KIDS WORLD LTD v. XL MACHINE LTD AND OTHERS

HCA 125/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 125 OF 2002

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J U D G M E N T

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1. XL Machine Ltd ("XL") appeals against Master Charles Wong's refusal (following a hearing on 8 April 2003) to order an account to be taken under RHC Order 43, Rule 1 of the sums due to XL from Kids World Ltd ("KW") pursuant to cl. 5 of a Deed of Agreement ("the Deed") dated 18 February 2000 and/or otherwise due to XL from KW as XL's agent.

2. Having reflected on the matter, I refuse XL's application for an account. I briefly set out my reasons for doing so.

3. I agree with Mr Pow, counsel for KW, that the summary procedure made available by Order 43 is not appropriate for this case. Order 43 is not appropriate where the parties are engaged in substantial disputes of fact which are fundamental to the manner in which any proposed account is to be taken. Such disputes of fact first need to be resolved by trial. The person conducting the account or inquiry would need guidance on how to resolve such fundamental factual disputes if the account or inquiry is to proceed smoothly. Such guidance could effectively only come after a trial judge has fully heard the parties and decided their fundamental disputes, not before.

4. By its Summons and Notice of Appeal XL seeks an account to be taken "of all sums due to XL from KW ... such account to include [4 specific] matters". At least 2 of the matters on which an account is sought give rise to disputes of fact which (in my view) should and could only be resolved at trial. Those 2 matters relate to:-

(1)	All fees and/or commissions deducted from monies received by KW or its agents from or on behalf of customers of XL (collectively, "the monies") and/or otherwise debited to XL by KW; and,
(2)	All expenses and/or costs paid on behalf of XL and deducted from the monies and/or otherwise debited to XL by KW.

5. In relation to commissions, XL alleges that KW breached its fiduciary duty as agent by deliberately and fraudulently deducting inflated commissions calculated on the basis of inflated prices of goods said to have been charged by PRC factories for the manufacture, packaging and/or shipping of the wooden toys. KW denies this. In order to determine what commission can properly be deducted by KW one must first resolve the factual dispute on whether the prices of goods have been fraudulently inflated. Fraud is not a matter that can be determined summarily, but should most appropriately be considered in the course of a full trial. Nor do I believe that it is pragmatic or workable to hive off the question of whether prices were inflated to an inquiry by a master and the question whether (if prices were inflated) inflation was fraudulent to a trial before a judge.

6. In relation to fees, KW claims to have been entitled to charge development fees in respect of goods developed by it. XL disputes this. In order to determine what fees can properly be deducted by KW, one must first resolve the factual and (insofar as it relates to the construction of the Deed) legal issue of KW's entitlement to charge development fees.

7. In relation to expenses paid by KW on XL's behalf or deducted by KW, factual issues would also arise which (to my mind) should best be resolved at a trial. Thus, for example, XL says that KW failed to ensure competitive pricing for goods in breach of its duties as agent. KW denies this. Further, XL accuses KW of fraudulently misrepresenting the factory cost of goods in furtherance of a conspiracy. KW similarly denies this. XL contends that KW deducted inflated cost. KW says that it did not. There is additionally a dispute as to the basis on which commission is chargeable and the meaning of "FOB Price" mentioned in the Deed. These are all questions that have to be determined at some stage, if a proper account is to be taken along the lines sought by XL. In my view, these are matters most appropriately left to the trial judge and not to the person conducting the accounting inquiry as an ancillary proceeding to the main trial.

8. In a Judgment dated 6 August 2002 in this Action, Deputy Judge Saunders in refusing summary judgment in KW's favour stated (at §16): "At the centre of the dispute between the parties is the issue as to whether payments made by Kids World to XL Machine were remittances from XL's machine's customers." I agree. KW contends that those payments were loans. Given that basic dispute at the core of this action, it does not seem sensible to conduct an account when even the true nature of the payments to be accounted for (or not) are hotly disputed.

9. In his judgment Deputy Judge Saunders was critical of the trade accounts produced by KW in support of its application for summary judgment. Such accounts tendered by KW in the past and the supporting material more recently provided (after Deputy Judge Saunders made his remarks) may or may not be in an unparticularised and unsatisfactory state. But I do not think that now ordering an account in the Order 43 sense would be the best way to address any problems with the trade accounts and supporting documents tendered. It seems to me that there exist other possible avenues (interrogatories and specific discovery (for instance)) which XL can more appropriately pursue in order to obtain such clarification of the accounts as it may reasonably require to put forward its case at trial.

10. I am not persuaded by the argument of Mr Stokes, XL's counsel, that as KW's principal XL would be entitled to an account in any event, so that the Court should have no hesitation in ordering an account sooner rather than later. In my view, the matters which I have referred to above simply make the taking of an account at this stage impractical. I do not think that the mere taking of an "ordinary account" is involved. See In re Ghyon (1885) 29 Ch D 834, at 837; In re Bowen (1882) Ch D 538, at 542-3. In my view, this is instead a case where the way an account is taken depends on whether (and to what degree) XL succeeds in the trial of its counterclaim.

11. Order 43 provides for the taking of an account which is a process of inquiry. I agree with Mr Pow that Order 43 does not simply involve both parties setting out what each party proposes to be the proper account between themselves. The taking of an account essentially involves the Court (whether by a master or Judge) vetting the accounts (including supporting oral and written evidence) produced by both parties with a view to arriving at an outstanding figure due from one party to another.

12. Mr Stokes suggested that I could order a 2-stage process. I could order the parties to provide an account of what they each claim is due to them, such account to be verified on affidavit and presumably backed by supporting documents. Each party could then lodge a list of objections against the other's account. At that stage, Mr Stokes suggested, the parties could come before the Court under a liberty to apply. The Court could then decide whether or not to proceed to an inquiry stage in which a Judge or Master could consider the competing accounts and determine the actual state of account between the parties. I have doubts whether the Court has jurisdiction to make such an order under Order 43 which concerns the "taking of an account" rather than ordering the provision of accounts by the parties subject to a later consideration whether an account should be taken. But, whatever the position on jurisdiction, the reasons which I have summarised in this Judgment seem to me to make Mr Stokes' suggested 2-stage course unattractive in this particular case.

13. Accordingly, I dismiss XL's appeal. I shall now hear the parties on costs.