GUANGDONG SILK GROUP FORTUNE CO., LTD v. CENTOPERCENTO LTD

HCA 1990/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1990 OF 2012

________________

________________

________________________

D E C I S I O N

________________________

1. This was an appeal by Centopercento Limited (“the defendant”) from an order of Master S Lo dated 24 April 2014 made in an application for summary judgment whereby the defendant was granted leave to defend, conditional on full payment into court of the sum of US$573,933.66 claimed by Guangdong Silk Group Fortune Co Ltd (“the plaintiff”).  At the conclusion of the hearing judgment was reserved which I now give.

BACKGROUND FACTS

2. The plaintiff is a company incorporated in the PRC.  The defendant is an international garment trading company.

3. The value of all of the commercial invoices issued by the plaintiff to the defendant in respect of goods allegedly sold and delivered by the plaintiff to the defendant in 2012 (“the goods”) was US$1,595,892.11.  It is common ground that the defendant has paid US$670,101.73 to the plaintiff and, further, that the sum of US$351,856.72 being charges of third parties settled by the defendant should be deducted.

4. Thus, the plaintiff’s claim is based on the unpaid balance of the commercial invoices.

5. The goods were not manufactured by the plaintiff but by two independent third party factories in the PRC, namely, Pacific Sino (China) Ltd (“Pacific”) and Guang Zhou Bruidoe Garment Factory (“Bruidoe”) (collectively “the factories”).

6. It is also common ground that the plaintiff and the defendant were introduced to each other on 11 March 2011 at a meeting (“the 2011 meeting”) arranged by the factories in relation to the supply and sale of certain goods, the subject matter of purchase orders dated 9 February 2011 (“the February orders”) placed by the defendant with the factories (being garments for the 2011 winter season).  Present at that meeting were Mr Zhang and Ms Qiu of the plaintiff, Ms Maria Pang the then manager of the defendant, Mr Zheng of Pacific and Mr Ye of Bruidoe.

7. At the 2011 meeting, the parties came to an arrangement but what transpired at the meeting and what was agreed is controversial.

8. The plaintiff’s case is that the arrangement or co‑operation procedure agreed was as follows:

(a)   The defendant to place purchase orders with the factories.

(b)   The factories to sell the goods (manufactured in accordance with orders placed by the defendant) to the plaintiff.

(c)    The plaintiff to sell the goods so manufactured by the factories to the defendant.

9. The plaintiff’s claim is based solely on the commercial invoices it had issued to the defendant earlier mentioned.  It will be seen that its claim is grounded exclusively on what, according to the plaintiff’s version of the agreement made at the 2011 meeting, was the third element or limb of the arrangement or co‑operation procedure.

THE APPLICABLE LEGAL PRINCIPLES

10. The relevant test is well settled.  On a summary judgment application, conditional leave to defend (whether upon payment of the whole or part of the sum claimed) should be imposed only if, on the evidence presented, there are good grounds for believing that the defence put forward is a sham defence or is so shadowy that the court is very nearly prepared to give judgment for the plaintiff.  But where a defendant shows that he has a fair case for defence or reasonable grounds for setting up the defence, or even a fair probability that he has a bone fide defence, he ought to have unconditional leave to defend: see Unic Co v Centus Development Ltd [1988] HKC 643 at 647 approved by Ma JA (as he then was) in Kwong Key Construction & Engineering Ltd v Sunlink Ltd [2003] 4 HKC 300 at 304.

THE DEFENCE

11. Two lines of defence have been raised.  First, while the defendant recognizes that the plaintiff had a role to play, it disputes the plaintiff’s case that there was no contractual relationship between the defendant and the factories in respect of the goods.  Its case is that the defendant’s contract was made with the factories and not with the plaintiff who became involved only as an intermediary (“the contractual party defence”).  Second, in any event, even if there were payment obligations to the plaintiff, those obligations were settled by an oral agreement between the plaintiff and the defendant on 7 June 2012 (“the oral agreement”); alternatively, by a written settlement agreement made on 18 January 2012 (“the written agreement”).

(1)       The contractual party defence

12. The circumstances giving rise to the 2011 meeting is set out in the 2^nd affidavit of Mr D’Angelo, the sole shareholder of the defendant.  In outline, the defendant’s case is that in January 2011, following confirmation by its buyers of orders with the defendant for the 2011 winter season, on 9 February 2011, the defendant placed the February orders (with an aggregate value of over US$1.2 million) with the factories with which it had an existing buyer/seller relationship, the factories having previously manufactured and shipped orders directly to the defendant.  Further, even prior to placing the February orders, on 18 January 2011, the defendant had already made an advance payment to the factories for processing those orders.

