WANG TAI ENTERPRISE (INTERNATIONAL) DEVELOPMENT LTD. v. TONG PAT LING PATRICK

HCA 9933/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 9933 OF 1999

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J U D G M E N T

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1. This is a claim to recover a loan and interest thereon.

Background

2. The plaintiff is a construction company incorporated in Hong Kong. It is essentially controlled and operated by its chairman Tse Chung-fat (Mr Tse). La Mode Incorporated (La Mode) is a garment manufacturer incorporated in the USA. It is controlled by its president, Mr Edward Kahn (Mr Kahn). La Mode (Far East) Limited (LMFE) is incorporated in Hong Kong for the purpose of looking after La Mode's interests in this part of the world.

3. At the material time the defendant was a director and employee of LMFE. Aside from his general and usual duties he was answerable to Mr Kahn in the chain of command. That came to an end in November 1999 when his employment was terminated.

4. In 1997, Mr Kahn directed the defendant to call for tenders for the building of a garment factory to be owned and operated by La Mode in Saipan. The defendant approached Mr Tse, an acquaintance. The plaintiff tendered. Its quote was successful. La Mode sent its legal counsel, a Mr David Wiseman, to Hong Kong for the signing of the construction contract. On 15 November he and the defendant and Mr Tse met in a hotel foyer where the contract was signed, by Mr Tse for the plaintiff and Mr Wiseman for La Mode. The contract price was US$1.3m. to be paid in stages. The first payment of US$600,000 fell due to be paid within seven days of the signing of the contract.

5. The document is a comprehensive one, clearly professionally drafted. Of its numerous clauses, one is relevant; namely, clause 15.2, as follows:-

"15.2 Entire Agreement. The making, execution and delivery of this Agreement has not been induced by any representations, statements, warranties or agreements other than those expressed in this Agreement. This Agreement embodies the entire understanding of the parties. There are no other agreements or understandings, written or oral, in effect between the parties relating to the subject matter of this Agreement, unless expressly referenced in this Agreement."

6. I interpose here that during the following month the parties entered into a second contract for the construction of staff quarters within the factory complex for a further US$600,000.

7. I revert back to the main contract. A few days after the signing, Mr Tse and the defendant arranged to meet for the purpose of payment of the first instalment. What happened and what was said at and around that event are in material dispute and why these proceedings came to pass.

8. It is the plaintiff's case that after the contract had been signed on 15 November, the defendant disclosed to Mr Tse that he, the defendant, was taking a 10% stake in the project. By arrangement with La Mode he was going to be responsible for US$100,000 of the down-payment. Then a day or so later the defendant telephoned Mr Tse and asked him to prepare two receipts in anticipation of receipt of the funds, one for US$500,000 made out to La Mode Inc., the other for US$100,000 made out to La Mode Inc. (Mr Patrick Tong). He did so. When they met the defendant handed him a cheque drawn on LMFE for US$500,000 and he handed over the first of the two receipts. Then the defendant told him that he could not, for the meantime, raise his share being US$100,000. He asked Mr Tse if the plaintiff would be prepared to advance him this amount for two months at a compound interest rate of 15% p.a. by the process of giving him the second receipt as if payment of the full down-payment had been made. Mr Tse agreed and did so. Since then there has been no payment of the principal sum or interest or anything on account, despite repeated demands. The plaintiff issued its writ in June 1999.

9. It is the defendant's case that his only function at the signing of the contract was in his capacity as a staff member of LMFE assisting Mr Wiseman. When it came to paying the first instalment he paid it all; as to US$500,000 by handing over the cheque and as to US$100,000 in cash in Hong Kong currency; the latter supplied by Mr Kahn for the purpose. He had no 10% stake or other interest in the project. He did not tell Mr Tse he had. He did not ask to borrow US$100,000 or any amount. There was no advance made to him and no principal sum or interest due by him.

The Issues

Fact

10. Did the plaintiff receive, of the down payment, US$500,000 or US$600,000?

11. If the lower amount, did it lend US$100,000 to the defendant on terms, and is it now entitled to claim against him in default of repayment?

Law

12. Is the plaintiff liable to fail because its case relies on the defendant being a party to the construction contract, when by virtue of clause 15.2 and the parole evidence rule that written document, in which the defendant was not a named party, was the entire contract, not subject to oral variation?

