J.T. INTERNATIONAL LTD v. BEST ENTERPRISE COMPANY

DCCJ 76/2012

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION No. 76 OF 2012

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JUDGMENT

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Introduction

1.  This is a claim by the plaintiff, as sale and marketing agent under an undated written co-operation agreement (“the Agreement”), for commission against the defendant.

2.  The plaintiff argues that the services relating an OEM (Original Engineering Manufacture) product it rendered to the defendant (“the OEM service”) were covered by the Agreement whilst the defendant contends otherwise. Further or in the alternative, the defendant contends that the OEM service did not lead to any conclusion of OEM agreements to which the defendant was a party and hence no commission is payable under the Agreement in any event.

3.  Therefore, this court is required to find out the ambit of the Agreement and if it did include OEM service, whether the plaintiff is entitled to commission by its provision of OEM service to the defendant under the Agreement. This is a purely a contractual claim.

Parties

4.  The plaintiff is a limited company incorporated in Hong Kong. It provides agency services and assists foreign goods to be marketed in retail outlets in Hong Kong. Ms Jade Chen (“Chen”) is the only shareholder of the plaintiff. She is also one of the directors of the plaintiff.

5.  The defendant is a partnership business. One of the partners is Wang Chih Chi (“Wang”). The defendant carries on its business in the trade of, among other things, toy accessories.

6.  Young Energy Source Co., Ltd (“YES”) is a company incorporated in Taiwan. It carries on the business in the manufacture and marketing of its beverage products traded under the trade name of “悅氏”. According to its website, it also provides OEM services to many famous outlets such as 7-11. Mr Chen Ching Yuan (“CCY”) is the chairman of YES and he is the brother-in-law of Wang. CCY was once a partner of the defendant (from January 1988 to July 1999).

Relevant facts  

7.  Most of the essential facts are evidenced by contemporaneous documents such as emails exchanged between the parties. A chronology is provided as follows.

8.  In late 2008, Chen came to know the special assistant of CCY, namely, Ms Betty Chang, through her friend. Their first business contact was evidenced by an email dated 9 January 2009 sent by Chen to Betty Chang. In the email, Chen explained her business proposal to Betty Chang. It can be seen that Chen suggested to Betty Chang that the products of YES be marketed in large cosmetics retail chain stores and well-known retail outlets in Hong Kong through the assistance of the plaintiff. Chen also suggested an initial term of three years. The business proposal did not mention and/or include any OEM products.

9.  YES preferred to do business with the plaintiff through its agent in Hong Kong. YES hence by a certificate of authorization dated 1 April 2009 appointed the defendant to be its authorized agent to import and retail products of its brand (“本公司品牌產品”).

10.  On 1 April 2009, the plaintiff and the defendant entered into an undated agreement entitled “飲料丶水類業務合作合約書” (“the First Agreement”) whereby the defendant appointed the plaintiff to be, among other things, sales agent in respect of the merchandise of the defendant (甲方[1]之商品) in a number of well-known local retail outlets including PARKnSHOP. The parties further agreed that the plaintiff would earn its commission by selling the products of the defendant in the specified outlets. The agreed commission rate was 8% for the first year, 6% for the second year and 5% for the third year of the total import price. The term of the First Agreement is from 1 April 2009 to 31 March 2012.

11.  In passing, I note that on the same day, the parties entered into another undated agreement entitled “化妝品丶保健食品業務合作合約書飲料丶水類業務合作合約書” in relation to the products of 台灣海洋深層水股份有限公司 sold under the brand name of Taiwanese and Oceandeep (“the Other Agreement”). The Other Agreement bears no relevance to the plaintiff’s claim.

12.  To perform the First Agreement, the plaintiff approached PARKnSHOP in or about July 2009. The emails exchanged between Chen and Fion Cheung (“Cheung”) of PARKnSHOP in July 2009 showed that Chen first explored the possibility of selling YES’s mineral water products in PARKnSHOP. In the email dated 13 July 2009, Chen indicated to Cheung that the plaintiff was importing a whole series of healthy drinks from the biggest bottle water supplier in Taiwan and referred Cheung to the website of YES for further information. She also offered to send samples if Cheung was interested.

13.  In the email dated 14 July 2009 sent at 11:18 p.m., Cheung, in addition to her request for samples of Yes’s mineral water products (2l), for the first time asked Chen whether the plaintiff could also do private label products and if it could, what the best prices would be.

