KAGA (H.K.) ELECTRONICS LTD v. SUN CUPID TECHNOLOGY (H.K.) LTD

CACV 154/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 154 OF 2014

(ON APPEAL FROM DCCJ NO 2088 OF 2013)

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REASONS FOR JUDGMENT
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Hon. Bharwaney J (Giving the Reasons for Judgment of the Court)

1. This is the defendant’s appeal against the order of HH Judge Kent Yee who dismissed the defendant’s application to set aside a regular default judgment that had been obtained by the plaintiff for the price of goods sold by the plaintiff to the defendant. An application for leave to appeal was refused by the learned Judge but was granted by the Court of Appeal, limited to one ground of appeal only, namely, whether the property in the goods had passed to the defendant so that the plaintiff was entitled to claim the agreed price of the goods in question.  After hearing counsel for the defendant, we dismissed the appeal with costs to the plaintiff. These are our reasons for so doing.

2. The facts of the case are fully set out in paragraphs 4 to 25 of the judgment of the learned Judge and may be stated briefly as follows.  Ortus Technology Co. Ltd. (“Ortus”) is a manufacturer of LCD monitors in Japan.  The plaintiff is Ortus’s authorised dealer in Hong Kong and the Mainland.  The defendant is a manufacturer of smart phones and wished to obtain these monitors for its phones.  It placed a sample order with the plaintiff for 40 pieces of the monitors in May 2012 and, on 10 September 2012, issued a purchase order to the plaintiff for 4,000 monitors to be delivered to the defendant in Hong Kong.  The plaintiff, in turn, ordered the monitors from Ortus.  This order was subsequently revised on 12 November 2012.  The defendant also placed a second purchase order dated 16 November 2012 for 10,000 pieces of the monitors for delivery to the defendant in Hong Kong.  Delivery was effected under these two orders and the defendant duly paid for the monitors.

3. The dispute in question arose from another purchase order, also dated 16 November 2012, that had been issued by the defendant to the plaintiff in respect of 10,000 pieces of long lead time materials (“LLTM”), which were components that had to be manufactured and which were to be used for the manufacture of the monitors.  The following terms appeared in the purchase order under the heading “Remarks”:

“1. Official PO for whole unit of LCD monitor will be placed on 15 December 2012.

2. Completed LCD monitor will be delivered to our Hong Kong office by 15 February 2013.

3. No party can cancel this purchase order without confirmation from both parties.”

The plaintiff, in turn, placed an order for the same quantity of LLTM from Ortus for delivery on 15 February 2013.

4. The LLTM materials had been ordered by the defendant in order that they may be used by Ortus to manufacture 10,000 LCD monitors which the defendant had intended to purchase by issuing a purchase order for the same on 15 December 2012.  Despite demands on a number of occasions to do so, the defendant never issued the purchase order for the monitors.  After a number of exchanges, a Mr Satoru Urawa, the deputy managing director of the plaintiff, by email dated 10 May 2013, informed the defendant that while Ortus agreed not to insist on the issue of the purchase order for 10,000 pieces of monitors, the plaintiff insisted that the defendant should pay the price for 10,000 pieces of the LLTM by the end of May 2013, and that delivery of the goods would be made to the defendant.  The defendant failed to make payment and these proceedings were commenced on 10 June 2013. 

5. It was not in dispute that the LLTM were unascertained at the time the defendant had placed the purchase order for them and that the contract for the sale of the LLTM was a contract for the sale of future goods, within the meaning of section 7(1) of the Sale of Goods Ordinance, Cap. 26, (“the SOGO”) being goods to be manufactured or acquired by the plaintiff after the making of the contract of sale.  The plaintiff had to acquire the LLTM from Ortus as evidenced by its purchase order to Ortus dated 16 November 2012.  By virtue of section 7(3) of SOGO, the contract operated as an agreement to sell the goods.   

6. Section 3(4) of SOGO also provides that an agreement to sell becomes a sale when the time elapses or the conditions are fulfilled subject to which the property in the goods is to be transferred.  The learned Judge rightly identified[1] that the central question in the case was when the property in the LLTM was intended by the plaintiff and the defendant to be transferred to the latter.  He also rightly indentified Rule 5(1) of section 20 of SOGO which provides rules for ascertaining the intention of the parties in respect of unascertained or future goods.  Rule 5(1) provides:

“20. Rules for ascertaining intention

Unless a different intention appears, the following are rules for ascertaining the intention of the parties as to the time at which the property in the goods is to pass to the buyer-

…

Rule 5 (1)  Where there is a contract for the sale of unascertained or future goods by description, and goods of that description, and in a deliverable state, are unconditionally appropriated to the contract, either by the seller with the assent of the buyer, or by the buyer with the assent of the seller, the property in the goods thereupon passes to the buyer.  Such assent may be express or implied, and may be given either before or after the appropriation is made.”

