BB & R LTD v. CHINAPLUS WINES LTD AND ANOTHER

HCA 1889/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1889 OF 2012

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(Heard together)

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D E C I S I O N

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1.  The plaintiff claims against the defendants for cost of goods sold in these actions. This is its application for summary judgment and interim reliefs.

A.  BACKGROUND

2.  Berry Brothers & Rudd is a century-old world renowned wine and spirit merchant in London by appointment to the British monarch.  The plaintiff (“BBRL”) belongs to the group.  For convenience, I shall refer below to BBRL, be it its predecessor or its present self which has been involved in the dealings with the defendants.  During the hearing, BBRL accepted that only the 1^st defendant (“CWL”) should be liable to the claim.  Again for convenience, I would only refer below to CWL, unless specific reference to the 2^nd defendant as opposed to CWL is strictly necessary.

3.  Since the late 1990s, BBRL and CWL had been business partners in the development of the wine markets of Hong Kong and gradually the Mainland China for BRRL.  This started with a Distributor and Co-operation Agreement dated 21 December 1998 (“the 1998 Agreement”) whereby CWL became the business vehicle and the sole distributor of the wines supplied by BBRL for Hong Kong.  In 2002, the parties[1] entered into 2 further agreements: the Licence and Distribution Agreement and the Marketing and Consultancy Agreement.

4.  CWL traded exclusively under the BBRL licences and its brand names, trademarks and get-ups.  BBRL bore 75% of CWL’s establishment and market cost; and was contractually entitled to 75% of the net operating profit from the distribution business[2].

5.  Apart from sale of wines under the distributorship, BBRL offered its branded wine-related services such as brokerage, cellar advice and other web-based services.  Of them, the wine storage service provided by the Customer Private Reserve Department of the group in London had a long history well before BBRL’s dealings with CWL. Gradually some of the Hong Kong customers who ordered wines to be supplied by BBRL also sought such storage service in the UK.  They became what are known as private reserve customers.

6.  The wines supplied by BBRL fell into 3 categories:

(1)   those supplied to CWL and effectively purchases for its own stock for sale (“Stock Wines”);

(2)   wines ordered by CWL for specific customers; such wines supplied would be allocated to the private reserve customers’ accounts kept with BBRL for long-term storage pending drawdown and shipment instructions from these customers (“CPR Wines”); and

(3)   wines en primeur [3], which were wines sold while still in the barrel by the vineyards; and would not be bottled and shipped to BBRL until up to 2 years afterwards (“EP Wines”); and the treatment of such wines once bottled and shipped to BBRL would be similar to that of CPR Wines.

7.  As the contractual buyer, CWL was and is personally liable to settle BBRL’s invoices for all 3 types of wines.

8.  The parties operated an inter-company running account system.  Invoices for Stock Wines were debited into running account no. C60795 and those for CPR Wines and EP Wines were debited into running account no. B27335.  Invoices for the wines were issued upon placement of purchase order.  The credit period for settling the invoices under C60795 was 120 days while that for invoices under B27335 was 90 days.

9.  Dispute between the parties arose over a decade later.  Eventually the business relationship broke down.  Litigation between the parties began.

10.  In May 2011, CWL commenced an action against, among others, BBRL for misuse of confidential customer information (“HCA 905/2011”).  Application for interlocutory injunction followed, which was eventually disposed of by way of undertaking.  In this action, BBRL counterclaims for its outstanding profit share pursuant to the 1998 Agreement.

11.  HCA 905/2011 triggered the negotiation between the parties for the settlement of the dispute and the re-structuring of the business operation for Hong Kong and the other markets in the region through a new company to be formed.  This led to the signing of a Term Sheet in August 2011 (“the Term Sheet”).  Yet the settlement did not materialise. The definite agreement contemplated by the Term Sheet was never entered into and the new company was never formed.  In June 2012, BBRL served notice to terminate the relationship with effect from December 2012.

12.  In September 2012, CWL commenced another action against BBRL, this time seeking injunction restraining BBRL from using the customer data that BBRL has accumulated in its computer system in respect of Hong Kong based private reserve customers (“HCA 1818/2012”). BBRL counterclaims for damages for wrongful interference by CWL of the storage contracts between BBRL and the Hong Kong based private reserve customers.

13.  In October 2012, BBRL commenced one of the present actions, HCA 1889/2012.  It claims the outstanding balance of the cost of wines sold and supplied during the period between October 2011 and December 2011 in the sum of £2,191,922.64 or alternatively damages.  BBRL also claims other declaratory reliefs and damages.  CWL raises the defence of set off by counterclaim.

14.  In December 2012, CWL’s application for interlocutory injunction in HCA 1818/2012 (mentioned above) was dismissed by Anthony Chan J in December 2012[4].

15.  The business relationship, at least as far as BBRL is concerned, therefore came to an end in December 2012.  Since then, BBRL has been carrying on its own distribution business in Hong Kong and Mainland China through another new subsidiary here.

16.  In July 2013, BBRL commenced the other one of the present actions, HCA 1332/2013.  It claims a total sum of £4,052,481.42 being the cost of wines sold and delivered during the last months of the distributorship under invoices between June 2012 and December 2012.  Defence is yet to be filed.  CWL puts BBRL to proof of delivery of the wines; and also raises the defence of set off by counterclaim.

17.  In the same month, BBRL took out the summons for summary judgment under O.14 and interim reliefs under O.29 of the Rules of the High Court in HCA 1889/2012.

18.  BBRL then obtained leave to amend the statement of claim in HCA 1889/2012. CWL responded by extensive amendments of its pleading, including additional allegations and heads of counterclaim.

19.  In November 2013, BBRL took out the summons for summary judgment for part of its claim and interim payment in HCA 1332/2013.

20.  On the first day of this hearing, BBRL applied for leave to amend its statement of claim in HCA 1332/2013.  The amendment dealt with the issue of delivery of the wines, which, as mentioned, is an issue taken by CWL.  The amendment reflected the stance and contentions set out generally in the indorsement of claim[5] and, albeit not as explicitly as the amended version, in the explanation of the wine allocation mechanism pleaded in the statement of claim[6]. The amendment did not entail change to the particulars and quantum.  Nor did it entail new evidence.  I therefore allowed the amendment.  BBRL’s summons for judgment in this action was amended accordingly.

