SANDEX INVESTMENT LTD. v. MARLANE INTERNATIONAL LTD.

DCCJ 15587/2000

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO.15587 OF 2000

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JUDGMENT ON COSTS

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Background

1. I have set out the full background of this case in my Judgment dated 17.10.2002. In short I found the Defendant succeeded in its counterclaim against the Plaintiff to the extent of $ 31,860.61 ($15,000 + 8,116.50 + 1,581 + 4,434.11 + 2,729). I dismissed the balance of the counterclaim. I ruled that the Defendant was entitled to set off the sum of $31,860.61 against the Judgment sum of $325,338.97. I made a nisi Costs Order in respect of the balance of the Plaintiff's claim, the Notice Disputing Authenticity and on the Defendant's counterclaim. The Defendant applies to vary that part of the said Costs Order concerning the Defendant's counterclaim, which was under para. 50 of the judgment:

"50. As to the counterclaim, the Defendant succeeded in part only. On the basis that costs to follow the event, the Defendant should have costs of the counterclaim relating to those Debit Notes it succeeded while the Plaintiff should have costs against the Defendant on those Debit Notes which the Defendant failed. Costs to be taxed if not agreed."

General Principle

2. It is not in dispute that as a general principle, a successful party to an action should not be ordered to pay any part of the costs of the hearing simply because he has failed to prove all the allegations made. The successful party should not pay any of the costs unless he acted improperly or unreasonably in raising issues. See Re Elginadate(No.2) [1992] 1 W.L.R. 1207 and Hong Kong Civil Procedure 2002 62/3/3). It is also not in dispute that costs are in the discretion of the court.

Proper Costs Order to be made

3. Mr. Wong, counsel for the Defendant urged me to consider awarding costs to the Defendant for the counterclaim on the above general principle, saying that the Defendant was the successful party. Alternatively it is submitted that the 9 debit notes were so closely related that the Defendant should get the costs of the counterclaim even not fully successful in view of the way the case was heard.

4. Mr. Ng, in opposing the application has referred me to the case of A.E.I Ltd v Phonographic Performance Ltd (C.A.) [1999] 1 W.L.R. 1507 in which Lord Wolfe M.R. has reiterated the position that the 'costs to follow the event' principle was a starting point from which a court could readily depart. The learned judge referred to Order 62 of the 'new' Rules (i.e. The Civil Procedure Rules1998) in the United Kingdom and said the new Rules 'are reflecting a change of practice which has already started' in that they 'require courts to be more ready to make separate orders which reflect the outcome of different issues' (see page 1523 of the judgment).

5. In essence the Defendant relied on 9 debit notes to establish the counterclaim. Of course for the proper administration of justice all 9 debit notes should be heard together and any suggestion to have 9 actions/hearings would have been absurd. Nevertheless it is still clear from the evidence before me that there were 9 separate and distinct claims represented by those 9 debit notes which were heard together. Different documents were adduced/referred to in support of those 9 claims. This is not a case where a party is suing on, say, a breach of contract, and only succeeded in proving some of the allegations made; or a claim based on tort where only some of the heads of damages are proved. The fact that the Defendant did not succeed in all 9 claims means that it is not a successful party in respect of all of them and cannot be said to be a successful party regarding the counterclaim. Having considered Mr. Wong's alternative submission I maintain that the Costs Order I have made on 17.10.2002 fairly reflected the position, i.e. costs to follow the event. I refused the Defendant's application to review the said Order is dismissed with costs.

Apportionment

6. In order to assist the Taxing Master, should no agreement on costs be reached, I accede to the request of Mr. Wong which was supported by Mr. Ng to make an apportionment in respect of the three-day trial. It is my estimate that 65% of the trial time was spent on those debit notes which were successful and 30% on those not successful with 5% on evidence relating to the issue of authenticity. I have already made no order as to costs regarding the said Notice Disputing Authenticity (see para 49 of the judgment dated 17.10.2002). It is my ruling that there will be no order as to costs regarding the 5% trial time I have apportioned.

Certificate for counsel

7. Mr. Wong asked me to certify his attendance as counsel being proper in the circumstances of the case as the amount recovered by the Defendant does not exceed $150,000 (see Schedule 1, Part II Rule 2 (3) under Order 62 of the Rules of the District Court, Cap. 336). Mr. Ng opposed the application on the basis that a solicitor could have represented the Defendant in these proceedings. In my view the Defendant's counterclaim in relation to the 9 debits notes, in itself, was not complicated. In my judgment dated 17.10.2002 I have already pointed out that the Defendant's legal representative had failed to exercise care to ensure only relevant documents in chronological order were placed before me (see para 15 of the said Judgment). Such failure had made it difficult for me to follow the Defendant's counterclaim and I spent a lot of time getting things in order. I do not think the legal or factual issues involved in this case were such that counsel should have been briefed. I therefore declined Mr. Wong's request.

Representation:

Mr. NG Man Kin of M/s Kwok Ng & Chan for the Plaintiff

Mr. William M F Wong ins't by M/s Au Yeung Cheng Ho &Tin for Defendant

DCCJ 15587/2000

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO.15587 OF 2000

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JUDGMENT

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Plaintiff's Claim

1. By a Writ of Summons dated 13.11.2000 the Plaintiff claimed against the Defendant the sum of HK$ 413,823.30 for unpaid price of goods sold and delivered to the Defendant. By an Inter Parte Summons dated 1.12.2000 the Plaintiff sought Summary Judgment against the Defendant. By an Order dated 6.6.2001 H.H. Judge Li entered partial judgment for the Plaintiff for HK$325,338.97 together with interest thereon and costs. The Defendant was granted unconditional leave to defend the balance of the claim by the Plaintiff. The learned judge also ordered stay of execution of judgment until trial of the Defendant's counterclaim. Defendant filed its Defence and Counterclaim on 20.6.2001. In essence the Defendant claimed against the Plaintiff the sum of HK$391,739.11 represented by a series of Debit Notes issued by the Defendant to the Plaintiff as a result of alleged 'bad quality and/or late delivery of the Plaintiff's products'.

