Regal Honour Industrial Ltd v. Matrix Crystal (Hong Kong) Ltd
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DCCJ5527/2007 IN THE DISTRICT COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION CIVIL ACTION NO. 5527 OF 2007 ----------------------
---------------------- Coram: H H District Judge Marlene Ng in Chambers (open to the public) Date of Hearing: 27th August 2008 Date of Handing Down Decision: 10th September 2008 ---------------------- DECISION ---------------------- I. Introduction 1. The Plaintiff was a manufacturer/distributor of different types of LCD products. The Defendant was a manufacturer of parts and components of LCD modules (“Modules”) each of which comprised a LCD monitor (“Monitor”) and a back light unit (“BL Unit”). 2. On 13th December 2007, the Plaintiff commenced legal proceedings to claim for outstanding price of goods sold and delivered to the Defendant in the total sum of US$36,158.52 being (a) a sum of US$35,820.00 under invoice no.RSL-003395 dated 26th January 2005 (“Monitor Invoice”) and (b) a balance sum of US$338.51 under invoice no.RSL-003277 dated 10th November 2004 (“IP Invoice”). 3. No notice of intention to defend was given by the Defendant. On 15th January 2008, the Plaintiff entered default judgment against the Defendant for the sum of US$36,158.52 or the Hong Kong dollar equivalent at the time of payment together with interest thereon at the rate of 10.750% pa from 13th December 2007 to the date thereof and thereafter at judgment rate until payment with costs (“Judgment”). It is common ground that the Judgment is a regular judgment. 4. On 21st April 2008, the Defendant applied by summons to set aside the Judgment and to seek leave to file and serve its Defence and Counterclaim within 28 days from the order to be made (“Summons”). The Defendant filed 2 affirmations of Wong Ka Wah Steven (“Mr Wong”), a director of the Plaintiff, dated 21st April and 15th August 2008 respectively in support of the Summons. The Plaintiff filed the affirmation of Leung Chi Fai (“Mr Leung”), the Plaintiff’s financial controller, dated 21st July 2008 in opposition. II. Legal principles 5. Since the Judgment is a regular judgment, the Defendant carried the burden of showing a meritorious defence with a real prospect of success or which carried some degree of conviction (Premier Fashion Wears Ltd v Lee Hing Chung [1994] 1 HKC 213, 219). Godfrey JA said at pp.219-220 that “[it] seems to me that unless potentially credible affidavit evidence from the defendant has demonstrated a real likelihood that he will succeed on fact, he cannot have shown that he has a real prospect of success” (see also Tong Yi Sang & anor v Fung Law & Ng & ors [1993] 2 HKC 665, 671-672). Kaplan J in Tong Yi Sang (supra) went on to say as follows :
6. This required the court to form some provisional view of the probable outcome of the action. Where the outcome depended on whose evidence was likely to be accepted, the appropriate test for determining whether the defendant had a real prospect of success was to ask whether the defence “could well be established” at trial or whether the defence witnesses could well be believed at trial (Guangdong International Trust and Investment Corp Hong Kong (Holdings) Ltd v Yuet Wah (Hong Kong) Wah Fat Ltd & anor [1997] 2 HKC 696, Morigood Development Ltd (supra) and L & M Specialist Construction Ltd v Wo Hing Construction Co Ltd [2000] 3 HKLRD 262). 7. There are other considerations which a court must consider in deciding whether or not to set aside a default judgment, such as the reason why default judgment was allowed to occur in the first place, any delay in setting aside and any consequent prejudice caused to the plaintiff. The court’s approach was to conduct a balancing exercise of all relevant factors (see Morigood Development Ltd, Young Bing Ching (deceased) v Chow Yung Fong & another [2001] 2 HKLRD 394, and Chekiang First Bank Limited v Ng Chun Hing Benjamin HCA3473/2000, Ma J (as he then was) (unreported, 12th December 2001) at paragraph 13). 8. But as Ma J (as he then was) pointed out in paragraph 14 of the judgment in Chekiang First Bank Limited (supra), the critical factor and starting point are the merits of the defence. If the defence has no real prospects of success, there is no point in setting aside the same (see also Premier Fashion Wares Ltd (supra)). 9. Even so, one should not lose sight of the guidance in Hong Kong Civil Procedure 2008 Vol.1 para.13/9/12 at p.176 that the power to set aside a default judgment which has been entered regularly is discretionary and such power is unconditional. The court should not lay down rigid rules which deprive it of the jurisdiction. The purpose of the discretionary power is to avoid injustice which may be caused if judgment follows automatically on default. III. Defendant’s case (a) MonitorInvoice 10. In the first half of 2004, Mr Wong came to know a Mr Patrick Fung (“Mr Fung”), who was a sales director of a company known as SAS. Mr Fung was responsible for sales business with a Taiwan-based manufacturer known as AUO in respect of 7-inch Modules. Mr Wong understood that AUO always sold entire Modules each comprising a Monitor and a BL Unit to its customers. 11. In the second half of 2004, Mr Fung left SAS and became the managing director of the Plaintiff, which was then a newly incorporated company. The Defendant always dealt with Mr Fung and a senior sales engineer known as Mr Chan Yik Fai (“Mr Chan”). 12. In late 2004, Mr Fung informed Mr Wong that AUO was willing to sell Monitors instead of just Modules to the Plaintiff. Mr Fung pointed out that since a Module and a Monitor cost US$50.00 and below US$40.00 respectively, if the Defendant could produce BL Units for assembly with Monitors supplied by the Plaintiff into Modules (“Processing Services”) at reasonable cost, it would be profitable for the Plaintiff to purchase the same from the Defendant (who would charge the Plaintiff part of the difference between the charges for the Processing Services and the price of raw materials for the BL Units) rather than from AUO. 13. But in the course of negotiations, Mr Fung requested the Defendant to buy Monitors from the Plaintiff on the basis that the Plaintiff would buy back the finished Modules after completion of the Processing Services (“Back-to-back Purchase”). Mr Fung proposed the Back-to-back Purchase arrangement because the Plaintiff was a new company and he wanted to boost the Plaintiff’s turnover. 14. In reliance of the Back-to-back Purchase arrangement, in/about early November 2004 the parties entered into a verbal agreement (“D’s Agreement”) as follows :
