BESTWAY INFLATABLES & MATERIAL CORPORATION v. GREYLAND TRADING LTD

CACV 104/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 104 OF 2003

(ON APPEAL FROM HCA NO. 3709 OF 2002)

_________________________

_________________________

_________________________

REASONS FOR JUDGMENT

_________________________

Hon Rogers VP:

1. This is an appeal from a judgment of Deputy High Court Judge Gill given on 14 April 2003. By that judgment the judge set aside the judgment ordered by the master on a summary judgment application and gave the defendant unconditional leave to defend. The judge also ordered that the plaintiff should furnish security for costs in the sum of HK$1 million in respect of the defendant's costs of and occasioned by the action up to and including trial. At the conclusion of the hearing of this appeal this court dismissed the appeal save as to the order of security for costs in respect of which the appeal was allowed. This court also ordered that the plaintiff should pay two thirds of the defendant's costs. The reasons for the judgment were to be handed down in writing later which we now do.

Background

2. The plaintiff is a Mainland company involved in manufacturing, amongst other things, inflatable plastic swimming pools and other products associated with aquatic leisure activities. The defendant is a Hong Kong company and is associated with Aqua-Leisure Industries Inc., which is a corporation based in Massachusetts. The plaintiff's claim in this case is quite simple. It is in respect of unpaid invoices for goods which have been supplied. There is no dispute that those goods were supplied. The defence to the claim is twofold. In the first place the defendant, Greyland Trading Ltd, avers that it was acting as agent for Aqua Leisure Industries Inc. In the second place the defendant says that even if it was liable to pay for the goods which had been supplied, there is a claim in respect of defective goods, which had been supplied under previous orders, and the defendant would be entitled to an equitable set-off in respect of the losses caused because of the supply of the defective goods.

3. When the plaintiff's claim was first raised in correspondence the question of agency was not mentioned. It only came to the fore when the defendant's evidence was filed in answer to the plaintiff's claim for summary judgment. Although the defence, which was filed on 29 January 2003, pleads the matter of agency as a defence, it is the plaintiff's case that proper particulars of the allegation of agency were only provided in an affidavit of a Mr Hoiriis filed the day before the hearing of the appeal before the judge below. Mr Hoiriis is the Vice President and Chief Financial Officer and a director of Aqua-Leisure Industries Inc. and a director and secretary of the defendant. Mr Fireman is the chairman of Aqua-Leisure Industries Inc., having founded that company some 30 years or so ago. Mr Hoiriis said in his affidavit that he and Mr Fireman were involved in negotiations with the relevant persons in the plaintiff's organisation prior to the commencement of trading relations between the various parties. He said in his affidavit that it was made quite clear throughout the negotiations that the defendant would be acting as agent on behalf of Aqua-Leisure Industries Inc. It is clear from the other evidence that those discussions must have taken place in late 1999. Since that time there have been approximately 100 or more orders which were placed with the plaintiff.

4. As the judge recorded in his judgment, the plaintiff disputed the allegation of agency. It was pointed out that in the early stages of the dispute that had been an admission as to liability and an expression of intention to satisfy the claim the money owing. Furthermore, the plaintiff placed reliance on the terms of the purchase orders. Those purchase orders had on their face an entry "FOR CUSTOMER:" and then the name of the customer who in nearly all cases was not Aqua-Leisure Industries Inc. Thus it was said that the allegation made by Mr Hoiriis could not stand up against a scrutiny of the documents. The judge warned himself that the court should not be drawn into a situation where the plaintiff would be denied its entitlement to a speedy resolution by the recovery of money by a spurious defence. Nevertheless, he went on to say that he did not find the defendant's allegations to be unmeritorious and that he considered that the defendant had done "enough to show it has an arguable defence".

5. Despite the fact that Mr Shieh SC has taken this court through a number of points which might be relevant in coming to the conclusion as to whether the defendant had been acting as agent, I would not differ with the conclusion of the judge below. The purchase order forms used by the defendant in placing the various orders that are the subject of the claim might be construed on the basis that the defendant's customers had been companies other than Aqua-Leisure Industries Inc. But I do not consider that such a conclusion can be reached without a great deal of further investigation including consideration of the manner in which business was conducted with the particular customers and who dealt with them. This court did not even have samples of the "Customer P/O" referred to on the purchase orders. It also has to be borne in mind that the reverse of the purchase orders was headed "Terms and Conditions". The first clause of those commenced by stating that the defendant was acting as agent for an overseas and/or local buyer and that that it should in no way incur liability in respect of the contract.

