GREATER CHINA CAPITAL INC. v. GBTIMES LTD

HCA 1455/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1455 OF 2015

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JUDGMENT

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The plaintiff’s claim

1.  By Writ and Statement of Claim issued on 29 June 2015 the plaintiff claims against the defendant for payment of a debt.  It also claims damages for breach of contract.

2.  In its Statement of Claim the plaintiff alleges that in performance of a service agreement (“the Service Agreement”) it provided “various media consulting services” to the defendant for which it provided monthly invoices.  There are no particulars of the nature of the services but in his first affidavit in support of the plaintiff’s application for summary judgment Mr David Lake, a director of the plaintiff, sets out the broad nature of the services.

3.  From October 2011 to June 2014, the defendant paid the plaintiff’s invoices but from 1 July 2014 to 31 December 2014 the defendant failed to pay the invoices rendered during that period.  The plaintiff considered that the defendant had repudiated the Service Agreement and accepted such repudiation by letter, dated 19 May 2015.

4.  The debt which the plaintiff claims is in the sum of €199,998, being the amount of the outstanding invoices from 1 July 2014 to 31 December 2014 (€33,333×6 months).  As damages for breach of the Service Agreement, the plaintiff claims €699,993 for loss of monthly earnings from January 2015 to the end of the term of the Service Agreement (September 2016) (€33,333×21 months).

5.  The plaintiff was incorporated in 2006 in the British Virgin Islands.

6.  The defendant filed a Defence and Counterclaim, dated 30 November 2015.

7.  By summons, dated 4 February 2016, the plaintiff applied, pursuant to Rules of the High Court, Order 14, rule 1, for:

(1) Final judgment for €199,998; and

(2) Interlocutory judgment with damages to be assessed for breach of the Services Agreement.

8.  Pursuant to Order 18, rule 19, the plaintiff applied for an order that the Counterclaim be dismissed.

9.  On 8 July 2016, a Master gave judgment for part of the plaintiff’s claim.  The Master made the following orders:

(1) The defendant pay the plaintiff €199,998 (or its Hong Kong dollar equivalent at the time of payment) being part of the claim with interest thereon at the rate of 8% per annum from 29 June 2015 up to the date of judgment and thereafter at judgment rate until payment in full;

(2) The defendant pay damages to be assessed for breach of agreement as defined in the Statement of Claim; and

(3) Dismissing the Counterclaim.

10.  The defendant appealed pursuant to Order 58 by filing a Notice of Appeal on 15 July 2016, seeking the following orders:

(1) The Master’s orders be set aside;

(2) The plaintiff’s application be dismissed with costs to the defendant with certificate for counsel;

(3) Alternatively, the defendant be granted unconditional leave to defend the action;

(4) Costs below be to the defendant with certificate for counsel to be taxed if not agreed.

11.  The Notice of Appeal set out many grounds of appeal, almost all of which were criticisms of the Master’s findings, his approach to the evidence and his application of the law.  An appeal from a Master is dealt with by way of a re-hearing of the application which led to the orders under appeal and the judge treats the matter as though it came before him for the first time.  See:  Hong Kong Civil Procedure 2017 Vol 1, para 58/1/2.  I shall not examine the numerous criticisms of the Master’s Judgment.  Instead, I shall approach the appeal by reference to Order 14, rule 1 and Order 14, rule 3 and consider whether the defendant has no defence to the claim and whether I am satisfied that there is an issue or question in dispute which ought to be tried. 

12.  During the course of the hearing before the Master, the defendant relied on a draft Amended Defence and Counterclaim, with the consent of the plaintiff, although no leave to amend has been given.  The plaintiff was content to proceed on the same basis during the appeal.  By the Notice of Appeal the defendant seeks leave to file and serve the Amended Defence and Counterclaim.

The Service Agreement

13.  The parties entered into the Service Agreement on 28 September 2011, clause I) of which provides:

“ [The plaintiff] will introduce media partners, frequencies, provide media consulting services and develop business relationships in the broadcast sector for [the defendant] on a mutually agreed basis. The first relationship will be in connection with delivery of content in the Italian marketplace. This agreement covers Rome.”

14.  Clause III) provides:

“ In consideration for the said services [the defendant] a [sic] monthly sum of €33,333 (one hundred thousand) for services rendered. All payments will be transferred by wire to an account of the choosing and at the direction of [the plaintiff].”

15.  Clause VI) provides:

“ … The Agreement will last until 15 October 2016 ….”

16.  The parties agreed that Hong Kong laws would govern the Service Agreement and any dispute would be referred to Hong Kong courts.