14.  Private label products are understood to be OEM products, i.e. those products manufactured for the purpose of PARKnSHOP to be marketed under/by reference to the trade name of PARKnSHOP or its designated trade name. In other words, PARKnSHOP showed their interest in having its products bearing its own label/brand to be manufactured by YES on its behalf.

15.  By an email dated 17 July 2009, in reply to the said request of Cheung, Chen suggested to Cheung that they meet the following Monday when her Taiwanese partner would be able to give the quotations after he made enquiries with the factory.

16.  Eventually, Chen, Wang and Cheung had a meeting on 21 July 2009. By an email dated 22 July 2009, Cheung wrote to make a summary of the matters canvassed at the meeting. The summary was divided into two parts, namely, those matters relating to YES brand products and those matters relating to OEM products.

17.  Chen replied by an email dated 24 July 2009 and pointed out that the plaintiff would like to start with OEM products first and then they would consider listing of the YES brand products (which PARKnSHOP would charge a listing fee according to Cheung’s email dated 22 July 2009). This was followed by Chen’s quotations of OEM products for 600ml beverage products and 2l beverage products.

Construction of the Agreement: whether it covered the OEM Service

18.  At this juncture, it is pertinent to remind myself of the oft-cited dicta of Lord Hoffmann in Jumbo King Ltd v Faithful Properties Ltd (1999) 2 HKCFAR 279 at 296:

“The construction of a document is not a game with words. It is an attempt to discover what a reasonable person would have understood the parties to mean. And this involves having regard, not merely to the individual words they have used, but to the agreement as a whole, the factual and legal background against which it was concluded and the practical objects which it was intended to achieve.”

19.  Further, it is trite that the court cannot look at evidence of the parties’ subjective intentions: Lewison, The Interpretation of Contracts, 5^th ed, §3.17.

20.  I have reviewed all the relevant emails between the plaintiff and PARKnSHOP prior to the signing of the Agreement. The matters arising therefrom provide the factual backdrop against which the Agreement should be construed.

21.  Chen agreed in her testimony that PARKnSHOP first raised OEM products in Cheung’s email dated 14 July 2009. Prior to that date, the parties had no discussion about the defendant’s distribution of OEM products manufactured by YES in Hong Kong. It follows that the First Agreement should not concern any OEM service to be rendered by the plaintiff. Indeed, the First Agreement only concerned the distribution of YES brand products. The terms of the First Agreement included nothing about OEM products at all.

22.  On the contrary, there could be found certain terms in the First Agreement which could not be applicable to OEM products. I need to give three examples.

23.  First, in clause 3, the calculation of commission payable to the plaintiff was dependent on the time when the products of the defendant were placed onto the shelves (上架) of the target retail outlets. From such time onwards for the first year, the plaintiff could earn 8% of the total price of all the imported products during that year, the second year 6% and the third year 5%. This important provision for commission cannot have any application to OEM products. OEM products were manufactured to the order of target retail outlets and they were the products of such target retail outlets. They were at the disposal of such target retail outlets. Such target retail outlets had to pay for their manufacturer regardless of whether or not and/or when they decided to put the OEM products on their shelves. 

24.  Second, clause 7 provided that all the expenses incurred out of sale promotion activities and promotional expenses were to be borne by the defendant. This clause could only be applicable to those YES brand products sold to the target retail outlets on a consignment basis. If YES only assumed the role of a manufacturer and produced products for a particular outlet under or by reference to its own label/brand, i.e. OEM products, the defendant needed not be concerned about the subsequent sale of such OEM products.

25.  Lastly, clause 11 provided that the plaintiff agreed to deduct the amount of commission payable to it when the goods were returned by such retail outlets after such goods were removed from shelves (下架). Again this could only make sense when the YES brand products were sold on a consignment basis. It does not make commercial sense if OEM products could be returned to the manufacturers on the mere condition that they were removed from the shelves of the purchasers. 

26.  In my judgment, the First Agreement was clearly an agreement relating to the sale of the YES brand products in well-known retail outlets and supermarkets in Hong Kong. It is noteworthy that the Agreement also contained these three terms.

