Dragon Pearl Night Club Restaurant Ltd v. Leung Wan Kee Shipyard Ltd

HCA 889/2010 & HCA1288/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 889 OF 2010

BETWEEN

BETWEEN

Before : Deputy High Court Judge Au-Yeung in Chambers

Date of Hearing : 29 October 2010

Date of Handing Down Decision : 9 December 2010

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D E C I S I O N

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THE APPLICATIONS

1.Dragon Pearl Night Club Restaurant Ltd. (“Dragon Pearl”) is the purchaser and Leung Wan Kee Shipyard Limited (“Leung Wan Kee”) is the builder/seller of a ship (“the Vessel”) under a shipbuilding contract made partly in Chinese and partly in English dated 2 July 2008 (“the Agreement”).  A dispute arose between the parties such that building of the Vessel did not proceed to completion.  Dragon Pearl took out an action under HCA 889/2010 for delivery up of the Vessel and damages for wrongful detention (“the DP Action”).  Leung Wan Kee took out another action under HCA 1288 of 2010 for damages for breach of the Agreement and trespass or conversion (“the LWK Action”) .

2.There are 4 summonses before me containing 6 applications:

Under the DP Action

A.  Dragon Pearl’s application for summary judgment for delivery up of the Vessel and an order, insofar as it is necessary, for payment into Court of a sum sufficient to discharge any lien which Leung Wan Kee may have (“the delivery application”);

B.  Alternatively, Dragon Pearl seeks an interim injunction restraining Leung Wan Kee from detaining the Vessel or otherwise interfering with or acting inconsistently with Dragon Pearl’s right of ownership and possession of the Vessel (“the injunction application”).

Under the LWK Action

C.  Dragon Pearl’s application for striking out parts of the statement of claim insofar as they contain assertions that property rights in the Vessel has not passed to Dragon Pearl (“the striking out application”);

D.  Leung Wan Kee’s application for part judgment under Order 14 for the 5^th and 6^th instalments of the purchase price (“the partial judgment application”);

E.  Alternatively, Leung Wan Kee’s application for interim payment (“the interim payment application”)

Under both Actions

F.     Leung Wan Kee’s application for consolidation of both actions (“the consolidation application”).

3.Central to the applications in A – C is the issue of which party has property in the Vessel.  Dragon Pearl asks that this question be answered under Order 14A, rules 1 and 2 although no separate summons has been issued.  It is a question of construction of the Agreement.  The facts relied on to answer that issue will be those entirely undisputed. 

4.If a question of construction will finally determine whether an important issue is suitable for determination under O.14A and where it is a dominant feature of the case a court ought to proceed to so determine such issue.  Respondents are not entitled to contend that they should be allowed to hunt around for evidence or something that might turn up on discovery which could be relied upon to explain or modify the meaning of the relevant document.  If there were material circumstances of which the court should take account in construing the document, they must be taken to have been known, and could only be such as were known, to the parties when the agreement was made.  In the absence of such evidence, the court should not refrain from dealing with the application.  See Hong Kong Civil Procedure 2011, paragraph 14A/2/4.  I consider it appropriate to approach under Order 14A in the circumstances of this case and resolve the question of passing of property first.

THE PASSING OF PROPERTY IN THE VESSEL

5.Property in goods passes at such time the parties intend it to pass.   The Vessel in question was not in existence at the time of the Agreement and thus come under the description of “unascertained or future goods” in section 20 of the Sale of Goods Ordinance, Cap. 26 (“SOGO”).  Under that section,

“20. Unless a different intention appears, the following are rules for ascertaining the intention of the parties as to the time at which the property in the goods is to pass to the buyer-

…

Rule 5. (1) Where there is a contract for the sale of unascertained or future goods by description, and goods of that description, and in a deliverable state, are unconditionally appropriated to the contract, either by the seller with the assent of the buyer, or by the buyer with the assent of the seller, the property in the goods thereupon passes to the buyer. Such assent may be express or implied, and may be given either before or after the appropriation is made.

(2) Where, in pursuance of the contract, the seller delivers the goods to the buyer or to a carrier or other bailee (whether named by the buyer or not) for the purpose of transmission to the buyer, and does not reserve the right of disposal, he is deemed to have unconditionally appropriated the goods to the contract.”

