Zhejiang Provincial Railway Investment International Trade Co., Ltd v. HK Zexin Resources Co., Ltd

HCA 3243/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 3243 OF 2016

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JUDGMENT

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INTRODUCTION

1.This is the application by the plaintiff (“P”) for summary judgment against the defendant (“D”) in the sum of RMB120,519,063.55 together with interest.  The application is made by a Summons[1] pursuant to Order 14, rule 1 of the Rules of the High Court, the Statement of Claim[2] having already been served on D.  P relies on the following affirmations:

(i) 3^rd Affirmation of Qian Kun (“Qian”)[3] ;

(ii) 4^th Affirmation of Qian[4] ;

(iii) 2^nd Affirmation of Ge Jinyang[5] ; and

(iv) Affirmation of Wang Jin[6].

2.Apart from the aforesaid affirmations, when considering the present application, I also have regard to:

(a) the Defence and Counterclaim of D[7] ;

(b) P’s Reply and Defence to Counterclaim[8] ; and

(c) the four affirmations of Xu E[9] made and filed on behalf of D. 

THE ISSUES

3.P’s pleaded case for its claim by the original action is about the outstanding payments which it alleges are due to it by D under 3 sales contracts (“the 3 Contracts”). 

4.On the other hand, D’s pleaded case for its Defence and Counterclaim is that P is owing it RMB1,040,994,221.32, being the sum total of the outstanding payments which P has failed to settle under 14 sales contracts (Contracts A – N)[10] for goods it sold to P,[11] so that any and all obligations of D to P under the 3 Contracts are subject to D’s right to set‑off and counterclaim.[12] 

5.P’s reply to D’s counterclaim is that Contracts A-N were part of 14 overall tripartite “close-end transactions” entered into by P, D and Sanca (HK) Ltd[13] in that (i) D sold goods to P (“D/P Contracts”); (ii) P then sold the same goods to Sanca at the same price (“P/S Contracts”); and (iii) Sanca then sold the same goods back to D also at the same price (“S/D Contracts”).  It was a feature of those “closed-ended transactions” that all the relevant warehouse receipts (title documents of the goods) would end up being delivered back to the original supplier.  In all the aforesaid transactions, it was provided in each of the sales contracts that the delivery of goods would be done simply by delivery of the original warehouse receipts.  Moreover, it is said that there was an oral agreement between all parties that any payment obligations under the D/P Contracts and the S/D Contracts would be discharged upon the delivery the relevant warehouse receipts to D under the relevant S/D contracts.  As a result, it is said, P’s payment obligation under all of the D/P Contracts (ie, Contracts A – N) were discharged under the Oral agreement by the redelivery of the warehouse receipts to D.  In the same vein, D did not make any payment to Sanca under the S/D Contracts.[14]

6.Generally speaking, if the defence of set-off is raised, save in the special situation of a claim on a bill of exchange or a cheque, the defendant is entitled to unconditional leave to defend up to the amount of the set-off claim: see Hong Kong Civil Procedure (“HKCP”), at §14/4/14.  In the present case, D’s only defence to P’s claim is one of set-off and it is wholly dependent on its Counterclaim against P. 

7.Therefore, for the present purpose the major issues in this application are:

(1) whether D has raised any triable issues as to its alleged entitlement to payment under Contracts A – N;

(2) whether set-off, at common law or in equity, is available to D; and

(3) if the court granted P’s application for summary judgment, whether the court should also order a stay of execution of the same: Order 14, rule 3(2).[15]

8.Mr Zimmern, counsel for P, submits that:

(a) as to (1), even on the facts as pleaded by D, it does not have any right to payment from P under any of Contracts A - N so that P cannot have owed D anything.  Moreover, D’s case about Contracts A – N is just “moonshine” and is incapable of being believed;

(b) as to (2), in any event D has no right to set-off whether at common law or in equity; and

(c) as to (3), there is no reason for any stay of execution.

