FECO DEVELOPMENT CORPORATION v. BONNY FORWARD CO LTD

HCA 1465/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1465 OF 2005

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J U D G M E N T

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THE CLAIM

1.  The present action was commenced by the Plaintiff in July 2005, by which the Plaintiff claimed against the Defendant for the balance alleged to be outstanding under an agreement signed between the parties dated 4 January 1999.  That agreement was referred to by the parties as the "Termination Agreement" and I shall adopt this terminology in this Judgment.  The Termination Agreement was in Chinese, and was signed by one Mr Kenneth Pin Chang ("Kenneth Chang" or "Mr Chang") on behalf of the Plaintiff and Mr Chow Chi Ming ("Louis Chow" or "Mr Chow") on behalf of the Defendant.  The Defendant is named "Party A" and the Plaintiff "Party B" to the Termination Agreement.  For ease of reference, I set out the Termination Agreement below:

“解除合作協議書

甲方：環進有限公司

乙方：匯格開發股份有限公司

                甲乙雙方曾協議合作開拓中國市場，發展餐飲設備業務。經甲方代表周志明與乙方代表張克斌會談後，甲、乙雙方在友好協商情況下，達成下列協議。現訂立本協議書，以便共同遵守:

(一) 甲、乙雙方確認即時終止過往的合作協議。

(二) 甲方支付陸拾萬美元給乙方，換取乙方終止合作協議時所放棄的全部權益。

(三) 本協議書第(二)條款的陸拾萬美元分兩期支付。第一期三拾萬美元在1999年3月31日前支付， 第二期三拾萬美元在1999年9月30日前支付。第二期的款項自4月1日開始，以月息0.8%計算利息，直至支付款項為止。

(四) 甲方可在每期支付日前，以書面向乙方要求延期付款。延長日期不得超過原付款日的六個月。在這其間，延期的款項以月息1%計算利息。

(五) 甲方清付本協議書第(二)條所述款項及第(三)條、第(四)條所述利息後，甲、乙雙方同意就此互不拖欠。

(六) 本解除合作協議書一式兩份，甲、乙雙方各執一份。

 

  

   

___________________	___________________
甲方代表簽字及蓋章 日期:	乙方代表簽字及蓋章 日期: Jan 4 1999”

2.  As may be noted from the terms of the Termination Agreement reproduced above, it was agreed between the parties that they would immediately terminate the "Co-operation Agreement" previously made between them.  It is not disputed that the "Co-Operation agreement" mentioned in the Termination Agreement referred to a previous agreement signed between the parties on 18 October 1993, as supplemented by a memorandum dated 24 February 1994 signed between them (which dealt with various matters relating to capital injection into a company called B&F Corporation ("B&F" or simply "the Company")).  B&F was a company incorporated in Western Samoa in which each of the Plaintiff and the Defendant owned 50%.  The Company was used by the parties as their joint venture company to carry on a business in Mainland China ("PRC" or "China") in the trade of kitchenwares and equipment.  I shall deal with this joint venture or co-operation between the parties in more detail in the latter part in this Judgment.

3.  Under the Termination Agreement, the Defendant agreed, inter alia, to pay to the Plaintiff the sum of US$600,000 (to be paid by 2 installments), and in return the Plaintiff agreed to give up all its interests and rights under the Co-operation Agreement upon its termination (“換取乙方終止合作協議時所放棄的全部權益”).   

4.  It is not disputed that between February 2001 and January 2005 the Defendant made part payment under the Termination Agreement in the total sum of US$135,000.  Accordingly, it is the Plaintiff's case that a principal sum of US$465,000 is still outstanding.  Moreover, as the Termination Agreement expressly provides for the interest rates applicable for delayed payment, the Plaintiff claims interest on the outstanding balance at the contractual interest rate provided in the Termination Agreement.  The Plaintiff's claim is hence a simple claim based essentially on the terms of the Termination Agreement.

5.  When the Defence was originally filed in September 2005, the principal lines of defence are basically that "Kenneth Chang had no authority to sign the Termination Agreement for the Defendant (sic.)"; alternatively that the Termination Agreement "must be void for lack of consideration, or otherwise for legal irregularities...". 

6.  These lines of defences were entirely removed by an amendment made almost 5 years later in June 2010.  In June 2010, the Defence was amended and for the first time the Defendant alleged that it was induced by certain representations ("the alleged representations") made by Kenneth Chang to Louis Chow into signing the Termination Agreement ("the Misrepresentation  defence").  Paragraph 5(j) of the Amended Defence and Counterclaim pleaded the representations allegedly made by Kenneth Chang as follows:

"In and about end of 1998, due to worldwide market slump, the operations of the Company were poor.  In order to induce the Defendant into signing the Termination Agreement, Kenneth Chang represented to [Louis Chow] that:

(I)  the Plaintiff and/or its associated companies ("Group") intended to totally retreat from PRC and requested to terminate their co-operation with the Defendant;

(II)     the Defendant could use cash as a "pay-out" to persuade the Plaintiff's other shareholders to agree to withdraw from the PRC market and thus to cease competition with the Defendant; and

(III)  Kenneth Chang was confident that the Plaintiff's shareholders would accept the proposal to completely withdraw from the PRC given that the Plaintiff only had one member of staff taking care of maintenance work in the PRC."

7.  There were no particulars given in the Amended Defence and Counterclaim as to exactly where, when and how the alleged representations were made.  It was alleged that the alleged representations were false "in that the Plaintiff and/or the Group and/or Kenneth Chang did not intend to retreat from the PRC and in fact did not eventually retreat from the PRC".  The misrepresentations were alleged to have been made by Kenneth Chang fraudulently, alternatively recklessly.

8.  By the time the Misrepresentation defence was first raised in the Amended Defence and Counterclaim, it was more than 11 years after the signing of the Termination Agreement.

