PHILIPS ELECTRONICS HONG KONG LTD v. MING HING ELECTRICAL CO LTD

HCA 1743/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1743 OF 2002

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J U D G M E N T

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1. The plaintiff is a company incorporated in Hong Kong. At all material times it has been carrying on business in supplying to selected dealers for sale in Hong Kong lighting products and luminaries that it imports. For the purpose of these proceedings a luminary is described as a lighting fixture, and lighting products are any other item of the genre sold by the plaintiff to its dealers.

2. The defendant is a company incorporated in Hong Kong. At all material times it has been carrying on business as a wholesaler and retailer of electrical products.

3. For some years prior to 2001 the defendant had been a non-exclusive dealer of the plaintiff on terms set out in writing and reviewable yearly. The terms provided for an agreed sales target; if the target was achieved or exceeded the cost to the dealer of the product purchased was reduced by a percentage-based rebate. If the target was not met then there was no rebate, but otherwise no penalty; however, a poor performance would render re-appointment for the next calendar year less likely.

4. For the calendar year 2001 those selected by the plaintiff as being suitable dealers for that year were offered terms that differed from previous years. The proposal provided for a pre-determined sales target called: "a minimum guaranteed annual sales amount". As before, the dealer who achieved or bettered this figure for the year was entitled to the benefit of a percentage-based rebate. But if the figure was not achieved he became liable for the plaintiff's calculated loss of profits occasioned by the shortfall.

5. The defendant was selected by the plaintiff to be one of its dealers for the year 2001. The proposed minimum guaranteed annual sales amount of $20m was rejected by the defendant as being unacceptably high; in the event, the parties negotiated and agreed to a figure of $13.5m. A document headed "Dealer Agreement" (I shall continue to call it as such) was executed by the parties. The Dealer Agreement incorporated the following terms:

(a)	clause 2.3, whereby the plaintiff covenanted to stipulate the minimum annual guaranteed sales amount of lighting products at Schedule 3, which amount should be the minimum guaranteed amount of lighting products that the defendant should purchase from the plaintiff in any event for the year;
(b)	clause 2.7, by which the plaintiff guaranteed to replace products supplied that were or became defective within 3 months of supply, the defendant to give notice of such defect in 14 days;
(c)	clause 3.2.3, whereby the defendant covenanted to purchase from the plaintiff lighting products of not less than the minimum annual guaranteed sales amount as set out at Schedule 3, failing which the defendant should compensate the plaintiff for all and any loss and damage thereby incurred;
(d)	clause 4.1, whereby the defendant covenanted, inter alia, to pay for all the lighting products purchased from the plaintiff in accordance with the conditions set out at Schedule 2;
(e)	clause 5.3, whereby the plaintiff reserved the right to charge interest on overdue payment at the rate of 2.5% per month;
(f)	clause 5.5, whereby the defendant was given a 60-day interest-free credit period commencing from the date following the plaintiff's pre-set payment cut-off date of each month to settle all invoices issued to the defendant during the preceding month expiring on the said payment cut-off date;
(g)	clause 2.4 of Schedule 2 which provided, inter alia, that payment of all products provided by the plaintiff should be made by the defendant on or before the payment due date.
(h)	clause 2 of Schedule 3 which provided, inter alia, that the minimum annual guaranteed sales amount of lighting products should be HK$13,500,000.00

6. The plaintiff's preset payment cut-off date was the 23rd of each month.

7. In addition to having been a non-exclusive dealer of the plaintiff's lighting products, the defendant prior to 1998 had purchased luminaries from time to time from the plaintiff on an ad hoc basis. In 1998, for the calendar year of 1998, the parties, for the first time, entered into a sales contract. By this means a sales target for the purchase of luminaries by the defendant was agreed and recorded; the defendant was thereby to be entitled to a percentage-based rebate if the target was matched or bettered. In fact, in 1998, the defendant's purchases fell well short of the target; there was no rebate, and no invitation to sign up for the following year. For the year 2000 the parties entered into another sales contract; the target was fixed at $2m. For the year 2001 the plaintiff proposed another sales contract, but this time on different terms. The target was fixed at $3m; for the first time it was referred to as: "a figure guaranteed to be achieved for the calendar year". There was no rebate scheme. The parties executed a sales contract on such terms. (For ease of reference I shall call this, the 2001 document, the "Sales Contract")

8. For the year 2001 the plaintiff agreed with selected dealers, of which the defendant was one, to pay a fixed monthly amount to those who promoted the plaintiff's products by advertising on their lorries. In respect of the defendant this came to $1,800 per month for the first 6 months and $3,600 per month for the second; all up $32,400, which was duly paid or credited to the defendant.

