GOOD CENTURY HOLDINGS LTD v. HANG MEI TAT LTD

DCCJ 5379/2019

[2024] HKDC 501

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 5379 OF 2019

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JUDGMENT

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I.  Introduction

1.  This trial concerns the proper interpretation and performance of a Chinese agreement titled “化妝品行銷佣金協議書” (“the Commission Agreement”) entered into between the Plaintiff, Good Century Holdings Limited and the Defendant, Hang Mei Tat Limited.

2.  As the parties agreed in their written closing submissions, the following is the revised list of issues which this Court is asked to determine in the trial:

(a)  Whether it was an implied term of the Commission Agreement that the costs and expenses to be deducted from the revenues shall be the costs and expenses incurred from the Plaintiff’s cosmetics products (“the Plaintiff’s Products”) sold or caused to be sold by the Defendant of the month (“Issue 1”);

(b)  Whether the Defendant was liable to pay the Plaintiff 50% of the net loss suffered by the Plaintiff, or any part thereof pursuant to the Commission Agreement (“Issue 2”);

(c)  Whether the Plaintiff suffered losses arising from the sales of the Plaintiff’s Products by the Defendant in the months July 2018 to September 2018 (“Issue 3”);

(d)  If the answers to Issues 2 and 3 above are both in the affirmative, what is the amount the Defendant was liable to pay the Plaintiff (“Issue 4”); and

(e)  If the answer to Issue 3 above is more than HK$32,685.66, whether the Defendant is entitled to set-off the amount against the outstanding sum of HK$32,685.66 under the Commission Agreement (“Issue 5”).

3.  I will set out the undisputed facts and the parties’ respective cases before discussing the issues.

II.  The undisputed facts

4.  In around September or October 2017, Mr Kong Hok Ming (Morris) (鄺鶴明) (“Mr Kong”) of the Plaintiff and Mr Lee Wai Tat (Andy) (李煒達) (“Mr Lee”) of the Defendant entered into the Commission Agreement for a term from 1 October 2017 to 30 September 2018. The Commission Agreement contained the following express terms:

“	化妝品行銷佣金協議書

貨主為“冠恒集團有限公司”簡稱（冠恒）公司註冊編號886540

行銷為“恒美達有限公司”簡稱（恒美）公司註冊編號2211135。

由2017年10月1日開始至2018年9月30日止，所有“冠恒”代理的化妝品產品如經由“恒美”銷售之佣金，計算如下：–

1) 當月營業額扣除貨物到倉價。

2) 物流及倉庫費用。

3) 差旅費及娛樂費用。

4) 銷售及支援人員的薪金、佣金、強積金和保險費用。

5) 一切廣告、促銷、推廣費用。

6) 財務費用，即在途商品利息、庫存利息、應收帳利息、以月利率 0.5% 另加銀行付款手續費計算。

得出之金額，雙方各 50 巴仙平均分配，而“恒美”一切之支出均為“恒美”自己負責。

“恒美”和“冠恒”其中一方可單方面終止此協議書旦（sic）必須給與（sic）對方不小（sic）於90日書面通知。

當此協議書到期時，如沒有任何修改，便自動續約壹年。”

5.  By a written confirmation dated 20 September 2018, the parties terminated the Commission Agreement with effect from 30 September 2018.

III.  The parties’ case

6.  The parties’ respective cases are pleaded in the Plaintiff’s Statement of Claim dated 3 October 2019 (“SoC”), Amended Defence dated 3 June 2021 (“Amended Defence”) and Reply dated 13 December 2019 (“Reply”).

The Plaintiff’s case

7.  It is the Plaintiff’s case that under the Commission Agreement, it was agreed between the Plaintiff and the Defendant that for any product provided by the Plaintiff to the Defendant for sale, the commission payable to the Plaintiff shall be calculated as follows:

(a)  Monthly sales by the Defendant minus the following items:

(i)  Costs of the goods;

(ii)  Logistics and warehouse expenses;

(iii)  Travelling and entertainment fees;

(iv)  Sales and support staff’s salary, commission, MPF and insurance;

(v)  Advertising, promotion and marketing expenses; and

(vi)  Finance expense including commodity interest, warehouse interest and account receivables interest which shall be calculated at a monthly rate of 0.5% and all bank handling charges.

(b)  After deducting the above expenses the Defendant and the Plaintiff shall split the net proceeds equally.

8.  According to the Plaintiff, under the Commission Agreement, the parties agreed to share any net profit and net loss equally (as opposed to only net profit) equally. The Plaintiff said that the Defendant had shared the net loss with the Plaintiff in the past.