9.  In the Amended Defence and Counterclaim, two alternative pleas were introduced (see, paragraph 5(s) and 5(t)) by way of defence to the Plaintiff's claim.  The first was to plead that "if there was no misrepresentation, which is denied, the agreement to terminate the relations between the Plaintiff and the Defendant was made partly orally and partly in writing... it was an express oral term of the agreement that in consideration of the Defendant making the payments as provided for in the Termination Agreement, the Plaintiff and/or the Group and/or its agents would retreat from the PRC market and cease all competition with the Defendant therein ("Express Oral Term")" ("the Express Oral Term defence").  The second alternative plea was to say that "[i]t was an implied term of the agreement to terminate the relations between the Plaintiff and the Defendant that the Plaintiff and/or Kenneth Chang would have an obligation to do all that is necessary for carrying out its part of the agreement, namely procuring the Plaintiff and/or the Group to withdraw  from the PRC and to cease competition with the Defendant ("Implied Term").  Such an obligation is to be implied as a matter of law under/or to give business efficacy to the Implied Term and/or to give effect to the obvious intention of the parties" ("the Implied Term defence").  It was further pleaded that the Plaintiff had breached the Express Oral Term and the Implied Term by participating in an exhibition held in Shanghai (known as "Hotelex Shanghai 2005") between 6 to 9 April 2005, where representatives from the Plaintiff were allegedly working in a booth dealing in kitchen equipment. By reason of the breach, so the Defendant says, the Plaintiff had evinced an intention not to be bound by the Termination Agreement and the Defendant by conduct had accepted the Plaintiff's repudiation by ceasing payments to the Plaintiff (see, paragraphs 5(u) to (w) of the Amended Defence and Counterclaim).

10.  At trial, Miss Elizabeth Cheung, counsel for the Defendant, has advanced various arguments on the Misrepresentation defence and the Express Oral Term defence.  She did not appear to be very keen in pursuing the Implied Term defence, and very little arguments were made by her on that defence.  I think that this approach was wise on Miss Cheung's part, for if she should succeed in the Misrepresentation defence or the Implied Term defence, she would not need the Implied Term defence at all.  On the other hand, if she should fail on those other defences, it is difficult to see how the Implied Term defence could save her case.  I shall return to this point when I consider the various defences in more detail.

THE ISSUES

11.  As I see it, the following issues are raised in the present case:

(1)  the Misrepresentation defence:

(i) whether the alleged representations were made by the Plaintiff (allegedly through Kenneth Chang)? 

(ii) if the alleged representations were made, was the Defendant induced by them to enter into the Termination Agreement?

(iii)  were the alleged representations false?

(iv)  if the answers to (i), (ii) and (iii) are "yes", were the alleged representations made fraudulently or recklessly, as alleged by the Defendant?

(v) what are the legal consequences to follow if the Misrepresentation defence is established?

(2)  The Express Oral Term defence:

(a) whether the Termination Agreement was an agreement made partly orally and partly in writing?

(b) if the Termination Agreement was an agreement made partly orally and partly in writing, what were the oral terms of the agreement?  In particular, was the Express Oral Term a term of the Termination Agreement?

(c) was the Plaintiff in breach of the Express Oral Term?

(d) was the Defendant entitled to rescind the Agreement by accepting the Plaintiff's alleged repudiation?

(e) what are the legal consequences to follow if the Express Oral Term defence is established?

(3)  The Implied Term defence:

(a) was the Implied Term alleged by the Defendant a term to be implied into the Termination Agreement?

(b) was the Plaintiff in breach of the Implied Term?

(c) was the Defendant entitled to rescind the agreement by accepting the Plaintiff's alleged repudiation?

(d) what are the legal consequences to follow if the Implied Term defence is established?

WITNESSES

12.  At trial, Kenneth Chang and Louis Chow gave evidence on behalf of the Plaintiff and the Defendant respectively.  The Plaintiff also called Su Hsin Chih ("David Su") to give evidence on its behalf.  David Su's evidence is however peripheral only.  This is because, on his own admission, he has no personal knowledge of the relevant negotiations that led to the signing of the Termination Agreement.  His evidence was mainly focused upon a meeting that took place on 8 May 1998.  

13.  I have carefully observed the manner by which the various witnesses gave their evidence before me.  As Miss Cheung rightly submitted, as a trial judge I have the advantage of receiving the evidence at first‑hand, and enjoy the privilege of having "the whole of the evidence unfolded in its living state" in my presence: see, Ting Kwok Keung v Tam Dick Yuen (2002) 5 HKCFAR 336, para 42.  However, I am also keenly aware of the limitation of discerning "from a witness' demanour, or the tone of his voice, whether he is telling the truth" (see, "Discretion", a paper read by Mr Justice MacKenna at University College, Dublin, 21 Feb 1973, printed in the Irish Jurist, vol IX, new series, p 1).  As Lord Devlin observes, it is "the tableau that constitutes the big advantage, the text with illustrations, rather than the demeanour of a particular witness" (see: Patrick Devlin, The Judge, OUP, 1979 at p 63).  Even the advantage of the "tableau" that Lord Devlin speaks of may be seriously limited by the fact that, as in the present case, the witnesses were required to recall events that occurred many years ago, when memories naturally would have lapsed.  In a case of this sort, it is understandable that with failing memories, witnesses may sometimes contradicted themselves, particularly on matters of peripheral relevance, as they tried to recall in the box events that happened decades ago.  I think I must give allowance to witnesses' failings in this regard, and what might appear to be a contradiction may in fact be no more than a confusion in recollection.  In my judgment, in a case such as the present, it is the contemporaneous documents, the undisputable conduct of the parties, and the inherent probabilities that provide a more reliable pointer to the truth than the failing memories of the witnesses. Accordingly, in coming to my conclusion in this case, I have put more reliance on matters of inherent probabilities, contemporaneous documents, and indisputable conduct in my assessment of the evidence.  As pointed out before I have also observed the demeanour of the witnesses closely, and in evaluating their evidence, I have also taken that into account.  But I have placed more reliance on the former than the latter.

