INABATA SANGYO (HK) LTD v. SUPERIOR PRECISION ENGINEERING CO. LTD AND OTHERS

HCA 1086/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1086 OF 2008

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ASSESSMENT OF DAMAGES

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Background

1.  On 18 August 2005, the 1^st Defendant and the Plaintiff entered into a sale and purchase contract whereby the 1^st Defendant agreed to purchase 12 sets of hydraulic injection moulding machines (“the Goods”) at a total price of JPY256,300,000 (“the Contract”).  There is a retention of title clause in the Contract.  It means that the Goods shall remain the property of the Plaintiff until purchase price of the Goods is fully paid.

2.  The 2^nd to 5^th Defendants guaranteed the payment of the purchase price of the Goods by a written guarantee dated 19 August 2005.

3.  The 1^st Defendant is a company incorporated in Hong Kong while the 2^nd , 4^th and 5^th Defendants were the shareholders/directors and the 3^rd Defendant was a director of the 1^st Defendant at all material times.

4.  The 1^st Defendant only partly settled the purchase price leaving an outstanding sum of JPY192,000,000 and an outstanding interest of JPY11,566,973.

5.  The Plaintiff obtained default judgment against the 2^nd and 5^th Defendants.

6.  On 11 March 2009, the Court entered summary judgment against the 1^st Defendant and granted unconditional leave to the 4^th Defendant to defend.

7.  The Plaintiff also obtained interlocutory judgment against the 3^rd Defendant with damages to be assessed because the Court found that there were disputes of facts in relation to whether the Plaintiff had acted reasonably in mitigating its loss.

8.  This is the assessment of damages against the 3^rd Defendant.

The Plaintiff’s Case

9.  The Plaintiff called 2 witnesses.  The first one is Mr. Masahiro Sato who is the General Manager of Shanghai Inabata Trading Co. Ltd., a wholly-owned subsidiary of the Plaintiff.

10.  Mr. Sato adopted his witness statement dated 29 September 2009 as his evidence.

11.  In his witness statement, Mr. Sato said that in around June 2008, he discovered that the Plaintiff had been perpetrating a fraud upon the Plaintiff and that had been for a period of 6 months.  Mr. Sato found out that while the 1^st Defendant had provided 5 bank transfer slips purporting to be evidence of bank transfers for payment of part of the purchase price of the Goods, between December 2007 and May 2008, there were in fact no such transfers.

12.  A representative of the Plaintiff was sent to visit the offices and factory of the 1^st Defendant in WuXi, PRC.  On 11 July 2008, the Plaintiff caused a search to be made at WuXi City Commercial Administrative Management Bureau.  The results shown that the 1^st Defendant had transferred its interest in the Goods to a connected third party, Superior Precision Engineering (WuXi) Ltd, which in turn had mortgaged the Goods to Bank of China in PRC (“the Bank”) as security for certain loans (“the Loan”).  These transactions were carried out without the knowledge/consent of the Plaintiff.

13.  In fact, as early as on 1 July 2008, the Plaintiff had through its PRC lawyer, Mr. Min Wei, raised objection to the WuXi Court’s property preservation procedures in relation to the Goods.  On 26 September 2008, the Plaintiff raised objection to execution to the WuXi Court. Upon advice of Mr. Min Wei, including a letter dated 24 November 2008, the Plaintiff withdrew its objection to the property preservation in the WuXi Court on 26 November 2008.

14.  Under cross-examination, Mr. Sato accepted that the rights of the Bank only extended to the amount of the Loan. However, he had no idea as to the extent of the claim of the Bank. Mr. Sato believed that he did give a thought about it but he did nothing further. He was not sure if the Plaintiff had any right in the proceeds of sale of the Goods. There was no advice on this.

15.  Mr. Min Wei was also called as a factual witness as well as an expert witness.  In so far as factual evidence is concerned, his evidence had already been covered by that of Mr. Sato.

16.  In the course of this hearing, I excluded the expert evidence of Mr. Min upon the application of the 3^rd Defendant.  It was my ruling that Mr. Min had not read the Code of Conduct for expert witnesses in Appendix D of Order 38 of the Rules of the High Court before he prepared his expert report.  I had given my reasons when I made this ruling and I shall not repeat them here.

17.  The 3^rd Defendant did not call any witness.

The Issue

18.  The only issue before the Court is whether the Plaintiff had mitigated its loss.

19.  It is trite law, and there is no dispute from the parties, that a Plaintiff “must take all reasonable steps to mitigate the loss to him consequent upon the Defendant’s wrong and cannot recover damages for any such loss which he could thus have avoided but has failed, through unreasonable action or inaction, to avoid”.  (para 7-004, McGregor on Damages, 18^th edition).  The onus is on the Defendant to prove that the Plaintiff had failed to take certain steps to mitigate his loss (para 26-103, Volume 2, Chitty on Contract, 2008 edition).

