SHAH AJAY KANAIYALAL AND ANOTHER v. WONG TAK KWONG JOLY AND ANOTHER

HCA 1431/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1431 OF 2008

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J U D G M E N T

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1. The plaintiffs and the defendants entered into business venture of sourcing stone materials, including marble and granite, from overseas for sale in the Mainland and Hong Kong for profits. The co-operation came to a standstill in 2008. The parties blame each other for breach.

BACKGROUND

2. The evidence, I find, shows the following background.

3. The 1st plaintiff (“Shah”) and the 1st defendant (“Wong”) are veteran businessmen in the trading of stone materials.  The 2nd plaintiff (“Gipoint”) and the 2nd defendant (“Simbel”) were respectively Hong Kong companies controlled by Shah and Wong.  The parties had had business dealings with each other well before their joint venture in question.

4. It was in about 2002 when Shah and Wong began importing stones from overseas quarries to Yun Fu, the Mainland, for sale for profits.  Yun Fu was (and is) an agglomerate of wholesalers and retailers of stone materials for the construction industry in the southern Mainland.  Shah could obtain supply of stone blocks from quarries in Oman, Turkey, India and Lebanon, while Wong had business knowledge about the Yun Fu market.  The parties agreed to source stone materials from these overseas quarries to Yun Fu for sale.  They would contribute towards the cost as well as to share the profits and loss in the business co-operation in equal shares.  The agreement was made orally (“the Marble Agreement”).

5. Pursuant to the Marble Agreement, Shah (through Gipoint)[1] would source stones from the overseas quarries to Yun Fu for sale in the local market.  The decision to purchase was made jointly by Shah and Wong.  Shah (through Gipoint) would first pay for the stones[2] and their shipment.  Wong (through Simbel) would reimburse him half of such cost[3].  This way, the parties jointly funded the importation of the stones.  When the stones were sold, the parties would share the profits or loss after deduction of the other expenses of the business.  The local daily operation of the parties’ business in Yun Fu was entrusted to their employee, Zhang Jin Yu (or Cheung Kam Yuk) (“Zhang”), a Mainlander introduced by Wong.

6. Pursuant to the Marble Agreement, Shah began to source and ship stones to Yun Fu for processing and sale in the local market in the fall of 2002.

7. In early September 2003, Xintiandi Stone Company Limited (“Xintiandi”) was incorporated in the Mainland, and became the vehicle through which the stones sourced were stocked, processed and sold in Yun Fu.  On record, Shah and Wong were respectively the 49% and 51% owner of Xintiandi.  Wong was the registered legal representative of the company.  Zhang became the manager of the company and continued to take charge of the daily operation.

8. In the same year, the parties further their business co-operation into sourcing granite for sale in Hong Kong.  This time Shah and Wong entered into the agreement for and on behalf of their respective companies, Gipoint and Simbel (“the Granite Agreement”).  The agreement was oral.  Again, Gipoint would pay for the cost of the granite sourced and recover half of it from Simbel before Simbel sold them in Hong Kong. Likewise, any profits and loss from the sale would be shared by the parties equally after the other expenses of the business, such as warehouse expenses, were taken into account.

9. Pursuant to the Marble Agreement, some 39 shipments of stones had been delivered to Yun Fu.  Of them, the invoices for 6 shipments on divers dates in the latter half of 2003 remain unsettled as at today.

10. Pursuant to the Granite Agreement, 5 shipments of granite had been made to Hong Kong, for which Gipoint issued 5 invoices during the latter half of 2003.  Simbel had settled 50% of all but one of those 5 invoices.  The 50% balances of all 5 invoices for the granite remain outstanding as at today.

11. The business between the 2 sides gradually came to a standstill in 2008, when there was also suggestion to wind up their business co-operation.  Dispute arose, when Shah discovered that stock sourced pursuant to the Marble Agreement and kept by Xintiandi had been removed.  There is no dispute that Wong had caused or allowed such stock to be moved to Simbel without payment.

12. Shah and Gipoint also complain that Wong and Simbel have failed to provide satisfactory account of the situation of the stock under the Marble Agreement and the Granite Agreement.  Simbel is also blamed for failing in the sale of the granite.

13. In July 2008, Shah and Gipoint commenced the present action.

THE PLEADED CASES

14. The pleaded cases of the parties have undergone numerous amendments since the commencement of action.  Amendments were still introduced in the course of the trial.  In particular, Wong and Simbel applied for leave to amend their pleading, to adduce further documentary evidence and to file supplemental witness statement. This happened after Shah and Wong have finished giving evidence.  The application was heard on the 8^th day of the trial.

15. Reluctance of the court in allowing amendment of pleaded case at a late stage (or after the close of evidence) is clear.  The new rules of court and their underlying objectives bring an additional dimension to the court’s consideration of such late application: see Ketteman v Hansel Properties Ltd [1987] 2 WLR 312 at 339-340; Liu Shiu To v Li Shiu Tsang, HCA 416/2003 (14 August 2012) at §§16-17; Hong Kong Civil Procedure 2014 (Vol.1) at 20/8/11.

16. I ruled on the summons, and would explain at the convenient junctures below the parts in respect of which leave was refused.

THE DISPUTE

17. Essentially Shah claims against Wong for the following breach of the Marble Agreement:

(1)  misappropriation (through Simbel) of about 10,410.35 sq.m. of marble slabs and 18.68 tons of marble blocks;

(2)  failure and refusal to settle 6 invoices issued by Shah (through Gipoint) for Wong’s 50% share of the cost of the stones[4]; and

(3)  failure to account for the unsold stock.

18. Shah claims that the business co-operation with Wong under the Marble Agreement was in the nature of partnership, with Xintiandi subsequently formed as the agent to facilitate the stocking, processing and sale of the stones.  Wong is therefore said to have been in breach of his contractual and fiduciary duties as a partner.  Shah claims against Simbel for knowing receipt or dishonest assistance in Wong’s breach.

19. Wong denies the existence of a partnership.  As to the misappropriation claim, Wong effectively pleads consent by Shah.  As to the 6 invoices unsettled, Wong raises quantum and quality dispute.  Wong denies the alleged failure to account in respect of the unsold stock. Wong also puts forward a counterclaim.  Simbel denies the alleged knowing receipt or dishonest assistance in respect Wong’s alleged breach.