13. The size of the orders apparently caused liquidity problems for the factories. They did not have sufficient funds to meet the manufacturing costs involved.

14. The defendant’s case is that the plaintiff was brought into the picture at the suggestion of Bruidoe to facilitate the February orders.  The factories introduced the plaintiff to the defendant at the 2011 meeting.  Prior to that meeting the plaintiff was not known to the defendant and there had not been any prior dealings between them.

15. The defendant’s understanding of the plaintiff’s role was that the plaintiff would pledge letters of credit (“L/Cs”) issued by the defendant in its favour and the plaintiff would pass the monies to the factories to fund their manufacturing of the orders although the defendant did not know the details of the arrangement between the plaintiff and the factories.

16. As regards payment for the goods, the defendant agreed that it would issue L/Cs to the plaintiff if so directed/instructed by the factories but the involvement of the plaintiff left unaltered the contractual relationship between the defendant and the factories.

17. While the L/Cs issued were in respect of the goods covered by the commercial invoices issued by the plaintiff to the defendant and pursuant to instructions from the factories, the defendant’s case is that issues arose in the implementation of the arrangement reached at the 2011 meeting.  The defendant maintains that due to insufficient financing by the plaintiff to the factories, it had to make various advances to the factories and settle various charges to third parties including suppliers to secure timely production.  According to the defendant, advances made to the factories and payments made to secure timely production fall to be deducted from what is being claimed.  Hence it disputes the amount the plaintiff claims.

18. It is apparent from the statement of claim that the plaintiff accepts that the defendant has settled charges amounting to US$351,856.72.  However, there is no evidence in the bundles as to the date the deduction was accepted except that the same amount appears in the written agreement made between the plaintiff and the defendant and witnessed by Ms Brenda Man and Mr Ye.  That would support an inference that an agreement was reached at least by that date.

19. As regards the sums allegedly paid directly to the factories, the plaintiff does not accept that the defendant ever made such payments because of the absence of evidence of direct payment such as bank transfers etc.

20. There is documentary evidence adduced by the defendant that supports a pre‑existing buyer‑seller relationship between the defendant and the factories.  For the earlier transactions pre‑dating the 2011 meeting, there are also documents that support the contention that the factories made direct shipments to the defendant.  The February orders are also in evidence.

21. Given that backdrop, the question why the plaintiff came to be involved in the transaction naturally arises.

22. It is to be noted that while the plaintiff’s explanation is that PRC legal requirements for the export trade and/or foreign currency control were such that the defendant could not have purchased directly from the factories because only an entity such as the plaintiff with the requisite licence and qualifications for the export trade could do so, no evidence has been adduced in support and, in any case, that seemingly is contradicted by the documents that show shipments of goods by the factories out of the PRC directly to the defendant.

23. Further support for the defendant’s version of the 2011 meeting can be derived not only from the fact that the style codes of a sizeable part of the goods described in the plaintiff’s commercial invoices issued to the defendant are reflected in the February orders placed by the defendant with the factories, but also that the invoice numbers appearing in a significant number of the commercial invoices issued by the factories to defendant also appear in the plaintiff’s commercial invoices.

24. Mr Wong SC who appeared for the plaintiff sought to dismiss the relevance of the February orders because it is said that they involve quantities that are very different from those appearing in the commercial invoices it had issued to the defendant. I do not consider the criticism valid because, as stated on the face of the February orders, the quantities therein stated fell under a column headed “Planned Qty”.  In other words, the quantities had not been finally settled and were subject to variation.

25. In my view, in the circumstances of this case, the fact that part of the goods manufactured appears to be covered by parallel purchase orders and commercial invoices clearly call for an explanation.

26. There are also documents that support the making of loans by the plaintiff to the factories which reflect the defendant’s account of the 2011 meeting.  The defendant has exhibited what appears to be the plaintiff’s spread‑sheet setting out details of loans made to Pacific.  Pacific had sent this spread-sheet to the defendant in June 2012 (see the note to § 29(a) and (b) below).

27. Those matters together with the common ground that the plaintiff and the defendant only met for the first time at the 2011 meeting lend credence to the defendant’s version of the 2011 meeting.