B.  THE EVIDENCE

21.  The parties have filed extensive affidavits, including those from Philip William Duggan, Finance Director of BBRL (“Duggan”), and Mui Kwok Ki, director of CWL (“Mui”).  Voluminous documentary evidence has been exhibited.  The parties did not stop there.

22.  Shortly before the hearing, CWL applied by summons dated 10 January 2014 for leave to adduce the 2^nd affidavit of Mui in HCA 1332/2013.  BBRL responded by summons dated 14 January 2014 applying for leave to adduce the 3^rd affidavit of Duggan. At the hearing, Mr Burns (appearing with Mr Alder) for BBRL indicated that his client had no objection to the new affidavit of Mui, but it would need leave to file and serve Duggan’s new affidavit in response.  However, Mr Joffe (appearing with Mr Lam) for CWL objected.  Counsel agreed to consider the further affidavit evidence on de bene esse basis.

23.  Just prior to the third and the last day of the adjourned hearing, CWL took out a summons dated 26 February 2014 for leave to file the 2^nd affidavit of Mui in HCA 1889/2012.  The purpose was to deal with the observations made by Anthony Chan J in his written decision dated December 2012 in refusing CWL’s application for interlocutory injunction in HCA 1818/2012 (mentioned above).  Mui had actually exhibited some of these documents to his existing affidavit.  Yet he now wanted to say that those documents disclosed were mere samples and there was need to disclose and to refer to the whole lot.  There were box files of them.

24.  In my view, it was a conscious decision of Mui to select those documents which both he and his legal representatives considered to be sufficient for the purpose of his affidavit evidence in resisting BBRL’s application.  The parties’ argument proceeded on such basis. Without even suggesting that such selection of documentary evidence was a mistake, Mui now attempted to adduce the whole lot of those documents on the last day of the hearing and after hearing the submissions of his opponent.  This could not be right.  I therefore dismissed the summons.

C.  HCA 1889/2012

25.  In HCA 1889/2012, BBRL claims that of the amounts that have become due and payable by CWL under the running accounts, (i) a total sum of £1,385,536.80 payable for March 2012; and (ii) a total sum of £806,385.84 payable for April 2012 are outstanding (total sum of £2,191,922.64).

26.  CWL has admittedly withheld the above amounts on the ground that it has a valid counterclaim.

27.  Of particular relevance to the counterclaim in this action is the so-called non-reefer container incident happened in early 2012. Briefly 2 shipments of wines for CWL and the private reserve customers in Hong Kong respectively had been erroneously packed for shipment in ordinary (or non-reefer) containers instead of refrigerated containers.  BBRL had to assume that those wines were thus adversely affected.  However the exact damage could not be ascertained, unless the bottles were actually opened and the wine tasted.  BBRL and CWL therefore came up with a customer compensation arrangement (“Customer Compensation Arrangement”).

28.  Under the Customer Compensation Arrangement, BBRL agreed to make an offer through CWL to each affected customer: (a) for the customer to accept delivery of the original wines; or (b) to locate and provide replacements to the customer; or (c) to refund to the customer.  As to refund, upon agreement between BBRL and CWL as to the refund as well as proof of actual refund by CWL, the amount would be credited (or deducted from) the amount payable by CWL to BBRL under the running account between the parties.

29.  Majority of the affected private reserve customers had responded to the offer.  As to the shipment for CWL, BRRL accepted rejection and the affected wines had been returned to BBRL.  CWL did not have to pay for shipment.

30.  Except for those accepted by and delivered to the customers, CWL still retains the rest of the affected wines in the shipment for the private reserve customers.  BBRL contends that upon the replacements or refund in respect of those affected wines pursuant to the Customer Compensation Arrangement, the title to the relevant affected wines should vest in BBRL and the wines should be returned to BBRL.  In the premises, CWL is allegedly liable for breach of contract, bailment, detinue or conversion of the relevant affected wines.  BBRL seeks declaration of its right to these wines, and order for delivery up of the same.

31.  By its summons in this action, BBRL seeks the following orders:

(1)   judgment in the sum of £2,191,922.64 as claimed in this action with interest; alternatively interim payment of the above sum or any part thereof;

(2)   judgment and order for delivery of such portion of the affected wines mentioned above (which were set out in the appendice to the Duggan’s affidavit); alternatively, order for their interim custody or preservation pending trial;

(3)   costs.

D.  HCA 1332/2013

32.  In HCA 1332/2013, the total sum claimed is £4,052,481.42.  It comprises the amount of the invoices in the final months of CWL’s distributorship: (i) £185,314.96 for Stock Wines supplied between June 2012 and December 2012 (under account C60795); and (ii) £3,687,166.45 for the non-Stock Wines supplied between July 2012 and December 2012 (under account B27335).

33.  By its summons in this action, BBRL seeks part judgment in the sum of £3,849,857.35[7] with interest; alternatively or additionally, interim payment of the same.

34.  CWL dispute delivery of some of the non-Stock Wines covered by the invoices.  It also puts forward a counterclaim.

E.  THE PRINCIPLES

35.  The relationship between summary judgment and interim payment as well as that between summary judgment and cross claim come to be considered.

E.1  Summary judgment and interim payment

36.  The principles governing application for summary judgment are trite; and I do not propose to recite the authorities advanced by counsel in this respect.  It is the burden of the plaintiff to prove the claim. 

Judgment may be entered if the defendant cannot demonstrate a credible defence or some other reason for which the matter should go to trial: see O.14, r.3.  This is not a trial of complex factual and legal dispute on affidavits: see Pacific Electric Wire & Cable Co Ltd v Harmutty Ltd [2009] 3 HKLRD 94.

37.  Whilst BBRL applies at the same time for interim payment, it is apparently an alternative, in the event that judgment is not given summarily.  In such event, if the action proceeds to trial and the plaintiff would obtain judgment for substantial damages against the defendant, the court may order the defendant to make an interim payment of such amount as it thinks just, not exceeding reasonable proportion of the damages which in the opinion of the court are likely to be recovered by the plaintiff after taking into account any set-off, cross-claim or counterclaim on which the defendant may be entitled to rely.  This is O.29, r.11(1)(c).

38.  Mr Joffe argues that r.11 does not apply, as the claim for cost of goods sold is one for debt, not damages.  As mentioned, BBRL indeed claims damages for breach of contract as an alternative.  However Mr Burns clarifies that it is the more general r.10 that should be relied on. R.10(3)(a) suggests that an application for interim payment may be made in respect of an action for debt or damages.

