RYDER INDUSTRIES LTD (FORMERLY SAITEK LTD) v. TIMELY ELECTRONICS COMPANY LTD

CACV 164 of 2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CIVIL APPEAL NO 164 OF 2013

(ON APPEAL FROM HCA 109 OF 2009)

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J U D G M E N T

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Hon Poon J (giving the judgment of the Court of Appeal) :

1. These are the appeals by the defendants in HCA 2358/2007 and HCA 109/2009 (“the Main Action” and “the Guarantee Action” respectively) against the judgment of Mr Recorder Anthony Houghton SC dated 11 July 2013 entering judgment against each of them in the sum of HK$6,502,555.15 with interest.

2. The background facts are largely not in dispute.  They are summarized as follows.

A. BACKGROUND

3. The plaintiff in both actions is Ryder Industries Limited, formerly known as Saitek Limited (“Saitek”), which is a Hong Kong company.  The defendant in the Main Action is Timely Electronics Company Limited (“Timely”), which is also a Hong Kong company.  The defendant in the Guarantee Action is Mr Chan Shui Woo (“Mr Chan”), the majority shareholder and director of Timely.

4. In about 2002, Saitek established a commission processing enterprise in conjunction with a local authority in Shenzhen, operating under the name Saitek Baoan Shanghe Saitek Electronics and Plastics Factory (“Saitek CPE”).  In October 2005, Saitek and Timely entered into a written agreement for the purpose of manufacturing mobile phones at the factory premises of Saitek CPE between 1 September 2005 and 31 August 2007.  The Agreement was governed by Hong Kong law, although its performance took place in the Mainland.

5. For the purpose of ascertaining the proceeds to be distributed between Saitek and Timely, a monthly running account was maintained.  By mid-2006, the running account was considerably in favour of Saitek and the sums due had been accruing and unpaid for some time.  The parties then negotiated towards a settlement of the outstanding sums under the running account, which resulted in the 1^st Supplemental Agreement made in September 2006.  The 1^st Supplemental Agreement introduced an interest obligation which set the interest on the outstanding balance at 1% above base lending rate.

6. At a meeting on 26 March 2007, the parties made a 2^nd Supplemental Agreement, under which Mr Chan undertook to guarantee repayment of the debt of Timely arising from the running account.

7. The Agreement was terminated in July 2007 by mutual agreement.  At the time, Saitek detained the machines of Timely which were still in the premises of Saitek CPE.

8. In the Main Action, Saitek sued on the outstanding balance arising from the running account.  It also sued for repair and maintenance fees of Timely’s machines in the sum of RMB1,670,210.29.  Timely did not dispute the quantum of the outstanding balance arising from the running account.  It alleged that the Agreement or its performance was illegal or tainted by illegality under PRC law.  As identified by the learned Recorder, the illegalities involved the following questions :

(1) Did the arrangement under the Agreement whereby Timely paid ‘rental’ to Saitek CPE render the Agreement and/or that part illegal under PRC Law (“the 1^st Illegality”)?

(2) Did the Agreement envisage the transfer of goods imported tax-free (ie bonded goods) from Saitek CPE to Timely WFOE without approval?  If so, would the Agreement and/or that part of the Agreement be rendered illegal under PRC Law (“the 2^nd Illegality”)?

(3) Did the Agreement envisage Saitek CPE accepting orders from mainland customers?  If so, would the Agreement and/or that part be illegal under PRC Law (“the 3^rd Illegality”)?

(4) If Saitek CPE used materials imported by Saitek WFOE, another operation of Saitek in Shenzhen, for the production of mobile phones, would such render the Agreement and/or that part illegal under PRC Law (“the 4^th Illegality”)?

9. By reason of the alleged illegality, Timely contended that the Agreement was unenforceable in Hong Kong.  Timely also counterclaimed for the loss and damage that it had suffered from Saitek’s wrongful detention of its machines, as to which Saitek raised the defence of lien.

10. In the Guarantee Action, Saitek sued Mr Chan on his guarantee for the Timely’s unpaid balance under the running account.  Mr Chan raised the same defence of illegality as Timely in the Main Action.