6.In ascertaining the intention of the parties, I bear in mind some general principles:

(i) The intention of the parties as to when the property should pass is to be ascertained at the time of the contract, in the present case, a written one. The exercise involves ascertaining the meaning which the document would convey to reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract: Investors Compensation Scheme Ltd. v. West Bromwich Building Society [1998] 1 WLR 896, at pages 912H – 913B, per Lord Hoffman.

(ii) The previous negotiations of the parties and their declarations of subjective intention are not admissible to prove their intention at the time of the contract: Investors Compensation Scheme Ltd. v. West Bromwich Building Society, above.  Likewise the conduct of the parties subsequent to the contract will not be considered.

(iii) In the absence of an express term, the property is usually vested in the seller until delivery to the buyer. The burden of proof is thus on the buyer to point to circumstances showing that the property is vested in him: per Lord President Dunedin of Scotland in Sir James Laing & Sons Ltd. v. Barclay, Curle & Co. Ltd., [1908] AC 35, at page 39; adopted by the House of Lords on appeal, at pages 43-44. 

(iv) It may be a useful guide to look at other decisions, but, after all, the question is what the parties said and intended: Sir James Laing case, per Lord Loreburn LC, at page 43.

7.Mr. Yin, counsel for Dragon Pearl, relies heavily on the obiter dictum[1] in Seath v. Moore (1886) 11 H.L. 350, 380 for the proposition that if a contract for the building of a ship provides for (i) payment by instalments and (ii) building under the superintendence of the buyer, property passes to the buyer at each stage upon payment of the instalment.  Lord Watson states,

“The English decisions to which I have referred appear to me to establish the principle that, where it appears to be the intention, or in other words the agreement, of the parties to a contract for building of a ship, that at a particular stage of its construction, the vessel, so far as then finished, shall be appropriated to the contract of sale, the property of the vessel as soon as it has reached that stage of completion will pass to the purchaser, and subsequent additions made to the chattel thus vested in the purchaser will, accessione, become his property. It also appears to me to be the result of these decisions that such an intention or agreement ought (in the absence of any circumstances pointing to a different conclusion) to be inferred from a provision in the contract to the effect that an instalment of the price shall be paid at a particular stage, coupled with the fact that the instalment has been duly paid, and that until the vessel reached that stage the execution of the work was regularly inspected by the purchaser, or someone on his behalf.”

8.I note, however, that Seath v. Moore is distinguishable from the present case because the contracts there were not between a shipbuilder and purchaser of a ship but between a shipbuilder and a sub-contractor responsible for supplying and installing machinery on the ship.  The contracts therein contain an express transfer of property clause as follows:

“Upon a payment being made on account of any such contract, the portions of the subject thereof, so far as constructed, and all materials laid down for the purpose of constructing the same, shall become, and be held as being the absolute property of the said TB Seath and Company (i.e. the shipbuilder), subject only to [the sub-contractor’s] lien for payment of the price on any balance thereof that may remain due to us.” (p.355)

The 2 principles in this case must therefore be considered in the light of these features.

9.The logic of the Seath v. Moore principles was spelt out in the earlier judgment in Clarke v. Spence (1836) 4 Ad.&E 448, 467-471,

“It seems to be clear that, as, by the contract, the vessel was to be built under a superintendent appointed by the purchaser, the builder could not compel the purchaser to accept any vessel not constructed of materials approved by the superintendent; and on the other hand, that the purchaser could not refuse any vessel which had been so approved. It follows that, as soon as any materials have been approved by the superintendent and used in the progress of the work, the fabric consisting of such materials is appropriated to the purchaser; otherwise the superintendent might be called upon, when one vessel had been nearly constructed, to begin his work de novo, and superintend the building of a second: and, in this point of view, the appointment of a superintendent, by the contract, appears to be of considerable importance. …