13. First I have to deal with the disputes of fact; I turn to consider the evidence.

The Evidence

14. I heard first from Mr Tse for the plaintiff. He confirmed as a matter of fact what I have summarised is the plaintiff's case. He accepted that the contract was between the plaintiff as contractor and La Mode as owner and that the defendant had no recorded interest. But when the defendant told him after the signing that in fact he was to take 10% and meet US$100,000 of the down payment it did not concern him, viewing that as an internal matter between the defendant and La Mode.

15. The discussion and exchange of cheque and receipts took place at a restaurant of the defendant's choosing, two days after the signing, on 17 November. He brought with him the two receipts made out as requested. The defendant gave him the cheque and he handed over the first receipt. Then he was given, to keep, a copy of a faxed memo from a La Mode executive to Mr Wiseman of 11 November 1997 for the purpose of verifying that he was to meet some of the down payment. Mr Tse kept the memo and produced it, and I now reproduce it in full:-

"Wiseman, Power of Attorney

To: wiseman
From: Gail Harmsen <Gail@lamode.com>
Subject: Power of Attorney
Cc: <rowena@lamode.com>
Bcc:
X-Attachments:

Attn: David-

1. You have my authorization to go ahead and sign the construction agreement to go ahead. It is urgent that we start.

a) See faxes from Mr. Tse and his attorney regarding your $600,000.00 concern. I have met him and am not concerned on this issue. I trust him.

b) I do need the bonding issue corrected if it is not correct.

c) I will wire to LMFE (Hong Kong) the $600,000.00. $600,000.00 ($500,000.00 from us and $100,000.00 from Patrick to start) tomorrow. Confirm to Patrick when it is O.K. to release to Mr. Tse (Bank has holiday today).

d) Call me when you get to the office to discuss any of the above.

Regards.

EK:gh

Printed for Gail Harmsen <Gail@lamode.com>

11/11/1997 13:18 3107156074 LA MODE/CREDIT PAGE 01"

16. The defendant explained paragraph 1(c) was evidence that US$100,000 was coming from him as his share of the cost.

17. When the defendant went on to tell him that he did not in fact have the money and he asked for a short-term loan he was taken aback; but to protect the contract he agreed to lend the money on the terms which the defendant proposed namely, two months with interest at 15% per annum compounded. He wanted an IOU from the defendant but was persuaded they should not put anything in writing as that might implicate them in a bribery investigation. But he did require the defendant to inform La Mode and get its consent. The defendant promised he would, and he handed over the second receipt.

18. But the consent was not to be forthcoming. And nor, by due date, was repayment of the loan or any interest. Mr Tse professed to be very angry and demanded repayment many times. But not only did the defendant refuse to pay he asked for more money, this time US$30,000. When Tse refused he became threatening, saying that he was in overall control of the project and could be disruptive. Mr Tse took the hint and made the advance, on the same terms. But the defendant declined to honour the terms of repayment in respect of this loan as well.

19. By March 1999 the project was in danger of foundering. The parties were increasingly at odds with each other. By the next month work stopped altogether with the factory and quarters not complete.

20. I pause to mention that what caused the problems and who was to blame are not material to this action. La Mode has issued proceedings in the US Courts against the plaintiff and there is a counterclaim. But the plaintiff alleges the defendant was, in his capacity of supervisor of the project, a materially disruptive element whose unreasonable demands were a major cause of the conflict.

21. Meanwhile after months of fruitless demands made by Mr Tse of the defendant for repayment of the loans the plaintiff instructed solicitors to write to the defendant. I reproduce the letter in full:

"Date: 5th March 1999

BY POST

Mr. Patrick Tong
Flat E, 13th Floor,
Capital Trade Centre,
No.62 Tsun Yip Street,
Kwun Tong,
Kowloon.

Dear Sirs,

We have instruction to act for Wang Tai Enterprise International Development Limited.

We are instructed that despite our client's repeated demand you still fail to provide to our client the consent or approval of your company, La Mode, Inc., that they are agreeable for you to borrow the sum of HK$1,233,720.00 together with interest HK$221,580.00 from our client.

We must inform you that our client is deeply concerned of the current situation, you may be committing the offence under the Prevention of Bribery Ordinance if you intentional hide this facts from your company. It is also part of the loan agreement that prior consent of La Mode, Inc. must be obtained, and it is obviously not the case, you are therefore in branch of the loan agreement.

We hereby demand you to pay to our client the said sum of HK$1,233,720.00 together with interest HK$221,580.00 within the next 7 days.

Yours faithfully,

(Signed)

KATHERINE Y. W. OR & CO."