15. Although Mr Wong in his first affirmation claimed the above arrangements suggested the Plaintiff’s sale of P’s Monitors to the Defendant was “effectively consignment”, Mr Yeung, counsel for the Defendant, clarified that the Defendant no longer maintained such contention. 16. Mr Wong denied criticisms of the Defendant’s manufacturing and/or processing abilities. He claimed the Defendant was well capable of carrying out the Processing Services otherwise Mr Fung would not have discussions with the Defendant on the consequence of possible purchase of over 50,000 Modules under D’s Agreement. 17. Mr Wong claimed that without the Back-to-back Purchase arrangement, the Defendant would not have entered into D’s Agreement at all. All along the Defendant’s business was to provide Processing Services, ie installing BL Units into colour Monitors for its customers, so there was no need for the Defendant to purchase Monitors from its customers. P’s Monitors (unit price of US$36.00) were substantially more expensive than the Defendant’s tooling/service charges (unit rate of HK$41.00). It made no commercial sense for the Defendant to enter into P’s Agreement (see paragraph 50 below) which contemplated an outright purchase of P’s Monitors by the Defendant from the Plaintiff who would act as selling agent of D’s Modules (with BL Units installed) for the Defendant. 18. The Defendant entered into D’s Agreement mainly as a favour to the Plaintiff given the parties’ on-going relationship. At that time, the Plaintiff was agent for the Defendant in promoting black-and-white Monitors produced by the Defendant. However, the Plaintiff was not a/the selling agent for D’s Modules under D’s Agreement. 19. The Defendant imposed tooling charges on the Plaintiff because the moulds for producing the metal and plastic frames had to be custom-made and the Defendant had to pay tooling charges to the mould factory. If the Plaintiff failed to place accumulative order for 50,000 D’s Modules, it would have to bear the cost of all tooling charges incurred by the Defendant. This clearly indicated the Plaintiff’s intention to buy back D’s Modules after the Defendant carried out the Processing Services. In the end, as seen in paragraph 38 below, the Defendant incurred tooling charges and raw material expenses in excess of HK$50,000.00. 20. So on 9th November 2004, the Defendant sent its invoice to the Plaintiff for inter alia the Tooling Payment of HK$50,000.00. On 13th November 2004, the Plaintiff issued a credit note to the Defendant for the Tooling Payment (“Credit Note”). The Credit Note contained a remark that the Tooling Payment would be refunded to the Plaintiff after placing accumulative order for 50,000 D’s Modules (see also the Defendant’s internal email dated 13th November 2004). On 24th November 2004, the Plaintiff paid the Tooling Payment to the Defendant. 21. In order to process/install the BL Units, the Defendant had to purchase from factories/suppliers various moulds/materials for upper and lower iron housing (metal frame), plastic light guide, brightness enhancement film, L-shaped CCFL light tube, paper sheet, diffuser and reflector. By issuing the Credit Note, the Plaintiff requested the Defendant to purchase metal frames and proceed with making samples. 22. Mr Wong said that on/about 27th November 2004, the Defendant ordered 1 set of metal frame from a PRC supplier for delivery on 10th December 2004. However, the exhibited purchase order revealed it was an order for 1 set of mould for metal frame with the condition that the PRC factory would refund 50% or 100% of the tooling charges upon manufacture of 50,000 or 100,000 pieces of metal frame respectively. 23. Mr Wong further said that on/about 2nd December 2004, the Defendant ordered 1 set of plastic frame from a PRC supplier for delivery on 22nd December 2004. Again, the exhibited purchase order revealed it was an order for 1 set of mould for plastic light guide or plastic frame with the condition that the PRC factory would refund 50% or 100% of the tooling charges upon manufacture of 50,000 or 100,000 pieces of plastic light guide or plastic frame respectively. 24. At about this time, the Defendant obtained samples of materials from various suppliers in respect of various purchase orders referred to in paragraphs 30 and 32 below. 25. On/about 24th and 25th January 2005, the Plaintiff issued 2 emails to the Defendant giving particulars of purchase of P’s Monitors under the Back-to-back Purchase arrangement. In the first email, Mr Fung informed Mr Wong P’s Monitors were in stock and asked the Defendant to place purchase order for “7.0” TFT semi goods” at the unit rate of “USD37, 30 days AMS ……”. Mr Wong instructed his colleague “…… to release PO and after assembly the [BL Unit], [the Defendant] will charge back to [the Plaintiff]”. In the second email, the Plaintiff gave particulars of inter alia 995 pieces of “semi goods – 7.0” TFT” at a unit price of US$36.00 for payment “30 days AMS”. 26. Pursuant to the aforesaid emails, the Defendant issued its purchase order dated 26th January 2005 (“ Monitor Purchase Order”) for 995 pieces of “7” TFT SEMI GOODS” to be delivered in February 2005 at the unit price of US$36.00 in the total sum of US$35,820.00 with payment term of “30 DAYS A.M.S.”. 27. Mr Wong claimed that at the time of the Monitor Purchase Order, the Defendant was not aware that the Plaintiff would on-sell D’s Modules to its customer in Shenzhen for producing portable DVD players. The Defendant only became aware of this when the Plaintiff asked the Defendant to deliver the PP Modules (see paragraph 35 below) from the Pilot Production (see paragraph 34 below) to such customer on 23rd February 2005 (see paragraph 35 below). Mr Wong claimed the existence of such customer showed that the Plaintiff must have intended to buy back D’s Modules. 28. On the same day (ie 26th January 2005), the Plaintiff issued a delivery note (“MonitorDelivery Note”) and the Monitor Invoice for P’s Monitors, which goods were delivered to the Defendant on 1st February 2005. The space for “Remarks” in the Monitor Purchase Order, Monitor Delivery Note and Monitor Invoice was blank. Notwithstanding the payment terms specified in the aforesaid emails and the Monitor Purchase Order, the payment terms in the Monitor Delivery Note were “30 DAYS PDC” (presumably meaning 30 days post-dated cheque). Mr Wong claimed the above payment terms did not conflict with the terms of D’s Agreement. The reference to semi-goods in the aforesaid emails and in the Monitor Purchase Order was a reference to P’s Monitors. 29. On 15th December 2004 and 5th January 2005 respectively, the Defendant sent 2 “engineering samples” (with Monitors) and 5 “workers samples” (with Monitors) of D’s Modules to the Plaintiff for inspection (see courier delivery slips of the same dates). Mr Fung Sui Mak (“Mr SM Fung”), the Defendant’s representative and a PRC national who had since left the Defendant’s employ to return to Mainland China, liaised with Mr Chan in relation to the samples. Mr Wong liaised with Mr SM Fung for the purpose of the Summons, and was informed that Mr Chan had inspected/approved the aforesaid samples and confirmed they were acceptable to the Plaintiff. There was no complaint as to the brightness or quality of the samples. 30. Upon Mr Chan’s approval of the aforesaid samples, the Defendant placed orders for purchase of materials. Between 25th and 28th January 2005, the Defendant placed purchase orders with PRC suppliers for purchase of 1,000 pieces each of upper and lower iron housing, plastic light guide, reflector and diffuser, 3 rolls of 3M雙面胶帶, and 2,000 pieces of 7寸模具接地線. But before placing such orders the Defendant received Mr Chan’s confirmation via telephone. 31. In respect of the upper and lower iron housing and plastic light guide, each of the purchase orders with PRC suppliers specified that 50 pieces of samples should be delivered first and bulk delivery was to follow on notice. The Defendant received the initial samples from these 2 purchase ordersin/about late January or early February 2005. 32. On/about 26th February 2005, the Defendant placed purchase order for 1,000 pieces of brightness enhancement film, which were exactly the same as the free samples referred to in paragraph 24 above. 33. The Defendant duly paid its PRC suppliers for the tooling charges and other materials. 