14.  In her closing submission, Miss Cheung asked me to disbelieve the oral evidence of Kenneth Chang, giving various examples of his contradicting himself on some matters, eg as to when his company - a company by the name "Feco International" that operated in the USA. - lost its agency with the Plaintiff (and an associated company in Taiwan that had a similar name, namely "Feco Corporation").  Initially Kenneth Chang told me that his company acted as the agent of the Plaintiff and Feco Corporation until one Larry Law, a fellow shareholder of the Plaintiff, moved to the USA about 20 years ago.  Kenneth Chang later said that the agency was lost sometime in the 2000s (which would be just about 10 rather than 20 years ago), but upon further clarification by me, he confirmed that the agency was lost in the 1990s. Miss Cheung pointed to this part of the evidence to submit that Kenneth Chang was being inconsistent in his evidence, which casted doubt on his credibility. I am unable to agree with Miss Cheung.  I am satisfied that Kenneth Chang was, on the whole, an honest witness.  Such inconsistencies as one may find in his oral testimony are, in my view, due to the confusion that arose from having to recollect events that happened many years ago.  I will deal with some of these events later.  Such confusion, in my judgment, was perfectly understandable, and I am not prepared to hold it against Mr Chang as undermining his credibility.

15.  Miss Cheung submitted that Kenneth Chang, who had been living in US for a long time, was clearly well-versed in English and she pointed to the instances when Mr Chang plainly understood the questions asked of him and started answering the questions without waiting for interpretation.  Miss Cheung suggested that Mr Chang chose to give evidence in Mandarin "so as to benefit from having more time to mull over the questions posed to him".Again, I am unable to accept Miss Cheung's suggestion.  A witness has the right to give evidence in such language as he finds most comfortable.  Merely because Mr Chang understood English does not mean that he found it as the language that he was most comfortable with.  Many witnesses who appear before this Court can understand English but choose to use other languages in giving evidence.  This Court does not penalize these witnesses for preferring one language to another, notwithstanding that it may appear to the Court that the witness should not have problem communicating in the language that is used by counsel in cross-examining him.

16.  It is also true that compared with Kenneth Chang, Louis Chow appeared to be more composed and calm in his evidence.  That said, my impression of Louis Chow is that he was a very sophisticated witness, and a person who was able to control his emotions well.  He was very cautious in giving his evidence.  I do not hold these against him, but I certainly do not form an impression of him as a "simple and straightforward witness", as Miss Cheung would like me to find him.  I find it difficult to judge the honesty of this witness from his demeanour, and even with the benefit of seeing his testimony "in action" - as it was played out in Court - hence my remark above that I have placed much more reliance on inherent probabilities, contemporaneous documents and indisputable conduct.  Testing Mr Chow's evidence against these markers, I have no doubt that Mr Chow's evidence is not to be believed.  I prefer Kenneth Chang's evidence to his.

THE BACKGROUND FACTS

17.  Based on the evidence before this Court, I find the following as facts. These background facts are in any event largely undisputed.

18.  The Plaintiff is a Taiwan company and Kenneth Chang is one of its shareholders.  Mr Chang was a director of the Plaintiff during the period between 1987 and 1999.  He moved to the USA in the late 60s and had lived there for more than 40 years.  He lived in San Francisco, California.

19.  In about 1980, the Plaintiff was set up by Mr Chang and a number of former colleagues (who worked with a company called Morn Sun Corporation).  The shareholders of the Plaintiff included Kenneth Chang, David Su, Larry Law, Allen Wu, Chang Ming Hsiung and Benson Wang.  As noted above, there was also an associated company set up in Taiwan called Feco Corporation. For convenience, in the paragraphs below, I will refer to the Plaintiff and Feco Corporation collectively as "Feco Taiwan".

20.  Kenneth Chang met Louis Chow in Taiwan when he was still working with Morn Sun Corporation.  After that meeting, they became acquainted with each other, and the evidence suggests that thereafter for a long period of time (until sometime in 2003 or 2004), they were good friends and their families were also quite close.  For example, when Louis Chow's wife gave birth to their children in San Francisco in 1987 and 1990, Kenneth Chang and his wife had helped them out in various ways.  Although Mr Chang lived and worked in USA and Mr Chow in Hong Kong, they would communicate with each other regularly, by phone and later, also by fax.

(a) In around 1985, Kenneth Chang suggested to Louis Chow that they could set up a company in Hong Kong to carry on business similar to that of the Plaintiff.  Louis Chow agreed to the suggestion.  Accordingly the Defendant was established and carried on business in the trading and supply of kitchen equipment to food‑related industries in Hong Kong and China.  At the time of its establishment, Louis Chow held 30% and Kenneth Chang 15% of the shares of the Defendant.  The rest of the shareholdings were held by a Mr Leung (a Hong Kong resident), a Mr Carl Chen and Mr Alan Fredette (who are both US residents).

21.  Kenneth Chang himself ran a company called Feco International in the USA, whose business was to act as an agent of various companies, including Taiwan Feco and some other companies in Thailand and Malaysia.  After the Defendant was established, Feco International also acted as the agent for it as well.  According to Kenneth Chang, whose evidence I accept, as agent Feco International provided services in sourcing, shipping, purchasing and paying import duties to its principals, in return for a ex factory commission of 5%. 

