HARMONIC LIGHTWAVES INC v. PROSTEN TECHNOLOGY CO. LTD.

1997, No.A8583

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

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J U D G M E N T

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1. On 10th September 1997, the Plaintiff herein, an American seller of optical cable TV equipment, entered judgment against the Defendant in the sum of US$833,673.90, together with interest and fixed costs. This was a default judgment, no Notice of Intention having been given by the Defendant.

2. In turn, this event spawned three summonses of which, I think, but one is relevant today; that is the summons issued by the Defendant, Prosten Technology Company Limited, dated 16th September 1997. A subsequent summons dated 26th September 1997 issued by the Defendant was dismissed by my brother, Mr Justice Barnett, on the basis that it duplicated the existing judgment. There is one other summons which was issued by the Plaintiff, which involves a dispute about parts of an affidavit being not read or being struck out, but I confess that in the circumstances I have not taken that very seriously, and I have attempted, in this case, to look at matters very much in the round. I make no Order on that summons.

3. Mr Mumford, S.C., who appears with Mr Wong before me today, takes three points. Firstly, he suggests that this is not a regular judgment; that it is irregular because of defects in service, and that therefore the Defendant is entitled ex debito justitiae to have the judgment set aside. He draws my attention to the somewhat cryptic nature of the affidavit of service, and invites my attention also to the material put up by the Defendant with regard to the locks of the registered office, and the existence of a glass door; in this regard, apparently you cannot gain access without pressing the door bell. It is an interesting point but at the end of the day, as I indicated at the outset of the hearing, I am minded to treat this as a regular judgment. I think on the balance of probabilities that it was, although I accept what Mr Yip, the deponent on behalf of the Defendant, says in terms of this not being simply a matter of ignoring a Court document, but that for some reason or other it had not come to the Defendant's attention.

4. Having established that I am proceeding on the basis of this judgment being regular, this then leaves two further matters for debate, namely Mr Mumford's second and third points. The second point is, of course, that his clients have merits which offer a reasonable prospect of success, and the third point is an application for a stay of proceedings pursuant to an arbitration clause which figures in one of the documents, a purchase order, but not in a subsequent document, a distribution agreement. I will deal with these points in turn.

5. As to the relevant principles, I remind myself of the well-known words of the Court of Appeal in the case of Premier Fashion Wears Ltd v. Li Hing Chung [1994] 1 HKC 213 (CA), and note in particular that the case must have some realistic prospect of success and carry some degree of conviction. I remind myself also of the Marginal Notes in the White Book as to the discretionary powers of the Court and, in particular, the note at 13/9/14 of the Annual Practice. And last but not least, I remind myself of the words of the English Court of Appeal in the judgment of Lord Justice Dillon in Allen v. Taylor [1992] 1 PIQR 255 at 259, where the learned Lord Justice observed as follows :-

"It is quite impossible to be dogmatic about the extent to which the court must be satisfied of the validity of a suggested defence. There must numerous cases where the issue will turn entirely on the assessment to facts at trial. Each party's case would carry conviction if it stood alone and without conducting a trial the court is not able to say which will succeed. The present is, it seems to me, one of those cases. If the case briefly indicated in the statement of claim is right, the plaintiff will win ..."

6. This case in particular seems to me to centre around a very real conflict on the face of the affidavits, as I shall shortly describe.

7. The judgment sum in question, namely US$833,673.90, is in fact made up of two sums. The first sum is US$774,330.90 which represents, I understand, 70% of the amount of US$1,106,187 pursuant to the Plaintiff's Commercial Invoice No.C11288. It is with regard to this amount that the bulk of the argument has taken place. The balance of the total judgment sum is US$59,343. This smaller sum represents a shortfall under the Plaintiff's Commercial Invoice No.1176 in the sum of US$663,908, the Defendant having paid, out of that invoice sum, only the amount of US$604,626. As to this latter figure, I understand that the sum of US$59,343 was effectively retained by the Defendant against defects which were found to exist within the goods which had been supplied by the Plaintiff. There is a certain amount of material before me in this regard, and suffice it to say that if there was to be a trial, the question of these defects would be an active matter for debate.