39.  In any event, for purpose of interim payment, it is the burden of the plaintiff to show on the balance of probabilities that it would, and not merely likely to, succeed in the trial: see Hong Kong Civil Procedure 2014 (“HKCP”) (Vo.1) at 29/11/1.  HKCP (Vol.1) at 29/11/4 contains a summary of the discussion of the relationship between applications for summary judgment and applications for interim payment in numerous authorities.  The conceptual difficulty in the court taking a view that the plaintiff would succeed in recovering substantial damages for the purpose of O.29 whilst satisfied that the defendant should have leave to defend under O.14 was pointed out.

40.  It would seem that the perceived margin for exercising the discretion under O.29 would be where on the balance of probabilities, the court has sufficient doubt as to the genuineness of the defence so that leave to defend, albeit given, would be subject to condition. If in all the circumstances of such a case that an interim payment seems sensible and desirable, it could be ordered: see Hollywood Palace Co Ltd v Trans-Global Hong Kong Investment Ltd [2011] 1 HKLRD 833 (at §§16-19).

E.2  Summary judgment and cross claim

41.  HKCP at §14/4/14 has the following summary of the various scenarios:

(1) Where the defendant can show an arguable set-off, equitable or otherwise, the defendant is entitled to leave to defend to the extent of the set-off.

(2) Where the defendant sets up a bona fide counterclaim arising out of the same subject matter or the action, and connected with the grounds of defence, the order should not be for judgment with a stay pending trial of the counterclaim, but should be unconditional leave to defend, even if the defendant admits the whole or part of the claim.

(3) The mere fact that the defendant has a counterclaim does not necessarily entitle him to leave to defend.  Where there is clearly no defence to the claim, but the defendant sets up a plausible counterclaim, the order should not be leave to defend but should be judgment for the plaintiff with costs with a stay until the trial of the counterclaim.

(4) If the counterclaim arises out of quite a separate and distinct transaction or it is wholly foreign to the claim or there is no connection between the claim and the counterclaim, the proper order should be for judgment for the plaintiff with costs without a stay.

42.  (2), (3) and (4) above gives the court the room to respond to the perceived justice of the case.  In this regard, the requirement of the necessary connection between the action and the counterclaim for the purpose of equitable set-off has been expressed in terms of different strictness by the court.

43.  In Esso Petroluem Co Ltd v Milton [1997] 1 WLR 938 at 950, it was said that the mere fact that both claim and cross claim arise out of a single trading transaction between the parties is wholly insufficient to supply the close link necessary to support an equitable set-off.

44.  In Dole Dried Fruit and Nut Company v Trustin Kerwood Ltd [1990] 2 Lloyd’s Rep 309, it was suggested that if the claim and the counterclaim are sufficiently closely connected to make it unjust for judgment to be given, then the defendant should be allowed to rely on a counterclaim as an un-liquidated set-off.

45.  The above less strict approach was applied in Bim Kemi AB v Blackburn Chemicals Ltd [2001] 2 Lloyd’s Rep 93, where it was held that even if the cross claim and the main claim do not arise from the same contract, a set-off against the main claim based on the cross claim is allowed if the cross claim flows from the dealings and transactions which gave rise to the subject of the claim.

46.  Similarly a set-off may also be available to a cross claim for damages in respect of different but closely connected contracts arising out of a long-standing trading relationship which is terminated.  Whilst a long-standing trading relationship per se will not establish the requisite inseparable connection, in an appropriate case, it may well be manifestly unjust to allow one claim to be enforced without taking into account the other.

47.  The above propositions in Bim Kemi was applied in Townearn Industrial Ltd v Golden Globe Holdings Ltd [2003] 1 HKC 186.  The same was applied as the modern test for equitable set-off in the recent case of Geldof Metaalconstructive NV v Simon Carves Ltd [2011] Lloyds Rep 517 at §43.

F.  THE CLAIMS

48.  As mentioned, CWL has admittedly withheld the balance of the cost of the wines being claimed in HCA 1889/2012.

49.  As to the claim in HCA 1332/2013, CWL takes issue as to delivery.  It argues that the cause of action for cost of goods sold is handicapped in the absence of pleading of delivery.  BBRL disagrees.  With leave on the first day of the hearing, the statement of claim was amended. Notwithstanding that, the primary argument of BBRL remains that as a matter of contractual terms and practice between the parties, it was not delivery that triggered CWL’s obligation to pay for the price of the wines ordered.

50.  Mr Burns submits that the questions of how and when delivery is to be effected as well as when payment is to be made are matters of agreement between the parties: see s.28 of the Sale of Goods Ordinance, Cap 26[8]; Benjamin’s Sale of Goods (18^th ed) at §§8-004 to 8.011.  I agree.

51.  As I see it, the payment terms and practice between the parties throughout the long history of their dealings reflected that the payment obligation arose upon the expiry of the applicable credit period from the issuing of the invoices.  CWL apparently also received payments from customers for the wines ordered on similar basis.

52.  Delivery in the circumstances may not be relevant to the accrual of contractual liability of CWL to pay for the wines ordered in the present case.  It is however relevant to BBRL’s entitlement to such payment now.  The extreme scenario is that what CWL is contractually liable to pay for has subsequently never been delivered as a matter of fact. This brings us to consider what constituted delivery in the circumstances of the case.  As mentioned, the dispute concerns only the non-Stock Wines, ie the CPR Wines and EP Wines.

53.  Purchases of EP Wines, due to their very nature, hardly entailed delivery as if in the case of bottled wines.  Being traded was effectively the right to the wines, which were to be bottled and delivered to BBRL in the years to come.  What BBRL became obliged to do, upon such orders, was to allocate the EP Wines ordered to the individual customer accounts.  As to CPR Wines, delivery entailed receipt by BBRL’s UK storage of the bottled wines.  Again, the same would be credited to the private reserve customer accounts.  In both cases, the customers became entitled to give instructions to deal with the wines (or the right to them) in their accounts.

54.  According to the evidence, the customer accounts were accessible and could be verified by the customers on line.  That CWL allegedly has become unable to access to such accounts on line for verification after the termination of the distributorship may be neither here nor there.  There is no evidence that it could not have done so prior to the termination.