22.  There were subsequent changes in the shareholding of the Defendant.  In about 1990, one of the shareholders, namely Mr Leung, decided to emigrate and desired to sell his shares in the Defendant.  Kenneth Chang then suggested to the Plaintiff to take up the shares of Mr Leung to become a shareholder of the Defendant.  At that time, the Chinese market was opening up and Taiwan Feco was interested in exploring the Chinese market.  The Defendant had been carrying on business in the Chinese market and becoming a shareholder of the Defendant would provide Taiwan Feco with a stepping-stone to seek out opportunities in that market.

23.  In the end, it was agreed that the Plaintiff would acquire 15% of the shares in the Defendant (with the remaining 5% reserved for the employees).  The Plaintiff was to pay US$120,000 for acquiring the 15% shares.

24.  Sometime in the 1990s, after Larry Law emigrated to USA (and became a neighbour of Kenneth Chang in San Francisco), Mr Chang's company (ie Feco International) lost its agency that it had with Taiwan Feco.  Kenneth Chang told me that his relations with other shareholders of the Plaintiff were "not as good as before".  He confided this to Louis Chow.  The two gentlemen were clearly on good terms at the time.

25.  By 1993, the Plaintiff was a 15% shareholder of the Defendant, and both the Plaintiff and the Defendant were carrying on the same line of business and trading in the same products.  The Plaintiff was exploring the Chinese market and it is clear that the two companies were going to directly compete with each other in the Chinese market.

26.  So Kenneth Chang came up with the idea that the Plaintiff and the Defendant should co-operate with each other by setting up a joint venture to exploit the Chinese market.  The idea was accepted by both the Plaintiff and the Defendant.  In my view, the fact that Kenneth Chang's idea was accepted by the Plaintiff is an indication that, although Kenneth Chang's relation with the other shareholders might not be as good as before, the relationship was not as bad as Ms Cheung submitted.  The relation, I think, was kind of luke-warm, but Kenneth Chang was clearly still on speaking terms with his fellow shareholders, who were prepared to accept his suggestion or advice when it made sense to them.

27.  The parties decided to set up a West Samoan company, namely B&F, and they signed a Co-operation Agreement dated 18 October 1993 (which included some annexures).  Under the Co‑operation Agreement B& F was to be used as a joint venture vehicle by the parties to develop the Chinese market, and it was agreed that each of the Plaintiff and the Defendant was to have an equal interest in B&F. 

28.  In order to acquire 50% interest in B&F, the Plaintiff was required to pay US$500,000 for the shares in B&F.  It was agreed that the Plaintiff would give up its 15% shareholding in the Defendant.  The US$120,000 originally paid (or to be paid) by the Defendant for the 15% shareholding in the Defendant would be appropriated as part‑payment for the 50% shares in B&F.  Accordingly the Plaintiff would only need to pay a sum of US$380,000 for acquiring the 50% shares of B&F, but it would cease to be a shareholder of the Defendant.  It was further agreed that a sum of US$10,000 would be retained in Taiwan for B&F's future use, and the balance of US$370,000 be remitted by the Plaintiff to pay for the 50% shareholding in B&F.  This arrangement was evidenced by a memorandum dated 24 February 1994.  The Plaintiff duly made payment of the sum of US$370,000 and became a 50% shareholder of B&F.

29.  It may be remembered that when Mr Leung decided to dispose of his 20% shares in the Defendant, it was agreed that the Plaintiff would take up 15%, with the remaining 5% reserved for the employees.  With the Plaintiff giving up its 15% holding in the Defendant, it was agreed between Kenneth Chang and Louis Chow that the 20% shares of Mr Leung would be split between them. Precisely how that was done is not clear from the evidence.  What is not disputed, for present purposes, is that after the Plaintiff had given up its shareholding in the Defendant, Kenneth Chang's shareholding in the Defendant was increased from 15% to 30%, and the shareholding of Louis Chow was increased from 30% to 35%.  As the two of them controlled 65% of the shareholdings of the Defendant, Kenneth Chang and Louis Chow together had effective control of the Defendant.

30.  The evidence before me suggests that B&F in fact did not carry on substantive business in China.  Louis Chow gave evidence (and I accept his evidence in this regard) to the effect that in actual fact, B&F was merely used as a kind of "booking entity".  Because of the PRC restrictions on foreign companies carrying on business in China, it was not convenient for B&F to carry on business in its own name.  Instead, business was carried on by or through various "nominee companies" ("人頭公司") operated by the Plaintiff and the Defendant respectively.  According to Louis Chow, these nominee companies would set aside a certain portion of their revenue or profits from the accounts as being attributable to B&F.  These revenues or profits would then be channeled back to B&F for distribution to B&F's shareholders as its profits.  No detailed evidence was adduced by the parties as to how this was actually done.  No accounts of B&F was produced.  However, as Louis Chow's evidence in this regard was not effectively challenged, I see no reason why I should not believe it.

31.  Although it is not disputed that each of the Plaintiff and the Defendant holds 50% of the shareholding in the Defendant, the Defendant has never actually issued any shares.

32.  The above background facts are, as said, largely undisputed.  What is more controversial are the events in 1997 and 1998, when the parties engaged in negotiation to terminate their co-operation in B&F.

TERMINATION OF CO-OPERATION

33.  In the first few years, the joint venture of the Plaintiff and the Defendant was quite successful, and B&F was making profits for its shareholders.  However, the global economy took a downturn in late 1997, and the business of B&F slumped.  According to Louis Chow, there were differences between the Plaintiff and the Defendant over the business of B&F.

34.  According to Louis Chow's witness statement (which he adopted as evidence-in-chief), in about end of 1998 Kenneth Chang made a proposal to him that he would suggest to the Plaintiff to terminate the co‑operation with the Defendant in the PRC.  Kenneth Chang's proposal, according to Louis Chow, was that they could use money or cash pay‑out to entice or induce the Plaintiff's shareholders to agree to the Plaintiff withdrawing from the Chinese market, and not compete with the Defendant whether directly or indirectly. Kenneth Chang allegedly told him that the other shareholders did not know about this at the time, but if his proposal was thought viable, he would try to persuade them to accept it.  