2. The balance of the Plaintiff's claim, i.e. HK$14,917.50 related to two invoices: ST9835 and ST9836. During the trial the Plaintiff abandoned its claim on this sum to save the Court's time. I therefore only have to consider the merits of the Defendant's counterclaim. It should be noted that the Plaintiff in its Reply and Defence to Counterclaim only made denials to the Defendant's counterclaim, putting the Defendant to prove its case.

Defendant's Counterclaim

3. The Defendant counterclaimed against the Plaintiff the sum of $391,736.11, represented by 9 Debit Notes issued by the Defendant to the Plaintiff. I will set out the particulars of each Debit Note for ease of reference:

Debit Note Number	Date	Amount HK$
146	15.8.2000	15,000
148	9.10.2000	8,116.50
149	25.10.2000	1,581
150	27.10.2000	4,434.11
151	30.10.2000	6,336
152	31.10.2000	2,729
153	31.10.2000	285,641
154	14.6.2001	21,920
155	14.6.2001	45,981.50

4. There is no dispute that the first 7 Debit Notes listed above were sent to the Plaintiff in one lot in November 2000 while the last two were only issued after the Plaintiff has instituted the present proceedings against the Defendant. When the Defendant sent those 7 Debit Notes to the Plaintiff it was accompanied with a document (p.252 of the Trial Bundle). (Since there is only one Trial Bundle I will only refer to the page number from now on). In this document it listed the balance owed by the Defendant to the Plaintiff for the months of June, July and August amounting to $398,905.80. After deducting the aggregate amount represented by the 7 Debit Notes (i.e. $323,837.61), the balance was $73,566.83. The Defendant drew a cheque in the sum of $73,566.83 in favour of the Plaintiff. Had the Plaintiff, by its conduct, accepted those 7 Debit Notes? If so, there is no need for me to consider the merits of those Debit Notes. The said cheque was dated 1.11.2000. The Plaintiff issued the Writ on 13.11.2000. In the Statement of Claim the Plaintiff claimed for $413,823.30. No mention of the $73,566.83 was made. There was indeed no record anywhere on which the Plaintiff indicated that it did not accept the 7 Debit Notes. According to Wong, which is not challenged, the plaintiff cashed the cheque after the Defendant filed its Counterclaim (after the Order 14 hearing). It was indeed while the Plaintiff applied for Order 14 Summary Judgment that it acknowledged receipt of the said sum towards satisfaction. Wong, very honestly and fairly, I must say, admitted in evidence that the Plaintiff had not accepted those 7 Debit Notes when they were presented. I rule that there is no basis to say that the Plaintiff had, by conduct, accepted those 7 Debit Notes. I therefore have to look at the merits of each and every Debit Note to see if the Defendant has proved its claim.

Background

5. Before doing so, I will set out some background which is not in dispute. It is common ground that Wong Yuk Mau ("Wong") and Sung Chung Kwun ("Sung") each held 50% shares in the Defendant until they split up in early 2000. Both Sung and Wong were also involved in the Plaintiff initially. Sung held 15% shares in the Plaintiff, apparently holding the largest number of shares as an individual. A company called Trenex (Hong Kong) Limited ("Trenex") held 55% shares. Wong represented Trenex at the Plaintiff's shareholders meetings as he held 5% in Trenex. It is not in dispute that Wong was actively involved in the sales business of the Plaintiff at one stage. Wong said he withdrew his 5 % share holding (presumably in Trenex) in May 2000.

6. It is also not in dispute that a Mainland company called Shuntak Addchance Dyeing Fty. Limited ("Addchance") was closely related to the Plaintiff. Orders placed by the Defendant with the Plaintiff for dyeing were carried out by Addchance. Mr. Tsui Ka Yim ("Tsui") who gave evidence on behalf of the Plaintiff confirmed such close relationship. Tsui himself was based at Addchance until the Plaintiff closed its business in August 2000. When Tsui wrote a letter dated 16.1.1998 (p. 159) to Sung and other shareholders after the Plaintiff had been in operation for one year, he put the name of Addchance before his name.

7. It is beyond dispute that the Plaintiff was not operating smoothly when it first started business and had suffered a loss. Although Tsui tried to say otherwise at one stage but such was clearly contradicted by his own letter to Sung and others (p. 159). It is clear that the Plaintiff suffered a loss and that 'there was a great possibility to suffer loss as a result of the current operation of the company, management of the factory, the technical aspect and the orders received", as penned by Tsui. Mr. Wong Chiu Hong of the Plaintiff also wrote to a Manager Chan Chor Keung and Mr. Poon Kin Keung (p.157) saying that "whether on the technical or personnel aspects, extreme chaos had occurred from the office to the production department. Mistakes were often made, causing loss to the Plaintiff, both in its reputation and in monetary terms...".

8. It is common ground that as between the Plaintiff and the Defendant, there was a running account and the Defendant had submitted Debit Notes to the Plaintiff in the past which were accepted (see Debit Note No. 116 at p.150, Debit Note No. 139 at p.175 and Debit Note No. 140 at p.181). The complaint in all three Debit Notes were "colour shading" (花毛).