55.  In view of CWL’s accrued contractual liability to pay according to the payment terms and practice, which is what BBRL has to establish, it will be for CWL to suggest by credible evidence for the present purpose that the relevant wines (or right thereto) credited to the customer accounts did not exist as a matter of fact.  CWL refers to some isolated incidents (some in the past) that caused it concern.  It also criticises (apparently only now) about the lack of earmarking of wines under this long-standing private reserve allocation system.

56.  The best evidence in support of CWL’s case would have been that of actual complaint by the private reserve customers of the missing of the very wines covered by the invoices in this action.  The lack of it may well be testimony to the contrary.

57.  BBRL provides a breakdown of the status of these wines covered by the invoices in this action, suggesting that majority of such wines had already been drawn down or transferred by/for the private reserve customers.  It also produces various delivery confirmations[9]. Some of the wines that were supposed to be delivered out of the UK private reserve storage to Hong Kong had in fact been delivered to the customers in Hong Kong direct without the intermediary of CWL.

58.  Insofar as the amount of the invoices is concerned, I doubt there is a genuine defence to liability under the invoices.

G.  THE COUNTERCLAIMS IN HCA 1889/2012

59.  The counterclaims in both actions are extensive.  The parties’ respective stances in respect of each head of counterclaim in these actions are set out in a common table of the parties[10].  Mr Joffe also prepared a table to indicate his client’s stance in respect of the defence of

set-off by the various heads of counterclaim.

60.  CWL raises counterclaim for:

(1) loss and damage arising out of the non-reefer container incident;

(2) CPR storage profits; and

(3) Cellar plans profits.

G.1.  Loss and damage arising out of the non-reefer container incident

61.  Of the claims under this head, BBRL is prepared to accept for the purpose of this application the following items:

(1)   Refunds (£401,996.58) and replacements (£9,612.38) made by CWL to the customers;

(2)   Warehouse expenses (£25,723.58); and

(3)   Loss of profits on the rejected shipment for CWL (£35,622.77).

62.  Hence set-off against BBRL’s claim by the total amount of £472,955.311, if proved.

63.  The following claims under this head are in dispute:

(1)   Liability of CWL to refund the CPR customers who have accepted delivery of the original (affected) wines;

(2)   Liability of CWL to refund the CPR customers who did not receive replacements that were yet to be sourced or shipped;

(3)   Liability of CWL to a specific customer;

(4)   various expenses; and

(5)   damage to reputation.

64.  Both parties refer to clause 4.3 of the 1998 Agreement.  The clause governs the respective responsibilities of BBRL and CWL in the event of delivery of defective or damaged goods by BBRL.  Clause 4.3.2 limits BBRL’s liability to replacement or (at BBRL’s option) refund to CWL in such event.  But this is subject to clauses 4.3.4 to 4.3.6.

65.  Clauses 4.3.4 to 4.3.6 provide for the respective responsibilities of BBRL and CWL for third party claims for damaged or defective goods.  Clause 4.3.6 provides that each party would indemnify the other from all third party claims for which it accepted responsibility under this agreement and all losses, damage (excluding consequential loss and damage), costs and expenses incurred or sustained by the other in respect of any such claim.

66.  The 2002 agreements did not alter the above provisions.  For their rights arising out of the non-reefer container incident, the parties are bound by the above clause.  The counterclaim by CWL arising out of the incident will have to be considered on this basis.

G.1(a)  Liability of CWL to refund the CPR customers who have accepted delivery of the original (affected) wines

67.  For the purpose of these applications, BBRL does not dispute the quantum (£141,013.07) but liability in respect this item.

68.  CWL’s claim is premised on a contractual relationship with and thus liability to the private reserve customers.  BBRL on the contrary emphasizes the importance of not mixing up the sale of wines contract and the CPR storage contract.  Contemplated when the 1998 Agreement was entered into was the sale of wines contract between BBRL as the supplier and CWL as the distributor.  Clause 10 of the agreement described the parties as a principal to principal relationship, not agency[11].

69.  As to the other services, clause 11.1 of the 1998 Agreement provided that in the event of CWL introducing business to the private reserves departments of BBRL in London, a commission would be paid to CWL at such rate or rates as shall be mutually agreed.  BBRL says that the storage contracts were thus between BBRL and the private reserve customers introduced by CWL.  Any liability for such CPR wines drawn down by and so shipped in the non-reefer container incident was that of BBRL.  CWL should not be exposed to personal liability to the private reserve customers as a result.

70.  Mr Joffe submits that with the documentary evidence[12], BBRL has now accepted[13] that CWL was perhaps the subcontractor of BBRL in respect of the storage business.  To me, this is not that clear.  CWL’s case is that BBRL was its subcontractor for the storage services to the private reserve customers, not the other way round.  What BBRL suggests here is that when it came to the retrieval and delivery of the CPR Wines from storage to the customers, CWL was perhaps its subcontractor for such purpose.  This is not necessarily inconsistent with BRRL’s stance throughout.

71.  Supposing there is somehow basis on which CWL may become liable to the private reserve customers in respect of the delivery of the CPR Wines from storage, all the more important is whether these customers retain the right to complain about the affected wines, and thus to claim against CWL (according to CWL, even for full value of the wines), after opting to accept the affected wines out of the 3 options offered pursuant to the Customer Compensation Arrangement mentioned above.

72.  There is lack of evidence of complaint or claim by these customers in respect of the affected wines since they received the wines in March to April 2012.  Mr Joffe argues that the exact terms on which the customers exercised the option were unclear and the prospect of claim remains.  CWL claims to be entitled to relief such as an order that BBRL has to set aside a fund on account of such potential loss or a declaration of his right to be indemnified for such potential loss.

73.  Mr Burns questions if BBRL would be expected to wait until the expiry of the limitation period for such potential claim, before it could get paid.  He submits that it would hardly be equitable to allow a counterclaim on such basis to stall BBRL’s entitlement on the debt: see Esso Petroluem Co Ltd (above) at 950; Derham, Set-Off at §§4.61 and 4.65.

G.1(b)  Liability of CWL to the CPR customers who have accepted and received replacements

74.  For the customers who have opted for and received replacement wines, I do not see real prospect of any credible further claim by them.

G.1(c)  Liability of CWL to the CPR customers who did not receive replacements as they were yet to be sourced or shipped

75.  The above argument regarding whether CWL would be exposed to personal liability to the private reserve customers in respect of the delivery from the UK storage applies.  However BBRL accepts that an allowance should be made for compensating these customers.  The questions are (i) how much; and (ii) who should stake-hold that.