B. JUDGMENT BELOW

11. After trial, the Recorder found for Saitek on its claims arising from the running account.  He found that of the 4 Illegalities raised by Timely, only two, that is, the 2^nd and 4^th Illegality, were proved.  But he said :

“72. I have found that there was illegality in the performance of the agreement, primarily on the part of Timely, in the arrangements described as the 2^nd Illegality, and illegality in performance on behalf of Saitek in regard to the 4^th Illegality. The question then is whether, as a matter of policy, these findings mean that the Court ought to decline relief to Saitek. In my judgment the answer is clearly that it should not. While I accept that there has been some illegal conduct, it is such that the parties largely share responsibility for it. On the material available it is not conduct that could be described as iniquitous, nor has it resulted in actual criminal or other enforcement proceedings in the PRC. There is no suggestion of any evasion of taxes or duties; the contraventions are, in a sense, administrative.

73. Considering pragmatically whether such illegality ‘taints’ the contract to the extent that it should not be enforced involves recognising that Saitek do not need to rely on the illegalities as a basis for the claims, and that, in my view, it would be disproportionate to decline to enforce the payment obligation under the Agreement, particularly where it has otherwise been performed.  Accordingly, in my judgment, the illegality defence fails, and the claims for payment succeed.”

12. The Recorder next rejected Saitek’s claim for the repair and maintenance fees.  On Timely’s counterclaim, he found that Saitek succeeded on its defence based on a particular lien.

13. He then entered judgment against Timely in the Main Action based on the undisputed quantum of the unpaid balance under the running account with interest at 1% over the base lending rate.

14. As Mr Chan relied on the same illegality defence which was rejected, the Recorder entered judgment against him in the Guarantee Action on amounts due under the running account.

C. APPEALS

15. In these appeals, Timely and Mr Chan seek to challenge the conclusion the Recorder reached in paragraphs 72 and 73 of his Judgment on the effect of the 2^nd and 4^th Illegality on the Agreement.  They also seek to challenge his conclusion that Saitek could rely on a particular lien against its counterclaim for the loss and damages arising from the wrongful detention of Timely’s machines.

16. Saitek seek to support the Recorder’s conclusion on illegality by the additional or alternative arguments as set out in its respondent’s notice.

D. ILLEGALITY

17. We will first discuss the question of illegality.

18. The Agreement is governed by Hong Kong law.  At the time of contract, it was perfectly lawful.  It could be performed legally too.  But as it turned out, its performance contravened the law of performance, namely the PRC law, by reason of the 2^nd Illegality and the 4^th Illegality.  As such, this case involves an element of foreign illegality.

19. In approaching the question of illegality, the Recorder set out the applicable principles thus :

“32. The underlying principles are not really in dispute between the parties. So far as the enforcement of contracts and contractual remedies is concerned, illegality is an aspect of public policy. The courts will not, in the ordinary course of events, enforce a contract which is illegal under domestic law, and moreover, neither will a contract to be performed in a foreign jurisdiction, the performance of which would be illegal in that place of performance, be enforced; see for example Regazzoni v KC Sethia (1994) Ltd [1958] AC 301. Similarly in Ralli Brothers v Compania Naviera Sota y Aznar [1920] 2 KB 287 a contract made under English law requiring partially illegal performance in Spain was not enforced by the English courts to the extent of the illegal part.

33. Nor is it disputed that, in any event, illegality of performance alone is not enough to defeat a claim. The party seeking to enforce the claim must have had knowledge of the illegality, and to have participated in the illegal conduct. The Defendants refer me to the judgment of Sankey LJ in Foster v Driscoll [1929] 1 KB 470 at 578 in support of this principle while the Plaintiff refers me to the judgment of Waller LJ in Colen v Cebrian UK Ltd [2004] ICR 568, at paragraph 21 in particular, to similar effect.

34. Moreover, as is clear from the decision of the Court of Appeal in England in Euro Diam Ltd v Bathhurst [1990] 1 QB 1 (at 35), such a defence must be ‘… approached pragmatically and with caution, depending upon the circumstances’. A distinction must be drawn between circumstances in which the plaintiff's claim is founded on an illegal contract, and those in which there is merely some reprehensible conduct on his part. In such cases an illegality defence will not succeed.

35. Finally, before turning to the specific illegalities alleged, I note that both parties commended to me the decision of the Court of Appeal in England in ParkingEye Ltd v Somerfield Stores Ltd [2013] 2 WLR 939 and in particular paragraphs 28‑39 in the judgment of Sir Robin Jacob from which I draw the following :

(1) The decided case which deal with illegality are inevitably fact specific, and the statements of principle are not always either consistent or easily reconciled one with another (at paragraph 28, citing Les Laboratories Servier v Apotex Inc. [2013] Bus LR 80).