9.  Pursuant to the terms of the Commission Agreement, a running account was kept between the parties. The Plaintiff would issue a monthly statement to the Defendant demanding the payment of the net proceeds that the Plaintiff was entitled to.

10.  On 22 November 2018, after the termination of the Commission Agreement, the Plaintiff sent the final statement to the Defendant, demanding the outstanding sum of HK$498,358.89 (“the Sum”) as the outstanding commission the Defendant was liable to pay the Plaintiff pursuant to the Commission Agreement. Particulars of the Sum are as follows (“the Particulars”):

Month	Doc No	Description	Amount (HK$)
Sep-18	DN-08092018	Travelling & Entertainment for July 2018	(21,935.16)
Sep-18	C/N 180901	May Chu Monthly Package for July 2018	41,500.00
Sep-18	CN-180902	Profit Share for July 18	49,591.84
Sep-18	GDN 182118861	美翔乳酸菌膠原蛋白口服液 50ML*10支盒*3盒	603.00
Oct-18	DN-06102018	Travelling & Entertainment for Aug 18	(2,192.00)
Oct-18	C/N 181001	May Chu Monthly Package for Aug 18	41,500.00
Oct-18	CN-181002	Profit Share for Aug 18	34,471.32
Nov-18	CN-181102	Profit Share for Sep 18	354,820.79
Total:			498,359.79[1]

11.  As could be seen from the Particulars, the Sum comprises:

(a)  The “Profit Share” for the months July 2018 to September 2018. According to the Plaintiff, there were in fact net losses for the above months. Hence, the claims by the Plaintiff against the Defendant were in fact the net losses for the above months (CN-180902; CN-181002; CN-181102);

(b)  The Credit Notes issued by the Defendant for the period from July 2018 to September 2018 (ie “May Chu Monthly Package” for July 2018 and August 2018 and “美翔乳酸菌膠原蛋白口服” - C/N 180901; C/N 181001; GDN 182118861);

(c)  Netting off the Debit Notes issued by the Defendant for the period from July 2018 to September 2018 (ie Travelling & Entertainment for July 2018 and August 2018 - DN-08092018; DN-06102018).

12.  For the “May Chu Monthly Package” (C/N 180901; C/N 181001), the Plaintiff says that Ms Chi Yin May (May Chu) (“Ms Chu”) was an agent of the Defendant. It was orally agreed between the Plaintiff, the Defendant and Ms Chu that the monthly commission/‌profit to be paid to the Defendant under the Commission Agreement should be split into half, one part to be paid to the Defendant and the other part to be paid to Ms Chu. When Ms Chu joined the sales operation, she expressed to the Plaintiff that she would like to have a proof of monthly salary from the Plaintiff to enable her to obtain a mortgage. Therefore, the Plaintiff paid Ms Chu a salary and provided proof of salary to her on a monthly basis. The above salary paid to Ms Chu was debited to the Defendant as part of the expenses and the Defendant never objected to the arrangement.

13.  As for the “美翔乳酸菌膠原蛋白口服液” (GDN 182118861), it was purchased by the Defendant in its personal capacity and purchased at an import price. Hence, it was not considered as a sale of the Plaintiff’s Product.

14.  Notwithstanding the Plaintiff’s repeated demands, the Defendant fails to pay the Sum to the Plaintiff. The Plaintiff therefore claims against the Defendant for the Sum with interest.

15.  In the Plaintiff’s written closing submissions, §§3-5, the Plaintiff withdraws its claim for “美翔乳酸菌膠原蛋白口服液” (GDN 182118861) and the Sum claimed by the Plaintiff against the Defendant is reduced to HK$497,756.79 (HK$498,359.79 - HK$603).

16.  As for the Previous Profit Share under the Previous Agreement (see §26 below), it represented 14% of the net profit which belonged to Mr Ng King Chong (“Mr Ng”), another agent of the Defendant. As Mr Ng was detained in the Mainland, it was orally agreed between the Plaintiff, the Defendant and Ms Chu that Mr Ng’s share of the commission/‌profit would be kept by the Plaintiff and paid to Mr Ng directly. For this reason, the Defendant denies that it is indebted to the Defendant for the Previous Profit Share.

17.  At the trial, Mr Yu Leung Sum (Sam) (“Mr Yu”), the Human Resource and Administration Manager of the Plaintiff gave evidence on behalf of the Plaintiff.

