ACTEX TEXTILES LTD v. THIRD MILLENNIUM ASIA LTD

DCCJ No. 2713/2005

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 2713 OF 2005   

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JUDGMENT

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1.  The Plaintiff’s claim is for the sum of $72,051.47, being the price of non-delivered goods that were ordered and paid for pursuant to a sale of goods and service agreement concluded between the parties in or around April 2004.  In the counterclaim herein, the Defendant claims against the Plaintiff for service fee in the total sum of $117,680.59.

Background of the case

2.  In February 2004, Mr. Chiu Ka Lun (“Mr. Chiu”), who was one of the directors of the Plaintiff, bought a property known as Penthouse, Block 1, No. 1 Po Shan Road, Hong Kong as his new home (“the New Home”).   For his enjoyment, Mr. Chiu wanted to install a luxurious high-tech audio-visual system at the New Home.  Through the introduction of his nephew, Mr. Michael Wong who was a fan in hi-fi appliances, Mr. Chiu came to know Mr. Anthony Nam (“Mr. Nam”) of the Defendant.  The Defendant was in the business of helping its clients to design and set up high-tech audio-visual systems, and Mr. Chiu therefore sought the assistance of Mr. Nam to design and set up the audio-visual system at the New Home (“the AV System”).

3.  The Defendant itself was an authorized dealer of certain high-end audio-visual equipments in Hong Kong.  To set up the AV System at the New Home, the Defendant recommended Mr. Chiu to purchase from it various audio equipments, and Mr. Chiu agreed.

4.  One of the requirements of Mr. Chiu was that all the audio-visual equipments in different parts of the New Home could be controlled from one single location through remote control devices.  As the Defendant did not supply such kind of equipments, Mr. Nam recommended Mr. Chiu to install a particular high-tech remote-control system known as the “AMX Control System”.  Mr. Chiu also agreed.  Mr. Nam therefore introduced Mr. Chiu to one Mr. Stephen Shi (“Mr. Shi”) who was responsible for the AMX Control System.  Mr. Chiu did not by then know the relationship between Mr. Shi and the Defendant, but it was later revealed that Mr. Shi was working for a company known as PAV Technology Limited (“PAV”) which was the supplier of the AMX Control System in Hong Kong.

5.  For the services provided by the Defendant, Mr. Nam proposed that Mr. Chiu would have to pay a 10% service fee to the Defendant.  However, there is serious dispute between the parties about the discussion leading up to the agreement for the payment of the service fee.  Firstly, the Plaintiff alleges that such fee was to be calculated by reference to 10% of the total costs of the equipments supplied by the Defendant only, and not to cover those equipments sourced by the Defendant and supplied by other suppliers.  On the other hand, the Defendant claims that the service fee should be calculated based on the total costs of all the components and equipments supplied, sourced and recommended by the Defendant.  Secondly, there is dispute as to when the 10% service fee became due and payable.  In any event, the existence of such agreement is not in issue.

6.  Upon the advice of Mr. Nam, Mr. Chiu purchased from the Defendant various audio equipments and appliances, including the ADA Home and Theater Receiver (“the Receiver”) and the ADA All Weather Outdoor Control Device (“the Outdoor Control”).  In the period from May to August 2004, the Defendant issued 4 invoices to Mr. Chiu or the Plaintiff for the items ordered by Mr. Chiu, and the Plaintiff paid those invoices, which amounted to $287,100.07, without much delay.

7.  The evidence also shows that PAV issued separate quotations and invoices to Mr. Chiu for the purchase of the various components of the AMX Control System.  The contract sum of the whole AMX Control System was agreed at $382,872, and the Plaintiff paid the invoices of PAV again without much delay.

8.  It is common ground that Mr. Chiu was quite generous about the budget for the installation of the AV System, and there had not been much negotiation on the prices of the various components and equipments of the system.

9.  It is also not in dispute that the Defendant would provide consultancy services for the installation of the AV System.  Hence, after the decoration of the New Home had started, Mr. Nam went there on a number of occasions to liaise with the decoration contractor about the installation of the AV System.  The decoration work was scheduled to be completed near the end of 2004.  However as there was delay in the decoration work, Mr. Chiu requested the Defendant to defer delivery of the Defendant’s products to the New Home.

