MILLENNIUM MARINE CO. LTD. v. KIM'S YACHT CO. LTD.

DCCJ 15597/2000

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO.15597 OF 2000

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JUDGMENT

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Background:

[1] International Paint, a manufacturer of paint and coatings has operated a subsidiary in Hong Kong known as International Paint Hong Kong ("IPHK"). IPHK had a division for the supply of yacht coatings. Around November 1999, IPHK decided to close down its yacht coating division.

[2] Mr. Ngan Kwan Otto ("Mr. Ngan") was a yacht coating sales executive for IPHK and when the division was closed down, he obtained the agency rights for yacht coatings for Hong Kong from IPHK. The Plaintiff limited company was incorporated for that purpose and Mr. Ngan became the Plaintiff's director.

[3] The Defendant is a boat builder of some reputation; it operates a boat building facility on the mainland. The Defendant purchased marine paints and coating supplies from IPHK before their yacht division closed down and continued to purchase supplies from the Plaintiff after the close down.

[4] In 1999, the Defendant was commissioned by The Challenge Business International Limited ('The Challenge Business") to construct two yachts for the 2000 BT Challenge series of races. All boats in the series must be identically constructed. All materials used on these boats, including their coatings were carefully specified in a contract between the Defendant and The Challenge Business. No departure was allowed.

[5] International Paint in the UK calculated the amount of coating material need for each boat and all of the materials were shipped directly from the UK to the Defendant's yard in the mainland. However, in the middle of constructing the two boats, it was clear that International Paint UK had seriously underestimated the requirements for Interprime 820. The Defendant found itself running short of the primer.

[6] On or about June 1999, Mr. Brodie of the Defendant approached Mr. Ngan at IPHK looking for supplies to make up for the shortfall. Mr. Brodie was shocked to discover that the IPHK price for Interprime 820 was HK$330 per liter, when the UK prices for the identical product was GBP8.26 per liter. Mr. Brodie was so incensed by IPHK's prices that he shipped 600 liters of Interprime 820 by air from the UK to the Defendant's yard in the mainland. Although the air transportation costs was high, the total was still substantially lower than the IPHK price for Interprime 820.

[7] The Defendant continued to complete the two yachts and between September 1999 and October 1999, the Defendant ordered coating supplies, including small volumes of Interprime 820, from IPHK. Commencing from November 2000, after the Plaintiff took over the distribution of International Paint's yacht coating products, the Defendant purchased supplies from the Plaintiff.

[8] From November 1999, the Plaintiff supplied the Defendant with coating materials under 6 separate invoices, including 295 liters of Interprime 820 on 30th November 1999. The Plaintiff's claim against the Defendant was for HK$110,925, being outstanding amount under these 6 invoices.

[9] The Defendant alleged that there was an oral agreement between Mr. Ngan and Mr. Brodie that the Plaintiff will supply Interprime 820 to the Defendant at UK prices. In breach of that agreement, the Plaintiff had invoiced the Defendant at HK$330 per liter. The Plaintiff denied that there was such an agreement.

[10] The Defendant stated that it had already paid the Plaintiff all outstanding amount for materials delivered. Mr. Brodie had recalculated the amount owed to the plaintiff based on Interprime 820's UK rate and paid the Plaintiff's invoices based on the sum so calculated.

[11] The Defendant also counter-claimed HK$6,110.63 against the Plaintiff for paints wrongly delivered. Prior to trial, Mr. Lok, Counsel for the Defendant, applied to withdraw the counter-claim and substituting a defence of set-off of the wrongly delivered paint against the Plaintiff's claim. Mr. Chum, Counsel for the Plaintiff, had no objection and the application was approved.

Issue:

[12] The issue in this matter was a simple one: Was there an oral agreement between Mr. Brodie and Mr. Ngan to charge the Defendant Interprime 820 at UK prices?

[13] Mr. Lok argued that the Plaintiff had the burden of proving that there was a legally enforceable agreement. That may be correct, however, that burden was not difficult to satisfy. The undisputed facts were as follows: (1) At least as early as June 1999, the Defendant knew that IPHK's price for Interprime 820 in Hong Kong was HK$330 per liter; (2) On or about 30th November 1999, the Plaintiff supplied the Defendant with 295 liters of Interprime 820; (3) The coating materials were delivered and used by the Defendant. Prima facie, there was a legally enforceable agreement between the parties for the supply of Interprime 820 at HK$330 per liter. The burden was thus on the Defendant to prove that there was an agreement by the Plaintiff to supply Interprime 820 at UK prices instead of the usual Hong Kong price of HK$330 per liter.

[14] During trial, a great deal of time was spend on explaining the Defendant's normal procedure in purchasing materials, whether a Purchase Order needed to be signed and chopped? Whether the Defendant's Purchase Order came first or the Plaintiff's quotation came first? With all due respect to Mr. Lok and Mr. Chum, that was surely irrelevant. There was no dispute that the Defendant did order a quantity of Interprime 820 from the Plaintiff, the materials were actually supplied by the Plaintiff and used by the Defendant. In any event, Mr. Brodie admitted that he was often away from Hong Kong and he sometimes signed Purchase Orders retroactively. So at the end of the day, it did not matter what was the defendant's normal procedure, because the Defendant had often departed from this practice.