THE RELEVANT LEGAL PRINCIPLES

9.It is trite that summary judgment under Order 14 should only be given where it is a plain case and ought therefore not to be tried: see Au Wing Cheung v Roseric Ltd[16].  The burden is on the defendant to show that there are triable issues: Mass International Ltd v Hillis Industries Ltd[17].

10.Where facts are in dispute, the court will not embark upon a mini‑trial on affidavit evidence and will only be satisfied that there is no issue or question in dispute which ought to be tried if it can be demonstrated that the defendant’s assertions are incredible or that even if what the defendant says is true, it gives rise to no defence as a matter of law.  In assessing the credibility of the defendant’s factual case, the question to ask is whether such case is capable of being believed, not whether it is to be believed: see Ng Shou Chun v Hung Chun San[18]. 

11.The burden on the defendant in an Order 14 application is not to disprove the plaintiff’s claim or to prove a ground of defence, set‑off, cross claim or counterclaim but only to satisfy the court that there is an issue or question in dispute which ought to be tried or that there ought for some other reason to be a trial: see Ho Kuen Fai v Chun Wo Construction & Engineering Co Ltd[19].  In all cases, sufficient facts and particulars must be given to show that there is a triable issue: see Order 14, rule 3(1); also §14/4/4, HKCP.  If an element of the defence is based on a matter of inference, the court should not attempt to determine whether the inference should be drawn. Instead, the court should ask itself whether the evidence put forward by the defendant raise a sufficiently credible foundation on which the inference may (not must) be drawn at trial: see generally §14/4/9, HKCP.  If a defendant raises a set-off or counterclaim, it behoves on him to particularize the amount of his set-off or counterclaim or to specify or indicate how it is made up or calculated, so that the court has the necessary material on which to make the proper order—if the court is entitled to grant leave to defend or a stay of execution (as the case may be), the order will be in respect of the whole claim if the amount of set-off or counterclaim exceeds the plaintiff’s claim; if the amount is less, the plaintiff will be entitled to judgment for the difference: §14/4/14, HKCP.

P’S CASE IN A NUTSHELL

12.P’s case is neatly summarized by Mr Zimmern which I gratefully adopt as follows:

(a) P is a joint venture company 55% owned by ZRI Group (via its subsidiary) and 45% owned by Yisihao.  

(b) D, a Hong Kong company, is a wholly-owned subsidiary of Yisihao.

(c) P as seller and D as buyer entered into the 1^st to the 3^rd Contracts respectively for a total quantity of 2,939 MT of nickel cathodes and/or briquettes (the “Goods”) for a total sum of RMB 217,391,732.  The 3 Contracts were made on the following dates:

• the 1^st Contract: 9 February 2015;

• the 2^nd Contract: 2 June 2016; and

• the 3^rd Contract: 20 June 2016.

(d) P has duly performed the contracts by delivery of the title to the Goods to the D, and is entitled under each of the 3 Contracts to payment:

(i)The 1^st Contract was for 900 MT (±5%) of nickel cathodes and/or briquettes.  On 1 March 2015, P delivered 900.802 MT of nickel briquettes to D by delivering the Warehouse Receipts and providing the other contracted documents including the final invoice in the sum of RMB 94,302,988.62.  D made a partial payment of RMB 84,872,694.50 on 25 May 2015, leaving an outstanding balance of RMB 9,430,294.12.[20] 

(ii)The 2^nd Contract dated was for 1,656 MT (±5%) of nickel cathodes.  On 13 June 2016, P delivered 1,656.523 MT of nickel cathodes to the D by delivering the Warehouse Receipts and providing the other contracted documents including the final invoice in the sum of RMB 98,526,148.25.  D failed to make any payment under this contract. 

(iii)The 3^rd Contract was for 384 MT (±5%) of nickel cathodes.  On 24 June 2016, P delivered 381.792 MT of nickel cathodes to D by delivering the Warehouse Receipts and providing the other contracted documents including the final invoice in the sum of RMB 24,562,595.18.  D made partial payments to P of RMB 6,999,987 on 11 July 2016 and RMB 4,999,987 on 15 August 2016 leaving an outstanding balance of RMB 12,562,621.18.[21]

(e) By the foregoing, the D has only made a number of partial payments to P under the 3 Contracts in the sum of RMB 96,872,668.5, leaving the outstanding balance of RMB 120,519,063.55.

