LEITCH ASIA LTD AND ANOTHER v. MACOSTAR TECHNOLOGY LTD

HCA 1008/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1008 OF 2004

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J U D G M E N T

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1.  On 15 February 2006, a Master ordered discovery of particular documents on an application made by the defendant.  Disappointed by the limited extent of the order she made, the defendant now appeals against the same.

2.  This is the appeal, by rehearing.

3.  In order to deal with what is the appropriate level of discovery, it is necessary to go into the historic relationships between the parties.

Background

4.  The Leitch Group of Companies under ownership of Leitch Technology Corporation is a group of companies having its headquarters in Toronto, Canada, with subsidiaries in Canada, the US, the UK and Hong Kong.  The group provides solutions to process high quality audio and video signals.  Its main product lines are video processing and distribution, video services and post-production.

5.  The 2^nd plaintiff (Leitch Technology) is a company incorporated in Canada and one of the main operators in the group.  The 1^st plaintiff (Leitch Asia) is a company incorporated in Hong Kong for the purpose of undertaking trade in this part of the world.

6.  The Macostar Group of Companies is based in Hong Kong.  Its main business activity is to provide lighting and video solutions and to trade in lighting and video products.  The defendant (Macostar Technology) is one of the group’s main operating entities.

7.  By a document headed “Exclusive International Dealership Agreement” bearing date 9 July 1997 (the 1^st Agreement) Leitch Technology appointed Macostar Technology as an authorized dealer to promote, sell, distribute and service its products, as defined, in Hong Kong and China, for the period 1 May 1997 to 30 April 1999.

8.  Pertinent provisions of the 1^st Agreement include the following :

(a)     Macostar Technology would purchase the product for on-sale to its customers;

(b)    for any order exceeding a prescribed credit limit, Macostar Technology could request Leitch Technology to deal direct with the customer, Macostar Technology to receive a commission (amount to be agreed) for the introduction;

(c)     subject to performance by Macostar Technology it would enjoy exclusive dealership for the term of the agreement for Hong Kong and China.  Notwithstanding, Leitch Technology reserved to itself the right to sell directly to customers in Hong Kong and China, with no obligation to pay commission to Macostar Technology;

(d)    Systems Integrators (SI’s) and Original Equipment Manufacturers (OEM’s) were described as independent agents who might engage in projects in Hong Kong and China.  Leitch Technology agreed to withhold 5% of the sale proceeds from any sale made to an SI or OEM within Hong Kong or China, as notified by Macostar Technology, payable to Macostar Technology;

(e)     Macostar Technology was obliged to provide service support to its customers, with Leitch Technology withholding 5% of the normal 30% discount to offset the cost.

9.  The parties entered into a similar agreement dated 1 June 1999 (the 2^nd Agreement) for the period 1 June 1999 to 30 April 2000.  This time the designated area was described as China.

10.  The format of the 2^nd Agreement was similar in form and effect to the 1^st Agreement, save that the terminology depicting OEM’s was replaced by Value Added Channel (VAC) representatives.

11.  From time to time during the course of both the 1^st and 2^nd Agreements, Macostar Technology ordered goods from Leitch Technology; Leitch Technology credited commission and where applicable the 5% service levy to its account with Macostar Technology.  Although no further agreements were entered into, Macostar Technology continued to order goods from Leitch Technology upon expiry of the 2^nd Agreement.  Whether this was on the same or similar terms is claimed but not admitted.

12.  From March 1999 Macostar Technology began purchasing product from Leitch Asia, the Hong Kong subsidiary.  Whether this was on terms set out in the 1^st and 2^nd Agreements or was on independent terms is also disputed.

13.  It is the pleaded case of Macostar Technology that various members of each group of companies engaged in business from time to time; that there came into being “an open account policy” whereby money due by a member of the Macostar Group would be set off against whatever may be due by a member of the Leitch Group, leaving outstanding for payment only the net difference.  This is not accepted by either of the Leitch plaintiffs.

14.  The parties fell out when they failed to agree on how much was due and owing the one to the other by the time trading had concluded.

15.  Leitch Technology claimed to be owed up to November 2001 an amount, subsequently adjusted to become US$29,883.  Leitch Asia claimed as at October 2003 the sum, also an adjusted figure, of US$98,439.  It is for these two amounts, which total US$128,322, that the two Leitch companies filed their writ, in April 2004. 

16.  Macostar Technology denies owing these sums or any amount.  Applying the “open account policy” the Macostar Group is, in fact, owed by the Leitch Group the sum of US$45,402.  There is a further counterclaim; that Leitch Technology has, in breach of the 1^st and 2^nd Agreements, failed to account to Macostar Technology for such commission and service levies to which it was and remains entitled.  Under this pleading and the heading “Particulars” it is pleaded :

“The Defendant is unable to provide full particulars of the amount of service and support compensation and service levy due from the 2^nd plaintiff until discovery and interrogatories have taken place in this action.”

17.  Which leads me to the discovery application that was before the Master, and now me.

The Discovery Application …

… was effectively divided into two parts.