34. In February 2005, at the Plaintiff’s request, the Defendant commenced pilot production of 30 Modules (“Pilot Production”) to ensure that the quality of D’s Modules would be acceptable before bulk production. Mr Wong claimed the materials and plastic light guide (which determined the brightness of the Modules) used for producing the aforesaid samples and the Pilot Production came from the same suppliers and were identical, the only difference being that the samples were made by hand and the Pilot Production were made by machine. Prior to the Pilot Production, there was no complaint as to brightness, and no mention that the Plaintiff’s customer would incorporate D’s Modules into portable DVD players. 35. In/about mid-February 2005, the Defendant completed the Pilot Production, and at the Plaintiff’s request, delivered 30 Modules (“PP Modules”) directly to the Plaintiff’s customer in Shenzhen on 23rd February 2005. On the same day, the Defendant issued an invoice to the Plaintiff for the PP Modules at the unit price of HK$321.80 for the total sum of HK$9,654.00 upon payment terms of “30 DAYS A.M.S.” (“PP Invoice”). The Defendant paid such sum in/about August 2005. 36. Subsequently, Mr Chan informed the Defendant that the Plaintiff’s customer complained about the brightness of thePP Modules. The Defendant denied any default on its part because the Plaintiff was fully aware of the quality of the materials and approved the samples before the Pilot Production. Despite requests, the Plaintiff refused to give instructions for bulk production of D’s Modules. At about such time, the cost of Monitors fell in the market. Despite the Defendant’s constant reminders to the Plaintiff over the following 2 years, the Plaintiff still failed to give instructions for bulk production. 37. The price of Monitors fell progressively throughout 2006. In the second half of 2006, the Defendant proposed 2 options to the Plaintiff, namely, (a) to give instructions to install the BL Units into P’s Monitors for assembly into D’s Modules and/or (b) to buy back P’s Monitors together with the materials (but without installation costs). The Plaintiff rejected either proposal. 38. Pursuant to D’s Agreement, the Defendant incurred and paid a total sum of RMB56,165.00 for tooling of the moulds and purchase of raw materials, but the Plaintiff did not place accumulative order for 50,000 Modules to seek refund of the Tooling Payment. To mitigate loss, the Defendant took immediate steps to look for potential buyers in Hong Kong and abroad, but it was difficult because (a) the market price of he Monitors continued to fall after the Defendant’s acceptance of the Plaintiff’s repudiation, and (b) the BL Units were custom-made for the Plaintiff. 39. In/about May 2007, the Defendant managed to find a Taiwanese customer (“D’s Buyer”) willing to purchase Modules assembled from P’s Monitors and raw materials on condition that “…… additional material …… be installed into the [BL Units]”. Pursuant to a purchase order dated 16th May 2007, the Defendant sold 900 of such Modules to D’s Buyer at a unit price of US$24.00 for a total sum of US$21,600.00 or RMB162,000.00 (at the exchange rate of RMB7.50 to US$1.00). The Defendant also had to buy additional materials from Best Skill International Limited (“Best Skill”) in Shenzhen pursuant to a purchase order dated 18th May 2007 for 950 pieces of “CCFL背光” (ie L-shaped light tube) for RMB22,059.00. The Defendant also spent RMB4,750.00 for processing work. 40. D’s Buyer only purchased 900 of such Modules and declined to take up 30-40 of the remaining 50 Modules because of “defective LCD monitors provided by the Plaintiff”. The net proceeds of sale from D’s Buyer was RMB135,191.00, which the Plaintiff received in May 2007. 41. Upon clarification by Mr Yeung at the hearing before me, the Defendant’s loss as a result of the Plaintiff’s breach of D’s Agreement was HK$64,651.00 calculated as follows :
42. The Defendant therefore denied liability for the Monitor Invoice, and claimed it had done its best to mitigate loss in light of the drop in market price of Monitors and the Plaintiff’s procrastination in not chasing up the Defendant until about late 2006. (b )IP Invoice 43. On/about 10th November 2004, the parties entered into a sales and purchase agreement in which Defendant agreed to purchase 10,566 and 9,720 pieces of integrated products (“Products”) at unit prices of US$1.80 and US$0.62 respectively for a total sum of US$25,045.20. The Products were delivered to the Defendant on 10th November 2004, and the Plaintiff issued an invoice of the same date (“IP Invoice”). 44. On 11th November 2004, the Products were sent to the Defendant’s PRC factory. On inspection, 546 out of 9,720 pieces (“Disputed Products”) were found to be defective, so on 1st December 2004 the Defendant’s PRC factory advised the Defendant by email that of the first batch of 9,720 pieces of the Products, 463 pieces “IC功能不良” and 83 pieces “IC外觀不良”. The Defendant replied by email on the same day instructing the PRC factory to report to the supplier (ie the Plaintiff) and to try to claim compensation. The Defendant issued a debit note dated 8th December 2004 (“Debit Note”) to the Plaintiff for the sum of US$338.52 in respect of the Disputed Products, which were returned to the Plaintiff (see also the PRC factory’s Return of Goods Report dated 4th December 2004), so the Disputed Products should still be in the Plaintiff’s possession. Mr Joey Kei of the Defendant had complained to the Plaintiff about the quality of the Products and asked for replacement of the Disputed Products, but the Plaintiff did not agree to such request. 45. Other than the Disputed Products, the Defendant had paid for the balance of the Products under the IP Invoice. IV.Plaintiff’s case (a) MonitorInvoice 46. Mr Fung was the former marketing manager of the Plaintiff, and he left the Plaintiff’s employ in January 2008. However, Mr Leung had made enquiries with Mr Fung when he made his affirmation in opposition. 47. In/about February 2004, Mr Fung on behalf of the Plaintiff discussed with Mr Wong on behalf of the Defendant about a business proposal that was potentially beneficially to both parties. Under such proposal, the Defendant would manufacture high quality Modules by using Monitors supplied by the Plaintiff, and the Plaintiff would act as the Defendant’s agent in selling those high-end Modules to different manufacturers. The Plaintiff denied AUO was only willing to sell Modules to the Plaintiff, and claimed AUO in fact offered to sell various components including Monitors to the Plaintiff. Further, Mr Fung told Mr Leung he never told Mr Wong that AUO was only prepared to sell Monitors to the Plaintiff. 48. Since the main competitors for such high-end Modules were Taiwanese manufacturers, Mr Fung told Mr Wong specifically that the Modules to be produced by the Defendant must be of the same standard as the Taiwanese Modules. Mr Fung also told Mr Wong that “since the Plaintiff would sell the [Monitors] to the Defendant, when the Defendant sell the [Modules] (using the Plaintiff’s [Monitors]) to the Plaintiff, the Defendant should not mark up the costing of the [Monitors]. That is to say, the Plaintiff would not be paying additional price for buying the [Monitors] supplied by itself. The Defendant, however, might make a profit with reference to its costing on [the BL Units]”. 49. Mr Leung claimed the Defendant was capable of producing low-technology components such as casing and BL Units, but incapable of producing Monitors which required high technology. With the Plaintiff’s Monitors, the Defendant would be able to assemble/produce Modules which could then be sold to manufacturers for producing different products with LCD display. It was hoped that by producing these non-essential components at lower cost, the Defendant could offer a product of the same standard as the Modules of Taiwanese manufacturers at a lower price. 50. To carry out such business proposal, the parties entered into a verbal agreement (“P’s Agreement”) on the following terms :