28. That said, is the defence a sham defence by reason of the fact that the defendant is unable to adduce evidence of direct payments made to the factories such as telegraphic transfers or bank transfers coupled with the fact that there is an auditors’ confirmation dated 15 November 2012 from the defendant’s auditors to the plaintiff seeking confirmation that as at 31 March 2012, the sum of US$723,559.70 was due to the plaintiff.

29. Ms Cheng, counsel for the defendant, submitted that there are documents that do support direct payment made by the defendant to the factories albeit not TTs nor bank transfers:

(a)   An e‑mail exchange between the defendant and Pacific dated 21 June 2012 and 4 July 2012

  Maria Pang of the defendant sent an e‑mail in Chinese to Brenda Man of Pacific stating that as the defendant’s proposal to the plaintiff had been rejected, Pacific was asked to provide various information including confirmation of “the amount of price of the goods that [the defendant] directly paid to [Pacific]”.  Pacific’s response was “USD 222,618.30 + HKD 646,000”.

 (NB.  Other information sought by the defendant in the same e‑mail related to the loans made by the plaintiff to Pacific.  The answers are consistent with the defendant’s version of the arrangement made at the 2011 meeting and the contractual party defence.)

(b)   A similar but undated e‑mail exchange between the defendant and Bruidoe

 The information given in response to a similar question put to Bruidoe elicited the response “Advance payments and accessory fees USD 117,550.4”.

 (NB.  Bruidoe also provided information concerning loans made to it by the plaintiff.)

(c)    Debit notes issued to the factories

 The defendant has exhibited various debit notes issued to the factories from time to time in respect of payments made to suppliers as well as advance payments made to the factories.  The debit notes are addressed to the relevant factory and provide details of the defendant’s Hong Kong bank account to which remittances should be made.  Some of the debit notes issued to Pacific were countersigned.

(d)   Pre‑written agreement e‑mail exchanges

 There is a series of e‑mail exchanges between the plaintiff and the defendant between 21 December 2011 and 17 January 2012 seeking to reconcile the different figures put forward by both sides in respect of various items including the amount of direct payments made by the defendant to the factories.  Although whether the factories had given confirmation of the amounts paid was a matter of dispute between the plaintiff and the defendant, the correspondence show that the underlying and accepted premise was payment to the factories having been made by the defendant.

(e)    The written agreement

 This is a document in the hand of Mr D’Angelo of the defendant.  He signed it on behalf of the defendant and Ms Qiu signed on behalf of the plaintiff.  Ms Man of Pacific and Mr Ye of Bruidoe also signed as witnesses.

 The first part of the written agreement recorded the amounts paid by the defendant to the plaintiff. In addition to telegraphic transfers, L/Cs and cheque, one finds the entries—“Direct paid to Factory Bruidoe USD 154,788” and “Direct paid to Factory Pacific Sino (Huge Dragon) USD 408,382”.

30. While Mr Wong dismissed the relevance of the e‑mails in § 29(a) and (b) above on the basis that they do not concern the goods as the subject matter of those e‑mails read Re: “2010” Winter Season, it is clear from the contents that that was a typographical error for 2011.  For that reason, they cannot be ignored or brushed aside as irrelevant since they do constitute some evidence of direct payment by the defendant to the factories.

31. So far as the debit notes are concerned, Mr Wong submitted that they do not evidence payment from the defendant to the factories; rather, the factories were being asked to pay the defendant.  While that may be the effect of the debit notes, it does not answer the question why they were issued in the first place if the defendant had never made such payments.  More pertinently, the factories do not appear to have taken issue with them.

32. The written agreement will be considered below but so far as the contractual party defence is concerned, it is fair to say that the plaintiff’s representative saw fit to append her signature to the document which, on its face, purports to state that the stated amounts had been paid directly by the defendant to the factories.

33. It is to be noted that the other matters relied on by the plaintiff such as the issuance of the L/Cs, inspection certificates, commercial invoices, the undated purchase orders from the defendant to the plaintiff, part payment of the L/Cs are equally consistent with the defendant’s version of the arrangement reached at the 2011 meeting.

34. In my view, having regard to all the evidence, it cannot fairly be said that the contractual party defence is so shadowy that it justifies the imposition of a condition requiring the payment into court of the full amount claimed before the defendant is to be allowed to defend the claim.  It may well be that the defendant may not succeed at the end of the day but that is not the relevant test and not the issue that arises.

