上海海泰克貿易發展公司 and Another v. CHINA SCI-TECH HOLDINGS LTD. AND OTHERS

HCA1769/1999 & 1771/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.1769 OF 1999 and 1771 OF 1999

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(Consolidated by Order of the Honourable Mr Justice Godfrey dated 22 July 1999)

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J U D G M E N T

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Parties

1. The 1st plaintiff is a Mainland company with its registered address at Shanghai Waigaoqiao Bonded Zone ("Shanghai Bonded Zone"). It has the right to engage in international trade and business with other enterprises in the same or other bonded zones in the Mainland.

2. The 2nd plaintiff is a Hong Kong company which had at all material times acted as the 1st plaintiff's agent. By a letter of authority dated 21 June 1998, it was nominated by the 1st plaintiff as payee of the cheque no.062792 issued by the 1st defendant dated 15 October 1998 for HK$23,636,122 ("the Cheque"), which later formed the subject matter of this action.

3. The 1st defendant is a company incorporated in the Cayman Island and registered in Hong Kong under Part XI of the Companies Ordinance, Cap.32. Formerly known as Conrad International Holdings Ltd, it is a public listed company in Hong Kong. The 2nd defendant was a director and authorised representative of the 1st defendant. The 3rd defendant was also a director.

4. Bonnie International Trading (Shanghai) Co. Ltd ("SH Bonnie") is another company in the Shanghai Bonded Zone. According to the 1st defendant's public announcement made on 2 February 1999, SH Bonnie was "a 50% owned associate company" of the 1st defendant. The 2nd and 3rd defendants were its directors. The 3rd defendant was also its general manager. Its managing director was Mr Liu Chao Ying ("Mr Liu").

5. Two other Hong Kong companies featured in these proceedings. One is called Bonnie International Development Ltd ("HK Bonnie"). The 2nd and 3rd defendants, Mr Liu and Mr Mau Leung ("Mr Mau") were its shareholders and directors. The other company is called Binet Trading Limited ("Binet"). The 3rd defendant and Mr Liu were its directors. It is apparent that the 1st defendant, SH Bonnie, HK Bonnie and Binet were all closely related.

Background facts

6. The background facts leading to the present action, which are not in serious dispute, may be summarised as follows.

7. The 1st plaintiff and SH Bonnie entered into a Chinese agreement no.HI-HY-98004 dated 17 June 1998 ("the June agreement"). The subject matter of the agreement were 5,120 pieces of 29" Toshiba CRT and 5,382 pieces of 38" Toshiba CRT ("the Goods"). The 1st plaintiff's obligation was to, inter alia, execute contracts in respect of the Goods, procure the issuance of irrevocable letters of credit 89 days after sight, ensure that SH Bonnie's funds would be successfully remitted, ensure that payment on the letters of credit would be honoured and send out shipping documents within three days of receipt to facilitate collection of goods by the consignee.

8. On the other hand, SH Bonnie was obliged under the June Agreement to, inter alia, nominate supplier of the Goods and provide all information necessary for opening letters of credit, pay a 20% deposit three days before opening of letters of credit, pay balance of 80% not later than 10 days before due date for payment under the letters of credit, deliver a cheque representing 80% balance in Hong Kong currency (at the exchange rate of US$1 to HK$7.8) to be drawn by New Excellence Holdings Limited and payable to the 1st plaintiff's nominee, namely, the 2nd plaintiff, and post-dated to 15 October 1998 as security for the balance, and pay to the 1st plaintiff 1.5% of the price as commission. Further, under clause 3, the quality and amount of the Goods, other matters not mentioned and the related costs shall be SH Bonnie's responsibility. Under clause III 2, SH Bonnie shall bear all the costs incurred after the Goods arrived at Hong Kong.

9. In about later June 1998, the parties agreed to substitute the 1st defendant for New Excellence Holdings Limited in providing the cheque for the 80% balance.

10. Pursuant to the June Agreement, the 1st plaintiff entered into two contracts to purchase the Goods from HK Bonnie, and two contracts to sell the Goods to Binet ("the Binet contracts"). These four contracts were all dated 17 June 1998. Under the purchase contracts, the country of origin was Japan whereas the port of destination was Shenzhen. The Binet contracts however stipulated the port of destination to be Hong Kong. According to the relevant bills of lading dated 7 July 1998, the Goods were shipped on board the vessel "Au Chun" in Kobe, Japan on the same date with port of discharge at Shenzhen. It is however not clear from the evidence before me whether the Goods eventually landed at Shenzhen or Hong Kong.