Consideration of Evidence and Findings

9. The main witness for the Defendant is Wong and the only witness for the Plaintiff is Tsui. After considering their evidence and considering the various documents, I find that basically Wong is a truthful and reliable witness. I accept his evidence unless otherwise indicated. Though he appears to be over anxious at times to explain or elaborate, I am satisfied that he did so as he was afraid that I might not appreciate his line of business. Tsui, on the other hand, is not an impressive witness. Whilst I do not think that he deliberately lie to me, his recollection of what had occurred at all material times between the Plaintiff, Addchance and the Defendant is just unreliable. His claim that written responses were made to some of the complaints (by faxes) by the Defendant was unsupported. I find it hard to believe that all documents in the Mainland office and all but invoices in the Hong Kong office were destroyed after the Plaintiff closed down. There is certainly no attempt for discovery of those alleged written responses from the Defendant. Further, his evidence that Sung did not 'participate in the operation of the Plaintiff' is plainly incorrect. There is no dispute that Sung chaired all the meetings of the Plaintiff when various issues were discussed. Sung was not a 'dormant' shareholder! I will say a bit more about Tsui's evidence later on.

Debit Note 146 (p.204)

11. By a letter dated 29.10.1999 (p.210) the Defendant informed Addchance that there were problems with 5 lots of goods in relation to Chiao Kuang, 4 lots concerned "2/28 55A/45C Order No. ML9-2424 (14485) with four "SA" numbers, two of which were CK32. They were SA1002041-877 lbs and SA1004221-488lbs. The complaint was serious colour-running (脫色). It was mentioned that the customer needed to ship the goods on 5.11 so urgent re-dyeing was needed. Wong said that all SA numbers referred to "Sandex" (i.e. the Plaintiff) and I accept his evidence. On 1.11.1999 Defendant again wrote to Addchance (p.209), confirming, inter alia, that those two lots were 'okay' but needed to be 'softened' as the customer found the yarn 'too hard'. However, earlier on 3.10.1999 Chiao Kuang had written to the Defendant (p.208) complaining about colour shading. The goods involved were "2/28 55%Ac 45%C CK32 SA1002042". This is clearly an order to be processed by the Plaintiff and not covered by the two letters mentioned above as it involved a different SA number. In respect of this complaint, the Defendant by a letter dated 3.11.1999 (p.207) informed Addchance of the complaint, repeating what Chiao Kuang had said; i.e. the number of items affected by colour shading was unknown and pending investigation. On 10.5.2000 Chiao Kuang issued its Debit Note (p.205) claiming against the Defendant the sum of $19,860. Such claim was reduced to $15,000 as evidenced by a revised Debit Note dated 8.6.2000 (p.206).

12. Wong testified that it was as a result of negotiation between the Defendant and Chiao Kuang that Chiao Kuang agreed to reduce the amount. I accept his evidence on that. Chiao Kuang claimed that 300 garments could not be shipped and claimed against the Defendant. Although there is a description of "less sub-standard goods return to your company" amounting to $4,860 on the revised Debit Note from Chiao Kuang and Wong cannot give any satisfactory explanation as to what that referred to, (and I suspect that figure is used to achieve the round sum of $15,000), on Wong's evidence which I accept, at all material times, all the Defendant's orders were placed with the Plaintiff. I rule that it is clear beyond doubt that the yarn supplied to Chiao Kuang were dyed by the Plaintiff (through Addchance) and that colour shading had occurred, causing Chiao Kuang to reject 300 items and that Chiao Kuang was prepared to claim a lesser amount from the Defendant. As the complaint was of 'colour shading' which clearly relates to the quality of the dyeing process and, the Plaintiff had previously accepted responsibility when colour shading had occurred, I rule that the Plaintiff is liable to the Defendant for this Debit Note.

Debit Note No. 148 (p.211)

14. A complaint about 'colour shading' was made by Kong Fook to a certain "Yip Chai"(業仔). It is unclear who this Yip Chai was but the date of the fax at the top of the document (p.214) was 15.8.2000. There was one reference to KM331 in respect of two lots: SA1229011 and SA1229011A. I have already ruled all SA numbers related to the Plaintiff. The total quantity under KM 331 is 314 P (230P+74P). By a fax dated 18.8.2000 (p.213) the Defendant informed the Plaintiff of Kong Fook, asking the Plaintiff to take delivery of the two lots under KM331 and also some 42 colour shading pieces also under KM331. By a Debit Note dated 19.9.2000 (p.212) Kong Fook claimed against the Defendant the sum of $8,116.50 under the said KM331 order. The nature of complaint was 'defective yarn'. The quantity involved was "386.50 lbs". The Defendant by its Debit Note No. 148 duly claimed against the Plaintiff. However, the complaint was colour shading.

15. During trial, Wong was allowed to produce further documents in support of the Defendant's claim. He produced a number of delivery orders (pp.290-318). It later transpired that not all new documents relate to the Defendant's counterclaim; only two are relevant (note that Solicitors for the Plaintiff thought there was only one so relevant). I do not think that Wong has tried to confuse me. I put the blame on the Defendant's legal representatives, who had not exercise care to ensure only relevant documents were placed before me. (It is also clear from my reference to the various page numbers that the Defendant's solicitors had failed to ensure that documents were placed in chronological order for my use).

16. In respect of KM331 (corresponding to SA 1229011), an Addchance Delivery Order dated 26.2.2000 (p.300) described the quantity as "363 (pieces) 382 lbs). Another Addchance Delivery Order dated 6.3.2000 (p.292) under KM 331 (corresponding to SA1229011A), "308 (pieces) 324 (lbs)".

