect, duplicated, etc.  For the present purpose, Sea Star is prepared to accept a deduction for those amounts claimed.  This defence is not a valid defence to the reduced amount now claimed, particularly in the light of above analysis.

Defence (3) – Substantial set-offs

24. Perception Digital claims against Sea Star for materials that it had supplied to Sea Star, various items of costs incurred, back charges, damages for breach of the COD Agreement and Temporary Agreement, and loss of profits.  It claims damages in the total amount of US$3,119,636.87.  This amount, if proven, would exceed and extinguish Sea Star’s claim.  The amount counterclaimed is substantial and has been fully pleaded.  Mr Chain, counsel for Sea Star addressed three items of set-offs.

25. On the breach of the COD Agreement, Mr Chain argues that Sea Star’s failure to deliver the three remaining orders is protected by clause 28 of the MSA, which allows Sea Star to suspend its performance obligation due to Perception Digital’s failure to pay the invoices.  This argument must fail if the parties entered into a separate COD Agreement with specific obligation on the part of Perception Digital to pay cash on delivery and Sea Star to deliver on that term, and particularly cash had been paid before the goods were to be delivered.

26. Mr Chain then argues that the COD Agreement is not supported by documentary evidence.  He argues that the emails dated 4 and 5 September 2013 issued by Venus Wong were issued by Perception Digital asserting an agreement to deliver the three remaining shipments.  He submits that there was no such agreement and Sea Star never agreed to give up its right under clause 28.  With respect, that is a very distorted way of construing the parties’ correspondence.  Zhang Wei demanded cash-on-delivery terms on 3 September 2013.  It must necessary mean cash to be paid for specific items of goods specified in a particular order.  Venus Wong replied on 4 September 2013 that Perception Digital “agree to accept the COD (Cash on Delivery) payment term for the following orders and detail as attached” and provided details showing the three remaining orders.  This email must be clear evidence of a concluded contract on cash-on-delivery term and the placing of an order for the goods specified therein, ie the goods under the three remaining orders.  Not only that, Zhang Wei replied mentioning the specified goods.  Then, Venus Wong responded on 4 September 2013 saying “we aligned”.  On 5 September 2013, she further wrote saying:

“As per our discussion, we will make payment USD157241.96 for Philips wk36 and wk37 shipment and GSA shipment as attached.”

There is very strong and cogent evidence that the COD Agreement was concluded; an order for the specified goods placed on cash-on-delivery term under that agreement was placed; and pursuant to that COD Agreement, payment was made before delivery.  Sea Star failed to deliver.  It was not open to Sea Star to treat the payment as partial payment for the unapproved end of August amount (even though the entire amount or part of it might have been approved and reconciled in October 2013). 

27. As for breach of the Temporary Agreement, Mr Chain argues that the agreement was for payment by two instalments on 27 September and 4 October 2013 as evidenced by the text messages, but the payment of the second instalment was only made on 7 and 8 October 2013.  Though the payment was late, it is at least strongly arguable that by accepting the payment without returning it, Sea Star must be taken to have affirmed the contract and under a duty to deliver the goods.

28. The counterclaim appeared to be genuine and not put up just for the purpose of resisting Sea Star’s claim.  Though the value of the three remaining orders was small, it could have serious consequences on Perception Digital.  There is evidence that Philips terminated its long term relationship with Perception Digital and switched its orders to Shenzhen Sang Fei Consumer Communications as a result of Sea Star’s failure to meet its obligation towards Perception Digital under the MSA, the COD Agreement or the Temporary Agreement.  The loss of that long term relationship could be very substantial, though not yet quantified. 

29. As for the back charge claim, Mr Chain argues that this claim is fully met by the contemporaneous emails of 25 and 26 November 2010 from the parties reflecting an agreement that Sea Star will not be liable for back charges.  I do not think the emails go that far as to absolve Sea Star from liability for back charges.  They only referred to agreement to the back charge arrangement. What that arrangement is remains to be explored.

30. In conclusion, I think Perception Digital has a good claim of set-off against Sea Star which is comparable if not in excess of Sea Star’s claim.

Defence (4) – PDL is not jointly liable for PDT’s orders

31. This is a defence which is only available to PDL.  Sea Star pleaded in paragraph 7 of its Amended Statement of Claim as follows:

“… on or about 18^th April 2008, upon [PDL’s] request, [Sea Star] gave written consent pursuant to clause 31 of the [MSA] for the payment obligations of [PDL] to be assigned to [PDT], such that [PDL and PDT] would be jointly liable to make payments to [Sea Star] …”

This allegation is not admitted by PDL.  Mr Li submits that Sea Star cannot prove this allegation.

32. First, Mr Li submits that the averment is self-contradictory.  If, PDL has “assigned” its payment obligations to PDT, it cannot remain jointly liable for what it has assigned away.

33. Second, he submits that clause 31 of the MSA does not in any way suggest that PDL would remain jointly liable upon assigning its rights and obligation to an affiliate or third party. 

34. Third, PDL’s request and Sea Star’s consent to the assignment likewise do not in any way suggest that PDL would remain jointly liable with PDT.

35. Fourth, the suggestion that PDL remains liable after assigning away its payment obligation to PDT makes no commercial sense.

36. Lastly, there is no dispute that all the orders now in dispute were placed by PDT and not PDL.

37. Sea Star has no counter-argument to offer.  On the evidence, it is difficult to see how Sea Star could prove its claim against PDL.

Conclusion

38. PDL has, at least, an arguably complete defence.  PDT’s first two defences of no approval and failure of proof appear to be shadowy, but it has a strong counterclaim for set-off comparable to Sea Star’s claim.  As PDT has an arguable defence, though shadowy, it is not appropriate to enter summary judgment against it.  In view of its strong counterclaim, it is also not appropriate to order interim payment or conditional leave to defend.  The only course open to me is simply to dismiss the application for summary judgment and let all the issues be ventilated at trial.

39. I make a costs order nisi that the plaintiff shall pay the 1^st defendant’s costs of this application to be taxed, if not agreed; and that the costs of the 2^nd defendant be reserved.