51. Mr Fung told Mr Leung he did not on behalf of the Plaintiff or otherwise propose the Back-to-back Purchase arrangement. 52. Pursuant to Plaintiff’s Agreement, the Plaintiff issued the Credit Note on 13th November 2004 and paid the Tooling Payment on/about 24th November 2004. Mr Leung denied that by issuing the Credit Note the Plaintiff requested the Defendant to purchase metal frames and/or other parts or components for producing the BL Units. The Plaintiff issued the Credit Note because it agreed to pay the Tooling Payment under P’s Agreement. 53. On 26th January 2005, the Defendant placed order for 995 Monitors at the unit price of US$36.00 pursuant to the Monitor Purchase Order. On the same day, the Plaintiff issued the Monitor Invoice, which the Defendant received on the following day. Consequently, 995 Monitors were delivered to the Defendant, but the Defendant failed to pay the price for the same. 54. D’s Modules to be assembled by the Defendant using P’s Monitors were to be sold to the “Plaintiff’s customer” for production of portable DVD players. So P’s Monitors, casing and BL Units and ultimately D’s Modules were semi-products to be assembled into finished products by the “Plaintiff’s customer”. In the circumstances, the target customers of Modules assembled from inter alia Monitors supplied by the Plaintiff were other manufacturers who would buy such Modules for their products, so both parties were in the same industry of producing LCD components for other manufacturers. 55. The Defendant never discussed with the Plaintiff how it was going to produce the BL Units, and the Plaintiff had no knowledge about the alleged purchase of materials. These matters were all within the Defendant’s expertise and responsibility, and the Plaintiff’s concern was merely that the BL Units must be compatible to the Modules by Taiwanese manufacturers. 56. Similarly, the Plaintiff had no knowledge of the Defendant’s manufacturing process. Mr Chan, who had left the Plaintiff’s employ in February 2008, was in charge of the engineering aspects of the Plaintiff’s production. He confirmed to Mr Leung that the Plaintiff had no involvement in and no knowledge of the Defendant’s Processing Services. 57. In respect of the 2 emails referred to in paragraph 25 above, the Plaintiff originally wanted to sell P’s Monitors to the Defendant at a unit rate of US$37.00 (see email dated 24th January 2005), but after discussion the unit rate was reduced to US$36.00 (see email dated 25th January 2005). Moreover, the payment terms of “30 days AMS” showed the transaction was actually a sale of P’s Monitors, which the Defendant should pay for within 30 days according to monthly statement. 58. In respect of the submission of samples, Mr Chan told Mr Leung that in/about December 2004 the Defendant sent a sample of the BL Unit (without the Monitor) to the Plaintiff for approval. Mr SM Fung, who was in charge of the technical aspects on behalf of the Defendant, explained to Mr Chan that the sample was submitted to the Plaintiff for approval of physical appearance of the BL Unit only. Upon inspection, the Plaintiff found the physical appearance acceptable. On/about 5th January 2005, the Defendant sent an engineering sample of the Module (with Monitor and BL Unit) for the Plaintiff’s initial testing. After testing, Mr Chan discovered that the brightness was insufficient. It took 30 minutes for the Module to brighten up, which would be unacceptable to any customer/manufacturer. Mr Chan immediately communicated such problem to Mr SM Fung, and requested the Defendant to fix it. The Defendant as a manufacturer should have been well aware that a Module with such defect would not be of merchantable quality or fit for the purpose of installing into a finished product. The Plaintiff denied that the Defendant placed orders for materials after it had approved the samples. 59. In February 2005, believing that the Defendant would have rectified the brightness problem, the Plaintiff requested the Defendant to carry out pilot production. However, when the PP Modules were delivered directly to “the Plaintiff’s customer in Shenzhen”, they were rejected due to the brightness problem, and the Defendant was informed of such rejection and the reason therefor. 60. The Defendant’s engineering sample sent to the Plaintiff on 5th January 2005 and the 30 PP Modules all had the brightness problem, and were rejected by the Plaintiff for failing to reach merchantable standard and/or for failing to fit the purpose of the Plaintiff’s customer for incorporation into portable DVD players. The Plaintiff did not place order for bulk production of D’s Modules. 61. Since the Defendant failed and/or refused to pay for P’s Monitors, the Plaintiff requested the Defendant to return the same, but the Defendant refused to do so. The Plaintiff caused its solicitors to issue a demand letter to the Defendant on 8th September 2006 (“Demand Letter”), but the Defendant still failed to make payment. The Plaintiff then commenced the present action. 62. The Plaintiff rejected the Defendant’s offered sale of the BL Units or materials since they were of inferior quality. The Plaintiff wanted Modules of merchantable quality and/or quality compatible with those of Taiwanese manufacturers. However, as clearly evidenced by the engineering sample and PP Modules, the Defendant failed to produce such quality products. 63. The Plaintiff kept its side of the bargain by not asking for refund of the Tooling Payment since, according to P’s Agreement, it was only refundable upon the Plaintiff placing order for more than 50,000 Modules. Since the Plaintiff did not place any order for bulk production, the Plaintiff did not ask for refund. 64. Mr Leung noted there was no explanation as to whether the additional material of 950 pieces of “CCFL背光” under the purchase order issued by Best Skill to 深圳寶譜光電科技有限公司 was for rectifying the brightness problem or not. 65. The sale of P’s Monitors to the Defendant was not conditional upon any Back-to-back Purchase arrangement as alleged or at all. The Defendant having received P’s Monitors from the Plaintiff without returning them on demand eventually used them to assemble into Modules for sale to D’s Buyer. The Defendant was therefore liable for the price of P’s Monitors. (b) IP Invoice 66. The Plaintiff denied there was defect in the Products sold and delivered to the Defendant. The Plaintiff did not have any record of (and would not accept) the Debit Note. “The Defendant might have over-ordered the [Products] and wanted to return the same when they were actually selling 9,000 pieces to its customers.” It was further denied that the Disputed Products were returned to the Plaintiff or were still in the Plaintiff’s possession. The Defendant was therefore liable for the Disputed Products under the IP Invoice. V. Discussion (a) Monitor Invoice 67. Does the Defendant pass the threshold test as set out in paragraphs 5-6 above? The defence case is that under the parties’ verbal agreement (which included the Back-to-back Purchase arrangement) the Defendant agreed to purchase P’s Monitors from the Plaintiff, and the Plaintiff agreed to purchase D’s Modules so long as their quality was similar to the AUO standard. Pursuant to such agreement, the Plaintiff approved samples from the Defendant whereupon the Defendant ordered raw materials and carried out the Pilot Production. The Plaintiff wrongfully rejected the PP Modules even though they were from the same materials/suppliers and of the same quality as the approved samples. The Defendant claimed it suffered loss and damages as a result of such wrongful rejection and the Plaintiff’s failure to place order for bulk production of D’s Modules. 