20.  Mr. Chain, Counsel for the 3^rd Defendant, submitted that since the Court excluded the expert evidence of Mr. Min, there was in fact no evidence of PRC law before the Court.  In the absence of proof of foreign law, the common law rule is that the Court applies Hong Kong law i.e. the foreign law is deemed to be the same as Hong Kong law.  On this, Mr. Chain relied on rule 18 as stated in Dicey, Morris and Collins on the Conflict of Laws, 14^th edition.

21.  Mr. Chain went on to submit that by applying Hong Kong law, the retention of title clause was a valid one and enforceable against the whole world including the Bank.  The Plaintiff should have commenced and proceeded with a litigation in the PRC by claiming title to the Goods.  He relied on Western Trust & Savings Ltd v Clive Travers & Co. [1997] PNLR 295 to support his submission (“Western Trust”).

22.  In Western Trust, H & W were registered proprietors of a property.  The Plaintiffs offered H a loan on condition that they obtained a first legal mortgage on the property.  The Defendant solicitors acted for both H and the Plaintiffs.  In a report on title, which purported to reveal any matters adversely affecting the property, the Defendants negligently failed to inform the Plaintiffs that W was also a registered proprietor, and that there was already a mortgage in favour of another lender.  The Plaintiffs would not have entered the transaction if the report had been accurate.  In May 1987, the Plaintiffs advanced a sum to H.  The Defendants discharged the pre-existing mortgage from this sum and accounted for the rest to H.  In early 1988, the Plaintiffs were aware of W’s involvement.  H then fell into arrears with the loan.  In August 1988, the Plaintiffs commenced proceedings against H for possession of the property which were adjourned for several times.  In December 1990, W was joined as a defendant in the possession action.  The Plaintiffs took no further steps in the possession action thereafter.  In January 1993, the Plaintiffs took out proceedings against the Defendants who contended that the Plaintiffs had failed to establish the necessary causation in respect of their loss and, by not pursuing the possession action, had failed to mitigate their damages.  The Court assessed the Plaintiffs’ damages in the nominal sum of £1.  The Plaintiffs’ appeal was dismissed.

23.  Phillips LJ, after having referred to Pilkington v Wood [1953] 1 Ch 770, as cited by Counsel for the Plaintiffs therein, said the “facts of [Pilkington] case were, in my judgment, very different from the facts in the present case.  In the present case the litigation in question was no more than a possession action which is an ordinary feature of enforcing security, with which the Plaintiffs in this case will be well familiar and which would have been a necessary step whether or not there were defects in the security.  Such litigation is in no way analogous to the action that was proposed in Pilkington”.  (letter F, page 303)

24.  In Pilkington, the Plaintiff claimed against his solicitors for failing to advise him of a title defect.  The Defendants admitted liability but contended that the Plaintiff should, before bringing the action against the Defendant, have mitigated his loss by suing the vendor on the covenant for title as implied by statute.  Harman J found that the vendor would resist any claim and went on to rule that “the so-called duty to mitigate does not go so far as to oblige the injured party, even under an indemnity, to embark on a complicated and difficult piece of litigation against a third party”.  (page 777 of the report)

25.  These authorities are illustration of what a Plaintiff should have done to mitigate his loss under particular circumstances.  In Pilkington, the Court ruled that the Plaintiff did not act unreasonably in not claiming against the vendor.  In Western Trust, the Court ruled that the Plaintiffs should have commenced and proceeded with the possession action.  It is obvious and understandable that decisions in these cases were, and cases of this sort must be, made against the backgrounds of the case.

26.  It is the 3^rd Defendant’s case that the Goods are subject to a retention of title clause and thus a piece of simple litigation for claiming title will help to mitigate or even avoid any loss.  This submission is however premised upon the exclusion of the expert evidence of Mr. Min concerning what is the governing PRC law and its application.

27.  The issue here is not whether PRC law or Hong Kong law should apply at the material times.  The position, of course, would be different, if that is so.  As the 3^rd Defendant is saying that the Plaintiff failed to mitigate, the 3^rd Defendant has to prove so.  It is incumbent upon the 3^rd Defendant to adduce evidence to show that the Plaintiff failed to take reasonable steps to mitigate loss in the light of all the circumstances including the applicable law, be it PRC law or Hong Kong law.  If the 3^rd Defendant contends Hong Kong law should apply, evidence should be led for this purpose.  However, there is no such evidence and in fact the 3^rd Defendant adduced no evidence in this case.  It is thus not open to the 3^rd Defendant to submit that Hong Kong law applies by reason of the failure on the part of the Plaintiff to prove what is the governing PRC law.

