RYDER INDUSTRIES LTD v. TIMELY ELECTRONICS CO LTD

HCA 2358/2007 & HCA 109/2009
(Heard together)

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2358 OF 2007

_____________

BETWEEN
	RYDER INDUSTRIES LIMITED (formerly SAITEK LIMITED)	Plaintiff
	and
	TIMELY ELECTRONICS COMPANY LIMITED	Defendant

____________

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 109 OF 2009

_____________

BETWEEN
	RYDER INDUSTRIES LIMITED (formerly SAITEK LIMITED)	Plaintiff
	and
	CHAN SHUI WOO	Defendant

_____________

Before: Deputy High Court Judge Lok in Chambers

Date of Hearing: 11 December 2013

Date of Decision: 11 December 2013

Date of Reasons for Decision: 7 January 2014

__________________________

REASONS FOR DECISION

__________________________

 

1.  This is an application by the defendants for stay of execution of the judgment dated 11 July 2013 granted by Mr Recorder Houghton, SC, in favour of the plaintiff (“the Judgment”) pending the determination of the appeal against the Judgment. In the hearing on 11 December 2013, I allowed the application subject to the undertakings given by the defendants to pay the whole judgment sum together with interest into court. I now give my reasons.

LEGAL PRCINIPLES GOVERNING WHETHER A STAY OF EXECUTION PENDING APPEAL IS TO BE GRANTED

2.  The relevant principles governing whether a stay of execution pending appeal should be granted are discussed by Ma J (as he then was) in Star Play Development Ltd v Bess Fashion Management Co Ltd [2007] 5 HKC 84 at §§6-10, which can be summarised as follows:

(i)   it is in the court’s discretion whether or not to grant a stay (§6);

(ii)   a stay of execution will not be ordered unless the defendant can justify a stay, and the practice of the court is that justification can be demonstrated only if good reasons exist (§7);

(iii)   good reason can exist in a variety of forms, and merits of the appeal and whether the appeal will be rendered nugatory are matters which may go to whether good reasons exist (§8);

(iv)   however exceptional the circumstances may be otherwise justifying a stay of execution, if the court is not convinced  that there exist arguable grounds of appeal, no stay will be granted, and so the existence of an arguable appeal is the pre-requisite for the grant of a stay (§9(6));

(v)   the court would have to form a preliminary view of the merits and strengths of an appeal, but the existence of an arguable appeal is only the minimum requirement.  Where there is an arguable appeal, then the appellant will have to provide additional reasons for a stay, for example that without a stay the appeal would be rendered nugatory.  Without such additional reasons, strong grounds of appeal, or a strong likelihood of success would be required (§§9(5) & 9(8));

(vi)   if the order appealed against is a money judgment, the court will require evidence as to why the levying of execution will result in the appeal being rendered nugatory, such as, for example, an appreciable risk that the respondent to the appeal would not be able to repay in the event of a successful appeal (§9(1));

(vii)    where it is said that levying of execution would result in financial ruin or serious financial consequences for the appellant, the court will require good evidence to support this contention, such as the production of accounts or other documents to justify the assertion.  A bare assertion is unlikely to meet with much sympathy where more substantial evidence is available (§9(3));

(viii)   it is important to stress that the court must not at any stage forget the position of the successful party.  It is always relevant to consider the prejudice that would be caused to the successful party in the event a stay is granted, and if necessary, to impose conditions so as to minimize the prejudice caused to him (§9(9)); and

(ix)   ultimately, the court embarks on a balancing exercise and uses its common sense, but bearing in mind at all times the starting point that the successful party is not to be deprived of the fruits of his success (§10).

3.  As to what would constitute a strong ground of appeal, Ma J in Wenden Engineering Service Co Ltd v Lee Shing Yue Construction Co Ltd, unrep, HCCT 90/1999 (17 July 2002) stated that the requisite strength of the appeal must be such that the court takes the view that “something has grievously gone wrong with the process of law in the court below”.

4.  Both parties do not seek to dispute these legal principles.

MERITS OF THE APPEAL

5.  I am given to understand that the hearing of the substantive appeal will take place on 10 September 2014.

6.  The defendants undertake to pay the whole judgment sum together with interest into court pending the determination of the appeal.  However, such factor alone is not sufficient for the court to exercise the discretion in the defendants’ favour.  Even if the defendants have made the payment into court, the plaintiff will still be deprived of the fruits of its success as it cannot gain immediate access to the fund.  Hence, some other good reason is required.

7.  In support of the stay application, the defendants just focus on the merits of the appeal.  Without additional good reasons for a stay, for example that without a stay the appeal would be rendered nugatory, it is trite law that the defendants will have to establish strong grounds of appeal, or a strong likelihood of success in the intended appeal.

8.  The background of this case has been fully set out in the Judgment of the learned Recorder and so I do not want to repeat the same here.

9.  I understand that some of the main issues at the trial are as follows:

(i)   whether the plaintiff was entitled to exercise the right of a particular lien by refusing to return the machinery to the defendant in HCA 2358 of 2007, i.e. Timely Electronic Company Limited (“Timely”); and

(ii)   whether the agreement signed by the parties in late October 2005 (“the Agreement”), under which the plaintiff is claiming for the work done and the goods supplied, is tainted with illegalities and as a result the court should not allow the plaintiff to enforce the claim under the Agreement.

10.  As I am not the trial judge of this case, I do not have the benefit of knowing every detail of the trial.  However after listening to the submissions of Mr Chiu, counsel for the defendants, I am satisfied that there are some uncertainties in the reasoning in the Judgment, and as a result the defendants have passed the threshold of establishing good grounds of appeal.

(i)   Particular lien

11.  Firstly, the attack is about the reasoning of the learned Recorder about the establishment of the particular lien.  The present case all first started when the plaintiff had spare capacity in the production facility in the Mainland, and the plaintiff and Timely entered into the Agreement whereby they would cooperate in processing mobile phones in a factory in Shenzhen established by the plaintiff with “commissioned processing enterprise” (“CPE”) status.  Such factory is referred to as “Saitek CPE” in the Judgment.

12.  Under the Agreement: (i) Timely would introduce customers to the plaintiff for the use of the latter’s production facilities; (ii) Timely would supply the machinery not then available to the plaintiff’s factory to enable the manufacturing to take place; and (iii) Timely was to provide management and supervision of the manufacturing process.  The operation under the Agreement was termed as “STC” operation, standing for “Saitek Timely Communication”.

13.  After the termination of the Agreement, the plaintiff refused to return the machinery to Timely and so it lodged a counterclaim against the plaintiff claiming for damages in the sum of RMB¥1,159,000 (or about HK$1,483,520).  The learned Recorder held that the plaintiff’s defence of general lien has not been made out, but nevertheless the plaintiff is entitled to rely on particular lien to justify the detention of the machinery.

14.  The learned Recorder’s reasons in this regard can be found in §§83 to 86 of the Judgment.  After setting out the elements of a particular lien as summarised by Harris J in Re Oasis Hong Kong Airlines Ltd [2011] 2 HKLRD 471 at §§9 to 10, the learned Recorder said in §84 that “it appears to [him] that those ‘requirements’ have been met in the circumstances of this case.”

15.  However, Mr Chiu submits that §9 of the Oasis case only set out the essential elements for particular lien which were not in dispute between the parties in that case.  There was one essential element which was in dispute and was dealt with later in the judgment of Harris J in the Oasis case, namely whether there must be “improvement to the chattel”.  After a lengthy review of the law in §§43 to 50 of that judgment, Harris J concluded that “improvement” was an essential condition for a particular lien.  The learned judge also went further and held that improvement was to be assessed by reference to the good’s physical character and not value, and that merely maintaining its value was not an improvement.  Mr Chiu submits that the plaintiff had not provided any particulars at the trial to prove that the work done by the plaintiff had resulted in improvement of the machinery, and the learned Recorder had not provided any justification as to how the maintenance of the machinery had resulted in improvement of the same.

16.  Further, relying on the case of Albermarle Supply Co Ltd v Hind & Co [1927] 1 KB 207, Mr Chiu submits that a person claiming a lien must either claim it for a definite sum, or give the owner particulars from which he himself can calculate the amount for which a lien is due.  However, the plaintiff all along has not provided the court or the defendants with a definite outstanding amount allegedly owed by Timely for the maintenance costs of the machinery.  In fact, there was no separate item for such repair or maintenance costs in the monthly account.  Hence, the plaintiff should not be allowed to exercise the right of a particular lien.

17.  In my judgment, these are respectable arguments which deserve serious consideration by the appellate court.  I am satisfied that the defendants have managed to establish good grounds of appeal in this regard.

(ii)     The effect of the illegalities on the enforcement of the Agreement

18.  The second battlefield is about the learned Recorder’s decision in allowing the plaintiff to enforce the Agreement despite the establishment of the 4^th Illegality as mentioned in the Judgment.

