D. G. TRADING LTD v. FULL YEAR ASIA PACIFIC LTD

HCA 987/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 987 OF 2010

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J U D G M E N T

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1. The plaintiff is a company incorporated in Hong Kong. The defendant is also a company incorporated in Hong Kong.

2. Sichuan Zhongxin Guo’an Wine Company Limited (“Sichuan Zhongxin”) is and was, at all material times, a company in the PRC and the producer of Guo’an Wine (“the wine”) in the PRC.

3. By a written agreement in Chinese made between Sichuan Zhongxin and the defendant dated 11 November 2008 (“the Head Distributorship Agreement”) Sichuan Zhongxin agreed to grant to the defendant the exclusive distributorship of the wine in the PRC (except in the Sichuan Province) and outside the PRC for a period of 5 years commencing 11 November 2008 and upon the terms and conditions contained therein.

4. By a written agreement in Chinese made between the plaintiff and the defendant dated 5 December 2008 (“the Sub-Distributorship Agreement”) the defendant agreed to appoint the plaintiff to be its exclusive sub-distributor of the wine in the PRC (except in the Sichuan Province and Shanghai City) and outside the PRC for a period of 1 year namely, from 5 December 2008 to 4 December 2009 upon the terms and conditions contained therein.

5. By clause 7.5 of the Sub-Distributorship Agreement the plaintiff undertook to the defendant that during the effective period of the agreement the plaintiff would purchase the wine amounting to not less than the total amount of RMB 40 million.  By clause 8.1 of the Sub-Distributorship Agreement it was agreed that the plaintiff should pay to the defendant the sum of RMB 8 million as security deposit within 7 working days after the signing of the agreement.

6. By a letter dated 5 December 2008 from the defendant to the plaintiff, the defendant requested that the security deposit of RMB 8 million be paid by a cheque made payable to Nullah Industries Limited. 

7. By a cheque dated 12 December 2008 for the sum of HK$9,004,400 made payable to Nullah Industries Limited issued by Dynamic Global Holdings Limited, a company which was affiliated with the plaintiff, the said sum was paid to Nullah Industries Limited as requested by the defendant.  The sum of HK$9,004,400 was the equivalent of RMB 8 million at that time. 

8. There is no dispute that the plaintiff has paid and the defendant has received the security deposit of RMB 8 million within the period as set out in clause 8.1 of the Sub-Distributorship Agreement.

9. Under the Head Distributorship Agreement, the defendant was required to pay Sichuan Zhongxin a security deposit of RMB 8 million (clause 1.2.6).

10. Clause 9.4 of the Head Distributorship Agreement provided that:

“Within 5 working days from the date of signing of this agreement Party B should remit the security deposit of RMB 8 million (block letters: EIGHT MILLION ONLY) into Party A’s designated account, otherwise, this agreement shall automatically become ineffective and performance of which shall cease.”

Party A was Sichuan Zhongxin and party B was the defendant.

11. There is no dispute that the defendant did not pay to Sichuan Zhongxin the security deposit of RMB 8 million within 5 working days from the date of the signing of the Head Distributorship Agreement or at any other time. 

12. By a letter dated 1 June 2009, Sichuan Zhongxin wrote to the defendant notifying the defendant that it had decided to cancel the agreement as the defendant was in breach of the Head Distributorship Agreement for not paying the security deposit of RMB 8 million in accordance with the Head Distributorship Agreement.

13. By a letter dated 2 June 2009 from the defendant to the plaintiff, the defendant asked the plaintiff to inform the defendant of the plaintiff’s sales plan or notices of purchase orders to be placed by the plaintiff under the Sub‑Distributorship Agreement. 

14. By a letter dated 18 June 2009, the plaintiff replied to the defendant stating that it considered that the plaintiff would not be able to fulfil the minimum amount of purchase under the Sub-Distributorship Agreement.  The plaintiff further stated that:

“Therefore, after our company’s serious consideration, we consider that the termination of the Distributorship Agreement is an appropriate way to protect both parties’ interests.