27.  Now I focus on the Agreement. The Agreement was undated and the effective date was 1 August 2009. The parties agreed that it was made on or about the effective date. I take note of the fact that the parties were then at the time of signing the Agreement aiming at doing OEM business with PARKnSHOP.

28.  The Agreement, however, did not differ from the First Agreement in any material aspect save the provision of commission rates. There was no reference to any OEM products at all. In the premises, my foregoing analysis of the First Agreement is equally applicable to the Agreement.

29.  The parties gave different reasons for the Agreement to be signed to replace the First Agreement. The major difference between the two agreements is that the commission rate was improved in the Agreement. In the First Agreement, the commission rate decreased annually whereas in the Agreement, the commission remained to be 8% throughout the full term of the Agreement.

30.  Chen explained that the improvement was due to the fact that the priority given to the OEM products might delay or impede the distribution of the YES brand products in PARKnSHOP. To compensate the plaintiff’s loss of profit arising from the deferred distribution of the YES brand products, the improved commission rate was only fair.

31.  Wang explained that the defendant found the plaintiff’s performance unsatisfactory after the First Agreement was signed. It was particularly the case in respect of the plaintiff’s performance of the Other Agreement. To give the plaintiff more incentive to open the market for the defendant, the defendant agreed to improve the commission rates in both the First Agreement and the Other Agreement so that the commission rates became flat throughout the terms of the Agreement (8%) and the replacement agreement of the Other Agreement (15%). I note that the improvement was more substantial in the case of the Other Agreement.

32.  Though generally I found Chen to be a truthful witness and I am not impressed by the evidence of Wang, on this issue I preferred Wang’s explanation. I do not have to, and I am unable to, make a finding as to whether the plaintiff’s performance of the First Agreement and the Other Agreement was actually good or bad. I accept Wang’s evidence because the Other Agreement did not concern PARKnSHOP at all and it also concerned other products. There is no reason why the commission rate under the Other Agreement had to be vastly improved to the detriment of the defendant because of any anticipated delay or impediment of distribution of the YES brand products in PARKnSHOP under the First Agreement. 

33.  It follows that I do not accept that the improved commission rate in the Agreement has anything to do with OEM products. The Agreement, to all intents and purposes, related to YES brand products only.

34.  There is another difference between the First Agreement and the Agreement. Clause 1 of the Agreement provided that the defendant appointed the plaintiff to be its sale agent to deal with YES’s “悅氏” series of beverages (悅氏系列飲料). Chen’s construction of ““悅氏” series of beverages” is that they include OEM products. She contended that the target retail outlets were free to choose any of “悅氏” series of beverages to be turned into OEM products. For example, PARKnSHOP could pick any of the existing YES brand products and ask YES to turn the same into products bearing the trade name/brand designated by PARKnSHOP.  Hence she argued that the subject matter of the Agreement must include OEM products made from “悅氏” series of beverages.

35.  I cannot agree to this construction. In its provision of OEM service, YES is a mere manufacturer and they should be able to manufacture any products for its clients. Their product range should not be confined to those existing YES brand products. It is clear to me that the subject matter of the Agreement is the existing series of products bearing the trade name/brand of YES, namely, “悅氏”.    

36.  In addition, as explained, Chen’s construction does not sit comfortably with the terms in the Agreement including the foregoing three provisions common to the Agreement and the First Agreement.

37.  Under cross-examination, Chen accepted that the agency service involved in OEM products is much heavier than a straightforward sale of YES brand products from the warehouse of YES to the target retail outlets. For the OEM service, the plaintiff has to be involved in the manufacture process and is required to do a lot of co-ordination work. The commission rate cannot be applicable to both sale of YES brand products and OEM products.

38.  For the foregoing reasons, I find that the Agreement did not cover OEM service to be rendered by the plaintiff to the defendant. In the result, the plaintiff cannot rely on the Agreement to claim remuneration for any OEM service rendered. Though the parties at the time of signing the Agreement had at the forefront of their minds OEM products to be sold to PARKnSHOP, they had yet to reach an agreement as to how the plaintiff was to be remunerated for such OEM service. The Agreement was made merely for the sake of improving the commission rate of the plaintiff in relation to the distribution of YES brand products in Hong Kong. On this finding alone, the plaintiff’s claim in relation to its OEM service falls to be dismissed.