20. Gipoint claims against Simbel for the following breach of the Granite Agreement:

(1)  failure to settle its 5 invoices for the cost of the stones in the amount of HK$608,119.41;

(2)  failure to render proper account; and

(3)  failure to act competently and in good faith to sell the granite within reasonable time.

21. Again, the alleged partnership relationship between Gipoint and Simbel, and thus the extent of duties of Simbel, are denied.  Simbel also denies breach and puts forward a counterclaim.

22. Shah and Gipoint seek dissolution of the partnership under the Marble Agreement and the Granite Agreement as well as consequential reliefs.

23. In fact, Xintiandi was already de-registered in 2010. During the trial, it was indicated on behalf of Wong and Simbel that they do not oppose the dissolution, if the partnership relationship is found.

WITNESSES

24. Apart from Shah and Wong, Wong also called Zhang and Kwong Yiu Fai (“Kwong”), account manager of Simbel, as his witnesses[5]. In relation to the quality issue, both sides have adduced expert evidence in the form of reports.  The experts also attended the trial.

PARTNERSHIP

25. The starting point is section 3(1) of the Partnership Ordinance, Cap 38 (“PO”), which says partnership is the relationship which subsists between persons carrying on a business in common with a view of profit.  Mr Wang for Shah and Gipoint summarises, among others, the following propositions, with which I agree.

26. When determining whether a particular relationship is a partnership, the court looks at the substance rather than the name: see for instance, Chan Sau Kut & Anor v Gray & Iron Construction & Engineering Co [1986] HJKLR 84 at 87D-88F; Lo Wai Man & Anor v Chung Kin Ming Daniel, HCA 4766/2001 (30 April 2004) at §§27-28; Ip Man Sun & Anor v Hui Cheong & Anor, HCA 2370/2002 (31 August 2011)[6] at §18.

27. In terms of evidence, the receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner of the business: see section 4(c) of the PO.  Persons engaged in any trade, business or adventure upon the terms of sharing the profits and losses arising therefrom are necessarily to some extent partners in that trade, business or adventure.  If several persons together purchase goods intending to resell them and to divide the profits, a partnership will also be created: see Lindley & Banks on Partnership (19^th ed) at §§5-10; 5-22.

28. Further the parties carrying on business together in that both has a particular role to play or where business decisions are to be made jointly is also testament to a partnership relationship: see Lo Wai Man (above); Ip Man Sun (above)[7].

Marble Agreement

29. There is no dispute that it was an oral agreement between Shah and Wong.  The following features of their business co-operation are borne out by the evidence, oral and documentary.

30. The parties’ common purpose was to source stones from overseas quarries to Yun Fu to be processed and sold.  Shah and Wong would share the cost as well as the profits and losses from the onward sale equally.

31. Shah and Wong jointly made decision as to the purchase.  That included whether to purchase from the quarries and the price. There is dispute as to the relative extent of their participation, including visiting and negotiating with the quarries.  Irrespective of that, the key is that Wong had the say and the decision was never dictated by Shah.  I specifically reject the suggestion that Wong’s participation in the decision to purchase was mere formality.  Likewise, the onward sale of the stones, including the pricing, was never dictated by either Shah or Wong.

32. The parties once planned to incorporate their business by way of setting up a limited company in Hong Kong, of which Shah and Wong would become the shareholders.  At one stage, a draft shareholders’ agreement was also prepared.  According to the draft shareholders’ agreement, it was supposed to be the Hong Kong company, which should set up a Mainland subsidiary in Yun Fu to store and sell the stock to be supplied by the company. However, the draft shareholders’ agreement was never signed, and the plan to incorporate a Hong Kong holding company never materialised.  Nevertheless, the parties did set up their Mainland corporate agent, ie Xintiandi.

33. There is no dispute that Shah and Wong proceeded with their agreed co-operation well before the incorporation of Xintiandi.  Zhang had also been employed to handle the daily operation of their business in Yun Fu.  By then, the business funds of the parties were kept in and operated through the personal account of Zhang.  There had also been many shipments of stones to Yun Fu since the fall of 2002.

34. Notwithstanding its establishment in 2003, Xintiandi or Zhang did not liaise with the quarries.  Nor did Xintiandi become the buyer of or payer for the stones in its name.  Zhang confirmed that in court.  The previous arrangement between Shah and Wong continued, only that the stones imported would now be stocked, processed and sold through Xintiandi as their agent[8] in Yun Fu.  The evidence shows that to the third parties, the quarries in particular, their counterparts were Shah and Wong together as partners, not Xintiandi.

35. In line with the principles, the evidence leaves me with no doubt that the business arrangement between Shah and Wong pursuant to the Marble Agreement was one of partnership.  Xintiandi was at all times

the partners’ agent in the business in Yun Fu.

Granite Agreement

36. The arrangement for the co-operation in sourcing granite from overseas quarries for sale for profits was in essence similar to the Marble Agreement.  Only that the parties, without dispute, were Gipoint and Simbel, which, as mentioned, were controlled by Shah and Wong respectively; and that the granite would be sourced by Gipoint and sold by Simbel[9] in Hong Kong.  Simbel would be responsible for keeping the account of the business co-operation.

37. Most of the above discussion in respect of the nature of business co-operation under the Marble Agreement applies.  I am satisfied that the common purpose of profit and loss sharing and the joint business decision making arrangement was manifestation of no other but a partnership between Gipoint and Simbel.

Other terms of the partnership

38. Apart from, and also subject to the terms of their agreement, the following terms and duties under a partnership, as summarised by Mr Wang, become relevant.

39. All property and rights and interests in property brought into the partnership or acquired, whether by purchase or otherwise, on account of the partnership, or for the purposes and in the course of the partnership business, are partnership property.  They must be held and applied by the partners exclusively for the purposes of the partnership and in accordance with the partnership agreement: section 22 of the PO.

40. The interests of partners in the partnership property, and their rights and duties in relation to the partnership, shall be determined, subject to agreement (express or implied) between the partners, by the following rules:

(1)  All the partners are entitled to share equally in the capital and profits of the business, and must contribute equally towards the losses, whether of capital or otherwise, sustained by the partnership;

(2)  The partnership must indemnify every partner in respect of payments made and personal liabilities incurred by him in the ordinary and proper conduct of the partnership business; or in or about anything necessarily done for the preservation of the business or property of the partnership;

(3)  Every partner may take part in the management of the partnership business: section 26 of the PO.

