J.H. TRACHSLER (HK) LTD. v. LIU YAN ROCKY AND ANOTHER

HCA 4998/1997

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 4998 OF 1997

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J U D G M E N T

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1. In this action the Plaintiff, a Hong Kong company which supplies photographic equipment, claims the sum of $755,487.24 from the 1st and 2nd Defendants being principal sums outstanding under 8 invoices and accrued interest in the sum of $406,169.58 as at 12 May 1997.

2. The 8 invoices were issued to the 2nd Defendant between December 1994 and November 1995.

3. It is the Plaintiff's case that the 1st and/or 2nd Defendant are liable as the contracting parties who purchased the goods under the 8 invoices which were to be sent to a corporation in Beijing, Rocky Electronic Photo Products (B J) Co. ("Rocky Co."). The Plaintiff's case is based upon the agreement or agreements pleaded in paragraphs 5 (f), (g) and (h) of the Statement of Claim.

4. The Defendants do not dispute that the amount claimed by the Plaintiff is owed by the buyer of the goods. Their case is simply that it was not the 1st or 2nd Defendant who was the buyer but Rocky Co. It is Rocky Co. who is contractually liable to the Plaintiff, not the 1st or the 2nd Defendant.

5. The main issues in this case are: (1) the identity of the buyer, in other words, whether the 1st and/or 2nd Defendant were the buyer of the goods under the invoices and (2) whether their agreement to buy the goods was as alleged in the Statement of Claim.

6. Although at the start of the trial, the Defendants put the Plaintiff to proof of the delivery of the goods under at least some of the invoices, Mr Wilson Chan on their behalf conceded on the 5th day of the trial that they no longer took issue on the question of delivery.

7. The claim for interest is based on an allegation that the goods under the invoices were supplied on 60 days credit and that interest on the outstanding balance thereafter was chargeable at 2.5% per month in accordance with the printed terms set out in the Plaintiff's monthly statements of account. The Defendants take issue with the Plaintiff's allegation that they are liable for interest, but not with the Plaintiff's calculation of interest, if they are found to be so liable.

The Plaintiff's version

8. The evidence for the Plaintiff came from 3 witnesses, Alfons Grieb, the Managing Director and David Wong, the Sales Manager of the Plaintiff at the relevant times as well as Wilson Chan, who was employed in the Plaintiff's sales department until June 1993. It amounted to this.

9. The invoices which are the subject to this action were part of a history of trading between the Plaintiff and the 2nd Defendant which went back at least until 1992. Initially purchases by the 2nd Defendant from the Plaintiff for 2nd Defendant's customers in China were not of great value and were made on a cash basis.

10. These were then two attempts to persuade the Plaintiff to trade directly with China corporations without the intervention of the 2nd Defendant.

(1) In November 1992, the 1st Defendant and his brother had approached David Wong by fax on behalf of the Photography Club of the China Ministry of Metallurgy asking him to meet them in Beijing. The meeting took place on 13 November 1992. They asked David Wong whether they could become sole distributors for the Plaintiff in Northern China and whether goods could be supplied to them on credit terms.

11. It was the evidence of all 3 witnesses for the Plaintiff that it was the strict policy of the Plaintiff that credit would never be granted to a Mainland organisation without letters of credit or other guarantees because of the risks involved. At this meeting, however, David Wong was told by 1st Defendant or his brother that "their Hong Kong Company", the 2nd Defendant, would give a bank guarantee. As matters turned out this bank guarantee was never set up and purchases continued to be made by the 2nd Defendant on a cash basis.

(2) About a month after the meeting on 13 November 1992, the 1st Defendant approached David Wong of the Plaintiff but this time on behalf of Rocky Co. and invited David Wong to go to Beijing for discussions. This was the first time that David Wong was aware of the existence of Rocky Co. The 1st Defendant explained that Rocky Company's business would be similar to that of the Club and that he wanted 60 days credit. In accordance with its policy, David Wong made clear it would not grant Rocky Co., a mainland entity, credit without security. There were even stronger grounds than usual for adhering to this policy as Rocky Co. was licensed only to conduct internal trade within China and could not obtain foreign exchange.