22. The demand in Hong Kong dollars was for both loans and accrued interest. There was a follow-up at the end of March. The defendant did not meet the demand in whole or in part. The plaintiff then sued. Mr Tse said he was advised to issue two writs because the action to recover the US$30,000 and interest was "more straightforward" then that for the US$100,000 which was "related to more complicated background facts". The first writ was filed in May 1999; the second, this writ, a month later. The defendant took no steps in respect of the first and judgment by default was entered against the defendant in June 1999. That judgment debt has now been satisfied.

23. Reverting to the US proceedings, the plaintiff produced a letter dated 11 February 2000 written by its US attorney to La Mode's in which the areas of dispute were spelt out and an attempt was made to define and limit the issues. The letter details the plaintiff's claim that the defendant was a disruptive element employing bully-boy tactics for advantage which included personal gain. There are two excerpts which are relevant to this action.

24. The first is at page 1 as follows:

" Background

La Mode entered into two written contracts with Wang Tai to build its garment factory complex for a total sum of $1.9 million. The first contract, for the factory, was signed on November 15, 1997 and it required the payment of $1.3 million.

The second contract, for "staff quarters", was signed on December 20, 1997 (and January 10, 1998), and it required the payment of $600,000.

The first contract required La Mode to pay an initial payment of $600,000 on or before November 22, 1997. La Mode instead paid $500,000 on November 17, 1997. (emphasis added)"

25. The second is at page 19:

" 6. WANG TAI'S CLAIM FOR DAMAGES

Winzler & Kelly and Wang Tai will testify that the entire La Mode project was approximately 80% completed by Wang Tai, Owen Rumley's reports concur (see, Owen Rumley Report of April 26, 1999 where he concludes the project was 82% completed by Wang Tai [your documents #083-9]).

The entire project, if completed, would have cost La Mode $2,382,000.00. The Winzler & Kelly report breaks that down as follows:

Factory Contract	$1,300,000.00
Barracks Contract	600,000.00
Extras	482,000.00
	$2,382,000.00

Wang Tai's claim for unlawful termination and breach of contract would be:

80% completed	$1,905,600.00
paid	$1,080,000.00
owed	$ 825,600.00	"

26. Mr Tse says the first excerpt relates to instructions belatedly given by him that the plaintiff only received US$500,000 as the down-payment. The amount paid and received in the second excerpt had been reduced from $1,180,000 to $1,080,000 because of the under-payment of US$100,000 in the first instalment. But when it was put to him that by writing in this way in effect the plaintiff was claiming this amount from La Mode as well as, by this action, from the defendant he did not agree; he was only, by this action, suing the defendant.

27. Next I heard from the defendant. He said that in his capacity as a director and employee of LMFE he was answerable to his boss in Los Angeles Mr Kahn. His regular duties were to oversee the garment manufacturing undertaken by the company in Saipan. Then when the decision was made for La Mode to operate from its own factory he was asked to seek out suitable contractors. When the plaintiff quoted he played no part except to relay to the US the quotation. He was present when the contract was signed but took no part in the drawing up of the document or the negotiations. He did not afterwards tell Mr Tse that he had an interest in the project and that he would be responsible for part of the down-payment because he did not have an interest and would not be responsible for any of the cost. When it came to payment of the first instalment he said he asked Mr Tse to prepare the receipts in the manner described because he was told to do so by Mr Kahn. This was because US$100,000 of the same was to be paid in cash in Hong Kong currency which Mr Kahn had accumulated in Hong Kong over a passage of time in his charge. That was his explanation for having his name in brackets recorded in the receipt for this amount. And that was why the sum was distinguished and referred to as "his" in the fax of 11 November. In fact contrary to the fax this amount was not wired to Hong Kong; it was already in Hong Kong. He did not recall showing or giving to Mr Tse a copy of the fax and does not know how he came to be in possession of it.

28. The meeting when it took place was on 19 November not 17 November. And it took place at LMFE's offices not in a restaurant. Mr Tse received a draft for US$500,000 and cash for the balance at an agreed exchange rate in Hong Kong dollars. The defendant counted it out and placed it in an envelope before handing that to Mr Tse, who received it without counting it. At no stage did he ask for an advance of US$100,000 and there was no advance.

29. When work got under way in early 1998 and thereafter until it stopped in April 1999 he played no prominent role in overseeing the project. His primary duties were in the manufacture of garments. There was a professional engineer employed to check on progress and authorize payments. Sometimes at Mr Kahn's request he reported and on one or two occasions he made payments. But this involvement was spasmodic. It was not possible for him to exert any influence over the operation, adverse or otherwise. Nor did he try to.