D’S CASE IN A NUTSHELL

13.D puts forward, through the 3^rd and the 4^th affirmations of Xu, a rather convoluted scheme:

(a) The scheme involved 3 circuits of transactions and each of them was formed by a set of close-ended arbitrage transactions.[22] 

(b) The purpose of the scheme was to transfer on-shore funds out of the Mainland via legitimate commercial transactions and thereafter to use those funds for investment purposes.[23]  

(c) The design of the scheme was that, within a period of 180 days each swap contact between P and the bank, the second and third circuits of transactions would go through once.[24] 

(d) The indebtedness of P to D arose in the third circuit and that each of Contracts A – N was pertaining to that circuit.[25]  It is also asserted that the 3 Contracts of P were also close-ended arbitrage transactions which formed part of the overall scheme.[26]  Reference was made to a table, which Xu says, shows the contracts involved in the 3 circuits.[27] 

(e) However, owing to the breaches of P under different circuits of transaction, D was unable to pay its supplier and it suffered losses.[28]  

CONSIDERATIONS

Undisputed facts

14.Before considering D’s assertions about the circuits of transaction, it is pertinent to note the following:

(i) prior to the proceedings of the present action, D never disputed its liabilities to pay the outstanding sum to P;

(ii) D admits that it had made substantial partial payments under the 3 Contracts;[29]

(iii) D does not deny receipt of the warehouse receipts for the Goods;

(iv) by Xu’s affirmation, D implicitly admits receipt and acceptance of the Goods by admitting to returning the warehouse receipts to the original supplier;[30] and

(v) as aforesaid, D’s only defence to the P’s claim is that it has a right to set off mutual debts. Implicit in this is a tacit acceptance of P’s claim subject to the purported set-off.

D’s alleged entitlement under Contracts A-N

15.I note that D’s assertion that there being 3 circuits of transactions of which P’s 3 Contracts and D’s Contracts A – N form part of those was not raised in the Defence and Counterclaim but were raised subsequently in Xu’s 3^rd and 4^th Affirmations filed in opposition to P’s application for summary judgment.[31]  

16.Moreover, whilst D’s case for P’s breaches of Contracts A-N was non-payment, as pointed out by Mr Zimmern, even on D’s own evidence (based on Xu’s 3^rd and 4^th Affirmations) the goods underlying Contracts A – N did not belong to D.  According to Xu, the relevant warehouse receipts (title documents of the underlying goods) were all “borrowed” by P from the original supplier and then returned back to the latter.[32]  Xu said that the supplier had acted as “consultant” charging a service fee.[33]  If that was indeed the case, then there would not be any intention between P, D and the supplier concerned that property in the underlying goods should pass with the delivery of the relevant warehouse receipts.  Thus, the ownership of the underlying goods would have always remained with the supplier.

17.I accept Mr Zimmern’s submission that there is a fundamental difference between P’s claim based on the 3 Contracts and D’s counterclaim under Contracts A – N in that:

(i) as regards the former, P’s case is such that it would have title of the Goods to pass to D.  This is because P says that the Goods were first purchased by P from its supplier with full payment;

(ii) whereas as regards the latter, D’s case is such that it would not be able to pass title to P.  Hence, by the maxim nemo dat quod non habet, P (as buyer) could acquire no better title than what D (as seller) had: see also s 23(1) of Sales of Good Ordinance, Cap 26[34]; see also the commentary in Chitty on Contracts, Hong Kong Specific Contracts, 5^th Edition, at §20-254.