12. There were then visits by David Wong, Wilson Chan and Alfons Grieb to the offices of the 2nd Defendant which, as in the earlier approach, it was proposed would provide this security. Wong Yi Ming, the general manager of the 2nd Defendant declined however to give a bank guarantee or a letter of guarantee for direct trade between the Plaintiff and Rocky Co. As a result therefore the previous arrangement whereby sales were made to 2nd Defendant continued, albeit that both parties knew that the goods were destined for Rocky Co. in Beijing. There were however some differences:

- Alfons Grieb had formed a favourable impression of the 2nd Defendant on his visit to the 2nd Defendant's offices when he had had discussions with Wong Yi Ming. Wong Yi Ming had assured him that there would be no problem with payment in respect of goods shipped to Rocky Co. in Beijing. As a result credit terms were granted to the 2nd Defendant for these transactions.

- Orders for goods which had previously been placed by the staff of the 2nd Defendant were now placed by staff of Rocky Co. in Beijing. Until the end of 1995 these orders were usually placed by Liu Jun, the younger brother of the 1st Defendant. After the end of 1995, they were usually placed by the 1st Defendant.

- Instead of goods being collected by the staff of the 2nd Defendant or delivered to the 2nd Defendant's premises, the goods were delivered to shippers for shipment on the instructions of staff of Rocky Co.

13. The Plaintiff, however, continued to invoice 2nd Defendant in respect of these transactions. Payments in respect of these invoices were mainly settled by cheques or credit notes of the 2nd Defendant or cheques of Wong Yi Ming its general manager. The Plaintiff sent monthly statement of account to the 2nd Defendant. Its auditors asked the 2nd Defendant to confirm liability in respect of the amounts outstanding at the end of each financial year.

14. This arrangement continued satisfactory until payments under the invoices began to fall in arrear.

15. Following the failure of negotiations to settle these arrears, the Plaintiff would only thereafter deal with the 2nd Defendant on cash terms.

The Defendants' version

16. The evidence for the Defendants came from three witnesses Wong Yi Ming, the general manager of the 2nd Defendant, Rocky Liu Yan, the 1st Defendant and legal representative and general manager of Rocky Co. and Miss Leung Siu Wai, a director of the 1st and 2nd Defendant and at the material times responsible for the bookkeeping of the 2nd Defendant.

17. Their evidence amounts to an assertion that, although both before mid 1993 and after 1995 there were genuine sales by the Plaintiff to the 2nd Defendant, during the period between mid 1993 and the end of 1995 (which coincided with the period goods were supplied by the Plaintiff on credit terms) the sales for which the Plaintiff invoiced the 2nd Defendant were not genuine sales to the 2nd Defendant or indeed the 1st Defendant but were direct sales by the Plaintiff to Rocky Co.

18. While Rocky Co. was a distributor of the products for which the 2nd Defendant held the agency from the manufacturers, there was not any particularly close relationship between the two companies and they were not part of the same commercial enterprise or "sister" companies.

19. Although the Plaintiff had invoiced the 2nd Defendant for goods shipped to Rocky Co., David Wong of the Plaintiff had explained to Wong Yi Ming of the 2nd Defendant that this was done in order to mislead David Wong's boss, Alfons Grieb, that the goods were being ordered by a Hong Kong company rather than a PRC company.

20. These transactions had never been put in the books of the 2nd Defendant by Miss Leung Siu Wai.

21. While payments had been made to the Plaintiff in payment of invoices issued to the 2nd Defendant during this period by the 2nd Defendant and Wong Yi Ming, they had only made those payments on behalf of Rocky Co. for which they had been reimbursed by Rocky Co. They were in effect simply the conduit for the payment by Rocky Co. of its debts as Rocky Co. could not directly make remittances of foreign currency outside the PRC.

A matter of credibility

22. This trial has involved lengthy and detailed examination of the documentation relating to dealings between the participants in these transactions. Ultimately, however, the question of who the buyer or buyers were in these transactions is a matter of the court's assessment of the credibility of the witnesses.