68. On the other hand, whilst accepting the parties had a verbal agreement, the Plaintiff denied any Back-to-back Purchase arrangement, and went on to claim that its sale of P’s Monitors to the Defendant was not conditional on any obligation to buy back D’s Modules assembled from inter alia P’s Monitors. Consequently and because of the defective engineering sample submitted by the Defendant to the Plaintiff in January 2005 and of the defective PP Modules, the Plaintiff was justified in not placing any order for bulk production of D’s Modules. The Plaintiff therefore claimed for the outstanding price of P’s Monitors. 69. The affirmation evidence and counsel’s written submissions canvassed the issue of whether the Plaintiff was obliged/required under the parties’ verbal agreement to place accumulative orders of up to 50,000 D’s Modules with the Defendant. Given Mr Yeung’s concession that there was no such obligation for the purpose of the Summons, I need not deal with this issue. In any event, the Defendant’s proposed counterclaim is confined to the transactions concerning P’s Monitors and D’s Modules. 70. Further, given Mr Yeung’s abandonment of the argument on consignment sale of P’s Monitors (see paragraph 15 above), and the Defendant’s concession that it “bought” Monitors from the Plaintiff to accommodate Mr Fung’s request to boost the Plaintiff’s turnover, there is little dispute between the parties that the Defendant actually bought P’s Monitors. Thus, the crux of the dispute turns on whether such purchase was subject to the Back-to-back Purchase arrangement under the parties’ verbal agreement. 71. Mr Yim, counsel for the Plaintiff, criticised the Defendant for having no written evidence of the Back-to-back Purchase arrangement. But I am unable to give much weight to such criticism since both parties accept their agreement was made orally. Much, therefore, will turn on the credibility of witnesses involved in the negotiations and conclusion of such verbal agreement. But some key witnesses, eg Mr Fung, Mr Chan and Mr SM Fung, have left the parties’ employ, and presently their assertions are merely included as hearsay statements in the affirmation evidence before me. In my view, evidence from these witnesses and/or assessment of their veracity may well be relevant for adjudication of the core issues in dispute. Prima facie, this suggests some difficulty in forming a provisional view of the outcome of such core disputes at this stage of the proceedings. 72. But Mr Yim submitted otherwise. He drew the court’s attention to a number of matters which, he argued, would show the Defendant’s contentions were incredible or at best merely arguable, and therefore insufficient to satisfy the threshold requirement of having a real prospect of success. But on careful consideration of the affirmation evidence and counsel’s submissions, I am of the view that the Defendant has by credible evidence shown its case could well be established or believed at trial. 73. There is no dispute that the genesis of the transaction were the parties’ expectations of savings and hence profit if the Plaintiff sourced Monitors from Taiwanese manufacturer(s) for sale to the Defendant and the Defendant carried out Processing Services at a reasonable cost. Such exercise should result in producing cheaper Modules which, if they were of the same quality as the latter Modules (according to the Plaintiff) or their quality was similar to the AUO standard (according to the Defendant), could compete with Modules from Taiwanese manufacturers. This was the backdrop for the Back-to-back Purchase arrangement alleged by the Defendant. 74. In considering the Back-to-back Purchase argument in contra-distinction to the Plaintiff’s contention of unconditional outright sale of P’s Monitors to the Defendant, I note the following. 75. First, there is no dispute that essentially the Defendant’s involvement was to carry out Processing Services and its remuneration were charges for such services. It is, in my view, a respectable argument to say there is little commercial benefit for the Defendant to buy P’s Monitors from the Plaintiff, install the BL Units on a custom-made basis, and then re-sell the assembled D’s Modules to the Plaintiff (ie the party from whom it acquired the Monitors) when the Defendant’s true function was to earn charges by carrying out the Processing Services. Had there been no Back-to-back Purchase arrangement, the Defendant would arguably have to bear substantial commercial risk of being liable for the price of P’s Monitors bought from the Plaintiff whilst the Plaintiff could choose not to buy D’s Modules. This is exacerbated by the disparity between the comparatively expensive Monitors supplied by the Plaintiff (unit rate of US$36.00) and the Defendant’s modest charges for its Processing Services (unit rate of HK$41.00 – see the PP Invoice). In my view, the above-discussed arrangements suggest that the Back-to-back Purchase arrangement has a real likelihood of success. 76. Secondly, the Defendant contended that D’s Agreement and the Back-to-back Purchase arrangement were to accommodate Mr Fung’s intention to boost the Plaintiff’s turnover, and the Defendant acceded to such request because of the parties’ on-going relationship (ie the Plaintiff was the selling agent of black-and-white Monitors manufactured by the Defendant). Given that the Plaintiff was a newly formed company at the material time, the parties’ existing commercial relationship, and the nature of the arrangements analysed in the above paragraph, I am of the view that D’s Agreement and the Back-to-back Purchase arrangement may well be established or believed at trial. 77. Thirdly, the Plaintiff claimed that pursuant to P’s Agreement the Defendant would make outright purchase of Monitors from the Plaintiff, and the Plaintiff would act as selling agent for the Defendant in respect of Modules assembled from inter alia such Monitors under a pricing system with no surcharge for such Monitors. Such assertion does not make clear whether the Plaintiff would deal with the assembled Modules as agent on behalf of the Defendant or as principal by purchasing such Modules and on-selling the same to the Plaintiff’s own customers. But enlightenment came from Mr Leung’s affirmation which stated that the Plaintiff was to purchase D’s Modules assembled from inter alia P’s Monitors “to be sold to a Plaintiff’s customer [in Shenzhen] for production of a portable DVD player” (my emphasis and paragraphs 48 and 59 above), which would arguably explain why the Defendant was not to mark up the cost of P’s Monitors in the “pricing system” for D’s Modules. If there were no agreement for the Plaintiff to purchase D’s Modules assembled from inter alia P’s Monitors on a back-to-back basis and the Plaintiff were to act as marketing agent only, a rhetorical question arises to why the Plaintiff would be concerned to make sure the Defendant did not earn any profit on the cost of P’s Monitors. Such correlation between the Defendant’s purchase of P’s Monitors and the sale of D’s Modules assembled from inter alia P’s Monitors to the Plaintiff speaks of a real likelihood that the parties contemplated and agreed to the Back-to-back Purchase arrangement. 