18.The above distinction is an important one.  This is because if D had no title to pass to P under Contracts A – N, then it would not be entitled to the price for the underlying goods but only to damages, if any, for P’s non-payment.  As Lord Goddard CJ said in Mediterranean v Fortress[35]:

“ In claiming the price of the goods the sellers, no doubt, fell into an error, often made in such circumstances, of asking for the price on the footing that the property had passed, whereas, in fact, as it was a sale of future goods, the property had not passed, and what they were entitled to was not the price, but damages for non-acceptance.”

19.There are, however, serious problems with D’s averment and evidence about the damages which D is said to have suffered as a result of P’s non-payment.  As pointed out by Mr Zimmern, for the present purpose the burden is on the D to show a triable defence and to condescend to particulars.  However, D has failed to do this:

(a) the mere averment in the Defence and Counterclaim that D’s loss amounts to RMB1,040,994,221.32, which is simply the sum total of the contract prices under Contracts A – N, would not do.  As aforesaid, as a matter of law D is not entitled to the price of the underlying goods;

(b) D only makes a bare assertion that P’s non-payment under Contracts A – N in turn caused D to be unable to pay Sanca.[36] There is, however, no evidence before the court that Sanca, or anyone apart from P in the alleged 3 circuits of transactions, is suing or has sued D for breach of contract. D has utterly failed to condense to particulars as to how its damages, if any, come to RMB1,040,994,221.32; and

(c) D’s case is also self-contradictory. Since it is not in dispute that all the borrowed warehouse receipts were eventually returned back to the original supplier[37] and that all the borrowed warehouse receipts were all paid for by P,[38] it would be the case that all the transactions in the third circuit had become complete without any outstanding payment obligations by any parties.[39]

20.Based on the above, it is my judgment that D has failed to show any triable issues in its defence on the undisputed facts and on the facts as it asserts.

D’s alleged entitlement to set off

21.The legal principles relating to set-off at common law and in equity are neatly summarised by Cheung JA, giving the judgment of the Court of Appeal, in Karpex (HK) Ltd v Yasmine Printing (China) Ltd[40] as follows:

“ 9. Set-off is a well-recognized defence (O.18 r.17). It is not the form of pleading, but the true nature of what is pleaded, that determines whether what is pleaded is or is not a set-off: Hanak v Green [1958] 2 QB 9 at p.26.

10. It is important to bear in mind the nature of a set-off. The position is summarised in BICC Plc v Burndy Corp & Anor [1985] 1 All ER 417 at pp.424–425:

(1) The first is set-off at law, or legal set-off as it is sometimescalled, of mutual debts under the Statutes of Set-off, where the claims on both sides have to be liquidated debts or money demands which can be ascertained with certainty at the time of pleading …

(2) The second form of set-off arose as explained by Parke B in Mondel v Steel (1841) 8 M & W 858, [1835–42] All ER Rep 511 and was a development of the common law: where an action was brought for an agreed price of a specific chattel sold with a warranty or a work which was to be performed according to contract, the defendant was allowed to plead by way of defence in reduction of the claim that the chattel, by reason of non-compliance with the warranty, or the work in consequence of the non-performance of the contract, was diminished in value.

(3) The third form of set-off, often referred to as equitable set-off, arose in cases in which a court of equity would have regarded the cross-claims as entitling the defendant to be protected in one way or another against the plaintiff’s claims; these were particularly cases where the cross-claim was related to the subject matter of the claim and there were factors which would have rendered it unjust in the eyes of equity that the claim should be enforced without regard to the cross-claim.

For ease of reading, I have numbered the three types of set-off.”

22.By application of the above legal principles to the present case, even assuming that D has suffered loss as a result of P’s non-payment under any of Contracts A – N, it is clear that D would not have a legal set-off, for its claim can only be for unliquidated damages rather than the price of the contracts.