23. I found the witnesses for the Plaintiff in particular Alfons Grieb and David Wong, to be straightforward and credible witnesses. They did not appear to be attempting to tailor their evidence to suit the Plaintiff's case. One particularly striking example of this was Alfons Grieb's admission that there was possibly room for different interpretations of the Plaintiff's written conditions regarding the payment of interest. I had no hesitation in believing their evidence, which was corroborated by Wilson Chan, who had left the Plaintiff's firm several years previously, that the company had a firm policy of not granting unsecured credit to PRC companies.

24. My impression of the witnesses for the Plaintiff was in direct contrast to my impression of the defence witnesses 1st Defendant and Wong Yi Ming. I found to them evasive and unsatisfactory. Both were noticeably evasive when asked about a reluctance of foreign owned companies to trade with PRC corporations without security.

25. The 1st Defendant was initially evasive even about his own role in Rocky Co. His allegation that a letter to FOBA from Deng Wai of Rocky Co. (to which I shall subsequently refer) was drafted by David Wong of the Plaintiff had not been put to David Wong in cross-examination and appeared to me to probably be a recent invention.

26. I found it improbable for instance that he would forget whether the question of credit had been raised in the initial discussion with David Wong in Beijing in November 1993. I found his attempt to distance Rocky Co. from the 2nd Defendant unconvincing.

27. Wong Yi Ming gave me the impression of a man who was not being frank with the court in a number of respects. He was for instance evasive about his knowledge of the address of Shenzhen Man Cheong Trading Company which he alleged was the money changer responsible for changing and then remitting the payments on behalf of Rocky Co. to Hong Kong when that same address was stated on his visiting card to be a contact address of the 2nd Defendant. His allegation for the first time in evidence that Alfons Grieb had expressed suspicions about David Wong was something I was satisfied he would have mentioned to the 2nd Defendant's solicitors if it had occurred. I considered that it was probably an invention along with his assertion that David Wong had told him that the invoicing of the 2nd Defendant was an attempt to deceive his boss that the transactions were proper. I did not find convincing his evidence that he had only seen two of the relevant invoices, that he had never personally seen the monthly statements and that he had signed the audit confirmation (exhibit P3a) by mistake. I did not believe his attempt to justify his allegation that the 2nd Defendant would have agreed to act as a conduit to enable Rocky Co. to pay its debts in relation to transactions which had on his account been poached from the 2nd Defendant.

28. The principal difficulty faced by the Plaintiff is that, on the documents, when faced with non payment of its invoices, it looked to Rocky Co. for payment of the arrears. While David Wong said that telephone calls were also made to the 2nd Defendant in this regard the correspondence clearly suggested that the Plaintiff regarded Rocky Co. as responsible for these arrears. This is no reference to any liability on the part of 2nd Defendant (or indeed 1st Defendant) in these letters. It was to Rocky Co. that demands for payment were made. The discussions for settlement of arrears involved a proposal that the assets of Rocky Co., in the form of its shares in a photographic studio, be used as part payment. Coupled with this is the fact that when it first issued its writ, before filing its Statement of Claim, the Plaintiff brought this action against the 1st Defendant alone.

29. David Wong was extensively cross-examined about this correspondence and repeatedly insisted that, regardless of what appeared in the correspondence, the Plaintiff would never have directly dealt with a PRC entity in such circumstances.

30. I have carefully considered this correspondence in the context of all the evidence in the case and am satisfied that notwithstanding the correspondence, the Plaintiff company did regard the 2nd Defendant as being primarily liable in law for payments of the invoices rather than just being a conduit for payments.

31. There can be no doubt that on the Plaintiff's accounting records these transactions must have been recorded as being with the 2nd Defendant. Sending invoices to the 2nd Defendant might alone have been consistent with the 2nd Defendant simply being a conduit for payment, particularly as it is accepted the invoices were also sent to Rocky Co. But the sending of monthly statements of account to the 2nd Defendant coupled with the demand by the Plaintiff's auditors to the 2nd Defendant to confirm their indebtedness leaves little doubt that these transactions were regarded as being, as a matter of law, with the 2nd Defendant. Mr Grieb would not have granted credit for goods to be shipped to Rocky Co. unless he knew that the 2nd Defendant was going to be ultimately responsible for the price of the goods shipped to Beijing. Indeed I believed his evidence that he was expressly assured by Wong Yi Ming not to worry about payment.