Your company is hereby notified that the Distributorship Agreement signed by both parties is terminated with immediate effect.  Your company is also requested to return to our company the whole of the security deposit of RMB 8 million in accordance with Clause 8.1 of the Distributorship Agreement.”

15. By a letter dated 14 July 2009, the defendant replied to the plaintiff as follows:

“Your company’s letter dated 18 June 2009 has been received. Because your company unilaterally considers it unable to fulfil the terms of the exclusive distributorship agreement, our company can only respect your company’s termination of both parties’ distributorship agreement and shall immediately terminate the distribution cooperation with the factory, but reserves the right to claim. To protect the three parties’ interests, our company needs to properly deal with and clear up with the factory all questions regarding the termination of distribution. After our company has dealt with all the clearing up formalities, our company shall deal with the matters between your company and our company. Please accept our apology in this regard!”

16. The defendant did not disclose to the plaintiff at any time that it had received the said letter of 1 June 2009 from Sichuan Zhongxin.

17. The above facts are undisputed and I find them proved.

18. The plaintiff’s primary case is that under the Head Distributorship Agreement the defendant was obliged to pay RMB 8 million to Sichuan Zhongxin as a security deposit within 5 working days of 11 November 2008.  The defendant failed to do so.  That being so, the Head Distributorship Agreement was rendered ineffective.  As the Head Distributorship Agreement was rendered ineffective for non-payment of the said sum of RMB 8 million, the plaintiff’s case is that the defendant was not in a position to appoint the plaintiff as its exclusive sub‑distributor of the wine under the Sub-Distributorship Agreement and the Sub-Distributorship Agreement was rendered void.  It follows that the sum of RMB 8 million paid by the plaintiff to the defendant should be returned to the plaintiff.

19. In the event that the plaintiff should fail in its primary case, the plaintiff’s alternative case is that by the letter dated 1 June 2009 from Sichuan Zhongxin to the defendant, the Head Distributorship Agreement was terminated and the Sub-Distributorship Agreement was also terminated under the terms and conditions of the Sub-Distributorship Agreement.  That being so, the plaintiff should be entitled to the return of the said sum of RMB 8 million which was paid to the defendant.

20. The plaintiff claims the return of RMB 8 million which was paid to the defendant as the security deposit under the Sub-Distributorship Agreement with interest thereon and costs.  Although there is also an alternative claim for damages in the prayer for relief, this was no longer pursued at trial.

21. The defendant denies that the plaintiff is entitled to the relief sought.  The defendant contends that the plaintiff was in breach of the Sub-Distributorship Agreement by not placing any order for the wine and counterclaims for damages, interest thereon and costs.  No particulars of loss and damage have been pleaded by the defendant in support of his counterclaim for damages.

The Agreed Issues

22. The agreed issues are:

(1)  (a) whether the Head Distributorship Agreement was rendered ineffective as a result of the defendant’s non-payment of the RMB 8 million security deposit required under the Head Distributorship Agreement?

       (b) if so, then whether the Sub-Distributorship Agreement was rendered void?

(2)    If the Sub-Distributorship Agreement was not rendered void, whether Sichuan Zhongxin has by virtue of the letter dated 1 June 2009 terminated the Head Distributorship Agreement, thereby also terminating the Sub‑distributorship Agreement, entitling the plaintiff to recover against the defendant, inter alia, the RMB 8 million deposit paid by the plaintiff to the defendant pursuant to the Sub-Distributorship Agreement?

(3)    If no to issue (2), then whether the plaintiff was in breach of clause 7.5 of the Sub-Distributorship Agreement for not having made any order during the term of the Sub-Distributorship Agreement, entitling the defendant to seek damages?

(4)    If yes to issue (3), then whether the defendant is entitled to retain the RMB 8 million deposit?  If no, then what is the amount of damages to be recovered by the defendant?