(2) Domestic illegality as a defence to a claim invokes the policy objectives of the Court.  Those have been summarized (Les Laboratories Servier (Supra)) as: ‘furthering the purpose of the rule which the illegal conduct has infringed; consistency; the claimant should not profit from his or her own wrong; deterrence; and maintaining the integrity of the legal system’. (at paragraph 39).

(3) The nature of the contract may be such as to make it wholly legal or wholly illegal.  But a contract which is not formed for an illegal purpose and which is performed over a period of time may be susceptible to some illegality arising in its performance.  Whether such illegality taints the whole contract such that it would not be enforced by the Court requires consideration of the proportionality of not enforcing the contract and the furtherance of the policy objectives underlying the illegality defence (at paragraphs 35-39).

(4) The necessity or otherwise for an illegal mode of performance to be adopted, and the question whether illegal performance was the object of the contract are relevant factors, as is the question as to whether the claimant plaintiff has to plead or rely on any illegality as a basis for the claim.”

20. Although the Recorder noted that the underlying principles as summarized by him were not in dispute between the parties, Saitek now contends in Ground 1 of its respondent notice that the Recorder should have found that there are only two situations in which a contract governed by Hong Kong law may be held unenforceable by reason of a foreign illegality, as the common law currently stands, namely (i) the contract cannot be performed in accordance with its terms without the commission of an illegal act, and/or (ii) the contract was entered into for the common purpose of doing an illegal act under the foreign law of the place of performance.  In support of this proposition, Mr Zimmern for Satiek relied on a number of English cases including Euro-Daim Ltd v Bathurst [1990] 1 QB 1 and in particular Re O’Connor’s Bill of Costs [1993] 1 Qd R 423, a decision of the Supreme Court of Brisbane, Australia.  There is however no local authority directly on the point.

21. Interesting and tempting as it may be, we do not think it is necessary for us to decide the point for present purposes.  We can quite easily dispose of the question of illegality by applying the well established principles as summarized by the Recorder.

22. It is common ground and indeed well established principle that if a claimant seeking to enforce a contract does not need to rely on his illegal performance then the contract is enforceable : see Tinsley v Milligan [1994] 1 AC 340.

23. Here, the Recorder found that Saitek did not need to rely on the 4^th Illegality as a basis for its claims arising from the running account.  Mr Chiu, counsel for Timely, however strenuously argued that contrary to the Recorder’s finding, Saitek did rely on the 4^th Illegality in order to make good its claims for the unpaid balance under the running account.  (He frankly admitted that this reliance point is the main plank of his submission.  If this reliance points fails, then the whole of the submissions on illegality would also fail.)

24. In order to succeed on his argument, Mr Chiu must satisfy us that the Recorder’s factual finding that Saitek did not need to rely on the 4^th Illegality is plainly wrong.  In attempting to do so, Mr Chiu embarked on an almost forensic analysis of the different components in the running account.  But his argument completely ignored Mr Chan’s own evidence that the entire outstanding balance in the running account, the subject matter of Saitek’s claims, was referable to transactions within the 3^rd Illegality (which, for the reasons given by the Recorder, involved no illegality) exclusively : see §§24 to 26 of Mr Chan’s witness statement dated 6^th October 2010.  So even Mr Chan’s own evidence supported Saitek’s case that no reliance had been placed on the 4^th Illegality for its claims based on the running account.  In the circumstances, we are not convinced that the Recorder’s finding on non-reliance was plainly wrong.  Quite to the contrary.  We are satisfied that his finding was entirely correct.

25. In the absence of reliance, Timely’s defence based on the 4^th Illegality must fail in limine.

26. Even if the 4^th Illegality could be relied on as a ground for not enforcing the Agreement, it would not take Timely’s defence any further.  By applying the proportionality test as propounded in ParkingEye, we agree with the Recorder, for the reasons that he gave, that in the overall circumstances of this case it would be wholly disproportionate to decline to enforce the Agreement.