41. Partners are bound to render true accounts and full information of all things affecting the partnership to any partner or his legal representative: section 30 of the PO.

42. Every partner must account to the partnership any benefit derived by him, without consent of the other partners, from any transaction concerning the partnership or from any use by him of the partnership property, name or business connection: section 31(1) of the PO.

43. By the very nature of trust and confidence behind the partnership, each partner assumed the position of fiduciary and owed such duty to the other partner to act in utmost good faith: see Kao Lee & Yip (a firm) v Donald Koo Hoi Yan & Ors [2003] 3 HKLRD 296 at §§40-61.

44. I see no real dispute as to these partners’ duties as a matter of principle.  Specifically in respect of the Granite Agreement, Simbel does not dispute its duty, at least contractually, to provide accounts of the granite brought into the business and to use best endeavour to sell them[10].  Nor does it dispute that the expenses of the venture such as warehouse expenses will be taken into account before any profits or loss would be shared by the partners equally[11].

UNDER THE MARBLE AGREEMENT

Misappropriation of stock

45. This relates to about 10,000 sq.m. of marble slabs and about 18 tons of marble blocks, which had been sourced by Shah into the partnership pursuant to the Marble Agreement.  The approximate value of the stock so taken away is said to be RMB3,028,142.80[12].  The partnership

has thus lost such assets and therefore Shah has suffered loss in terms of his 50% interest in the partnership assets or potential profits that could have been derived therefrom.

46. There is now no dispute that Wong had caused Simbel to select and to take such stock away by March 2008; but he contends that this was done with the knowledge and consent of Shah[13].

47. According to Shah, he learned from Zhang in about the end of March 2008 about the removal of stock under the Marble Agreement without payment.  The parties’ correspondence in the following 2 months reflects that Shah did not approve of what had happened.  In their reply to the Mainland solicitors for Shah in late May 2008, Wong’s Mainland solicitors admitted the taking away of marble slabs for use in his own projects, but asserted that the all were approved by Zhang and recorded in Xintiandi’s records.  In court, Zhang added that the records were stored in the computer of Xintiandi, to which Shah had access.

48. There was no real suggestion or evidence of actual consent by Shah to the appropriation of the partnership stock by Wong.  It may of course be argued that Zhang, who was put in place to operate the daily business, was clothed with the necessary authority from both partners.  There might well be records in the corporate agent’s computer.  Whilst this may clear any suspicion of fraudulent practice, this does not suffice in discharge of the duty of a partner to account.  A relatively more important aspect of the matter has to be answered.  The stock taken away by Wong was never paid for and it was for his own profits.

49. At the trial, Wong accepted liability to pay for the stock taken away from Xintiandi.  According to Wong, the stock taken away had not been paid for because the parties had yet to agree on the price at which the appropriated stock should be paid.  Such assertion is problematic.

50. First, the evidence in this respect from the witnesses for Wong is not impressive.  In court, Wong suggested that he could not pay because Zhang was unable to tell him the prices.  Zhang suggested that he could not tell the prices because the bosses, ie Shah and Wong, were yet to agree on the prices.  This became a circular responsibility shifting exercise between Wong and Zhang.  The fact is there is no evidence of proposal and negotiation between the parties or result of such alleged pricing exercise in respect of such stock before or after the same had been taken away by Wong.

51. Second, if the parties’ agreement had been a pre-requisite to fixing the price of the stock that either partner proposed to take away, then the stock in any event should not have been taken away in the absence of such agreement.  That the partners could have disagreed as to the price would mean that they had the right to veto the proposed taking away of the stock.

52. Third, whilst the prices at which the stock would be sold might generally be set by agreement of Shah and Wong, the prices, once set, should be the prima facie rates at which the stock should be sold, whether to the third party buyers or either of the partners.  In the absence of agreement between the partners that sale to the partners would entail different pricing or prices, the assertion that Wong had no idea at all about how much he had to pay for the stock he was about to take away sounds more like excuse than reality.  The fact was that Shah, through Gipoint, had also purchased the partnership stock on numerous occasions.  All were invoiced, paid for and recorded in the income and expenses account of Xintiandi.

53. According to Shah, the prices he pleaded are based on those at which the stones under the Marble Agreement had been sold to third party buyers (which consisted of a 30% mark-up from cost as the expected profits margin for the partnership).  Shah has produced documents, albeit very limited, to show that when he (or Gipoint) purchased the partnership stock from Xintiandi, the prices paid did not differ materially from those at which the stock was sold to third party buyers.

54. Wong disputes the amount pleaded by Shah.  He argues that the amount payable should be those set out in a table contained in one of the documents in the trial bundle.  There the amount was stated to be the approximate prices of various items of stock[14], which, according to Zhang, were cost of the stock.  Reliance on the abovementioned document by Wong as the basis for the valuation of the stock taken away at cost has never been raised before the trial.

55. Another problem is that Wong has admittedly taken away the stock for his own projects. There is no evidence in respect of how much he charged his customers for the stock in question and how much profits, if any, he so earned.  As partner, Wong owed the duty not to make secret profits out of the partnership property; and therefore the duty to account for such profits.  Readiness to pay the cost of the stock, as suggestion, is not the complete answer.

56. Halfway through the trial, Wong sought leave to amend his case.  One of the proposed amendments[15] was to assert a deal or arrangement between the parties whereby one type of the stones taken away, namely Rosso Marfil, would be paid for by Wong in return for Gipoint’s settlement of the cost of some other materials supplied by Simbel to Gipoint.  Ms Lau explained that it was not until the trial has begun did she realise that such part of the alleged misappropriated stock had been paid for.  She accepted that Shah was not even cross-examined in this respect; but proposed that he be recalled and that leave be granted to him to adduce further relevant documentary evidence, if necessary.  For the surprise and prejudice which such proposed amendment would bring about to Shah and the progress of the trial, I refused leave for such amendment to be introduced in such manner and at such stage[16].