Granting therefore that, under such a contract as this, the parts of the vessel, as they are added to the fabric, are appropriated to the purchaser by way of contract, so that neither could he refuse them when the vessel should be completed, nor the builder compel him to accept any other, yet it does not necessarily follow that such appropriation vests the property in the purchaser until the whole thing contracted for is in existence, that is, until the completion of the vessel. But, in the passage under discussion, the payment under the contract is relied on as the most material point, the appropriation being effected, as it is said, by that payment: and accordingly, in Atkinson v. Bell (8 B.&C. 282), Mr. Justice Bayley, in alluding to Woods v. Russell (5 B.&Ald.942), says, that as by the contract given portions of the price were to be paid according to the progress of the work, by the payment of those portions of the price the ship was irrevocably appropriated to the person paying the money. That was a purchase of the specific articles of which the ship was made. …

… The passage above cited … is founded on the notion that provision for the payment regulated by particular stages of the work is made in the contract, with a view to give the purchaser the security of certain portions of the work for the money he is to pay, and is equivalent to an express provision that on payment of the first instalment the general property in so much of the vessel as is then constructed shall vest in the purchaser. If this notion be correct, the payment is no doubt material to the vesting of the property, and the effect of such payment is, that there is not only an appropriation of so much of the vessel as is then constructed, but also a vesting of the general property in so much in the purchaser, subject to the right of the builder to retain it in order to complete it, and earn the rest of the price.  The rights of the parties will then be in the same state as if so much of the vessel as is then constructed had originally belonged to the purchaser, and had been delivered by him to the builder to be added to and finished; and it will follow that every plank and article subsequently added will, as added, become the property of the purchaser as general owner.”

10.The House of Lords in a subsequent case held that the  principles in Seath v. Moore might be marks pointing to the property passing, but they were not conclusive.  The House declined to treat those principles as raising a presumption but instead treated that case as a decision based on the evidence and the words of the contract that the ship had become the property of someone. See Sir James Laing & Sons Ltd. v. Barclay, Curle & Co. Ltd. [1908] AC 35, per Earl of Halsbury, at page 44.

11.In the Sir James Laing case, the vessels were to be built by the English shipbuilders with their materials according to certain specifications and under the superintendence of the Italian purchaser.  Payment was to be by 7 instalments.  The agreement expressly provided that the vessels would not be considered as delivered to and finally accepted by the purchasers until they had passed the official trial trip and had been approved by the Italian emigration authorities and all the conditions of the contract had been fulfilled (at page 37).  On completion of each of the steamers the builders shall, in exchange for the purchase money due and for a bank guarantee for the final instalment, hand over to the purchasers the ‘usual certificates’.  The steamers shall be at the risk of the builders who shall keep them insured against fire and other risks.  The Lord President Dunedin in Scotland held,

“I think the onus, so to speak, rests upon the person who wishes to show that the ship belongs not to the builder to whom it would what I call naturally belong, but to someone else. … But the whole matter has been really altered by the Sale of Goods Act (56 & 57 Vict. c.71), and now it is quite clear that by the law of Scotland, if people choose so to contract, they can pass the property of a thing which is being sold without delivery. That being so, it seems to me clear, and I think it should be clearly laid down, that if people want these consequences to happen they must really say so. There is not the slightest difficulty in so framing a contract, if it is wished, as between a shipbuilder and the person who is buying the ship, that the property in a gradually constructed ship shall be held to pass at certain stages; but if so, I think it must be clearly said.” (at page 39)

This judgment was upheld by the House of Lords who was of the view that the contract was for a completed ship; the risk lay upon the builders until delivery and there was no intention to make delivery or to part with the property until the vessel was completed (at page 43).

12.In Reid v. Macbeth & Gray [1904] AC 223, although the contract contained the terms of payment by instalments and superintendence by the buyer, an express provision stated that the vessel, as she is constructed shall immediately as the sale proceeds become the property of the purchaser but the builders shall have a lien for their unpaid purchase money.  This was stated, obiter, to be a contract for the sale of a complete ship.