18.  The first part was for invoices/credit notes in respect of three transactions between February and November 2001 for amounts totalling US$1,680, which emerged in the accounting giving rise to Leitch Technology’s claim (as adjusted) of US$29,882.

19.  The second part is much more detailed and far-reaching; summarised, the following documents are sought :

(a)     invoices and shipping documents for all goods sold to customers in Hong Kong and China for the period 1 May 1997 to 30 April 2000 save those invoices and documents addressed to Macostar Technology;

(b)    all invoices for SI and OEM sales in respect of projects undertaken in Hong Kong or China between 1 May 1997 and 30 April 1999 save those addressed to Macostar Technology;

(c)     all invoices for SI and VAC sales in respect of projects which took place in China between 1 June 1999 and 30 April 2000 save those addressed to Macostar Technology.

20.  It is apparent that Macostar Technology needs the documents in the second part to establish the extent to which, as is hotly denied, that Leitch Technology was in breach of its obligations to account to Macostar Technology for what it claims is its entitlement.

The Master’s Order

21.  She ordered in terms as to the first part of the application but was not nearly as accommodating when it came to the second.  In respect of that part she ordered discovery of :

“(II)     The following documents issued or received by the 1^st and/or 2^nd Plaintiffs or copies thereof :

(a)   all invoices for sales to CCTV, including SI or OEM sales, in China during 1999 whether made directly or indirectly to CCTV; and

(b)   all shipping documents in respect of goods which were shipped to CCTV in China during 1999.”

22.  It seems that in doing so she was influenced by the evidence of Sharron Cheng, a director of Macostar Technology, whose affirmation supported the discovery application.  In it she deposed to prospective sales and so on that Leitch Technology might have entered into so as to give rise to payment to her company in that in the 1^st and 2^nd Agreements : “it was contemplated that those sales and shipments … might take place.”

23.  She was able to condescend to particulars in respect of only one possible transaction and I repeat verbatim what she said of that :

“10. In fact, I knew of a particular sale which had been effected by the 2^nd Defendant’s SI or VAC in 1999.  In the summer of 1999, the China Central Television ordered a large lot of equipment manufactured by the Leitch group of companies under the brandname of “Tekniche” as per the list a copy of which is produced and shown to me marked “CMS-4”.  The Defendant lost in the tender process.  It was obvious that the sale had been effected by the 2^nd Plaintiff’s SI or VAC or other dealers.”

24.  Of course the expression ‘ 2^nd Defendant’s ’ is a typographical error.  She would have meant ‘2^nd Plaintiff’s ’.  CCTV being China Central Television, it was in respect of this one, alleged, transaction that the Master acceded to the application.

The Aftermath

25.  Whilst not accepting the limited order for discovery made by the Master was a proper one to make in the circumstances, Leitch Technology chose to comply rather than cross-appeal.  This was by affirmation by the Leitch Group’s Vice President of Sales, Asia Pacific, who deposed to having caused extensive enquiries to be made, which failed to bring to light any of the documents ordered to be discovered.

26.  He (or she) went on to state :

“5. In relation to item (II) of the above schedule, I have been unable to ascertain whether any sales, including SI and OEM sales, were made to CCTV in China during 1999, and/or whether any goods were shipped to CCTV in China during 1999 (whether made directly or indirectly).  Nevertheless, I have caused extensive enquiries and searches to be made to locate any invoices and shipping documents in respect of such sales and shipments, but without success.  I am unable therefore to say whether any invoices and shipping documents relating to sales and shipments to CCTV in 1999 (whether made directly or indirectly) were ever in the 1^st Plaintiff’s possession, custody or power, and if they were, what became of them and the date and circumstances in which they ceased to be in the 1^st Plaintiff’s possession, custody or power.”

The Appeal

27.  Leitch Technology filed evidence to show that in the accounting between the parties there is an explanation which shows that Macostar Technology’s officers have misread some accounting sent to them by Leitch Technology and have thus fallen into error in claiming a credit balance of US$45,402 instead of a negative one totalling US$128,322.  Perhaps so; but that is for trial.

28.  What however emerges is that Macostar Technology’s claim for hidden moneys due is based almost entirely on speculation, with only one glimmer of evidence; that is the alleged deal between Leitch Technology and CCTV, in respect of which discovery was ordered, though with nil result.

29.  As for the balance; Mr Carolan representing both Leitch plaintiffs submits this amounts to “a classic fishing expedition which the court should not entertain”.

30.  I agree.  This is an application for specific documents.  But none are specified.  And even if it were to be established that Leitch Technology had dealt with customers directly in Hong Kong or China without remunerating Macostar Technology, it has not been pleaded or particularized as to how this is in breach of the 1^st or 2^nd Agreements.

31.  There is no or no sufficient evidence that the documents claimed exist; nor that any that might be categorized as claimed relate to matters in issue.

32.  This is not a case for further discovery.

33.  The appeal is dismissed.  Costs, nisi, are to the plaintiffs, in any event.