17. There are certainly discrepancies among the various weight: 382 lbs and 324lbs taken delivery by Addchance and 386.5 lbs claimed by Kong Fook. When Wong gave evidence to explain the discrepancy he only referred to "363" as that was the weight put to him by Plaintiff's solicitor. It can be seen quite clearly that under the quantity column there was a description of "pieces" and "lbs". The relevant figure "363" was under "pieces", not "lbs". I do not find it surprising that Wong did not give evidence to clarify that. After all, the Delivery Order was a document of Addchance! Wong in his evidence tried to explain the discrepancy by reference to 'wastage'. Although Wong did not give evidence to this effect, it is clear from the documentary evidence that Addchance had taken delivery of 706 lbs under KM331 in respect of the two said SA orders (i.e. pp.300 and 292). There is nothing strange about Kong Fook claiming 386.5 lbs, being much less than the total quantity taken back by Addchance. It should be added that Tsui had clearly admitted that once goods were taken back by Addchance with a chop on the Delivery Order it means that the Plaintiff had accepted responsibility for the returned goods!

18. Kong Fook has indeed complained about 'defective yarn' while the Defendant's complaint to the Plaintiff was "colour shading", bearing in mind the complaint by Kong Fook under KM331, in respect of the two said SA orders, was indeed for colour shading, I rule that the Defendant has proved that the Plaintiff is liable for this Debit Note.

Debit Note No. 149 (p. 215)

20. By a fax dated 31.7.2000 (p.219) the Defendant informed the Plaintiff that a total of 4 lots of goods, (all with SA numbers and amounting to a total of 77 lbs (19+19+19+20 Lbs)) were found by the customer矅錦to be 'hard to knit' and also had problem of "holes" occurring (爆孔). By an Addchance Delivery Order dated 2.8.2000 (p.220) a total of 71 lbs (17+17+17+20 lbs) were taken back by Addchance. (It should be noted that the sum was incorrectly stated as "72"). The Plaintiff clearly accepted responsibility for these 71 lbs and deducted the relevant amount from their invoice to the Defendant (p. 222). By another fax dated 14.8.2000 to the Plaintiff (p.218) the Defendant referred to the same 77 lbs of goods, saying that 'hole occurring" problem still occurred after re-softening and informing the Plaintiff that the Defendant would get some other factory to 're-dye' the goods. On 18.8.2000 the Defendant by a fax (p.217) informed the Plaintiff that the customer had cancelled the order for 3 lots (out of the 4 lots mentioned earlier) due to 'hole occurring' problem even after the Defendant enlisted the help of outside factory to do the re-dyeing. The Defendant also adduced a copy of the invoice by the "outside factory" (p.216) in softening some 51 lbs of the goods in question. It should be noticed that this invoice was addressed to Super King Weaving Company Limited ("Super King"). There is no evidence led as to why this invoice was addressed to Super King.

21. Although I have reservations about Wong's evidence that the problems faced by the customer, namely 'hard to knit', 'holes occurring' were as a result of defective dyeing done by the Plaintiff, or that Wong is in a position to give such "expert" evidence, on the basis that once Addchance had accepted return of goods the Plaintiff accepted liability, I rule that despite efforts made by the Defendant the problems could not be remedied and the Plaintiff is therefore liable for this Debit Note. Although the invoice from the outside factory was addressed to Super King, I am satisfied that this amount was related to the goods dyed by the Defendant. As to why the name of Super King appeared at all, I will deal with that question under Debit Note No. 152.

Debit Note No. 150 (p.223)

23. By a letter dated 11.4.2000 (p. 232) Sky Resources wrote to the Defendant, complaining about colour shading problem in relation to 162 lbs in lot SA0218432 - Clearly goods dyed by the Plaintiff as the reference was a SA number. The Defendant in turn by a fax dated 13.4.2000 (p.230) informed Addchance. (However, the Defendant mentioned 156 lbs instead of 162 lbs). Addchance was asked to take delivery of the goods to be 'dealt with again'. By an Addchance Delivery Order dated 20.4.2000 (p.229) Addchance took delivery of 126 lbs of the said lot. The Plaintiff had by conduct accepted responsibility of these 126 lbs. On the same day (i.e. 20.4.2000) the Defendant informed Addchance (p.227) that the goods could not be "dealt with again" and asked Addchance to 'replenish' 150 lbs.

24. On 20.7.2000 Sky Resources wrote to Super King (p.226) in relation to the same SA number goods, complaining about serious colour shading problems and asking for compensation. On 21.10.2000 Sky Resources issued a Debit Note (p.225) claiming $8,868.21. By a revised Debit Note dated 25.10.2000 (p.224) the sum was reduced to $4,434.11. The Defendant claimed against the Plaintiff for the same amount of $4,434.11 under Debit Note No. 150. Again, I will deal with the question of why there was a reference to Super King under Debit Note No.152.

25. It is clear on the evidence before me that Sky Resources was complaining about goods covered by an SA order. As a result of serious colour shading Sky Resources made a claim against the Defendant. Although there are some discrepancies regarding the quantity/weight: 126 lbs returned to Addchance, 150 lbs replenishment, 156 lbs (yarn costs) claimed by Sky Resources, I am satisfied that the 156 lbs stated by Sky Resources were loss it suffered as a result of defective dyeing by the Plaintiff, causing colour shading. I also accept Wong's evidence that he negotiated the sum to $4,434.11. I rule that the Plaintiff is liable to the Defendant for this Debit Note.

