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

HCA 4687/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 4687 OF 2002

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J U D G M E N T

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1. UL Tran ("UL") seeks summary judgment on its counterclaim against Pacific Digital ("Pacific"). The Master refused summary judgment. UL appeals against that refusal.

2. UL sold some 10 Kraus Maffei machines ("the Machines") to Pacific pursuant to a sales contract ("the Contract") dated 25 February 2002. The Contract included a Romalpa clause in the following terms (in translation): "Until payment of the goods has been made, the title to the equipment shall remain with [UL]" (see cl. 6(1)). For the purposes of today's application, Mr Lam (who appears for UL) does not rely on Clause 6.1.

3. Pacific paid Euros 400,000 ("the deposit") as deposit for the Machines and (through a related company) gave UL 9 post-dated cheques by way of further payment. A dispute has arisen as to whether the Machines were defective. Pacific says that they were. UL says that Pacific did not use the Machines properly.

4. Following the dispute Pacific asked UL to take back the Machines. See letter dated 5 December 2002 from Winners' Laser Production, a company related to Pacific, which states (in translation):-

"Now, due to the defects of your machines, we are unable to produce DVDs. Your company has made us suffer substantial pecuniary loss. In the circumstances, that your company to return all payment of the goods received by you and take back the relevant machines is reasonable, is in accordance with the contract and is the best way to resolve the dispute."

UL initially did not agree to take back the goods. It instead insisted by letter dated 16 December 2002 that Pacific honour its contractual commitment to pay for the Machines.

5. In its Statement of Claim ("SOC") dated 16 December 2002 Pacific pleaded that there had been a total failure of consideration. It sought the return of the deposit and 9 cheques and claimed damages in respect of monies spent on equipment and premises to accommodate the Machines. See SOC §22 and Prayers (i), (iii), (iv) and (v). I agree with Mr Lam that by such pleading Pacific has clearly intimated an intention to reject the Machines and terminate the Contract.

6. In its Defence and Counterclaim ("DC") dated 19 February 2003, UL denied that the Machines were defective. But UL accepted that the Contract was at an end and opted to sue Pacific for damages. UL counterclaimed for a declaration that the Machines belonged to it and an Order that the Machines be delivered up to it. See DC §34 and Prayers (A)(2) and (3). Again I agree with Mr Lam that the DC makes it clear, unequivocally clear, that from UL's viewpoint the Contract has been terminated and the Machines should be returned to UL as its property.

7. Mr Leong SC (appearing for Pacific) submits that the Court should look closely at the DC. DC §25(a) pleads:-

"Pacific Digital had accepted the machines as set out in paragraph 20 above."

Mr Leong takes that to mean that Pacific had accepted the goods within the terms of Sale of Goods Ordinance (Cap. 26) s. 37. If so, it would have been UL's case (Mr Leong argues) that Pacific had accepted the Machines and had thus lost the right to reject the same. How now can UL say that it accepts Pacific's rejection? That (Mr Leong says) contradicts UL's pleaded case.

8. I agree with Mr Lam that Mr Leong's argument is logically untenable. By the DC, 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. The fact that UL initially did not accept the cancellation of the Contract when it was raised in Pacific's letter of 16 December 2002 is irrelevant on this question. An initial refusal to accept a repudiation, does not prevent a subsequent acceptance when the other party to a contract refuses to continue performance

9. Mr Leong argues that, if one ignores Clause 6.1, there is no basis for property in the Machines to re-vest in UL just because it accepted a rejection (whether rightful or wrongful) of the Machines by Pacific. Mr Leong suggests that DC §§33-4 only plead a repudiation by Pacific through non-payment of monies due under the Contract. Acceptance of such repudiatory breach (even if established) should only terminate the Contract from time of acceptance, not ab initio. Property could thus (Mr Leong reasons) not have re-vested in UL purely as a result of any acceptance of the repudiatory breach specified in DC §§33-4.

