RYDER INDUSTRIES LIMITED(formerly SAITEK LIMITED) v TIMELY ELECTRONICS COMPANY LIMITED

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

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2358 OF 2007

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IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 109 OF 2009

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REASONS FOR DECISION

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

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

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

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

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

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

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

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

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

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

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

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

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

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

MERITS OF THE APPEAL

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

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

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

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

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

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

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

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

(i)   Particular lien

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

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

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

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

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

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

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

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

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

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

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

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

“72. I have found that there was illegality in the performance of the agreement, primarily on the part of Timely, in the arrangements described as the 2^nd Illegality, and illegality in performance of behalf of Saitek in regard to the 4^th Illegality. The question then is whether, as a matter of policy, these findings mean that the Court ought to decline relief to Saitek. In my judgment the answer is clearly that it should not. While I accept that there has been some illegal conduct, it is such that the parties largely share responsibility for it. On the material available it is not conduct that could be described as iniquitous, nor has it resulted in actual criminal or other enforcement proceedings in the PRC. There is no suggestion of any evasion of taxes or duties; the contraventions are, in a sense, administrative.

73.   Considering pragmatically whether such illegality ‘taints’ the contract to the extent that it should not be enforced involves recognising that Saitek do not need to rely on the illegalities as a basis for the claims, and that, in my view, it would be disproportionate to decline to enforce the payment obligation under the Agreement, particularly where it has otherwise been performed.  Accordingly, in my judgment, the illegality defence fails, and the claims for payment succeed.”

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

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

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

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

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

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

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

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

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