PACIFIC DIGITAL TECHNOLOGY LTD v. UL TRAN TECHNOLOGY & SERVICE CO

CACV 82/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 82 OF 2004

(ON APPEAL FROM HCA NO. 4687 OF 2002)

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(by Counterclaim)

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J U D G M E N T

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Hon Rogers VP:

1. I agree with the judgment of Le Pichon JA. There will therefore be an order as proposed in paragraph 18.

Hon Le Pichon JA:

2. This is an appeal from the order of Reyes J allowing an appeal from the master who had refused summary judgment sought by the defendant UL Tran ("UL") on its counterclaim against Pacific Digital ("Pacific").

Background

3. The contract underlying the action is a contract of sale by UL (as seller) to Pacific (as purchaser) dated 25 February 2002 of 10 "Triathlon" CD/DVD 5 production lines manufactured by Kraus Maffei Kunststofftechnik GmbH ("the Triathlon Machines"). UL also agreed to provide Pacific with 2 Triathlon DVD injection moulding machines ("the DVD Machines") free of charge.

4. Pacific paid ?400,000 by way of deposit and gave UL 9 post-dated cheques for the balance. These were later replaced because of a mistake in the name of the payee. The total cost of the Triathlon Machines was in excess of ?4 million. The Triathlon Machines were delivered on various dates between 12 April 2002 and 20 August 2002. There is a dispute between the parties as to whether the Triathlon Machines delivered were defective. It is common ground that that is an issue that has to be tried.

5. By letter dated 5 December 2002, Pacific requested UL to return all payment for the Triathlon Machines as well as cheques received by UL and to arrange for "the repossession of all the production lines". On 16 December 2002, Pacific issued a writ asserting total failure of consideration and claiming the return of the deposit as well as the 9 cheques and damages. UL filed a defence and counterclaim accepting Pacific's repudiation of the contract. Paragraph 25(a) averred that "Pacific had accepted the machines". UL counterclaimed, inter alia, for an order for the delivery up of the Triathlon Machines. In its reply and defence to counterclaim, Pacific pleaded that the goods had never been accepted and claimed a lien over the Triathlon Machines for damages suffered. On 24 October 2003, UL took out an Order 14 summons on its counterclaim. The master granted Pacific unconditional leave to defend. On appeal, Reyes J reversed the master's decision.

The judgment below

6. The judge concluded that by its statement of claim, Pacific had clearly intimated an intention to reject the Triathlon Machines and terminate the contract. Whilst denying that the Triathlon Machines were defective, in its defence and counterclaim, UL accepted that the contract was at an end. Pacific had contended that UL's pleading in paragraph 25(a), namely, that Pacific had accepted the Triathlon Machines, meant that Pacific had lost the right of rejection. It was therefore submitted that it was not open to UL to accept Pacific's rejection. The judge rejected that contention, holding that by its defence and counterclaim,

"8. ... UL simply said that Pacific had accepted the goods and was not entitled to reject the Machines. This cannot alter the fact that Pacific purported to reject the Machines (UL says wrongfully) on the basis of a total failure of consideration. UL was entitled to accept that purported rejection, treat the Contract as avoided and demand the return of the Machines...."

7. The judge reasoned that since Pacific had unequivocally pleaded the rejection of the goods on the ground of total failure of consideration, it was raising an avoidance of the contract ab initio and that by accepting Pacific's rejection on that basis, UL caused the property in the Triathlon Machines to revest in it. Those legal consequences flowed from the way in which the parties had pleaded their respective cases. The judge considered that Pacific's reply and defence to counterclaim which claimed a lien on the Triathlon Machines for the damages claimed by Pacific fortified his analysis. Since a lien cannot be exercised over one's own goods, Pacific was implicitly recognising that the property had revested in UL.

This appeal

8. Much of the argument before this court centred on whether, as a matter of law, there had been a revesting of the property in the Triathlon Machines. Mr Chain, who appeared for Pacific, submitted that in a case where possession and property have both passed to the buyer, and the contract is terminated for the buyer's breach, the property in the goods does not revest in the seller upon his acceptance of the buyer's repudiation. As Mr Chain rightly acknowledged, direct authority is lacking. He referred to Benjamin's Sale of Goods, (6th edition) at 15-117 where it is stated as follows:

"No power at common law to terminate the contract or to retake where both property and possession in the buyer. Where, following the contract of sale, the buyer has both possession of, and the property in, the goods, any retaking of the goods by the unpaid seller will (except in cases of fraud or misrepresentation) be a conversion against the buyer. ..."

This was explained on the basis that:

"The assumption behind the statutory rules on the unpaid seller's rights of lien or of stoppage in transit is that if the property has passed to the buyer and the goods themselves have reached the actual possession of the buyer or his agent, the unpaid seller has no further remedy against the goods; if the seller had a common law power of revesting the property in himself by terminating the contract even where the buyer had lawfully obtained both the property in, and possession of, the goods, the statutory restrictions on the remedies of lien and stoppage could be easily evaded."

Then at 15-118, there is the following statement:

"Revesting of property in other circumstances. It seems anomalous that the seller's termination of the contract on the ground of the buyer's repudiation or fundamental breach will not revest the property in him if the buyer had both possession of, and the property in, the goods before the termination, whereas, in two other apparently similar situations, the property in the goods will revest in the seller, namely, when the buyer validly rejects the goods, or the seller or buyer 'rescinds' the contract on the ground that the other's misrepresentation induced him to enter the contract...."

