KINGSWAY TEXTILHANDELS GMBH v. GAINSMORE (OVERSEAS) LTD.

HCA 197/96

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 197 OF 1996

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J U D G M E N T

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1. In this action, the plaintiff claims against the defendant damages for breach of an agreement for payment of commission made between the parties as evidenced by or contained in a letter dated 14 June 1991 from the defendant to the plaintiff.

2. The defendant was legally represented until the week before this trial when its solicitors applied for and was granted leave by the court to cease acting for it. The defendant was not represented and did not attend the trial. In proving its claim against the defendant, the plaintiff called one witness, Mr Leung Chiu To Michael ("Mr Leung"), and relied on documentary evidence contained in 6 bundles.

Background

3. The plaintiff is a corporation incorporated in Germany in 1980 to act as the sales agent for a company called Leung & Leung Company Limited ("Leung & Leung"). Mr Leung was and still is the beneficial owner of Leung & Leung, which trades in manufacture and export of knitwear under the name of "Kingsway Company". Mr Leung and one Mr Jurgen Kauffels were the shareholders in the plaintiff, each holding 50% of the shares. In 1991, Mr Michael Leung acquired Mr Kauffels' shareholding, and has since become the sole beneficial owner of the plaintiff. When the plaintiff acted as the sales agent for Leung & Leung, it received commission from Leung & Leung at a rate of approximately one-third of the gross profits of the goods sold by Leung & Leung to Germany.

4. The defendant was formed in 1984 to act as the corporate vehicle for a joint venture entered into by Leung & Leung, one Mr Moses Wong and one Mr Billy Fung ("the Joint venture"). At the material time, Leung & Leung was a 51% shareholder while Mr Wong and Mr Fung each held 24.5% of the shares of the defendant. Mr Leung, Mr Wong and Mr Fung were the directors of the defendant. The defendant traded in the business of knitwear and knitwear materials.

5. By an agreement dated 12 August 1988 made between the plaintiff and the defendant ("1988 Agreement"), the defendant retained the plaintiff as its sales agent in Germany. The operative date of the 1988 agreement was back-dated to 1 July 1987, when the plaintiff started to act as the defendant's sales agent. The 1988 Agreement extended to all goods delivered by the defendant to Germany, except those in relation to 5 customers listed in paragraph 1 thereof. In return, the defendant would pay the plaintiff commission. It is Mr Leung's evidence that the commission was calculated also at approximately one-third of the gross profits made by the defendant over exports to Germany, excluding those relating to the 5 excepted customers.

6. In March 1990, as evidenced by the minutes of a board meeting of the defendant held on 13 March 1990, the defendant and the plaintiff began discussions over the continuation of the relationship between the parties and the rate of commission to be paid by the defendant to the plaintiff. These discussions cumulated into a letter dated 14 June 1991 to the plaintiff signed by Mr Billy Fung on behalf of the defendant ("the Letter"). As the plaintiff's claim is founded on an agreement said to be evidenced by or contained in the Letter, it is necessary to set out its content in full. It is as follows :

"Referring to our several discussions recently we hereby confirm that we agree to pay you the following commissions :-

1. Statement of account as at end of February, 1991 HK$131,409.10.

2. Shipments from 1st March 1991 to 31st September, 1991 a lump sum of HK$265,000.00.

3. 2% commission for all shipments from 1st October, 1991 onward and guarantee not less than DM5,000.00 per month or DM60,000.00 per year.

Now your duty is only to follow up the orders with the customers whilst ourselves are looking after the sales.

Please countersign the duplicate of this letter as confirmation."

7. The plaintiff had countersigned this letter as requested thereby acknowledging the terms set out therein.

8. Between 1 October 1991 and 31 December 1994, the defendant had paid to the plaintiff DM60,000 per year, the total of which is equivalent to HK$930,726.

9. By an agreement dated 20 March 1995, Leung & Leung and Mr Moses Wong agreed to sell their shares in the defendant to Mr Billy Fung. The relevant instruments of transfer and sold and bought notes were dated 4 September 1995. The Joint Venture therefore came to a dissolution.