23. It is common ground that if issues (1)(a) and (b) are resolved against the defendant, then that is an end to the action and the plaintiff would be entitled to the return of RMB 8 million.  It is only if issue (1)(a) or (b) is resolved in favour of the defendant would it then be necessary to deal with issue (2).  Further, if issue (2) is resolved against the defendant, then it would not be necessary to consider the other issues.

The Applicable Principles

24. The applicable principles on the construction of documents are well settled.  These have been summarised by Lord Hoffmann in Investors Compensation Scheme Limited v West Bromwich Building Society & Anor [1998] 1 WLR 896 at 912 to 913.

25. And as Lord Hoffmann NPJ said in Jumbo King Limited v Faithful Properties Limited & Ors (1992) 2 HKCFAR 279 at 296:

“The construction of a document is not a game with words. It is an attempt to discover what a reasonable person would have understood the parties to mean. And this involves having regard not merely to the individual words they have used, but to the agreement as a whole, the factual and legal background against which it was concluded and the practical objects which it was intended to achieve...

But the overriding objective in construction is to give effect to what a reasonable person rather than a pedantic lawyer would have understood the parties to mean. Therefore, if in spite of linguistic problems the meaning is clear, it is that meaning which must prevail.”

The Witnesses

26. I heard evidence from Zhang Guodong (“Zhang”) who gave evidence on behalf of the plaintiff.  I also heard evidence from Calvin Tsao Kewan (“Tsao”) who gave evidence on behalf of the defendant. 

27. I found Zhang to be an honest, credible and reliable witness.  However, Tsao was, in my view, neither a credible nor a reliable witness.

Issues (1)(a) and (b)

28. It is plain that by clause 1.2.6 of the Head Distributorship Agreement the defendant agreed to pay Sichuan Zhongxin a security deposit of RMB 8 million. 

29. Clause 9.4 of the Head Distributorship Agreement comes under the heading “Effectiveness of Agreement”.  I have already set out above what was provided in clause 9.4. 

30. In my judgment, the words in clause 9.4 are clear and unambiguous.  The parties to the Head Distributorship Agreement have expressed their intention in plain and clear language.  The defendant was obliged to pay the security deposit to the designated account of Sichuan Zhongxin within 5 working days from the date of the signing of the agreement and, in the event that it failed to do so, the Head Distributorship Agreement automatically became ineffective.  As the Head Distributorship Agreement became ineffective, there was no obligation on either party to the Head Distributorship Agreement to perform its obligations thereunder.  In my judgment, that is clearly what a reasonable person would have understood the parties to mean.

31. Clause 9.4 was a condition precedent in the Head Distributorship Agreement.  The undisputed evidence is that the defendant failed to fulfil that condition in that it failed to pay the security deposit to Sichuan Zhongxin within 5 working days of the date of signing the agreement.  Under the Head Distributorship Agreement, the last date for payment was 16 November 2008.  In fact, on the undisputed evidence, the defendant failed to pay any sum to Sichuan Zhongxin at any time.  I so find.

32. Tsao said in cross-examination that before he received the letter of 1 June 2009 from Sichuan Zhongxin there had been ongoing communications between the parties to the Head Distributorship Agreement as to the payment of the security deposit and all of a sudden he received the letter of 1 June 2009 from Sichuan Zhongxin.  I do not believe Tsao on these matters.  These facts were never pleaded.  They were also never mentioned in Tsao’s witness statement.  In any event, Mr Siu, for the defendant, accepted that this evidence of Tsao in cross-examination was irrelevant to any issue before the Court.

33. Mr Siu made it plain that the defendant was not relying on any waiver of clause 9.4 by Sichuan Zhongxin or any affirmation by Sichuan Zhongxin of the Head Distributorship Agreement notwithstanding the non‑payment of the security deposit by the defendant in accordance with the Head Distributorship Agreement. In any event, waiver or affirmation of the Head Distributorship Agreement was not pleaded in the defence and the defendant was not entitled to rely on the same.

