XPOLY RECYCLING LTD v. GOLD LEADER ENTERPRISES LTD

CACV 12/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 12 OF 2011

(ON APPEAL FROM DCCJ No. 5241 of 2008)

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BETWEEN

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J U D G M E N T

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Lam J (giving the judgment of the Court):

1.  This case concerns about a sale of goods dispute between the Plaintiff as the seller and the Defendant as the buyer. By a Sales Order Contract dated 22 July 2008, the Defendant agreed to purchase 250 metric tons (+/- 20%) of waste plastic to be packed in 10/11 containers at the price of US$285 per metric ton. It was an international transaction, with the Plaintiff based in United Kingdom and the Defendant based in Hong Kong.

2.  The description of the goods, as set out in the Sales Order Contract was as follows under the heading “spec and samples”,

“The material offered to contain waste plastic --- shredded mixed weee plastics of European / Scandinavian origin. Material to be as per epics offered to the customers during week 25, 2008, moisture as standard.”

3.  Eventually, only 9 containers instead of 10 were shipped and delivered to the Defendant. However, the Defendant only paid 30% of the agreed price. In this action, the Plaintiff sued for the balance of the price in the sum of US$48,894.60.

4.  The Defendant defends the claim by alleging that the goods were defective. There is also a plea that the parties had reached an oral agreement for the settlement of the dispute.

5.  After the close of pleadings, in the wake of an application for security for costs by the Defendant, the Plaintiff applied for summary judgment. The master granted summary judgment and dismissed the application for security for costs. On appeal, the judge reversed the master’s decision on summary judgment and gave the Defendant unconditional leave to defend. As regards the security of costs application, the judge refused to order security on the ground that the Plaintiff had a strong likelihood of success.

6.  With leave granted by Judge Leung, the Plaintiff appeals to this court in respect of the application for summary judgment. There is no cross-appeal by the Defendant as to the dismissal of the application for security for costs.

7.  In Treewell Development v Tsang Chun Wah [2003] 4 HKC 401, Ma JA (as he then was) made the following general observation at para.10,

“Where a judge has made an order giving unconditional leave to defend on the basis there are triable issues of fact, it will be an exceptional case before an appellate court (meaning the Court of appeal) will disturb this order: see the decisions of this court in Strong Base Services Ltd v Geroma Electronic Ltd [1996] 2 HKC 94, [1996] 2 HKLR 124; Ng Lung Sang Anita v Lam Yuk Lan [1999] 4 HKC 106; both cases referring to the well-known dicta of Robert Goff LJ in European Asian Bank AG v Punjab and Sind Bank (No 2) [1983] 1 WLR 642.”

8.  The relevant dicta of Robert Goff LJ is at p.654 of the report,

“If the judge has already decided, on the evidence, that there is a triable issue on a question of fact, it must in the very nature of things be unlikely that this court will interfere with his decision and decide that no trial should take place; because, where such a conclusion has already been reached by a judge, this court will be very reluctant to hold that there is no issue or question which ought to be tried.”

9.  Thus it is only in very special circumstances that this court will interfere with a judge’s grant of unconditional leave to defend on points of fact. We wish to make it clear that we are in complete agreement with these observations and whatever we say below should not be interpreted as any derogation of the same.

10.  It also follows that it is only in exceptional circumstances that a judge would grant leave to appeal against his own decision to grant unconditional leave to defend on points of fact. As mentioned, in the present case, Judge Leung granted leave to the Plaintiff to appeal against his decision.

11.  We have read the judgment of the learned judge carefully. It is fair to say that on the whole Judge Leung was rather critical of the defence case. In paragraphs 29 to 37, the judge analysed the evidence adduced by the Defendant to support the allegation of defective goods and highlighted the various weaknesses in them. In paragraphs 38 to 44, the judge highlighted the weaknesses in the defence case on the alleged oral settlement agreement. The conclusion of Judge Leung at paragraph 45 was that the problems in both limbs of the defence are obvious.

12.  Then at para.46 Judge Leung gave his decision on the Order 14 application which, with respect, can only be described as a volte-face. The judge said,

“Having said that, I decide that the dispute should still be resolved by way of trial. My reservation about Gold Leader’s case has caused me to consider imposing condition for the defence to proceed. Parties in the hearing were made aware of this possibility. It is only with reluctance that I finally decide not to do so.”

13.  Mr Nip submitted that the learned judge fell into error in coming to such conclusion without identifying the triable issues and giving no reason for holding that they were triable. On the other hand, Mr Yip contended that the judge had identified the two limbs of the defence and concluded that they were triable issues.

14.  Whilst the judge had identified the issues, he did not explain why he regarded those issues to be triable despite all the criticism he had about the defence. We accept that in a judgment on an Order 14 application the judge should not conduct a mini-trial. In many cases it would be sufficient for a judge to explain briefly why an issue should go to trial. However, in the present instance, when the judge had only commented unfavourably on the defence case in the preceding paragraphs leading to the conclusion, the Plaintiff had a legitimate doubt as to whether the proper test was applied by the judge in granting unconditional leave to defend.

15.  Such a doubt is enhanced by what the judge said in dismissing the application for security for costs at para.47,

“As discussed above, I am just steps from confirming the summary judgment against Gold Leader. In view of that, I agree with Mr Nip that the strong likelihood of success of the claim in the present case does operate against the exercise of discretion in ordering the security.”