11. On or about 22 June 1998, the 2nd plaintiff sent the 1st defendant a draft agreement to guarantee payment on the cheque for the balance should SH Bonnie fail to make payment. The 1st defendant however did not sign the draft agreement. It provided to the 2nd plaintiff a cheque no.062783 for the amount of HK$23,636,122 post-dated to 15 October 1998. But the cheque only bore one signature. That was not acceptable to the plaintiffs. On 26 June 1998, the 1st plaintiff's holding company, China Hi-Tech Group Co. Ltd ("China Hi-Tech") wrote to the 2nd defendant in his capacity as the chairman of the 1st defendant, informing him that the transaction would be suspended and the cheque no.062783 would be returned. Separately on 2 July 1998, China Hi-Tech notified the 2nd plaintiff that the transaction was suspended because of the 1st defendant's default and stipulated three conditions required before the transaction could be proceeded with : (1) a valid cheque by the 1st defendant; (2) proper undertaking by the 1st defendant's shareholder, New Excellence Holdings Limited; and (3) personal guarantee by the 2nd and 3rd defendants.

12. On 10 July 1998, the 1st defendant drew the Cheque which was duly signed by two authorised signatories. The 2nd defendant on behalf of the 1st defendant executed a letter of undertaking in favour of the 2nd plaintiff ("the Undertaking") whereby the 1st defendant warranted that it would honour the Cheque on its due date, acknowledged and confirmed that the 2nd plaintiff could enforce payment under the Cheque and agreed to pay interest at the rate of 5% over the best lending rate of the Ka Wah Bank Limited and the full amount of all legal costs incurred by the 2nd plaintiff as a result of the 1st defendant's failure to honour the Cheque. Each of the 2nd and 3rd defendants executed a deed of personal guarantee in favour of the plaintiffs in the presence of a solicitor of Messrs Or Ng & Chan, Mr Francis Chan ("Mr Chan").

13. The 1st plaintiff then caused Hua Xiu Bank to open two letters of credit in respect of the Goods on or about 24 July 1998. On 15 July 1998, Bank Brussels Lambert S.A. advised HK Bonnie of receipt of the two letters of credit. On or about 24 July 1998, HK Bonnie presented documents under the letters of credit to Bank Brussels Lambert S.A. for payment. Documents presented included bills of exchange, commercial invoice and packing list.

14. On 28 July 1998, Hua Xiu Bank notified the 1st plaintiff of receipt of documents under the letters of credit. It is the 1st plaintiff's case that on the very same day, shipping documents were delivered to SH Bonnie. By two letters of 28 July 1998, SH Bonnie acknowledged receipt of the documents ("the Receipts"). But the defendants now claim that only one copy of the bill of lading was delivered to SH Bonnie. By two letters both dated 31 July 1998, HK Bonnie asked Binet to confirm receipt of warehouse receipts dated 16 July 1998. The 3rd defendant signed on the letters to indicate receipt on behalf of Binet ("Binet's Acknowledgements"). Binet's Acknowledgements were subsequently faxed to the 1st plaintiff.

15. On 4 August 1998, SH Bonnie obtained payment on the two letters of credit. However, SH Bonnie defaulted its promise to pay the 80% balance.

16. By a letter dated 26 November 1998 signed by the 2nd defendant for and on behalf of the 1st defendant ("the Admission Letter"), the 1st defendant admitted receipt of the Goods and admitted liability to make payment but asked for a three months indulgence. The parties then engaged in discussion on how to settle the balance. On 28 December 1998, the 2nd plaintiff presented the Cheque for payment but it was dishonoured, payment having been countermanded by the 1st defendant.

Proceedings

17. On 30 January 1999, the plaintiffs commenced the present proceedings, claiming against the 1st defendant on the Cheque and the Undertaking and against the 2nd and 3rd defendants on the personal guarantees.

18. The defendants raised several defence thus. First, the performance of the purchase contracts was illegal under PRC law. Secondly, SH Bonnie had not received the Goods. Thirdly, the Cheque was not supported by any consideration. Lastly, the 2nd and 3rd defendants alleged that the personal guarantees were not binding on them as they did not know that they were signing their personal guarantees on 10 July 1998. It is however not a full plea of non est factum.