57. Then it is suggested that the stock taken away was defective and had little or no value; and that the stock was taken away to mitigate loss and to raise cash for the business.  That Wong found the stock appropriate for use and managed to use them dilutes, if not contradicts, the suggestion that the stock was defective.  It lies ill in Wong’s mouth to make that suggestion, after he had helped himself with the partnership stock without payment (or, according to him, without first agreeing with Shah on the prices payable), and then used it in his projects unrelated to the partnership for his own profits.  Equally it lies ill in Wong’s mouth to suggest that his conduct helped funding the business, when he took away the partnership stock without payment.

58. Considering all the evidence, I find the misappropriation claim proved.  On this basis, Wong was in breach of his duty, contractual and fiduciary as a partner, as mentioned above.  Wong is liable to account to the partnership the stock taken away at their sale prices (ie prices at which they would have been sold to third party buyers) or alternatively their cost plus the profits that Wong had obtained from the use of them in his own projects. Shah is prima facie entitled to half of such amount upon account.

Unpaid invoices

59. Mr Wang explains that in the absence of proper account, it is uncertain as to what extent the stock covered by these unpaid invoices had actually been sold, misappropriated as discussed above and remain unsold as will be discussed below.

60. As mentioned, the payment arrangement under the Marble Agreement was that Shah would pay for the stones and their shipment to Yun Fu.  Shah would cause invoices to be issued (by Gipoint); and Wong would cause the payment of 50% of the invoiced cost (by Simbel) as his contribution to the cost of sourcing the stock.  There is no dispute that the 6 invoices in question remain unpaid.

61. The invoiced cost amounted to HK$1,246,617.84. Shah claims 50% of that plus his share of profits for whatever part of such stock that had been sold or alternatively, the return of the unsold stock to the partnership plus his loss as a result of diminution of the value of the stock.

62. Wong refused and still refuses payment for 2 reasons: first, the invoiced cost was too high; and second, the stones sourced to Yun Fu were defective and Shah refused to accept return of the goods or discount.

The invoiced cost

63. The complaint is that Shah invoiced not only for the bare cost of the stones paid to the quarries but also additional expenses incurred by him without proof. Wong also puts forward counterclaim in respect of the invoices previously settled on the ground of overpayment.

64. According to Shah, expenses had to be and were incurred on top of the bare cost of the stones for the stones to be shipped to Yun Fu.  They included, and not surprisingly, expenses incurred by Shah in connection with placing the orders with the overseas quarries such the freight (if the same was not borne by the quarries and included in the cost to Shah).  According to him, throughout Wong had never requested any separate documentary evidence of such expenses, apart from the invoices, as a pre-condition to payment.

65. Wong had indeed settled 33 out of the 39 invoices issued under the Marble Agreement.  Wong, whether by himself or the accounting staff of Simbel, had to be satisfied with the invoiced cost before settling them.  In court, Wong had to accept those as a matter of fact.  There is no plea of payment by mistake of fact.

66. As mentioned, Wong had the say in the sourcing of stones from the overseas quarries; and it is unbelievable that the cost of the stones had been kept from him.  Examples of quotations given in writing and orally are given[17]^. There is evidence that the parties did not actually discuss breakdown of expenses on top of the bare cost of the stones.  Sometimes all that was stated was a figure.  But the evidence is that Shah made it open that he was adding his cost and expenses incurred in connection with sourcing to the bare cost of the stones paid to the quarry owners[18].  I am not impressed that the invoices were settled because of any mistake of fact in any event.

67. Kwong, the account manager of Simbel, testified that Shah had been asked for documentary proof of his expenses.  They took the form of telephone enquiry, which was not followed up, before Simbel proceeded to settle the invoices.  Kwong accepted that such enquiry was made out of prudence and good practice.  As far as the liability to settle the invoices was concerned, documentary proof of the expenses was never understood to be a contractual obligation or condition precedent.

68. There is no evidence of complaint about overpayment or unjust enrichment in respect of the 33 invoices settled until the parties’ relationship has broke down.  This aspect of the dispute bears the hallmark of an afterthought.  In court, Wong eventually suggested that he would have been happy to pay the additional expenses for the sourcing of the stones. 

69. As to the outstanding invoices, there should be no legitimate objection to Shah adding cost and expenses incurred in sourcing the stones on top of the bare cost paid to the quarry owners.  As to the amount, Wong questions that the expenses might not be incurred exclusively for the purpose of the partnership business.  But I accept Mr Wang’s submission that that partly explains why a rough figure or percentage was added to the bare cost of the stone.  The reality is that inflating the cost of the invoices for sourcing the stones, which would not only be borne by Shah but would also have a bearing on the profits margin, would have been detrimental to his interest as well.  I am not satisfied that Shah had unjustifiably inflated the invoiced cost.

Quality of the stones

70. This is the major complaint of Wong.  This also forms the basis of part of his counterclaim.  Several sub-issues arise: (i) whether there was a contractual obligation on the part of Shah to source stones that corresponded with samples; (ii) whether the stones sourced failed to correspond with samples or in any event unmerchantable; (iii) whether there was a contractual obligation on the part of Shah to accept return of the stones or discount on their cost on the ground of defect; and (iv) whether Shah unreasonably refused to sell the defective stones at discount.

71. Wong contends that as a matter of contractual obligation, Shah had to source stones that corresponded with the samples, which had been shown prior to the placing of the orders.  The stones that arrived at Yun Fu would be checked by Zhang, who would propose what to do with them according to their quality.  In particular, the non-corresponding or defective stones would be rejected.

72. The alleged sale by sample has to be understood in context.  By their very nature, no piece of stone, be it block of slab, could possibly be identical even out of the same quarry. Therefore, there is no one sample to which the stones could possibly correspond to by way of comparison of the appearance and content, as one normally understands sale-by-sample means.  At most, any so-called sample could only be a specimen serving as reference for the general quality and features of the stone to be extracted and supplied by the quarry.  The experts also testified that superficial inspection of blocks, for instance at the time of placing order, could only be about 70% accurate, and the final quality would be affected by or revealed after processing such as cutting of the block into slabs and polishing.  When samples are provided in the trade, the suppliers would invariably qualify that they are for reference only.

73. In fact, Shah does not deny having shown such so-called samples to Wong or Zhang for about half of the orders that he placed.  However none of the so-called samples had been left with Wong or Zhang so that subsequent comparison could be carried out.  In court, Wong and Zhang did not suggest otherwise.  The evidence indeed demonstrates the practice of Zhang in compiling his reports of examination of the shipments of stones arriving at Yun Fu.  Examination was random.  The comments upon such examination sounded like Zhang’s opinion as to quality or, according to Wong, a comparison of the shipment with recollection of what had been seen before.  In any event, there was never reference to any sample.