APPLICATION OF THE LAW TO THE FACTS

13.There is no express provision governing ownership of the Vessel.  Payment of the purchase price is by 7 instalments in similar terms to those in Seath v. Moore.  Four instalments have already been paid.  Timely payment is not a pre-condition for Leung Wan Kee’s performance because there can be compensation from Dragon Pearl by way of penalty under clause 11.4.  The Agreement also provides for construction of the Vessel under the superintendence of Dragon Pearl’s surveyor, who is given the power to make regular inspection of the Vessel and accept or reject the work in progress.  There has been appropriation of building materials by the seller and assent by the buyer.  Prima facie, Seath v. Moore applies so that with payment of every instalment, whatever has been completed will be appropriated to Dragon Pearl.  Dragon Pearl accepts that whatever defects had occurred up to the 4^th instalment would only result in a claim for breach of warranty and not rejection of the Vessel.

14.On the other hand, the contract is more than just for sale of materials and appropriating them to the Vessel.  (In fact, some building materials and fittings were supplied by Dragon Pearl.)   The Agreement clearly provides for the design and custom building of a vessel in the Mainland with delivery as a completed vessel in Hong Kong on CIF terms.  CIF term is clearly a reservation by the seller of a right of disposal. 

“The appropriation must be unconditional, that is to say, the party appropriating must intend that the property shall pass by the appropriation, if assented to by the other party, and not upon the occurrence of some further event, e.g. payment or tender of the price.  By s.[21(1) of SOGO], the seller may, by the terms of the contract or appropriation, reserve the right of disposal of the goods until certain conditions are fulfilled; he may be deemed to have done so in the circumstances set out in s.[21(2) and (3)].  So, for example, in the case of the usual c.i.f. contract, the seller reserves the right of disposal by retaining the documents against payment or securing of the price by the buyer, and “the notice of appropriation under an ordinary c.i.f. contract is not intended to pass, and does not pass, the property.” Benjamin’s Sale of Goods, 8^th ed, 2010, para. 5-029, 5-133.

A conditional appropriation may be inferred from the circumstances of the contract.  Even though the goods may have been so far appropriated that the parties are agreed that those goods alone are to be delivered, yet the appropriation may be conditional on some final act being done by the seller before the property is to pass.  In Carlos Federspiel & Co SA v. Charles Twigg & Co Ltd, Pearson J. said:

‘Usually but not necessarily, the appropriating act is the last act to be performed by the seller. For instance, if delivery is to be taken at the seller’s premises and the seller has appropriated the goods when he has made the goods ready and identified them and placed them in position to be taken by the buyer and has so informed the buyer, and if the buyer agrees to come and take them, that is the assent to the appropriation. But if there is a further act, an important and decisive act, to be done by the seller, then there is prima facie evidence that probably the property does not pass until the final act is done.’

… There is little doubt that, where the goods were previously unascertained, but have been appropriated to the contract, the passing of property would likewise be conditional on the performance of such an obligation by the seller.” Benjamin’s Sale of Goods, 8^th ed, 2010, para. 5-071.

15.The preliminary sea trial is to be done in the Mainland with the final sea trial in Hong Kong waters by the Marine Department.  The 6^th instalment of the price is payable only upon delivery in Hong Kong and delivery of documents in respect of the Vessel.  There is in my view reservation of a right of disposal by Leung Wan Kee until after sea trials and all the approvals are to be obtained.

16.There is also a provision for risk to remain with Leung Wan Kee who must take out insurance.  Under section 22 of SOGO,

“Unless otherwise agreed, the goods remain at the seller’s risk until the property therein is transferred to the buyer, but when the property therein is transferred to the buyer the goods are at the buyer’s risk, whether delivery has been made or not …"

That express provision for risk and duty to insure is an indication that property and risk remains with Leung Wan Kee. 

17.Further, the Agreement does contemplate the question of ownership but does not provide the answer.  Clause 11.6 provides that during the building process, if Leung Wan Kee encounters financial problems, industrial action or other problems so that it cannot perform the Agreement, both parties can engage a qualified arbitrator to assess the value of the Vessel in accordance with the contract price, and retrieve the ownership of the Vessel.  It is not clear under this clause who the person having the ownership is and who can retrieve it.  If the parties had intended it to be Dragon Pearl, they would have, at the time of drafting the Agreement, disapplied the ordinary rule of ownership being with the seller.

18.Considering all circumstances, the facts of this case are more in line with the Sir James Laing case.  I find that as a matter of construction of the Agreement, the property in the Vessel remains with Leung Wan Kee until completion and delivery of the Vessel to Dragon Pearl.