The Defendant’s case

18.  According to the Defendant, at all material times, the Defendant was the buyer, distributor and/or sale agent of the Plaintiff’s Products.

19.  Under the Commission Agreement, the parties agreed that the Plaintiff shall pay commission to the Defendant, being 50% of the monthly sales of the Plaintiff’s products after deducting the specified costs and expenses.

20.  All moneys received from the sales of the Plaintiff’s Products by the Defendant would be received by the Plaintiff first. The Defendant only received the commission from the Plaintiff after the Plaintiff deducted the alleged costs and expenses from the sales amount and multiplied the net sum by 50%.

21.  The Defendant denies that there had been any arrangement that the Defendant would pay monthly commission to the Plaintiff under a running account with the additional items payable by the Defendant to the Plaintiff as alleged by the Plaintiff or at all.

22.  The Defendant contends that the Commission Agreement contained the following implied terms (“the Implied Terms”). This was accepted by the Plaintiff in its Reply, §5:

(a)  The costs and expenses to be deducted shall be costs and expenses incurred for the Plaintiff’s Products sold or caused to be sold by the Defendant;

(b)  The costs and expenses to be deduced from the monthly sales shall be the accrued costs of the month.

23.  The Defendant contends that the Plaintiff would unilaterally prepare monthly accounts setting out the alleged amount of commission payable to the Defendant (“the Monthly Statements”).

24.  The Plaintiff had not provided the Monthly Statements for August 2018 and September 2018 to the Defendant before the commencement of these proceedings. The Plaintiff had not provided to the Defendant any supporting documents for any of the Monthly Statements.

25.  The Defendant makes no admission to the accuracy of the alleged profit, expense, costs, commission entitlement and/or net profit/‌loss alleged by the Plaintiff and puts the Plaintiff to strict proof thereof:

(a)  The Defendant claims that some of the costs and/or expenses claimed by the Plaintiff may not be costs and/or expenses incurred for the purposes of the sales of the Plaintiff’s Products by the Defendant;

(b)  The Defendant claims that not all the costs and/or expenses claimed by the Plaintiff were costs and/or expenses accrued, but are speculation and/or forecast without reasonable or proper basis;

(c)  The Defendant denies liability for the alleged “May Chu Monthly Package” under the Commission Agreement. There was an understanding between the Plaintiff and the Defendant that Ms Chu’s entitlement in the business cooperation between the Plaintiff and the Defendant would be recognised for an agreed sum and the entitlement does not relate to the profit to be shared between the Plaintiff and the Defendant. The amount which Ms Chu received should be treated as team payroll when calculating the Plaintiff and the Defendant’s monthly share of profit;

(d)  The Defendant avers that the Plaintiff miscategorises “美翔乳酸菌膠原蛋白口服液” as monetary items payable to the Plaintiff. According to the Defendant, this should be costs and/or expenses incurred for the sale of the Plaintiff’s Products by the Defendant. As stated in §15 above, the Plaintiff has withdrawn its claim for this item;

(e)  The Defendant avers that the Plaintiff had wrongfully deducted a total of HK$328,485.84 for “AP Bad Debit (蟑螂藥)” in the Monthly Statements for April to May 2018.

26.  Even if the Defendant were held to be liable to pay the Sum to the Plaintiff, the Defendant should be allowed to set-off the sums of HK$32,685.66 and HK$328,485.84 against the Sum:

(a)  With respect to the sum of HK$32,685.66:

(i)  Pursuant to the agreement made between the Plaintiff and the Defendant covering the period from 1 October 2016 to 30 September 2017 for the profit distribution between the parties from the sale of the Plaintiff’s Products, the Plaintiff agreed to pay 42% of the monthly net profit to the Defendant;

(ii)  For the month of September 2017, the Plaintiff only paid 28% of the monthly net profit to the Defendant but failed to pay the remaining part of HK$32,685.66 to the Defendant (“the Previous Profit Share”).

(b)  As to the sum of HK$328,485.84, the amount was stated to be “AP Bad Debit (蟑螂藥)” and wrongfully deducted in the Monthly Statements for April and May 2018.

27.  It should be noted that the Defendant is not claiming the above sums against the Plaintiff by way of a standalone counter-claim. The Defendant only seeks to set-off the sums against the Plaintiff’s claim in the event that it is held liable to pay the Sum or any part thereof to the Plaintiff[2].

28.  At the trial, Mr Lee, the sole shareholder and director of the Plaintiff and Ms Chu gave evidence on behalf of the Defendant.