34. It seems to me, and I so find, that on the proper construction of the  Head Distributorship Agreement, the Head Distributorship Agreement became ineffective on 17 November 2008 after the 5 working days had elapsed with no payment by the defendant of the security deposit to Sichuan Zhongxin.

35. In his opening submissions, Mr Siu submitted that clause 9.4 of the Head Distributorship Agreement was contradicted by clause 8.3.1.  I am unable to accept Mr Siu’s submission that clause 8.3.1 contradicts clause 9.4. 

36. I would observe that clauses 8.3.1 to 8.3.5 of the Head Distributorship Agreement set out the 5 events giving rise to a breach on the part of the defendant. 

37. Undoubtedly, by not paying the security deposit within the required period of time, the defendant was in breach of the Head Distributorship Agreement.  Clause 8.3.1 sets out that event as amounting to a breach, namely, failure on the part of the defendant to pay the security deposit to Sichuan Zhongxin “in accordance with the agreed amount or time”.

38. There is no contradiction between clause 9.4 and clause 8.3.1.  Clause 9.4 clearly and unambiguously set out the consequence of non‑payment by the defendant of the security deposit within the agreed period of time which was to render the Head Distributorship Agreement ineffective. 

39. As the Head Distributorship Agreement became ineffective on 17 November 2008, it seems to me to be clear, and I am satisfied, that by the time the Sub-Distributorship Agreement was entered into between the plaintiff and the defendant on 5 December 2008, the defendant was not the appointed distributor of Sichuan Zhongxin of the wine for the PRC (not including Sichuan Province) and outside the PRC.

40. The recitals to the Sub-Distributorship Agreement clearly set out the parties’ objectives. 

41. Recital (B) recited that the defendant had obtained the exclusive authorisation of Sichuan Zhongxin and became the exclusive seller of the wine within the PRC (except Sichuan Province and Shanghai City) and outside the PRC (“the distribution area”). 

42. Recital (C) recited that the defendant intended to appoint the plaintiff and the plaintiff also intended to accept the appointment by the defendant as the sole and exclusive distributor of the wine in the distribution area.

43. It is plain that the commercial purpose of the Sub-Distributorship Agreement was for the defendant to appoint the plaintiff and for the plaintiff to accept the appointment as the sole and exclusive sub-distributor of the wine in the distribution area on the terms and conditions as contained therein.

44. As I have found, the defendant was in fact not the appointed distributor of Sichuan Zhongxin of the wine at the time of the entering into of the Sub-Distributorship Agreement for the reason that the Head Distributorship Agreement was rendered ineffective.  At the time the Sub-Distributorship Agreement was entered into, the defendant did not have the exclusive right to distribute and sell the wine in the distribution area.  The defendant was in no position to appoint the plaintiff as the sole and exclusive sub-distributor of the wine in the distribution area.

45. It seems to me, and I so find, that the Sub-Distributorship Agreement lacked subject matter and the consideration that had been paid namely, the security deposit of RMB 8 million, had totally failed.  The Sub-Distributorship Agreement was rendered void.

46. As to issue (1)(a), I am satisfied and find that the Head Distributorship Agreement was rendered ineffective as a result of the defendant’s non‑payment of the RMB 8 million security deposit required under the Head Distributorship Agreement.  As to issue (1)(b), I am also satisfied and find that the Sub-Distributorship Agreement was rendered void.

47. Issues (1)(a) and (b) are resolved in favour of the plaintiff. 

48. The remaining issues do not arise.

Conclusion

49. The plaintiff is entitled to the return of the RMB 8 million paid to the defendant.  The plaintiff is also entitled to interest on the said sum from the date of payment namely, 12 December 2008. 

50. As the plaintiff has succeeded on its primary case, I give judgment to the plaintiff against the defendant for the sum of RMB 8 million with interest thereon from 12 December 2008 to judgment at 1 % above the best lending rate of HSBC and from judgment until payment at the judgment rate.

(Submissions on costs)

51. I make an order that the costs of the action and the counterclaim be costs to the plaintiff to be paid by the defendant, such costs to be taxed if not agreed.