ZHANG YONG HONG v. DAYS IMPEX LTD

DCCJ2425/2003

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 2425 OF 2003

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J U D G M E N T

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1. These are Order 14 proceedings.

2. This is an appeal from a judgment of Master Yu dated 21 August this year whereby he entered judgment for the plaintiff in the sum of $395,841 together with interest. Before the master, the defendants had accepted that they had no defence to the claim but had sought to stay the judgment on the basis of a counterclaim which was said to exceed the amount of the claim and which arose out of previous transactions between the parties. The master held that there were no proper grounds for a stay largely based on his view of the merits of the counterclaim.

3. Before me, the defendants have principally sought to defend the matter on the basis of allegations that the goods that are the subject matter of the action are in fact defective. This means that they have sought to resile from the admission originally made that they had no answer to the claim. This situation comes about in the following way.

4. The plaintiffs are manufacturers of, amongst other things, electronic goods, and the defendants are a well-established trading company who export such goods to their customers overseas. There was a history of transactions between the parties where the defendants have ordered goods from the plaintiffs who have manufactured them to the defendant's order. This action concerns an order for 19,800 portable radio cassette players at $20 each, which perhaps says something about the mark-up charged to the ultimate consumer but nothing turns on that. The total order was worth $396,000 less $159 for the certificate of origin which was to be provided by the plaintiffs. The radios were duly manufactured and delivered to the defendant's shipper at the shipping terminal for export to the defendant's customer in California.

5. The chronology is of some importance. The contract for the purchase by the defendant from the plaintiff is dated 6 March of this year. The expected shipping date to Los Angeles is expressed in the contract as "before 15 March 2003", page 25 of the bundle. The shipping document at page 30 shows receipt by the shipping company on 26 March 2003. The invoice for the consignment in the sum of $395,841, page 32, is dated 22 March.

6. Following the defendant's failure to pay the invoice, a writ was issued on 26 May. The substantive defence to the matter appears in the affirmation of Mr Nanik Dayaram dated 6 June. That accepted liability but raised the prospect of a set-off and counterclaim of as much as $543,000. This failed to impress the master, who entered judgment and refused a stay.

7. On 2 October, Mr Mahesh Dayaram made an affirmation to say that this consignment has now been rejected by the defendant's customer in the United States, the first that the defendants learnt of the complaint that the radios were defective came in an e-mail on 26 August, five days after the master had entered judgment. Until then the defendants had no reason to believe that there was anything wrong with the consignment and for that reason they felt able to say before the master that they acknowledged liability subject to their own set-off and counterclaim.

8. I have heard an application to admit this evidence and although this was resisted, I acceded to the application for the reasons which I gave in my ruling at the time, and so the shape of this appeal is different from that before the master. I have to consider two distinct issues. Firstly, whether based on the late affirmation by Mr Mahesh Dayaram, the defendants have demonstrated that there is a triable issue. If they have, I need go no further. If I find there is no triable issue and enter judgment, then I must consider whether that judgment should be stayed pending the trial of the counterclaim.

9. Not surprisingly, Mr Lin for the defendants has stressed the exceptional nature of Order 14. He has cited the well-known judgment of Godfrey JA in Man Earn Ltd v Wing Ting-fong [1996] 1 HKC, where at 227I to 228A he said:

"Since the policy which underlies the summary procedure is to prevent the defendant from delaying the plaintiff from obtaining judgment in a case in which the defendant has clearly no defence to the plaintiff's claim, the procedure should be invoked only where this condition is satisfied. Practitioners and sometimes judges are in danger of losing sight of this."

These sentiments really come from what Lindley LJ said in Codd v Delap (1905) 92 LT 510 at 511;

"That unless it is obvious that the defence put forward by the defendant is frivolous and practically moonshine, Order 14 ought not to be applied."

The other side of the coin to this has been considered by Ackner LJ (as he then was) in Banque de Paris et de Pays-bas Suisse SA v Costa De Naray [1984] 1 Lloyds R 21 at 23 where he held that;

"A defendant has to satisfy the court that he has a real or bona fide defence. Any allegation made must be believable in light of all the evidence placed before the court."