9. During the course of 2001, after a bright start, the defendant failed to achieve the preset targets fixed in both the Dealer Agreement and Sales Contract. Furthermore, it failed to pay for some goods purchased and supplied and was late in payment of a number of accounts, incurring, thus, the additional liability of interest. The plaintiff calculated the loss caused by the defendant's default under both the Dealer Agreement and Sales Contract, based on the profit margin (sale price less cost of sales) that would have been achieved had the designated target been met in each case. In a letter before action its solicitors wrote demanding recompense. A cheque in partial settlement was paid and received. The defendant also went on the offensive, seeking a refund of the purchase price of goods supplied said to be defective. There was no resolution; the plaintiff issued a writ, dated May 2002.

10. In its statement of claim the plaintiff sued for the following loss suffered:

Loss of profit (the Dealer Agreement)	1,769,499.33
Purchase price of goods not settled	153,320.00
Interest thereon to the date of writ	17,039.51
Interest on overdue payments until settled	48,999.22
Loss of profit (the Sales Contract)	705,108.86
	2,693,966.92
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Interest on the sum of $153,320 is also claimed at $126.02 per day from the date of the writ (8 May 2002).

11. In its defence, the defendant averred that it was not made aware of clause 3.2.3 in the Dealer Agreement rendering it liable, for the first time, to compensate the plaintiff should there be a shortfall. Denying liability, it averred the sole purpose of a sales target was to calculate a rebate. Referring to the Sales Contract, it averred there was no express or implied provision rendering it liable to compensate the plaintiff should it not reach the sales target figure; further, that in the previous 10 odd years it had not made the target without any adverse consequence. Generally it denied liability for all that the plaintiff claimed. Further, it counterclaimed for the cost of defective goods supplied of $290,755.60 and, curiously, the cost of advertising for 6 months to June 2002, amounting to $21,600, thereafter at $3,600 per month.

12. By its reply the plaintiff repeated its entitlement to recover the amounts claimed. It averred that the defendant all along was aware of the prospective liability under the Dealer Agreement and Sales Contract; further, by conduct, it had affirmed the terms thereof. It denied liability for the counterclaim for defective goods, averring that the defendant had failed to comply with all of its obligations under the Dealer Agreement to give timely notice of any alleged defect; further, that the defendant was in breach of the Dealer Agreement. The claim for advertising costs was also denied.

13. Following discovery and the usual exchange of witness statements the matter was listed to be set down in the running list. By this time the defendant's solicitors had been given leave to withdraw, and a director called Yeung Tze Kee was then given leave to represent the defendant. But when the matter came to be listed before me there was no sign of Mr Yeung or anyone else purporting to represent the defendant. Mr Maurellet appearing for the plaintiff told me those instructing him had, that morning, contacted and been told by Mr Yeung that he knew of the appointment but had no intention of appearing in court; in the event he was absent throughout. So it was that I came to have before me only the plaintiff and evidence adduced on its behalf.

14. There were four witnesses. All adopted their witness statements as evidence in chief.

15. The first called was Choi Leung Ming. He has been employed by the plaintiff since 1997. His current position is as a sales manager; as such he had first-hand knowledge of the circumstances surrounding the execution of the Dealer Agreement and subsequent performance by the defendant. He stated that the change of construction of the Dealer Agreement for 2001 was because of a change of policy introduced by management from that year to make the dealers responsible for the loss caused by a shortfall in meeting the established target. As such a meeting was called for December 2000. Mr Yeung of the defendant attended, along with representatives of other dealers. The new-found risk of liability was explained. At least one dealer was not happy with the arrangement and pulled out. The defendant did not. Mr Yeung remained keen to participate, but at a figure lower than that originally proposed. The figure of $13.5m minimum was finally agreed after several meetings and the exchange of offers and counter offers. The agreement was signed by the defendant by chop, Mr Yeung adding his signature.

16. For the first 6 months the defendant achieved the monthly targets. But in July there was a significant shortfall. In August Mr Choi reminded Mr Yeung of the consequential risk of failing to meet the targets. But there was a shortfall thereafter. Again Mr Yeung was reminded of the consequences at performance-review meetings held in September and October, but to no avail; by the end of the year the defendant had fallen short of the target by more than $4.6m.

17. He also gave evidence concerning the advertising. The defendant as dealer was entitled to be compensated for the advertising he provided; a total of $32,400 was in fact paid or credited for the year 2001. The scheme was discontinued thereafter; in any event, the defendant was no longer a dealer.

18. The second witness was Eric Chan. Mr Chan has been employed by the plaintiff since 1999. He is a Business Manager and Mr Choi's superior. It was his decision to amend policy and change the terms of the dealer agreements making in each case the dealer liable for loss caused by a shortfall in sales achieved.

19. Mr Choi played the part of informing the dealers of the new terms but he, Mr Chan, did talk to Mr Yeung about the target proposed in respect of the Dealer Agreement, and played a part in the negotiations which led to the terms finally agreed by the parties. Otherwise, where he had knowledge, he confirmed the evidence of Mr Choi.

20. He went on to state in evidence that there was communication between plaintiff and defendant concerning defective products which, if established, the plaintiff would have replaced. But the defendant did not respond to his requests to comply with its contractual obligations, so nothing further was done; in particular, no product was made available for testing.