32. I am satisfied that the probable explanation for the references in the correspondence to Rocky Co. owing the arrears is that, although the 2nd Defendant had, on the Plaintiff's insistence in order to protect its interests, undertaken the legal responsibility as buyer, the Plaintiff and in particular David Wong recognized that the ultimate "customer" for these goods was Rocky Co. It was Rocky Liu, the 1st Defendant, who had approached the Plaintiff for credit and Rocky Company's staff who placed the orders and gave the shipping instructions. Relations were very good between the staff of Rocky Co. and Wong Yi Ming on one hand and Alfons Grieb and David Wong on the other hand. This can be seen for instance in the friendly personal terms of much of their correspondence, the fact that a generous wedding present had been given to David Wong and Alfons Grieb's initial reluctance to bring an action against the 2nd Defendant because of his then still close relationships with Wong Yi Ming. Coupled with the good personal relationship between the staff of the Plaintiff and the staff of 2nd Defendant and Rocky Co. would have been an understandable tendency to identify Rocky Co. and the 2nd Defendant as part of the same enterprise.

33. I am satisfied that it was not only a matter of appearances and there was in fact a much closer relationship between Rocky Co., 1st Defendant and the 2nd Defendant than Wong Yi Ming and 1st Defendant admitted in their evidence. There is a wealth of evidence to support a close identification of the interests of Rocky Co. and the 2nd Defendant. The attempts by the defence witnesses to explain this evidence was unconvincing. I believed David Wong's evidence that at the meeting with Rocky Liu and Liu Jun in November 1993, David Wong had been told that the 2nd Defendant was "their Hong Kong company". On Wong Yi Ming's visiting card the address of Rocky Co. was given as a contact address of the 2nd Defendant. On the same card the address given as the contact address of the 2nd Defendant in Tianjin was the same address as that of the Tianjin Foreign Trade Cooperation, the name of the consignee which the staff of Rocky Co. had given to the Plaintiff for the goods which were shipped to them under the invoices in question. David Wong had frequently seen 1st Defendant in the 2nd Defendant's offices. Indeed it was at the 2nd Defendant's offices that $400,000.00 representing part payment of arrears was given to Mr Grieb by the 1st Defendant in cash, the receipt being on the 2nd Defendant's notepaper. Mr Grieb said that they had been informed that Rocky Co. was a "sister company" of the 2nd Defendant. That was the exactly the same term used by another employee of Rocky Co., Deng Wai in referring to the 2nd Defendant when writing a letter dated 6 March 1996 to FOBA (AG), a Swiss supplier, in attempting to forge direct links with that supplier.

34. These circumstances namely the recognition of Rocky Co. as the ultimate "customer", the close personal relationships between the parties involved and the identification in the minds of the staff of the Plaintiff of Rocky Co. with the 2nd Defendant were all facts which I am satisfied probably led them initially to press for payment from Rocky Co. Payment if effected by Rocky Co. would have been made by it through the party legally liable to make payment, namely the 2nd Defendant.

35. I accepted Mr Grieb's explanation of why the Plaintiff had initially sued the 1st Defendant and not the 2nd Defendant, namely a belief that the 1st Defendant was personally liable and a desire at that stage not to upset relations with Wong Yi Ming of the 2nd Defendant.

36. I do not believe that it was just a coindence that in the letter from Mr Deng Wai to FOBA (AG) of 6 March 1996 to which I have referred he should offer an arrangement whereby goods should be supplied to Rocky Co. for which the 2nd Defendant would be responsible for payment. That of course is essentially the arrangement alleged by the Plaintiff against the 2nd Defendant.

37. I have no hesitation in rejecting the evidence of Wong Yi Ming that in response to a query by him as to why invoices were sent to 2nd Defendant David Wong had told him that the invoices were issued in the name of the 2nd Defendant in order to mislead Alfons Grieb. I found Wong Yi Ming to be evasive when was examined about this allegation. I shared the view of Alfons Grieb that David Wong was an employee who could be trusted. There was no credible evidence therefore that any query was raised on behalf of the 2nd Defendant at to why they were being invoiced and receiving monthly statements. I am satisfied there would have been such an enquiry if 2nd Defendant had believed that it was simply a conduit for payment by Rocky Co.