35.  It is important to note that taking Louis Chow's evidence-in-chief at its highest, he did not actually claim that Kenneth Chang had told him that the Plaintiff intended to withdraw from the Chinese market, and not to compete with the Defendant.  All that he alleged was that Mr Chang had made a proposal that they (which I understand to mean the Defendant) could use money or cash pay-out to induce the Plaintiff's shareholders to agree to the Plaintiff withdrawing from the market.  This is not quite the same as saying that Mr Chang had made a representation to him that the Plaintiff agreed or intended to withdraw from the Chinese market upon ceasing co-operation with the Defendant. It is also not clear whether the proposed money or cash pay-out was to be made to the Plaintiff, or to the shareholders of the Plaintiff.

36.  As pointed out above, in his evidence in chief, Louis Chow alleged that the proposal made by Kenneth Chang was made to him in about end of 1998. No particulars were given in Louis Chow's witness statement as to how this proposal was made - whether at a personal meeting, or during a telephone conversation, or in some other way.  At trial, it was suggested by the Defendant that the matters set out in paragraph 34 above were said by Kenneth Chang to Louis Chow during a number of telephone conversations in 1998 and when they met each other on the following occasions:

(a)at a meeting in Shanghai during a training event sponsored by two kitchenware suppliers between 20 and 23 April 1988;

(b)     at a meeting in Chicago in May 1998 during an industry convention; and

(c)at a meeting in Shanghai in November 1998 when Mr Chang and Mr Chow stayed in the same hotel.

The occasions mentioned in (a) and (b) above were plainly not occasions that took place in about end of 1998, as pleaded in paragraph 5(j) of the Amended Defence and Counterclaim.

37.  It is not in dispute that on 8 May 1998, there was a meeting held which was attended by Louis Chow, David Su, Benson Wang, and Chang Ming Hsiung. Kenneth Chang was not present at this meeting.  According to him, he was only informed of the meeting by the other shareholdings of the Plaintiff in about October 1998.

38.  At the meeting of 8 May 1998, there were discussions about the Plaintiff selling its interest in B&F to the Defendant.  The Plaintiff offered to sell its interest to the Defendant at the price of US$1 million.  Minutes of the meeting (the "Minutes") were drawn up by the Plaintiff and provided to Louis Chow shortly after the meeting.  The Minutes purported to record that Mr Chow had indicated that he had authority to make a counter‑offer of US$900,000.

39.  Kenneth Chang was informed of the meeting by Louis Chow shortly after it was held.  It may be noted that at the time Kenneth Chang was a shareholder of both the Plaintiff and the Defendant.  His relationship with the other shareholders of the Plaintiff was, as I found above, luke‑warm; but his relationship with Louis Chow was quite good at the time.  Louis Chow discussed with Kenneth Chang about what was discussed at the meeting of 8 May 1998.  By a letter dated 11 May 1998, Mr Chow wrote to Chang Ming Hsiung to give his comments on the Minutes.  In his letter, Mr Chow sought to point out the various aspects of the Minutes which he claimed did not accurately reflect what took place at the meeting.  For example, he pointed out that he had made it known to the meeting that he would be able to make decision on behalf of the Defendant provided that it was within his scope of authority. He further added that although he did make a counter-proposal at the meeting for US$900,000, he had never indicated that this counter-proposal was within the scope of his authority to make on behalf of the Defendant. 

40.  The letter dated 8 May 2011, according to Louis Chow, was drafted with the help of Kenneth Chang.  Kenneth Chang agreed – although he was not sure about this – that he might have helped Louis Chow in drafting the letter and given him suggestions on how to respond to the Plaintiff. 

41.  According to David Su, after the meeting of 8 May 1998, he had made numerous verbal requests to Louis Chow to ask him to put in writing the Defendant's counter-offer.  Mr Chang's evidence, which I accept, is that both parties were desirous of terminating their co‑operation in China, and the only issue between them was the price.

42.  At a shareholders' meeting of the Plaintiff held on or about 11 October 1998, it was resolved that Kenneth Chang be authorized to negotiate with the Defendant, on behalf of the Plaintiff, the sale of the Plaintiff's shares in B&F, and to sign the relevant agreement to terminate the co-operation between the Plaintiff and the Defendant.  This is evidenced by a written Letter of Authorization executed by the Plaintiff's board of directors dated 11 October 1998. 

43.  The fact that Kenneth Chang was authorized by the Plaintiff's board to negotiate with the Defendant supports my view above that although the relation between Kenneth Chang and the Plaintiff was only luke‑warm, it was not as bad as Miss Cheung would like me to hold.  There was still a degree of trust between the Plaintiff and Kenneth Chang, or else the Plaintiff's shareholders would not have resolved to appoint Mr Chang to conduct the negotiation (and to sign the relevant termination agreement) on the Plaintiff's behalf.  Mr Chang stated in his evidence that he believed that the Plaintiff decided to authorize him to negotiate with the Defendant because he was also a shareholder of the Defendant, and it was thought that it would be easier for him to talk to Louis Chow and conclude a deal.