The Eurostar Agreement

17.  There is another agreement which featured in the appeal.  On 28 September 2011, the defendant entered into an agreement with Eurostar Media Srl (“Eurostar”) (“the Eurostar Agreement”) by which:

(1) The defendant provided Eurostar with the necessary elements for the production and dissemination of daily 24 hours radio programming created by the defendant and characterized by the trademark, “Radio Globale” (“the Format”, also referred to as “content”).

(2) Eurostar undertook to use a radio station in Rome, Italy, operating on the frequency 100.5Mhz solely for the content (“the radio station”).

(3) In consideration for the use of the content, Eurostar agreed to pay the defendant €8,000 per month.

(4) Eurostar agreed to sell all advertising slots available on the radio station to the defendant for €58,000 per month.

18.  In particular, clause III) of the Eurostar Agreement provides:

“ In consideration for the license to use the Trademark and the Format, [the defendant] will receive from Eurostar a monthly sum of Euro8,000…as royalties.…For its part, Eurostar will sell…all advertising slots available…in consideration of a corresponding monthly fee paid by [the defendant] equal to euro 58,000 …. The amounts mutually owed will be offset up to the available amount, following the issuing of the relevant invoices, so that the monthly balance owed by [the defendant] to Eurostar will be equal to €50,000‌ ….”

19.  Eurostar was incorporated under Italian law on 15 December 2010.  It has its headquarters in Bolzano, Italy.  Mr Lake is Managing Director.  The parties agreed that the agreement would be governed by Italian laws and Eurostar is suing the defendant in Italy for money allegedly due under the Eurostar Agreement.

20.  (The parties each used different names for the two agreements.  For consistency, I have called them the Service Agreement and the Eurostar Agreement.)

Preliminary point

21.  The defendant took as a preliminary point that the Statement of Claim is defective.  Paragraph 10 of the Statement of Claim states:

“ By reason of the aforesaid, the Plaintiff claims the sum of €899,991 or the equivalent of Hong Kong dollars as damages for breach/repudiation of the Agreement.”

The defendant asserts that this is unequivocally a liquidated claim, such that there can be no interlocutory judgment for damages to be assessed.  Hence, summary judgment cannot be entered.

22.  Paragraph 10 should be read together with paragraph 9:

“ By reason of the aforesaid, the Defendant is indebted to the Plaintiff for services rendered from 1 July 2014 to 31 December 2014 and the Plaintiff has suffered loss and damage as a result of the Defendant’s breach/repudiation of the Agreement.”

Thereafter follow particulars setting out the separate sums referred to in paragraph 4 above.

23.  When read as a whole, it is clear from the Statement of Claim that the plaintiff is claiming a liquidated sum with regard to unpaid invoices and damages for breach of the Agreement being loss of future earnings.  The Statement of Claim is not defective.

The Defence

24.  The draft Amended Defence raises the following defences:

    (1) The Agreement is a sham;

    (2) Misrepresentation;

    (3) Defective frequency;

    (4) Failure of consideration;

    (5) An agreement to agree;

    (6) The Service Agreement was subject to a condition precedent which was not fulfilled;

    (7) Clauses I), II) and III) are vague, ambiguous and incapable of being performed;

    (8) The payment of €33,333 is incapable of being valid consideration absent a mutual agreement under Clause I);

    (9) No services were rendered for €699,993.

Sham agreement

25.  On 29 April 2011 Mr Lake, on behalf of Eurostar, and Mr Zhao Yinong, the defendant’s Executive / Managing Director, acting on behalf of the defendant, signed a Letter of Intent.  The recitals to the Letter of Intent record that Eurostar wished to buy content for the radio station from the defendant and wished to sell advertising space on the radio station to the defendant.  The recitals record that the parties wished to sign a cooperation agreement upon terms and conditions that both parties would agree later in a “Definitive Agreement”.  The Letter of Intent recorded that the purpose of the agreement would be to broadcast content provided by the defendant on the radio station and to sell advertising space to the defendant.

26.  The Letter of Intent also recorded that, after payment by Eurostar for content, the defendant would pay a net amount of €137 per hour or €100,000 per month or €1,200,000 per year.  In its Defence, the defendant states that this sum would be for advertising space. 

27.  The defendant asserts that, prior to the signing of the “Definitive Agreement” on 28 September 2011, Eurostar and the defendant agreed a discount, such that the defendant would pay a monthly fee of €83,333.

28.  The defendant alleges that, during negotiations for the “Definitive Agreement”, Mr Lake said to Mr Zhao:

(1) The €83,333 should be split into two sums, €50,000 and €33,333, to be incorporated into two agreements.