The Pleadings

10. The plaintiff commenced these proceedings on 6 January 1996, claiming that the defendant was in breach of the agreement evidenced by or contained in the Letter ("the 1991 Agreement"). It is the plaintiff's case that the defendant had only paid the guaranteed minimum commission of DM60,000 for the period from 1 October 1991 to end of 1994, and had not paid the total of the 2% commission on all shipment made by the defendant during this period. Further, the plaintiff says that the defendant had failed to pay any commission at all after the end of 1994.

11. The defendant admits having entered into the 1991 Agreement, but avers that the 1991 Agreement contains 2 implied terms as to termination. The first is that the defendant is entitled to terminate the agreement by giving reasonable notice to the plaintiff that the plaintiff's service would no longer be required. Secondly, the agreement shall be automatically terminated in the event the defendant ceases to be the corporate vehicle for the Joint Venture.

12. The defendant contends that it only paid the plaintiff the guaranteed minimum commission up to the end of 1994 because the defendant had not requested the plaintiff to perform any service during this period. As for the period after 1994, the defendant says that in around December 1994, it had given reasonable notice to the plaintiff that the plaintiff's service would not be required, and that the defendant had ceased to be the corporate vehicle for the Joint Venture. The defendant therefore says that the 1991 Agreement was terminated in accordance with the aforesaid implied terms. Further and in the alternative, the defendant avers that the 1991 Agreement had been discharged by mutual agreement upon Mr Leung of the plaintiff agreeing that it would be terminated with effect from 1 January 1995.

The Issues

13. The issues for determination as arising from the pleadings are as follows :

(1) Whether, for the period from 1 October 1991 to the end of 1994, the plaintiff is entitled to further commission, other than the annual amount of DM60,000 already paid by the defendant ;

(2) Whether, for the period after 1994, the defendant is entitled not to pay commission to the plaintiff on the basis that the 1991 Agreement had been terminated ; and

(3) If the plaintiff's claim for damages for breach of the 1991 Agreement is made out, what is the amount of damages that the defendant is liable to pay.

Period from 1 October 1991 to 31December 1994

14. In order that the defendant's defence to the plaintiff's claim that further commission is payable for this period can succeed, the defendant has to establish 2 matters. The first is that it is a term of the 1991 Agreement that the plaintiff is only entitled to commission at DM60,000 per year, unless the plaintiff had rendered services to the defendant. The second is that the plaintiff had not performed any service for the defendant since the commencement of the 1991 Agreement.

15. On the first point, it is obvious that the letter dated 14 June 1991 makes no reference to this being a term agreed between the parties. Had it been agreed that the plaintiff would only be entitled to commission on 2% of the shipment when the plaintiff had rendered services to the defendant, one would have expected it to be included in the letter from the defendant to the plaintiff. This is clearly an important term, at least from the defendant's point of view. The conspicuous omission of it from the letter is a strong indicator that this was not a term agreed between the parties.

16. The defendant had not pleaded that it is an implied term of the 1991 Agreement, nor had the defendant given any basis for implying such term. It is therefore not open to the defendant to say that the plaintiff had only been paid the guaranteed minimum of DM60,000 per annum because the plaintiff had not rendered any service during this period.

17. Even if the defendant is entitled to raise this as a defence, the documentary evidence adduced by the plaintiff reveals that there had been frequent fax communications between the parties during this period and beyond, evidencing instructions by the defendant to the plaintiff to follow up the orders with its customers in Europe. This shows that services had indeed been rendered by the plaintiff at the defendant's requests.

18. Accordingly, this part of the defendant's defence fails.

Period after 1994

19. Three matters fall to be determined for the plaintiff's claim relating to this period. The first is whether the 1991 Agreement contains the 2 implied terms pleaded by the defendant in its Amended Defence. Secondly, if there are these implied terms, whether the defendant had given reasonable notice for the termination of the 1991 Agreement. Thirdly, whether the plaintiff had through Mr Leung agreed to a termination of the 1991 Agreement.