76.  CWL claims £346,744.84, including the liability to a specific customer David Zhang in the sum of £194,991.96.  However, the evidence shows that this customer had changed his mind from accepting replacements to refund.  BBRL had thus directly paid and this customer had accepted a sum of £175,856.94 in full and final settlement.  Taking away £194,991.96 (as claimed), what remains under this item would be £151,752.88. This still contrasts with the amount of £110,120.28 as calculated by BBRL.

77.  BBRL opposes the balance of £110,120.28 to be held by CWL.  It proposes that the amount be paid into court for the purpose of future disbursement to the affected customers.  For the present purpose, I need only take that, if proved, to be accepted by BBRL to serve to set off the claim.

G.1(d)  Liability of CWL to a specific customer

78.  This was indeed the David Zhang mentioned above.

G.1(e)  Other expenses

79.  CWL claims a sum of HK$3,699,286.76 (or £300,755.02), which comprises:

(1) Fees paid to its former solicitors;

(2) Fees paid to another firm of solicitors for issuing protective admiralty proceedings in respect of the vessel carrying the shipment; and

(3) Fees paid to its current solicitors up the end of September 2013.

80.  Pursuant to clause 4.3 of the 1998 Agreement, BBRL would be liable to indemnify CWL against the loss, damage, costs or expenses incurred or sustained in respect of all third party claim for defective or damaged wines.  The fees sought to be recovered do not seem to have been incurred in respect of third party claim as contemplated under clause 4.3.6.  As to CWL’s costs incurred in its defence and counterclaim in the present action, they should be claimed, as they are actually pleaded, as a final relief pursuant to the court’s discretion.

81.  CWL also claims for alleged loss of credit insurance coverage as a result of BBRL’s commencement of the present action, which is said to be caused by the defective shipments.  Mr Burns questions its alleged connection and recoverability.  I share the reservation.

G.1(f)  Damage to reputation

82.  CWL claims damages for alleged damage to reputation as a result of the alleged default on the part of BBRL in the incident.  The court generally does not award (general) damages for damage to reputation for ordinary business dealings: see Addis v Gramaphone Co Ltd [1909] AC 488; Chu Pun Kei v Lee Yee Hung, HCA 1981/1999 (23 March 2001).    The complaint must be translated into loss of business, and thus special damages, to be recoverable.  Mr Joffe apparently accepts that.

83.  Clause 4.3 of the 1998 Agreement, as mentioned, limits BBRL’s liability to CWL arising out the quality of the wines supplied. The indemnity under clause 4.3.6 does not afford CWL a right to claim against BBRL other than an indemnity against all losses, damage, costs and expenses incurred or sustained by CWL in respect of third party claim.

84.  Further, as mentioned, CWL at all material times traded under the name, brand and get-ups of BBRL.  One queries whether the reputation of the business was really that of BBRL (and its group) instead of CWL.  There is no suggestion or evidence of actual damage.

G.2  CPR storage profits

85.  According to CWL, the arrangement for UK storage service for Hong Kong based customers came about in the course of development of the business.  It started as ad hoc arrangement; and developed through various oral agreements between the parties made over time including one in 2000 and one in 2002.  It was last agreed that BBRL would invoice the customers directly for storage fees at a customer rate.  Out of that, BBRL would be entitled to keep a specific rate, the so-called BBRL rate.  The difference between the 2 rates would be the profits margin belonging to CWL. CWL’s claim is for such profits in the sum of £1,697,526.69.

86.  I mentioned above the dispute as to whether it was CWL which provided such storage service to the customers through subcontracting to BBRL (as CWL contends) or CWL simply passed on the storage business to BBRL (as BBRL contends).  I also referred to clauses 10 and 11 of the 1998 Agreement that governed the parties’ relationship in respect of distributorship and CWL’s introduction of other business, including the private reserve customer service in London.  For the introduction of such business, CWL was to receive a commission at a rate or rates to be agreed.  Such dispute was indeed the central issue in CWL’s application for interlocutory injunction in HCA 1818/2012.

87.  CWL’s case is that the parties came up with a different agreement soon after the 1998 Agreement, and chose to do so merely orally.  After considering all the circumstances and submissions (including what Mr Burns repeated in these proceedings), Anthony Chan J in his decision dated 13 December 2012 gave 5 major reasons[14] for why he doubted the existence of the alleged oral storage agreement between the parties.  Whilst his lordship felt obliged, but not without considerable reluctance, to conclude that this was a serious issue to be tried, he nevertheless proceeded to conclude that this had no good prospect of success.  As reference, such decision of the court cast unfavourable light over the existence of the alleged oral storage agreement for the present purpose.

88.  Upon my consideration of the materials, including what CWL seeks to say now in resisting the present applications, I have the following observations.

89.  First, in HCA 1818/2012, CWL’s case was that the oral storage agreement was allegedly made in 1999 and the storage fee was increased in 2010.  In the original defence in HCA 1889/2012, more details and terms of such 1999 oral storage agreement were asserted.  It was only another 9 months later, when CWL extensively amended its pleading well beyond what was occasioned by BBRL’s amended statement of claim, that CWL introduced assertions never made before, including: (i) CWL was to be paid a commission of 2.5% for the storage business; (ii) a further oral agreement between the parties in 2000; and (iii) another further oral agreement between the parties in 2002.

90.  Second, the term of the alleged further oral agreement in 2002 as pleaded differs from that as deposed to in Mui’s affidavit in support.  In the former, it was said that BBRL would be entitled to gain at a rate at cost basis as would be agreed between the parties from time to time (the so-called BBRL rate).  In the latter, the rate was said to be at cost plus profit basis.

91.  Third, when CWL first demanded for the alleged share of such storage profits in late 2012, the basis was an alleged agreement made in 2011 when the Term Sheet was signed.  No mention however was made to the various alleged oral storage agreements mentioned above.  Whilst the alleged oral storage agreement formed the core of HCA 1818/2012, there was no allegation of any share of profits falling due and payable by BBRL to CWL.  Nor was there such monetary claim.

92.  Fourth, CWL relies on a few invoices dated between 2000 and 2002 and the correspondence dated 2008 in support.  Mr Burns cautions against accepting them as evidence without understanding their isolated and sporadic nature.  CWL also relies on a couple of invoices issued in December 2012 seemingly suggesting such demand.  However, they came about when the parties were already deep in dispute; and one of them came shortly after the adverse decision of Anthony Chan J mentioned above.

