TOWNEARN INDUSTRIAL LTD. v. GOLDEN GLOBE HOLDINGS LTD.

CACV 205/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 205 OF 2002

(ON APPEAL FROM HCA 10357 OF 2000)

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J U D G M E N T

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Hon Mayo VP (giving the judgment of the Court):

1. This is an appeal from a decision of Burrell J who in turn was hearing an appeal from a Master.

2. The Judge entered judgment under Order 14 on a cheque for HK$287,193.23 with a conditional stay, entered judgment on admissions for US$60,959.76 pursuant to Order 27 of the Rules of the High Court and held that a purported assignment dated 7 February 2001 between the defendant's principal Naughty Clothing Co. Ltd. ("Naughty Clothing"), a U.K. company, was invalid. This Ruling was made in accordance with the provisions contained in Order 14A.

3. The stay on the cheque above referred to was conditional upon the defendant paying into court the amount payable under the cheque within 14 days. This condition was complied with. However having regard to the orders made by the Judge on his appeal it is difficult to understand the rationale of the payment as it is by no means clear how long the moneys would remain in court having regard to the fact that judgment had been entered on the two claims being made by the plaintiff and that the defendant's set-off and counterclaim had been dismissed and struck out.

4. The plaintiff, a Hong Kong company, is a garment manufacturer. It sold a consignment of goods to Naughty Clothing. It is their case that the defendant guaranteed that Naughty Clothing would pay for the goods. It is their contention that the guarantee took the form of a post-dated cheque which was to be returned to them when Naughty Clothing had discharged its obligations to the plaintiff. The cheque was dishonoured on presentation. This was the cheque initially referred to.

5. The plaintiff and the defendant entered into a further contract for the supply of samples for US$60,959.76. The defendant admitted their liability on this and this constituted the admission upon which the Order 27 judgment was based.

6. Two days before the defendant filed its Defence and Counterclaim to the plaintiff's claim Naughty Clothing assigned to the defendant various claims that it had against the plaintiff to the defendant who in turn sought to set these off against the claims being made by the plaintiff. In this connection it needs to be added that the total of the said claims being made by Naughty Clothing against the plaintiff far exceeded the amount of the claims being made by the plaintiff and formed their counterclaim.

7. It is the defendant's contention that the rationale for the assignment of Naughty Clothing's claim to them was to in effect consolidate the various claims and counterclaims which were being advanced by the parties.

8. The defendant sought to contend before the Judge that there were two arguable defences to the claim on the cheque.

9. The first was that the cheque had been delivered to the plaintiff conditionally and that as the condition had not been complied with the plaintiff was not entitled to recover the amount payable under the cheque.

10. The second contention advanced was that the plaintiff was not entitled to succeed in its claim as there had been a total failure of consideration for the cheque.

11. It is convenient to deal with these matters together. The first point which has to be made is that it is only in exceptional circumstances that a court will deprive a plaintiff of judgment on a claim based on a cheque.

12. The question which has to be considered is whether there were exceptional circumstances in the present case.

13. Mr Sussex SC for the plaintiff submitted that the condition which was imposed when the post-dated cheque was delivered to the plaintiff is set out in a letter dated 24 March 2000 from the defendant to the plaintiff which they countersigned. It is in these terms:

" Unit 1, 2/F, Winning Centre, 29 Tai Yau Street, San Po Kong, Kowloon.
Tel: 2742 6486 Fax# 2786 5267

Date: 24/3/2000

To:	Townearn Industrial Ltd
	Rm 903, Laford Centre
	838 Lai Chi Kok Road,
	Cheung Sha Wan,
	Kowloon, Hong Kong.
Attn: Ms Fanny Tsoi
From: Fanny Kwan/Johnson Chak (Golden Globe)

Re: Payment for 'Sin' USA shipment

According to our running practice, the payment for 'Sin' USA order should be made by L/C and all documents should be consigned to bank. Due to time constraint, our buyer, SIN, had requested you to consign to their final customer, the 'Ultimate Sin', instead before. We understood that this was unworkable and unacceptable for your end. After discussing with our buyer and your side, all had compromised that all shipping document will be consigned to 'Ultimate Sin', Golden Globe will issue post-dated cheque based on your submitted invoice amount on behalf of our buyer as payment guarantee. Our cheque will be effective only in case you cannot receive the payment from the bank. When you have received the payment, our cheque will be void automatically and must be returned to us.

Please sign back for your acknowledgement.

(Sgn)	(Sgn)
Townearn Industrial Ltd	Golden Globe Holdings Ltd"

14. It will be appreciated that the condition in question was that the plaintiff would receive payment for goods which were being shipped to Naughty Clothing.