REVESTING OF OWNERSHIP

19.Assuming I am wrong and property has passed to Dragon Pearl, Mr. Suen has an alternative submission that there is an implied term to the effect that in the event of the buyer’s repudiation, property in the Vessel would revest in Leung Wan Kee. 

“The cases on the sale of goods give little guidance on the consequences which the seller’s termination of the contract, following the buyer’s repudiation or breach, has upon the seller’s right to resell or his power to pass a good title in the goods to the second buyer. Where a contract for the sale of land is validly terminated by the vendor on account of the purchaser’s repudiation or default in completion, the vendor is entitled to deal with the property as owner and to resell. He may retain the whole of the proceeds of the resale (even when he sells at a higher price) and either: (a) claim from the original purchaser any difference between the original price and that under the resale, after giving credit for any deposit paid; or (b) forfeit the deposit. These principles are derived from the decided cases, and do not depend on any express terms in the contract. Indeed, the power of resale derived from the restoration of the rights of ownership is independent of a power of resale expressly reserved in the contract of sale in the event of the purchaser’s default; even if the contract contains such an express power, the vendor may terminate the contract and resell as owner.

A New Zealand case holds that exactly the same principles apply to the seller’s termination of a contract for the sale of goods: that at common law (and quite apart from the provisions of the Sale of Goods Act) the seller’s acceptance of the buyer’s repudiation revests the property in the seller so that he can resell as owner. … Where the seller resells under his common law rights as owner of the goods following his termination of the original contract, he can keep the whole proceeds of the resale and either forfeit the deposit paid by the buyer, or sue for damages for any net deficiency after giving credit for the deposit paid.

If these principles from the cases on contracts for the sale of land can be carried over to contracts for the sale of goods, the seller who justifiably terminates the contract on the ground of the original buyer’s repudiation or breach is entitled to resell whether or not the property in the goods had passed to the original buyer.”

Benjamin’s Sale of Goods, 8^th ed, 2010, para. 15-112 to 113.

20.The analogy to sale of land may not be appropriate since upon such sale, the legal title is not transferred to the buyer until completion.  However, in the usual breach of contract case, common law and SOGO give him a right to re-sell, enabling him to validly pass title to the new buyer under section 50(2) SOGO.  I am inclined towards agreeing with Mr. Suen.

THE DELIVERY APPLICATION

21.In the light of my finding on property remaining with Leung Wan Kee, there is no basis for ordering the Vessel to be delivered up to Dragon Pearl.

22.In case I am wrong in my finding, I also deal with the issues on lien.  Does Dragon Pearl need to pay a sum to satisfy Leung Wan Kee’s lien?  Has the lien been lost?

A Sum to Satisfy the Lien

23.Leung Wan Kee has not received the full purchase price.  Not only does it have a common law lien but as an unpaid seller, it also has a lien under section 41 SOGO.  A lien extends to the price but not damages.

“The extent of the lien is limited to the price: the seller is not entitled to exercise his lien so as to claim from the buyer his expenses for detaining the goods until the price is paid, because during the period of the lien the seller is detaining the goods for his own benefit. The seller’s remedy against the buyer for these expenses will be a claim for damages if he can establish a ground for such a claim. If, however, there is an agreement that such expenses are to be treated as part of the price, the lien will extend to the amount of the expense.” Benjamin on Sale of Goods, 8^th ed, 2010, para. 15-044; Halsbury’s Laws of England, 5^th ed, Vol. 68, at para. 822, 827 and 841.

24.The 5^th instalment of the price should have been paid 7 days after launching of the Vessel on 19.9.2009.  It is covered by the lien.

25.The 6^th instalment should be payable 7 days after delivery of the Vessel in Hong Kong and its documents. At the same time, the fees for additional and variation works (“the fees”) are also payable.  It is indisputable that the time for payment of the 6^th instalment has not yet arrived.  Even Leung Wan Kee says that it has deliberately withheld application to the Marine Department for final inspection for fear that once inspection was completed and a license was granted in favour of Dragon Pearl, the latter would simply take possession of the Vessel without settling the outstanding payment. Even though Leung Wan Kee was allegedly ready, willing and able to deliver the Vessel, the primary obligation of Dragon Pearl to perform the contract by paying the 6^th instalment was transformed into a secondary obligation to pay damages for breach of contract: Photo Production v. Securicor [1980] AC 827, 848B to 850C, per Lord Diplock.  It is all the more so since liability to pay the fees and quantum are disputed. 