10.  As to the various television sets for the New Home, Mr. Nam recommended Mr. Chiu to buy the models distributed by the Defendant.  However as the prices were too high, Mr. Chiu asked Mr. Nam to recommend models from other suppliers.  Mr. Nam therefore introduced Mr. Chiu to one Meide Wholesale Company (“Meide”), and Mr. Chiu eventually purchased various television sets from Meide in the total sum of $269,000.

11.  Back in August 2004, the Defendant issued the first invoice to the Plaintiff which included a claim for the payment of service fee.  By that time, only a sum of $28,110 was claimed which covered 10% of the costs of the equipments supplied by the Defendant at that stage.  However, Mr. Chiu did not then pay for the service fee, taking the view that such fee was only due for payment when the Defendant completed the services under the consultancy agreement and the whole AV System was set up and functional.  Later, Mr. Chiu also disputed the basis for the calculation of the service fee.

12.  There were also other disputes between the parties when Mr. Shi commenced the installation work of the AV System near the completion of the decoration work.   Despite various attempts to set up the AV System, the system still did not work.  Later, it was found out that the problem was caused by the lack of a control device which acted as an interface between the AMX Control System and the audio equipments supplied by the Defendant (“the Interface Control”).  Without such device, the two systems could not communicate with each other.  According to Mr. Shi, the interface between the two systems could usually be achieved by appropriate computer programming of the AMX Control System, and it was a unique problem of the Defendant’s audio equipments that required a particular physical device for the interface.  However, the evidence shows that the Defendant had not offered any assistance to solve such problem, and Mr. Nam just claimed that it was the responsibility of PAV to work out the solution.  The problem was eventually solved by Mr. Shi, with considerable difficulty, by purchasing the necessary Interface Device directly from the manufacturer of the Defendant’s products.  At the beginning of the trial, the Plaintiff intended to further amend the Statement of Claim by adding a claim for breach of the service agreement on the part of the Defendant in failing to advise the Plaintiff to purchase the Interface Device.  However, as such amendment of the pleading might necessitate an adjournment of the trial, Ms. Wong, counsel for the Plaintiff, decided not to pursue the amendment.

13.  There is also dispute between the parties about the involvement of Mr. Nam during the installation of the AV System.  It is the Plaintiff’s case that despite repeated attempts to contact Mr. Nam, he was not available to offer any consultancy services for the installation of the AV System.

14.  As the Plaintiff and Mr. Chiu refused to settle the 10% service fee demanded by the Defendant, the Defendant withheld delivery of the Receiver despite the fact that the Plaintiff had paid for the same.  Mr. Shi tried to buy the Receiver directly from the manufacturer of the Defendant’s audio equipments.  However as the Defendant was the only authorized dealer in Hong Kong, the manufacturer refused to sell the Receiver directly to the Plaintiff.  Mr. Shi therefore recommended the Plaintiff to buy a substitute system from another supplier.  However, Mr. Shi indicated to Mr. Chiu that the quality of the sound of the substitute system would not be as good as that of the original system.  Nevertheless, the Plaintiff had no option but to replace the Receiver with the substitute system.  Eventually, the AV System was installed and became functional in March or April 2005.

15.  Further, it is the Plaintiff’s case that the Defendant had failed to deliver the Outdoor Control as ordered and paid for by the Plaintiff.

16.  By reason of the aforesaid, the Plaintiff claims against the Defendant in the total sum of $72,051.47, which includes the prices of the Receiver and the Outdoor Control in the respective sums of $65,926.9 (US$8,450) and $6,124.57 (US$785).  On the other hand, the Defendant counterclaims the 10% service fee in the total sum of $117,680.59, which is calculated by reference to the total costs of the audio-visual components and equipments supplied, sourced and recommended by the Defendant.

Evidence at the trial

(i) The evidence of the Plaintiff

17.  At the trial, Mr. Sunny Chan Chi Cheung (“Mr. Chan”) testified on behalf of the Plaintiff.  He lived with his uncle, Mr. Chiu, at the New Home.  As he was closely involved in the discussion about the setting up and the subsequent installation of the AV System, the Plaintiff does not see the need to call Mr. Chiu to testify himself.

18.  Mr. Chan was involved in the initial discussion about Mr. Chiu’s specifications of the AV System at the New Home, in particular the importance of controlling all the audio-visual equipments through one single remote system.  He was also involved in the discussion about the contents of the service agreement with the Defendant.  After the discussion, the Defendant agreed to be responsible to design, set up and install the AV System, to supply the required audio-visual equipments and to source other necessary equipments from other suppliers.  Mr. Nam also requested Mr. Chiu to pay a 10% service fee, and Mr. Chiu agreed.  However according to the discussion, the service fee was to be calculated by reference to the total costs of the audio-visual components and equipments supplied by the Defendant only, and not to cover those other items sourced or recommended by the Defendant.

