PROSPERITY MATERIALS MACAO COMMERCIAL OFFSHORE LTD v. BLACKROCK METALS INC

HCA 598/2020

[2022] HKCFI 1744

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 598 OF 2020

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DECISION

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1.  This is the hearing of: (1)  the plaintiff’s application for summary judgment against the defendant; and (2)  the plaintiff’s appeal against the order of Master K W Wong dated 1 November 2021 ordering the plaintiff to provide further security for the defendant’s costs in this action (up to and including discovery and the summary judgment application)  in the sum of HK$348,800 by payment into court.

2.  On 2 June 2022 which was the last working day before the hearing, the defendant’s solicitors wrote to inform the court that they had made an application on 1 June 2022 for leave to cease to act for the defendant which would be heard by a Master on 13 June 2022.  They said that they no longer had instructions to handle the action and the hearing for the defendant and asked to be excused from attendance.  I declined the request given that they are still the solicitors on record for the defendant.  Mr Liu Cheen Man of the defendant’s solicitors attended the hearing and confirmed that: (1)  the defendant was duly notified of the hearing date when it was fixed; and (2)  he had no instructions to make any submissions on behalf of the defendant.  No skeleton argument was filed on behalf of the defendant to resist the plaintiff’s applications.

3.  That said, it is still incumbent on the plaintiff to satisfy me that it is entitled to summary judgment against the defendant or, if I decline to enter judgment, overturn the Master’s order for further security.  I have considered the oral and written submissions of Ms Tara Liao, counsel appearing for the plaintiff, and all the pleadings and evidence filed by the parties and the defences raised by the defendant, even though there is no one advocating the defendant’s case on its behalf.

4.  This is my decision.

5.  The plaintiff claims against the defendant for the return of the initial and additional deposits in the total sum of US$40,000,000 (“Deposits”).  The Deposits were paid pursuant to a 2011 Offtake Agreement, which was amended in 2013 by a Supplemental Agreement and superseded and restated by a 2015 Offtake Agreement.  The 2015 Offtake Agreement granted the plaintiff the right to purchase pig iron from the defendant on the following terms:

(1)  The defendant agrees to sell to the plaintiff up to 1,000,000 tonnes of pig iron of a specified grade (clause 3.1). 

(2)  The defendant shall deliver to the plaintiff such quantity of pig iron as the plaintiff shall request from time to time commencing from the later of 30 June 2019 or such other date as may be agreed by the parties (clause 3.2). 

(3)  At the commencement of each fiscal year commencing 1 April 2019, the plaintiff shall give the defendant an indication of the quantity of pig iron that it may require for that fiscal year (clause 6.1). 

(4)  When the defendant has sufficient pig iron for delivery, it shall give a delivery notice to the plaintiff setting out the quantity available, price, delivery date and port of loading (clause 6.2).

(5)  If the plaintiff agrees to take delivery of the pig iron set out in the delivery notice, the plaintiff shall give a written purchase order to the defendant within 5 business days upon receipt of the delivery notice (clause 6.3)  upon which a binding sale and purchase agreement is reached (clause 6.4).

(6)  The plaintiff shall arrange for vessels to take delivery of the pig iron at the delivery date (clause 6.5).

(7)  Payment shall be made by the plaintiff by irrevocable letter of credit which shall be received by the defendant not less than 5 business days prior to the delivery date (clause 9.2).

(8)  The defendant shall repay the Deposits to the plaintiff by applying them as partial payments (equivalent to US$40 per tonne)  of the purchase price of the pig iron delivered to the plaintiff, and the balance (if any)  shall be repaid forthwith upon the termination of the agreement (clause 5.2).  

(9)  The defendant agrees to use its reasonable endeavours to fulfil the quantity of pig iron required by the plaintiff and meet the delivery timetable of the plaintiff’s customers (clause 3.3).

(10)  The agreement shall continue until the earlier of the full delivery of the contracted pig iron quantity or any termination event under clause 12 (force majeure), clause 13.3 (mutual consent)  and clause 13.4 (failure to remedy breach)  (clause 13.1).