6. In my view, much will depend upon the evidence at the trial. It is impossible in this case to say other than that, at this stage, the defendant has an arguable case. Quite apart from the approach which an appellate court should take in finely balanced cases where summary judgment is sought, this case seems to me to be a clear case where the judge's view must be upheld.

7. In relation to the question as to whether the claim for defective goods could be relied upon by the defendant as a set-off should it be held liable for the price of the goods, the judge below came to the conclusion that, although the defendant's evidence may be short on proof of defective products, he did not consider that its counterclaim was a sham. He considered that if the issue of equitable set-off were a live one he would have found, on the facts, that the case fell within the category warranting a judgment in favour of the plaintiff but with execution stayed pending resolution of the counterclaim.

8. This aspect of the case is not now in point in view of my conclusion as to the disposal of the summary judgment application. I would, nevertheless, say that for my part, I would not rule out the possibility that the defendant could rely upon a true equitable set-off. The principle to be applied is clear. Simon Brown LJ put it shortly at page 950D of his judgment in Esso Petroleum Co. Ltd v Milton [1997] 1 WLR 938 when he said:

"For equitable set-off to apply it must therefore be established, first that the counterclaim is at least closely connected with the same transaction as that giving rise to the claim, and second that the relationship between the respective claims is such that it would be manifestly unjust to allow one to be enforced without regard to the other."

9. In this case, it is clearly arguable that there was, starting in late 1999, a series of transactions constituted on the basis of an arrangement which had been arrived at the commencement. There were a series of orders which could clearly be treated as part and parcel of a continuous series of ongoing transactions. Although each order would have to be dealt with as a separate order and each item of defective goods would have to be treated separately, nevertheless it would not stretch the imagination that the parties would treat their relationship as being part of, or at least under the umbrella of, the original arrangement. It might be expected that if there were a claim for defective goods and that claim were honoured by the plaintiff, the parties would make adjustments in payments for later orders to take account of any reimbursement.

Security for costs

10. Not only was the defendant successful in obtaining leave to defend the action but it also successfully obtained an order against the plaintiff for security for costs in the sum of $1 million. As already mentioned, the security was intended to cover the costs up to and including trial. Initially the defendant had requested security in the sum of $1 million but when the application was made the defendant sought security in the sum of $2,360,000. The way that sum was arrived at was set out in an estimate contained in an affirmation made by the defendant's legal representative.

11. The estimates given in that affirmation are clearly both very generous and rough and ready. For example a total of $150,000 is claimed in respect of the application of security for costs. Moreover, an item of $1 million is given in respect of discovery and inspection. Without any estimate of the length of trial, the cost of the trial is put at $600,000. The judge below came to the conclusion that a fair and reasonable sum to provide was $1 million. In doing so he clearly took a figure which he considered was reasonable in contrast to the figures given by the defendant. In respect of the defendant's estimate he said that it may or may not be "grossly excessive and unreasonable" as the plaintiff argued.

12. No doubt the judge took a course which arrived at what he considered would be practical justice. In doing so, it must be observed that a very substantial amount of security was ordered in comparison to the size of the claim. As noted, the plaintiff's claim is not contested insofar as it is not denied that the plaintiff had manufactured and supplied goods and was entitled to be paid by at least somebody, whether that was the defendant or somebody else. So not only was the plaintiff being kept out of money to which it is entitled from somebody but it was being asked to pay an amount in respect of security for costs which would cover the trial, which, at this stage, would be of unknown length. Furthermore, the court was being asked to order security on the basis of estimates as to costs which clearly it did not accept. In my view, the proper course in those circumstances was for the party claiming security to put its case in order and make an application supported by acceptable material. In the circumstances of the present proceedings, given the issues between the parties, it may also not be appropriate to order security which would cover the trial, but rather it may be right to make an order that would take the matter up to a suitable stage in the preparation of the case.

Costs

13. Finally, the judge ordered that the costs before him and before the master should be costs in the cause. That was an order which the judge could make if he considered it appropriate. He could have made other orders. Often on an Order 14 summary judgment application where leave to defend is given the costs are made costs in the cause. Hence, if the master had given leave to defend, it would not have been unusual if costs had been made costs in the cause. If there had been an unsuccessful appeal from an order giving leave to defend the judge might have ordered that the costs of the appeal should be to the defendant on the appeal. Nevertheless, there were circumstances in this case particularly the late filing of the affidavit, to which I have already referred, which would make it appropriate to vary the form of order of costs. In my view, it would be impossible in this case for this court to interfere with the exercise of the discretion of the judge below in relation to costs.

Hon Le Pichon JA:

14. I agree.