38. I did not accept the evidence of Wong Yi Ming that he and the 2nd Defendant were simply the conduit for the payment of Rocky Co.'s debts. Quit apart for the unlikelihood of the Plaintiff agreeing to enter an arrangement which was dependent upon the unofficial and presumably illegal transfer of funds out of the PRC, I did not believe that Wong Yi Ming would have acted as a conduit for payment in relation to transactions which on his account he believed were sales poached from his company.

39. I am satisfied that the Plaintiff has discharged the burden of showing that the 2nd Defendant had assumed the liabilities of the buyer in relation to the transactions which are the subject of this action.

40. In reaching this conclusion I have borne in mind the evidence of Miss Leung that she did not enter these transactions in the books of the 2nd Defendant. It would be speculation for me to advance possible reasons why it was decided to omit them from the books.

41. I have also borne in mind the evidence of the remittances to Hong Kong through the money changer and references in the documents to the payments being on behalf of Rocky Co. I do not regard this of particular significance as on my findings the 2nd Defendant had assumed the legal liability for the goods on behalf of Rocky Co. Nor do I regard it as significant that Rocky Co. may have reimbursed the 2nd Defendant, Wong Yi Ming or 1st Defendant for payments made by them. This was merely an internal arrangement entered into by Rocky Co. in order to enable the 2nd Defendant to discharge its liabilities.

42. I have further borne in mind the evidence that Wong Yi Ming had refused to give a letter of guarantee in respect of transactions between the Plaintiff and Rocky Co. I am satisfied that there would have been a great difference to the 2nd Defendant between giving a blanket guarantee to unspecified and unlimited transactions between the Plaintiff and Rocky Co. and assuming responsibility for transactions for which it was invoiced and over which would have a measure of control.

The personal liability of the 1st Defendant

43. I find that there is insufficient evidence that the 1st Defendant ever assumed personal responsibility for these transactions. While he was the person who made the approaches to the Plaintiff at the end of 1992 and the beginning of 1993, there is insufficient evidence that he was acting in his personal capacity. Alfons Grieb, understandably in view of the fact that the 1st Defendant bore the same name as Rocky Co., identified him with that company but there is no evidence that he was anything more than the legal representative and general manager of it. He was not even personally responsible for placing all the orders which resulted in the invoices in question as the evidence was that before the end of 1995 it was his brother Liu Jun who placed most of the orders.

The agreement pleaded

44. Mr Chan on behalf of the 2nd Defendant has argued that, even though the Court might be satisfied on the evidence that agreement had been reached that the 2nd Defendant would assume the liability of buyer for these transactions, the Plaintiff has failed to prove the specific agreement pleaded in paragraph 5(f) of the Amended Statement of Claim, as particularised in the reply to the request for Further and Better Particulars dated 24 March 1998. He argues that the Plaintiff has restricted its case to an oral agreement between David Wong Kwong Ming on behalf of the Plaintiff and Rocky Liu, the 1st Defendant on behalf of 2nd Defendant and that the evidence does not support such an agreement. He points out that the evidence shows that on the occasion in late 1992 or early 1993 when 1st Defendant approached David Wong of the Plaintiff on behalf of Rocky Co., no agreement was reached, as an agreement to trade with Rocky Co. depended on the 2nd Defendant providing a bank guarantee or letter of guarantee. It was this stage merely a request which David Wong had to discuss with his boss. David Wong's evidence was that there were thereafter several meetings at the 2nd Defendant's office to talk about this proposal. At those meetings the 2nd Defendant refused to give a letter of guarantee or bank guarantee. It was his evidence that after these meetings at the 2nd Defendant's office when 2nd Defendant failed to give the guarantees, he had no further discussion with either 1st Defendant or Wong Yi Ming before the Plaintiff granted credit to the 2nd Defendant. The agreement alleged, so Mr Chan argued, could not therefore have been an oral agreement between David Wong on behalf of the Plaintiff and the 1st Defendant on behalf of 2nd Defendant.