30. He did borrow from the plaintiff US$30,000 on or about January 1998 but not in circumstances advanced by Mr Tse. It was Chinese New Year's eve; the time for lai see. He wanted to invest in the stock market but had no funds. He approached Mr Tse and asked if the plaintiff would lend him US$30,000. Mr Tse said it would, and it did. There was no time limit or interest rate mentioned. He took it that that meant the loan was interest free repayable on demand. The advance was made in equivalent Hong Kong dollars. There had been no pressure to lend coming from him; no threats of disruption by him. He denied that there was any subterfuge; in particular, that it was a secret commission to oil the wheels of the project. It was simply a loan made by one friend to another.

31. Neither the plaintiff nor Mr Tse made subsequent verbal demands for repayment, so that when Katherine Or's letter arrived it was a complete surprise. He gave it to his solicitors to deal with on instructions. Of course the claim was not just for the equivalent of US$30,000 in Hong Kong dollars but a much larger amount, and with accrued interest, and with allegations of corrupt practice.

32. His employment with LMFE came to an end in November 1999 because of "a misunderstanding".

33. That is the evidence.

Findings of fact

34. The task of finding where the truth lies is a difficult if not impossible one. It is not simply a question of believing one or other of the two witnesses, for there are many issues for which the answers or explanations were either fabricated or were selective as to the truth. There follows those I found the most glaring.

35. The first concerns the payment of the first instalment and the receipts. If, as the defendant attested, the full amount really was paid, all by La Mode, why was there a need for two receipts? Why was part of it paid in cash? Why was the defendant named in one of the receipts? Why did the fax of 11 November refer to the telegraphing of $600,000 when only $500,000 was transferred? And what does "$100,000 from Patrick to start" signify? The defendant had answers to these questions but the logical response favours the plaintiff's cause, or at least that there was something else going on behind the scenes.

36. The second was Mr Tse's apparent willingness to lend such an amount as US$100,000 when, without forewarning, he was confronted with the request in a tea-shop. And this without security, without the stroke of a pen, without checking with La Mode that the defendant really was a co-investor, and without enquiry as to where repayment of the advance and accrued interest was to come from. His response that he felt constrained to do so to protect the contract was hardly a convincing one.

37. The third was Mr Tse's reaction to the defendant's default in January 1998. He admitted to being angry. And not only was there default with no explanation but the defendant had failed to provide La Mode's consent as promised. In my view the natural reaction would have been to get on to Kahn at La Mode and complain of the default, get confirmation of the defendant's status in the project and otherwise take steps to recover the shortfall. To do nothing was a most unlikely course to take. But to advance to the defaulting debtor another US$30,000 because he was threatening disruption was nothing short of extraordinary. Why, if not before, not then complain to La Mode of such bully-boy tactics? And when default of that loan was made (hardly surprising) why did he not then speak out? Mr Tse gave his reasons for taking no steps. These were hardly rational and logical and weigh against his cause.

38. The fourth was contained in the excerpts in the US attorney's letter of 11 February 2000. This supports the plaintiff's case that the US$100,000 was not paid as part of the down-payment, though La Mode's response to this would have been more crucial, and this has not been revealed to me. What it does not do is shift the obligation to the defendant; whatever Mr Tse said in evidence, the maths in the letter reveals that it forms part of what the plaintiff was claiming against La Mode.

39. The fifth is the defendant's account of how and why and on what terms he borrowed the sum of US$30,000 from the plaintiff, and how and why he did not repay the same until after judgment. If, on the defendant's account, the loan of US$30,000 was one repayable on demand why did he not pay it when demand was made? And if it was interest free why did he submit to paying 15% interest? There is, as I find, no truth in what he said of that.

40. Sixthly, why did the plaintiff really issue two writs against the defendant? What is it I have not been told about this?

41. Why are there so many other imponderables?

42. In the end I am left with the firm belief that both protagonists have either lied or been selective in what they have chosen to tell me; that there is a hidden agenda and the truth remains submerged in a murky world of bribery, protection money, secret commissions or other corrupt practices.

43. I conclude that I believe that the plaintiff was paid only US$500,000 of the first instalment due. In this respect I am satisfied the defendant has lied about the transfer of the cash. But I cannot be satisfied that there was an advance made to him by the plaintiff on terms being sued for.

Conclusion

44. The inevitable result is that because of inconclusive issues of fact the plaintiff's claim cannot succeed. There is no need thus for me to deal with the issue of law. The claim is dismissed.

45. Because of the circumstances of the case I propose to make no order as to costs. But I come to this conclusion without benefit of argument and this part of the order is nisi at first instance.