19. At the trial before me, the only factual witnesses came from the plaintiffs. They are : Mr Wang Zixin, vice president of China Hi-Tech ("Mr Wang"), Ms Feng Kai Xin, accountant of the 1st plaintiff ("Ms Feng"), Mr Zhang Yuhong, director of the 2nd plaintiff ("Mr Zhang"), Mr Cheung Tak Ming, deputy manager of the 2nd plaintiff ("Mr Cheung") and Mr Chan. They also called one expert on PRC law, Mr Cheng Xueli ("Mr Cheng").

20. The 3rd defendant was absent. Mr Yeung, appearing for the 1st and 3rd defendants sought to adduce the 3rd defendant's witness statement under the old hearsay rule (which is still applicable here) on the ground that he was beyond the seas. On 14 January 2002, the trial was adjourned to 26 March 2002 for part-heard. The solicitors acting for the 1st and 3rd defendant contacted the 3rd defendant who was then in Australia. He promised to come back to Hong Kong to attend the trial in March and gave evidence. However, when the solicitors attempted to contact him again shortly before the resumption of the trial, he was nowhere to be found. No reason had been advanced to explain why he chose not to appear. I agreed with Mr Yu, SC, who appeared for the plaintiffs, that a party should not be allowed, in the absence of any good reason, to rely on his own witness statement under the hearsay rule without coming to court to testify and substantiate his case. Allowing the application would cause prejudice to the plaintiffs in that they would be deprived of the opportunity to cross-examine the 3rd defendant whose evidence on certain main events was hotly contested. I therefore exercised my discretion against Mr Yeung's application. In the end, Mr Yeung only called an expert on PRC law. His evidence, however, became insignificant when under cross-examination, he withdrew his opinion on those major areas where he initially disagreed with the plaintiff's expert.

21. Mr Chain, appearing for the 2nd defendant, did not call any witness, factual or expert, although an expert report on PRC law had been produced during the adjournment.

22. In the circumstances, the defendants had not adduced any factual evidence to support its defence or contradict the plaintiffs' factual witnesses. And insofar as the major issues arising from PRC law are concerned, the only evidence that I have is that of Mr Cheng.

Evidence

23. I now turn to the evidence. In light of the above development and defence counsel's final submissions (which I will deal with in full in a moment), I do not propose to set out the evidence in great detail. I think a summary of the main points will be sufficient. I wish however to add that I have already carefully considered all the evidence adduced.

24. It is common ground that the 1st plaintiff and SH Bonnie had previously entered into three contracts which were in substance identical to the June agreement. They bore the reference of HI-HY-98001, HI-HY-98002 and HI-HY-98003. Each of them stipulated Binet as the purchaser of the goods. And the modus operandi was similar to the June agreement. No problem arose out of the first two agreements whereas contract no.HI-HY-98003 is, like the June agreement, subject to dispute.

25. Mr Wang signed the June Agreement on behalf of the 1st plaintiff. Mr Wang first described the parties' obligations under the June agreement. He then confirmed that the 1st plaintiff was not responsible for the importation of the Goods. Both the supplier of the Goods and the ultimate buyer were nominated by SH Bonnie. The 1st plaintiff's primary obligation was to delivery the bills of lading to SH Bonnie. In substance, the 1st plaintiff acted as a provider of finance by way of letters of credit and earned commission.

26. On 28 July 1998, the 1st plaintiff received the inward documents under the letters of credit from Hua Xiu Bank. After redeeming the bills of lading, Mr Wang and Ms Feng went to the office of SH Bonnie and delivered to Mr Mao, who was then vice general manager of SH Bonnie, the requisite shipping documents under each of the letters of credit. Both Mr Wang and Ms Feng confirmed that the whole set of three original bill of lading in respect of each of the two letters of credit were given to Mr Mao. Mr Wang further said that Mr Mao was a man of great experience. "It would be a serious mistake if some documents are missing. He would not let it be ... must be the whole set. Mao Leung is very serious in this regard. He will check and have them counted." After checking the documents, Mr Mao then issued the Receipts.

27. Both Mr Wang and Ms Feng confirmed that the Binet contracts did exist although the original could no longer be located.