19.  According to Mr. Chan, Mr. Nam also introduced Mr. Shi of PAV to Mr. Chiu and himself.  By that time, he was not aware of the exact relationship between the Defendant and PAV, but Mr. Shi was mainly responsible for setting up the AMX Control System.

20.  Pursuant to the advice of Mr. Nam, the Plaintiff purchased various high-tech audio equipments from the Defendant with full payment made.  Despite the allegation by Mr. Nam, the Plaintiff actually paid the invoices issued by the Defendant, except those related to the payment of the service fee, without much delay.

21.  Due to the delay in the decoration work, the installation of the AV System began in January 2005.  By that time, Mr. Nam could no longer be reached to deal with inquires as to how the different audio-visual components and equipments should be integrated together, and the installation work of the AV System was actually carried out by Mr. Shi and his team of colleagues.  The AV System was finally installed in or about March or April 2005.

22.  Mr. Shi also testified at the trial.  His company, PAV, was the distributor of the AMX Control System in Hong Kong.  In April 2004, Mr. Nam approached him for the supply and the installation of the AMX Control System at the New Home.  In later that month or May 2004, he met with Mr. Chiu, Mr. Chan and Mr. Nam to discuss what audio-visual components, equipments and appliances were most appropriate to meet the requirements of Mr. Chiu.  Due to the delay in the decoration work, the installation of the AV System only commenced in January 2005.  He gave evidence about the problems facing him in installing the AV System, in particular the lack of the Receiver and the Interface Device.  He tried to contact Mr. Nam for assistance, but the latter was not available most of the time.  He later discovered that he would need a special Interface Device because of the peculiar specifications of the Defendant’s audio equipments.  He purchased such device directly from the manufacturer.  The Defendant also failed to deliver the Receiver, and Mr. Shi helped Mr. Chiu to acquire a substitute system.  As he was closely involved in the installation work himself, he recalled clearly that the Defendant had not delivered the Outdoor Control as ordered by the Plaintiff.

(ii) The evidence of the Defendant

23.  Mr. Nam testified in support of the Defendant’s case.  Through the introduction of Mr. Michael Wong, the Defendant agreed to help Mr. Chiu to set up a high-tech audio-visual system at the New Home.  He recommended Mr. Chiu to purchase the audio equipments distributed by the Defendant in Hong Kong and to acquire the AMX Control System.  As part of the deal, the Defendant agreed to obtain the “best prices” for the equipments supplied by the Defendant and those sourced from other suppliers.  In fact, the prices offered by the Defendant for its own products were lower than the wholesale prices that the Defendant was offering to its dealers.  In order for the Defendant to get a fair profit for its services, Mr. Chiu agreed to pay 10% service fee for the work of the Defendant calculated by reference to the total costs of the components and equipments supplied by and sourced through the Defendant.

24.  In May and June 2004, the Defendant issued a number of invoices to Mr. Chiu for the supply of the Defendant’s products.  In all these invoices, there was a remark that the Defendant would charge the Plaintiff “a 10% service charge on top of the total costs of all the [audio-visual] related items including the smart control system” to be installed at the New Home.  Despite the payment records shown in the evidence, Mr. Nam insisted that the Plaintiff did not pay the invoices promptly.

25.  When the decoration work of the New Home was in the final stage, Mr. Nam had a discussion with Mr. Chiu about the television sets to be installed at the New Home.  Mr. Nam recommended Mr. Chiu to purchase the models distributed by the Defendant.  However as they were too expensive, Mr. Chiu asked Mr. Nam to acquire other models.  The Defendant therefore recommended Mr. Chiu to buy the television sets from Meide.  It was a practice in the trade that the Defendant would get rebate or commission from Meide for referring the business deal, but as the Defendant had already agreed to obtain the lowest prices for the Plaintiff in return for the 10% service fee, the Defendant did not ask Meide, or indeed PAV, for any rebate or commission.

26.  Regarding the problem of installation caused by the lack of the Interface Device, Mr. Nam maintained that it was the responsibility of PAV to work out the solution.  For the Outdoor Control, Mr. Nam insisted that the Defendant had delivered the same to the Plaintiff.