7. The learned Judge expressed his reasons for dismissing the application to set aside the default regular judgment in the following paragraphs of his judgment:

“66. In the present case, when the PO was created, it must be the intention of the parties that [the plaintiff] should appropriate the LTT (sic.) Materials unconditionally and make them available as soon as possible (since they were long lead time materials) to Ortus for the manufacture of the 10,000 LCD monitors for the purpose of [the defendant] (of course with its assent). Such LCD monitors would be the subject matter of the official PO to be issued by [the defendant] by 15 December 2012 pursuant to the PO.

67. In the event that the official PO was issued and as a result 10,000 LCD monitors were manufactured for [the defendant], the LTT (sic.) Materials would be delivered to [the defendant] as components of the finished products by 15 February 2013 pursuant to the official PO. In the event that the official PO was not issued, nevertheless, the LTT (sic.) Materials would still be delivered to [the defendant] pursuant to the PO.

68. The [email of 10 May 2013] shows that [the plaintiff] unconditionally appropriated the LLT Materials in a deliverable state from Ortus for the purpose of the PO with the implied assent of [the defendant]. The LLT Materials were ascertained when, if not at an earlier time, by the [email of 10 May 2013], [the plaintiff] demanded [the defendant] to perform the PO and accept delivery of the LLT Materials after a discussion with Ortus. Ortus should have earmarked those LLT Materials to be delivered to [the defendant] pursuant to [the plaintiff’s] PO. The [email of 10 May 2013] shows clearly the readiness and willingness of [the plaintiff] to deliver the LLT Materials to [the defendant]. There is no contrary evidence and Mr Lam does not argue otherwise.

69. Thus, the property in the LTT (sic.) Materials has, in my judgment, passed to [the defendant] despite [the defendant’s] refusal to accept delivery.  [The plaintiff] is entitled to maintain an action for the price of the LTT (sic.) Materials and hence the Default Judgment is justified.”

8. At the hearing of this appeal, the point was validly made on behalf of the defendant that it had unequivocally informed the plaintiff, by email on 7 May 2013[2], that it refused to accept the LLTM, and that it was no longer possible to imply any assent on the part of the defendant that the LLTM be unconditionally appropriated to the contract after that date. Was there any unconditional appropriation of the LLTM to this contract, at an earlier time, before the defendant’s refusal to accept the goods had been communicated to the plaintiff? 

9. Section 19(2) of the Ordinance, a provision which applies to both specific goods and unascertained goods, stipulates that, for the purpose of ascertaining the intention of the parties, regard should be had to the terms of the contract, the conduct of the parties, and the circumstances of the case.  The intention of the parties, as to when the property is to pass, has to be ascertained by having regard to the terms of the contract in question in the context of the surrounding factual matrix.

10. The defendant purchased 10,000 pieces of the LLTM in order that they may be used for the manufacture of 10,000 pieces of the monitors, pursuant to a purchase order to be issued by the defendant on 15 December 2012 under which the completed monitors were to be delivered to the Defendant by 15 February 2013.  It can be inferred from the terms of the purchase order in question that the parties intended that the LLTM, purchased by the defendant from the plaintiff and which, in turn, were purchased by the plaintiff from Ortus, would be appropriated for the manufacture of 10,000 monitors, the subject of the purchase order to be placed by the defendant on 15 December 2012. 

11. For this reason, there was no stipulation of the date of delivery or the place of delivery of the LLTM to the defendant.  On our construction of the purchase order in question, there was no obligation on the part of the plaintiff to deliver the LLTM to the defendant in Hong Kong, the intention of the parties being that they would be used to manufacture the 10,000 monitors that had to be delivered to the defendant in Hong Kong.  By its purchase order dated 16 November 2012, the plaintiff had placed a back to back purchase order with Ortus for the same quantity of LLTM.  This stipulated that the LLTM would be shipped to the defendant in Hong Kong by 15 February 2013, which is consistent with the intention that they would be used to manufacture the monitors to be delivered to the defendant in Hong Kong by 15 February 2013.  There being no obligation to deliver the LLTM to the defendant in Hong Kong, the question whether there was an appropriation of the goods by shipment does not arise.  Under Rule 5(2) of section 20 of SOGO, delivery to the buyer or a carrier without reservation of a right of disposal is deemed to be an unconditional appropriation of the goods. The fact that delivery is a common form of appropriation does not mean that goods cannot be unconditionally appropriated to the contract prior to delivery. 

12. Absent contrary agreement, payment and delivery are made concurrent conditions of the contract by section 30 of SOGO in the sense that the seller must be ready and willing to give possession of the goods to the buyer against the price and the buyer must be ready and willing to pay the price in exchange for possession of the goods.  The fact that payment and delivery are concurrent conditions of the contract does not prevent an unconditional appropriation of the goods to the contract from taking place prior to delivery.  Accordingly, the fact that there was a demand for payment against delivery of the goods, contained in the email of 10 May 2013, does not mean that the goods could not have been unconditionally appropriated to the contract prior to delivery.