93.  CWL also relies on the Term Sheet.  As mentioned, it was entered into in 2011 with a view to settling HCA 950/2011 and to restructuring the business into one carried on by a new company to be formed by BBRL and Mui.  The settlement did not materialise.  The definite agreement contemplated was never entered into; and the new company was never formed. Nevertheless attention was drawn to the mention of income from storage rental in the Term Sheet.  There is dispute as to whether that was an acknowledgement about pre-existing storage income sharing (as CWL contends) or no more than a comprehensive agreement for the future business of the new company (as BBRL says).

94.  It may be said that the above only serves to highlight the factual dispute.  However, Mr Burns makes a fair point: CWL resorts to rely on the abovementioned evidence, instead of what would have been more direct evidence, such as alleged storage contract between it and the private reserve customers, internal account of CWL (which presumably would have recorded such alleged receivable storage profits due and owed by BBRL over a decade) and demand for such alleged share of storage profits throughout the years other than when the parties were already deep in dispute in late 2012.  In the circumstances, whilst CWL sought to explain that new evidence came to light after the adverse decision of Anthony Chan J in December 2012, the concern is also, if not more, about the lack of assertions and documentary evidence which were not, but should and could have been, put forward before.

95.  Whilst I would refrain from ruling out this item of counterclaim at this stage, the scepticism, which the court has previously expressed, about it is still there.

G.3  Cellar plans profits

96.  There is no dispute that BBRL operated cellar plans whereby customers purchased young wines that would be kept in the cellar of BBRL for maturation.  CWL allegedly funded the management of the plans, though the plans were all booked on BBRL’s system in the UK.  CWL says that there was an oral agreement between the parties in 2010 that out of these plans, the gross profits earned would accrue and be transferred to CWL while BBRL would earn its share from the sale prices of the wines plus an administration charge of £10 per plan per month.  BBRL denies the alleged agreement.

97.  CWL refers to the meetings between the parties in 2011 and related documents as evidence, which post-dated the alleged 2010 oral agreement.  It also relies on the Term Sheet.  BBRL admits that those meetings were held and cellar plan income was referred to in the Term Sheet. But it stressed that they formed part of very complex negotiation for re-structuring of the Hong Kong business in the future.  The negotiation was said to be inconclusive and no agreement had been reached.

98.  BBRL also disputes the quantum of this item. CWL claims to be entitled to a total sum of £676,302.86 being profits for 375 transactions under 72 cellar plans.  BBRL says the plans concerned only 42 customers, one of which alone held 31 accounts.  BBRL also says that CWL has exaggerated the quantum, firstly by claiming gross revenue instead of profits; and secondly by failing to take into account the 75% share of BBRL under the 1998 Agreement.

G.4  The claim and the counterclaim

99.  BBRL accepts that if proved, the total sum of £583,075.59 (£472,955.31 plus £110,120.28) could be set off against the sum of £2,191,922.64 claimed.  That leaves a balance of the claim in the sum of £1,608,847.05.

100.  CWL emphasizes the parties are in a longstanding business relationship; and transactions were entered into in furtherance of such relationship.  Between them, the parties operated inter-company running accounts for their respective liabilities in the course of the business.  The practice was not one of set-off only in respect of claims and cross claims arising out of matching invoices.  An example is the payments arising out of the non-reefer container incident.  BBRL also agrees to such set-off for the purpose of the present applications.

101.  CWL also says that the cross claims partly arise out of the process of unwinding their business relationship, which, as far as BBRL is concerned, was already terminated.  It would therefore be unfair to allow one side to exit with its claim arising out of the business whilst denying the other its own. This applies particularly to the counterclaims for storage profits and cellar plans profits, which involve the dispute as to which of the parties usurped the private reserve customer storage service, and is very much the dispute also raised in related pending actions.

102.  For these reasons, CWL argues that the remaining heads of counterclaim in this action are so closely connected to BRRL’s demand that it would be manifestly unjust not to take them into account.

103.  Adopting the modern approach towards the necessary close connection between the action and the counterclaim in the circumstances of the present case, I see the room for equitable set-off.

104.  Having said that, I refer to the discussion of the disputed heads of counterclaim above.  In my view, they per se are doubtful; and CWL should be allowed to defend only subject to condition.  Not attempting precision, I impose a condition of payment into court of a sum equivalent to £800,000.

G.5  Delivery up

105.  In the non-reefer container incident, the shipment for CWL was rejected and returned to BBRL.  Part of the shipment of non-Stock Wines had been released to and accepted by the private reserve customers pursuant to the Customer Compensation Arrangement.  The remaining affected non-Stock Wines are still in the possession of CWL.  BBRL now claims them back or alternatively a preservation order under O.29, r.2.

106.  CWL contends that there is insufficient basis for BBRL’s claim of right to possess the remaining affected wines, whereas BBRL questions CWL’s basis for retaining possession of the same.

107.  By pleading[15], CWL contends that it is willing and able to return to BBRL the affected wines upon BBRL’s payment of storage charges and expenses.  There is no pleading of right of lien that the law recognises and that CWL claims to possess over these affected wines for the alleged storage charges and expenses.  I see no genuine dispute as to BBRL’s entitlement to the return of these affected wines; but this should happen at BBRL’s cost.

108.  In the circumstances, this is not so much a question of preservation of the affected wines pending resolution of the dispute as to which party has title over them.  In any event, without suggestion and evidence of the affected wines being in actual or potential jeopardy while in CWL’s custody, the consideration of a preservation order in the interim also does not set in.

H.  COUNTERCLAIM IN HCA 1332/2013

109.  In HCA 1332/2013, CWL raises the following heads of counterclaims:

(1) Recovery of 5% surcharge;

(2) Recovery of salary and benefits of staff who worked for BBRL without its consent;

(3) Stock buy-back;

(4) Non-delivery of CPR Wines; and

(5) Cancelled order.

H.1  Recovery of 5% surcharge

110.  CWL complains that BBRL had charged for the wines supplied at 5% above cost, which was not contemplated by their agreement. The amount is £7,454,260.55.  BBRL claims that it was entitled to do so.  For the purpose of summary judgment, BBRL has not included the 5% in the cost of the wines supplied in both actions[16]. What is in question is the 5% charged on the wines sold and supplied in the past decade.