78. Fourthly, although there was no obligation on the part of the Plaintiff to place accumulative order for 50,000 Modules with the Defendant, there is no dispute that the Defendant effectively agreed to absorb the tooling costs of custom-made moulds if the Plaintiff purchased a sufficiently large volume of Modules assembled by the Defendant from inter alia Monitors supplied by the Plaintiff. Thus, the parties agreed the Plaintiff should pay the Tooling Payment in advance to be refunded upon the Plaintiff placing accumulative order for over 50,000 Modules, which agreement plainly contemplated that the Plaintiff would purchase some Modules assembled by the Defendant using Monitors supplied by the Plaintiff (albeit not on the basis of any agreed quantity). This agreement and the Defendant’s consequent orders with suppliers for moulds on similar basis (see paragraphs 22-23 above) also lend credence to the Back-to-back Purchase arrangement. 79. In such circumstances, I disagree that the Back-to-back Purchase arrangement is incredible or merely arguable. Further, it is telling that (a) the Plaintiff actually lined up its own customer in Shenzhen for acquisition of D’s Modules (see paragraphs 48 and 59 above) and (b) the Defendant issued the PP Invoice (which the Plaintiff settled) for the Pilot Production, ie the forerunner of D’s Modules under bulk production. In fact, I find such argument on back-to-back sales carries some degree of conviction. 80. Mr Yim submitted that the contemporaneous documents speak otherwise. He pointed out the Tooling Invoice, the Credit Note, and the 2 emails dated 24th and 25th January 2005 were silent on the Back-to-back Purchase arrangement. Further, the space for “Remarks” in the Monitor Purchase Order, the Monitor Invoice and the Monitor Delivery Note were left blank. However, I do not read anything sinister in the silence. There is no dispute these documents were made pursuant to the parties’ verbal agreement, and even though they do not reflect the full terms of D’s Agreement, they do not detract from the argument that the Back-to-back Purchase arrangement is a real probability. Further, it is the Defendant’s case that such arrangement was to boost the Plaintiff’s turnover, so documentation drawn to give effect to such purpose is arguably unsurprising. 81. Mr Yim referred to the email dated 24th January 2005 from the Defendant to the Plaintiff which stated the unit price of P’s Monitors was US$37.00, and to the Plaintiff’s contention that it was adjusted down to US$36.00 after negotiations (see the email dated 25th January 2005 and the Monitor Purchase Order). Mr Yim questioned why the parties would have bothered to negotiate such unit price if the Defendant were only concerned with charges for its Processing Services under the Back-to-back Purchase arrangement. 82. It is true that the Defendant claims its remuneration was essentially processing charges. But in my view the cost of the Monitors is still pertinent. As explained above, the backdrop to the parties’ verbal agreement was the Defendant’s assembly of cheaper Modules similar in quality to the AUO standard (according to the Defendant) or of the same quality as Modules by Taiwanese manufacturers (according to the Plaintiff) from Monitors supplied by the Plaintiff together with the BL Units. In the circumstances, there is necessarily a price ceiling for such Modules (which comprised inter alia cost of Monitors supplied by the Plaintiff and charges for Processing Services by the Defendant) in order to effectively compete with Modules by Taiwanese manufacturers. In such circumstances, the lower the cost of Monitors supplied by the Plaintiff the greater the window for the Defendant to demand higher charges for its Processing Services to increase its remuneration or to offer lower price for the assembled Modules to increase their competitiveness in the market. I do not agree that on the Defendant’s case the cost of Monitors supplied by the Plaintiff can be put aside entirely. 83. Mr Yim next complained that it was unclear whether the Defendant claimed the parties had to actually pay for the Monitors and Modules that were supplied on a back-to-back basis. I interpose to note Mr Yeung’s submission that the affirmation evidence before me showed the parties had not reached discussions on these aspects as yet. Mr Yim went on to submit that whilst the Defendant’s case was uncertain, the payment terms of “30 days AMS” in the 2 emails dated 24th and 25th January 2005 and in the Monitor Purchase Order clearly indicated the Plaintiff’s sale of P’s Monitors to the Defendant was an outright sale and the Defendant should pay the price within 30 days according to monthly statement. 84. A few observations can be made. First, the Defendant also adopted payment terms of “30 days AMS” in its PP Invoice to the Plaintiff (see paragraph 35 above). But there is no evidence before me that either party had ever issued any monthly statement to the other party to crystallise the payment due date, and no such monthly statement was exhibited to the affirmations before me. One is therefore left with a lurking doubt as to the effectiveness of such payment terms. 85. Secondly, the Monitor Delivery Note refers to payment terms of “30 days PDC”, ie by 30 days post-dated cheque. No explanation has been given as to why the Plaintiff adopted different payment terms for the sale of P’s Monitors in the contemporaneous Monitor Delivery Note, which underlines the lurking doubt referred to in the above paragraph. 86. Thirdly, the payment terms of “30 days AMS” or even “30 days PDC” are arguably not inconsistent with the verbal D’s Agreement and the Back-to-back Purchase arrangement when one bears in mind the Defendant’s case that the sale and purchase (and presumably the documentation) was drawn for the purpose of boosting the Plaintiff’s turnover. Indeed, the conflict between the different payment terms referred to above lends credence to such purpose. 87. Further, even on the Plaintiff’s case that the Defendant failed to pay for P’s Monitors pursuant to the Monitor Purchase Order and Monitor Invoice, the crux of the dispute remains not so much whether the Defendant purchased P’s Monitors, but whether such purchase was subject to the Plaintiff’s obligation to buy back D’s Modules if they were similar to the AUO standard or of the same quality as Modules by Taiwanese manufacturers, and if so, whether the Plaintiff’s failure to place order for bulk production of D’s Modules was in breach of such Back-to-back Purchase arrangement. As I have found, the Back-to-back Purchase arrangement carries a degree of conviction. Consequently, I find the proposed defence and counterclaim based on such argument constitute a probable answer to the Plaintiff’s claim. 88. Mr Yim drew my attention to the Court of Appeal judgment in Hayton International Ltd v Massoni Treasures (Mandarin) Ltd HCA125/1990 (unreported, 23rd October 1990). In that case, the plaintiff claimed for the price of watches sold and delivered to the defendant. The defendant argued it was a sale on consignment. The subject invoice contained the words “Terms 45 days”. The trial judge rejected the explanation by the defendant’s witnesses that such term was inserted because the defendant thought it necessary to review the situation after 45 days. It was held on appeal that in concluding the sale was a consignment sale the trial judge overlooked the contemporaneous invoice. Sir Derek Cons VP found it impossible to reconcile the words “Terms 45 days” with a consignment sale, and held that such words “cannot be simply dismissed by an explanation which the trial judge himself found “not entirely satisfactory”.” 