16.  As observed at para.23/3/3 of Hong Kong Civil Procedure 2011, in the context of an application for security for costs, the court should only investigate the merits of the case when a plaintiff can clearly demonstrate a high degree of probability of success at trial.  

17.  In so saying, we should not be taken as equating the test for summary judgment with the test for refusing security on the grounds of merits. However, on the facts of the present case, it does seem to us to be surprising that the judge would grant unconditional leave to defend when he concluded in the same judgment that the plaintiff had clearly demonstrated such a high degree of probability of success that security for costs should be refused.

18.  We are therefore driven to the conclusion that the judge had applied the wrong test in concluding that there should be unconditional leave to defend. Thus it falls upon this court to exercise the discretion afresh.

19.  The test for determining whether summary judgment should be granted is well-known and we do not think it is necessary for us to repeat what had been said in earlier cases as set out at para.14/4/9 of Hong Kong Civil Procedure 2011. 

20.  We do not think there is any merit in the oral agreement defence. It is common ground that neither party had performed the alleged agreement. The Plaintiff denied there was such agreement. On the other hand, the Defendant said the Plaintiff had repudiated on the oral agreement to settle the dispute by refusing to execute the draft written agreement. The alleged agreement, according to the Defendant, was that the claims would be settled by the payment of US$10,000 by the Defendant to the Plaintiff by two cheques, dated 12 December 2008 and 12 January 2009 respectively. It is admitted on behalf of the Defendant in a letter dated 19 November 2008 from the Defendant’s solicitor to the Plaintiff’s solicitor that the Defendant had countermanded the payment of the two cheques.

21.  A party facing with a breach of a settlement agreement has two options: (1) insisting on the performance of the settlement agreement (in which case he has to perform his part of the bargain); or (2) accepting the repudiation of the agreement and reverting back to the original remedies available to him as if there were no settlement, see Lam Fung Ying v Ho Tung Sing [1993] 2 HKC 436.

22.  Not only did the Defendant fail to perform its part of the bargain of the alleged settlement agreement (by countermanding payment of the two cheques), its solicitor positively elected to revert to the original position by demanding for, inter alias, the refund of the deposit, return of the 2 cheques and return of the goods to the Plaintiff in the letter of 19 November 2008.

23.  In such circumstances, the rights and liabilities of the parties fall to be determined by reference to the original sale of goods contract. The oral settlement agreement (even assuming it existed) cannot afford a defence to the Defendant.

24.  Turning to the defence of defective goods, as explained in the course of the appeal, for present purposes it does not matter whether the transaction was a sale by sample or simply a sale by description. The crucial question is whether the Defendant has shown a triable issue on defective quality.

25.  We agree with the judge’s observations in his judgment as to the unsatisfactory state of the defence evidence. There is no surveyor’s evidence backing up the complaint of defects. The photographs produced by the Defendant are unclear and there is no evidence as to how representative they were in relation to all the goods shipped. The judge held that the defence case would be made out only if it is proved that the alleged extraneous materials exist in the scrap to such an extent that the overall character of the scrap being sold has changed.   

26.  On the other hand, we should have regard to the totality of evidence. It is common ground that after the Defendant had raised the complaint as to the quality of the goods, a representative of the Plaintiff visited Hong Kong to carry out an inspection. There is a dispute as to whether the goods inspected were the goods shipped because they had already been taken out from the original contained used by the carrier. The Defendant had offered an explanation for the removal of the goods from the original containers in its evidence.

27.  Some photos were taken by the Defendant allegedly of the goods shipped and they were sent to the Plaintiff under the cover of the letter of 19 November 2008. The Plaintiff’s representative made some handwritten comments by the side of the photos and produced them as exhibits. The comments were meant to be evidence that the goods shown in the photos were not those shipped, as such supporting the Plaintiff’s case that the goods inspected were not the goods shipped. However, if the court were to find that the goods shown in the photos were those shipped by the Plaintiff,  those comments could equally be evidence that the goods shown in the photos (at least as far as the lot identified by the photos are concerned) does not comply with the specification under the contract.

28.  Even taking into account of the prior request of the Defendant to cancel the order (before the goods arrived), we do not think the evidence as to the swapping of the goods for inspection (and photo-taking) is so compelling that the court should shut the Defendant from its day in court.

29.  At the same time, we are of the view that the defence of defective goods is shadowy notwithstanding the handwritten comments by the Plaintiff at the photos. As we have observed, there is no credible evidence as to how representative these photos are in respect of the whole shipment.

30.  We have heard submissions on condition to be imposed for leave to defend. Mr Yip told us that the Defendant needs 28 days to pay. We agree with counsel that since only 90% of the goods had been shipped, the condition should be the payment of the balance of the price for the 90%, viz. US$42,750[1] into court.

31.  In the circumstances, we decide to allow the appeal, set aside the unconditional leave to defend granted by the judge and order that if the Defendant within 28 days pays US$42,750 into court it may defend the action as to the whole of the Plaintiff’s claim. If the sum is not so paid, the Plaintiff may enter interlocutory judgment against the Defendant for damages to be assessed.

32.  As for costs below, the judge ordered costs in the cause. Though we substitute the unconditional leave with conditional leave to defend, we are not minded to disturb that. As for the costs of the appeal, we consider the Plaintiff to be successful on the appeal and we shall order (by way of costs order nisi) that the Plaintiff shall have the costs of the appeal, such costs to be taxed if not agreed.