The approach most often adopted in Hong Kong is that proposed by Bokhary JA in Re Safe Rich Industries CA 81/94, unreported.

"The test at the summary stage is indeed as simple as whether the defendant's assertions are believable but it must be recognised because failure to recognise it would create a debt dodger's charter that whether the defendant's assertions are believable is a question to be answered not by taking those assertions in isolation but rather by taking them in the context of so much of the background as is either undisputed or beyond reasonable dispute."

10. I do not think of any this can be doubted. It now falls to me to apply those principles to the evidence.

11. Mr Lin's submission is perfectly simple. The defendant's customers have now shown that they are minded to reject the goods on the basis of the defects specified in their letter of 11 September. This is Exhibit MD-4 of the latest affirmation. Its material parts bear repetition here.

"The major defect is the fading out sound when playing a cassette using the battery. The problem is more than 20 per cent of the consignment. Apart from the above defect were other minor defects, e.g. radio not working or loose loudspeaker. This problem has been in the past shipment but also it is the worst in the two most recent shipments. In this particular shipment the problem is in 35 per cent of the consignment. We have decided not to market this consignment and would like to return the consignment back to you in Hong Kong. We want your authorisation for return or your instructions as to where to ship the goods to. In the event we do not hear from you within the next 10 days, we should return the consignment to Hong Kong and you are responsible to refund the invoice value of the goods plus freight from Hong Kong and from LA to Hong Kong or to wherever you want the goods to. In addition, you have to pay the other disbursements incurred by us on this consignment."

12. This follows their initial letter on 26 August, MD-1, which does not provide particulars. It is as follows.

"Container of the BA-525, more than half in shipment are no good. I need to return it, or can you sell this shipment to Miami or any other place? I still have 15,750 pieces in Los Angeles. All my customers refuse to take anymore of this broken shipment and return a lot of this unit. I will arrange ship back to Hong Kong on seven days later."

13. Based on this rejection, Mr Lin says that this must raise the clearest triable issue. In a defects case it would be most unusual to shut a defendant out from having the matter tried in the conventional way.

14. Mr Ng for the plaintiff has much to say about this. Firstly, he points to the fact that the whole timing of this is highly suspicious. It starts with, out of the blue, the unparticularised e-mail of 26 August. This is five days after the master's judgment and after the defendants had tried to persuade the plaintiffs to settle the matter overall, to which the plaintiffs had stood firm and said they expected to be paid under the judgment. Secondly, Mr Ng points to the fact that it is very strange indeed that this complaint was made as late as 26 August when the goods were shipped at the end of March, presumably arriving in April or early May, and yet nearly four months had elapsed before the defendant's customer made a complaint. Mr Ng suggests that this may smack of a "put up" job between the defendant and its customer for the purpose of procuring a defence. While Mr Ng did not express it quite as boldly, I think that is really what he was driving at.

15. Then, looking at the particulars of the complaint in the letter of 11 September (supra), he submits that it is far from clear that these complaints actually refer to the particular consignment to which this action relates; the letter speaks of "the two most recent shipments". If the defendants seek to make out a triable issue, it behoves them to make out a clear and cogent basis for their defence. They must therefore take the risk that any lack of clarity in the evidence must bring.

16. He has also drawn attention to the fact that on the defendant's terms of trading with their customer, the customer has seven days in which to complain about any defects (see term No. 6, part of Exhibit MD-2 of Mahesh Dayaram's affirmation). He suggests that there must be every prospect that the defendants will be able to resist any claim based on defects should they be put to arguing the matter in court against their customer.

17. Mr Ng has also referred to the fact that the defendant had had this consignment inspected by their own surveyor before shipment to California who found the consignment to be in good order, which would therefore militate against the bona fides of the claim that the defendant's purchaser is now making that the goods are defective. Mr Lin's specific answer to this is that under clause 5 of the terms and conditions of the contract between the plaintiff and the defendant, which is as follows - page 26 of the bundle:

"Buyer at their discretion may or may not carry out random inspection. Such inspection does not relieve sellers of their liability for claims arising out of supply of defective merchandise. Seller's liability will only cease once the ultimate buyer has accepted the merchandise and has confirmed that the merchandise is in order. Ultimate buyer is defined as buyer of the buyer."