[15] Mr. Lok also argued that since Mr. Ngan admitted he, and not Mr. Maurice Ng in Singapore, had set the price for Interprime 820, it was more likely that there was an agreement to charge UK prices. However, as an independent agent, unless restricted by contract, the Plaintiff must have some freedom to set its own prices. This was clearly demonstrated by the 25% discount stated in all of the invoices to the Defendant. Beyond the 25% discount, the Plaintiff may be restricted by contract and require approval from the Singapore office. This would still be consistent with Mr. Ngan's testimony that he set the price. In any event, that again was irrelevant to whether there was an agreement to charge UK prices or not.

Finding:

[16] After careful consideration of the evidence, I found that the Defendant had failed to satisfy its burden of proof. My finding was based on the following:

[17] The Defendant's sole defence was that it could have purchased Interprime 820 from the UK at the equivalent costs of approximately HK$99 per liter, it simply did not make any sense for the Defendant to order the same product from the Defendant at HK$330 per liter. At first glance, this was a powerful argument, however, the fact was that the Plaintiff did ordered and paid for Interprime 820 at HK$330 per liter, both before and after the 295 liter delivered by the Plaintiff.

[18] Page 101 of the Agreed Bundle was a list, prepared by Mr. Brodie, of all invoices containing Interprime 820 received by the Defendant. There were 2 invoices issued by IPHK, dated 27th September 1999 and 1 December 1999, for 30 liters and 10 liters respectively. Mr. Brodie admitted that these two invoices had been fully paid by the Defendant. The costs for these Interprime 820 were HK$330 and HK$211.20 per liter, respectively.

[19] Furthermore, page 74 of the Agreed Bundle was Defendant's Purchase Order dated 18th January 2000, which stated clearly the unit price of Interprime 820 was HK$330 (HK$440 subject to a discount of 25%). Page 78 of the Agreed Bundle was another Purchase Order issued by the Defendant dated 10th February 2000, this also listed Interprime 820 at HK$330 per liter. One must remember that these were Purchase Orders issued by the Defendant to the Plaintiff. It is difficult for the Defendant to argue that there was an agreement to charge UK prices, when the Defendant's own Purchase Orders stated the unit price as HK$330 per liter.

[20] Additionally, the defendant's allegation simply did not make sense mathematically. It was agreed that UK prices for Interprime 820 was approximately GBP8.28, but the costs of transporting 600 liters from the UK was GBP4899.24, or GBP8.16 per liter, approximately the same costs of the Interprime 820's UK price per liter. It is common knowledge that the costs of transporting goods per unit will increase as the total number of units decreases, it is safe to assume that the costs per liter to air flight 295 liters of Interprime 820 from the UK will not be cheaper than GBP8.16 per liter. In other words, the price that the Plaintiff must meet, if it was competing with the Defendant's costs of importing Interprime 820 directly from the UK, was GBP16.44 per liter and not GBP8.28 per liter. It simply made no sense for Mr. Ngan to agree to supply Interprime 820 to the Defendant at UK prices.

[21] Finally, page 61 of the Agreed Bundle was a letter, dated 21st October 2000, from the Defendant to International Coatings (Pte) Ltd. In this letter, after complaining bitterly about the different prices charged for the same products in the UK and in Hong Kong, Mr. Brodie wrote:

"Although I reserve my position on all the prices we have been charged by IP and by MM, there is one product that stands out as being hugely different and that is the primer family of 820. This product was sold to us and to The Challenge Business by IP in the UK at the equivalent of HK$99.25 per liter. The same product was purchased by us from a IP retailer in Australia at the equivalent of HK$83.86. This same product has been sold to us by IPHK and MM at HK$330 and HK$211.20. These prices represent over 3.5 times the price at which you sell elsewhere.

We believe the appropriate price for this product in HK should be HK$92.00. Attached to this letter is a spreadsheet showing the quantity of 820 sold to us by IP and by MM and the amount we consider we have been over charged which amounts to HK$110,992. We have been in constant negotiation with Otto Ngan of MM over this matter. We have never agreed to the price of this 820 and we are refusing to pay our outstanding payment of HK$110,992." (Emphasis added)

[22] Mr. Brodie had clearly admitted that Interprime 820 was sold to the Defendant by the Plaintiff at HK$330 per liter. Although there was certain reference that the Defendant had not agreed to the price, there was no mention of any agreement with Mr. Ngan to sell at UK prices. The first time that an agreement to charge UK price was raised by the Defendant was in the Statement of Defence.

Set-off:

[23] As to the defence of set-off, during trial, Mr. Brodie gave evidence that the wrong materials were supplied to the Defendant by IPHK and not by the Plaintiff. One must remember that although Mr. Ngan had represented both IPHK and the Plaintiff at different times, IPHK and the Plaintiff are legally independent entities. It is trite that even if the Defendant managed to proof that there were actually materials wrongly delivered and IPHK owed the Defendant a sum of money, the Defendant still cannot set-off that sum against the Defendant's indebtedness towards the Plaintiff. The defence of set-off must therefore fail.

Judgment:

(1) Judgment is for the Plaintiff at the sum of HK$110,925.00.

(2) Interest on HK$110,925.00 at the judgment rate, calculated from 14th November 2000 until payment is received.

(3) Plaintiff shall have costs of this matter, together with all costs reserved, with certificate for counsel.