44.  Eventually, after some further negotiation, the Termination Agreement was signed.  Louis Chow admitted at trial that he himself prepared the Termination Agreement (by using an electronic writing pad as he did not know how to type Chinese), affixed the chop of the Defendant and signed the same before sending it over to Kenneth Chang for signature on behalf of the Plaintiff.  Mr Chow however insisted that the terms of the Termination Agreement were proposed by Kenneth Chang and he was merely the scribe.  He claimed that the agreement by the Plaintiff to withdraw from the Chinese market was a very important condition to the Termination Agreement, and that the reason why it was not included in the written document prepared by him was because Kenneth Chang had told him that in order to make the Plaintiff accept the same, it would be better for the written document not to expressly mention this as a condition.  Mr Chow claimed that he had trusted Kenneth Chang because he felt that it was also in the interest of Kenneth Chang to see to it that the Plaintiff would withdraw from the Chinese market.  As Kenneth Chang was no longer the agent for the Plaintiff/Taiwan Feco, but was still the agent of the Defendant, Kenneth Chang stood to benefit more by the Plaintiff’s withdrawal from the Chinese market, as his company would be able to earn more commission by serving as the Defendant’s agent in importing US kitchenwares into the PRC.  For this reason, according to Louis Chow, he trusted that Kenneth Chang would be able to make the Plaintiff retreat from the Chinese market.  He also trusted Mr Chang as he was a friend known to him for many years.

45.  During cross examination, Kenneth Chang steadfastly denied that he had ever represented to Louis Chow that the Plaintiff intended or agreed to withdraw from the Chinese market.  According to Mr Chang, the Plaintiff never intended to withdraw from the Chinese market, and he never told Mr Chow that this was the intention of the Plaintiff. 

DISCUSSION

The Misrepresentation defence

46.  I have no hesitation in holding that the Defendant has failed, on the evidence, to establish the Misrepresentation defence.  In my judgment, the Defendant has failed to establish that the Plaintiff had made the alleged representations, whether through Kenneth Chang or at all.

47.  As has been noted above, taking the evidence of Louis Chow at its highest, all that he was saying, by way of his evidence-in-chief, was that Kenneth Chang had made a proposal to him to use money or cash pay‑out to entice or induce the shareholders of the Plaintiff to agree to the Plaintiff’s withdrawal from the Chinese market.  Even if Kenneth Chang had made such a proposal, this was not, without more, a representation by him that the Plaintiff in fact intended to retreat from the Chinese market.

48.  That Louis Chow allegedly trusted that Kenneth Chang would be able to procure the Plaintiff to withdraw from the Chinese market is neither here nor there.  Whether this was wishful thinking on Mr Chow’s part, or whether he had good reasons so to think, is also neither here nor there.  Mr Chow’s own belief as to what Kenneth Chang would be able to do, and what motivation he might otherwise have for doing what Mr Chow hoped he would do, is in my judgment wholly irrelevant.  What is relevant is what representation, if any, had been made to Mr Chow regarding the intention of the Plaintiff.  The evidence before this Court does not show that any such representation had been made.

49.  I accept, of course, that the intention of a person is as much a fact as his digestion (see, Edgington v Fitzmaurice (1885) LR 29 Ch D 459, Glory Gold Ltd v Star Play Development Ltd [2008] 2 HKLRD 416).  If a representation is made as to a person’s present intention, it is capable of amounting to a representation of fact.  But to make a proposal on how another person (A) might be convinced to take a particular course is not the same as making a representation that A has the present intention of taking that particular course.  To say that A might be persuaded to do something is very different from saying that he has the present intention of doing it.

50.  It seems to me that even taking Louis Chow’s evidence at its highest, the Misrepresentation defence cannot get off the ground.  No actionable misrepresentation has been shown, let alone proved, on the evidence.  There is then no need for me to further consider the other elements of the Misrepresentation defence (ie inducement, reliance etc).

51.  In any event, I accept Kenneth Chang’s evidence that he had never represented to Louis Chow that the Plaintiff intended to withdraw from the Chinese market after ceasing its co-operation with the Defendant.  I find as a fact that no such representation had been made by Mr Chang to Louis Chow.

The Express Oral Term defence

52.  I also have no hesitation in rejecting the Express Oral Term defence.

53.  As a starting point, I accept Miss Cheung’s submission that she is not prevented by the parol evidence rule to rely on extrinsic evidence to show that the Termination Agreement was intended by the parties as an agreement partly oral and partly in writing.  Miss Cheung must be right when she cited Chitty on Contracts, Vol 1, 30^th ed, para 12-097, where the judgment of Lord Russell CJ in Gillespie Bros & Co v Cheney, Eggar & Co. was quoted as follows:

“although when the parties arrive at a definite written contract the implication or presumption is very strong that such contract is intended to contain all the terms of their bargain, it is a presumption only, and it is open to either of the parties to allege that there was, in addition to what appears in the written document, an antecedent express stipulation not intended by the parties to be excluded, but intended to continue in force with the express written agreement.”

54.  The parol evidence rule only becomes relevant if the Court, after considering the evidence, is satisfied that the parties intended the written document to contain the whole of the contractual bargain between them.  It is only after the Court has come to such conclusion that the parol evidence rule would operate to prevent extrinsic evidence from being admissible to contradict the written document.

55.  Although the Defendant is not prevented by the parol evidence rule to rely on extrinsic evidence, when all the evidence is examined, I have no doubt that the Express Oral Term does not constitute part of the terms of the Termination Agreement.

56.  As a matter of inherent probabilities, there does not appear to be any commercial reason why the Plaintiff should be motivated to agree to a withdrawal from the Chinese market when it ceased co-operation with the Defendant.  By 1999, the Plaintiff had already accumulated several years’ experience doing business in kitchenware and equipment in the PRC.  The Defendant has offered no evidence to show why the Plaintiff would choose to give up that market upon terminating its joint venture with the Defendant.

57.  Moreover, the conduct of the Defendant is, in my judgment, inconsistent with its case that the Plaintiff’s withdrawal from the Chinese market had all along been an important term of the proposed transaction.