27.  Mr. Nam kept chasing the Plaintiff for the payment of the 10% service fee billed in the invoice.  As such payment remained due, the Defendant withheld delivery of the Receiver ordered and paid for by the Plaintiff.  The Defendant also counterclaims against the Plaintiff in the sum of $117,680.59, being the 10% service fee calculated by reference to the total costs of the components and equipments of the AV System supplied, sourced and recommended by the Defendant.

28.  The Defendant had also subpoenaed Mr. Eddie Cheung of Meide to testify at the trial.  He confirmed that it was customary for Meide to pay rebate to the Defendant for introducing business to his company.  However, Mr. Nam told him that it was not necessary for Meide to pay for this particular deal, as the Defendant was going to receive service fee directly from the Plaintiff.

Assessment of the evidence

29.  Although the evidence of the witnesses lasted for more than two days, it may not be necessary for me to resolve all the factual disputes between the parties for the determination of liability in the present case.  At least the following matters are not in issue:

(i)	Mr. Chiu and Mr. Nam did not have any specific discussion about the time when the 10% service fee was due and payable;
(ii)	the Plaintiff was relying on the Defendant’s expertise and professional consultancy services in choosing the appropriate components and equipments for the AV System and in setting up the whole system; and
(iii)	the Defendant withheld delivery of the Receiver pending the payment of the 10% service fee.

30.  So far as the delivery of the Outdoor Control is concerned, I certainly prefer to accept the evidence of the Plaintiff in that regard.  As Mr. Shi was responsible for installing the AV System, he would be in the best position to know whether any item was missing in the delivery of the components or equipments made by the Defendant.  On the other hand, there is no evidence adduced by the Defendant to show that its staffs had verified the products when the Defendant made delivery of the same to the New Home.  Neither did Mr. Nam attend the New Home to take stock of the items delivered.  In such case, the evidence of the Plaintiff should be preferred and I find that the Defendant had not delivered the Outdoor Control to the Plaintiff.

31.  In respect of the basis for the calculation of the 10% service fee, there are arguments in support of either party’s case.  For the Plaintiff, Ms. Wong argues that as there was no way for the Plaintiff to know: (i) whether the Defendant was obtaining the “best prices” for the Plaintiff for all the components and equipments of the AV System; and (ii) whether the Defendant was getting any rebate or commission from third party suppliers, it could not have been possible for the Plaintiff to have agreed to pay 10% service fee on all the products.  Instead, it was free for the Defendant to put whatever price-tags on its own audio equipments and to receive commission or rebate from other suppliers, and so the 10% service fee was only restricted to the total costs of the Defendant’s products only.

32.  On the other hand, Mr. Kwok, counsel for the Defendant, submits that the Defendant was actually selling its products to the Plaintiff below the dealers’ prices, and yet the Defendant had to provide considerable consultancy services to the Plaintiff for the setting up of the whole AV System, including advising on the choice of the components and the equipments of the AV System, sourcing and obtaining the best prices for such products, and liaising with the decoration worker about the installation of the AV System.  If the 10% service fee only covered the goods supplied by the Defendant, it would be too small a profit margin for the Defendant to provide so much services.  Instead, the Defendant could have simply sold the products to Mr. Chiu at the higher retail prices without bothering with the payment of the service fee.  Further, it was customary for the Defendant to obtain rebate from Meide for referring the business of the purchase of the television sets for the New Home.  Had there been no agreement to pay 10% service fee based on all the items, the Defendant would certainly have asked Meide for commission which the Defendant had not done so in the present case.

33.  After hearing the evidence of both Mr. Chan and Mr. Nam, I accept both of them had held a genuine belief that their respective version of events was correct.  As I see it, the contents of the discussion about the payment of the service fee would depend very much on the specific words used by the parties during the conversations, and with the passage of time, it may be quite possible for the parties to make a genuine mistake about the contents of the conversations.  However after careful consideration, I prefer to accept the evidence of Mr. Nam in this regard.  The evidence clearly shows that the Defendant was selling its products to the Plaintiff at very low prices.  If the service fee of the Defendant was just limited to 10% of the costs of its products only, I doubt very much whether the Defendant would have agreed to provide so much services to the Plaintiff.  Further, the evidence shows that Mr. Chiu was quite generous about the budget of the AV System and there had not been much negotiation on the prices of the various components of the AV System.  His main concern was that the AV System met his specifications and that it could function properly.  In such circumstances, it was probable that Mr. Chiu could have agreed to the Defendant’s proposed terms about the service fee by that time.  The remark in the invoices sent to the Plaintiff as mentioned in paragraph 24 above also adds weight to the Defendant’s evidence on this particular issue.