35. Clearly there are factual issues that need to be investigated.  In my view, the defendant has raised a bona fide and arguable defence and it should be allowed to defend the claim without the imposition of any condition.

36. That conclusion is sufficient to dispose of this appeal.  Nevertheless, I will briefly address the defence based on the parties having reached a settlement agreement.

(2)   Settlement

37. The second line of defence is that the parties reached a settlement concerning the plaintiff’s claim.  Within this second line of defence, there are alternative defences: an oral agreement reached at a meeting between Mr D’ Angelo and Mr Zhang on 7 June 2012 to settle the dispute (“the oral agreement”); alternatively, the written agreement dated 18 January 2012 which remains binding on the plaintiff and the defendant.

38. As the oral agreement needs to be understood in the context of the written agreement, the latter will be considered first.

(a)   The written agreement

39. Reference has already been made to the e‑mail exchanges between the plaintiff and the defendant between 21 December 2011 and 17 January 2012 in which the parties commented on each other’s calculations concerning various items mentioned in the e‑mails: see § 29(d) above.  They included various charges settled by the defendant with third parties and amounts of direct payments made to the factories.

40. As the parties could not agree on the final calculations, a face‑to‑face meeting therefore took place on 18 January 2012 attended by representatives of the plaintiff, the defendant and the factories: Ms Qiu and Kathy Hon of the plaintiff, Maria Pang and Mr D’Angelo of the defendant, Brenda Man of Pacific and Mr Ye of Bruidoe.

41. The written agreement reads:

“On 18 January 2012 [the defendant] and [the plaintiff] agree the below calculation as final settlement of all L/C and TT payment referred to Season FW 11-2011

Appendix 1 This agreement is understood from both parties and agreed. No further action will be taken from either parties in respect of this issue, and this is understood and agreed.”

42. As noted earlier, the written agreement was signed by the “authorised representatives” of the defendant and the plaintiff and witnessed by Brenda Man and Mr Ye who also appended their signatures.

43. As regards the body of the written agreement, it is clear that it was meant to ascertain what was outstanding in respect of the goods.  The first part listed payments made by the defendant which, as earlier noted, included amounts “direct paid” to each of the factories; the second part listed amounts claimed by the buyers.  This amount corresponds to charges that the defendant claimed to have settled and which in its statement of claim, the plaintiff accepted that it had agreed to albeit “as a gesture of goodwill”.

44. The final part was a calculation of the balance of US$60,763.69 reached by deducting the aggregate of the first and second parts from the total amount invoiced.

45. On its face, it is at least arguable that the written agreement evidenced a settlement reached by the parties and that the written agreement is binding and enforceable, subject to the question of whether it has been superseded by the oral agreement which will be considered below.

46. Mr Wong submitted that the written agreement was subject to a condition precedent, namely, proof of payment to the factories.  Objectively read, I cannot agree that it carries such a meaning, quite apart from the fact that such a defence was never pleaded in the plaintiff’s Reply.  I should add that the plaintiff has raised other objections concerning the validity of the written agreement on grounds (such as the fact that Ms Qiu is not the plaintiff’s legal representative) that need not detain us here. 

47. I now turn to consider the oral agreement.

(b)   The oral agreement

48. Notwithstanding the written agreement, the dispute continued.

49. On 7 June 2012, Mr Zhang met with Mr D’Angelo.  The defendant’s case is that they reached an agreement the terms of which Mr D’Angelo set out in his e‑mail to the plaintiff which, together with a Chinese translation was forwarded the following day, ie 8 June 2012.  By his reply e‑mail dated 11 June 2012, the plaintiff disputed that any agreement had been reached.

50. It appears to be common ground that on 7 June 2012 the defendant did make payment to the plaintiff of the sum of US$50,000.  According to the defendant, this was pursuant to the oral agreement and was part payment for US$100,000 the defendant agreed to pay but that this obligation has to be seen in the context of the remaining provisions of the oral agreement which contemplated and were linked to orders and payment for the season FW 12.

51. I accept that whether the oral agreement was ever reached and if so, its terms, are controversial.  Again, the defendant may or may not succeed on this defence but it would not be reasonable or fair to grant conditional leave on the basis that this defence is a sham defence.

CONCLUSION

52. For the reasons set forth above, the appeal is allowed.  There is to be an order nisi of costs in favour of the defendant with certificate for counsel.