(2) The Service Agreement was a device solely to enable Eurostar to avoid Italian tax and would not create any rights and obligations.

(3) The plaintiff would be used as the party to the Service Agreement for the purpose of effecting Eurostar’s tax avoidance operation in Italy.

(4) The monthly fee to be paid under the Service Agreement (€33,333) was a sum split off from the €83,333 “to be charged for the FM100.5 frequency under the Intended Definitive Agreement”.

(5) The only and real contractual relationship would be between Eurostar and the defendant under the Eurostar Agreement.

29.  The defendant alleges that Mr Zhao agreed to Mr Lake’s proposal and executed the Eurostar Agreement and the Service Agreement on behalf of the defendant.

30.  The defendant’s pleaded case is:

(1) The business deal between Eurostar and the defendant was that as stated in the Letter of Intent and the Eurostar Agreement.

(2) The plaintiff was never a party to the business deal.

(3) The plaintiff was a vehicle used by Mr Lake to create the Service Agreement, which agreement was fictitious.

(4) The only object of the Service Agreement was to operate as a sham device to enable Eurostar to avoid tax in Italy.

(5) No real and binding contractual rights and obligations were created between the plaintiff and the defendant under the Service Agreement.

(6) The Service Agreement is of no effect, void and unenforceable.

31.  The defendant pleads:

“ … the essence of the [Eurostar Agreement], which reflected the real intention of the parties as stated in the Letter of Intent, represented the only and real business deal between Eurostar and the Defendant which provides, except the real fee payable to Eurostar should be €83,333 …. [then follows a recital of certain clauses of the agreement]”

32.  The defendant pleads that the evidence that the Service Agreement is a sham is, inter alia:

(1) An email sent by Mr Lake to the defendant’s accounts office, dated 29 September 2011, from which I set out the following:

“ Zhao and I have concluded our Agreement for Rome. Please see the attached two Agreements for your files …. We will break the monthly payment of €83,333 into two parts—one of 50K to be sent to Eurostar in Italy and one of 33.333K to be sent to [the plaintiff] in Hong Kong. … In addition, 83.333 is the net amount. We will pay you 8,000 per month as a royalty for the Trademark and Content to be invoiced to Eurostar. Hence, this 8K amount will be deducted from the [Eurostar] invoice of 58K for a net amount to be paid by [the defendant] to [Eurostar] of 50K. …”

(2) An email, dated 21 January 2012, sent by Mr Lake to Mr Zhao, from which I set out the following:

“ This letter is to confirm the amount paid for the lease of the Rome frequency in consideration for the license after payment to [the defendant] for the use the [sic] Trademark and the Format is a grand total of €83,333 per month to the bank accounts designated by the Eurostar Group.”

(3) Mr Lake and Mr Zhao signed a subsequent agreement between Eurostar and the defendant, purportedly dated 28 September 2011, from which I refer to clause III):

“ In consideration for the license to use the Trademark and the Format, [the defendant] will receive from Eurostar a monthly sum of Euro8,000…as royalties.… For its part, Eurostar will sell…all advertising slots available … in consideration of a corresponding monthly fee paid by [the defendant] equal to euro 91,333 …. The amounts mutually owed will be offset up to the available amount, following the issuing of the relevant invoices, so that the monthly balance owed by [the defendant] to Eurostar will be equal to Euro83.333 ….”

33.  Clause III) of the agreement referred to in paragraph 32(3) above is in the same terms as clause III) of the Eurostar Agreement save that the monthly fee for advertising slots is a net €83,333 instead of €50,000. 

34.  Mr Lake sent the agreement referred to in paragraph 32(3) above to Mr Zhao attached to an email, dated 22 January 2012, advising: “As per your request please see the signed contract attached.”  The contract attached was signed by Mr Lake.  (Mr Zhao characterizes this agreement as “the proper agreement for the real amount of [€83,333] for the rental of the Rome FM100.5 frequency.”)

35.  The defendant did not produce any evidence of Italian tax law.  Mr Zhao asserted that the Services Agreement was for the purpose of tax avoidance but he is not an expert in Italian tax law and I disregard his evidence.

36.  There is no dispute that invoices were rendered monthly for €33,333 and, from October 2011 to June 2014, the defendant paid the sums invoiced.  (Copies of the unpaid invoices bore the description “Service related to Rome FM100.5 as per Agreement €33,333”.)