19.  Under the Agreement, the plaintiff was to provide the production facility at Saitek CPE for the manufacturing of the goods for the customers introduced by Timely.  In order to manufacture the goods, the production line had to use the bonded materials imported into Mainland. Instead of using the quota of Saitek CPE for the import of the bonded materials, the production facility used the quota of another Mainland entity owned by the plaintiff, namely “Saitek Wholly Foreign Owned Enterprise” (“Saitek WFOE”).  In so doing, the learned Recorder found that there was a breach of the customs regulations in the Mainland which might attract a heavy monetary penalty, and this was the 4^th Illegality referred to in the Judgment.

20.  There was a raid by the customs authority of the production facility in January 2007.  Prior to the raid, the learned Recorder found that Timely was not aware of such breach of the customs regulations by the plaintiff.  According to the defendants, the joint venture business had to pay a substantial amount of “under-table money” in order to avoid the prosecution relating to the breach of the customs regulations.

21.  Despite such illegality in the performance of the Agreement, the learned Recorder allowed the plaintiff to claim for the amount due under the Agreement.  The reasons can be found in §§72-73 of the Judgment:

“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 of 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.”

22.  From the judgement, it is clear that the learned Recorder has taken into account the following two factors in allowing the plaintiff to enforce the Agreement despite the illegalities:

(i)   the plaintiff does not need to rely on the illegalities as a basis for the claim; and

(ii)   it would be disproportionate to decline to enforce the payment obligation under the Agreement.

23.  Mr Chiu submits that the learned Recorder has erred in reaching the conclusion that the plaintiff does not need to rely on the illegalities as a basis for the claim.  I am given to understand that there was a serious dispute of fact at the trial as to whether the sums claimed by the plaintiff under the running account were related to the STC orders. Apparently, only the performance of the STC orders involved the breach of the customs regulations.  It is the plaintiff’s case that the sums due under the Agreement or the running account relate to non-STC orders and so the plaintiff does not need to rely on the illegalities as the basis of its claim.  On the other hand, the defendants claim that the sums due under the Agreement or the running account relate to STC orders and so the plaintiff’s claim is tainted with illegality.  From the Judgment, I do not know how the learned Recorder has resolved such factual dispute between the parties and how he has come to the conclusion that the plaintiff does not need to rely on the illegalities as a basis for its claim.  In such circumstances, I am satisfied that the defendants have managed to establish good grounds of appeal in this regard.

24.  I must emphasise that this is only my preliminary view on the strength of the appeal.  As I am not the trial judge myself, I do not have the benefit of knowing all the evidence presented to the trial judge for consideration, and yet I have to form a preliminary view on the strength of the appeal.  In the substantive appeal, the parties may be able to refer the appellate court to all the evidence at the trial, but I do not have the luxury of considering all the minute details at this stage.  As pointed out by Lam JA in Master Yield Ltd v The estate of Ho Kan Bau, unrep, CACV 67/2012 (23 May 2013), the court should not allow a stay application to become a test run for the substantive appeal.

25.  I appreciate that the burden on the defendants to establish good grounds of appeal is a heavy one.  I must emphasise that I am not the appellate judge, and yet I am required by law to form a preliminary view on the merits of the appeal.  Having heard all the submissions of Mr Chiu, coupled with the fact that the defendants will pay the whole judgment sum and interest into court, I am prepared to exercise the discretion in favour of the defendants in the present case.  I therefore ordered the stay of execution.

26.  As there is a stay of execution, I will not order the payment out of the sum of $3,000,000 paid by the defendants into court.  The court will therefore keep the fund pending the outcome of the appeal.

(David Lok) Deputy High Court Judge

Mr Richard Zimmern, instructed by Munros, for the plaintiff in both actions

Mr Simon Chiu, instructed by Allen Chan & Co, for the defendants in both actions

HCA 2358/2007 & HCA 109/2009
(Heard together)

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2358 OF 2007

____________

BETWEEN
	RYDER INDUSTRIES LIMITED (formerly SAITEK LIMITED)	Plaintiff
	and
	TIMELY ELECTRONICS COMPANY LIMITED	Defendant

____________

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 109 OF 2009

____________

BETWEEN
	RYDER INDUSTRIES LIMITED (formerly SAITEK LIMITED)	Plaintiff
	and
	CHAN SHUI WOO	Defendant

____________

Before: Mr Recorder Anthony Houghton, SC in Chambers

Dates of Written Submission: 23 July, 6, 15 and 22 August 2013

Date of Decision on Costs: 19 September 2013

________________________

DECISION ON COSTS AND INTEREST

_________________________

 

Background

1.  These consolidated actions relate to a claim by the Plaintiff against its former business associate for sums due and arising of a written agreement between the parties.  Judgment was given on 11 July 2013.  The primary matters in dispute were the subject matter of HCA 2358/2007 (“the Main Action”).  HCA 109 of 2009 (“the Guarantee Action”) concerned a guarantee given by the Defendant in that action in regard to the liabilities of the Defendant in the Main Action.  The two actions were consolidated by an order of the Registrar made on 26 January 2011.

2.  Although the Plaintiff in each action is Ryder Industries Ltd, at the time relevant to the disputes between the parties the Plaintiff was known as Saitek Ltd and this judgment will follow the convention adopted by the parties, and the Plaintiff will be referred to as “Saitek”.  The Defendant in the Main Action will be referred to as “Timely”, and the Defendant in the Guarantee Action, Mr Chan Siu Woo, as “Mr Chan”; collectively “the Defendants”.

3.  The judgment dealt with costs on an Order Nisi basis.  The judgment also gave the parties liberty to apply in regard to matters of interest.  By a letter dated 23 July 2013 the legal representatives of Saitek have made applications in regard to both of those matters.  That correspondence also addresses two other matters, namely the question of whether a certificate for two counsel should be granted, and an application for “payment out” to Saitek of certain monies held in Court.  As explained briefly below, neither application is dealt with in this Decision.

4.  So far as the application for a certificate for two counsel is concerned, this is a matter which has already been addressed.  An application for such a certificate was made orally by counsel at the trial, and this was considered (and rejected) in the judgment.  The Claimant submits that this forms part and parcel of the costs matters reserved by the order nisi.  I do not agree.  There is neither jurisdiction nor justification for that decision to be revisited.

5.  So far as the payment out of monies held in Court is concerned this is an application which should properly abide the outcome of an application currently on foot elsewhere for a stay of execution of the judgment pending appeal.  This is plainly the pragmatic course.  Moreover I agree, in this instance, with the submission of the Defendants to the effect that the application ought properly to have been made by summons.  It does not fall within the compass of matters reserved for decision by the liberty to apply provisions in the judgment.

Interest

6.  The principal sum awarded to Saitek by the judgment was $6,502,555.15.  Pursuant to paragraph 91 of the judgment interest was to accrue on that sum, in accordance with a contractual agreement of the parties, at a rate of 1% above BLR from 1 September 2007 to the date of judgment.  The parties were given liberty to apply in the event that the relevant calculation could not be agreed.

7.  The parties have been able to agree the quantum of that interest at the stated rate of 1% above BLR calculated to the date of judgment (11 July 2013), and this amounts to HK$2,345,887.95.

Sanctioned Offer?

8.  However Saitek seeks enhanced interest for a part of the period pursuant to Order 22 rule 24(2), based upon what are said to have been Sanctioned Offers made by Saitek in each action on 26 April 2013.  In summary, offers were made by Saitek in correspondence to settle the claims and counterclaims in both actions by a payment by Timely of a sum of HK$6,000,000.  This was less than the amount of Saitek’s principle claims.  Neither offer was accepted and subsequently Timely and Mr Chan have been held liable for a greater sum than the offered amount. 

9.  Saitek therefore seeks the enhanced rate of interest for the period after the latest date on which the Defendants could have accepted the offer without leave (i.e. 25 May 2013, being 28 days from 26 April 2013) until the date of payment. Saitek accordingly seeks a variation of the Judgment and requests orders to the effect that interest should accrue on the principal sum of HK$6,502,555.15 at 1% above BLR (as presently ordered), but only from 1 September 2007 to 24 May 2013, and that thereafter interest should accrue at a rate of not more than 10% above judgment rate from 25 May 2013 through to the date of judgment and thereafter until payment.

10.  The Defendants do not accept that there is any such entitlement because, they submit, neither of the letters dated 26 April 2013 qualifies as a Sanctioned Offer under Order 22 rules 4 and 5.

11.  The primary reason for this is that the offers made to Timely were conditional.  Both letters were in similar terms, with the letter served on Timely in the Main Action for example, providing that “This offer shall be conditional upon Mr. Chan’s acceptance of the Sanctioned Offer to Chan in accordance with Order 22 rule 16”.  The letter in the Guarantee Action reflected a similar provision.  On behalf of Timely and Mr Chan it is submitted that the conditions had to be satisfied “before the offer is valid” meaning that because neither Defendant ever accepted the conditional offer made to them “neither letter has ever taken effect as an offer, [to the other defendant] less still a sanctioned offer in the statutory form”.