15. The situation however is not as clear as that. Mr Chua for the defendant referred us to other correspondence which indicated that the letter of 24 March 2000 did not evidence the final agreement concluded between the parties on this subject.

16. He referred to a further letter dated 1 April 2000 which read:

"TO: TOWNEARN
ATTN: FANNY
FROM: GOLDEN GLOBE/FANNY KWAN
DATE: APRIL 1, 2000

RE: BALANCE USA ORDERS

AS OUR BUYER FAX DATED MARCH 31ST 2000 THEIR REF# FA 6042, THEY CONFIRMED TO SHIP BALANCE 18 STYLES TO USA IMMD. WITHOUT A VISA, AND WILL SUBMIT VISA BY MONDAY APRIL 3, 2000.

YOU MUST BE AWARE ON THEIR FAX, HARRY WILL DEBITING TOWNEARN IN IT'S ENTIRETY ALL MONIES LOST TO NAUGHTY WHICH HARRY WILL ADDRESS WITH YOU WHEN HE COME TO H.K. APRIL.

GOLDEN GLOBE ISSUE AN POSTDATED CHECK TO TOWNEARN, AS A GUARANTEE FOR OUR BUYER IF THEY DO NOT HONOR THEIR L/C AFTER FINAL CLAIMS SETTLEMENT BETWEEN NAUGHTY/SIN AND TOWNEARN.

IF YOU AGREE THE ABOVE TERMS, PLEASE SIGN AND RETURN IMMD.

POSTDATED WILL ISSUE TO BE COLLECT ON MONDAY APRIL 3RD 2000 AND PLEASE ARRANGE SHIPMENT IMMD.

Yours truly,

 

(Sgn)	(Sgn)
FANNY KWAN	TOWNEARN (FANNY)"

 

17. The condition referred to in this letter is that the cheque should not be presented until "after final claims settlement between Naughty Sin and Townearn".

18. Mr Sussex referred to affidavit evidence sworn on his client's behalf which suggested that the plaintiff was not aware that the 1 April letter referred to the goods in question. However there was no evidence of a definite denial that the goods were those in dispute.

19. Perhaps more importantly when the Judge considered these letters he held that the 1 April letter did indeed refer to the goods the subject of the invoice in question. In our view this being the case the condition upon which the plaintiff held the cheque was that there had to be a final settlement of outstanding claims between the plaintiff and Naughty Clothing.

20. Clearly it is at the very least arguable that the condition imposed upon the plaintiff in respect of the cheque extended much further than simply being a condition that the goods must be paid for.

21. On the basis that there is an arguable case that the cheque was a form of guarantee of payment and that the condition which had been imposed had not been fulfilled it is not necessary or desirable to go on to consider whether there had been a total failure of consideration.

22. This then brings us to the question as to whether the Judge was in error when he entered judgment on the defendant's admissions pursuant to Order 27 rule 3 of the Rules and declined to permit the defendant to set off its claim against this.

23. The hearing before the Judge was somewhat complicated by the plaintiff's application under Order 14A that there be a determination as to whether the assignment earlier referred to was a valid assignment.

24. With respect it was perhaps somewhat premature to adjudicate upon this issue. What needed to be established before this became a relevant factor was whether the set-off and counterclaim being advanced by the defendant related to the same subject matter as the claim being made by the plaintiff.

25. The case being run by the defendant was that as they were agents for Naughty Clothing it was realistic to have regard to all of the relevant dealings between the parties and to view them as being the same subject matter as the claim being made by the plaintiff.

26. The criteria which is to be adopted in determining whether or not judgment should be entered on admissions under Order 27 rule 3 is similar to that obtaining in relation to applications made under Order 14 of the Rules.

27. Before it is appropriate to permit a defendant to set off amounts counterclaimed it has to be established that the set-off or counterclaim which is being maintained by a defendant relates to the same or closely connected subject matter as the claim which is being made by the plaintiff.

28. Potter LJ reviewed the relevant law on this topic at p. 100 of Bim Kemi AB v. Blackburn Chemicals Ltd [2001] 2 Lloyd's Law Reports 93:

