GOLDEN COSMOS TRADING LTD. v. LUI KWOK KWONG t/a WELL-PLUS FASHION CO.

HCA 11099/96

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATION REGION

COURT OF FIRST INSTANCE

ACTION NO. 11099 OF 1996

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JUDGMENT

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1. This hearing represents the trial of an issue following interpleader by the defendant in the main action. The issue lies between the plaintiff in the main action, who is now the defendant in the issue (the defendant), and the claimant, who is the plaintiff in the issue (the plaintiff). The issue itself is the sum of $218,070.08 paid into court by the defendant in the main action, MacHan Ltd (MacHan), pursuant to the order made on its interpleader summons in those proceedings. The relevant part of that order frames the issue as - "whether the said sum of $218,070.08 or any part thereof for which this action is brought, is the property of the said claimant as against the said plaintiff". For our present purposes "claimant" and "plaintiff" must now be read as "plaintiff" and "defendant" respectively.

2. The supporting affirmation of Ko Hung Kwong (page 4 of the affirmations bundle) sets out the position of MacHan in seeking interpleader relief. Five contracts were formed from July to September 1995 between MacHan and the plaintiff herein for the supply of fabrics and accessories, which the plaintiff would then manufacture into children's garments and sell back to MacHan. The cost of the fabrics and accessories supplied to the plaintiff was to be deducted from the sale price of the finished goods to MacHan. The five contracts appear at pages 37-41 of the agreed bundle of documents, and it is apparent from the plaintiff's statement of claim that that the agreement between the present parties was made orally by reference to these original five agreements.

3. The plaintiff's evidence was given by Mr. Lau Wo Shing as a director and major shareholder of the plaintiff. Shortly after concluding the five agreements, Mr. Lau said that he decided that the plaintiff's limited resources necessitated a partner to share its contractual obligations. To this end he approached Ms. Lam Wei Man, the General Manager of the defendant, with a view to cooperating on the MacHan agreements. He described the arrangements reached as amounting to a joint venture. The defendant elected not to call any evidence, although of course the burden of proving its case remains on the plaintiff.

4. The plaintiff's explanation of its arrangement with the defendant's Ms. Lam is set out in the statement of claim and in Mr. Lau's witness statement. In summary, the defendant was to receive the purchase money from MacHan, and would act as the plaintiff's agent for the receipt of that part of the money, as yet unquantified, which would ultimately be calculated to represent the plaintiff's share of the profits. Payments from MacHan to the defendant would be appropriated to the respective costs of the parties in supplying the goods to MacHan, whereafter the balance would be distributed to them in equal shares. According to Mr. Lau, the defendant was to be mainly responsible for the cost of fabrics, whilst the plaintiff was concerned with manufacturing and delivery of the finished goods to MacHan. Both parties apparently contributed to the cost of accessories. These arrangements were not reduced to writing, but their original nature is not disputed.

5. It is however the defendant's pleaded case that Mr. Lau indicated around October 1995 that the plaintiff was no longer able to perform its joint venture obligations with the defendant in respect of the five MacHan contracts. In this context the defendant relies on the letter of 12 October 1995 at p.41a of the documents bundle as operating to "transfer the orders" placed by MacHan from the plaintiff to the defendant. In other words, there was no longer a joint venture between plaintiff and defendant, but the execution of the five orders had become a direct matter of contractual privity between the defendant and MacHan. In addition, on the defendant's case, at the plaintiff's request the parties concluded a separate sub-contract for the plaintiff to do certain processing work as part of the fulfilment of the five MacHan contracts. On this scenario the plaintiff no longer had contractual relations with MacHan; he was only the defendant's sub-contractor, and the defendant had taken over the five MacHan contracts.

6. The plaintiff's case is that the original arrangement between the parties - the joint venture - remained unchanged. It is undisputed that the letter of 12 October 1995 was written by the defendant after Mr. Lau gave Ms. Lam some signed blank letterheads. It is also undisputed that the letterheads were given to Ms. Lam for her to advise Ms. Chan Wai Sze, MacHan's merchandising manager, of the arrangements between the parties - although each party appears to have had a different understanding of the nature of those arrangements at the material time.

7. Mr. Lau maintained that the contents of the letter inserted by Ms. Lam did not reflect the original intention of the parties. He said that he understood that Ms. Lam would advise Ms. Chan Wai Sze about the arrangements for MacHan to make payment under the five purchase orders directly to the defendant. On Mr. Lau's understanding there was no other purpose to the letter. He was not transferring the orders to the defendant, and there was no sub-contract back to the plaintiff of the manufacturing work. The contractual situation remained unchanged, and the payment instructions intended to be in the letter amounted to a clarification at the request of Ms. Chan. Mr. Lau also said that his own company lacked secretarial facilities, he trusted Ms. Lam, and that he did not see the letter before it was sent.

8. The terms of the letter are that MacHan should transfer all the orders to the defendant and issue credits to the defendant for the goods supplied pursuant to the agreements. Although MacHan duly observed these instructions and made payments on the defendant's invoices, Mr. Ko stressed in his interpleader affirmation that this was only because of the plaintiff's instructions, as MacHan's contractual relationship remained with the plaintiff and not the defendant. Mr. Ko was the accounting and administration manager of MacHan and he was apparently unaware of any change in the status of the five contracts between his company and the plaintiff.

9. Ms. Chan Wai Sze dealt with Mr. Lau in regard to the five purchase contracts. Her witness statement was filed in January 1999, but she now lives in the United States. In the circumstances her affirmation, with the witness statement annexed, has been admitted in evidence under hearsay notice. Ms. Chan mentions MacHan's initial acceptance of the plaintiff's quotation and Mr. Lau's later introduction of Ms. Lam as a partner and joint supplier, to which Ms. Chan had no objection provided the goods were delivered on time.