Debit Note N0. 151 (p.233)

27. By a fax dated 1.11.1999 (p. 239) Million Concept wrote to the Plaintiff complaining about 'toughness to the feel, difficulties in knitting and [yarn] breaking", and requested the Plaintiff to take delivery of the goods for 'additional softening' (加輭). On the same date (i.e. 1.11.99) the Defendant also faxed to Addchance (p.238) repeating Million Concept's request. Reference was made to SA0928022 involving 1,040 lbs. On 3.11.1999 the Defendant again wrote to Addchance (p.237) in relation to the said SA0928022 together with three other SA orders with Million Concept: SA0928021, SA0928041 and SA0928181. By a Debit Note dated 17.12.1999 Million Concept claimed against the Plaintiff $6,336. There is no information on the Million Concept Debit Note indicating which lot(s) of goods it is claiming the Cleaning material for. The Defendant by Debit Note No. 151 claimed against the Plaintiff the same amount.

28. Wong in his evidence said that 'Cleaning material" was softener. In the Trial Bundle there was a fax (p.236) with the characters "cleaning material" (洗水濟) and $6,336 on the top left, and a reference to 'Super King' and 'Attn. Mr. Li' on the top right. The date of the fax was 26.9.2000. There was certainly no evidence who had sent this fax or how the information on this fax was related to cleaning material used back in 1999.

29. Wong explained that most of the Defendant's customers knew that the Plaintiff and the Defendant were like 'one entity', so Million Concept sent the letters direct to the Plaintiff to have problems sorted out without delay. Wong also said that sometimes customers confused about the Plaintiff and Defendant. Whilst I can understand the explanation given by Wong, there is still no explanation as to what happened after Million Concept issued a Debit Note to the Plaintiff? As Wong testified that the Defendant did not debit such sum against the Plaintiff earlier but waited until after the Plaintiff had closed down, it is logical to infer that the Defendant had paid such cleaning material charges to Million Concept (though there is no direct evidence on that.) As indicated earlier, I have reservations in relation to Wong's evidence that it was as a result of defective dyeing that the need to 'soften' the 'hardness' of the yarn arose. In this incident there is no admission of liability on the part of the Plaintiff by taking delivery of the goods. I am not satisfied that the Plaintiff is liable to the Defendant for this Debit Note and I dismiss the Defendant's counterclaim thereon.

Debit Note No. 152 (p.240)

31. On 29.2.2000 Citifield wrote to the Defendant (p.243) complaining of unevenness (花紗). On 1.3.2000 Defendant wrote to Addchance (p.242) relating Citifield's complaint, citing colour shading. On 19.4.2000 Citifield wrote to 'Super King' (p.247) complaining about colour unevenness (花紗, 陽色). The addressee of the said fax was altered from 'Super King' to 'Marlene' (p.244). The Plaintiff issued a Notice dated 3.9.2002 challenging the authenticity of the said fax.

32. The evidence before me was that after Wong and Sung split up, the Defendant moved office and informed its customers that the Defendant would use the name of Super King as from 1.4.2000. Ms Lo Wai Yee ("Lo"), Assistant Manager of Citifield, testified that she faxed a document to 'Super King' though the matter therein concerned the Defendant and Citifield. She said she wrote to 'Super King' for ease of communication and as a result of misunderstanding. It should be noted in her written statement the date of the fax was said to be 14.9.2000, which must be incorrect as the fax in question was clearly dated 19.4.2000. Leung Wai Kin, ("Leung") who was an employee of the Defendant and currently employed in Super King, testified that he altered the name from 'Super King' to that of the Defendant as the matter actually concerned the Defendant and Citifield.

33. Although the fax was address to Super King, I am satisfied that it was an order involving the Defendant. Apart from the evidence of Wong, Lo and Leung on this aspect which I accept, it can also been seen from the Addchance Delivery Order (p.250) taking delivery of 239 pieces, addressed to "Marlene, Citifield and Sonic (apparently Citifield's factory in the Mainland (see pp. 248 and 249). Since Addchance had taken delivery of these 239 pieces the Plaintiff had accepted liability. After re-dyeing, 234 pieces were delivered by Addchance to Citifield's factory Sonic (pp. 248 and 249). On 27.10.2000 Citifield wrote to the Defendant (p.241) referring to the colour shading problem 'mentioned earlier that year'. Citifield claimed against the Defendant $2,729. Since the Plaintiff had accepted liability by taking delivery and the re-dyeing did not eliminate the problem of colour shading, I rule that the Plaintiff is liable to the Defendant for this Debit Note.

Debit Note No. 154 and 155 (pp.256 & 257)

34. I will deal with these two Debit Notes before dealing with Debit Note 153, which is rather different in nature.

35. Both Debit Notes were dated 14.6.2001, 5 days before the filing of the Defence and Counterclaim. The amount claimed under these two Debit Note are not insubstantial: $67,901.50. Unlike the other Debit Notes which I have found proved, these two were not supported by any document. There is no document to support Wong's claim that there was colour shading problems; that new raw materials were used to meet deadlines; and that the Defendant had tried to sell the goods with 'colour shading' without success before deciding to claim against the Plaintiff. Unlike the other 7 Debit Notes there is no clear evidence before me that these two had been sent to the Plaintiff. Since these two Debit Notes were issued after the Order 14 proceedings there is no reasonable explanation as to why Wong was not able to tell me precisely whether they had been sent to the Plaintiff or not. There is simply nothing to indicate that the Defendant had rejected the goods under the two Debit Notes or alerting the Plaintiff that the goods were defective and/or not acceptable. Regarding these two Debit Notes I do doubt Wong's honesty and reliability in relation to these two Debit Notes. There is no reason why goods under these two Debit Notes were treated differently. Since it has always been the practice between the Plaintiff and the Defendant that dyed goods would be sent directly to the customer I would have thought that if the Defendant had indeed decided to get new raw material to 'beat the deadline' there would have been complaints from the customer(s) re colour shading evidenced by faxes or letters (as in the case of those customers mentioned above). No such written complaint was adduced by the Defendant to support its claim. I find that the Defendant has failed, on a balance of probabilities, to prove that the Plaintiff is liable for these two Debit Note and I dismiss its counterclaim thereon.