58.  I note that neither in the Minutes of the meeting held on 8 May 1998, nor in the letter dated 11 May 1998, was there any reference at all to the Plaintiff withdrawing from the Chinese market.  If the question of the Plaintiff’s withdrawal from the Chinese market was something so important to Louis Chow, it is surprising that he would have failed to raise it for discussion in the meeting of 8 May 1998; and if the Minutes had somehow omitted to record discussion of this matter, there was no reason why Louis Chow should fail to raise the omission in his letter dated 11 May 1998.  By his letter dated 11 May 1998, Mr Chow took pains to identify the matters that he claimed had not been accurately reflected by the Minutes.  Whether or not the letter was drafted with the assistance of Kenneth Chang, if the matter of the Plaintiff’s withdrawal were discussed at the meeting but omitted from the Minutes, there was no reason why Mr Chow would have failed to allude to the omission in his letter of 11 May 1998.   

59.  The contemporaneous documents do not appear to support the Defendant’s case – indeed nowhere in the relevant contemporaneous documents or correspondences was there any reference at all to the Plaintiff’s intention or agreement to withdraw from the Chinese market upon the termination of the parties’ co-operation in the PRC.  If the matter (of the Plaintiff’s withdrawal from the PRC market) was indeed so important – as Mr Chow purported to emphasize while giving evidence before this Court – it is extraordinary that the same would have received no attention at all in any of the contemporaneous documents or correspondences.

60.  On the question of contemporaneous documents and correspondences, an argument was raised by Miss Cheung in her closing submission that it would be convenient for me to deal with at this point.  Miss Cheung complained in her closing submission that “there may have been incomplete discovery on the part of the Plaintiff” because, at one point in his evidence, Kenneth Chang admitted that he had written faxes to Louis Chow that was not included in the trial bundle.  Miss Cheung submitted that such faxes were prima facie discoverable by the Plaintiff, and she invited me to rely on the maxim “Omnia praesumuntur contra spoliatorem” to draw adverse inferences on the basis that the documents for which the Plaintiff failed to discover must be presumed to be unfavourable to it: see Tullett & Tokyo International Securities Ltd v APC Securities Co Ltd [2001] 2 HKC 713 at 723A-G.

61.  I have little sympathy for Miss Cheung’s argument in this regard. Kenneth Chang is not a party to this action, nor is he a director of the Plaintiff.  It has not been established that the faxes that Mr Chang said he had sent to Louis Chow was in the possession, custody or control of the Plaintiff.  More importantly, the faxes were sent to Louis Chow, and prima facie they should be in his possession, custody and control.  If those faxes have any relevance at all to the issues in the present action, Mr Chow could have easily provided the documents to the Defendant for discovery in the present proceedings.  I have no idea of the contents of the faxes, but if they were not produced by Mr Chow or the Defendant, I do not see why I should draw adverse inferences against the Plaintiff.  I would have thought that if any adverse inferences are to be drawn at all, they should be drawn against Mr Chow or the Defendant, rather than against the Plaintiff.  I am therefore unable to accept Miss Cheung’s submissions in this regard.

62.  Mr Chow admitted that it was he who prepared the Termination Agreement, although he insisted that the terms were proposed by Kenneth Chang.  Mr Chow was an experienced businessman.  If indeed the Plaintiff’s withdrawal from the Chinese market was an important condition of the deal, there was no reason why Mr Chow would have failed to mention it in the written agreement that he himself prepared (with his writing pad).  The absence of any reference at all to such a condition in the Termination Agreement strongly militates against the case of the Defendant.

63.  Under Clause 4 of the Termination Agreement, the Defendant was entitled to request for an extension of the payment date in accordance with the provision stipulated therein.  By a letter dated 29 March 1999, the Defendant made a written request, pursuant to Clause 4, to extend the time for making the first installment payment of US$300,000 from 31 March 1999 to 30 September 1999.  The Plaintiff failed to make the payment on the extended date, but made part payment in the total sum of US$135,000 during the period between February 2001 to January 2005.  Louis Chow admitted in cross-examination that the reason for the late payments was purely financial. Between January 1999 (when the Termination Agreement was signed) to January 2005 (when the last part‑payment was made), the Defendant had raised no allegation or complaint against the Plaintiff for either misrepresentation or breach. Hence there was a long period of some 6 years when the Defendant’s conduct clearly showed that it was affirming or acknowledging the validity of the Termination Agreement and its obligation to make payment thereunder.

64.  The Defendant’s explanation for such conduct was that it only discovered the alleged misrepresentation and/or breach of contract by the Plaintiff after Louis Chow was informed by one Bell Sit and Edwin Mak that representatives of the Plaintiff had participated in a trade exhibition for kitchen equipment in Shanghai held sometime in April 2005.

65.  I do not accept this explanation.  On the evidence, the Defendant was an experienced trader and operator of kitchenware business in China.  Louis Chow alleged in his witness statement that the Plaintiff had been co-operating with certain Chinese partners (called the “Pang brothers”) to operate a joint venture business in Shanghai.  He pointed to the Plaintiff’s website where it was stated that it was running a business in Shanghai.  Kenneth Chang's evidence at trial was that the Plaintiff never withdrew from the Chinese market and never intended to do so.

66.  I find that the Plaintiff had never withdrawn from the Chinese market as it never intended to do so.  The Plaintiff’s business operations in China must have been readily known to the Defendant, who was an experienced trader carrying on in the same line of business and dealing with the same products in that market.  The Plaintiff was a competitor of the Defendant and it is simply unbelievable that the Defendant was not aware of its market presence until it found out, some 6 years after the Termination Agreement was signed, that the Plaintiff had participated in a trade exhibition in Shanghai.  I found, on the balance of probabilities, that at all material time after the Termination Agreement was signed, the Defendant was well aware that the Plaintiff continued to carry on business in China and in competition with the Defendant.

67.  If indeed the Express Oral Term was a term of the Termination Agreement, the conduct of the Defendant, in seeking an extension of the payment date and subsequently making part payments thereunder, would have been inexplicable. The breach of the Express Oral Term by the Plaintiff would have been well known to the Defendant.  There would have been no reason why, instead of complaining against the Plaintiff for breach, the Defendant would have made part-payments under the Termination Agreement.  The Defendant’s conduct is hence inconsistent with its case that the Express Oral Term was part of the terms of the Termination Agreement.