12.  It is submitted that in order for an offer to qualify as a sanctioned offer, the prescribed form of the offer as set out in Order 22 rule 5 must strictly be complied with: see paragraph 22/5/A of the White Book 2013. The Defendants submit accordingly that a Sanctioned Offer should be an “immediately valid offer”, not an offer subject to a condition precedent.

13.  The Defendants submit that any difficulty arising out of the form of the offers is of Saitek’s own making since a Sanctioned Offer not subject to any condition on acceptance could have been made in each Action without any risk to Saitek.  That is so; the offers made seem not to have fully recognised the fact that the two actions had been consolidated, and were in effect no longer separate actions.

14.  Saitek does not accept that the correct approach to the RHC is to look for “strict compliance”, but says that, in any event, offers with conditions are not precluded by the terms of O22 rules 4 and 5. Although O22 rule 5 sets out the minimum requirements as to form and content of any offer which is to be treated as a “Sanctioned Offer” under the rules, it does not purport to constrain what may be considered to be an offer for the purposes of the Sanctioned Offer procedure provided those minimum requirements have been met.  In contract an offer may be made with conditions as to acceptance and, says Saitek, there is nothing in the RHC which mandates a different position for a Sanctioned Offer.

15.  The underlying objective of the sanctioned offer procedure is of course the encouragement of the settlement of actions without recourse to adjudication of the matter by the court.  To that end rules have been devised so as to codify a process by which a plaintiff may make an offer of settlement of a claim through a mechanism which is not dissimilar to the mechanism for the making of payments into court by defendants.  The rules set out certain requirements for any such offer of settlement to qualify as a sanctioned offer, but that does not of course preclude offers other than Sanctioned Offers being made by plaintiffs.  The position may be paraphrased by saying that if an offer meets the requirements of the rules, then the “code” applies including the costs and interest consequences specified in the rules, as appropriate, as and when the offer is accepted, rejected, beaten at trial or otherwise.

16.  If an offer is made which does not meet the prescription for a Sanctioned Offer then it may perhaps be a matter which may be taken into account by the court in the exercise of its general discretion as to costs as and when this arises.  But, as Order 22 rule 4 makes clear, in order to carry the specified consequences the offer has to be a “Sanctioned Offer”.

17.  As a matter of contract law the Defendant’s proposition that a conditional offer cannot be an offer until the condition is satisfied is plainly incorrect; an offer is not precluded from being an offer simply because its acceptance is subject to a condition.  This not a matter of contract law however, and I understand the submission to be premised on the understanding paraphrased above, that the relevant rules of court curtail which offers attract the status of a “Sanctioned Offer”.

18.  There has been not inconsiderable litigation in England which has considered the equivalent provisions of Part 36 of the Civil Procedure Rules. The trend of that litigation has been to approach Part 36 offers in a manner distinct from common law concepts of offer and acceptance.  This can be seen from the Court of Appeal’s judgment in Susan Gibbon v Manchester City Council [2010] EWCA 726 in which Moore-Bick LJ said this:

“4. It can be seen from Part 36 as a whole, as well as from the extracts cited above, that it contains a carefully structured and highly prescriptive set of rules dealing with formal offers to settle proceedings which have specific consequences in relation to costs in those cases where the offer is not accepted and the offeree fails to do better after a trial. In cases where there has been no Part 36 offer or a Part 36 offer has been bettered the judge has a broad discretion in dealing with costs within the framework provided by Part 44. Rule 44.3(4) provides that when exercising its discretion as to costs the court will have regard to the general rule that the unsuccessful party should pay the costs of the successful party, but will also have regard to the conduct of the parties and any payment into court or admissible offer to settle made by one or other party which falls outside the terms of Part 36. In seeking to settle the proceedings, therefore, parties are not bound to make use of the mechanism provided by Part 36, but if they wish to take advantage of the particular consequences for costs and other matters that flow from making a Part 36 offer, in relation to which the court's discretion is much more confined, they must follow its requirements.

5. Part 36 is drafted as a self-contained code. It prescribes in some detail the manner in which an offer may be made and the consequences that flow from accepting or failing to accept it. In some respects those consequences reflect broadly the approach the court might be expected to take in relation to costs; in others they do not; for example, rule 36.14(3) allows the court to award a claimant who has obtained a judgment at least as advantageous as his offer interest on the sum for which he has obtained judgment at an enhanced rate of up to 10% over base rate, costs on the indemnity basis and interest on those costs at an enhanced rate as well.

6. Basic concepts of offer and acceptance clearly underpin Part 36, but that is inevitable given that it contains a voluntary procedure under which either party may take the initiative to bring about a consensual resolution of the dispute. Such concepts are part of the landscape in which everyone conducts their daily life. It does not follow, however, that Part 36 should be understood as incorporating all the rules of law governing the formation of contracts, some of which are quite technical in nature. Indeed, it is not desirable that it should do so. Certainty is as much to be commended in procedural as in substantive law, especially, perhaps, in a procedural code which must be understood and followed by ordinary citizens who wish to conduct their own litigation. In my view, Part 36 was drafted with these considerations in mind and is to be read and understood according to its terms without importing other rules derived from the general law, save where that was clearly intended.”

19.  It is clear from the authorities referred to in the White Book that the minimum requirements as to form prescribed by the rules must be met.  It is not clear that conditions which form part of the offer exclude such an offer from the scheme of Order 22 rules 4 and 5. 

20.  In my judgment the correct approach involves firstly a consideration of whether the minimum requirements for a valid sanctioned offer have been complied with.  If those requirements have been met, then the offer made is ordinarily to be taken as falling within the “scheme” provided for in the rules.  If those requirements have been met, but conditions have been added to the offer, it seems to me that these conditions are to be considered in the context of whether or not the particular offer which has been made has been bettered, not whether it is an offer at all.   I do not accept therefore that the fact that an otherwise compliant (with Order 22) offer contains a condition precludes it from being a valid offer for these purposes.  This appears moreover to be the implication of Order 22 rule 24(5) (a).  The better approach in my judgement is for the condition (where relevant) to be considered as an additional element of the offer which the offeror itself has to “better” at trial in order to be able to claim the specified consequences.

21.  What then of the particular offers that were made by Saitek?  It seems to me, for the reasons given, that the Defendants are not correct to submit that the inclusion of the provision precludes Saitek’s offer from being an offer for the purposes of Order 22, the other requirements of that rule as to form and content of a Sanctioned Offer having been met.

22.  Moreover there is no question but the Saitek has achieved more, and the Defendants achieved less, than would have been the case had the offers been accepted.  In the circumstances of the present case it was inevitable that the outcome of the Main and the Guarantee Actions would go “hand in hand”.  The liability of Timely, the principal debtor in the Main Action, and the liability of Mr Chan as the guarantor were co-extensive.  There was no line of defence in the Guarantee Action which was independent of the defences canvassed in the Main Action.

23.  There is no contention advanced on behalf of the Defendant’s that an award of a higher rate of interest would be unjust and, accordingly the consequences of the Defendant’s non-acceptance of the Sanctioned Offers made by Saitek are as prescribed in Order 22 rule 24(1) and (2).  In principle therefore I accept that Saitek would be entitled to interest at an enhanced rate for the period between the end of the period within which the offer was automatically open for acceptance, and the date of judgment.  That period was one of about 7 weeks.

24.  In determining the rate for enhanced interest, the Defendants invite the court to consider the following circumstances.

(1)   The Sanctioned Offer was only made close to the trial.

(2)   Saitek did not provide any detail as to how the offer of HK$6 million was arrived at.

(3)   The Defendants themselves attempted to reach a compromise with a view to avoiding the trial.  Timely made a sanctioned payment into court of $3,000,000 on 6 February 2003, and Mr Chan made a sanctioned payment of $1 in the Guarantee Action.

(4)   Some element of the illegality defence was established by Timely at trial; and the Court found in favour of the Defendants in respect of the claim by Saitek for machine repair costs, and Saitek abandoned its claim for mesne profit.

25.  Moreover, although these provisions of the rules are intended to encourage the settlement of disputes, the interest and cost consequences of a defendant’s failure to better a Sanctioned Offer are not intended to be penal in nature.  See Golden Eagle International (Group) Ltd v GR Investment Holdings Ltd [2010] 3 HKLRD 273.

26.  Keeping those matters in mind, and balancing the relatively late timing of the offer with the encouragement to be given to settlement of disputes even at the last minute, I award Saitek an additional element of interest calculated at 5% above the rate already awarded for this period.  By my calculation this additional element amounts to HK$41,865.77 (HK$6,502,555.15 @5% x 47 days).

27.  The parties have debated whether or not the court has jurisdiction to make any order for enhanced interest run up to the date of payment, overriding in effect the default judgment debt rate.  The Defendants submit that there is no such jurisdiction in reliance on the judgment in McPhilemy v. Times Newspapers Ltd (No.2) [2002] 1 WLR 934 at 945 and paragraphs 28 to 30 of the judgment in the Kai Min Fashion(HK) Limited v. Fond Express Logistics Limited HCCL 20/2011.  The Defendants submit that this must be correct as a matter of principle because any such enhanced interest is there to address the elements of inconvenience and disruption caused by the diversion of senior management from their normal duties, an inconvenience which ends with the judgment.