26.Solely to discharge the lien, Dragon Pearl must pay the 5^th instalment without any deduction. This is because the lien will be lost once Leung Wan Kee delivers possession to the owner: Trustee of the Property of F. Lord (a bankrupt) v. Great Eastern Railway Company [1908] KB 54, 60.  (This view  should not affect the court’s discretion to impose other conditions in the Order 14 context to cover other rights of the unpaid seller when making an order for delivery. )

Has the Plaintiff Lost the Lien?

27.A person entitled to a lien must claim it for a sum for which a lien is due and he may lose the lien if he so conducts himself as to excuse the owner from tendering: Albermarle Supply Co. v. Hind & Co. [1927] 1 KB 307, at 318-9, per Scrutton LJ.  Hence, a lien was lost in the following circumstances:

(a)   When the person claiming the lien makes it clear that he will not release the goods upon tender of the correct amount: Albermarle Supply Co. v. Hind & Co., above;

(b)   When the claimant of the lien refuses to deliver up the goods by claiming a right to retain them upon a different ground, making no mention of the lien: Boardman v. Sill (1808) 1 Campb. 410n.  He cannot afterwards resort to his lien as a justification for retaining them: White v. Gainer (1824) 2 Bing.23.

28.Mr. Yin submits that although Leung Wan Kee’s statement of claim now asserts a lien, that is only an alternative claim to its primary claim that property in the Vessel has not passed under the Agreement.  The correspondence showed that when delivery of the Vessel was demanded of Leung Wan Kee, there was never any claim to a lien.  In particular, in a letter dated 27 May 2010, Leung Wan Kee’s solicitors asserted a right to resell the Vessel which was equivalent to asserting that it was Leung Wan Kee’s property, without any mention of a lien. Leung Wan Kee has by its conduct, so Mr. Yin submits, made clear to Dragon Pearl that it would not have released the Vessel upon tender of the correct amount and consequently any right which Leung Wan Kee may have to assert a lien has since been lost. 

29.I do not think the law requires the unpaid seller to use the word “lien” expressly provided his meaning is clear.  In the correspondence, especially the letter dated 27 May 2010, Leung Wan Kee made it clear that without having received the 5^th instalment, it would not arrange any handover of the Vessel.  That was clear assertion of a lien.  It went on to assert that it accepted repudiation of the Agreement and claimed damages of  about $9.45 million. The claimant under a lien does not lose it by demanding for too large a sum or by basing it partly on the wrong cause: Albermarle Supply Co. v. Hind & Co. [1927] 1 KB 307.

“A person claiming a lien must either claim it for a definite amount, or give the owner particulars from which he himself can calculate the amount for which a lien is due. The owner must then in the absence of express agreement tender an amount covering the lien really existing. If he does not, unless excused, he has no answer to a claim of lien. He may be excused from tendering (1) if he has no knowledge or means of knowledge of the right amount; (2) if the person claiming the lien for a wrong cause or amount makes it clear that he will not release the goods unless his full claim is satisfied, and that claim is wrongful. The fact that the claim is made for more than the right amount does not matter unless the claimant gives no particulars from which the right amount can be calculated, or makes it clear that he insists on the full amount of the right claimed.”

30.Further, Leung Wan Kee’s threat of re-selling the Vessel was its alternative remedy under SOGO.  There was nothing to show that it was giving up its right under a lien.  The lien was not lost.

THE INJUNCTION APPLICATION

31.Dragon Pearl seeks an interim injunction restraining Leung Wan Kee from detaining the Vessel or otherwise interfering with or acting inconsistently with Dragon Pearl’s right of ownership and possession of the Vessel. 

32.The DP Action does not contain an alternative claim for breach of the Agreement. Consequent upon my ruling on the question of property, there is no more serious question to be tried.  I cannot see why, as owner, Leung Wan Kee should be denied the right of detaining the Vessel. 