89. Hayton International Ltd is clearly distinguishable. It dealt with adjudication at trial (for which a different threshold test was applicable) with a finding that Plaintiff’s explanation for the payment terms was unsatisfactory (but as explained above, for present purpose the Back-to-back Purchase arrangement cannot be said to be unsatisfactory). Further, in that case it was a contest between an outright sale and a consignment one. Here, the contest was between an unconditional outright sale (Plaintiff’s contention) and back-to-back sales of P’s Monitors and D’s Modules (Defendant’s contention). I am unable to draw assistance from Hayton International Ltd. 90. Next, there is no dispute that in December 2004 and January 2005 the Defendant submitted samples to the Plaintiff for approval. The dispute turns on whether the December 2004 samples were with Monitors and on the scope/result of the approval exercise. The Defendant claimed the Plaintiff would inspect the entire samples with Monitors and there was no complaint of any brightness problem. The Plaintiff claimed the December 2004 samples were approved for physical appearance only, but it did complain about the brightness problem in respect of the January 2005 samples. But apart from the hearsay statements of Mr SM Fung and Mr Chan and some courier slips, there was no written evidence of such approval or complaint. So much therefore turns on the credibility of witnesses, and in my view either party’s case could well be established or believed at trial. 91. According to the Plaintiff’s case, the brightness problem of the January 2005 samples was a serious one (ie the Modules took 30 minutes to brighten up), in fact so serious that Mr Leung opined it would have been plainly obvious to any manufacturer that the quality was unacceptable. 92. But several matters are of note. First, despite the alleged seriousness of the complaint, there is no affirmation evidence before me that the Plaintiff called for and was consequently provided with further engineering sample(s) to demonstrate the brightness problem has been rectified. 93. Secondly, the Plaintiff requested the Pilot Production in February 2005, but there is no evidence that the Plaintiff sought and received prior assurance from the Defendant that the brightness problem has been rectified. The Plaintiff claimed it merely assumed the problem had been rectified even though it was most anxious that the quality of D’s Modules must be the same as Modules by Taiwanese manufacturers and further it had lined up a customer in Shenzhen for D’s Modules. 94. Thirdly, the Defendant started to place orders for materials for Processing Services for D’s Modules about 3 weeks after submission of the January 2005 samples (see paragraphs 30-32 above). The Defendant claimed it placed such orders after receiving Mr Chan’s confirmation, but the Plaintiff disputed this. However, if the Plaintiff made clear to the Defendant the brightness of the January 2005 samples was grossly unacceptable, Mr Yeung’s query as to why the Defendant proceeded with ordering materials without re-submission of samples or otherwise obtaining the Plaintiff’s acceptance of quality is a legitimate one. 95. As regards the Pilot Production, there is no dispute that the Plaintiff rejected the PP Modules on the ground that its customer asserted there was a brightness problem. However, it remains a disputed issue as to whether there was actually a brightness problem, and if so, whether such problem amounts to breach of contract on the part of the Defendant (ie whether the PP Modules were not merchantable or failed to satisfy the requirement of being similar to the AUO standard (according to the Defendant) or being of the same quality as Modules by Taiwanese manufacturers (according to the Plaintiff)). On the evidence before me, there are no documents relating to the brightness problem of the PP Modules, eg testing record of the PP Modules or written complaint by the Plaintiff’s customer, so much will turn on the credibility of witnesses’ evidence on the relevant events and communications at the material time. 96. On the Defendant’s case, there is also a question as to whether the PP Modules were same in quality as the samples approved by the Plaintiff. Mr Yeung argued that if the January 2005 samples were defective and the Plaintiff did not ask for a further engineering sample before ordering the Pilot Production, it would have been logical for the Plaintiff to request inspection of the PP Modules before instructing the Defendant to make direct delivery to its customer. Mr Yeung submitted that the confidence exhibited by such instructions for direct delivery without prior inspection was more consistent with the Plaintiff’s approval of the quality of the December 2004 and January 2005 samples. Further, the available documents showed the moulds and raw materials for the samples and the Pilot Production came from the same suppliers, so question is also raised as to the veracity of the Plaintiff’s complaint of the brightness problem. 97. Mr Yim submitted that the Defendant was in breach of contract because the PP Modules were not fit for the purpose of sale to other manufacturers to be incorporated into finished products with LCD display. However, the Defendant claimed it was unaware of such purpose before the Plaintiff’s instructions for direct delivery of the PP Modules to the Plaintiff’s customer in Shenzhen, and consequently disputed any alleged breach based on such purpose. Since the parties’ agreement was a verbal one, much will turn on the credibility of witnesses’ evidence on the negotiations and agreed terms at the material time, and on their understanding of the meaning of “semi-goods” in the emails of 24th and 25th January 2005 and the Monitor Purchase Order. 98. In light of the above arguments, I am of the view that it could well be established at trial that there was no brightness problem and/or no breach of contract on the part of the Defendant. 99. Mr Yim submitted that the Defendant’s failure to return P’s Monitors spoke strongly of an outright sale to the Defendant. He argued that the Defendant’s reason for not returning P’s Monitors (ie the Plaintiff’s refusal to take them together with unused raw materials) was unsustainable. Had the Defendant returned P’s Monitors, it would have been out of pocket for HK$1,566.00 only, ie RMB56,165.00 (or HK$61,220.00) for tooling charges and cost of raw materials less HK$50,000.00 for the Tooling Payment and HK$9,654.00 for processing charges for the Pilot Production. Mr Yim argued there was no commercial justification for the Defendant to retain P’s Monitors worth US$35,820.00 (or HK$279,396.00) for 3 years in light of the Demand Letter and the continued fall in market price for Monitors. 100. The Defendant’s short answer was that (a) it kept on pressing the Plaintiff to place order for bulk production of D’s Modules, (b) the parties were negotiating for a resolution during this time (but the Plaintiff eventually rejected the Defendant’s proposals for the Plaintiff to place order for bulk production or to take back P’s Monitors with the raw materials), and (c) there was difficulty in finding a potential buyer either in Hong Kong or abroad. The undisputed lateness in using P’s Monitors to assemble into Modules for D’s Buyer arguably supports the Defendant’s contention that time has been spent on the above matters, and consequently acceptance of repudiation came late in the day for triggering any duty to mitigate. The suggestion that potential buyers were hard to come by is also arguably bolstered by the fact that moulds for the BL Units were custom-made. 101. Further, from the Defendant’s perspective, its loss was not confined to HK$1,566.00. The Defendant denied D’s Modules were unmerchantable, defective or not fit for purpose, so it claimed for loss for breach of the Back-to-back Purchase arrangement (see paragraph 41 above). Since the BL Units were custom-made and the Plaintiff was unwilling to recognise the Defendant’s loss arising from the Back-to-back Purchase arrangement, I cannot say that the Defendant’s efforts to look for a potential buyer who would absorb the costs of raw materials already purchased (which would arguably minimise damages arising from loss of bulk production order for D’s Modules) as reasonable mitigation has no real probability of success. 