68.  For these reasons, I reject the Express Oral Term defence.

The Implied Term defence    

69.  Having rejected the Express Oral Term defence, I need only say very little on the Implied Term defence.  As noted above, Miss Cheung has advanced no or little argument in support of this defence, and it is quite clear that the defence cannot possibly save the Defendant’s case.

70.  It is trite law that for a term to be implied into a contract, it must be necessary to give business efficacy to the contract so that no term will be implied if the contract is effective without it.  The term to be implied must be so obvious that “it goes without saying”: see, The Moorcock (1889) 14 PD 64, Reigate v Union Manufacturing Co [1918] 1 KB 592, Shirlaw v Southern Foundries (1926) Ltd [1939] 2 KB 206.  This principle is trite and should be familiar to every student of the law of contract.

71.  In the present case, it cannot possibly be argued that the Implied Term referred to in the Amended Defence is necessary to give business efficacy to the Termination Agreement, as it is plain that the Termination Agreement is perfectly effective without it.  To put it in another way, it cannot possibly be argued that the Implied Term is one that is so obvious that “if, while the parties were making their bargain, an officious bystander were to suggest some express provision for it in their agreement, they would testily suppress him with a common ‘Oh, of course.’” (per MacKinnon LJ in the Southern Foundries case, supra at 227).

72.  There is no merits in the Implied Term defence and I reject it.

CONCLUSION

73.  I am satisfied that, in all the circumstances of the case, the Misrepresentation defence, the Express Oral Term defence, and the Implied Term defence are, in truth, recent inventions by the Defendant.  They were only raised for the first time when the Defence was amended in June 2010, more than 5 years after the present action was commenced (in July 2005) and 11 years after the Termination Agreement was signed.  For reasons mentioned above, these defences have no merits at all and I have no hesitation in rejecting them.

INTEREST

74.  The Termination Agreement provides for certain interest rates to apply in respect of delayed payments.  I see no reason why the contractual rates should not be applied.

75.  Mr Timothy Wong, Counsel for the Plaintiff, has sought to persuade me to order interest on a compound monthly basis.

76.  I am satisfied that this Court does have “common law jurisdiction to award interest, simple and compound, as damages on claims for non-payment of debts as well as on other claims for breach of contract and in tort”: see, Sempara Metals Ltd v Inland Revenue Commissioners [2008] AC 561, para 100, per Lord Nicholls.

77.  The common law jurisdiction to award interest as damages is in addition to the Court’s statutory jurisdiction to award simple interest on debts and damages.  The two jurisdictions are separate and should not be confused: see the judgments of Lord Nicholls and Lord Walker in Sempara Metals, supra at para 99 and 164.  As is pointed out by the learned editors of McGregor on Damages, 18^th ed, at 15-067:

“The recovery of interest at common law, now established, is entirely different, and separate, from the recovery of interest under statute.”

78.  The claim for compound interest under the common law jurisdiction is hence a claim for interest as damages.  As such, the party claiming such interest must prove loss.  The ordinary rules such as the rule of remoteness of damages, the rule of the obligation to mitigate damage etc apply.  While it is “always open to a claimant to plead and prove his actual interest losses caused by late payment of a debt”, “an unparticularised and unproved claim simply for damages will not suffice.  General damages are not recoverable.  The common law does not assume that delay in payment of a debt will of itself cause damage.  Loss must be proved”: see, Sempara Metals, supra at para 94-96.

79.  A claimant for compound interest may satisfy the Court by proving that he has suffered loss in terms of the cost of borrowing money. The cost of borrowing may, subject to actual proof, include an element of compound interest.  The loss may also take the form of the loss of an opportunity to invest the moneys subject of the delayed payment, and the investment loss may also include an element of compound interest.  Circumstances may vary but the principle that loss must be proved is the same.

80.  In the present case, no attempt has been made by the Plaintiff to prove loss of interest as damages.  There is no evidence adduced by the Plaintiff of loss suffered by it, whether in terms of costs of borrowing funds, or loss of opportunity to invest the promised money, or any other loss. 

81.  That said, it must not be forgotten that the basis of the Plaintiff’s claim for compound interest is based on the contract itself.  In my judgment, where the contract expressly stipulated that monthly interest be payable, prima facie the intention of the parties was that interests were to be compounded on a monthly basis.  It would not make sense for the parties to provide for a monthly interest rate if their intention was that interests were to be computed annually instead of monthly.  And if they intended that interest be computed on a monthly basis, it seems to me plain that they intended that the interest be compounded on a monthly basis.

82.  I see no reason why this Court should not give effect to the contractual intention of the parties.  Accordingly, I accede to the Plaintiff’s request that the Defendant be ordered to pay interest, compounded on a monthly basis, for the delayed payments under the Termination Agreement.

83.  In the Statement of Claim, the Plaintiff sets out its calculation of interest (on a compound monthly basis) and the total amount claimed by the Plaintiff, with interest so calculated, is in the sum of US$1,085,910.49.  The sum included contractual interest (compounded on monthly basis) up to 29 July 2005.  The Plaintiff claims for this sum, and interest pursuant to s 48 of the High Court Ordinance.  No claim is made for contractual interest after 29 July 2005, the date of the Writ.

ORDER

84.  I order that judgment be entered against the Defendant in the sum of US$1,085,910.49.  I also order that interest be paid by the Defendant on the sum of US$1,085,910.49, at half the judgment rate, from the date of Writ until judgment. 

85.  As to costs, I see no reason why costs should not follow the event.  I would therefore make a costs order nisi that the Defendant pays the Plaintiff’s costs of this action.