The central issue in the present case : time for the payment of the service fee

34.  However, such favourable finding of fact cannot assist the Defendant’s case.  As the Defendant purported to exercise a lien over the Receiver pending the payment of the service fee, the main issue here is, in my judgment, the time when the 10% service fee was due and payable.  In the case that the payment was not due when the Defendant withheld delivery of the Receiver, the Defendant would then be in breach of the term of the service and sale of goods agreement between the parties, and as such the Defendant is liable for the refund of the price of the Receiver.

35.  As there had been no discussion on the time for the payment of the 10% service fee, such fee should only be payable when the Defendant completed its services under the service and sale of goods agreement.  In the present case, it is clear from the evidence that the Plaintiff was relying on the Defendant’s expertise in setting up the AV System, and the Plaintiff was prepared to pay a handsome 10% service fee, calculated by reference to the total costs of all the items supplied, sourced and recommended by the Defendant, in consideration of the services provided by the Defendant in setting up the AV System.  In such case, the Defendant had a duty under the service agreement to ensure the proper functioning and installation of the AV System, and it should only entitle to receive the service fee when it completed its services under the agreement.  Hence, in the absence of specific discussion on the time for payment, this was the implied obligation under the service agreement.

36.  As I see it, there was no lien over the Receiver before the Defendant completed its services under the service agreement.  In the written supplemental submissions submitted to court after the hearing, Mr. Kwok relies on two Australian authorities, Hewett v Court (1983) 149 CLR 639 and Rolfe v Transworld Marine Agency Co. [2000] BPIR 822, and argues that the Defendant, at the time when it withheld delivery of the Receiver, had equitable lien over such article because there was “potential indebtedness” on the part of the Plaintiff to pay the service fee.  However, both of these cases concerned bankruptcy proceedings, and the issue there before the courts was whether the bankrupts had equitable interests over the house for uncompleted building work or fund of proceeds of sale, which is quite different from the issue in the present case.  In any event, I cannot understand how the Defendant could exercise a lien over the Receiver when the service fee was not yet due for payment.  If Mr. Kwok’s logic is correct, it would mean that a seller, in the absence of an agreement on the time for payment, can withhold delivery of the goods because there is potential liability on the part of the purchaser to pay for those goods at a later stage.  This simply cannot be right.

37.  As the Defendant wrongfully withheld delivery of the Receiver, the Defendant was in breach of the sale of goods and service agreement and was liable to repay the price of the Receiver received from the Plaintiff.  Further, as the Defendant had not completed its services under the service agreement, including refusal to deliver the Receiver and to provide further consultancy services on the installation of the AV System, the Defendant is not entitled to claim for the 10% service fee.

38.  In the pleading, the Defendant had also put forward an alternative claim of quantum meruit for the work and service done by the Defendant for supplying its products at the lowest prices, sourcing other components and equipments of the AV System, and providing related consultancy services for the installation of such system.  However, such claim also cannot succeed for the following two reasons.  Firstly, the Defendant had not adduced any evidence relating to the quantum of reasonable fee for the Defendant’s “services”, and so the court would not be in a position to assess the reasonable fee for such claim.  Secondly, and perhaps more importantly, it is common ground that the 10% service fee was for the Defendant to provide consultancy services for the setting up of the AV System.  As I have ruled above, in the absence of specific discussion on the time for the payment of the service fee, such fee would only be payable when the Defendant completed its services under the service agreement and the AV System was fully installed and functional.  As the right of the Defendant in obtaining the service fee was governed by the contractual obligation under the service agreement, there is no room for the application of the doctrine of quantum meruit in the present case.  The Plaintiff’s alternative claim therefore also fails.

39.  I therefore grant judgment in favour of the Plaintiff in the sum of $72,051.47, being the total price of the Receiver and the Outdoor Control paid by the Plaintiff.  The Defendant’s counterclaim for the service fee is dismissed.  On the question of interest, I make an order nisi that the Plaintiff is entitled to interest on the said sum at the rate of 10.42% per annum, which is the existing judgment rate, from the date of the issuance of the writ to the date hereof and thereafter at judgment rate.  I also make an order nisi for the costs of the action in favour of the Plaintiff with certificate for counsel.  The order nisi shall be made absolute 14 days after the date of the handing down of this judgment.