27. Mr Chiu argued that the 4^th Illegality gave rise to serious contraventions.  He took essentially four points.

28. Referring to the figures in the running account, Mr Chiu first contended that the value of the mobile phones in question was about HK$18.5 million, which made up a sizeable part of phones produced under the Agreement.  The corresponding costs involved in producing such offending phones of which Timely was responsible ranged from 31% to 49% of the total costs.  But that is not conclusive.  It is only one of the many factors to be taken into account in applying the proportionality test.  We agree with the Recorder’s conclusion that despite the substantial quantity of phones involved, the mode of performance involving the 4^th Illegality is not in the overall circumstances a very serious contravention of the law.

29. Mr Chiu next argued that the 4^th Illegality would attract a hefty fine and even confiscation of gains.  He complained that the Recorder was wrong when he said that there was a range of potential sanctions from warning to fine.  He said the Recorder had confused the regulation on sanction applicable to the 1^st and 2^nd Illegality with the one applicable to the 4^th Illegality under the Regulation of the People’s Republic of China on the Implementation of Customs Administrative Punishment when he said at §67 of his judgment that the level of punishment depended upon the severity of the offence and ranged from reprimand or criticism to a fine and confiscation of gains.  The only sanction applicable to the 4^th Illegality is a hefty fine and confiscation of gains.  Mr Chiu’s submission is however contrary to the expert evidence on the applicable PRC law.  The experts called by the parties basically agreed that there is a range of potential penalties depending on the severity of the offence.

30. Thirdly, Mr Chiu argued that the 4^th Illegality took place unceasingly between August 2005 and November 2006.  That may well be the case.  But they were all past contraventions, which carried little weight in the overall assessment on how the 4^th Illegality under PRC law might have tainted the Agreement in terms of enforcement in Hong Kong.

31. Fourthly, Mr Chiu argued that the parties must have taken the 4^th Illegality very seriously.  He referred to the incident the Recorder recorded this :

“54. The goods in question were ultimately the property of a major customer of the STC business, one Kong Profit Technology Ltd, and the release of these goods from detention was arranged by Kong Profit seemingly with the payment of a substantial, and inferentially illicit, ‘administration fee’. Timely say that Kong Profit, Saitek and Timely itself all knowingly contributed to that payment; Saitek accept that a monetary payment was made through a set off in the accounts, but do not accept that it was known by Saitek to be for an illicit purpose. Saitek’s witnesses maintained this position under cross-examination.”

Mr Chiu submitted that the parties must have regarded the 4^th Illegality as a serious matter.  They therefore paid the customs authority the illicit money so that no further investigation which might lead to the discovery of the 4^th Illegality would be carried out by the customs authority.  We note that the Recorder had made no finding on this particular incident.  Even taking Mr Chiu’s case at its highest, we do not think the parties’ subjective view of the seriousness of the matter is of any significance in the objective assessment whether the Agreement should be enforced by reason of the 4^th Illegality.

32. None of the points raised by Mr Chiu is meritorious.  We reject his submission that the 4^th Illegality is a serious contravention that had tainted the Agreement such that Saitek’s claims ought not to be enforced.

33. We next turn to the question of lien.

E. LIEN

34. In its defence and counterclaim, Saitek pleaded a general lien.  But at trial, it sought to rely on a particular lien.  The Recorder dealt with it in his judgment :

“83. Broadly, a particular lien is the right to retain goods for which charges have been incurred until those charges have been paid. The position was summarized by Harris, J in Hong Kong Aircraft Engineering Company Limited v The Joint And Several Liquidators Of Oasis Hong Kong Airlines Limited (In Liquidation) [2011] HKCU 380 at paragraphs 9 and 10 as follows :

‘(1) The person asserting the lien must be in possession of the chattel;

(2) The possession of the chattel must be ‘lawful’ : the transfer of possession to the person asserting the lien must have been with the express or implied authority of the chattel’s owner;

(3) The possession of the chattel must be continuous. The surrender of possession of the chattel usually results in the extinction of the lien. The lien is not regained if possession of the chattel is regained;

(4) The person asserting the lien must have done work on the chattel in respect of which he asserts the lien;

(5) The work on the chattel must usually have been completed and the sum in respect of which the lien arises must be due to the person asserting the lien.

This type of lien allows a person who has done work on a chattel to retain it until his charges for work done on the chattel have been paid. The workman cannot, as he may in the case of a general lien, retain the chattel until all monies owing to him have been paid : Halsbury, 5th edition, 2008, vol 68, §818, Palmer on Bailment, 3rd edition 2009, § 15-072 and Dinmore Meatworks Pty. Ltd. v Kerr [1962] 108 CLR 628 at 632.’