Debit Note No. 153 (p.251)

36. This is the single largest sum the Defendant counterclaims against the Plaintiff: $285,641.00. It complained of serious delay in the Plaintiff's delivery, causing the Defendant to suffer loss in having to compensate $200,000 to its customer Wiseknit Factory Limited ("Wiseknit") and the legal costs $85,641 incurred in instituting proceedings against Wiseknit for outstanding sums.

37. Evidence from Wong disclosed that originally the Defendant instituted proceedings against Wiseknit for outstanding sums for goods sold and delivered. Wiseknit counterclaimed alleging late delivery. After negotiation between representatives of Wiseknit and Sung at the office of Addchance on the 2nd floor (with Wong present), the Defendant agreed to settle Wiseknit's counterclaim by payment of $200,000. Wong said that at the time of the negotiation, Sung was in "multiple capacity" as Sung was the shareholder of the Plaintiff, Addchance and the Defendant.

38. Wong did not think that the Defendant should bear the loss of $200,000 to Wiseknit and looked to the Plaintiff for reimbursement. At a Shareholders' Meeting of the Plaintiff (p.168) he made his views to the other shareholders, including Sung. (Incidentally the meeting took place at the office of Addchance).

39. According to the Minutes of the Meeting (which was recorded by Wong) the issue of the settlement between the Defendant and Wiseknit was mentioned. It was recorded (p.169):

"Regarding the 50,070 lbs of 1/12 Cotton/Nylon which [the Defendant] on 25.3.1997 had entrusted [the Plaintiff] to dye, as a result of failure/delay in delivery, the [Defendant's] customer Wiseknit claimed compensation. Both partied reached settlement outside court in August 1998. The compensation to be paid by [the Defendant] was reduced from the original claim of $588,717.80 by to $200,000. Both parties to bear their own legal costs."

40. According to the said Minutes, Wong, representing the Defendant, told all the directors of the Plaintiff the Defendant's stance, saying that the Defendant should not bear the compensation and legal costs, but that the Plaintiff should be responsible. Sung then asked Chan Chor Keung whether there was indeed delay in delivery. Chan Chor Keung claimed 'such was caused by the late delivery of raw material by Wiseknit'. Wong then indicated that only part of the raw material was delivered late, and that it was because there was 'chaos with the Plaintiff at the time, both in production and management, which caused the incident'. Finally Sung requested Wong to prepare sufficient evidence to prove that the Plaintiff was indeed late in delivery and the matter was to be discussed during the next meeting. No Minutes of the next Meeting (or indeed any other Meeting) was adduced.

41. In a document dated 5.10.1998 (p.154) addressed to all the Directors of the Plaintiff, Wong pointed out the reason why the Defendant accepted the settlement proposal and agreed to pay $200,000 to Wiseknit. He referred to the chaotic situation of the Plaintiff and Addchance with letters from Wong Chiu Hong to employees of the Plaintiff and Addchance (pp.156 and 157), and from Tsui (p.159) in support. He then listed out the various dates when delivery by the Plaintiff was late. Wong said it took him a long time to prepare the document but it took Sung 'less than 30 seconds' to read. Sung said 'it had nothing to do with the Plaintiff' and that it was 'a business between the Defendant and Wiseknit'. Sung refused to let Wong pursue the matter. Wong said he was dissatisfied but did not say anything. Wong said all other Directors dared not voice their own opinion.

42. Based on the Minutes of the Meeting and Wong's evidence, there is no room to argue that the Plaintiff had accepted responsibility/liability for the compensation paid by the Defendant to Wiseknit, nor the legal costs incurred. Although Wong claimed that his document was proof that the Plaintiff was responsible, and the evidence clearly shows that the Plaintiff's management and production was chaotic, in the absence of admission, it is not enough for the Defendant to just rely on a document prepared by Wong to say that the Plaintiff is liable. I appreciate that at the material time of this incident (involving Wiseknit), there was an overlapping of personnel between the Plaintiff and the Defendant, which could well explain why the Defendant did not join the Plaintiff as a Third Party. The fact remains that the Plaintiff had clearly not accepted liability. Whilst it is clear that the Plaintiff was responsible in making delivery to the Defendant's customers (including Wiseknit), and it is implicit from the said Minutes that there was a delay in delivery, it does not follow that any delay must be the fault of the Plaintiff, even with the said management and production problems. There was an allegation raised during the Meeting that Wiseknit had delivered the raw material late which Wong disagreed. A list prepared by Wong indicating the various dates of late delivery without any supporting documents is not proof that the Plaintiff is liable and I so ruled.

43. I will mention in passing that when Wong and Sung split up, Wong did not bring up the issue of the Wiseknit compensation with Sung when they finalised the split. Wong explained that he did not mention to Sung lest Sung would delay the signing of various papers which would in turn affect the business of the Defendant. Wong's evidence in fact was that when Sung disregard the document he presented he did not pursue the matter, and when there was a split with Sung he again did not raise the matter. There is no basis to argue that Wong or the Defendant had 'reserved' the Defendant's right to claim against the Plaintiff. Mr. Ng, Solicitors for the Plaintiff, in the final submission raised the issue of Estoppel. The Plaintiff has chosen to simply put the Defendant to strict proof and had never raised the defence of estoppel, which must be expressly pleaded. However, in view of my ruling, there is no need for me to consider whether the Plaintiff could raise such a defence and I make no further comment on it.