33.The right to “interfere with or act inconsistently” by asserting a lien or threatening to resell are statutory rights in mitigation of loss.  The Vessel was built as a harbour cruiser for business purpose.  Any loss which Dragon Pearl would suffer as a result of any wrongful act of Leung Wan Kee could be compensated for by damages. 

34.I am of the view that an interim injunction should not be granted in the circumstances of this case.

THE STRIKING OUT APPLICATION

35.The statement of claim relies on Dragon Pearl’s breach of the Agreement. Further, Dragon Pearl and its Managing Director (the 2^nd defendant) had, in the absence of the security guard, cut off the chains and ropes tied onto the Vessel and towed it away from the shipyard of Leung Wan Kee without its knowledge and approval.  The police found the Vessel with crew members of Dragon Pearl on board.  Leung Wan Kee therefore sues in trespass of its shipyard and conversion of the Vessel.

36.The striking out application is wholly premised on property having passed to Dragon Pearl.  It falls with the delivery application.

37.Trespass and conversion are premised on possession: 

“A person has title to sue for conversion if and only if he had, at the time of the conversion, either actual possession or the immediate right to possess the property concerned. It is not necessary to prove ownership.” Clerk & Lindsell on Torts, 19 ed, 2006, para. 17-40.

“Though the right to possession, without actual possession, may enable a claimant in conversion to maintain a claim, in trespass the claimant must be in possession at the time of the interference.” Clerk & Lindsell on Torts, 19 ed, 2006, para. 17-128.

There is no basis to strike out part of the statement of claim.

THE PARTIAL JUDGMENT APPLICATION

38.Leung Wan Kee seeks part judgment for the 5^th and 6^th instalments of the purchase price.

39.The question of which party was in breach is hotly contested.  In purported defence and counterclaim, Dragon Pearl alleges that there were defects in the production and delay in delivery of the Vessel under the Agreement, causing it to suffer loss of profit and reputation and goodwill. Although the DP Action referred to the Agreement, Dragon Pearl did not seek damages along these lines.  Even so, I do not think it should be barred from raising a defence and counterclaim in the LWK Action.

40.Insofar as defective production is concerned, long before the litigation started, Dragon Pearl has already asserted that Leung Wan Kee’s production was not complete or up to standard and refused to accept some of the work and materials covered by the 5^th instalment. There was also the question of whether variation works arose out of Leung Wan Kee’s fault.  The letter before action dated 28 April 2010 set out some of the defects.  In addition, a list of defects has been exhibited.  I accept that there are triable issues on the question of defects.

41.The costs of making good those defects are claimed to be $4,000,000, supported by a one-page document from the company managing the Vessel on Dragon Pearl’s behalf.  There is no breakdown for this sum.   On the other hand, Leung Wan Kee asserts that at most the costs for remedial works should be in the sum of $30,000.  I disregard Dragon Pearl’s estimated sum for want of particulars.

42.However, the loss arising out of defective production is not limited to making good those defects.  During the period for remedial work, Dragon Pearl may be entitled to e.g. rent a substitute vessel to discharge the functions of the Vessel. Dragon Pearl has provided documents to show the daily rental cost and estimated loss of profits.  I find the quantum to be triable and may well exceed the claim of Leung Wan Kee.

43.Insofar as delay in delivery is concerned, there is a dispute as to whether or not Leung Wan Kee had been guilty of delay.  Leung Wan Kee claims that any delay was consented to by Dragon Pearl.  Further, the maximum loss recoverable is prescribed under clause 11.5 which provides that starting from the 31^st day after the due date for delivery (i.e. 4.8.2009) Leung Wan Kee has to deduct $5,000 from the contract price as penalty for each day’s delay in delivery.  The maximum deduction will be $600,000.

44.Complaints of delay were as early as in mid-2009.  According to Dragon Pearl, it was even before the 4^th instalment was paid. Although a fire at the Xingjiang shipyard was said to have caused a few months’ delay, it occurred after the original completion date under the Agreement.  Notwithstanding the “consent” to postpone the completion date, there remains a live issue as to whether or not Leung Wan Kee was responsible for the delay.  This is clearly triable.

45.As for the damages arising out of delay, arguably the quantum is limited to $600,000 pursuant to clause 11.5.  However, any loss arising out of defective production is not so limited. 