28.  Saitek submit that the entitlement to make such an award of interest lies with the court, the jurisdiction being conferred by s49 of the High Court Ordinance (Cap.4) which provides:

“49 (1) Judgment debts shall carry simple interest-

(a) at such rate as the Court of First Instance may order; or (Amended 25 of 1998 s2)

(b) in the absence of such order, at such rate as may be determined from time to time by the Chief Justice by order,

on the aggregate amount thereof, or on such part thereof as for the time being remains unsatisfied from the date of the judgment until satisfaction.”

29.  I agree with that submission and accept that I have jurisdiction to make the order.  However, having regard to the factors referred to by the Defendant I do not believe it appropriate for such an order to be made in this case.  The enhanced element of interest will run to the date of judgment only.

Costs

30.  By reason of the Sanctioned Offers and pursuant to Order 22 rule 24(3), Saitek considers that it is entitled to costs on the indemnity basis from 25 May 2013.  The Defendants make no submission that, in the circumstances as I have found them that it would be “unjust” that orders for indemnity costs (or enhanced interest) should be made.  Nor, on the basis that the offers were valid sanctioned offers, do the Defendants make any specific submission as to whether indemnity costs from 25 May should be awarded.

31.  In my judgment there is a clear policy incentive in encouraging the settlement of actions where there is a reasonable offer advanced by one party to the other whether within the mechanism of Sanctioned Offers or otherwise.  This does not mean that indemnity costs should always be visited on a party who decides not to accept an offer which, in hindsight ought to have been accepted.  The imposition or otherwise of costs on an indemnity basis remains a matter of discretion.  In the circumstances of the present case however there is no doubt in my mind that the defendants ought to have accepted the offers that were made to them, and, moreover, not doing so was, it seems to me unreasonable.  Accordingly I accept Saitek’s application for a variation of the costs order nisi, and order that costs be recovered on an indemnity basis for the period after 25 May 2013.

Interest on Costs

32.  Also arising out of the making of the sanctioned offer, Saitek seeks interest on its costs at the enhanced rate, also from 25^th May 2013 pursuant to Order 22 rule 24(3)(b).  Saitek have tabulated the cases in which such an award has been made these including Golden Eagle International (Group) Ltd v GR Investment Holdings Ltd [2010] 3 HKLRD 273 in which Lam J. made such an order and adopted the judgment debt rate as the rate of interest for the pre-award period.  In Kai Min Fashion (HK) Limited v Fond Express Logistics Limited HCCL 20/2011, Mr Recorder Jat Sew-tong, SC also awarded such interest.

33.  For my own part, while I accept that the entitlement in principle arises, in view of the relatively late stage at which the Sanctioned Offers were made, and the uncertainty as to when any relevant costs were in fact incurred, I decline to exercise my discretion to make any award of enhanced interest in respect of Saitek’s costs.

Costs of this Application

34.  Saitek seek the costs of the application to vary the order nisi on an indemnity basis.  I accept that entitlement arises since I have awarded the costs of the trial on the same basis.  In view of the inclusion of certain matters going beyond the order nisi matters in Saitek’s application, and with which I have not dealt, I make the order applicable only to a proportion of Saitek’s costs of the application.  In an attempt to simplify any taxation exercise I direct that Saitek is to have 80% of its costs of these appolications, such costs to be taxed on an indemnity basis if not agreed.

(Anthony Houghton, SC) Recorder of the Court of First Instance High Court

Written submissions by Mr Jason Yu, instructed by Munros, for the plaintiff in both cases

Written submissions by Mr Simon Chiu, instructed by Allen Chan & Co, for the defendant in both cases

HCA 2358/2007 & HCA 109/2009
(Heard together)

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2358 OF 2007

____________

BETWEEN
	RYDER INDUSTRIES LIMITED	Plaintiff
	(formerly SAITEK LIMITED)
and
	TIMELY ELECTRONICS COMPANY LIMITED	Defendant

____________

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 109 OF 2009

____________

BETWEEN
	RYDER INDUSTRIES LIMITED	Plaintiff
	(formerly SAITEK LIMITED)
and
	CHAN SHUI WOO	Defendant
____________

Before: Mr Recorder Anthony Houghton, SC in Court

Dates of Hearing: 27-31 May, 3-5 and 7 June 2013

Date of Judgment: 11 July 2013

______________

JUDGMENT

______________

 

Background

1.  The two matters which are addressed in this judgment were consolidated by an order of the Registrar made on 26 January, 2011.  The primary matters in dispute are the subject matter of HCA 2358/2007 and this will be referred to as necessary as “the Main Action”.  HCA 109 of 2009 concerns a guarantee given by the Defendant in that action in regard to the liabilities of the Defendant in the Main Action.  This action will be referred to as “the Guarantee Action”.

2.  The Plaintiff in each action is Ryder Industries Ltd, a Hong Kong company.  At the time relevant to the disputes between the parties the Plaintiff was known as Saitek Ltd and for convenience in this judgment the convention adopted by the parties will be followed and the Plaintiff will generally be referred to as “Saitek”.  Reference will be necessary during the course of the judgment to an associate of Saitek established in China as a Wholly Foreign Owned Enterprise, and for convenience, and again following the convention of the parties, this will be referred to as “Saitek WFOE”.  Saitek’s main claim against Timely in the Main Action is for a contractual debt (HK$6,502,555.15) and contractual interest on that sum owing under a cooperation agreement between the parties, made as described below.

3.  Reference will also be made to an operating division of Saitek doing business in China by way of a “Commission Processing Enterprise”. This body was established by Saitek in conjunction with the local authority in China.  It operates under the name of Saitek Baoan Shanghe Saitek Electronics and Plastics Factory.  Although not a separate company this will be referred to in the judgment as “Saitek CPE”.

4.  The Defendant in the Main Action is also a Hong Kong company, and will be referred to as “Timely”.  The Defendant in the Guarantee Action, Mr Chan Shui Woo is the majority shareholder of, and a director of, Timely.

5.  Timely also has an associated wholly-owned company incorporated in the PRC which is a Wholly Foreign Owed Enterprise and which operates a factory at Kung Ming Property Development Main Company, Baoan, Shenzhen.  This will be referred to as “Timely WFOE”, and the factory as “the Kung Ming Factory”.

6.  The factual background may be stated shortly. Saitek CPE was established in about 2002 in China but found itself with substantial spare capacity at its factory in or about 2005.  At about that time a former employee of Saitek, Mr Albert Mak Fook Chi (who gave evidence at the trial) introduced Timely to Saitek and therefore Saitek CPE.  At that time Mr Mak had left the employment of Saitek and was a consultant to Timely.

7.  Mr Mak instigated discussions between the parties in regard to the introduction by Timely of customers seeking a manufacturing facility for mobile phones in China at Saitek CPE.  Saitek CPE did not have all of the equipment necessary to carry out this manufacturing function and felt themselves unable commercially to invest in the purchase of the remaining necessary equipment.  Factory facilities and part of the necessary equipment was available however, and so the discussion became one which contemplated the formulation of a form of joint venture between Saitek and Timely.  The general nature of this envisaged Timely supplying, in addition to customers, the machinery not then available to Saitek CPE to enable the manufacturing to take place.  Timely was also to provide management and supervision of the manufacturing process.

8.  These discussions resulted firstly in a written Memorandum of Understanding and, subsequently, in a written contract (“the Agreement”) made between the parties to the Main Action which was signed in late October 2005.  There is no dispute between the parties as to the content of this Agreement, and nor is it disputed that it was to run for a fixed period, mainly from 1 September, 2005 to 31 August 2007.  It is common ground that this Agreement is governed by Hong Kong law.  Under that Agreement Saitek was to provide the factory facilities at the premises of Saitek CPE, part of the necessary equipment, and was to arrange the logistics, including customs declarations freight and insurance for the import of materials and the export of finished goods.  The overall process under the Agreement was termed the “STC” operation standing it appears for “Saitek Timely Communication”.

9.  The precise terms of the Agreement will be touched on in more detail below, but salient to the present outline of the facts is that it was agreed between the parties that revenue would be set against income, and the proceeds distributed between the parties from time to time.  This was effected by the formulation of a periodic mutual account (a “Running Balance”) expressed in favour of one or the other party.  As matters transpired, by mid-2006 this Running Balance was considerably in favour of Saitek, and the sums due had been accruing and unpaid for some time.

10.  In those circumstances the parties negotiated towards a settlement of the outstanding sums under the Running Balance and agreed on an approach that was recorded in writing in a document entitled “The 1st Supplemental Agreement”.  Saitek contends, and Timely does not dispute, that this constituted a variation to the Agreement.  The 1st Supplementary Agreement introduced an interest obligation in regard to the outstanding unpaid balance sums, providing for interest to be paid at 1% above base lending rate (BLR).