(11)  If the defendant shall fail to meet its delivery obligation (save for force majeure)  at any time, the plaintiff may give a written notice to the defendant requiring it to remedy the failure within 30 business days.  If the defendant fails to remedy the failure within the prescribed time (or if the failure cannot be remedied), the plaintiff may give a further notice to the defendant to terminate the agreement (clause 13.4).

(12)  Time shall be of the essence (clause 14.3).

6.  It was the common anticipation between the plaintiff and the defendant that the pig iron to be supplied would be produced from a mine owned and to be developed by the defendant in Canada (“Mine”), which was referred to as the “Project” in the 2015 Offtake Agreement, although there is no express provision to such effect in the agreement.

7.  The plaintiff’s case is that:

(1)  The defendant was in breach of clause 3.2 of the 2015 Offtake Agreement by failing to make any delivery of pig iron to the plaintiff by 30 June 2019. 

(2)  The defendant by its words and conduct evinced an intention not to perform its obligation under clause 3.2 when it: (a)  requested the plaintiff to extend the first delivery date to beyond 30 June 2019; and (b)  continuously failed to make any delivery of pig iron or give any indication as to when delivery could be made, despite repeated requests from the plaintiff.

(3)  The defendant was in breach of an implied term of the 2015 Offtake Agreement (to give business efficacy and/or represent the obvious intentions of the parties)  that it shall commence production at the Mine by the latest on 30 June 2019 or any such other date as may be agreed between the parties.

8.  The defendant’s defence as discerned from the Amended Defence and its evidence in opposition may be summarized as follows:

(1)  The 2015 Offtake Agreement per se did not give rise to any delivery obligation by any certain date.  The purported first delivery date of 30 June 2019 is only the earliest date by which delivery of pig iron may commence.  To trigger a delivery obligation the plaintiff must follow the mechanism under clause 6 of the 2015 Offtake Agreement by: (a)  indicating to the defendant at the beginning of a fiscal year the required quantity of pig iron for that year; (b)  agreeing on the quantity, price and other terms for the delivery; and (c)  making a request for delivery.  This was never done.

(2)  There is no implied term that production of pig iron at the Mine must commence by 30 June 2019.  There is no requirement that the pig iron to be supplied by the defendant to the plaintiff must be sourced from the Mine.

9.  It is in my view reasonably arguable in favour of the defendant that on a proper construction, clause 3.2 of the 2015 Offtake Agreement does not per se impose a delivery obligation by 30 June 2019.  Logically there can be no obligation (and in turn, failure)  to deliver before the quantity, price and other terms for the delivery have been agreed by following what Ms Liao described as the mechanism and logistics for the execution of the plaintiff’s order under clause 6.  This is reinforced by clause 3.2 stating that the defendant shall deliver to the plaintiff such quantity of pig iron of the specified grade “as the [plaintiff] shall request from time to time in accordance with this Agreement”.  Such a request must be made by the plaintiff to the defendant by way of a written purchase order under clause 6.3 in response to a delivery notice issued by the defendant under clause 6.2, upon which a binding sale and purchase agreement is reached, and in turn gives rise to a delivery obligation on the part of the defendant. 

10.  There is no dispute that the plaintiff never indicated to the defendant at the beginning of the fiscal year commencing 1 April 2019 the quantity of pig iron it may require for that fiscal year as provided for under clause 6.1 of the 2015 Offtake Agreement, or made a request to the defendant for delivery of any particular quantity of pig iron pursuant to clause 6.3.  It is reasonably arguable that the defendant was not in breach of clause 3.2 simply by failing to make any delivery of pig iron to the plaintiff by 30 June 2019 when the quantity and other terms (especially the price)  for the delivery had never been agreed.

11.  However, the defendant does not have any real answer to the plaintiff’s alternative claim that the defendant was not in a position to deliver any quantity of pig iron to the plaintiff commencing from 30 June 2019, and was as a result in anticipatory breach of its delivery obligation under clause 3.2 of the 2015 Offtake Agreement.