The defendants are therefore still able to bring a defects claim against the plaintiffs.

18. Ultimately I have decided that this is one of those cases where the defendants have just about done enough to raise a triable issue. To attempt a resolution of the points which have been so well made by Mr Ng would involve me in a mini trial on the affirmations, which of course I cannot do. The evidence as to whether these goods are defective can only be determined in a conventional way by live evidence and cross-examination.

19. I appreciate that the defendants and their customers, who they have now committed themselves to relying on, will need to explain the delay that I have referred to and explain why, between 26 August 2003 and 2 October 2003 when Mr Mahesh Dayaram affirmed these matters, a surveyor's report had not been obtained and exhibited to his evidence.

20. Notwithstanding the uphill task which they face, I cannot exclude the fact that ultimately this evidence may be accepted by the court. The ball undoubtedly remains in play, albeit perilously close to the sidelines. I say that based on the suspicious timing of the appearance of this evidence and its, at present, lack of detail, although I accept that it must clearly be capable of being firmed up by, at the very least, a surveyor's report, but I consider on its present showing the defence is "shadowy" in the way described in Wing v Thurlow (1893) 10 TLR 51. I am very nearly prepared to give judgment for the plaintiff.

21. Mr Lin has just about done enough to prevent that. I will direct that the defendants will have leave to defend on condition that they bring into court the entire amount of the claim within 21 days of today, failing which there must be judgment to the plaintiff as ordered by the master. I have enquired of Mr Lin whether his clients will be able to make that payment and he has confirmed that they would be, and so no issue arises as to whether I need to hold an enquiry as to their financial circumstances.

22. On these terms, therefore, the appeal must be allowed and the order that I have made must be substituted for that of the master whose decision cannot be faulted on the basis of the evidence before him as I will now, albeit briefly, demonstrate.

23. I think in the event of an appealI need to indicate how I would have ruled had I not given leave to defend. I would, as I have just said, upheld the master. Mr Lin accepts that on this alternative basis there would have to have been judgment to the plaintiff subject, at best, to a stay pending the trial of the counterclaim. He accepts that this is not the case of an equitable set-off but a case of an unrelated counterclaim, unrelated to the subject matter of the claim itself that is.

24. The approach is clearly set out at the top of page 159 of the current edition of 'The Practice'. It is either (c) or (d), as Mr Lin accepts. (c) covers the situation where there is no defence to the claim but a plausible counterclaim of not less than the claim is set up. Judgment should be for the plaintiff on the claim with costs, stayed until the counterclaim. (d) covers the situation where the counterclaim arises out of a separate and distinct transaction or is wholly foreign to the claim. Judgment should be for the plaintiff with costs without a stay. The lack of clarity between classes (b), (c) and (d) gives the court freedom to respond to the perceived justice of the individual case (see United Overseas Limited v Peter Robinson Limited, unreported 26 March 1991 per Bingham LJ).

25. Whilst I have a broad discretion as to how to deal with this, I cannot see how it can be said that the counterclaim is plausible. The main complaint is one of delay in the making of the moulds, but the history of the payments made by the defendants shows that at the time they were making no complaints and perfectly prepared to continue making these payments under the contract. There is nothing there which would have justified keeping the plaintiff from their judgment but for, of course, the quite separate evidential basis which has persuaded me to give the defendants conditional leave to defend. I therefore agree with the master on this aspect and for that reason, if the payment in is not made in time, the judgment will go and there will be no stay pending the trial of the counterclaim.

(Discussion re costs)

26. I think really at the end of the day my analysis of this is that this evidence - I have got to be loyal to my findings in my judgment - was not available to them at the time that Master Yu ruled on the matter so it has not been their fault in that sense. They have succeeded in getting a different order before me and whilst of course you need to be protected because it is not your fault at all that this has happened, I can only really protect you by giving you plaintiff's costs in the cause below. So the worst that will happen to you is you will have to bear your own costs before the master. If you win, of course, you will get everything.

27. On the appeal itself the order will be costs in the cause with certificate for counsel.