44. Tsui in his statement said that it was only on 15.12.2000 that the Defendant, for the first time, claimed against the Plaintiff re the Wiseknit compensation. When faced with the fact that the Defendant issued the relevant Debit Note to the Plaintiff in November 2000 he said that he was not in Hong Kong, and that 15.10.2000 was the date he believed to be correct as there was a long lapse of time. I do not find Tsui deliberately lie in this respect. However, it does show that Tsui was prepared to make assertion on behalf of the Plaintiff when he was not in a position to do so.

Further comments on the 'proved' Debit Notes

45. Of the Debit Notes which I found proved, I wish to add that I do not find it strange that the Defendant did not send them onto the Plaintiff as soon as the Defendant's own customers made claims. I accept that it was when the Defendant realised that the Plaintiff had ceased business that the Defendant decided to make claims, as evidenced by the document setting out the outstanding balance to the Plaintiff for the months of June, July and August (p.252).

Conclusion

46. For the reasons above, I find the Defendant succeeded in its counterclaim against the Plaintiff to the extent of $ 31,860.61 ($15,000 + 8,116.50 + 1,581 + 4,434.11 + 2,729). I dismiss the balance of the counterclaim.The Defendant is therefore entitled to set off the sum of $31,860.61 against the Judgment sum of $325,338.97.

Costs

47. I will make a Nisi Costs Order, to be made absolute within 14 days should no application be made by either party.

Costs on balance of the Plaintiff's Claim

48. As the Plaintiff abandoned the balance of its claim the Defendant is to have costs of the Plaintiff's claim for the sum of $14,917.50 prior to 4.5.2002, to be taxed if not agreed.

Costs on the Notice Disputing Authenticity

49. Although the Plaintiff's attempt to challenge the authenticity of the fax dated 19.4.2000 by Notice failed, in the circumstance I find it entirely reasonable for the Plaintiff to take such a course of action. No attempt has been made by the Defendant to explain the obvious alteration made. I made no order as to costs re this Notice.

Costs on the Defendant's Counterclaim

50. As to the counterclaim, the Defendant succeeded in part only. On the basis that costs to follow the event, the Defendant should have costs of the counterclaim relating to those Debit Notes it succeeded while the Plaintiff should have costs against the Defendant on those Debit Notes which the Defendant failed.

Costs to be taxed if not agreed.

Representation:

Mr. NG Man Kin of M/s Kwok Ng & Chan for the Plaintiff

Mr. William M F Wong ins't by M/s Au Yeung Cheng Ho &Tin for Defendant

DCCJ15587/2000

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 15587 OF 2000

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Judgment

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1. In this action, the Plaintiff sues the Defendant for the price of goods sold and delivered and services rendered to the Defendant. The total amount claimed is $413,823.30 being the aggregate of sums in a large number of invoices as listed in the Statement of Claim. The Plaintiff acknowledges that $73,566.83 has been paid by the Defendant towards satisfaction. Hence the net outstanding claimed by the Plaintiff is $340,256.47 and the Plaintiff applies for summary judgment.

2. The Defendant raises three matters in opposition to summary judgment. First, the Defendant alleges that the amounts due under two invoices are not that as claimed by the Plaintiff. Specifically, the Defendant by affirmation in opposition says that the amount of $3,292.50 under Invoice No. ST009835 is not due because it related to the cessation of business of the Plaintiff. In regard to Invoice No. ST009836, the Defendant by affirmation says that $11,625.00 ought to be taken off as unjustified.

3. Secondly, the Defendant contends that is a customary 2% discount allowed on all invoiced amounts. Hence the outstanding amount claimed should be reduced by 2%. However, this issue was abandoned by the Defendant during the course of the hearing before me.

4. Thirdly, the Defendant asserts by affirmation that

"5. As a result of the bad quality and/or late delivery of the Plaintiff's products, the Defendant received complaints from its customers and a series of debit note were issued to the Plaintiff which up to this day remains unsettled. The particulars are as follows :-

Debit Note No. 146	HK$15,000.00
Debit Note No. 148	HK$8,116.50
Debit Note No. 149	HK$1,581.00
Debit Note No. 150	HK$4,434.11
Debit Note No. 151	HK$6,336.00
Debit Note No. 152	HK$2,729.00
Debit Note No. 153	HK$285,641.00
Total:	HK$323,837.61"

And the Defendant counterclaims this $323,837.61 and set off against the Plaintiff's claim.

5. Mr. Au for the Plaintiff contends that there is no evidence to support the dispute over Invoices ST009835 and ST009836. Nothing can be further from the truth. The affirmation filed on behalf of the Defendant and remarks written across the copy invoices exhibited to the affirmation is evidence. There is nothing inherently unbelievable in such challenges raised by the Defendant. Mr. Au also asserts that evidence is not admissible to challenge the invoices because of the Parol Evidence Rule. Clearly the Parol Evidence Rule does not apply in such circumstances. In conclusion, I have no difficulty at all in holding that the amounts disputed, i.e. $3,292.50 under ST009835 and $11,625.00 under ST009836 should go for trial.