37.  However, the defendant asserts that the parties never intended the plaintiff to provide services to the defendant pursuant to the Services Agreement and the plaintiff did not provide any services.  With regard to paying invoices for €33,333 from October 2011 to June 2014, the defendant pleads that, pursuant to the agreement that the monthly sum of €33,333 was part of the monthly contract sum under the Eurostar Agreement, the defendant paid the plaintiff from October 2011 to June 2014 “for the provision of FM100.5” under the Eurostar Agreement and not otherwise.

38.  The plaintiff denies the defendant’s allegations.  In his first affidavit in support of the plaintiff’s application for summary judgment, Mr Lake stated that he and Mr Zhao agreed that the plaintiff would provide consultancy services to establish the Rome market and Eurostar would provide radio frequencies in Rome and related operational management.  He stated that, to ensure there was no conflict of interest from an accounting, reporting and corporate law perspective as well as a tax perspective, different entities and different agreements were used for the provision of different services.

39.  Mr Lake referred to a series of emails exchanged with Mr Zhao between December 2010 and September 2011, which Mr Lake contends illustrate that the parties were discussing the services which were eventually covered by the Services Agreement.  I shall refer to three emails by way of example. 

40.  First, Mr Lake’s email, dated 21 January 2011.  The subject of this email is “note on Milan” (prior to the Services Agreement, the parties had entered into a similar agreement with respect to the operation of a radio station in Milan).  The email refers only to Eurostar and the defendant, not the plaintiff.  The email refers to a single “Definitive Agreement”, not two agreements.  The email refers to “Other Services”:

“ … it seems like there are services that you still need, and you would like us to do this as part of goodwill.…If you indeed want this we can figure in a reasonable service fee for them,….…perhaps you can supply me with a mandate and retainer to work on the bigger picture [with the defendant] on a global content basis, starting with the completion of the business plan, financial model and merger work on Infomedia.”

41.  The other two emails were also written by Mr Lake. One, dated 29 January 2011, refers to a “financial consultancy agreement” but no reference to media consultancy.  The other, dated 14 March 2011, refers to a “Eurostar-GBMM contract” and to a “GCC-GBMM contract” stating: “… it would be nice to complete this in the next couple of weeks.” (“GBMM” refers to the defendant and “GCC” refers to the plaintiff.)  It appears that these are not references to either the Eurostar Agreement or the Services Agreement but to contracts concerning the Milan radio station because the email states: “I will hope to provide you with something on Rome ASAP.”

42.  Mr Lake stated in his affidavit that, in performance of its obligations under the Services Agreement, the plaintiff provided various media consultancy services and, as I noted above, he set out the broad nature of the services provided.

43.  Regarding the email referred to in paragraph 32(2) above, Mr Lake stated that he sent the email at the request of Mr Zhao for Mr Zhao’s “internal purposes”.

44.  Regarding the agreement referred to in paragraph 32(3) above, Mr Lake stated that Mr Zhao asked him to prepare and send the agreement to Mr Zhao only for Mr Zhao’s “internal purposes”.  He did not deny executing the agreement.

45.  The plaintiff’s counsel drew my attention to the fact that the first time the defence of sham agreement was raised was in the Defence and submitted that the real reason for non-payment is that the defendant did not have any money.  Counsel referred me to an email which Mr Zhao sent to Mr Lake, dated 12 June 2014, in the following terms:

“ Our money situation is very bad now since CRI has not yet got its budget of 2014 approved. So [we] have not got any money for two months. … A special requirement has been made already and I hope we will get the money very soon.

…

I hope we can conclude our termination agreement as soon as possible. …”

46.  Counsel also submitted that the defendant has admitted liability and referred to a letter, dated 6 September 2014, which Mr Zhao wrote to Mr Lake in the following terms:

“ … I officially inform you that we require a termination of our contract of transmission service in Rome and the last transmission in Rome will be last day of August 2014.…We will commit to pay you every unpaid invoices…. We will pay you additional 4 months of invoices (of September, October, November and December, 2014) as compensation for early termination of our contract,…. Before August, we should pay you all the unpaid open invoices…. By end of the year, we should pay you all the rest of invoices….”

47.  Counsel also referred to the Italian proceedings, which Eurostar commenced in March 2015 to recover unpaid amounts in respect of the Eurostar Agreement. In its Defence filed in the Italian proceedings, the defendant pleaded: “This [Eurostar Agreement] is connected to another contract ….”  The other contract referred to is the Services Agreement.

48.  Regarding the termination letter, dated 6 September 2014, Mr Zhao stated in an affidavit that this was intended to terminate the Eurostar Agreement, it did not concern the Services Agreement.

49.  Mr Zhao also stated that the defendant had not objected to payment of the €33,333 because the parties treated that sum as part of the €83,333 payable under the Eurostar Agreement.