45. I accept that while there is no evidence that Rocky Liu was not present at the meetings at the 2nd Defendant's office there was no evidence that he was.

46. I do not find, however, that this argument based on the way the matter has been pleaded has any substance.

47. The argument depends on the proposition that what is alleged is that all the terms of the agreement between the Plaintiff and the 2nd Defendant were reached on one occasion in an oral agreement involving Wong Yi Ming and the 1st Defendant. I do not regard paragraphs 5(f), (g) and (h) as confining the Plaintiff to such a allegation. It does not follow for instance that the Plaintiff is necessarily alleging that the agreement to grant credit to the 2nd Defendant was reached on the same day and between the same individuals as the agreement by the Plaintiff to sell goods to the 2nd Defendant to be shipped for delivery to Rocky Co. Sub-paragraphs (f), (g) and (h) could, for instance, refer to different agreements involving different persons acting on behalf of the parties.

48. The Plaintiff has merely given particulars of the agreement alleged in paragraph 5(f)

49. Even if the agreement that the 2nd Defendant would be invoiced and would be personally liable for payment (which I am satisfied which reached between the Plaintiff and the 2nd Defendant) was reached at the meetings in the 2nd Defendant's office, for instance by Wong Yi Ming after the 2nd Defendant had refused to provide letters of guarantee of bank guarantees and while 1st Defendant was absent, I am satisfied that that would be consistent with the case pleaded by the Plaintiff.

Interest

50. A substantial part of the Plaintiff's claim is for contractual interest allegedly accrued as at 12 May 1997.

51. It is alleged that the terms agreed with the 2nd Defendant was that the 2nd Defendant would be entitled to 60 days free credit and that thereafter interest would accrue at 2.5% per month on any balance outstanding. The Plaintiff concedes that there was no express oral agreement regarding interest. For the reason I have referred to above, I do not regard this itself is fatal to the Plaintiff's claim on the pleadings.

52. It is alleged by the Plaintiff that the agreement as to interest arises from the course of dealings between the Plaintiff and the 2nd Defendant, in particular from a printed statement appearing at the bottom of each statement of account that "an interest of 2.5% per month will be charged for delay payment".

53. One party to an agreement cannot unilaterally impose a term on the other party but if the other party continues to do business with the other, knowing that the terms upon which the other is prepared to do business is on the basis that interest will be charged then such a term as to interest will be inferred in the course of their subsequent dealings.

54. In order to infer a term arising from the course of dealings, the evidence must be unequivocal that the party offering to do business on these terms insists upon such a term being part of its dealings.

55. It is the case for the Defendant which I accept that the course of dealings between the parties contradicts the assertion that the Plaintiff was insisting on such a term. Despite the printed assertion that 2.5% interest would be charged for delayed payment, the monthly statements of account specified "amount due for immediate payment" without referring to interest on any outstanding arrears. It also stated that if the customer paid the amount stated to be due on the statement of account, the statement of account would become void. Furthermore, the auditor's confirmation sent to the 2nd Defendant at the end of each financial year stated the amount allegedly owed by the 2nd Defendant without including any sum in respect of interest. Even Mr Grieb himself conceded that this particular term in the statement of account was as he put it "open to interpretation".

56. I find in such circumstances that the 2nd Defendant was entitled to assume that the Plaintiff was not insisting that the term as to interest was part of its agreement with the 2nd Defendant.

57. I accordingly give judgment to the Plaintiff against the 2nd Defendant in the sum of $755,487.24 plus interest thereon at 11% from the date issue of writ until today and thereafter at judgment rate until payment. I dismiss the Plaintiff's claim against the 1st Defendant.

58. I make the following order nisi as to costs: that unless either party makes application within 14 days to be heard on the question of costs, the following order is to take effect

(1) The Plaintiff's costs of this claim be taxed if not agreed and paid by the 2nd Defendant.

(2) The Plaintiff is to pay to the 1st Defendant any costs exclusively referable to the defence of the 1st Defendant to be taxed if not agreed.

59. For the assistance of the taxing master I regard no more than one hour for trial to have been exclusively referable to the defence of the 1st Defendant.