23.As regards equitable set-off, I accept the submission of Mr Zimmern that it is also not available to D for the following reasons:

(a) contrary to D’s case, if one looks at D’s table which, Xu says, shows the 3 circuits of transactions, the 3 Contracts of P are simply not there.[41]  Instead D’s table tends to shows that the 3 Contracts are distinct and separate transactions from Contracts A – N;

(b) given that Xu’s affirmations has not provided any particulars of D’s loss, the damages (if any) cannot be ascertained for which any set off can reasonably be applied;

(c) other than claiming that the types of transactions are similar, there is no reason why equity should intervene; and

(d) the fact that D continued to pay P in 2016 (the 2 partial payments) warrants non-intervention in equity.  One would ask rhetorically, if the D did not seek any set off to assist itself, then why should equity do so now?

24.I conclude therefore that D is unable to show an arguable set‑off, whether equitable or otherwise, to P’s claim. 

Should there be a stay of execution?

25.In Mass International Ltd v Hillis Industries Ltd,[42] P Chan J (as he then was) giving the judgment of the Court of Appeal, said:

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

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

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

(c) where there is no defence to the claim but a plausible counterclaim of not less than the claim it set up, judgment should be for the plaintiff on the claim with costs, stayed until trial of the counterclaim; and

(d) where the counterclaim arises out of a separate and distinct transaction or is wholly foreign to the claim, judgment should be for the plaintiff with costs without a stay; the lack of parity between classes (b), (c) & (d) give the court freedom to response to the perceived justice of the individual case.”

26.In Karpex (HK) Ltd v Yasmine Printing (China) Ltd, supra, it is held that if a counterclaim arose out of a separate and distinct transaction, the proper order on a summary judgment application by a plaintiff was for judgment to be entered for the plaintiff with costs without a stay pending a determination of the counterclaim.

27.As discussed above, in my judgment D does not have an arguable set-off against P’s claim.  Moreover, it is also my judgment that D has failed to show that its Counterclaim arises out of the same subject matter as or is sufficiently connected with P’s claim.  To the contrary, D’s table shows that the Counterclaim is based on separate and distinct transactions.  Therefore, applying the aforesaid case authorities there are no reasons why P should not be entitled to a summary judgment against D and why the summary judgment should be executed.

28.However, for the sake of completeness, I would also consider the strength of the counterclaim.  In this regards, I respectfully agree with Mr Zimmern that there are inherent improbabilities in D’s Counterclaim in that:

(a) according to Xu, P owed D a huge debt of over RMB1 billion and D in turn owed Sanca the same amount, such purported debts had allegedly accrued over Contracts A – N.  If that were true, it would mean that both D and Sanca had allowed those purported receivables to accumulate over the multiple contracts between April and November 2015 to the total of over RMB1 billion;

(b) despite the vast “debts” owned by P, D even continued to pay P and Sanca for other contracts up until August 2016 which included the partial payments under the 3^rd Contract;

(c) after the present action was started in December 2016 and despite several court appearances, D still did not raise the Counterclaim in court.  Further, D failed to affirm to the purported and enormous debt in Xu’s 1^st Affirmation but only in his 2^nd Affirmation.  Despite this vast “debt”, D has taken no steps to set aside either the Domestic or Worldwide Mareva Injunction; and

(d) it can be seen from the disclosure affirmations made by Xu that apart from the purported “debt” said to have been owed by P, D does not have much assets.  As such, it is inconceivable that D would have let the “debt” remain outstanding for so long without any reminders or demand, and yet continue to deal with P and even continue to make payments to the latter without any complaint, action or demand.

29.In all the circumstances, I am satisfied that there are not valid grounds for a stay of the summary judgment.

CONCLUSION

30.Based on all of the above, I give judgment for P that final judgment be entered against D in the sum of RMB120,519,063.55 (or its Hong Kong dollar equivalent at the date of payment).

31.As regards P’s claim for interest pursuant to s 49 of the High Court Ordinance, I will award this to P at 1% above prime rate from the date of the writ until judgment and thereafter at the judgment rate until payment. Because I have not heard the parties on this, the award of interest will be an order nisi.

32.I also make an order nisi that the costs of this application be to P, to be taxed if not agreed.

Mr Richard Zimmern, instructed by Reynolds Porter Chamberlain, for the plaintiff

Mr Edmund Wan, instructed by King & Wood Mallesons, for the defendant