IV.  Issue 1: Whether the Implied Terms form part of the Commission Agreement

29.  As could be seen from §5 of the Amended Defence and §5 of the Reply, it is common ground between the parties that the Implied Terms form part of the Commission Agreement, and I so find.

V.  Issue 2: Whether the Defendant was liable to pay the Plaintiff 50% of the net loss suffered by the Plaintiff pursuant to the Commission Agreement

30.  I agree with the Defendant that on a proper interpretation of the Commission Agreement, the Defendant was not required to share any net loss which the Plaintiff may suffer in the sale of the Plaintiff’s Products under the agreement.

31.  Interpretation of contractual provisions involves identifying what the parties mean and intend through the eyes of a reasonable person having all the knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract. A contract ought to receive that construction which its language will admit, and which will best effectuate the intention of the parties, to be collected from the whole of the agreement.

32.  The express terms of the Commission Agreement made it quite clear that the Defendant were to receive commission (佣金) for the Plaintiff’s Products which were sold through the Defendant. As pointed out by the Defendant, which I agree, the ordinary meaning of “commission” denotes a form of remuneration for, inter alia, services rendered and/or work carried out. In the present context, the service/‌work of selling and marketing (行銷) the Plaintiff’s Products.

33.  In the Commission Agreement, the parties further agreed that the commission shall be calculated by (a) first netting off from the monthly revenue earned from the sales of the Plaintiff’s Products the expenses listed in items (1) to (6) of the Commission Agreement; (b) and then giving 50% of the net amount to the Defendant as the commission (“由2017年10月1日開始至2018年9月30日止，所有“冠恒”代理的化妝品產品如經由“恒美”銷售之佣金，計算如下… 1) 當月營業額扣除貨物到倉價。2) … 3) … 得出之金額，雙方各 50 巴仙平均分配，而“恒美”一切之支出均為“恒美”自己負責。” (Emphasis added)).

34.  Reading in the context of the Commission Agreement, the phrase “雙方各 50 巴仙平均分配” was referring to how the commission for the Defendant was to be calculated. It does not mean that if the Plaintiff suffers a loss for a particular month, the Defendant would have to share 50% of the loss. My interpretation is reinforced by the following in the Commission Agreement:

(a)  The title of the Commission Agreement was “化妝品行銷佣金協議書” (beauty products sales/‌marketing commission agreement), as opposed to a “co-investment agreement”;

(b)  The Commission Agreement was entered into between the Plaintiff as the owner of the Plaintiff’s Products (貨主) and the Defendant as the party responsible for the sales/‌marketing (行銷) of those products;

(c)  It was provided that the Plaintiff’s shall bear its own expenses (而“恒美”一切之支出均為“恒美”自己負責。); and

(d)  There was no reference to “loss” (損失) at all in the Commission Agreement, nor was there any reference to the Defendant being liable to share any loss (分擔損失).

35.  The Plaintiff said that the Defendant had shared the loss with the Plaintiff in the past. However, whether that was the case will not impact upon my interpretation of the clear provisions in the Commission Agreement as explained above. In any event, for the months in which the Plaintiff suffered a loss (ie October 2016, December 2017, July 2018, August 2018 and September 2018), there is no evidence showing that the Defendant had shared such loss with the Plaintiff by making payment to the Plaintiff or allowing its share of the loss to be deducted from the sales revenue in subsequent months. As Mr Lee of the Defendant confirmed, for these months, the Defendant would not receive any commission, but it did not share any of the loss.

36.  As to the Credit Note for December 2017, Mr Lee explained that it was prepared by the Plaintiff and the Defendant stamped on the Credit Note merely to acknowledge that there was a loss in the month. I accept Mr Lee’s explanation that stamping on the Credit Note, without more, does not show that the Defendant acknowledged any liability to share the loss with the Plaintiff. In any event, the above stamping of the Credit Note took place after the Commission Agreement was entered into. It is trite that post-contractual conduct generally has no relevance to the proper interpretation of the contract.

37.  In the circumstances, the Plaintiff is not entitled to claim for any loss for the months July 2018 to September 2018 (CN-180902; CN-181002; CN-181102).

VI.  Issues 3 and 4: Whether the Plaintiff suffered losses in the months July 2018 to September 2018 and the amount that the Defendant is liable to pay (if any)

38.  As I have found in Issue 2 that the Plaintiff is not entitled to claim against the Defendant for any losses which it had suffered as a result of selling the Plaintiff’s Products under the Commission Agreement, I do not need to make any finding on Issues 3 and 4.