8. However, as I have indicated, the real crux of the case is the dispute over the figure of US$774,330.90. The case has taken a slightly odd turn in terms of the evidence, because the way it has been dealt with is this : it is accepted by both Counsel, Mr Mumford, S.C. for the Defendant and Mr Carolan, for the Plaintiff, that so far as the Defendant and the Plaintiff are concerned, this is a "pay when paid" situation. In other words, as Mr Carolan very fairly says, if the Court is satisfied that the Defendant has not received the relevant sum of US$774,330.90 from the end user, a mainland entity, whom I shall call for short "Hunan PTA", then the obligation has not yet arisen to reimburse the Plaintiff. If, on the other hand, the Defendant in fact has received the sum of money, then the Plaintiff is wrongfully being kept out of the monies that are otherwise due to it. So there is a very simple line of demarcation. The sworn evidence, on behalf of the Defendant, in the shape of Ms Gladys Chan and Mr Yip, is that to-date the Defendant has simply not been paid the sum. That, says Mr Mumford, should be the end of the matter; until the Defendant is so paid, the obligation to pay the Plaintiff under the contract does not arise.

9. The Plaintiff's response is interesting and somewhat unusual. The Plaintiff has made its own assiduous enquiries and has developed the thesis, from a variety of sources, that in fact the Defendant has been put into funds by Hunan PTA, the end user, in the sum of US$774,330.90 as part and parcel of a larger sum of US$1,292,102.90 remitted by Hunan PTA. To buttress its case in this regard, the Plaintiff asked for, and was granted, an adjournment at the first hearing date of this summons to put in further evidence. And the dichotomy which has arisen in this case seems to me to neatly come down to a straight fight between the sworn evidence on behalf of the Defendant (in the persons of Ms Gladys Chan and Mr Yip) to the effect that they have not received these monies, and the evidence filed primarily on behalf of the Plaintiff by one Mr Tony Xu, who argues cogently, as a result of his enquiries, that this is wrong, and that the Defendant indeed has been put in funds. In particular (at paragraph 13 of his second affidavit), Mr Xu says that Mr Zan of Hunan PTA says that the transfer of funds to Prosten (the Defendant) in May 1996 included the 70% after-shipment payment for which Harmonic has obtained default judgment, against Prosten, in this action. Of course, he continues, the sum paid to Prosten of US$1,292,102.90 covered the 100% price payable by Prosten to Harmonic of US$1,106,187 and, presumably, Prosten's profit margin. He then exhibits and deals with, in his affidavit, various particular documents that he has been able to uncover, the provenance of which appears to be the Hunan Provincial Lawyers' Association.

10. So the situation with which the Court is faced is direct evidence on the one hand placed against a picture which appears to derive from circumstantial information casting doubt on what Mr Carolan calls the 'bare assertions' which have been made on behalf of the Defendant. Mr Carolan in particular points to the absence of surrounding documentation going to the identity of the particular payment made to the Defendant, if indeed such payment was not pursuant to this particular contract.

11. It is not an easy question to resolve. And I say in the strongest possible terms that this Court will not be drawn into anything remotely resembling a trial on affidavit. In his reply to Mr Carolan's persuasive submissions, Mr Mumford analysed the nature of the further circumstantial information put forward by Mr Xu, and he was also scathing about information which had emanated from the Hunan PTA as to whether there had been payment or not under this contract, Hunan PTA in this case, maintained Mr Mumford, being the "real Defendants". As Mr Mumford observed, if Hunan PTA have not paid the monies that are due from them to the Defendant, and if they wish to do business with the Plaintiff independently, the sort of things that they are reported as saying are things, which, to paraphrase the immortal words of Miss Rice-Davies, "they would say, wouldn't they".