111.  Clause 8.2.1 of the 1998 Agreement provided that CWL would pay BBRL for the wines at their cost price as advised in writing by BBRL from time to time.  CWL would also pay to BBRL a supplemental price calculated in accordance with clause 8.6.  The supplemental price would be 75% of the net operating profit of CWL[17] earned in respect of each annual period.

112.  The 5% surcharge in question and the supplemental price under clause 8.6 referred to different things.  BBRL explains that it imposed the 5% surcharge to compensate BBRL’s own management cost and tax; and claims that it was entitled to do so pursuant to clause 8 of the 1998 Agreement.

113.  The parties are in dispute as to the construction of the reference to ‘cost price’ in clause 8.  CWL argues that it could only mean the bare cost at which BBRL acquired the wines for supply to CWL’s customers.  BBRL disagrees.

114.  In my view, clause 8.2.1 should be read in conjunction with clause 8.2.3, which provided that BBRL had the right to increase its cost price for the wines by advance written notice to CWL.  Since clause 8.2.1 already provided that BBRL would advise CWL the cost price of the wines from time to time, the right to increase the cost price by advance

written notice pursuant to clause 8.2.3 arguably was a separate right of BBRL.  As such, BBRL would have the right to charge CWL for the wines at more than its bare cost and on top the additional sum pursuant to clause 8.6.

115.  BRRL also argues that CWL is estopped from recovering the 5% that had consistently been charged and paid by CWL since day one over the past decade.  But CWL argues that the payment had all along been made under protest.

116.  Considering the series of relevant correspondence between the parties, I do notice complaint by Mui about the reasonableness of the imposition of the surcharge.  BBRL indeed explained to CWL what accounted for the surcharge.  Mui expressed understanding of that and merely strived to negotiate for a resolution more acceptable to him.  There was no actual challenge against BBRL’s entitlement to impose the surcharge under the 1998 Agreement.  Nor was there indication anywhere near a refusal to pay.

117.  There are 2 more hurdles to the recovery of the surcharges paid.  First, CWL’s claim is for reimbursement of the payments made in alleged unjust enrichment of BBRL.  Mr Joffe accepts that such payments are irrevocable under the common law.  However he submits that the door is not close to further development of the law in this respect.  He finds such room from what was said in Woolwich Equitable Building Society v IRC [1993] AC 70 and Ying Ho Co Ltd & Ors v Secretary for Justice (2004) 7 HKCFAR 333.  The former involved the recovery of tax paid under (ultra vires) regulations and demands.  The latter involved the recovery of premium paid by a developer to the Government to avoid breach of Government lease.

118.  In Woolwich Equitable, Lord Goff (at 164-166) set out the present state of the relevant law.  His lordship carried on to explain that a payment is regarded as voluntary and becomes irrecoverable in various circumstances.  Among others, the mere fact that money is paid under protest will not suffice in affording the right to reimbursement, in the absence of actual agreement between the payer and the payee that the money will be returned upon proof of that not having fallen due.  Bokhary PJ in Ying Ho (at §17) did not say otherwise.

119.  The room for reformation of the law of restitution that Lord Goff suggested (at 166B-C) was where money was paid to public authority pursuant to ultra vires demand, then not only should the money paid be recoverable but it should also be prima facie recoverable on the simple ground of unlawful demand and lack of consideration without the further need to establish the element of compulsion (as it is currently required).  It was such sentiment expressed in Woolwich Equitable that Bokhary PJ in Ying Ho considered to be forceful (at §14).

120.  Both cases cited were decided in the context of payment to meet the demand of the public authority.  The significance of such context lies in the perceived social and economic consequence of non-compliance (to the payer) stemming from inequality of the parties’ positions that created the pressure on the part of the payer.  Precisely because of that, the courts in both cases saw room for reformulating the law governing the recovery of such kind of involuntary payment: see Woolwich Equitable (at 71D); and Ying Ho (at §15).

121.  In the light of the above observations, these cases do not actually support the development of the law that Mr Joffe advocates for a commercial dispute like the present one between two contracting parties.  The kind of involuntariness in those cases, and thus the context in which the room for development of the law was advocated, does not exist in the present case.

122.  The second hurdle is that not less than half of this item of claim would have been time-barred when this action was commenced. Further, the claim is apparently exaggerated.  Further, by its letter in July 2012 before action, CWL claimed to be entitled to recover 25% of the 5% surcharge over the years, acknowledging the 75:25 profit sharing ratio between the parties.  According to BBRL’s calculation, the amount would be £1,534,518.18 instead of the sum of £7,454,260.55 being claimed.

H.2  Recovery of salary and benefits of staff who worked for BBRL without its consent

123.  This is a claim first raised in HCA 905/2011.

124.  The claim is for £816,962.84 being the cost of numerous employees of CWL who were allegedly procured to work almost full-time for BBRL from 2009 to 2012 for setting up BBRL’s new China venture unrelated to CWL’s business.  CWL claims that BBRL is liable to effectively reimburse it the cost of these employees that it had paid during the relevant period.  According to the affidavits, there is substantial factual dispute in this respect.

125.  Mr Burns submits that the cause of action behind this item of counterclaim is unclear.  This is probably a claim for reimbursement on the ground that BBRL has been unjustly enriched.  If CWL is alleging breach of employment on the part of the employees and procuring breach of employment on the part of BBRL, CWL should have been claiming for its loss and damage as a result of such breach.  One queries whether such loss and damage should be measured by what CWL was obliged to pay the employees by virtue of the relevant employment contracts.

126.  Inherent in the allegation is the suggestion that all that happened without CWL’s knowledge and approval.  That so many employees managed to work full time for BBRL over such a substantial period of time without Mui’s knowledge and acquiescence also invites scepticism.

127.  Fundamentally, one queries whether such counterclaim, even if arguable, is extraneous and may not amount to a sustainable equitable set off against the claim in this action.

H.3  Stock buy-back

128.  CWL relies on clause 16.2 of the 1998 Agreement, which provided for the obligation of BBRL, when the distributorship was terminated, to buy back stock owned and paid for by CWL at CWL’s cost; and such stock would then be returned to BBRL at BBRL’s expense.  There are 4 items under this head of claim:

(1) stock in Hong Kong at HK$9,925,433.24 (or £806,945.79);

(2) stock in the UK at £430,212.19;

(3) warehouse charges for the stock in Hong Kong at HK$192,603.40 (up to November 2013) (or £15,658.81); and

(4) expenses for returning the stock to BBRL to be ascertained.