84. It appears to me that those ‘requirements’ have been met in the circumstances of this case.  There is no question but that Saitek are in possession of the chattels, and lawfully and continuously so.  Nor does it seem to be disputed that money has been expended by Saitek in the maintenance of the machinery in question.  In submissions Timely contends that the items of machinery were delivered to the parts of the CPE premises which were occupied by Timely and, therefore, were not delivered to Saitek.  That submission is of course premised upon Timely having exclusive possession of that part of the CPE premises which premise I hold to be incorrect.

85. Timely also contends that there is not in fact been expenditure by Saitek on maintenance and repair because the cost of wages of the technicians said to have carried out this work would, under the Agreement have been borne by Timely.  That submission could amount to a defence only if the sums due under the Agreement had in fact been paid, by Timely which they have not.

86. Accordingly I find that Saitek was entitled to a lien over the machinery of Timely and Timely’s claim for damages arising out of the detention does not succeed.”

35. It is settled law that a person claiming for a particular lien must claim for a definite sum or give the owner from the information which he himself can calculate the amount a lien is due, failing which the owner may be excused from tendering the costs : see Albermarle Supply Company Ltd v Hind and Company [1927] 1 KB 307 at pp 318 and 319; Thaper v Singh [1987] Fin LR 369 at pp 373 and 374.

36. Mr Chiu submitted that at the trial below, Saitek had failed completely to plead or provide particulars of the alleged work which would result in improvement to the detained machines; the costs of such alleged work or information from which the costs could be ascertained by Timely. Hence no particular lien could possible arise.  We agree.

37. To counter Mr Chiu’s argument, Mr Zimmern first argued that there is evidence to show the costs expended on repairing Timely’s machines. But as demonstrated by Mr Chiu, Mr Zimmern’s argument is not borne out by a more careful look at the relevant evidence.

38. Mr Zimmern next argued that Timely being responsible for the repair and maintenance of the machines must have known the costs involved in so doing.  With respect, we think that does not detract from the burden imposed on Saitek to provide particulars of the improvement work and the costs involved that it sought to rely on in support of its case on a particular lien.

39. Finally, Mr Zimmern argued that for the purpose of a particular lien the distinction between maintenance and improvement is now gone.  He relied on a decision of the High Court of New Zealand in Stockco Ltd v Walker [2011] NZAR 669, in which the court queried, obiter, in §§22 to 24 if the distinction is justified in a modern age.  Now is not the occasion to examine if the distinction should be maintained.  For present purposes, even if it is not necessary to differentiate maintenance from improvement, the fact remains that Saitek had failed to provide the requisite particulars to support the particular lien.

40. In our view, Saitek’s defence on particular lien fails.  It is liable to Timely for the loss and damage arising from the wrongful detention of its machines.  On quantum, Mr Chiu is prepared to accept the valuation prepared by Saitek’s expert at RMB569,000.00.  Judgment should be entered for Timely against Saitek on its counterclaim in the sum of RMB569,000.00 with interest at the judgment rate from the date of detention up to payment. Further, there should be a set off of this sum against the judgment sum Saitek obtained under the claims for the unpaid balance under the running account against both Timely and Mr Chan.

F. DISPOSITIONS

41. For the above reasons, we allow Timely’s appeal to the following extent :

(1) Subject to the orders below, the Recorder’s judgment in favour of Saitek against Timely and Mr Chan stands.

(2) Judgment be entered for Timely against Saitek on its counterclaim in the sum of RMB569,000.00 with interest at judgment rate from the date of detention up to payment.

(3) There be a set off of the judgment sum entered in favour of Saitek against Timely and Mr Chan by the judgment sum entered in favour of Saitek in (2) above.

42. On the costs of the trial below, there should be an appropriate apportionment to reflect the correct outcome which the Recorder should have reached.  We think a 50% apportionment is fair and reasonable in the overall circumstances.  We therefore make an order nisi varying the Recorder’s costs order to the extent that Saitek should only have 50% of its costs for trial.

43. On the costs of these appeals, having regard to the outcome and the way the matter was argued before us, we think it is fair and reasonable to award Saitek 50% of its costs, to be taxed if not agreed.  We accordingly make an order nisi to that effect.