10. I disagree. One must look at the whole context. Mr Leong looks at the DC too narrowly. The Court cannot ignore the fact that in the SOC Pacific unequivocally pleaded a rejection of the goods on the ground of total failure of consideration. In other words, Pacific has precisely raised an avoidance of the Contract ab initio. By accepting Pacific's rejection on that basis, UL accordingly caused the property in the Machines to revest in it.

11. Mr Leong says that pleadings can be amended and re-amended. That may be the case. But one cannot ignore the fact that certain pleas have been made which have triggered legal consequences in this case. No amount of amendment or re-amendment can alter the consequences which have already flowed from the fact of certain positions having been taken in the pleadings.

12. Mr Lam submitted that I should consider the Contract as an entire agreement so that, independently of Pacific's letter of 5 December 2002 and the plea in the SOC of a total failure of consideration, acceptance of a repudiation of the Contract would re-vest property in the Machines in UL. Given my reasoning above, it is unnecessary to decide UL's application on this basis of an entire agreement and I decline to do so.

13. Pacific's Reply and Defence to Counterclaim ("the Reply") fortifies my analysis. In the Reply, Pacific says that it never accepted the Machines. Pacific goes so far as to claim a lien on the Machines for payment of the damages claimed by it. One cannot exercise a lien over one's own goods. Pacific must therefore have understood the DC to mean that UL was claiming the return of the Machines as UL's property and, to forestall the eventuality of a return, Pacific pleaded a lien.

14. I briefly note that there appears to be no legal basis for the plea of a lien in the Reply. Liens are either general or special. The common law frowns on general liens in the absence of express contractual or statutory provision to that effect. There are no such provisions here. Special liens arise in certain types of bailment relationships, usually where a bailor hands goods over to a bailee for the purpose of doing something to the same (such as repairing or improving the goods). Otherwise, in the absence of specific contractual or statutory provision, special liens do not normally arise. Although by statute a seller may exercise an unpaid seller's lien over goods sold but remaining unpaid, no lien typically arises in favour of a buyer in an ordinary sale transaction.

15. I am not impressed by Mr Leong's suggestion that, read in context, the 1st sentence of Reply §11 ("The machines have never been accepted by the Plaintiff as pleaded by the Defendant or at all.") should be read as qualified and as only meaning that Pacific has not accepted the quality of the Machines. There is no ambiguity in the categorical denial by Pacific of any type of acceptance in that 1st sentence of the Reply.

16. In my judgment, the conclusions to which I have come are consistent with Benjamin's Sale of Goods (6th ed.) (§12-064): "A wrongful rejection would have no effect on the property in the goods unless the seller accepted the repudiation."

17. I have also found the following statement in Atiyah's Sale of Goods (10th ed.), pp. 508-9 helpful:-

"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."

18. Recently, by a 2nd Affirmation of Wong Dak Sun dated 26 January 2004, Pacific has contended as follows:-

"Pacific Digital has now decided to accept goods which by reason of the defects as aforesaid are worth only approximately HK$20,000,000 being the market value for 10 CD production machines."

I do not see how, having rejected the Machines and such rejection having been accepted, Pacific can now suddenly accept the Machines. It is too late. The Contract came to an end long before Pacific's change of heart. Mr Leong says that UL have done nothing prior to 26 January 2004 to signify acceptance of any rejection by Pacific of the Machines. I disagree. For the reasons I have given, it seems to me that the DC clearly accepted Pacific's rejection. There is further UL's act of issuing its Order 14 summons on 24 October 2003 demanding the return of the Machines.

19. It seems to me that, regardless of the effect of the Romalpa clause, there is no defence against UT's counterclaim against Pacific for delivery up of the Machines. Accordingly, I allow UL's appeal against the Master's refusal to grant summary judgment.

20. Pacific has cross-appealed against the Master's refusal to allow Pacific to adduce the 3rd Affirmation of Wong Dak Sun dated 2 February 2004. No explanation has been given as to why the affirmation was filed late in breach of the unless order made by Master Levy on 19 January 2004. In any event, I do not see how the contents of Wong's 3rd Affirmation (which relates to the quantum of Pacific's damages) can be relevant to UL's application for delivery up. For those reasons, Pacific's cross-appeal is dismissed.

21. I shall now hear the parties as to costs.