74. Further, according to Shah, the stones were sourced from the quarries on an exclusive basis.  In exchange for the exclusive supply and favourable prices, Shah would have to agree to purchase the stones in bulk with limited right to select and thus of mixed quality.  The experts confirmed the existence of such practice.  The contemporaneous correspondence between 2002 and 2004 also contained references to and explanation of such exclusive supply arrangement.  Therefore, in reality, there was never the basis for expecting the stones subsequently supplied to correspond with the so-called sample.  When the stones were sold, they would also be sold by bundles, whereby the risk of mixed quality of stones would be transferred to the customers.  According to the experts, there was such market practice in Yun Fu.  Zhang also confirmed that in court.

75. As mentioned, Zhang’s comment in his examination reports sounded like his opinion on the quality of the stones.  Yet his benchmark was never consistently clear.  At one point, Zhang seemed to be suggesting that the stones were of defective quality because they could not be sold.  Various points are made by Mr Wang about his evidence in this respect[19].  I am not impressed by Zhang’s evidence in respect of the defective quality of the stones.

76. Wong’s pleading is completely silent on the particulars of the alleged defects in quality of the stones.  Nevertheless the parties proceeded with the case, and managed to obtain from court directions in respect of expert evidence in this respect.  Considering the expert evidence, I think it must be accepted that natural materials like stones, even out of the same quarry, come in variation of colour and shade as well as existence and distribution of veins and cracks.  Quality in those terms is a matter of degree.  There is no evidence, including expert evidence, that stone by a particular name must represent certain quality in terms of combination of colour and shade as well as the existence and distribution of veins and cracks.  If different quarries or suppliers happen to use the same or similar name for their respective products, the stones would probably not be identical in terms of the abovementioned quality.  There is also no dispute that the grading system differs from quarry to quarry as well as from retailer to retailer.

77. Several undisputed features of the expert examination of the stones should also be noted.  When the expert came to examine the stones in October 2011, it was years since the stones had been stocked.  Available for the examination are what remains after those parts had been selected in sales and taken away by Wong as mentioned above.  There was also divergent opinion about the quality of storage.  The experts agreed that the exposure during storage could at least have affected the colour shade and gloss of the stone materials.  Nevertheless Shah’s expert assessed that the overall quality of what could be examined on site was acceptable.  Wong’s expert accepted that what could be examined consisted of first class materials.  Lower grading was given in respect of others for the patterns of the veins.  Never was there opinion that the stones examined were by nature below merchantable quality[20].  There is basis for believing that those that had been sold and taken away by Wong were no less desirable in quality than those remaining.

78. Zhang’s examination reports never suggested rejection due to quality.  Notwithstanding the reports, Wong also caused the settlement of 33 out of 39 invoices so far issued.  Of the invoices outstanding, the quality issues mentioned in the relevant examination reports in respect of 4 were relatively minor.  The evidence shows, and confirmed by Wong in court, that the stones covered by the 6 invoices in question had been processed and some of the processed stone materials had been sold to third parties.  As discussed in respect of the misappropriation claim above, Wong also saw fit to take away some of the stock for his own projects.  All were testament to the quality of the stones, contrary to the allegation that they were not even merchantable.

79. The evidence does not show that the examination by Zhang or his reports was condition precedent to settlement of the invoices. In settlement of the 6 outstanding invoices, Wong had caused cheques to be issued well before the date of the relevant examination reports.  Interestingly, one of the cheques was stopped even prior to any complaint about quality of the stones.  In court, Wong explained that he refused to pay not because of the quality of the stones supplied under that invoice but those supplied previously[21].

80. Even when dispute arose and that Zhang at one stage proposed for the liquidation of the business co-operation between the partners, the proposal made no mention, let alone account, of any part of the stock that was said to be defective and rejected.

81. Factual dispute aside, the flaw of Wong’s contention in this respect is more that in principle.  Wong and Shah was not in a relationship of buyer and seller, which would have been governed by the (implied) term as to quality and thus the right to reject or to damages if the quality fails to correspond with sample or to be merchantable.  The relationship between Wong and Shah, as I find, was one of partnership in which both shared the profits and loss as well as business risk associated with the quality of the imported partnership property.  Any quality issue should be raised with the supplier as a matter for both partners.  In court, Wong admitted that that had to be the spirit of their joint venture.

82. This was indeed what the evidence shows.  In 2004, Shah on behalf of the partnership negotiated a settlement with a Turkish quarry owner, who apparently agreed to a discount as a result of quality issue raised by Shah for the stones supplied[22]. Worth noting are first, it was negotiation and settlement between the partners and the quarry owner[23]; and second, the discount was clearly indicated to be applied in respect of future shipment, not those already supplied[24].  According to Wong’s expert, such future discount was also a practice of the quarry owners in dealing with complaint about quality of previous shipments.

83. In the circumstances, if Wong was not happy with Shah’s performance of his part in sourcing the partnership stock, he might be entitled to hold Shah responsible for his duties as a partner or, in case of breakdown of trust and confidence (as it indeed happened), termination of the partnership and necessary consequential account.  Indeed it is suggested that Shah unreasonably and thus wrongly refused to allow Xintiandi to sell the alleged defective stock at a discount.  But the particulars and evidence of such discount proposals and unreasonable conduct of Shah are lacking.  What Wong would not be entitled to do is to reject the stones or to refuse the reimburse Shah’s sourcing cost for quality reason as if Shah were the seller having to bear that as his own business risk.

Unsold stock

84. As mentioned, it is uncertain if there is any overlap between the stock covered by the unpaid invoices discussed above and the unsold (and thus remaining) stock.  But there is no dispute that substantial quantity of stock sourced pursuant to the Marble Agreement was unsold and had been removed in about mid-2008 from the warehouse originally rented by Xintiandi to various storage places in the Mainland.

85. Shah complains that Wong has not properly accounted for the unsold stock, which, according to him, amounted to approximately HK$4.3 million, despite his repeated requests between 2010 and 2012.  Shah claims he has thus suffered loss and damage in terms of his 50% entitlement to the asset or, if any part of them had been sold, potential partnership profits.