11.  A further modification to the Agreement was made in March 2007 when the parties agreed what has been referred to as “the 2^nd Supplementary Agreement”. That agreement, recorded in Meeting Minutes of 26^th March 2007 set out the agreed status of the Running Balance owed by Timely to Saitek.  The main claim which Saitek makes is the sum of HK$5,615,394.97 referred to in the 2^nd Supplementary Agreement, together with the monthly sums which are said to have accrued in the March 2007 to August 2007 period less certain payments made by or on behalf of Timely.

12.  The amount of that Running Balance is undisputed as to quantum.  Contractual interest is claimed on this sum also.

13.  Saitek also makes claims in respect of certain maintenance fees (not included in the Running Balance) for the maintenance of the machines, in the amount of RMB1,670,210.29.

14.  In due course the performance of the Agreement and the STC Operation business was terminated by mutual agreement of the parties in July 2007.

15.  At about the time that the Agreement was terminated Saitek detained the machines of Timely which were still in the premises of Saitek CPE in China, and Timely brings a counterclaim in the Main Action seeking damages representing the loss of the value of the machines, and in addition, damages representing the loss of business flowing from the detention of the machines.  Saitek asserts a lien over those machines which have not been returned.

16.  The Guarantee Action is based on provisions recorded in the 2^nd Supplementary Agreement.  It is contended by Saitek, and not disputed, that Mr SW Chan undertook to guarantee repayment of the debt of Timely arising out of the Running Balance. Neither the sums said to be due under the Running Balance, nor the amount said to be due under the guarantee have been paid to Saitek and the defence in each case is the same.  Timely contends that it is not bound to pay the sums claimed under the Running Balance due to the Agreement being affected or tainted by illegality.  That defence to the Main Action is said to provide a defence also in the Guarantee Action.

17.  In addition Mr SW Chan counterclaims for repayment of a sum of HK$2 million which was paid pursuant to the making of the 2^nd Supplementary Agreement, but which is alleged to have been paid under a mistake of law.

18.  In summary therefore the parties are not in dispute as to the terms of the Agreement, although the implication of some of the provisions is disputed; nor are they in dispute as to the contractual variations to that Agreement.  There is no dispute as to the amount of the Running Balance, and no dispute that the relevant sum has been guaranteed as to payment by Mr SW Chan.  Timely’s defence comprises assertions that the Agreement which underlies the debt or its performance was illegal, or so tainted by illegality under PRC law that it is therefore unenforceable in the Hong Kong Courts.  Timely also relies on a set off of the sums claimed by way of its counterclaim.

The Agreement

19.  The Agreement was a brief document which included the following provisions:

(1)  Clause II

“Both Saitek and Timely have a mutual interest in the manufacturing of mobile phones and Saitek will provide the resources listed below to support the manufacturing process in return will share the portions of the revenue with Timely.”

(2)  Clause IIIB

“Responsibility of Saitek and Timely:

Saitek will provide the following facilities for the manufacturing of mobile phone products.

· The 3^rd & 4^th floor and ½ of 2^nd floor of Building 8B2, District 72, Baoan will be dedicated for the STC operations for mobile phone manufacturing. The facilities and the associated utilities will be properly equipped for manufacturing of mobile phone, per the mutually agreed attachment/appendix.

Saitek will provide the following major equipment…

Saitek will be responsible for the task and costs of:

· Customs Declaration

· The logistics/fright costs of importing the components from Hong Kong to Saitek Baoan, and the freight costs to export the finished goods to Hong Kong (Timely will pay the transportation costs between the Saitek and Timely factories)

The insurance charges during transit to import the raw materials from Hong Kong and re-export the finished products to Hong Kong (except the insurance charges to cover the risk in transits between Kung Ming and Baoan will be the responsibility of Timely)

Except for above listed responsibilities of Saitek.  Timely will bear all other responsibilities regarding STC operation, including the responsibility for payment collection from customers.”

(3)  Clause IIIC

“Payment terms and transactions:

· Timely to pay Saitek a Monthly rental for the premises: HK$80,000 in the beginning of each month.

· Timely to pay Saitek a Monthly depreciation charge for the equipment: HK$150,000 …

· Timely will pay Saitek the Utility charges, Wages and Salary for the workers and technical, and security staff dedicated to the project, Export Inspection fees, and other STC expenditures …

· Saitek will, upon receipt of the payments from the customers, pay Timely their share of the Sales Revenue within 7 days according to … [certain percentages] …

· Due to customer reason, Timely may place Mobile Phone P.O. to Saitek directly. In such case, Timely will pay Saitek their share …

·   Do not encourage non-STC PO to be run in STC. If customer contracts/orders are not signed with Saitek, Saitek will not provide any customs declaration service, and Timely will pay Saitek … for the prior month shipment …”

(4)  Clause D

“… All costs incurred for the maintenance (including spare parts) of within the STC premise will be the responsibility of Timely.”

The 1^st Supplementary Agreement

20.  This was made in September 2006 and provided at Clause 1 that: “Timely will pay off all overdue debts to Saitek before September of 2007…”.  By Clause 3 it was agreed that: “Timely agree to pay BLR + 1% as the interest for all overdue balances, and the interest will be charged on monthly basis based on actual outstanding debts confirmed by mutual parties” .

The 2^nd Supplementary Agreement

21.  The 2^nd Supplementary Agreement was recorded in the following terms:

“(1) With reconciliation and final adjustment, both Timely and Saitek agree the net outstanding payable to Feb 2007 is HK$5,615,394.97 … Timely will pay off debts before 31 December 2007.

(2) Timely promise to reduce at least HK$400,000 of the outstanding debts each month from March 2007.

(3)   Both Timely and Saitek agree to do a detailed and professional evaluation of STC machines status, and an overhaul maintenance may be required before end of August 2007 …”

The 2^nd Supplemental Agreement also evidences SW Chan’s guarantee in the following way:

“SW Chan will personally guarantee all outstanding debts are paid off by end of agreement date”.

Illegality: Introduction

22.  In a written opening submission counsel for Saitek, Mr Richard Zimmern, appearing with Mr Jason Yu, identified four areas of illegality pleaded on behalf of the Defendants as follows:

“l Did the arrangement under the Agreement whereby Timely paid “rental” to Saitek CPE render the Agreement and/or that part illegal under PRC Law (“Alleged Rental Illegality”)?

l 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 (“Alleged Transit Illegality”)?

l 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 (“Alleged Mainland Orders Illegality”)?

l If Saitek CPE used materials imported by Saitek WFOE for the production of mobile phones, would such render the Agreement and/or that part illegal under PRC Law (“Alleged WFOE Import Illegality”)?”

23.  This formulation represents a convenient categorisation of the illegality issues, and although counsel for the Defendants, Mr Simon Chiu provided a more detailed summary of the issues, no agreement of a formulation of the issues was achieved by the parties.  In part this is because the issues framed on behalf of the Defendants were not only more detailed than those formulated on behalf of the Plaintiff, those issues also went beyond pleaded matters.

24.  It is therefore perhaps appropriate at this juncture to address the issue which arose during the trial as to the pleading of illegality.  Objection was taken on behalf of the Plaintiff to attempts by the Defendants to broaden the scope of evidence to encompass assertions that the Agreement had been formulated with an illegal objective in mind or in contemplation.  On behalf of Timely Mr Chiu contended that because illegality was a public policy matter, the “normal rules of pleading” could not be relied on to preclude the court making the findings of illegality based on such facts as might emerge at the trial.  Mr Chiu advanced this submission in part by reference to a decision of Sakhrani, J in Chan Yau v Chan Calvin (HCA 666/2007; judgment dated 15 May 2009), and the decision of Devlin J. in Edler v Auerback [1950] 1 KB 359 submitting that the court would take account of illegality whether pleaded or not.

25.  The Hong Kong judgment was one given in the context of an application for summary judgment, but the authority to which Sakhrani, J made reference; Snell v Unity Finance [1964] 2QB 203, was a decision on appeal after trial, as also was the decision in Edler v Auerback. The principle is indeed that courts will, ordinarily, refuse to enforce a contract which has an illegal objective, and this is so whether or not the illegality has been pleaded.  However the court will only do so where it is satisfied that all relevant facts are before it.

26.  It is clear however that this does not absolve a party from the mandatory requirement to plead illegality expressly (see for example Edler v Auerback at 371), and this obligation applies particularly, it seems to me, when the illegality in question is not illegality under the domestic (Hong Kong) law, but rather is illegality under a foreign legal system (in this case the People's Republic of China).  Illegality in such a circumstance is to a significant extent a question of fact, and as such, can only be acted on by the court if pleaded and proved.  The parties having exchanged pleadings, witness statements and supplemental/reply witness statements, and moreover having (in the case of the defendants at least) adduced several adduced reports of expert witnesses on Chinese law, it seemed to me only fair and proper that Timely be confined to the pleaded instances of alleged illegality.