13. The primary submission made by the defendant was that there was insufficient evidence of the unconditional appropriation of 10,000 pieces of the LLTM to the contract in question with the consent of the defendant, prior to 10 May 2013, so as to entitle the plaintiff to claim against the defendant for the price of the goods.

14. The evidence before the learned Judge included an email from the plaintiff to the defendant, sent at 09:41 hours on 10 December 2012, asking the defendant to confirm the date of the issue of the purchase order for the monitors, a later email sent at 15:04 hours on the same date by the plaintiff to the defendant, expressing the hope that the purchase order for the monitors would be issued before 12 December 2012, and yet another email from the plaintiff to the defendant sent on 14 December 2012, stating that the purchase order for the monitors was originally scheduled to be issued today[3], whether it could be provided today, and stating, further, that if there was delay in issuing the purchase order, there would be a corresponding delay in the delivery of the monitors.  A further email was sent by the plaintiff to the defendant on 25 December 2012, referring to the purchase order for the LLTM, reminding the defendant of its promise to issue a purchase order for the monitors “to replace (LLTM) PO” before 15 December 2012, and requesting the defendant to issue the purchase order for the monitors before 27 December 2012.

15. The proper inference to be drawn from these emails was that 10,000 pieces of the LLTM were ready and available for use in the manufacture of the monitors, that the manufacture of the monitors could proceed as soon as the purchase order for the monitors was issued by the defendant, and that any delay in the issue of that purchase order would lead to a delay in the manufacture of the monitors, with consequent delay in delivering the same to the defendant.  This was the evidence from which it could be inferred that Ortus had unconditionally appropriated 10,000 pieces of the LLTM to the purchase order issued by the plaintiff.  As there was no evidence that the plaintiff had need of 10,000 pieces of the LLTM for itself or to perform some other contract for LLTM or monitors,   the appropriation by Ortus of the 10,000 pieces of the LLTM to the purchase order issued by the plaintiff was tantamount to the plaintiff unconditionally appropriating the same goods to the purchase order in question.  Consequent upon the appropriation of the LLTM to the purchase order issued by the plaintiff and to the contract in question, the plaintiff then made the demand that the purchase order for the monitors should be issued so that production of the monitors could commence.  

16. In addition, Mr Urawa stated in paragraph 44 of his second affirmation made on 21 October 2013 that:

“I would confirm that the (LLTM) for the production of 10,000 pieces of LCD Monitors were already ready for delivery to the Defendant or production of the LCD Monitors (subject to the Defendant’s purchase order) as at 14 December 2012. ”

17. The defendant has not adduced any contrary evidence to challenge the evidence of Mr Urawa.  The defendant’s complaint in this appeal was that the plaintiff had not adduced documentary or other evidence to support the assertion made by Mr Urawa in his affirmation.  However, it is not incumbent on the plaintiff to adduce such evidence to resist the application to set aside the regular judgment. The plaintiff could rest its case on the evidence of the emails and Mr Urawa.  The statement of Mr Urawa, contained in his affirmation, was evidence that was properly before the court and which the court could accept.  In the absence of the contrary evidence from the defendant, there was no reason for the court not to accept that evidence.  And once it was accepted that 10,000 pieces of the LLTM were ready on 14 December 2012 for use in the production of the monitors, it must follow that the goods were in a deliverable state and capable of being appropriated to the contract in question.  Further, absent contrary evidence from the defendant, the inference was compelling that there was an unconditional appropriation of the 10,000 pieces of the LLTM by Ortus to the purchase order issued by the plaintiff and which also amounted to an unconditional appropriation of the same to the purchase order issued by the defendant.

18. The real complaint of the defendant was that it was required to prove a negative in order to discharge its burden to show that it enjoyed a real prospect of success.  The defendant did not have any evidence at hand to show that the 10,000 pieces of LLTM were not unconditionally appropriated to the contract in question in mid-December.  The defendant was unable, in this case, to prove a negative.  We accept that the burden on the defendant in cases such as the present is onerous, but the defendant had only itself to blame for permitting the default judgment to be entered in the first place.  Our acceptance that the defendant had an onerous burden to prove a negative in the present case does not, however, lead us to reject the evidence of Mr Urawa or to refuse to draw the compelling inference, arising from that evidence, that 10,000 pieces of the LLTM were unconditionally appropriated to the contract in question at or about the middle of December 2012. 

19. In the absence of evidence that the defendant took issue on the availability of 10,000 pieces of the LLTM in mid-December to manufacture the monitors, the present case was a case in which the assent of the defendant to the unconditional appropriation of the LLTM to the contract in question could be properly inferred. 

20. The learned Judge was right to conclude that there had been an unconditional appropriation of 10,000 pieces of the LLTM to the contract in question before 10 May 2013, with the result that the property in the goods passed to the defendant, and that the defendant had failed to establish a real prospect of successfully defending the action on the ground that the property in the goods had not passed to the defendant.