12. After some reflection, and after considering the additional material provided by Mr Xu, including the documentation put up, the precise provenance of which, at least in terms of the makers, is not totally clear, I am bound to say that on balance I agree with Mr Mumford. I do not think that the justice of this situation is served either by shutting out the Defendant or (and here I note that I did have this in mind for a period of time) in requiring the Defendant to pay money into Court as a condition of being allowed to defend. I certainly have jurisdiction to do this, as the Marginal Notes in the White Book make clear. But Mr Mumford protested that, in the circumstances, this would not be fair, and I am inclined to think, notwithstanding Mr Carolan's very persuasive efforts, that this is correct. So on the substantive issue, at the end of the day in the exercise of my discretion I am going to permit the Defendant to come in and defend this case. I am satisfied that the benchmarks had been met and, as I have said, I think this is one case where the words of Lord Justice Dillon in Allen v. Taylor are more than usually apposite.

13. This leaves outstanding the third point, which is a question of a stay. I am not interested in this point. Although there is in the standard terms and conditions of the purchase order provision for arbitration by the Foreign Economic and Trade Arbitration Commission of China Council for the Promotion of International Trade, which arbitration should take place in Hong Kong (see Clause 27.2 of a standard terms and conditions annexed to the purchase order), it seems to me that the matter is effectively put beyond doubt by the terms of the subsequent Distribution Agreement, and in particular Clause 18B annexed thereto, which reads as follows :-

"The terms and conditions contained in this agreement constitute the entire agreement between the parties and supersede all previous agreements and understandings whether oral or written between the parties hereto with respect to the subject matter of this agreement and no agreement or understanding varying or extending the same shall be binding upon either party unless in a written document signed by both parties."

I note also that Exhibit B to this Distribution Agreement, at sub-Clause D (at page 8 of 9 of the Distribution Agreement) specifically includes a variation of payment clause in terms of the relevant contract we are considering, sub-Clause D introducing for the first time the "pay when paid" formula. I am bound to say, therefore, that the case really boils down to whether or not I think that there is an arbitration agreement continuing in existence contractually between the parties. It seems to me that the entire agreement clause, quoted above, when taken together with the specific reference to this contract in the exhibit thereto, deals with the point neatly. I reject, therefore, the issue of a stay. Moreover, it seems to me that this matter is more than usually appropriate to be dealt with by the Courts of Hong Kong and I can foresee, on the material before me, a lively trial with some probing cross-examination as to the provenance of the various sums of money which had been received by the Defendant, and whether the "pay when paid" clause has become operative. But I will not anticipate matters by speculation at this stage.

14. That, I think, deals with the three main matters. My Order therefore will be as follows : that the Judgment entered in this case, dated 10th September 1997 be set aside. The Defendant is to have leave to file its Defence within 14 days of the date hereof, and the Plaintiff is to file its Reply, if any, within 14 days thereafter. The application for a stay is dismissed, and I will hear Counsel as to costs. In this regard, I note that not only was there an initial hearing before me which stood adjourned with, I think, costs reserved, but I believe there was also one hearing before Mr Justice Barnett, where the matter was again adjourned. I will ask for Counsel's assistance as to the costs in that regard, and whether any order was made.

[Submissions from Counsel]

15. I thank Counsel for their helpful submissions on costs. Sometimes it strikes me that costs orders are more difficult than the substantive argument, but there it is. I do not propose to make a costs order which is a Taxing Master's nightmare, and attempt, for example, to split off the stay issue from the question of the judgment being set aside. It seems to me the appropriate way to do it is as follows : there are three days' worth of costs to look at, and it seems to me that so far as the costs of 5th December 1997 are concerned, that is the adjourned first hearing before me, that the Plaintiff should have those costs in any event. So far as the balance of the costs are concerned, which includes the hearing before Mr Justice Barnett on 7th October 1997 and today's hearing of 30th December 1997, I think that the appropriate order should be the Plaintiff's costs in the cause.

16. I think that that dispenses with all the matters before me today, save to formally extend my thanks to both Counsel for their very considerable assistance.