ICI SWIRE PAINTS LTD v. TECHI MOTOR ENGINEERING & TRADING CO

HCA7251/95

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.7251 OF 1995

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(by Counterclaim)

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J U D G M E N T

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1. The Plaintiff ("ICI") is a company trading in the supply of paints and paint-related products. A Mr Cheung Chi Chiu ("Mr C.C. Cheung") was its manager who dealt with the Defendant in the period between 1987 and 1990 and after 1993. Between 1990 and 1993 he had emigrated to Canada and worked in an ICI branch over there.

2. The Defendant (Cheung Kin Man,Barry - "Mr Barry Cheung") trades under the names of Techi Motor Engineering & Trading Company ("Techi Motor") and Techi Paints and Auto Accessories Specialties ("Techi Paints"). Mr Barry Cheung purchased the Plaintiff's products and resold them in Mainland China (under the name of "Techi Motor") and Hong Kong (under the name of "Techi Paints") respectively. The parties have started trading over the Mainland market since 1987 and over the Hong Kong market since 1989.

3. ICI's predecessor in the name of ICI (China) first established its relationship with Mr Barry Cheung for the year 1988. By a letter dated 13 November 1987 signed by Mr C.C. Cheung, Mr Barry Cheung was given 20% trade discount on the PRC list price. Mr Barry Cheung would have to purchase a total of 12,000 litres of paints in 1988 with an initial order of 3,000 litres in early 1988 to stock up for Mr Cheung's PRC clients. He was given a 30 days credit there and then.

4. Thereafter Mr Barry Cheung's annual performance increased year after year. For the year 1991, Mr Barry Cheung was given trade discount for certain purchases and special discount of 2% for early settlement before the payment due date from the invoices. I was told that the credit period was then changed to 60 days as stated in the invoices. He was also given an annual rebate scheme for purchases of goods exceeding 30,000 litres at 2% and 50,000 litres at 3%.

5. For the year 1992 he was given certain trade discounts for certain goods. He was given special discount for settlement of the invoices as follows : -

(1) 5.5% on or before 30 days;

(2) 3.5% on or before 60 days;

(3) 2% on or before 90 days, and

(4) 1% on or before 120 days.

6. Although it was stated that the period was from the date of invoices, the practice was from the end of the month of all the invoices of that month. The credit limit given to Mr Barry Cheung was stated in the letter to be $800,000.

7. For the year 1993, the same trading discounts and special discounts for settlement before 30, 60, 90 or 120 days were also provided. Similar provisions for annual rebates was also given. However there was no stated credit limit. It can be seen from the past dealings that in March 1991, the total outstanding amount had already exceeded $800,000. Between September and December 1991, the total outstanding amount had already exceeded $1,000,000. This is because of the increase of sale and for every year Mr Barry Cheung succeeded in exceeding the anticipated business volume.

8. The contract in question was the one for 1994 which was contained in the letter from ICI to Mr Barry Cheung dated 8 February 1994. It was stated as usual as the : "ICI Autocolour Refinished Products Sales Agreement (China) Market for 1994." The first sentence confirmed that "The Sales Agreement for the calendar year 1994 are as follows:". The usual trading discounts and payment discounts were given. Again there was no stated credit limit. However, an annual rebate of 3% for purchases between 95,000 litres to 129,999 litres and 4% for 130,000 and above were given to the Defendant. The letter ended by saying : "This Agreement is prepared for the year of 1994." This was signed by Mr Andy Mok, the then Sales Manager of ICI.

9. ICI in this action sued Mr Barry Cheung trading under the name Techi Motor for 12 invoices of goods sold and delivered to him less partial payment, leaving the outstanding balance at $3,548,007.80. These 12 invoices were goods order by Mr Barry Cheung in April and May 1994. This is not disputed by Mr Barry Cheung.

10. The Defendant counterclaimed under the trade name of Techi Motor that the Sales Agreement 1994 was for the whole year of 1994. It was an implied term of the Sales Agreement that the Plaintiff would apply ICI products to the order of the Defendant for the whole calendar year of 1994 in accordance with its current price-list applicable to the Mainland China market and the express terms contained therein.

11. However, wrongfully and in breach of the Sales Agreement, the Plaintiff in or about May 1994 purported to terminate the Sales Agreement unilaterally with immediate effect and/or refused to supply the Defendant with ICI products from June 1994 onwards for the Mainland China market. It has been agreed between the parties that this trial should concern with the liability of breach of contract as alleged by Mr Barry Cheung first. Should the Court find for him, assessment of damages would follow thereafter.