Expert Evidence

27.  The illegalities said to be of relevance are matters of illegality under Chinese law, and expert evidence on this was called.  It is appropriate to have in mind the function of such evidence to inform the court of the relevant contents of the foreign law; explaining where necessary the foreign courts’ approach to the construction of the relevant legislation; and to assist the Court to make a finding what the foreign court would decide if required to decide the issue.

28.  A few further observations as to the expert evidence are appropriate.  Timely, who raised the issues of illegality, relied on the evidence of Mr Lin Bo Yee, a lawyer practising in Shenzhen.  Mr Lin produced no less than 4 reports, two of which preceded the service of the pleaded Defence, although the last of this series, a report dated 7 December, 2011 was not relied on by Timely, the reasons for which were not explained.

29.  Saitek relied on expert evidence given by Mr Winston Jin Chunquing who produced two reports in 2010.  Mr Jin (as did Mr Lin) told me in oral evidence of his qualifications and experience as a lawyer in the PRC.  Neither expert had seen fit to attach a CV to their reports to demonstrate their competence to give expert evidence, and surprisingly, neither party supplemented the expert evidence at any stage with a written cv.  Indeed, both sets of reports were written as being the opinions of the legal firms employing Mr Lin and Mr Jin respectively rather than as expressing the views of the individuals who attended the hearing.  Neither expert was challenged as to his competence to give expert evidence, but Saitek did ask me to conclude, on the basis of the oral evidence, that Mr Jin’s experience was to be considered more relevant.  The absence of a cv from either expert was, for this reason also therefore, potentially quite significant.

30.  Importantly in my view, neither expert set out in any detail the issues which they had been asked to address, nor did they clearly identify the facts with which they had been provided or asked to assume.  It was not apparent that either of them had been provided with copies of the witness statements.  In the case of Mr Lin’s earlier reports this is unsurprising; those reports were made before the pleadings had advanced to a stage at which any issues of law had arisen, and the reports were therefore somewhat abstract.  The later reports from the experts, and most certainly a joint report, should have defined precisely the issues on which the experts were rendering their opinions.  This is one of a number of matters addressed by the Code of Conduct for Expert Witnesses appended to the Rules of the High Court with which the parties and the experts ought to have sought to comply by the date of the hearing, even if this Code of Conduct was inapplicable at the time of the compilation of the individual reports.

31.  The parties did direct the attention of the experts to the requirement to prepare a joint report, but unfortunately this resulted in the production of two reports, not one.  Those reports attempted to identify areas of agreement with the views of the other expert, but also expanded the areas of disagreement.  Where disagreement was expressed, the reasons for disagreement were not always clear from the reports, obscuring rather than highlighting the issues.  A joint report as required by the Code of Conduct is a simple concept, and the experts should have been required by the parties to produce such a document.  Presentation other than in this joint format does not meet the objectives of narrowing issues and assisting the Court and the parties to understand what the differences between the experts actually are.  As became clear in due course, the differences between the experts in this case were relatively narrow in extent, and a joint report, preferably produced at the earliest possible opportunity, would have made this apparent. I would also encourage parties to contemplate, and prepare for the possibility of having the expert witness evidence heard as a discrete segment of the trial; that is, both experts of like discipline heard one after the other, with the evidence thereby more readily juxtaposed.

Illegality; Principles

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. 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.

36.  It is the third and fourth aspects of this list which are particularly germane here.  This was a contract which was, on its face, legal and one which, on its face, was to be performed over a period of time.  Saitek points out, it is not necessary for it to plead or rely on any illegal conduct as the basis for its claim.

37.  Before turning to the specific allegations of illegality it is appropriate that I record, in the context of illegality arising during the course of performance of a contract that the Court of Appeal in England in Colen v Cebrian (supra) expressed the view (at [23]):

“The above passages demonstrate that an analysis needs to be done as to what the party's intentions were from time to time.  If the contract was unlawful at its formation or if there was an intention to perform the contract unlawfully as at the date of the contract, then the contract will be unenforceable.  If at the date of the contract the contract was perfectly lawful and it was intended to perform it lawfully, the effect of some act of illegal performance is not automatically to render the contract unenforceable.  If the contract is ultimately performed illegally and the party seeking to enforce takes part in the illegality, that may render the contract unenforceable at his instigation.  But not every act of illegality in performance, even participated in by the enforcer, will have that effect.  If the person seeking to enforce the contract has to rely on his illegal action in order to succeed then the court will not assist him.  But if he does not have to do so, then in my view the question is whether the method of performance chosen and the degree of participation in that illegal performance is such as to “turn the contract into an illegal contract ...”

The Alleged Illegalities

The “1^st Illegality”

38.  This has been given various short form descriptions by the parties including “the rental illegality” and “the factory within a factory” illegality.  By the stage of closing submissions Timely described this illegality as involving Saitek acting “in substance” as “a Facility and Service Provider” to Timely.

39.  It is perhaps debateable whether this formulation of the allegation has been adequately pleaded but it is unnecessary to consider whether that is the case in the circumstances.  I do not accept that the arrangement entered into has been shown to be illegal as a matter of Chinese law.

40.  The underpinning to the allegation by Timely is that the arrangement under the Agreement involved Saitek providing premises at Saitek CPE which were rented to Timely and within which Timely was to operate an independent factory.  The agreed arrangement involved Timely in payment of “rental” to Saitek for the premises, a payment which was to be made irrespective of the revenue, if any, from the business.  This allegation finds its origin in the express terms of the Agreement which refer to Timely paying “rental” to Saitek “for the premises”.

41.  What is alleged by Timely in closing is that the arrangement was designed to evade PRC law; “the strict regime of examination and supervision” provided under the “Interim Measures for the Management of Examination and Approval of Processing Trade”, a set of Customs Regulations referred to in short form as the Interim Measures.

42.  Timely relies on the legal opinions given by its expert, Mr Lin.  So far as relevant this appears primarily to be contained in his report of 11^th January 2008.  In “Part Three Legal Opinion” of his report Mr Lin expresses the view that a lease of the premises by “Saitek Plastic Factory”, (meaning Saitek CPE) to Timely would be legal, but that Timely could only lawfully carry on (what I understand to be) an independent business through a mainland body such as a WFOE or a CPE.  Mr Lin’s opinions as to the legality or otherwise of the arrangements under the Agreement were premised on two (relevant) assumptions; that there was a lease by Saitek to Timely and that the STC operation conducted at Saitek CPE was in effect run independently by Timely.

43.  Two sub issues appear to be central to this alleged illegality therefore: was the arrangement between Saitek and Timely in fact a lease of the premises; and was Timely operating an independent business otherwise than through a CPE or a WFOE.  In my view neither proposition has been made out by Timely.

44.  So far as the “lease” allegation is concerned the high water mark of Timely’s allegation is the reference in the Agreement to the payment of monthly “rental” for the use of the premises.  As is submitted on behalf of Timely this was to be payable irrespective of the amount of business conducted through the STC with the period over which it was to be paid specified as two years.

45.  It is not correct to construe this part of the “Payment Terms” provisions of the Agreement in isolation however.  The Agreement summarised a commercial co-operation between the parties as was clearly spelled out at clause II.  Timely were not being granted exclusive possession, nor indeed were they said to be able to use the premises for general business purposes other than the STC operation.  Their occupation was as part of the STC operation and only STC production was contemplated.  Seen in that context and considering the Agreement as a whole I do not accept that the use of the word “rental” in a clause dealing with the Payment Terms has created a lease of these premises.

46.  Nor do I accept that the Agreement envisaged Timely operating a separate or independent business under the Agreement.  The Agreement was, plainly, an arrangement whereby the two parties contemplated both mobile phone assembly and other types of business being conducted.  In each type of business however revenue (after expenses) was to be shared.  It is true that the Agreement provided that the wages of the workforce (other than customs staff who were Saitek group personnel) were to be paid by Saitek with reimbursement to be made by Timely to Saitek.  That does not mean that Timely were running a separate business however.  The Agreement envisaged the system that was put into practice, namely that the STC business was conducted by Saitek CPE, with revenue shared.

47.  It was clear from the evidence of Mr Marco Chan, Timely’s Marketing Director that the staff were sourced from both Saitek CPE and Timely, with the seconded Timely personnel mainly supervising or overseeing the production process.  Mr Lam Fui Yan, a former Financial Director of Saitek was asked why it was that Timely staff were “placed under the name” of Saitek CPE; seconded to Saitek CPE and paid by Saitek CPE in other words.  His answer was that this was done to stay within the law.  The workers at Saitek CPE were required to be employees of Saitek CPE.  The staff at Saitek CPE were therefore CPE staff.  The work undertaken was, it appears, solely work falling within the ambit of the Agreement, at least to the extent that revenue from such business was shared by the parties.  There is no evidence of any independent or separate business operation by Timely.