86. The division of labour between the partners was that Shah was mainly responsible for the sourcing of the stones.  Shah visited Yun Fu only infrequently.  As mentioned, Wong had caused the removal of the stock, of which Shah denies prior consent.  Wong caused Xintiandi to close down, which was de-registered in 2010.  The unsold stock had been removed for storage; and as observed by the expert and confirmed by Kwong, the remaining stock were possibly mixed up with other non-partnership stock in storage by now.  As Mr Wang submits, Shah should at least be allowed to stock-take, which has not been successful.

87. Wong seemed to take the view[25] that as the remaining stock was in similar quantity as those taken away by him, it would be manifestation of their equal share if Shah just takes back the remaining stock.  Indeed in both his pleading and his counsel’s submission, Wong offers that Shah takes back the remaining stock.  That could not be right.  What needs to be accounted for is partnership stock, in which Shah has 50% interest.  It is no answer for Wong to have had effectively a prior selection of the stock, presumably the best and potentially profitable part, for his own profits and then to ask his partner to take those remaining as the so-called equal share.

88. The evidence shows that the former solicitors for Shah had made proposals to Wong back in May and July 2010 regarding disposal of the remaining stock pending the resolution of the parties’ dispute. Further proposals were made in 2011 and 2012.  There was no constructive reply to these proposals.

89. Wong is liable to account for the unsold stock, which is very much under his control and custody, and its state.

Simbel

90. The claim against Simbel is based on alleged knowing receipt and dishonest assistance.  It now becomes clear that it is primarily the former of the two bases that Shah seeks to enjoin Simbel in the account exercise.

91. The test for knowing receipt was recently considered by the Court of Final Appeal in Akai Holdings Ltd (in liquidation) v Thanakharn Kasikorn Thai Chamkat (Mahachon) (2010) 13 HKCFAR 479 at §§125-135.  Mr Wang accepts that actual knowledge on the part of the recipient of property in breach of trust or fiduciary is required so as to make it unconscionable for the recipient to retain the benefit of the receipt.  He submits that Simbel was involved with the requisite knowledge.

92. Wong was the 90% shareholder and managing director of Simbel.  Throughout the years, Wong admittedly involved Simbel and its staff, such as Kwong, in handling the partnership business with Shah (and his company Gipoint) in various aspects, including making payments and keeping of accounts. Importantly Wong caused Simbel to take away the partnership stock under the Marble Agreement as mentioned above.

93. I accept Mr Wang’s submission that Simbel was in the circumstances very much the alter ego of Wong in handling the partnership business pursuant to the Marble Agreement.  The basis for actual knowledge on the part of Simbel and participation in the dealings exists beyond doubt.  So is the basis for joining Simbel as the knowing recipient for the purpose of account of the partnership stock and whatever profits or benefits that Simbel had received out of them.

New claim

94. Another proposed amendment to Wong’s pleaded case halfway through the trial mentioned above was the introduction of a new claim[26]. It was based on an alleged agreement between the parties in 2003 or 2004 whereby Shah agreed to pay commission to Xintiandi for using the resources of Xintiandi for his own purpose.  The commission was 5% of the value of the goods that Xintiandi purchased on behalf of Shah.  The amount was in excess of RMB110,000.

95. Wong made such mention of the alleged commission in his statement[27], albeit in the absence of any pleaded case or claim.  In the circumstances, attempt to elaborate on this topic in Wong’s evidence in court was objected to and duly stopped.  Now after Shah and Wong have finished giving evidence, Wong renewed the attempt by proposing to introduce such new claim by way of amendment of pleading.  For such purpose, Wong also sought to file a supplemental statement of Kwong, who was then yet to be called, to give evidence in support of such new claim.  Though prima facie relevant, counsel did not address me on the question of limitation in respect of the proposed new claim, which apparently related to alleged rights accruing in 2003-2004.  In any event, it should be clear that such attempt to introduce a new claim at this stage and in such manner defied all basic principles of fair play and the underlying objectives of the new rules.  I therefore refused leave to amend and to adduce the incidental supplemental witness and documentary evidence.

UNDER THE GRANITE AGREEMENT

Unpaid invoices

96. Gipoint claims, and undisputedly, Simbel owes a duty to account for the stock of granite, which it was supposed to sell for the partners in Hong Kong pursuant to the Granite Agreement.  The fact was Simbel had provided such account by late 2004 at Gipoint’s requests but not ever since.  This causes Gipoint concern, especially when it is not disputed that Simbel has not fully settled Gipoint’s invoices for half of the cost of sourcing the granite pursuant to the Granite Agreement.

97. Simbel has withheld full payment for the invoices for granite on the ground that Gipoint owed it certain expenses, especially warehouse expenses for the majority of the granite stock.  The stock was allegedly not saleable.  The exact extent of such alleged idle granite stock is unknown, in the absence of a proper up to date account.

98. Simbel’s pleaded case is that pursuant to the parties’ agreement, cost and expenses incurred by Simbel would be factored in the calculation of profits or, as the case might be, loss, after the stock sourced by Gipoint was sold.  This does not sit well with the alleged right to set off the reimbursement to Gipoint of half of the cost of sourcing the granite stock against the alleged warehouse charges.

99. According to Simbel, it was agreed between the parties that Gipoint would bear a fixed rate of 25% of what Simbel had to pay for renting its warehouse, instead of warehouse charges according to the space occupied by the granite stock.  According to Gipoint, there was no discussion of the warehouse expenses of such specificity.

100. The granite stock sourced to Hong Kong was stored in the warehouse rented by Simbel for its other businesses.  That it was Simbel’s choice of warehouse should not be surprising. On the one hand, I could understand that adjusting the warehouse charges in accordance with the possibly changing the amount of stock in place from time to time might be cumbersome.  On the other hand, Wong’s evidence in respect of the alleged agreement was not impressive.

101. According to Wong, the warehouse expense was the only expense that was treated differently from the others, which the parties agreed to share equally.  Gipoint would be solely responsible for such expense, though the same was obviously incurred for storing stock for the partnership.  I am not impressed that Shah is the kind of businessman who would readily commit Gipoint to bearing a fixed percentage of the cost of whatever warehouse that Simbel would rent also for its other businesses (if not mainly).  On balance, I accept Gipoint’s evidence in this respect and reject Simbel’s allegation.  In any event, Gipoint agrees that it should share warehouse charges the same way as the other cost and expenses of the partnership.