10. Ms. Chan in particular states that she was unaware both of the plaintiff's inability to fulfil its contractual obligations to MacHan, and of the defendant's taking over the role of the plaintiff as sole supplier of the goods. She dealt with the plaintiff's Mr. Lau throughout in regard to the manufacturing and supply of the goods, and only contacted Ms. Lam or Ms. Lam's colleague, a Mr. Lai, if Mr. Lau were unavailable.

11. The plaintiff's version of the parties' contractual arrangements as at late September to early October is consistent with the evidence of Mr. Ko and Ms. Chan, and in particular with paragraph 6 of Ms. Chan's witness statement. Ms. Chan, as MacHan's merchandising manager, had concluded the five contracts with the plaintiff. She states that in about September 1995 Mr. Lau said he wanted a partner as joint supplier under the contracts and introduced Ms. Lam. If Ms. Chan is correct in this, there is remarkably little time between Mr. Lau making the initial contractual arrangement with the defendant "in about September 1995" and his realising (on the defendant's case) in early October that the plaintiff could not perform those obligations - resulting in the letter of 12th October.

12. The five contracts between the plaintiff and MacHan are respectively dated 6 and 7 July, 21 August, and two on 23 September 1995. It is reasonable that Mr. Lau should appreciate in September that the plaintiff needed a partner for the contracts with MacHan, as Ms. Chan deposes at her paragraph 6. However it is unlikely that he should then decide so quickly that the plaintiff could not fulfil those contracts at all and assign them to the new partner shortly after informing Ms. Chan of a totally different arrangement with that same partner. It is also unlikely that all this had to occur (on the defendant's version) so shortly after the date of the plaintiff's last two contracts with MacHan. I therefore find it probable that the original terms of the joint venture between the parties remained unchanged at the time of the letter of 12 October 1995.

13. Thereafter however the contractual arrangements between the parties appear to have been an ongoing exercise of a somewhat fluid nature, which did not adhere to the certainties of their original joint venture. The evidence in this regard is not easy to evaluate and it is by no means all in the plaintiff's favour. There is documentary evidence clearly supporting the existence of, and payment for, sub-contracts for processing work done by the plaintiff on the defendant's behalf. Moreover Mr. Lau admitted under cross-examination the existence of those sub-contracts and the plaintiff's receipt of processing fees in that respect. The documents at pages 52 a-b, 56 a-b, and 56 e-f were admitted by the plaintiff to be in his own handwriting and expressly state that they are receipts for various substantial amounts in payment of sub-contract fees. They are all dated in December 1995.

14. Mr. Lau initially explained in his oral evidence that these receipts were meant to be for processing fees and that the word "sub-contract" in the translations did not reflect his understanding of the Chinese originals. The translation however remains in evidence as it was not challenged, and Mr. Lau later admitted in cross-examination that these payments were indeed in respect of sub-contracts. Insofar as the existence of sub-contracts between the parties is inconsistent with the concept of a joint venture, it casts doubt on the continuation of the joint venture either in its original form or at all.

15. In terms of the joint venture as originally agreed between the parties it is common ground that the defendant was responsible for providing the plaintiff with fabrics for manufacturing, whilst the plaintiff was responsible for manufacturing, supplying accessories and deliveries. The defendant later apparently assumed responsibility for some accessories as well. Despite this apportionment of responsibilities it emerged from the figures that the defendant's expenditure on deliveries was many times that of the plaintiff, and this was eventually accepted by Mr. Lau in cross-examination.

16. I find it difficult to evaluate the precise status of the contractual relationship between the two parties in the months following their original joint venture, which apparently commenced sometime in the latter half of September 1995. The defendant has declined to call evidence, and in cross-examination the evidence of Mr. Lau for the plaintiff was verbose, sometimes contradictory, and often missed the point of the question, giving frequent rise to tedious repetition.

17. I do however conclude without difficulty that the parties' contractual relationship changed after its inception. There are several indications of this change; the defendant's payments to the plaintiff for what Mr. Lau admitted were sub-contracts; the heavy disparity in delivery costs borne by the defendant, as against those borne by the plaintiff, in an area of the original arrangement which was the plaintiff's responsibility; Mr. Lau's admission in cross-examination that he failed to give the defendant any documents to support his costs of production, although those costs were necessary for estimating profit for distribution.

18. I do not find that the plaintiff assigned its interest in the five MacHan agreements to the defendant, neither by way of the letter of 12 October 1995 nor otherwise. I do however find it probable that by December of that year, when the sub-contract receipts were issued by the plaintiff for the defendant's payments, the nature of the agreement between the parties had fundamentally changed. Such a change short of assignment would not be inconsistent with the evidence of Ms. Chan and Mr. Ko of Mr. Lau's continued involvement with MacHan. Bearing in mind that the eventual quantification of the respective costs of production showed the defendant's costs to be more than twice those of the plaintiff with only an equal share in profits, it is likely that the defendant insisted on a change in the arrangements and the plaintiff acquiesced.

19. I do not however need to speculate. I am satisfied that the original joint venture between the parties did not survive the end of 1995. I have no precise idea what the new arrangement was, and on the evidence I have no way of knowing. It suffices that the plaintiff's claim in this interpleader is based on a distribution of the money in court on the terms of the original joint venture. The plaintiff has failed to discharge its burden of proving that those terms were binding at the material time, and it must therefore fail. There will be judgment for the defendant in the issue with costs and a certificate for counsel. The money paid into court on the interpleader summons should be paid out to the defendant in the issue.