The principles on set off and summary judgment

6. There can be no serious dispute as to the applicable principles for a case like the instant one. In Shenzhen Baoming Ceramics Co. v. Companion-China Ltd. [2000] 2 HKC 790 at 796-797, Keith JA observed :-

"What order, then, should be made in these circumstances? The law in this area has been usefully summarised in the Supreme Court Practice 1999 Vol 1 at p 179 as follows:

An analysis of the authorities as to what order should be made where the defendant raises a set-off or counterclaim shows that there are four different classes or groups of such orders, namely:

(a) where the defendant can show an arguable set-off, whether equitable or otherwise, he is entitled to defend to the extent of the set-off and the court has no discretion;

(b) where the defendant sets up a bona fide counterclaim arising out of the same subject matter as the action and connected with the grounds of defence, the order should not be for judgment on the claim, subject to a stay pending trial of the counterclaim, but should be for unconditional leave to defend, even if the defendant admits the whole or part of the claim;

(c) 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 trial of the counterclaim;

(d) 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 (United Overseas Ltd v. Peter Robinson Ltd, March 26, 1991, CA Transcript 91/0297, per Bingham LJ).

The defendant's counterclaim does not come within category (a) or category (b). Accordingly, there is no defence to the plaintiff's claim for $1,859,755.88 plus interest, and there must be judgment for the plaintiff for that sum. The issue is whether the defendant's counterclaim comes within category (c) or category (d). In our view, it comes within category (c). Both the settlement agreement and the third agreement arose out of orders given to the plaintiff for ceramic tiles pursuant to an ongoing trading relationship. In our judgment, it would be unjust to require the defendant in such a relationship to pay a sum which represents a compromise as to the balance of the purchase price of goods to which the original agreement related before the determination of the seller's liability to compensate the buyer for losses alleged to have been incurred as a result of sub-standard goods being delivered under the third agreement."

7. An authoritative summary of the law regarding to set-off is contained in Axel Johnson A.B. v. Mineral Group A.G. [1992] 1 WLR 270 per Legatt L.J. The current position is that :-

- Legal Set-off for liquidated debts, even if unconnected

- Equitable set-off for unliquidated debts which are connected

- No-set-off for debts which are unconnected and unliquidated

The above principle has been applied in a recent case in Hong Kong : Alco International Ltd. v. Akai Electronics Co. Ltd. [2000]3 HKC 724, a case with facts almost identical to those of the present.

The nature of the counterclaim

8. The Defendant has not raised any issue in relation to the invoices except the specific two dealt with hereinbefore. Hence there is no real substantive defence to the claim by the Plaintiff. What remain to be considered is the nature of the items counterclaimed.

9. In brief, each of the debit notes relates to claim for loss due to sub-standard or late delivery of goods supplied by the Plaintiff. It is basic common sense that claims (counterclaims in this case) for loss due to sub-standard quality or late delivery can only be for damages to be assessed even though the Defendant has quantified them. Because the counterclaims are not for liquidated debts, there cannot be legal set-off.

10. It may be argued that, because the debit notes were all issued in 1998 and the Plaintiff has adduced no evidence to show controversy over such debit notes, the Plaintiff may be taken to have accepted the debits and thus the debits can be treated as liquidated debts. However the Plaintiff now disputes these debits. So question arises as to whether the debits have been accepted by the Plaintiff as a matter of fact or law. Such question obviously requires trial with hearing of evidence on the conduct of the parties (in particular the Plaintiff) vis-a-vis each of the debit notes.

11. Still on the debit notes. The Defendant asserts that each of them relates to goods supplied under some of the invoices the basis of the Plaintiff's claim. Hence, it is said, the Defendant seeks equitable set-off. However, the documents exhibited pertaining to the debit notes do not show immediately the connection with the goods supplied under the invoices. Indeed the Plaintiff contends that there is no connection for equitable set-off. Thus, it is inevitable that the Defendant has to call witnesses to show the alleged connection. In short, equitable set-off is not available to the Defendant on purely affirmation evidence before the court.

12. In the premises, since neither legal set-off nor equitable set-off can be supported, there must be judgment for the Plaintiff for the amount of $(340,256.47 - 3,292.50 - 11,625.00) = $325,338.97.

13. Nonetheless, the counterclaims by the Defendant for sub-standard quality and late delivery are supported by documentary evidence of claims by purchasers against the Defendant. The counterclaims are at the very least plausible. Thus the matter boils down to case(c) alluded to by Keith JA whereby although there is judgment for the Plaintiff stay of execution ought to be ordered.

14. In exercising the discretion to order stay of execution, I also bear in mind the allegation by the Defendant that for a considerable part of the material time one Mr. Sung was shareholder and director of both the Plaintiff and the Defendant and he ran both companies. Mr. Sung allegedly co-ordinated the businesses between the Plaintiff and the Defendant. Now, the implications of Mr. Sung's alleged role in the Plaintiff and in the Defendant have not been firmly or properly pleaded. Affirmation evidence from the Plaintiff admits that Mr. Sung invested in both companies but he had no management role in the Defendant. Nevertheless, it is open to the Defendant to plead in such a way as to implicate Mr. Sung on matters germaine to the debit notes or the accounts between the Plaintiff and the Defendant.

15. Last but not the least, there is ample evidence from the Plaintiff that the Plaintiff and the Defendant had substantial trading relationship with each other and that there may well be a kind of running account between the Plaintiff and the Defendant.

16. In the light of all the circumstances aforesaid, this is a strong case for stay of execution until trial of the Defendant's counterclaims.

Order

17. Accordingly, I gave partial judgment for the Plaintiff for $325,338.97 with interest and costs. Leave to the Defendant to file and serve Counterclaim in due course. Stay of execution of judgment until trial of the Counterclaim to be filed and served by the Defendant. Unconditional leave to the Defendant to defend the balance of the claim by the Plaintiff.

Representation:

Mr. Gordon Au Wing Yip of Messrs. S.K. Lam, Alfred Chan & Co for the Plaintiff.

Mr. William Wong instructed by Messrs. Au Yeung, Cheng, Ho & Tin for the Defendant.