46.Given that Dragon Pearl has a defence and counterclaim for damages which might extinguish Leung Wan Kee’s claim and which arise out of the same subject matter of Leung Wan Kee’s claim under the Agreement,   Dragon Pearl is entitled to unconditional leave to defend.

47.Although Leung Wan Kee was aware of the potential defence of Dragon Pearl, Dragon Pearl has never purported to quantify it before action.  Dragon Pearl did not even claim for damages in the DP Action.  This might well have led Leung Wan Kee into thinking it has a greater chance than it should have in the present application.  I consider it proper to order costs in the cause of the LWK Action.

THE INTERIM PAYMENT APPLICATION

48.Under Order 29 rule 11(c), Leung Wan Kee has to show that if the action proceeded to trial, it would obtain judgment for substantial damages against Dragon Pearl.  From the analysis under the Partial Judgment Application, Leung Wan Kee is unable to show that, taking into account the potential defence and counterclaim, the debt/damages it can recover will at least represent the amount of the 5^th and/or 6^th instalment.  The burden under Order 29, rule 11(c) is not discharged.

THE CONSOLIDATION APPLICATION

49.It would have been correct as a matter of principle for the 2 actions to be consolidated and tried together given that the causes of action arose out of closely connected facts.  However, given my ruling under O.14A, if the DP Action is not pursued, there is no point in ordering consolidation.   Dragon Pearl can simply put in a defence and counterclaim to LWK Action.  I leave it to the parties to work out a set of directions within 28 days after considering this Decision.  Costs will be reserved.

CONCLUSION

50.Under Order 14A, I rule that the property in the Vessel remains with Leung Wan Kee as a matter of construction of the Agreement.  It possesses a common law lien, a statutory lien of an unpaid seller and a statutory right to sell. The lien is limited to the 5^th instalment of the purchase price but not damages.  The fact that Leung Wan Kee has not used the word “lien” when it first asserted its right in correspondence and that it had claimed for a larger amount thereunder do not deprive it of the lien. 

51.In respect of each application, I order as follows:

(a)   Re the delivery application and injunction application:  Dragon Pearl’s summons is dismissed, with an order nisi that costs be to Leung Wan Kee with certificate for counsel.

(b)   Re the striking out application: the summons is dismissed, with an order nisi that costs be to Leung Wan Kee with certificate for counsel.

(c)   Re the partial judgment application: there be unconditional leave to Dragon Pearl to defend.  Re the interim payment application, that it be dismissed. There be an order nisi that costs be in the cause of the LWK Action with certificate for counsel.

(d)   Re the consolidation application: I adjourn it for the parties to jointly submit the terms (agreed or disagreed) for consolidation for my approval (or notify me if consolidation is no longer required) within 28 days.  No attendance is required unless otherwise directed.  I order nisi that costs of the consolidation application be reserved.

52.With regard to costs of the hearing before me, I order nisi that such costs be apportioned as follows:

(a)   As to 70%, it shall be costs in relation to the delivery, injunction and striking out applications

(b)   As to 25%, it shall be costs in relation to the partial judgment and interim payment applications;

(c)   As to 5%, it shall be costs in relation to the consolidation summonses.

53.Any application to vary this costs order shall be by summons taken out within 14 days from the date of handing down of this Decision.  Any return date shall, as far as possible, be on 7 January 2011.

54.The matter is adjourned to 7 January 2011 for summary assessment of costs on the papers.  Statements of costs shall be filed and served by 28 December 2010.  Grounds in opposition shall be filed and served by 6 January 2010.  No attendance is required.

55.I am most grateful to counsel for their very thorough research and enlightening arguments.

Mr. Michael Yin, instructed by Messrs Yu, Tsang & Loong, for the plaintiff
in HCA889/2010 and the 1^st and 2^nd defendant in HCA1288/2010

Mr. Jenkin Suen instructed by Messrs S.K. Wong & Co., for the defendant in HCA889/2010 and the plaintiff in HCA1288/2010

Dragon Pearl's appeals to Court of Appeal dismissed. Please refer to CACV277/2010 and CACV278/2010 dated 11 October 2011