WORLDWIDE DIAMOND MANUFACTURERS (HK) LTD v. DIAFRO CO LTD

HCA 1544/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1544 OF 2005

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J U D G M E N T

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1.  This is an appeal by rehearing from an Order 14 RHC summary judgment ordered by a Master on the plaintiff’s claim. 

History

2.  The parties were engaged in business but fell out.  The plaintiff’s business is in diamonds.  At the material time, the defendant sourced diamonds for polishing and sawing on behalf of a company operating a factory in Panyu, China, called Real Oriental Diamond Product (Panyu) Co. Limited (“Real Oriental”).

3.  In September 2002, the parties began doing business.  In this regard they were assisted both in the providing of services and in the accounting by a corporate service company called Prima Group Limited.

4.  As described by Mr Meir Boukris, the managing director of the plaintiff, typically the plaintiff would receive a consignment of diamonds from a customer for polishing.  This consignment would be delivered to Prima Group, which would undertake the paper work and then deliver the same to the defendant, thence to Real Oriental for the work to be undertaken.  Once done the consignment would be returned through the same channels to the plaintiff and then its customer.  The customer was entitled not only to the polished stones but the fragments of diamonds that had become disengaged in the process.  The defendant would invoice the plaintiff for the cost of the service; the plaintiff would do likewise to its customer with an appropriate mark-up.

5.  Originally the payment term between the parties was 30 days following completion of work.  But to support the defendant’s cash flow it came to be agreed and to be the norm that the plaintiff would pay in advance on request by the MD of the defendant, Mr Vijay Nahata.  In that event, Mr Boukris would authorise Prima Group to make a payment which, on Mr Nahata’s instructions, was sometimes to the defendant, sometimes to Real Oriental and sometimes to himself.

6.  During the course of this transacting statements of account regularly issued, sourced at Real Oriental, reflecting all the transactions and a running balance.

7.  Between September 2002 and December 2004 the gross worth of the business transacted was over US$1 million per annum.

8.  For reasons that are not material, the parties fell out.  The plaintiff gave three months’ notice to terminate, to expire by the end of November 2004.

9.  By September 2004, because of advanced payments made by the plaintiff and credit supplied the plaintiff calculated on the defendant’s accounting that US$100,655.09 was due to the plaintiff.  There was also a further amount due in respect of work undertaken for a customer called Glik.  The plaintiff had made an advance payment of US$25,000 but the work charged for it came to US$8,135.39, leaving a credit due to the plaintiff of US$16,864.61.  I shall call this the Glik transaction.

10.  The plaintiff sought to recover these amounts.  The defendant called for more consignments and advances.  The plaintiff obliged.  By January 2005, allowing for further advances net of the cost of further work, the amount outstanding in the general account had risen to US$144,072.06.

11.  The plaintiff made formal demand for the sums of US$144,072.06 and US$16,864.61.  Further, it claimed diamond fragments weighing in total 1,800 carats that the defendant had wrongfully not handed over. 

12.  No payment, or delivery, was forthcoming.

The Action

13.  The plaintiff sued to recover the indebtedness and the diamond fragments by writ of August 2005.  Its Order 14 RHC summons was issued in October 2005.

14.  Attached to the statement of claim was a schedule showing a breakdown of how the main, general claim was calculated, first to arrive at the debt of US$100,655.09 (referred to as the intermediate subtotal) and then the final figure of US$144,072.06.  Within the figures leading to the intermediate subtotal was an item of 31 July 2004 stated to be “amount payable by Diafro US$544,284.12”.

15.  Messrs Boukris and Nahata filed affirmations in support of and in opposition to the application for summary judgment.

16.  In his affirmation, Mr Nahata denied that his company was liable for much of the money claimed to have been paid or credited to the defendant.  He stated that the plaintiff’s principal, a Belgian company called Bettonville, had an agency agreement with Real Oriental, and that many of the advances had been made on behalf of Bettonville direct to Real Oriental, for which the defendant could not be held accountable.  He listed a number of these and the names of the purported payee.  He also included the amount of US$544,284.12 against which he recorded “no payment made”.

17.  On this basis, the plaintiff was wrongfully charging the defendant as much as US$1,067,170.33, so that far from owing any money it was due a substantial amount.

18.  There was no stated challenge to the amount due under the Glik transaction nor the claim for the diamond fragments.  But he said that the defendant was entitled to retain these pending payment.