39.  As a fallback position, Chen argued that under cross-examination of Wang, he accepted that if the plaintiff’s OEM service led to any conclusion of business between the defendant and PARKnSHOP, the defendant would agree to pay the plaintiff a commission to be computed in accordance with the Agreement.

40.  Obviously Wang’s answer was given to a hypothetical question and the fact that the defendant was willing to pay commission to the plaintiff if its OEM service yielded fruit does not mean that the Agreement in fact covered the plaintiff’s OEM service.

41.  Lastly, Chen argued that even if the Agreement did not cover the OEM service, there was a new agreement to extend the terms of the Agreement to its OEM service. The alleged new agreement was created by the exchange of emails between the parties. I cannot accept this contention. It is not the pleaded case of the plaintiff in the first place and more importantly I can find no such agreement formed in any of the emails.  

Whether OEM service provided led to any conclusion of OEM agreements between the defendant and PARKnSHOP

42.  Given my conclusion on the construction of the Agreement, this issue is academic. I would still deal with the same in case my construction is found to be erronerous.

43.  It can hardly be disputed that the plaintiff since July 2009 had taken part in the negotiation process with PARKnSHOP in relation to an Oolong tea product and a green tea product to be marketed by reference to the private label of PARKnSHOP known as “Baqi” (八起). From the emails exchanged from July 2009 to November 2009, it can be seen that the plaintiff was heavily involved in this hopeful OEM business with PARKnSHOP. The plaintiff attended to the relevant tasting and labelling matters on behalf of the defendant. I accept Chen’s evidence that the defendant relied heavily on the plaintiff to deal with PARKnSHOP regarding the maturing OEM business in addition to the distribution of YES brand products in PARKnSHOP.

44.  Chen contended that because of the plaintiff’s OEM service, PARKnSHOP and the defendant entered into an OEM agreement. Thus, the plaintiff, she claimed, is entitled to commission for its OEM service.

45.  The alleged OEM agreement consisted of a written agreement entitled “PARKnSHOP Exclusivity Agreement” dated 23 September 2009, a written agreement entitled “2009 Trading Terms Agreement” and a document entitled “Own Brand Product Specification” dated 24 November 2009. It is not in dispute that PARKnSHOP and the defendant signed these documents.

46.  It is plain to me that the PARKnSHOP Exclusivity Agreement and the 2009 Trading Terms Agreement did not concern any OEM products. The latter made it clear that the goods were sold thereunder on a consignment basis only and PARKnSHOP was entitled to return any unsold items to the defendant.

47.  In regard to the Own Brand Product Specification, it was, as stated in the document, designed to provide a complete record of all information relating to an OEM product for quality control purpose. The information of an Oolong tea product (“the Product”), which was one of the YES brand products, was provided. Wang on behalf of the defendant signed an acknowledgement of receipt and confirmed the information of the product in the said document on 5 January 2010.

48.  These two simple documents were no doubt a necessary step towards the conclusion of an OEM agreement but they were, in my judgment, far from being an OEM agreement concluded between the defendant and PARKnSHOP. Chen admitted that she had never handled an OEM agreement. She might not appreciate the complexity of an OEM agreement which has to cover a lot of grounds between the parties.

49.  The gravamen of the plaintiff’s complaint is, in a nutshell, that the plaintiff felt hard done-by and the defendant had caused PARKnSHOP to deal with YES directly in relation to OEM products, thereby bypassing the plaintiff and avoiding any payment of commissions to the plaintiff for its OEM service.

50.  About this complaint, the first relevant documentary evidence is an email dated 16 January 2010 from Cheung to Wang. In the email, Cheung indicated to Wang that PARKnSHOP wanted to deal with YES directly in relation to OEM products whilst PARKnSHOP would continue to work with the plaintiff concerning YES brand products.

51.  The evidence of Chen is that in late February 2010, Wang told Chen over the phone that PARKnSHOP wanted to deal with YES directly about the OEM business of the Product. Wang told Chen that YES had agreed to give 5% commission to the defendant for sample delivery charges and other co-ordination work in respect of OEM business in the future. Wang offered the plaintiff to share the 5% commission equally with the plaintiff for OEM business whilst the distribution of YES brand products in PARKnSHOP would still be governed by the Agreement.