12. The Defendant also counterclaimed for 4% rebate on the purchase from January to May 1994 in the sum of $428,485.18 and the value of free tins allowance for May 1994 in the sum of $116,043.13. These two sums are not disputed by the Plaintiff.

13. Similarly the Defendant also counterclaimed under the trade name of Techi Paints that the Dealership Agreement for the Hong Kong market was for the calendar year 1994. It was an implied term of the Dealership Agreement that ICI was to supply its products to the orders of Techi Paints for the calendar year 1994 in accordance with its current price-list applicable to the Hong Kong market and the express terms contained in the Sales Agreement. Similarly Techi Paints alleged that ICI was wrongful and in breach of the Dealership Agreement by terminating the same in or about May 1994 with immediate effect and failed and/or refused to supply Techi Paints with ICI products from June 1994 onwards. Similarly, this trial is also concerned with the liability thereon with assessment of damages, if any, to follow.

The two issues

14. There are two main issues in this trial :

(1) "The implied term" issue : -

Whether the document described as "The Authorised Dealer Appointment" dated 21 January 1994 for Techi Paints and "The Sales Agreement" dated 8 February 1994 for Techi Motor are (as the Defendant contends) contracts which were intended by both parties to last for the duration of the whole calendar year 1994 under which the Plaintiff was bound to supply goods upon orders placed by the Defendant, or whether (as the Plaintiff contends) they were contracts which merely set out the trade terms and left the Plaintiff with the right to decide whether or not to accept the orders placed by the Defendant.

(2) "The breach of contract" issue : -

If Issue One is in favour of the Defendant, then whether (as the Defendant contends) the Plaintiff was in breach of those contracts when in late May 1994, it unilaterally declared that it would not supply goods to the Defendant and did not in fact supply goods to the Defendant since 1 June 1994, and later confirmed that refusal by letter dated 1 July 1994, or whether it was (as the Plaintiff contends) the Defendant who took the initiative to suggest that the two contracts should be terminated in May/June 1994 and it was so terminated by mutual agreement on 1 July 1994 as confirmed by the letter of the Plaintiff dated 5 July 1994.

The implied term

15. Admittedly there are no express terms stating that the Plaintiff was bound to supply the Defendant for the whole of 1994. Hence the Defendant pleaded an implied term as being obvious and necessary to give business efficacy to the Sales Agreement/Dealership Agreement.

16. In this respect I accept the submission of Mr Simon Chiu, Counsel for the Defendant. The parties have started trading over the Mainland market since 1987 and over the Hong Kong market since 1989. In 1987, when they first established the relationship, it was Mr C.C. Cheung of ICI (China) who dealt with Mr Barry Cheung. However Mr C.C. Cheung emigrated to Canada between 1990 and 1993. He came back to assume the post of Business Manager in January 1994.

17. Mr C.C. Cheung admitted that many of the customers were "trader" with second line dealers and that they formed a sale network for ICI's products. In order to make the dealings with ICI by traders profitable, various incentives were given to them. In the case of Techi Motor, at least since 1992, there was in place a scheme for early settlement allowance on reducing scale, annual rebates/quarterly rebate and general discount on the price of goods sold. From time to time there were also promotions such as the "1 for 15 tins" free gift.

18. It is not in dispute that ICI knew that traders such as the Defendant would require credit lines and time, i.e. credit period, in order to recoup payments from the second line dealers in order to pay ICI. This is hardly surprising since the products, auto paints, are accessories for vehicles. They are not final consumer products and the purchasers from the Defendant would most likely to be second line dealers, garages, factories, workshops and the like, which are all business concerns as opposed to ordinary consumers.

19. It is also a common experience in the business world that for such chain of dealership to work, the trader relies heavily on the continuous supply of the goods from the supplier so that he can keep up the supply to his sub-dealers and thereby ensuring the next round of credit would be available while the sub-dealers settled their earlier round of outstanding accounts with the trader. Such practice of trade would have been both obvious, necessary and in fact beneficial to both ICI and the Defendant.

20. Since a continuous supply of goods is so vital to such type of trade operation, I accept the Defendant's submission that if the parties, when entering into the contracts, were asked by an officious bystander the question : "Can ICI stop supply the products at any time they like during the year?", both parties would have answered : "Of course not!". Otherwise, it would simply make no business sense. This is of course based on the assumption that stocks or goods are available at the time of the order.

21. The Defendant also pleaded the implied term by reason of past dealings between the parties. It can be seen that when the parties first started in 1987 the credit facilities granted the Defendant was only limited to 30 days in 1987. However, by practice of the parties, it was increased to 60 days since at least 1990. I was told it was so stated on the invoices since 1990 which was agreed by Mr C.C. Cheung. From Exh.D2, the Defendant settled the invoices within the 60 days limit for the first 10 months in 1990. It exceeded 60 days by 9 days only in November 1990 and settled the invoice for December 1990 within 90 days.