VII.  Whether the Plaintiff is entitled to claim the “May Chu Monthly Package” under the Commission Agreement

39.  The remaining 2 items in the Plaintiff’s claim are the “May Chu Monthly Package” for July 2018 and August 2018.

40.  According to the Plaintiff’s SoC, the basis of its claim was the Commission Agreement: see SoC §6; Answer to Requests for Further and Better Particulars of the Statement of Claim dated 21 July 2020, answer under §6; Answer to 2^nd Requests for Further and Better Particulars of the Statement of Claim, answer under §3. According to the Plaintiff’s Reply §10, the May Chu Monthly Package would be paid by the Plaintiff to the Defendant and debited to the Defendant as part of the expenses.

41.  In the Plaintiff’s written closing submissions §§33-34, the Plaintiff seeks to change the basis of its claim by saying that the claim arises from the Defendant’s stamping on the Credit Notes:

“33. The Defendant disputed to settle for May [C]hu salary for July and [A]ugust 2018 for the full sum under the credit notes. He only disputed it because [the credit notes were] not signed or stamped.

34. He agreed that he stamped the credit notes for January 2018 to June 2018. It showed he agreed to such arrangement. The Plaintiff paid Chu salary of July and [A]ugust 2018. Whether the D will deduct from Chu was irrelevant. It was a matter between the debit notes and credit notes between the Plaintiff and the Defendant.”

42.  I am not prepared to consider the Plaintiff’s claim for the “May Chu Monthly Package” for July 2018 and August 2018 based on the Defendant’s stamping of the Credit Notes, as this was not the pleaded basis of the Plaintiff’s claim.

43.  Focusing on the Plaintiff’s pleaded case, if one looks at the terms of the Commission Agreement, there was not mention of the “May Chu Monthly Package” or Ms Chu’s commission/‌remuneration as a separate item. There was no provision in the Commission Agreement that the Defendant had to pay the “May Chu Monthly Package” to the Plaintiff as an out-of-pocket item.

44.  According to the Reply at §10, the “May Chu Monthly Package” were to be deducted as part of the expenses of the sales of the Plaintiff’s Products pursuant to the Commission Agreement. I agree with the Defendant that the expenses should fall under “4) 銷售及支援人員的薪金、佣金、強積金和保險費用” for the purposes of calculating the Defendant’s commission under the Commission Agreement (see also the entry “Team Payroll (MPF & Insurance) included” in the July 2018 and August 2018 Monthly Statements respectively). If the Plaintiff suffered a loss for a particular month after calculating the net profit according to the Commission Agreement (as it did in July 2018 and August 2018 according to the Monthly Statements), the Plaintiff would not have to pay commission to the Defendant. However, there was no further provision in the Commission Agreement which provided that the Defendant had to paid the “May Chu Monthly Package” to the Plaintiff.

45.  Further, having heard the oral evidence of Mr Lee and Ms Chu, I accept their evidence that there was an understanding between Mr Kong on behalf of the Plaintiff and Ms Chu that on top of any commission which the Defendant may share with Ms Chu, Ms Chu would receive a monthly income from the Plaintiff (i.e. the May Chu Monthly Package) for her services provided to the Plaintiff. The Defendant was informed of the above after the discussion between Mr Kong of the Plaintiff and Ms Chu. Pursuant to the above understanding, the expenses arising from the May Chu Monthly Package should fall under under“4) 銷售及支援人員的薪金、佣金、強積金和保險費用” in the Commission Agreement. On the other hand, Mr Yu of the Plaintiff was not personally involved in the above discussion between Mr Kong and Ms Chu and he only relied on what Mr. Kong told him. However, Mr Kong did not give evidence in the trial to rebut Mr Lee and Ms Chu’s evidence.

46.  For the above reasons, I am of the view that the Plaintiff’s claim for the “May Chu Monthly Package” for July 2018 and August 2018 fails.

VIII.  Issue 5: The Defendant’s set-off claim

47.  The Defendant’s set-off claim will become relevant only if it were found to be liable for any part of the Plaintiff’s claim.

48.  As I have found above that the Plaintiff’s claim fails, I do not need to make any finding on Issue 5.

IX.  Disposition and Costs

49.  For the reasons stated above, I dismiss the Plaintiff’s claim.

50.  I grant a costs order nisi that the Plaintiff shall pay the costs of any occasioned by the Action (including any costs reserved) to the Defendant, to be taxed if not agreed. The costs order nisi shall become absolute after 14 days from the date of this Judgment unless an application is taken out to vary the same.

51.  Lastly, I thank Counsel for their assistance.