102. The invoices issued by Gipoint for the granite in question amounted to HK$608,119.41.  The unpaid amount is 304,059.71 plus 98,924.80 [28].  Gipoint is entitled to an account of that and any receipts from the sale of any of such stock.  This will be subject to half of any cost and expenses incurred, including warehousing expenses, which Gipoint readily accepts to share.

Best endeavour to sell

103. Simbel admits its responsibility to use best endeavour to sell the granite stock sourced to Hong Kong[29].  In his statement[30], Wong reiterated that.  The only dispute is whether Simbel was under the obligation to do so within a reasonable time.

104. In reality, the time taken could reflect whether best endeavour has been used.  Doing a deed within a reasonable time could well be inherent in the obligation to use best endeavour.  This should be true in the case of sale of goods subject to trend, such as the granite.

105. Simbel denies the obligation to sell the granite stock within a reasonable time on the ground that it had no control over when the stock could be sold.  However lack of control is no answer to lack of reasonable effort.  In court, Wong suggested that the best endeavour would be no more than leaving the stock on the site for sale.  The attitude of Simbel, as he expressed, was that he had no plan to sell the granite stock any more since 2010 (if not earlier).

106. Wong referred to the quality of the granite; but the same was not raised as part of Simbel’s pleaded case, unlike his case concerning the stones under the Marble Agreement.  Then he explained that the scale of this part of his business, compared with his other businesses, was so minor that not every allegation had to be made.  That is hardly an answer either.  As pointed out by the experts in their joint statement dated August 2012, whilst the market trend, pricing and quality of stone materials would affect sales, sale packaging was equally a key factor.

107. Whilst there should be no commercial reason for Simbel to withhold the sale of the granite stock at its expense (in terms of growing storage expenses), the evidence does not give me the impression that best endeavour had indeed been exercised.

108. Gipoint asks to be put in the position where Simbel had performed its part of the business in properly selling the granite stock within a reasonable time.  Mr Wang projects a calculation of the likely profits obtainable from the sale of all the granite stock[31], and thus his client’s share of such profits.  The assumption is that the stock would have sold out in 6 months at a flat rate of profits margin of 30%.  Somehow, in her oral submission in respect of her client’s counterclaim for the profits that he should have expected from the sale of the remaining stock under the Marble Partnership, had it not been defective, Ms Lau also projects a calculation on the basis of 30% profits margin.

109. The above particulars and calculation projected by Ms Wang were introduced by way of amendments after the lack of them was pointed out when the trial began.  The assumption behind the calculation is based on what Simbel (Wong)’s expert said in court.  The expert elaborated that sale of stones would be considered slow, if they were not sold out in 6-9 months after arrival.  But the expert said so upon questioning in the context of the turnover period in Yun Fu as set out in her report.  The experts’ joint opinion is that the profits margin and turnover period would have to depend on the market.  Specifically as to when and at what prices the stones in the present case could have been successfully sold, neither expert expressed any or any firm opinion.  Unless agreed between both sides, the assumption behind the projected calculation of the expected profits from the sale of the remaining stock does not strike me as a reliable one.

DISSOLUTION AND ACCOUNT

110. Pursuant to section 37 of the PO, the court may decree dissolution of a partnership in various cases.  They include:

(1)  where, in the opinion of the court, a partner has been guilty of such conduct that is calculated to affect prejudicially the carrying on of the business: section 37(c);

(2)  where a partner wilfully or persistently commits a breach of the partnership agreement or otherwise conduct himself in matters relating to the partnership business that it is not reasonably practicable for the other partner to carry on with the partnership business with him: section 37(d);

(3)  when the partnership business could only be carried on at a loss: section 37(e); and

(4)  where circumstances have arisen that, in the opinion of the court, renders it just and equitable to dissolve the partnership: section 37(f).

111. In view of the breach on the part of Wong and Simbel and the breakdown of trust and confidence as found above, the partnership should be dissolved on any one of the above grounds.  As mentioned, Wong and Simbel have no objection to the winding up of the affairs with their opponents, if the same are found to be partnerships.  There will be the necessary account and enquiry, which would have to be carried out in accordance with the above findings before the partners could properly exit their relationship.

112. Shah and Gipoint also seek appointment of a receiver, which, according to Mr Wang, is the usual consequential relief upon dissolution of a partnership.  However, there is no more partnership business as a going concern that would have called for or benefited from receivership.  What remains is the disposal of the remaining stock for the purpose of finalising the account between the two sides.  The parties should manage the necessary arrangement by way of agreement, if they act sensibly, with or without engaging professional help from independent third party.  At the moment, I am not inclined to make such appointment.  Any change in circumstances would be a matter for further directions.

COUNTERCLAIM

113. Besides asking for an account, Wong and Simbel put forward their respective counterclaims.  Subject to the above findings, some of the items of counterclaim need to be taken into account in the account and enquiry upon dissolution of the partnerships.

Under the Marble Agreement

114. Wong has the following counterclaim under the Marble Agreement:

(1)  Xintiandi had admittedly paid on behalf of Shah for purchase of goods for his own use in the sum of RMB 428,807.75.  Wong claims 50% of what Shah should have repaid their corporate agent.

(2)  As mentioned, Wong alleges overpayment in respect of the invoices from Shah (through Gipoint) under the Marble Agreement that had been settled.

(3)  On the basis that the stock sourced by Shah was defective, Wong claims profits that he was supposed to make from the sale of the stock, had they not been defective, through Xintiandi.

(4)  Wong had paid warehouse expenses since May 2008, while Xintiandi had paid import expenses for the stock covered by the unpaid invoices.  Wong claims his entitlement to contribution by Wong.

Payment by Xintiandi

115. This is supposed to be repayment to Xintiandi.  That has become infeasible, when Xintiandi exists no more. Nevertheless it is in line with the parties’ understanding that the parties should have contributed towards the cost and expenses of their agent; and no expenses of the agent for the partnership should be borne solely by a partner and unaccounted for.  By pleading[32], Shah also admits that credit should be given to this sum.  The account and enquiry in respect of the partnership pursuant to the Marble Agreement should therefore take into account such liability of Shah.