22. Although Mr C.C. Cheung of the Plaintiff insisted in evidence that the 60 days credit limit applied throughout from 1990 to 1994, his evidence was not borne out by the dealings between ICI and the Defendant both before and after Mr C.C. Cheung's return to Hong Kong in January 1994. The evidence showed that the Defendant was allowed to settle his monthly invoices from within 60 days to 150 days. The expansion of credit period is in fact consistent with the letter dated 20 December 1991 when the Defendant was given, since 1992, "early settlement allowance" on a sliding scale up to 120 days from the end of the month for invoices issued within that month.

23. Further, despite the fact that in the same letter dated 20 December 1991, the Defendant was only given a credit limit of $800,000 as aforesaid, this credit ceiling has been consistently exceeded with the full connivance of ICI in accordance with the table in Exh.D1. As I have said before since mid-1991, the total amount outstanding had already exceeded $800,000. At the end of 1992, the total amount outstanding was $5.69 million odd and 1993 $6,890,000. Mr C.C. Cheung agreed that the increase of total outstanding amount was due to the fact that there was a tremendous increase in the sales record of the Defendant. This is also because the payment was lengthened from 60 days to 90 days and sometimes 120 days and 150 days.

24. These two factors, namely, increased credit period and increased credit ceiling, show only one thing, that is ICI was apparently happy and willing to allow the trader to continue and to let the Defendant expand his business under the chain of dealership. ICI has, in the nearly seven years of dealings with the Defendant since 1987, never once refused to supply to the orders of the Defendant subject only to stock availability. It would therefore be most surprising indeed for ICI now to maintain that they have in fact reserved the right to cease to supply to the Defendant at will.

25. The Defendant further pleaded that the implied term was based on the fact that the Defendant was openly acknowledged by ICI as a dealer in the Mainland and Hong Kong markets respectively, and by the fact that the Defendant was required to incur costs, time and labour to facilitate the sale and promotion of ICI products with encouragement and co-operation of ICI. Mr C.C. Cheung admitted this to be the case prior to June 1994. This will mean that people in both Hong Kong and Mainland markets were given the expectation that ICI would, through the Defendant as one of the dealers, supply them with ICI products. In respect of Techi Paints, this commitment of continuous supply is further reinforced by various requirements imposed by ICI in Clauses A to H of the Dealers Appointment dated 21 January 1994, which were mere repetition of the terms imposed for the years 1991, 1992 and 1993. Clauses A to H clearly imposed the duty on the Defendant to promote the products of ICI.

26. In respect of Techi Motor, although such requirements were not made expressly, joint promotion exercises had in fact been carried out as evidenced by the various debit notes and credit notes given by ICI to the Defendant. Mr C.C. Cheung, though at first denied knowledge of it (on the ground that he was not in Hong Kong at that time), had to admit later in the cross-examination that at least in relation to Credit Note dated 10 January 1994, after he had returned to Hong Kong. In all these circumstances for ICI to suggest that it could unilaterally put an end to the supply at any time is plainly not within the contemplation of the parties.

27. Defendant further pleaded that the implied term can be inferred from the wordings of the contracts. In respect of Techi Paints, the contract dated 21 January 1994 clearly stated that it was for the calendar year 1994. By Clause L is stated that ICI had the right to review all the trading terms for post 1994. Apart from offering a quarterly bonus, Clause I(d) further offered the special annual bonus "if the said annual target is achieved within the year of 1994". It is therefore obvious that the trade terms were meant to give a contractual right to the Defendant trading as Techi Paints to achieve as much benefit as possible on meeting a threshold target in term of purchase volume for the whole year. This right of "special annual bonus" cannot be realised if ICI can unilaterally put an end to the contract before the year end. There is therefore no justification for ICI to take away a right so expressly given to Techi Paints to earn an annual bonus which, by definition, can only be concluded by the end of the year.

28. What were said above in respect of Techi Paints apply equally to the contract with Techi Motor. Although in the case of Techi Motor, there was no quarterly rebate, there was however annual rebate under Clause 3 of the Sales Agreement. Although in this case, the Defendant has already met the minimal requirement for annual rebate by May1994, he clearly was still entitled to further rebates should he make further purchases from June to December 1994 which would mean less cost and greater profit for him for that whole year.