21. Hau Sui Keung came next. Mr Hau joined the plaintiff in 1990. As a senior sales executive in the Professional Luminaries Group, latterly Accounts Manager of the Wholesale Lighting Division, he had first hand personal knowledge and experience of the 2001 Sales Contract entered into by the defendant. His superior, a Mr Alvin Tse, instructed that from 2001 the sales contracts for luminaries for all dealers were to require a guaranteed minimum target to be met without provision for payment of rebates. He was told to explain to all dealers the change in policy. He did so. In particular, he spoke to Mr Yeung over the telephone in October 2000, telling him of the obligation for the dealer to meet the designated guaranteed sum or suffer payment for any loss. He repeated this explanation face to face, one on one, in November. He also told him on both occasions there was to be no rebate for having met or exceeded the target. There was a third meeting, this time also attended by Mr Tse, in January 2001. Mr Tse repeated the change of policy. Mr Yeung expressed himself willing to commit to an annual target of $3m on such terms and the defendant signed the Sales Contract under seal. The difference in policy was highlighted by a change in description of the target; hitherto it had been referred to as "Annual Contract Sum". Now it had become "Annual Guarantee Contract Sum".

22. Mr Hau's duties included monitoring the defendant's performance under the Sales Contract. By July or August 2001 it was apparent it was lagging well behind the committed target. In his presence, Mr Tse warned Mr Yeung that if the defendant did not meet the annual contract sum the defendant would be liable for the plaintiff's consequential loss. There was another meeting, with the same warning given, the following month. Mr Yeung was thus well aware of the consequences of the defendant's shortfall both before and after execution of the Sales Contract. In the event, its performance did not improve; the shortfall in sales was over $2.3m.

23. The fourth and final witness was Lua Kei Kin. He joined the plaintiff's Accounts Department in 1998 and is Senior Accountant in the Lighting Division. As such he was able to calculate the loss, that is loss of sale minus cost of sale, occasioned by the defendant's inability to achieve the minimum targets fixed in the Dealer Agreement and Sales Contract.

24. He was also able to quantify the amount of the unpaid purchase price of goods and interest thereon and to calculate the amount of interest due consequent upon late payment of some of the invoices.

25. It was he who calculated the amounts now being sued for.

26. That was the evidence before me. Of course, the defendant having elected not to participate in the trial there was no evidence adduced for me to consider coming from the defendant.

27. I come now to my findings and decision.

28. The defendant's counterclaim can be quickly disposed of. A combination of Order 35 rule 1 and Order 18 rule 18 RHC provides that where a defendant who has counterclaimed chooses to be absent at trial, the plaintiff is entitled to judgment dismissing the counterclaim. That must therefore be the fate of the defendant's counterclaim. In any event, there was no evidence adduced in respect either of the existence of defective goods or an entitlement to recompense, and no evidence that there was an ongoing contract for advertising. The counterclaim thus falls away.

29. In so far as the plaintiff's claims are concerned; these fall under several heads as follows:

(a)	failure by the defendant to pay for all the goods supplied;
(b)	failure by the defendant to pay interest on late payments;
(c)	failure by the defendant to reach a designated target under the Dealer Agreement, giving rise to liability for the plaintiff's consequential loss;
(d)	breach by the defendant of the Sales Contract giving rise to the remedy in damages.

30. I have no reason to doubt the evidence adduced setting out the history of the events. There is no defence to the claim for non-payment and for late payment, and it is established that the plaintiff is entitled to recompense and interest. I do not doubt Mr Lua's calculations.

31. The pleaded defence that the defendant was not caught by its failure to meet the minimum guaranteed annual sales amount recorded in the Dealer Agreement because it was not referred to the relevant provisions is defeated by the document itself having been signed under seal and the evidence, which I accept, that the consequences of the new policy were explained to Mr Yeung before he committed the defendant. I do not doubt the accuracy of the accounting information and methodology used to establish the shortfall and loss.

32. The pleaded defence that Mr Yeung and the defendant were caught napping by the punitive provision of the Sales Contract is similarly defeated by the document itself as executed and that Mr Yeung had the new terms explained to him before he committed the defendant. In this document, unlike the Dealer Agreement, there is no spelling out of the consequences of breach. I am satisfied however that prior to execution Mr Yeung was apprised of the contractual obligation to meet the target and the consequences of breach and the defendant is caught and bound thereby. Once again there is nothing to suggest that the extent of the loss in damages has not been properly calculated.

33. The result is that I find the plaintiff to have proved its claim as pleaded for. I order in its favour judgment as follows:

(a) the sum of $153,320;

(b) interest thereon to the date hereof $91,013.25;

(c) unpaid interest $48,999.22;

(d) loss of profits $2,474,608.19; and

(e) interest on the sum of $2,627,928.19 from the date hereof at the judgment rate until payment.

34. The counterclaim is dismissed.

35. Costs are to the plaintiff taxed if not agreed; this order as to costs is nisi at first instance.