52.  Chen asked Wang to write to her by email to reduce into writing what he had related to her. Wang did so by his email dated 1 March 2010. Chen said she had rejected the offer. There is no documentary evidence that Chen raised any objection to the proposal of the defendant and Chen accepted that the plaintiff and the defendant continued to do business relating to YES brand products as usual under the Agreement despite her alleged breach of the same by the defendant. I find the plaintiff’s reaction unreasonable if she genuinely thought the Agreement was breached.

53.  Chen said that to her dismay she received by accident a purchase order placed by PARKnSHOP with YES (and not the defendant) in relation to the Product by reference to its own brand Baqi as an attachment to an email dated 8 September 2010. On the face of the purchase order, the involvement of the defendant could not be discerned. Nevertheless, it was then obvious to her that an OEM agreement was struck between PARKnSHOP and YES. Chen said this was in contravention of the Agreement, to which she submitted that all of PARKnSHOP, YES, the plaintiff and the defendant were parties. I cannot agree.

54.  Chen suspected that the defendant caused YES to directly deal with PARKnSHOP. She highlighted to this court the close relationship between Wang and the chairman of YES. She said that they acted in concert to deprive the plaintiff of the fruit under the Agreement. I would not say that her suspicion is totally unfounded but I am not convinced that the allegation is made out by the available evidence before me.

55.  Wang explained in his testimony that PARKnSHOP was unhappy with the performance of Chen. He alleged that Chen was not responsive enough. She even refused to take part in PARKnSHOP’s representatives’ visit to the factory of YES in Taiwan in late 2009. PARKnSHOP was then driven further away from the plaintiff and closer to YES. Furthermore, the price for OEM products offered by PARKnSHOP was unacceptable to the defendant and the defendant found it not commercially viable to provide OEM service to PARKnSHOP. Wang denied any involvement in the contract(s) signed between the defendant and PARKnSHOP for OEM products.

56.  I am not convinced by his evidence as to why PARKnSHOP preferred to deal with YES directly. The documentary evidence shows that the plaintiff worked eagerly for the defendant for OEM business with PARKnSHOP. There is not a shred of evidence of PARKnSHOP’s complaint about Chen and/or the plaintiff. There is also no reason why PARKnSHOP would be happy to continue to deal with the plaintiff on behalf of the defendant for YES brand products if Chen’s performance was found wanting. I believe PARKnSHOP preferred to deal with YES directly with respect of OEM products for obvious commercial reasons.

57.  In any event, nothing advanced by the plaintiff cannot alter the fact that there was no OEM agreement concluded between the defendant and PARKnSHOP.  Even if the plaintiff is entitled to commission for its OEM service under the Agreement, no such commission is payable in the circumstances.

Conclusion and Orders

58.  Having found against the plaintiff on both the construction issue and the factual issue, I accordingly dismiss the plaintiff’s claim for commission for its OEM service. Though it appears to me that this action concerns commission for OEM products only, I note that there is an order given by a master dated 11 June 2012 that “judgment be entered for the plaintiff for commission for YES brand products from 1 April 2009 to 31 March 2012 and damages to be assessed including an order for taking of account under Order 43(3), Rules of the District Court”. It was further ordered that assessment of damages to be heard together with the present trial.

59.  Ms Mak, counsel for the defendant, explained to me that the order was made after hearing an Order 14 summons, which was dismissed by the master. However, upon the defendant’s admission that it was liable for commission payable to the plaintiff under the Agreement, judgment was entered against the defendant in respect of such commissions. In the wake of the order, the defendant has already disclosed all the necessary documents for the purpose of the assessment and/or account.

60.  No assessment and/or account was conducted at the trial. The parties were not prepared to do so despite the order. To enforce the order, I now direct that the defendant do lodge and serve on the plaintiff its account duly verified by affidavit of any one of its partners together with all the relevant accounting documents in accordance with Order 43 rule 4 of the Rules of the District Court within 21 days from the date of this judgment. The plaintiff shall lodge and serve on the defendant its notice of objection thereto with full particulars, if any, within 21 days thereafter. The parties be given leave to fix a 2-hour hearing before me in open court for an account to be taken.

61.  Insofar as the plaintiff’s claim for commissions for OEM products is concerned, costs of this action including this trial should follow the event and I make an order nisi that the plaintiff do pay the defendant such costs, to be taxed if not agreed with certificate for counsel. Absent any applications by way of summons to vary the order nisi,it will be made absolute 14 days after the date hereof.