29. In Attorney General v. Melhado Investment Ltd. [1983] HKLR 327 the Court of Appeal stated the conditions which have to be fulfilled before a term will be implied into a contract, citing with approval the words of Lord Simon in B.P. Refinery (Westernport) Pty. Ltd. v. President, Councillors and Ratepayers of the Shire of Hastings [1978] 52 ALJR 20 at p.26 :

"... for a term to be implied, the following conditions (which may overlap) must be satisfied:

(1) it must be reasonable and equitable;

(2) it must be necessary to give efficacy to the contract, so that no term will be implied if the contract is effective without it;

(3) it must be so obvious that 'it goes without saying';

(4) it must be capable of clear expression;

(5) it must not contradict any express term of the contract."

30. In conclusion I find that all five conditions of Lord Simon in the aforesaid case are satisfied for such an implied term for the Dealership Agreement and the Sales Agreement.

Breach by the Plaintiff or a mutual agreement to terminate by the parties

31. I shall start with Exh.D2 showing the annual turnover between Techi Motor and ICI. It actually increased greatly in excess of 100% for every year since 1991. In the years 1993 to 1994, ICI experienced an expanding market in the Mainland. This is confirmed by Mr C.C. Cheung for ICI. Why did the Defendant want to end and terminate this lucrative contract with ICI? Why did he want to get himself into the difficult situation of being unable to collect his debt from his sub-dealers/customers by abruptly cutting off the flow of goods from ICI?

32. There was no apparent reason why the Defendant should have chosen such an action but for the fact that it was unilaterally terminated by Mr C.C. Cheung for ICI. Mr Barry Cheung said he had since 1993 undertaken dealership of another line of similar products of the PPG Brand from Inchcape. The dealership was originally signed by him but later continued under the name Fanex Limited, a company he incorporated for that purpose. Before Mr C.C. Cheung's return to Hong Kong in early 1994, ICI did raise concern with him about the matter but took no serious objection to it. When Mr C.C. Cheung returned to ICI, he insisted that the Defendant should cease trading in PPG products, a direct competitor of ICI. Upon the Defendant's refusal, he stopped the supply in June 1994. When in the meeting of 1 July 1994, the Defendant still refused to succumb, Mr C.C. Cheung declared that there would be no more supply of goods for him and asked the Defendant to immediately repay all the monies outstanding. As a Business Manager of ICI charged with promoting its products, the aversion of Mr C.C. Cheung to his ICI dealers undertaking to promote goods of ICI's competitor was something perfectly understandable. This is particularly so when the Defendant has proved himself as such a effective dealer.

33. Mr Barry Cheung's version leading to the unilaterally termination of the agreement was fully pleaded in the original Reply to the Re-amended Defence to Counterclaim in response to the Plaintiff's allegations. The evidence of the Defendant did not come out as an afterthought.

34. In comparison, the Plaintiff's version of the matter is quite inconsistent and incredible. In the pleadings of the Plaintiff nowwhere was it alleged the reason why the Defendant would want to terminate the contract. In paragraph 16 of the Further Re-amended Rely and Defence to Counterclaim of the Defendant, the Defendant alleged that as early as May/June 1994, the Defendant already informed the Plaintiff that he did not want to sell ICI products. Then in paragraph 24 thereof, the Plaintiff pleaded that in relation to Techi Paints, "for whatever reason", the Defendant ceased to place orders with the Plaintiff since June 1994. The Plaintiff submitted that that paragraph 24 was only related to Techi Paints and not Techi Motor. This, in my view, is not tenable. The Defendant is counterclaiming as a natural person, (i.e. Mr Barry Cheung) against ICI. The dealings between him and ICI in May/June 1994 would directly bear on the mutual relationship between ICI and Mr Barry Cheung, whether it was under Techi Motor or Techi Paints.

35. Then in the supplemental witness statement of Mr C.C. Cheung, it was mentioned in paragraph 6 that during the meeting on 1 July 1994 the Defendant mentioned that he had difficulties in collecting payments from Techi Motor's customers in China and requested assistance to collect payments. He decided to close the trading accounts of Techi Motor with ICI. This was the first time it was alleged that the Defendant's closure of his accounts with ICI was due to difficulties in collecting payments. Mr C.C. Cheung, in his second supplemental statement, in paragraph 8 thereof, said that as a matter of business consideration the excess of credit limit and credit period would not bear heavily against a trader "provided that some payments were made in part settlement of the overdue amounts and/or bring the amounts due back within the credit limit". However, the evidence of Mr C.C. Cheung in the witness box gave a different picture. First, he brush aside all the past dealings between ICI and the Defendant as something which he had no personal knowledge since he was in Canada. He nevertheless asserted that the credit period for the Defendant was only for 60 days. He maintained that version in spite of the fact that it was pointed out to him that under the Sales Agreement the Defendant was entitled to at least 1% discount if he paid within 120 days. He simply offered no satisfactory explanation at all for the discrepancy between what he asserted and what was written on the Sales Agreement and the conduct between the parties, i.e. when ICI was paid within 120 days, Mr Barry Cheung was still given the aforesaid 1% discount. He then stated that since he seized hold of the Defendant's account, he became aware of the "trend" in the increased length of repayment and increasing credit. He first brought up the matter with the Defendant during a spring banquet in early March 1994 and continued on raising the matter with the Defendant in April to May 1994.