Overpayment

116. In view of the above finding in respect of the 33 invoices from Shah (through Gipoint) that had been settled, Wong is not entitled to this item of claim.

Profits that would have been made

117. This item of claim is premised on the stock sourced pursuant to the Marble Agreement being defective.  As discussed, I do not find that the stock was defective or un-merchantable.  The marketability of the stock of whatever quality was a matter of business risk of both partners.  The remaining stock should be, as it should have been, disposed of for the purpose of the account exercise.

Warehouse and other expenses

118. Shah admits[33] liability to contribute towards half of the cost and expense incurred in matters incidental and related to the winding up of the affairs of Xintiandi.  Together with the warehouse expenses, Mr Wang submits that they all should form part of the account exercise.  I agree.

119. Wong is claiming the expenses for importing the stock covered by the unpaid invoices, presumably as wasted expenses.  Claim for such expenses on top of the claim for loss of profits that should have been obtained from the sale of such stock, had they not been defective as alleged, is double recovery.  Ms Lau accepts that.

Under the Granite Agreement

120. Under the Granite Agreement, Simbel claims warehouse expenses during the period between August 2003 and April 2009 in the sum of HK$300,750 and transportation expenses in the sum of HK$10,046[34].  The warehousing charges were said to be continuing; but Wong confirmed in court that no further charge has been imposed since the stock was moved to a bigger warehouse in 2010.

121. The above discussion of the warehouse expenses refers.  Gipoint accepts liability to contribute towards the warehouse and in fact other expenses incurred in connection with the stocking, processing and sale of the granite stock.  These too should be taken into account in the account exercise.

ORDER

122. As claimed, there be the following orders:

(1)   declaration that Shah and Wong under the Marble Agreement as well as Gipoint and Simbel under the Granite Agreement were respectively partnerships in substance;

(2)   order that the partnerships pursuant to the Marble Agreement and the Granite Agreement between the parties respectively be dissolved and their affairs be wound up;

(3)   order that all necessary accounts and enquiry be taken and made for the purpose of the dissolution of the partnerships, including but not limited to:

(a)   that Wong do account to Shah his share of all the monies, benefits, profits and interest received by him and Simbel under the partnership pursuant to the Marble Agreement including but not limited to the unpaid invoices, misappropriated stock and unsold stock as aforesaid;

(b)   that Wong and Simbel do render to Shah account of the stock under the partnership pursuant to the Marble Agreement taken by them including but not limited to the sale of the stock covered by the unpaid invoices, the misappropriated stock and the unsold stock as aforesaid;

(c)   that Simbel do render to Gipoint account of the sale and handling of the stock under the partnership pursuant to the Granite Agreement;

(d)   that account be taken of the expenses incurred by the parties in connection with the stocking, processing, sale and disposal of the stock under the partnerships pursuant to the Marble Agreement and the Granite Agreement respectively as aforesaid;

(e)   account to be taken of the expenses incurred by the parties in connection with the winding up of the affairs of Xintiandi under the partnership pursuant to the Marble Agreement as aforesaid;

(4)   liberty to apply.

123. In view of the findings and outcome, I make a nisi order that subject to the costs orders made during the trial, Shah and Gipoint shall have their costs of this action, to be taxed, if not agreed.  Unless application is made within 14 days to vary, the costs order shall become absolute.

124. I thank counsel for their assistance.

[1] Though Wong could also source stones for the parties’ business.

[2] By way of letters of credit.

[3] And the other way round when it was Wong who sourced the stones.

[4] As set out in Annexure I to the re-re-re-amended statement of claim.

[5] The contents of the statements of Wong and Kwong were similar.  Substantial part of Zhang’s statement represents the Chinese translation of that of Wong.

[6] Affirmed on appeal, CACV 199/2011 (19 December 2012).

[7] In the context of a partner sourcing raw jade stones from abroad to another’s shop for processing and sale.

[8] §1 of the defendants’ closing submissions.

[9] A situation not dissimilar to that in Ip Man Sun (above).

[10] §21(b) of the re-re-re-amended defence and counterclaim.

[11] §21(d) of the re-re-re-amended defence and counterclaim.

[12] After downward adjustment during the trial: see Annexure 1 to the re-re-re-amended statement of claim.

[13] In particular, but only transpired during the trial, Shah was said to be aware of the taking away of stock called ‘Rosso Marfil’ at the instruction of Wong.

[14] 新天地犮货信保货物汇总表 (at Bundle B4(2) p.20).

[15] Proposed §13A of the draft amendments.

[16] Except for the 1^st sentence of proposed §13A(c), which now forms §13A of the re-re-re-amended defence and counterclaim.

[17] Summarized in §83 of the plaintiffs’ closing submission.

[18] There was quotation containing explanation that the quoted cost was “all in CNF Yunfu which we add costs”.

[19] §130 of his closing submission.

[20] In the concluding paragraph of their Chinese joint statement dated August 2012, the experts agreed that stones are natural materials and different customers and construction projects could have different specifications for the colour shade and pattern required.  Therefore it is difficult to pass judgment on their quality.  The experts could only express their opinion on whether the stone materials are merchantable.  Yet the sale of stone materials depends not only on the quality and market trend but also on reasonable pricing.

[21] It is accepted that there had been complaint about a particular type of stone in previous shipments.

[22] Concerning stone by the name of ‘Ada Beige’.

[23] In court, Wong accepted that.

[24] That eventually did not materialize as no further order was placed with that Turkish supplier.

[25] He did not dispute such suggestion to him during cross examination.

[26] Proposed §18; and §(3A) of the prayer for relief.

[27] §30.

[28] Being 50% balance of invoices SB-3062, SB-3085, SB3093 and SB-3110 as well as 100% of invoice SB-3090.  Simbel had issued a cheque for the first 50% of the cost of invoice SB-3090; but the same had never been presented.  Counsel confirmed that this had not been paid.

[29] §21(b) of the re-re-re-amended defence and counterclaim.

[30] §34.

[31] §§78-79 of Mr Wang’s closing submissions.

[32] §16 of the re-re-re-amended statement of claim.

[33] §14 of the re-re-re-amended statement of claim.

[34] §§22; 25 of the re-re-re-amended defence and counterclaim.