48.  The proposition that Timely were conducting separate business operations seems to me to fail both as a construction of the Agreement and on the facts.  It seems to me to follow therefore that neither of the critical “assumed facts” on which Mr Lin’s conclusions were based are established in regard to this alleged illegality.  The assumed basis for Mr Lin’s opinion, that the arrangements under the Agreement were illegal under the laws of the PRC is, in my judgment incorrect therefore, and his conclusion does not follow.  I believe that the parties made their Agreement intending it to be legal.  That this was likely to be the intention of the parties would follow from the fact that the person who introduced the parties and who appears to have instigated the arrangements that led to the Agreement, Mr Albert Mak Fook Chi had formerly been a senior manager of the Plaintiff before becoming a consultant and was very familiar with the relevant PRC regulations.  Moreover I accept the evidence of Mr Jin that he has, in his practice as a lawyer, designed various business models which are in effect the same as that described in the Agreement.  This does not necessarily mean that the arrangement was legal of course, but it does provide support for the view that the parties were intending to achieve a legal way of conducting their business.

49.  I do not need to go so far as to conclude that the evidence establishes that the Agreement was definitely legal under the laws of the PRC, although I believe that is probably the position.  The evidence is more than sufficient to establish, in my mind, that Timely’s contention that the Agreement was illegal in this way is not made out.  This limb of the defence accordingly does not succeed.

The 2^nd Illegality

50.  This allegation centres on the fact that semi-finished processed goods were transported from the Saitek CPE premises to the Kung Ming Factory of Timely WFOE for processing (testing, it appears) before being returned to the Saitek CPE premises.  Several of the witnesses of Saitek were unwilling to accept that they had knowledge of this taking place, but that it did take place was acknowledged by Mr Lam Fui Yan among others, and the evidence overall shows, clearly in my view, that it was commonplace in the conduct of the STC business.  The “problem” that this caused arises out of the fact that the materials imported to China for processing under the STC business was imported duty free.  This is permitted provided that the materials so imported (referred to as “Bonded Goods”) are kept under supervision and ultimately re-exported out of China.

51.  In fact the oral evidence suggested that it was commonplace for businesses operating with Bonded Goods to transfer them between factories for processing.  Mr Henry Wu Chang Lun the General Manager of Saitek WFOE said as much in his witness statement, and Mr Lam Fui Yan agreed with a proposition put to him by counsel that this was commonplace.  There is no dispute that the process can be performed legally.  Because the goods in question are Bonded Goods and therefore technically subject to the supervision of the customs authorities a mechanism exists whereby written authorization, (a “Bei An”) may be applied for and issued.  However, because that process is relatively time consuming it is, according to the witnesses, a process which is frequently honoured in the breach.  Timely’s case is a curious one; Timely were aware of the requirement for a Bei An but understood that because of the time required to process this, the obtaining of a Bei An certificate was in a practical sense, unworkable.  As set out in Opening therefore “Hence Timely HK did not apply for it and Saitek knew and condoned it”.  The “illegal performance” was said therefore to be that of Timely itself, not of Saitek.

52.  Both expert witnesses were in agreement that such conduct would be in breach of the Customs Law of the PRC, leaving the offending party liable to a penalty under that law.  The parties were divided as to how “serious” this form of breach might be considered to be, as were the experts.  The evidence of Saitek’s factual witnesses and of Mr Jin suggests that the primary concern of the Customs Authorities is to see that materials imported duty free are ultimately re-exported (or, if not, that relevant import duty and tax is paid).  Several of these witnesses, and Mr Jin also, said that there is less official concern with the transfer of goods for processing without the Bei An certificate provided the goods are ultimately exported, or duty is paid.  That would seem to be consistent with Timeley’s conduct in not applying for the Bei An certificate.  This is not to suggest that the process of transfer to another factory for processing without authorisation is even tacitly permitted.  Plainly it is not.

53.  Several of Timely’s witness recounted in evidence a “raid” by the Commercial Bureau on the Kung Ming factory operated by Timely WFOE.  That factory was used by the STC to carry out part of the processing of the mobile phones and in this raid a very large quantity of mobile phone components were seized and impounded by the authorities apparently because their source of origin could not be verified.  It is Timely’s case that these were components which were in the course of processing as part of the STC business which had been transferred (outsourced) to the Kung Ming factory for processing.

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.

55.  Notwithstanding the debate as to the severity of any potential penalty arising out of this type of breach Timely do not seek to rely on this alleged illegality as, by itself, constituting a defence to the claims of Saitek.  Rather it is said to be a factor in assessing the extent to which the Agreement was tainted by illegality.  That is an aspect to which I return below.

The 3^rd Illegality

56.  The gist of this allegation is that there were orders carried out as part of the STC business which were in reality orders carried out for mainland customers (referred to as “non STC Orders”).  Since the production took place, at least in part, at Saitek CPE this is said by Timely to have been illegal.  This was the conclusion reached by Mr Lin as set out in his expert report.  Part of the basis for his view lay in the definition of the business scope of a CPE (“the Processing Trade”) contained in the “Interim Measures for the Management of Examination and Approval of Processing Trade” (“the Interim Measures”) which, at Article 2, provides such a definition as being “the processing of materials provided by foreign clients”.  That article also defines “processing enterprises”.  Mr Lin expressed the view that work undertaken by Saitek CPE for mainland clients would be illegal therefore.  As Mr Lin stated in that report however, and as he confirmed in the course of his cross-examination, this conclusion was premised upon his understanding that Saitek CPE were accepting orders directly from local (mainland) companies.

57.  However that was not the true position.  All of the business which has been categorised as being “non-STC Orders” was in fact business placed contractually by Timely in Hong Kong.  In other words, the work commissioned by the mainland companies was routed via Timely.

58.  There is evidence to show that Saitek were aware of the existence of the mainland customers through the staff at Saitek CPE who, at certain stages sought copies of the purchase orders which had been placed by those mainland customers (these being relevant to the accounting as between the parties to the STC).  Building upon that foundation Mr Chiu submits on behalf of Timely that Saitek were clearly aware of this “illegality”.  He refers me to evidence given by Mr Marco Chan to the effect that orders were placed via Timely in this way with a view to concealing the illegality from the mainland authorities.  He submits that, so far as illegality is concerned it is a question of substance not of form, and that if the parties to a transaction know that the contract entailed Saitek CPE processing materials delivered in mainland China for delivery to mainland China, then the Interim Measures have been breached and the transaction is illegal.

59.  I do not agree.  Mr Lin's evidence does not say so; his opinion was given in the context of contracts having been placed directly by mainland companies with Saitek CPE.  Mr Jin was of the view that this was a legal arrangement, and I agree.  Indeed it seems to me overwhelmingly to be the case on the evidence that the parties themselves have put this into operation, not to conceal an illegality from the mainland authorities, but rather to ensure that the business was being conducted legally.  It appears to me that not only was the “form” legal, so was the substance.

60.  Moreover, although it appeared to be common ground that the processed products were initially delivered to the mainland customers on completion, according to Mr Marco Chan neither of the parties to this action would have known whether those processed materials were for export or for domestic consumption.

61.  This alleged illegality was expanded upon by Timely during the course of the evidence to suggest that processing by Saitek CPE of domestic orders would also be illegal since the machinery used in the processing was “bonded”, that is the machinery had been imported without duties being paid.  The relevant legal provisions are said to be those contained in the “Notice of the Ministry of Foreign Trade and Economic Cooperation of the General Administration of Customs on Relevant Issues concerning the Import of Equipment for Processing Trade” more conveniently referred to as “the Bonded Equipment Notice”.  By the Bonded Equipment Notice tax-free import of equipment to be used in a processing trade is permissible provided there is an independent factory which is exclusively for processing trade, “i.e. not engaged in the processing or production of products for domestic sale” or if this criterion is not met, an existing enterprise in which over 70% of the yearly production is exported.

62.  This was not a provision of law that was addressed by Mr Lin in any of his written reports, but he was taken to the provision as part of his evidence in chief.  He provided little elaboration as to the meaning of the provision other than expressing the view that he believed that the 2^nd part of the provision (existing enterprises exporting more than 70% of yearly production) must apply to non-CPE enterprises.  The gist of this new allegation therefore (as I understand it) is that there was illegal performance under the Agreement also in the use of bonded machinery in the production of goods for domestic sale. This, it seems to me, is a hopeless allegation.  For the reasons given above, the existence of Timely as a contracting party with Saitek CPE has the consequence that these were not products for domestic sale, and accordingly there is no question of the “misuse” of the bonded equipment at Saitek CPE.

63.  This alleged illegality is of particular importance because it is said that there was a very substantial value of non-STC orders placed, and given the Running Balance arrangement between the parties, the sums claimed by Saitek in these proceedings are in effect wholly the proceeds of these non-STC orders together with the “standing” premises and equipment charges.

64.  For the reasons given I do not accept that Timely have shown any relevant illegality in this regard.  As was pointed out by Mr Zimmern, the failure to establish this illegality is perhaps particularly significant in circumstances in which Timely contends that the whole of the claim falls foul of this defence.