36. However, according to the table in Exh.D2, by early March 1994 the Defendant would have left outstanding invoices for the months of November, December 1993 and January and February 1994 only. Prior to the invoices for November 1993, all the invoices were settled within 60 days, except the one in October 1993 which was settled within 90 days. Since it was still early March 1994, the outstanding invoices for November 1993 would only have been left outstanding for slightly over 90 days. If Mr Barry Cheung settled it within March 1994, he would still be entitled to 1% discount for settling it on or before 120 days' due. There was simply nothing which would have alarmed Mr C.C. Cheung in early March 1994.

37. As to the outstanding amount, the table in Exh.D1 shows that the outstanding sum in February was about $7.2 million. Although the statement of accounts for January shows a balance of $8,500,000, it is nothing alarming when compared with the percentage of increases in the earlier months in 1993. It only shows a gradual increase in purchase volume which ICI positively encouraged its dealers by their annual rebate incentive and promotion schemes. Again, there was simply nothing alarming about the increase in the outstanding sum that could have alarmed Mr C.C. Cheung in early March 1994. Thus, his original version that in March 1994, he started to worry about the long overdue payment was not correct at all.

38. The Plaintiff has offered no evidence to explain why the Defendant could have been in difficulty in collecting payments in China. However, assuming there was such difficulties, there is no reason why the Defendant would, as a long time business associate of ICI, suddenly want to cut off all trading relationship with ICI and thus putting himself in even greater difficulty to the cash flow problem. Mr C.C. Cheung, however, did inadvertently, in the words of Counsel for the Defendant, "let the cat out". He stated that after discussing with the Defendant who told him that he could not reduce the credit limit, it was he who informed Mr Barry Cheung in late May 1994 that ICI would not supply its products to the Defendant anymore. This led to the complete cessation of supply beginning in June 1994. In fact Mr C.C. Cheung himself used the vivid Chinese expression that he decided to "turn off the tap".

39. As an experienced business executive and by the adoption of that very expression, Mr C.C. Cheung clearly realised the drastic effect of a sudden "turning off the tap" might have on a trader's business. The Defendant relied heavily on the continuous flow of supply to secure reciprocal repayments from the second line dealers onwards. Mr C.C. Cheung's action clearly was intended to put a squeeze on the Defendant. But since Mr C. C. Cheung himself admitted that the Defendant had over the years been a satisfactory customer, one cannot but wonder why he would suddenly want to take such drastic measure. He was clearly putting great commercial pressure on the Defendant. The measure, however, was totally out of proportion with the alleged problem about credit limit and credit period, particularly in view of the fact that even by 1 July 1994, the Defendant was still settling his outstanding accounts as usual. One cannot help but conclude that the pressure exerted on the Defendant was made in order that the Defendant would cease trading in PPG products. Since the Defendant replied that he would have lost a few million Hong Kong dollar if he ceased to trade in PPG products under Fanex Limited, Mr C.C. Cheung decided that he, for the benefit of ICI, would cease supplying him with the goods. I must add here that Mr C.C. Cheung gave me the impression that he was over-zealous to prevent ICI from suffering should "Techi Motors" and "Paints" suddenly go buzz. However his worry was out of proportion with the business reality that the business volumes had (since his departure in 1990) increased several folds and a different payment scheme was already in operation.

Conclusion

40. In conclusion, I find that it is clearly an unilaterally action made by Mr C.C. Cheung for and on behalf of ICI, the Plaintiff, and the termination was not by mutual consent. Accordingly, the Plaintiff was in breach of both the 1994 Sales Agreement and the Authorised Dealer Appointment, and the Defendant is entitled to judgment on the Counterclaim.

Since it is not ascertained at the moment the amount of damages and the Defendant's Counterclaim was for equitable set-off against he Plaintiff's claim, no final judgment can be entered at this stage and all costs have to be reserved pending the assessment of damages on a date to be fixed, preferably before me.