102. Mr Yim further argued that the Defendant failed to reasonably explain why it had to purchase additional raw materials worth RMB22,059.00 before it could re-sell P’s Monitors, and that some of the additional raw materials, ie “CFFL 背光”, appeared to relate to lighting which reinforced the Plaintiff’s contention of the brightness problem. The Defendant explained that “CFFL 背光” was one of the component raw materials for assembling Modules, and in mitigation of loss it had to purchase components to assemble the 900 Modules it sold to D’s Buyer. There is insufficient material before me to suggest the purchase of “CFFL 背光” was necessarily for rectifying the brightness problem. I am satisfied that the Defendant’s explanation has a real likelihood of success. 103. Looking at the matter globally, I am satisfied the defence and counterclaim put forward by the Defendant in answer to the Plaintiff’s claim under the Monitor Invoice have a real prospect of success and/or that they could well be established or believed at trial. (b) IP Invoice 104. The Defendant agreed it did not pay the IP Invoice, but claimed the Disputed Products were defective as evident from the Debit Note and contemporaneous emails between the Defendant and the Defendant’s PRC factory that described the nature of the defects and the relevant quantities of defective products. The Plaintiff denied the Debit Note and complained there was no written evidence that it received the same. In my view, there is no requirement for the Debit Note to be receipted in writing. Further, the Plaintiff’s speculative assertion that the Defendant “might” have over-ordered and therefore wished to return the excess (see paragraph 66 above) is insufficient to detract from the real probability of success of the Defendant’s defence as evidenced by the contemporaneous emails and report by its PRC factory. 105. There is also dispute as to whether the Disputed Products have been returned to the Plaintiff. The Plaintiff denied they were returned, and queried why the Defendant did not respond to the Demand Letter that also demanded payment of the IP Invoice. Again, much turns on the credibility of the evidence on the subject from witnesses (including Mr Joey Kei who allegedly demanded the Plaintiff to deliver replacement products). But if the Disputed Products were arguably defective, the Defendant would have a respectable argument for not paying the IP Invoice even if the Disputed Products were not returned to the Plaintiff. 106. Mr Yim further submitted it was stipulated in the IP Invoice dated 10th November 2004 that any defective goods should be returned within 7 days, but the internal emails showed the earliest complaint of defects of the Disputed Products was on 1st December 2004. However, there is no evidence before me to show that such provision in the IP Invoice was a contractual requirement under the sales and purchase agreement as distinct from a unilateral provision in a sales invoice. 107. I have considered the whole circumstances relevant to the IP Invoice and find that the Defendant has established a meritorious defence that has a real prospect of success. VI. Discretion 108. Mr Wong claimed that he was on a business trip to the PRC when the writ of summons was served on the Defendant. The Defendant’s staff who opened the letter containing the writ did not appreciate the significance of the document. When Mr Wong returned to Hong Kong at/about the end of January 2008, he received the Judgment. Mr Wong immediately made telephone calls to Mr Fung who replied he would clarify the matter with the Plaintiff “since the parties were in the course of negotiations”. In the meantime, Mr Wong sought legal advice on/about 6th February 2008. Due to his absence from Hong Kong on business and the long Chinese New Year holidays and Easter holidays, he did not finalise his supporting affirmation until 21st April 2008. 109. Mr Leung claimed that the Defendant had failed to give any satisfactory explanation as to why it allowed the default to occur. However, there is simply insufficient evidence before me to dispute the explanation given in paragraph 108 above and I accept such explanation. Even so, I agree that once the Defendant was alerted to the existence of the Judgment, it should have acted with more alacrity to apply to set aside the Judgment. But having come to the view that the Defendant has established a meritorious defence with a real prospect of success, I do not consider the delay of 2-3 months in applying to set aside the Judgment justifies dismissal of the Summons. The Plaintiff also has not identified any prejudice caused by such delay. For the avoidance of doubt, I have also considered all the circumstances, and do not find any matter that encouraged an exercise of discretion not to set aside the Judgment. VII. Conclusion 110. In the circumstances, the Judgment is set aside unconditionally. I also grant leave to the Defendant to file Acknowledgment of Service within 7 days from the date hereof, and to file and serve Defence (and Counterclaim, if so desired) within 21 days thereafter. 111. I have heard preliminary submissions on costs from both parties. Mr Yeung conceded that save and except for costs of the hearing before me, the Defendant should bear costs of the Summons. Mr Yeung seeks costs of the hearing before me presumably on the basis that the Plaintiff unreasonably resisted the application after sight of Mr Wong’s affirmations. On the other hand, Mr Yim contended that should I set aside the Judgment, the appropriate order for costs of the hearing before me should be costs in the cause since it was as yet unclear whether the Defendant’s defence arguments would stand up at trial. 112. I grant a costs order nisi that save and except for costs of the hearing on 27th August 2008 before me the Defendant should pay to the Plaintiff costs of the Summons (including all costs reserved, if any) in any event to be taxed if not agreed with certificate for counsel. The Judgment is a regular judgment, and the Defendant in making the present application seeks an indulgence of the court. Thus the Defendant should bear the costs of the Summons up to the time when it had sufficient information to reasonably and realistically consider if it should oppose the application. I take the view that Mr Wong’s affirmations contained sufficient information for the Defendant to so consider. But as Mr Yim pointed out, I should not lose sight of the fact that the Defendant’s application was made to enable it to raise a defence and counterclaim. It is therefore inappropriate at this stage to order the Plaintiff to bear any part of the costs of the application given the possibility that the Defendant’s defence may eventually turn out to be unmeritorious. In the circumstances, I grant a costs order nisi that the costs of the hearing on 27th August 2008 before me be costs in the cause with certificate for counsel.
Representation: Mr Eugene Yim instructed by MessrsGallant Y T Ho & Co for the Plaintiff. Mr Stephen Yeung instructed by Messrs Huen & Partners for the Defendant. |
Cases cited in this judgment