"29. The Dole Fruit case illustrates the wise refusal of this Court to become bogged down in the nuances of different between the formulation of the test propounded in The Nanfri, both in relation to the earlier criterion of 'impeachment of title' disapproved by Lord Brandon in the Bank of Boston case, and in relation to the reference to a need for a 'close connection' between claim and cross-claim which the Bank of Boston case was elaborated as the need to demonstrate a cross-claim 'flowing out of and inseparably connected with the dealings and transactions which give rise to the subject of the claim': see also the discussion in P & O Steam Navigation Co. v. Youell and Others, (C.A.) Mar. 26, 1997 97-0588 and Esso Petroleum v. Milton [1997] 1 WLR 938 at p.950D, in which Lord Justice Simon Brown stated that the cross-claim must be 'at least closely connected with the same transaction as that giving rise to the claim'. It seems that, insofar as there may be a difference, the Court has been content for the outcome to be governed by the notion of fairness involved in the proposition that it must be 'manifestly unjust' to allow one to be enforced without regard to the other. For myself, I consider that Lord Brandon's formulation is to be preferred because on the one hand it emphasizes that the degree of closeness required is that of an 'inseparable connection', while on the other it makes clear that it is not necessary that the cross-claim should arise out of the same contract; all that is required is that it should flow from the dealings and transactions which gave rise to the subject of the claim. It is of course in such cases, which frequently involve periodic settlement of accounts between the parties on an 'overall' basis rather than separate treatment as between each transaction, that the injustice of disallowing a set-off is most likely to arise.

30. That said, however, it is clear that the principle as stated by Lord Brandon and applied in the Dole Fruit case is apt to cover a situation where there are claims and cross-claims for damages in respect of different but closely connected contracts arising out of a long-standing trading relationship which is terminated. That fact will not per se establish the requisite 'inseparable connection' but, in an appropriate case, it may well be manifestly unjust to allow one claim to be enforced without taking account of the other. Further, I consider that the necessary equity may well be demonstrable in a situation where, in the context of such a relationship, the claimant claims damages for the repudiation of a supply contract which the defendant justifies by asserting conduct of the claimant which not only breached the supply contract but also breached a related contract between the parties for supply of other products of the defendant, in respect of which the defendant counterclaims damages. That is, of course, this case."

29. It is apparent from this extract from the judgment that an overall view of the situation has to be considered and that no single factor is likely to be conclusive of the matter.

30. Mr Sussex argued that this was not a case where it would be appropriate to permit the defendant to set off the plaintiff's claim on the admissions.

31. Besides the fact that Naughty Clothing and the defendant were separate entities it was apparent from the available material that what the defendant was attempting to do was to obfuscate the overall picture by indiscriminately making reference to past invoices which had no relevance to the present case in an endeavour to confuse the issues.

32. Indeed he took us through a number of invoices and attempted to demonstrate that the defendant had been acting in bad faith.

33. We are not convinced that he succeeded in establishing this.

34. What is very clear from the voluminous documentation is that there has been an ongoing business relationship between Naughty Clothing and the plaintiff and that the defendant has been peripherally involved in this as Naughty Clothing' agent.

35. It is also apparent that the plaintiff has itself accepted that there were serious defects in some of the clothes which they sold to Naughty Clothing. It would seem to us that in adopting the criteria referred to by Potter LJ in Bim Kemi the interests of justice would be best served by ordering that the defendant be allowed to set off its claims against the plaintiff and proceed with its counterclaim.

36. This is all of course independent of the question as to whether the assignment of the choses in action from Naughty Clothing to the defendant was valid.

37. Having regard to the contentious factual matrix of this issue we do not consider that it was appropriate to attempt to resolve this issue summarily pursuant to Order 14A. We accordingly set aside the Judge's adjudication on the issues which were before him in this respect.

38. We appreciate that we have reached a different conclusion to that of the Judge. However it is evident from his judgment that he was significantly influenced by his findings in relation to Order 14A and in these circumstances we are justified in interfering with the way in which he exercised the discretion reposed in him.

39. The final matter which has to be dealt with is the question as to whether any conditions should be imposed on permitting the defendant to set off its claim on the Order 27 admissions.

40. Mr Sussex submitted that the case which was being run by the defendant was of such a shadowy nature that a condition should be imposed that the defendant be required to pay into court the whole of the amount which is being claimed by the plaintiff.

41. We do not consider that any such condition should be imposed. It is clear that there is a genuine dispute between the parties and it cannot be said that the defendant's case is a shadowy one.

42. In this connection it can be added that the defence which is being run by the defendant on the cheque was also not a shadowy defence and that the order of the payment into court was not justified and the defendant is entitled to the return of this payment with interest at the relevant rate.

43. To summarise this appeal judgment on the cheque is set aside and the defendant will have unconditional leave to defend. The defendant will have leave to set off the plaintiff's claims on the said admissions. Also the Judge's order that the defendant's counterclaim be struck out is set aside and the defendant is entitled to repayment of the moneys it paid into court pursuant to the Judge's order.

44. We also make an order nisi that the defendant will have the costs of this appeal and the costs of the hearing before the Judge be costs in the cause.