28. Mr Wang described how the Admission Letter came about. On or about 24 or 25 November 1998, the 2nd and 3rd defendants and Liu came to Shanghai after the plaintiffs' solicitors issued the demand letters on 23 November 1998. They came to discuss with the 1st plaintiff how to settle the matter. The Admission Letter was faxed to the 1st plaintiff's office from Westin Hotel (now known as Sheraton) where the 2nd defendant was then staying.

29. Mr Zhang wrote the letter of 26 June 1998 to the 1st defendant suspending the transaction : see paragraph 11 above. At a meeting on or about 3 July 1998 with the 2nd and 3rd defendants and Mr Mao, Mr Zhang told them specifically that the defendants must comply with the three conditions (which were reduced into the letter of 2 July 1998 to the 2nd plaintiff). The step was taken as finance risk control, Mr Zhang explained.

30. On about 10 July 1998, Mr Cheung faxed the draft deeds of guarantee to the 2nd and 3rd defendants for their consideration. As he did not hear any objection from either of them, Mr Cheung contacted Mr Francis Chan and arranged the parties to execute the deeds on the same day. The 2nd and 3rd defendant together with Mr Cheung later attended Mr Chan's office. Mr Chan, in the presence of Mr Cheung, explained to the defendants in Cantonese that the deeds they were about to sign were deeds of guarantees in favour of the plaintiffs in respect of the obligations of SH Bonnie under the June agreement and the obligations of the 1st defendant under the Cheque. He specifically drew their attention to clause 19 of the guarantees which contained an acknowledgement that Messrs Or, Ng & Chan only acted for the 2nd plaintiff and that the guarantor was advised to seek independent advice on the execution of the deed. Both defendants nodded to indicate their understanding and agreement. They then executed the deeds respectively. Afterwards, Mr Chan gave copy of the deeds to Mr Cheung and the defendants.

31. Mr Cheng confirmed in essence that under PRC law, no illegality arose out of the transaction in question. He also stated that even with one bill of lading, instead of the complete set of three, the holder of the bill could take delivery of the Goods. In the absence of any expert evidence to the contrary, I do not propose to go into detail of his evidence.

32. As noted, the defendants had not adduced any evidence to the contrary. Having carefully considered the evidence adduced by the plaintiffs, I am satisfied that their witnesses are truthful and honest. I accept their evidence in entirety.

33. I now turn to examine the defence.

Illegality

34. Illegality is a common defence. It was premised on the allegations of facts as particularised in paragraph 5 and 5A of the defence. In short, the 1st plaintiff agreed to be responsible for making all import arrangements of the Goods into the Mainland and that the 1st plaintiff would arrange for the Goods to be so imported without going through formal custom procedures and without the requisite import licence to avoid custom duty. The burden of course rested with the defendants to prove these allegations. But they had adduced no evidence in support at all. I agree with Mr Yu that this defence must fail in limine.

35. Mr Yu further submitted that the weight of the evidence pointed clearly to the other way. The terms of the June agreement showed plainly that the 1st plaintiff had no duty with regard to importation of the Goods to Shenzhen or anywhere. Its duty was to hand over the bills of ladings to SH Bonnie. The June agreement further stipulated that all the expenses after the Goods had arrived at the port shall be SH Bonnie's responsibility. I agree and find that the primary obligations of the 1st plaintiff under the June agreement was to provide finance of the transaction and not to import the Goods as alleged. Even if there was a need to import the Goods into the Mainland, according to Mr Cheng whose evidence I accept, no illegality arose.

36. For the above reasons, the illegality defence fails.

37. A subsidiary point arose out of the illegality defence. The existence or otherwise of the Binet contracts was in issue. Mr Yu submitted that whether the plaintiffs proved the existence of the Binet contracts did not even arise in light of the 1st plaintiff's obligations under the June agreement. I agree. Mr Chain also agreed that the existence of the Binet contracts was immaterial but for different reasons. He argued that those contracts were not part and parcel of the deal. I will consider Mr Chain's submissions later.

38. Mr Yu further submitted that even if the Binet contracts were relevant, I could be satisfied on the balance of probabilities that they did exist. Both Mr Wang and Ms Feng testified that they exist. The defendants never disputed that the 1st plaintiff had received the Binet's Acknowledgements. And there is no evidence to show that the two warehouse receipts dated 16 July 1998 referred thereto were not genuine. I agree and find on the balance of probabilities that Binet was involved in the transaction as the purchaser and that the Binet contracts did exist.