12.  The evidence before me suggests that by 30 June 2019, the Mine was not ready for production of any pig iron.  As early as 26 July 2018, Edward Yu, the vice-chairman of the defendant, emailed to inform the plaintiff that the first production of pig iron from the Mine was anticipated to be “closer to the 4^th quarter of 2020 and delivery will shortly follow”.  In another email of Colbert Lam of the defendant to the plaintiff on 28 August 2018, it was stated that “there will be production by 29 January 2021”.  As Edward Yu described in his affirmation, only preliminary construction works of the Mine had been commenced by 30 June 2019.  There was no indication as to when the Mine could start to produce pig iron ready for delivery to the plaintiff, if and when a request for delivery is made by the plaintiff after 30 June 2019.

13.  At one stage the plaintiff indicated to the defendant that it was prepared to defer the first delivery date to 29 January 2021 provided that the defendant could show to its reasonable satisfaction on or before 30 June 2019 that: (1)  the defendant had entered into binding agreements with reputable investors and government agencies for no less than US$850 million of funding to complete construction of the Mine and commence production by the fourth quarter of 2020, and the funding is available for drawdown by 30 June 2019; and (2)  construction of the Mine has commenced by 30 June 2019.  No satisfactory proof to the plaintiff was provided by the defendant.  There was no agreement between the plaintiff and the defendant to vary the first delivery date of 30 June 2019 provided for under clause 3.2 of the 2015 Offtake Agreement.

14.  That being the case, the defendant plainly had no ability to perform its delivery obligation as from 30 June 2019 when the Mine had not yet started its production.  As Ms Liao submits, whether the plaintiff made a request for delivery is of no relevance, when there was no suggestion or any evidence from the defendant that it would have made delivery to the plaintiff had such a request been made.  I accept Ms Liao’s submission that the defendant’s conduct leads a reasonable person to conclude that it had no intention to perform its delivery obligation by 30 June 2019 which constituted an anticipatory repudiatory breach of the 2015 Offtake Agreement.  This entitles the plaintiff to accept the defendant’s repudiation, terminate the 2015 Offtake Agreement, and sue for damages: Chitty on Contracts (34^th ed.)  para 27-070 at p 2031.

15.  For completeness, I am not inclined to find in favour of the plaintiff’s case based on breach of implied term.  Whilst the dealings between the parties indicated a common anticipation that the pig iron to be delivered to the plaintiff by the defendant would be produced from the Mine, I fail to see why there should be an implied term that the pig iron must be produced from the Mine and not anywhere else.  There is no evidence before me suggesting that the pig iron to be produced from the Mine is of such a unique composition or quality that could not be found in pig iron sourced from the open market.  In any event, in light of my conclusion on anticipatory breach above, I do not need to come to a firm conclusion in this regard.

16.  For the above reasons, I enter judgment against the defendant for the sum of US$40,000,000 or the Hong Kong dollar equivalent at the time of payment, with interest at HSBC prime rate + 1% from the date of writ (11 May 2020)  to the date of judgment (6 June 2022), and thereafter at judgment rate until full payment by the defendant.

17.  I also allow the plaintiff’s appeal against Master K W Wong’s order dated 1 November 2021 ordering further security and set aside the order, on the basis that the plaintiff has a strong case on merits against the defendant as reflected in my decision above. 

18.  I further order the sum of HK$350,000 paid by the plaintiff into court on 21 September 2020 and the sum of HK$348,800 paid by the plaintiff into court on 11 November 2021 as security for the defendant’s costs be paid out of court and released to the plaintiff forthwith.

19.  There is no reason why costs should not follow the event.  I order the defendant to pay to the plaintiff: (1)  costs of the plaintiff’s summons dated 7 July 2021 for summary judgment; (2)  costs of the defendant’s summons dated 23 June 2021 (as amended and varied by the order of Master Phoebe Man dated 30 July 2021)  for further security (including costs of the hearing before Master K W Wong on 1 November 2021 with certificate for counsel); and (3)  costs of this action (including all costs reserved), to be taxed if not agreed.