The 4^th Illegality

65.  The question here is whether throughout the course of the STC arrangements Saitek CPE had been obtaining bonded materials from Saitek WFOE but processing the materials under Saitek CPE.  This is said to have taken place because of limitations on the amount of materials which could be imported by Saitek CPE.  Ostensibly, if imported by Saitek WFOE duty-free such materials should remain under the control of Saitek WFOE until they are re-exported.  Timely say that they were unaware that this was going on until the raid by the customs authorities in January 2007, their witnesses confirmed this, and I accept that to be the position.

66.  It is undisputed that outsourcing of bonded materials from a WFOE to a CPE would be a breach of the law of the PRC, specifically Article 23 of the “Measures of the Customs of the People's Republic Of China for the Supervision of Goods for Processing Trade”.  That Article provides for outsourcing by an operating enterprise to be subject to the approval of the customs office.  Absent such approval then such outsourcing is not permitted.

67.  Failing to comply attracts a sanction contained in the “Regulation of the People's Republic of China on the Implementation of Customs Administrative Punishment” the level of punishment depending upon the severity of the offence, and ranging from a reprimand or criticism to a fine and confiscation of gains.

68.  According to Timely this was likely to be considered as a serious infraction because the evidence produced by Saitek included a summary of the products exported by Saitek WFOE which indicated that mobile phones of approximately $18.5 million in value had been exported by Saitek WFOE between August 2005 and November 2006.  It is not disputed, that all of these would have been part of the STC operation.

69.  There seems to be no dispute that this import and processing arrangement happened in fact.  The primary issue is the legal consequence.  The evidence given by Mr Jin was that this would not have been considered a serious infringement had it been discovered.  He stated that the primary concern of the Customs officials was as to whether or not processed products made from bonded materials were, after processing, exported.  If they were not exported there was of course a breach of the import duty obligations; if they were exported there was no such breach.  The approach was described as being one of “three point control”; that is control at the import, processing and export points.

70.  Mr Jin’s evidence was that the penalties for this type of breach would be very minor, but this is a matter of speculation, not one based on experience of such penalties being imposed it appears.  Mr Lin did not set out to assess the seriousness of any such contravention.  The evidence shows that there is a wide range of potential penalties, but evidence as to the seriousness with which any such breach would be viewed is very limited. So far as that evidence goes, although a substantial amount of goods were involved, it does not persuade me that this mode of performance would be considered a very serious contravention of the law.

71.  Accepting that Timely have established illegality in this sense in the performance of the STC agreement and that Saitek were aware of this illegal performance, the question is whether such circumstances have tainted the Agreement such that the claims made by Saitek ought not to be enforced.

Conclusions on Illegality as Established

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.

Repair and Maintenance

74.  The claims made by Saitek in the Amended Statement of Claim include a claim for “maintenance fees” amounting to approximately RMB 1.7 million in respect of maintenance of the Saitek's own machinery.  This obligation on the part of Timely is said to arise under clause 3D (3) of the Agreement which provided that “all costs incurred for the maintenance and (including spare parts) of within the STC premises will be the responsibility of Timely”.

75.  In September 2007 Saitek obtained quotations and sought payment from Timely of such amount.  According to be evidence of Mr Henry Wu however Timely refused to make any such payment and nor, it appears did Saitek pay for the maintenance as such.  Instead what appears to have happened is that a member of Saitek's engineering staff undertook certain work involving cannibalising spare parts from two production lines for use on other production lines.

76.  Saitek's case is not therefore that it is entitled to reimbursement of sums expended, but rather that there is an unfulfilled contractual obligation on Timely’s part to pay for such maintenance costs. There seems to me no factual dispute that some such maintenance was required and, in circumstances in which an independent quotation has been obtained, no room for serious dispute as to its extent or value.  Moreover in the meeting at which the 2^nd Supplementary Agreement was concluded the parties discussed the need for maintenance and, as described by Mr Henry Wu had undertaken a form of joint inspection of the relevant machinery before the quotations were obtained.

77.  However it appears that the maintenance which was discussed in March 2007 was considered to be separate from the routine maintenance referred to in the Agreement, hence the arrangement referred to in the 2^nd Supplementary Agreement (varying the Agreement) that this overhaul maintenance cost was to be shared between the parties.

78.  Timely rely on the provisions of paragraph 4 of the Meeting Minutes which stated that although ovehaul maintenance may be required, the overhaul maintenance costs would be shared between Saitek and Timely in a proportion to be discussed after the evaluation results were obtained.  Mr Chan refers in his evidence to an e-mail he sent to Mr Henry Wu on the 30^th July, 2007 stating that was no agreement as to the machine maintenance costs.

79.  I do not accept that the failure to reach agreement as to the sharing of such costs would necessarily absolve Timely from a contractual obligation.  However the relevant provision does not specify the proportion of such costs to be borne by Timely and I accept that no binding agreement was ever reached.  No mechanism was provided in the Agreement to resolve this situation.  Moreover, it appears that even had there been a breach of agreement by Timely, there would have been no damages suffered by Saitek, or certainly not in the amount claimed.

80.  Accordingly, this head of claim by Saitek does not succeed.

Counterclaim

Lien

81.  It is not in dispute that Saitek retained at the CPE premises certain machinery which was the property of Timely.  Mr Henry Wu recounted in his evidence how some of the more portable items of equipment were removed by Timely in or about July 2007, with one large machine and other machines which he presumed to be of little value left behind.  It is Saitek's case that it was entitled to detain such items on the basis of either a common law (general) lien or a particular lien. Specifically it is contended that Saitek had undertaken maintenance work on the Respondent’s machinery and is therefore entitled to retain possession until such time as the charge for that “improvement” work has been paid by Timely.

82.  The contentions as to improvement work in reality referred to maintenance as was discussed with Mr Marco Chan during the course of his cross-examination.  Saitek contends that since the Trading Balance is still due and owing, the sums owed by Timely in respect of the wages of the maintenance staff at Saitek CPE suffice to support a lien over Timely's machines.  It is clearly doubtful that a general lien arises in the circumstances of this case, there being no relevant contractual provision or other relevant agreement, nor any general usage referred to, and counsel for the plaintiff did not strenuously contend otherwise.  I do not accept that the general lien has been made out.

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.

The Guarantee Action 

87.  There is no dispute as to the making of the guarantee and no separate defence is advanced other than those matters canvassed in regard to the principal claim under the Main Action.  Accordingly for the reasons given above I concluded that Saitek’s claim under the Guarantee Action also succeeds.

Interest

88.  The parties agreed in the 1^st Supplementary Agreement that interest would be payable by Timely on the overdue balance at a rate of BLR + 1%.  It is accepted by Saitek that this is to accrue on a simple interest basis.  Saitek are therefore entitled to recover interest at such a rate, and only two aspects require consideration.

89.  The first is the date for the commencement of the running of interest.  Saitek have invoiced Timely for such interest, calculated based upon a commencement date of 1^st September 2007, this being the day following the expiration of the Agreement.  I accept that to be an appropriate starting point for interest.

90.  As to rate, this is specified by the 1^st Supplementary Agreement, but the base component, BLR, has of course varied over time.  Although Saitek has invoiced Timely for interest up to November 2012, as discussed at the hearing I prefer to leave this for agreement between the parties in the first instance.

91.  Accordingly there will be an order for interest to accrue on Saitek’s awarded sum of HK$6,502,555.15 at the rate of 1% above BLR from 1^st September 2007 to the date of this judgment.  The parties have liberty to apply in the event that the relevant calculation cannot be agreed.

Conclusion

92.  There will be judgment for Saitek in both the Main Action and in the Guarantee Action as provided above in the principal sum of HK$6,502,555.15 plus interest.

Costs

93.  It was agreed that an order nisi should be made as to costs.  Following usual principles it is clear that Saitek is to be categorized as the successful party and should be entitled to its costs in the usual way.

94.  The hearing was adjourned on 31^st May 2013 due to the non-availability of the Plaintiff’s expert witness.  I ordered the costs wasted and thrown away by the adjournment to be to the Defendants in any event.

95.  Saitek were represented by two counsel and a certificate for two counsel is sought.  While I have no doubt that the presentation of the case has been enhanced by the additional assistance provided I do not think that this was a case of such complexity as to require the presence of two counsel and I decline to grant the certificate.

96.  Subject to the separate order in regard to the costs of the adjournment therefore the Plaintiff is to have its costs, on an order nisi basis, to be taxed if not agreed on a party and party basis.

(Anthony Houghton, SC) Recorder of the Court of First Instance High Court

Mr Richard Zimmern & Mr Jason Yu, instructed by Munros, for the plaintiff in both cases

Mr Simon Chiu, instructed by Allen Chan & Co, for the defendant in both cases

Please refer to CACV164/2013 and CACV165/2013 for the relevant appeal(s) to the Court of Appeal.