129.  BBRL argues that such right might be taken to have been abandoned with the passage of time.  I would be slow to accept that, unless the same is a proven concept recognised by the law (other than limitation) or fact evidenced by contemporaneous evidence.  Here it seems to be a question of stock-taking and proof of the pre-requisites of clause 16.  This is very much in dispute.  So are the particulars of the stock in question provided by CWL for such purpose.

130.  Having said that, I doubt if such counterclaim, except for the expenses, affords CWL the defence of set-off, bearing in mind that this is going to be a bilateral movement of values (notwithstanding CWL’s denial of the value of the stock to it).  This is what Mr Burns describes as a ‘cash neutral’ situation.  Assuming that CWL’s entitlement is established, I believe the practical relief will be one of specific performance of clause 16.2 of the 1998 Agreement in relation to the stock in question.

H.4   Non-delivery

131.  CWL complains that BBRL had failed to comply with CWL’s instructions to transfer some wines to another storage facility (Octavian Vault) and to deliver some to Hong Kong.  BBRL is also said to have bypassed CWL by changing the addresses of delivery of some wines under the invoices in this action and other CPR Wines.  That, CWL claims, also amounted to wrongful interference with the contract between CWL and the customers, which allegedly caused loss of profits from CWL’s future business.

132.  The claim is based on the alleged direct contractual relationship between CWL and the private reserve customers in respect of the UK storage.  On this basis, it is said that CWL owes the customers the duty as bailee and BBRL owes similar duty as sub-bailee.  The cause of action is conversion of the wines in BBRL’s possession.

133.  The dispute in respect of whether there was direct contractual relationship between CWL and the private reserve customers in respect of the UK storage was discussed above.

134.  BBRL apparently does not deny that it had delivered some wines to the private reserve customers direct shortly before and after the termination of the distributorship.  That was done after alleged verification with the customers as to the genuineness of the alleged instruction to transfer the wines to the rival storage facility when the distributorship was about to end.  BBRL claims to be entitled to bypass CWL as it would have been entitled to terminate the distributorship by notice.  A spread sheet was referred to that illustrate the situation.

135.  The wines, BBRL says, belonged to the customers after all, who were in a position to change or countermand instruction in relation to the wines.  So long as there was no loss of the wines, about which it would have been for the customers to complain, CWL’s complaint on the basis of bailment (and sub-bailment) would have had no substance.

136.  I see the force of BBRL’s argument.  Irrespective of whether CWL was in a position to complain on the basis of a right to possess (as a bailee), that would have been technical, had there been no loss of the wines according to the customers.  There is no evidence of such complaint by any customer concerned.

137.  As to the claim for loss and damage for wrongful interference with the contract between CWL and the private reserve customers in respect of storage, that is intertwined with the termination of the business relationship.  At the moment, I can only say that this is fact sensitive and uncertain.

H.5  Cancelled orders

138.  The alleged cancelled orders had not been paid for.  CWL claims for an account to be taken of the invoiced value of these wines in the amount of BBRL’s claim.  The cancellation was alleged communicated by email during the period between mid-November 2012 and mid-January 2013 prior to delivery.  The invoiced cost was £511,207.46.  According to BBRL, that consisted of £250,570’s worth of EP Wines.

139.  BBRL refers to the written contractual terms governing the option to cancel in respect of the different kinds of wines.  It says the deadline for the option to cancel order had elapsed in respect of the orders in question.  CWL refers to the alleged practice in respect of cancellation of order in the course of their dealings, which was basically a matter of agreement between the parties.

140.  The relevant email correspondence mentioned above shows that except for certain request for cancellation that caused BBRL to inquire about the reasons, the orders would be passed on to the finance department for cancellation.  The evidence contains no further replies from BBRL suggesting otherwise.  I therefore do not agree with Mr Burns that the apparent agreement to cancel was equivocal.

141.  BBRL accepts that £1,260.96’s worth of order has been cancelled.

H.6  The claim and the counterclaim

142.  As mentioned, for the purpose of summary judgment, BBRL reduces the amount claimed by 5% on account of the surcharge. Hence £3,849,857.35.  BBRL also accepts a reduction of £1,260.96 for cancelled order.  Hence the balance of £3,848,596.39.

143.  CWL repeats its argument that the actions arose out of the course of the contracts entered into in furtherance of a long-term trading relationship between the parties and their unwinding of it.  BBRL’s claims and CWL’s cross claims are so closely connected that it would be unjust to allow BBRL to obtain judgment and exit the relationship without taking into account CWL’s cross claims.

144.  I doubt whether equitable set-off is available to the claim for salaries and benefits of staff (for effectively procurement of their breach of employment contract by BBRL) and the stock buy-back (which is probably a cash neutral exercise).  Equitable set-off may be available in respect of the claim for the 5% surcharge (in respect of previous orders), non-delivery and cancelled orders.  Yet the claim for the 5% surcharge and non-delivery per se are doubtful for the reasons as discussed above.

145.  In the circumstances, I too consider that CWL should be allowed to defend this action only on condition.  Again, short of precision, I impose a condition of payment into court in the sum equivalent to £1,500,000.

I.  CONCLUSION AND ORDER

146.  As to the parties’ respective applications by summonses for leave to file and to rely on Mui’s 2^nd affidavit and Duggan’s 3^rd affidavit in HCA 1332/2013, I allow them.

147.  I give an order for delivery up, at BBRL’s cost, of the affected wines in terms of §3 of BBRL’s amended summons in HCA 1889/2012.  There will be liberty to apply in respect of this order.

148.  As to the monetary part of the claim, there will be leave to CWL to defend on condition of payment into court in these actions respectively as aforesaid within 21 days.  Further directions should be sought.

149.  In the light of counsel’s indications during the hearing, and unless the parties agree on costs, the parties are directed to lodge and serve written submissions on costs of the O.14/O.29 applications. BRRL shall do so in 14 days; and CWL shall do so in 14 days thereafter.  Costs reserved prior to and during the hearing as well as costs orders made during the hearing should be taken into account.  Each set of submissions should not exceed 3 pages.  Costs shall be decided on paper, unless otherwise directed.

150.  I am grateful for counsel’s assistance.