19.  In response to that an accounts executive of Prima Group called Isabelito Manio filed an affirmation.  She stated that she had conduct of the business transacted between the parties and was familiar with the accounting.  She said frequently the plaintiff in making advances was asked to make them to other parties including Real Oriental direct; she understood this was to save time and bank charges.  She said the defendant’s accounts department kept records which were provided to the plaintiff monthly which then passed them on to Prima Group.

20.  She stated that apart from the sum of US$544,284.12 and two other items of US$37,250 and US$5,750 (all three of which were stated to have been paid or to be due as at 31 July 2004) the amounts challenged by Mr Nahata in his affirmation were all payments made to or at the direction of the defendant for polishing work undertaken for the plaintiff.  She left it to Mr Boukris to explain the three 31 July 2004 amounts.

21.  Mr Boukris made a further affirmation.  He denied that any of the payments claimed by Mr Nahata were for another party on account of unrelated matters.  He reiterated that the figures derived from the defendant’s or Real Oriental’s accounts’ departments as confirmed by Prima Group.

22.  He provided an explanation for the three credits of 31 July, which fell into a different category.  US$37,250 represented a credit for the purchase of some equipment by the defendant from the plaintiff.  US$5,750 was the price of diamonds bought by the defendant from a customer of the plaintiff.  The sum of US$544,284.12 represented the sum total of a number of separate amounts due by the defendant to the plaintiff.

23.  There was no response to these affirmations of Miss Manio and Mr Boukris, and no further evidence.

The Order 14 Application and Aftermath

24.  Before the Master it appears the defence focused primarily on what was described as the complexity of the relationships that existed involving not just the parties but other related corporate entities.  Thus it was argued that because the defendant through Mr Nahata challenged the defendant’s liability in respect of many of the items, a proper accounting was necessary; and a trial.

25.  The Master rejected the defence as not sustainable, and by order of 5 January 2006 gave judgment for the amounts claimed and delivery of the diamond fragments.

26.  The defence next sought and was given another audience before the Master on 19 January when she was invited to reconsidered her order.  She declined to do so.  She ordered fixed costs in respect of the summary judgment application of $90,000 and for the subsequent hearing a further $24,000.  She also refused a stay of execution pending appeal.

27.  Against all these orders, the defence has mounted its appeal.

The Appeal

28.  There was no further evidence adduced. 

29.  Before me Mr Ip representing the defendant concentrated attention on the sum of US$544,284.12 described by Miss Manio as “a summary of a number of figures not an amount due” and by Mr Boukris as “a summary of the amounts paid by the plaintiff as set out in [the schedule of accounts]”.

30.  The challenge against the other items referred to by Mr Nahata whilst not expressly cancelled appears to have been discontinued.

31.  Mr Ip pointed out that Mr Boukris’ somewhat cryptic explanation could be taken to read that the sum in question was a total of other individual items in the schedule; thus a double accounting.  And if the amount of US$544,284.12 was taken out of the calculations as not sustainable, it not merely cancelled the debt but left outstanding to the defendant a sum of in excess of US$400,000, justifying its withholding the much smaller amount due on the Glik transaction, and to a lien over the diamond fragments.

Discussion

32.  what concerns me about the explanation for the entry of US$544,284.12 is that it stands alone amongst a series of credits of much smaller sums; the next highest being US$70,000.  There is no explanation why the total was not itemised as were the remaining items and no indication as to whether these were credits or payments or partly one and partly the other, or when they were made or fell due.  The legend in the schedule alongside the entry — “amount payable by Diafro” — is of singularly no assistance.

33.  If as was stated the accounting information came from the defendant’s accounts department, it seems to me that this would have been dealt with in contemporaneous invoices, vouchers or such other accounting material that could confirm the origin.  It seems most likely that the plaintiff would be in possession of or could get access to such documents.  Had these been produced and had they rendered unassailable the claim that this was the sum total of debts properly due, then that would probably have been the end of matter.  But neither Mr Boukris nor Miss Manio have seen fit to pursue and make this data available.  In the vacuum that prevails, I cannot reject as groundless the defence’s challenge to this sum, or any part of it.

34.  So there will need to be an accounting, and a trial.

35.  In the circumstances, I am unable to find there is no triable issue or arguable defence.  And although there is no challenge to the claim in respect of the Glik transaction or the diamond fragments, there should be no judgment in favour of the plaintiff in respect of these claims either whilst the possibility of a much larger counterclaim remains at large.

Result

36.  I allow the appeal and set aside the entry of judgment and orders for costs.

37.  The defence has unconditional leave to defend.

38.  Liberty to apply for directions.

39.  The costs order I make is nisi.  The costs here and below are in the cause.