Goods not received by SH Bonnie

39. The defence is that SH Bonnie had not received the Goods because the 1st plaintiff had delivered only one copy of the bill of lading instead of three. The defendants of course had not adduced any evidence in support. Further, it is flatly contradicted by the oral testimony of Mr Wang and Ms Feng, and the Receipts.

40. Mr Yeung contended that there was a discrepancy in the plaintiffs' case. He referred to the affirmation filed on behalf of the plaintiffs' application for summary judgment in which the handling solicitors averred that two sets of bills of lading were delivered. Mr Yu submitted that what the solicitor meant was two complete sets of bills of lading, which consisted of three copy each. He did not mean only two copy of the bills of lading were delivered. Mr Yu said the fuller evidence was to be given by Mr Wang and Ms Feng. And it is not the defendants' pleaded case that two copies of the bills of lading were delivered. I agree and accordingly reject Mr Yeung's submission. Further, by virtue of the Admission Letter, the 1st defendant had clearly admitted receipt of the Goods.

41. In my view, this defence must also fail.

No consideration for the Cheque

42. The 1st defendant contended that it was a stranger to the transaction or alternatively that there was no sufficient legal relationship between it and the parties to the transaction as would fix the 1st defendant with any liability on the Cheque.

43. The 1st defendant is the drawer of the Cheque. Prima facie, it is deemed to have been a party to the Cheque for value : see section 30 of the Bills of Exchange Ordinance, Cap.19. Mr Yu submitted that in reality the 1st plaintiff would not have caused the issuance of the letters of credit. This must be correct as the 1st plaintiff suspended the transaction when the 1st defendant gave a defective cheque. Mr Yu further submitted that the consideration of the Cheque was the implied warranty by the 2nd plaintiff as to its authority to accept the Cheque as named payee in diminution or discharge of obligation of SH Bonnie to provide security under the transaction, or alternatively, the implied promise by the 2nd plaintiff to procure the 1st plaintiff to accept the provision of the Cheque as security under the transaction : Pollway Ltd v. Abudullah [1974] 1 WLR 493, Spencer v. Crowther [1986] 1 NZLR 755, Pendergrast v. Chapman [1988] 2 NZLR 177 and Wong Fook Heng v. Amixco Asia Pte Ltd [1992] 2 SLR 342. No submission to the contrary had been advanced. In my view, the Cheque is well supported by consideration. This defence must fail.

Defence on the guarantees

44. The defendants had not adduced any evidence capable of supporting any defence on the guarantees at all. The evidence of Mr Cheung and Mr Chan on how the deeds were executed was not seriously challenged. Neither Mr Yeung nor Mr Chain had made any submission directly on this point. Accordingly, I have no hesitation in rejecting the defence on the guarantees.

Mr Chain's submission

45. All the defence relied on by the defendants on pleadings have been disposed of. What remains is Mr Chain's submission. He took only one point for the 2nd defendant. In essence, he argued that on a proper construction of the June agreement the 1st plaintiff undertook to have the Goods ready for SH Bonnie's collection in Shenzhen. But it was unable to do so. It was a breach of the fundamental term of the June agreement. Hence the liability of the 2nd defendant as guarantor did not arise.

46. Mr Yu submitted that this point was not pleaded. I agree. Leaving that aside, I do not find Mr Chain's submission tenable. First, I am of the view that on a true and proper construction of the June agreement, the 1st plaintiff was obliged to deliver the bills of lading to SH Bonnie to enable physical delivery of the Goods to be taken by SH Bonnie or the ultimate purchaser. That the 1st plaintiff had done. Second, the evidence clearly showed that delivery of the Goods did take place subsequently. Both the 1st defendant and Binet admitted receipt of the Goods. I therefore reject Mr Chain's argument.

Conclusion

47. For the above reasons, none of the defence, whether pleaded or not, succeed. I will therefore enter judgment for the plaintiffs as per the prayer of the statement of claim. Interest on the judgment sum after judgment will be at the judgment rate until payment. Pursuant to the terms of the Undertaking and the deeds of guarantees, the plaintiffs are entitled to recover costs on an indemnity basis. Accordingly, I will also make an order nisi that the plaintiffs do have the costs of the action, including any reserved costs and the costs in connection with the application referred to in paragraph 20 above, to be taxed on an indemnity basis if not agreed.