9. But in an earlier chapter, at 12-064, there is to be found a statement to the opposite effect:

"Where, however, the property has passed to the buyer, by rejecting the buyer revests it in the seller.... A wrongful rejection would have no effect on the property in the goods unless the seller accepted the repudiation."

10. Understandably, Mr Yu SC who appeared for UL placed reliance on that passage as clear authority for the proposition that where a buyer wrongfully rejects goods and the seller accepts the rejection, even if the property in the goods had already passed to the buyer, it will revest in the seller. Statements to similar effect appear in Goode's Commercial Law (2nd edition) at 361:

"6. The Effect of improper rejection

Where the buyer purports to reject without being entitled to do so, this constitutes a repudiation which the seller is entitled, though not obliged, to accept as discharging the contract...

Where the seller accepts the buyer's repudiation, the property (if then in the buyer) revests in the seller, who is entitled to recover the goods and sue the buyer for damages for non-acceptance."

and from Atiyah's Sale of Goods (10th edition) at 508-9:

"The acceptance by the seller of the buyer's rejection revests the property in the former if it has passed to the buyer, and also restores to him the immediate right to possession. Consequently, as we have seen, the buyer has no lien on the goods for the repayment of the purchase price. The seller, upon receipt of notice of rejection, is entitled to have the goods placed at his disposal so as to allow of his resuming possession forthwith."

11. A possible explanation for the seemingly diametrically opposed positions taken in Benjamin may lie in the fact that different editors were responsible for the chapters concerned. Be that as it may, I do not see that the passages relied on by Mr Chain have any bearing or application where the buyer voluntarily consents to or offers the return of the goods albeit on recovery of the deposit paid. That, in fact, is what has arisen from the pleadings in the present case.

12. As noted above, Pacific's plea was that there had been a total failure of consideration. On that basis, it sought the recovery of the deposit paid of ?400,000, the return of the 9 unpaid cheques as well as damages. UL elected to accept Pacific's repudiation of the contract, albeit denying that the Triathlon Machines were defective. It therefore sought damages as against Pacific as well as the return of the Triathlon Machines.

13. Pacific's plea of total failure of consideration necessarily encompassed an offer to return the goods. As a matter of principle, if indeed Pacific had both possession and the property in the Triathlon Machines at the time its plea or offer was made, I do not see why, as a matter of law, it could not make that offer. Equally, as a matter of principle, there is no reason why UL could not take up that offer. But it goes without saying that if it does, it could not do so while at the same time retaining the deposit.

14. I should mention that Mr Chain also submitted that the seller has to show that the right of rejection was subsisting at the time the buyer sought to exercise that right. Mr Chain drew a distinction between "the wrongful exercise of a subsisting right of rejection and the non-existence of such a right". It was his case that if at the time of rejection the buyer had already lost its right to reject because of acceptance of the goods, the property in the goods cannot revest in the seller.

15. Mr Yu SC, who appeared for UL, made the point that the distinction sought to be drawn by Mr Chain between a wrongful rejection and the non-existence of a right of rejection was a distinction without a difference. Where the goods were not defective or the buyer had already accepted the goods, in either case, any purported rejection by the buyer would be wrongful. A wrongful rejection is thus nothing more than a purported rejection by a buyer who was not entitled to do so.

16. For present purposes, it matters not whether there had or had not been acceptance of the Triathlon Machines. Assuming, for the sake of argument that acceptance had taken place so that the buyer loses its rights to reject the goods, I am not aware of any legal impediment to the seller electing to accept the buyer's wrongful rejection and taking the Triathlon Machines back upon repayment of the deposit.

17. The matter can be viewed in this way. UL's acceptance of the return of the Triathlon Machines, on analysis, is but a step taken to mitigate its loss. If, at the trial, it were found that the goods were not defective, UL would have a claim for damages in respect of any loss suffered by Pacific's wrongful repudiation of the contract. This may include, for example, interest on the balance of the purchase price and the difference, if any, between the value of the Triathlon Machines under the contract and their value as at the date of their return to UL. If, on the other hand, the Triathlon Machines were found to be defective which is the basis of Pacific's plea of total failure of consideration, the return of the Triathlon Machines to UL is but part and parcel of the relief sought by Pacific. Pacific would be entitled to the return of the deposit and damages in respect of any loss suffered by reason of UL's breach. Approaching the matter in this manner and on the facts of this case, whatever the result, UL would be entitled to the possession of and property in the Triathlon Machines. Leaving aside the matter of damages, the matter outstanding would be whether Pacific would be entitled to the return of the deposit. Since this aspect is bound up to the question of title, it strikes me as reasonable and fair that UL should be entitled to delivery of the Triathlon Machines and the DVD Machines on condition that the deposit is paid into court pending trial or further order.

Conclusion

18. For these reasons, I would vary the order dated 16 March 2003 by deleting paragraph 1 and varying paragraph 2 by making it conditional on the payment of £400,000 into court by UL pending trial or further order and specifying the Triathlon Machines as had been done in paragraph 1. I would also make an order nisi that the costs of this appeal be in favour of UL.