50.  I have referred above to a Milan radio station.  With regard to that station, Eurostar and the defendant entered into an agreement similar to the Eurostar Agreement and the plaintiff and the defendant entered into a services agreement similar to the Service Agreement.  The Milan agreements were executed before the Eurostar Agreement and the Service Agreement.  Both parties rely on the Milan agreements.  The plaintiff argues that they are consistent with the structure adopted in respect of the Rome radio station.  The defendant asserts that the Milan agreements are a similar structure to enable the plaintiff to avoid Italian tax.

Discussion

51.  Both Mr Lake and Mr Zhao made numerous points and counter-points in their respective affidavits.  Similarly, both counsel made numerous points and counter-points.  I have not set out all of these points because I consider that the issues raised and taken, which I have set out above, are sufficient to illustrate my view that this is not a matter which is suitable for summary disposal.  The evidence is such as would require a mini-trial on affidavits, which must be avoided.  This is a matter in which the evidence should be presented, tested and considered by a court at trial.

52.  The defendant’s case concerning Mr Lake’s representations regarding tax avoidance is based on alleged oral representations.  There are no documents recording the alleged conversations which might have assisted the court in this application.  The evidence regarding the alleged representations should be considered at trial.

53.  There are three signed agreements, the Eurostar Agreement, the Services Agreement and the agreement referred to in paragraph 32(3) above, each signed by the parties and each purporting to deal with the agreement made between the parties.  Mr Zhao claims that the agreement referred to in paragraph 32(3) above is the true agreement.  Mr Lake’s evidence is that he provided the agreement referred to in paragraph 32(3) above at Mr Zhao’s request for Mr Zhao’s internal purposes.  The resolution of which agreement or agreements represent the actual agreement is a matter for trial.

54.  Regarding Mr Lake’s email, dated 21 January 2012, referred to in paragraph 32(2) above, it refers to a “lease” and to a single payment of €83,333, without reference to the provision of services.  On its face, this email does not establish that the payment of €83,333 included payment for services.

55.  As I have noted, Mr Lake broadly described the services provided.  The defendant either denies that the services were provided or, in respect of some of the services described, alleges that they were included in the Eurostar Agreement and were not subject to a separate fee to be charged by the plaintiff.  This area of dispute should be investigated at trial and after discovery.

56.  Regarding the plaintiff’s submission that the defendant has admitted liability, in the context of the issues as a whole, I am not prepared to conclude at this stage that the defendant admitted liability.  This is a matter for trial.

57.  The plaintiff also sought a judgment on admissions. This is not a ground raised in the plaintiff’s summons.  This ground relies on the termination letter referred to in paragraph 46 above.  As I noted, Mr Zhao asserts that the letter was intended to terminate the Eurostar Agreement and did not concern the Services Agreement.  In the context of the defendant’s case that the only agreement was the Eurostar Agreement, I am not prepared to find at this stage that the letter is an admission of liability.

58.  In my view, there are live issues to be considered at trial.  I cannot conclude that there is no defence to the plaintiff’s claim and I am satisfied that there are issues or questions in dispute which ought to be tried.

59.  Accordingly, I allow the appeal and I make the following orders:

 (1) The orders of Master S Kwang, made on 8 July 2016 are set aside;

 (2) The plaintiff’s Order 14 application for summary judgment is dismissed; and

 (3) The defendant has unconditional leave to defend the action.

60.  I grant the defendant leave to file and serve its Amended Defence and Counterclaim.  The defendant is to pay the plaintiff’s costs of the application to amend, to be taxed if not agreed.

61.  I make an order nisi that the plaintiff pay the defendant’s costs of the plaintiff’s Order 14 application for summary judgment before Master S Kwang.

62.  As to the costs of this appeal, I make an order nisi that the plaintiff is to pay the defendant’s costs, to be taxed if not agreed.

63.  Regarding the costs of the appeal, I make the following observations, which may assist a taxing master.  As I noted above, notwithstanding that this appeal is a re-hearing of the plaintiff’s application, the Notice of Appeal was primarily a criticism of the Master’s approach to the application.  ‌Before me the defendant’s counsel relied on his skeleton submissions and reply submissions for the hearing before the Master.  The skeleton submission amounted to 22 pages and the reply submissions amounted to 10 pages.  For the appeal, the defendant’s counsel filed written submissions amounting to 36 pages, which apart from a brief introduction and outline of the parties’ respective cases, were submissions criticizing the Master’s approach.  Given that the appeal was a re-hearing the written submissions filed for the appeal criticizing the Master’s approach were unnecessary.