28.  Even assuming that the submission of the 3^rd Defendant is right and that Hong Kong law shall apply, does it mean that the Plaintiff should pursue legal proceedings in PRC to claim title to the Goods or the balance of the proceeds of sale after paying off the debt owing to the Bank? It is not a question of mere submission and the question has to be answered in the light of the factual backgrounds of this case as placed before the Court.  The only evidence before the Court is that the 1^st Defendant had not fully paid for the Goods which are subject to a retention of title clause.  The Goods were somehow mortgaged to the Bank by Superior WuXi.  There is no evidence as to what had happened to the Goods after they came into the hands of the 1^st Defendant. There is no evidence as to the circumstances under which and how Superior WuXi would be in the position to mortgage the Goods.  There is also no evidence as to the stance of Superior WuXi in relation to the ownership or title of the Goods or the balance of the proceeds of sale. 

29.  While some machineries and plants of Superior WuXi (and including the Goods) were sold by auction at around RMB 16 million and part of this proceeds of sale was applied to pay off the Loan in full, there is no evidence as to the price at which the Goods were sold; and there is no evidence as to the extent of the interest of the Bank in the proceeds of sale. The fact that the Bank is fully paid off does not necessarily mean that the proceeds of sale of the Goods is sufficient to pay off the debt owing to the Bank. It may be the case that there is other security in relation to the Loan and such security is part of the machineries and plants sold as aforesaid.

30.  What are known to the Court are only small parts of the story.  Without the missing information as aforesaid, I am of the view that there is simply insufficient evidence to support the submission of the 3^rd Defendant that the situation is that simple like Western Trust.  

31.  The 3^rd Defendant submitted that since the advice of Mr. Min, being the Plaintiff’s lawyer and thus its agent, was patently wrong, the Plaintiff was not entitled to rely on the fact that they acted upon the advice of their lawyer. I do not agree that the Court should view this matter from the perspective of agent and principal as suggested by the 3^rd Defendant. Even assuming the advice is wrong and that the situation is a simple and straightforward one so that a simple litigation in PRC will help to mitigate or avoid loss, the ultimate question for the Court to decide remains the same - did the Plaintiff act reasonably in all the circumstances? 

32.  Once the Plaintiff spotted that there might be something wrong, they carried out investigation without any delay.  The Plaintiff’s objection to the WuXi Court’s property preservation procedures was raised by the Plaintiff’s PRC lawyer, Mr. Min, on 1 July 2008, less than one month after Mr. Sato discovered the alleged fraud.  A search was conducted on 11 July 2008 revealing the mortgage aforesaid.  The Plaintiff raised objection to execution to the WuXi Court on 26 September 2008.  Notice of hearing was issued by the WuXi Court on 7 October 2008.  The hearing scheduled to take place on 21 October 2008 was vacated.  The Plaintiff eventually withdrew their objection on 26 November 2008.  Such withdrawal was approved by WuXi Court on 2 December 2008.

33.  The Plaintiff did take out legal proceedings against the Bank at the outset.  However, they withdrew their case upon the legal advice of Mr. Min.  I do not see anything wrong on the part of the Plaintiff.  The Plaintiff is a Hong Kong company facing legal problem in the PRC.  It is entirely normal for the Plaintiff to instruct a PRC lawyer for legal advice.  The Plaintiff is not in the position to tell whether the legal advice rendered by Mr. Min is a sound one or not. Thus, it is also entirely normal and reasonable for the Plaintiff to rely and act on the legal advice given. 

34.  For the reasons aforesaid, I am satisfied that the Plaintiff had acted reasonably.  The 3^rd Defendant failed to prove that the Plaintiff had failed to mitigate its damages.

Quantum

35.  It is my ruling that the 3^rd Defendant has to pay damages in the sum of JPY192,100,000 or HK$15,314,094.39 and interest up to 19 May 2010 at HK$1,461,775.20 and thereafter at judgment rate until full payment.  The calculations of the figures are in fact not disputed by the 3^rd Defendant.

Costs

36.  The 3^rd Defendant do pay costs of the assessment (excluding the costs of and in relation to the expert evidence of Mr. Min) to be assessed by summary assessment if not agreed.

37.  If costs is not agreed and has to be assessed as aforesaid, the parties should fix a date for such hearing (30 minutes) within 14 days from the date of handing down of this judgment.  The 3^rd Defendant shall file and serve his objection not less than 7 days before the hearing.