20. There can be no dispute that the letter dated 14 June 1991 makes no reference to the manner in which the 1991 Agreement may be terminated. In paragraph 7 of the Amended Defence, the defendant pleads that the 2 implied terms as to termination were implied by operation of law and/or by reason of the circumstances under which the agreement was entered into and/or by reason of giving business efficacy to the agreement and/or by reason of the officious by-stander test. Despite this all embracing, catch all paragraph, no particulars had been given to substantiate the factual and legal basis for implying into the 1991 Agreement the terms pleaded by the defendant. This is particularly so in respect of the alleged defence that the 1991 Agreement would automatically come to an end upon the defendant ceasing to be the corporate vehicle for the Joint Venture.

21. Quite apart from that, the defendant's allegations of the giving of reasonable notice and the agreement to terminate the 1991 Agreement with effect from 1 January 1999 are simply not borne out by the evidence. It is the defendant's pleaded case, as contained in the Amended Defence and the Answers to Further and Better Particulars of the Defence, that the notice was given orally by Mr Moses Wong to Mr Leung at a meeting in December 1994, and that it was also orally agreed between the two at the same meeting that the 1991 Agreement was to be terminated. Mr Leung denied the existence of such a meeting as well as any agreement to terminate the 1991 Agreement. No evidence had been adduced by the defendant to prove either the existence of the meeting or the contents of it. This part of the defendant's defence has simply nothing to stand on.

22. The documentary evidence also contradicts the defendant's pleaded case that the 1991 Agreement was automatically terminated upon the defendant ceasing to be the corporate vehicle for the Joint Venture, which the defendant says occurred in mid December 1994 when the dissolution of the Joint Venture was agreed. There are fax communications between the plaintiff and the defendant after December 1994 whereby the defendant sought, and the plaintiff provided, services in relation to orders with the defendant's customers in Europe.

23. The defendant had also pleaded in the Amended Defence that the plaintiff had not demanded payment of commission from the defendant for the period between 1 January and 2 October 1995. The relevance or significance of this averment is not altogether clear from the pleading given that the defendant is not relying on waiver or estoppel. Insofar as this may be an attempt to add credence to the allegation that the 1991 Agreement was terminated on 31 December 1994, it is rendered nugatory by the fact that the defendant, in particular through Mr Moses Wong, had enlisted the service of the plaintiff after December 1994.

24. In the premises, the defendant's defence to the plaintiff's claim under this period must also fail.

25. The plaintiff has succeeded in proving its case of a breach of the 1991 Agreement. The only remaining question is what is the amount of damages that the defendant is liable to pay.

The Quantum of Damages

26. The plaintiff claims damages at the rate of 2% of the defendant's sales to Europe for the period from 1 October 1991, being the commencement of the 1991 Agreement, to the end of 1995, which is just before the commencement of this action. It is Mr Leung's evidence that the reference to "2% on all shipment" in the letter dated 14 June 1991 means 2% on the gross sales price of the export to Europe.

27. It is evident from the commencement of the action that the plaintiff does not have the details or all the necessary details on the sales price or volume of the defendant's export to Europe for the relevant period. Accordingly, the plaintiff had applied for and obtained several orders compelling specific discovery by the defendant. These orders made between November 1996 and October 1998 require the defendant to disclose and produce documents relating to the sales to Europe since the commencement of the 1991 Agreement. In particular, pursuant to an order of Mr Registrar Betts made on 16 October 1998, the defendant had produced monthly and yearly trading profits and loss accounts for the period from 1991 to 1996, save in relation to a few which were said to have been lost. The audited accounts for these years had also been disclosed. 26 out of the monthly accounts have breakdowns of the sales attached.

28. As a result of discovery, the plaintiff is able to establish the sales volume in respect of goods exported by the defendant to Europe for 26 out of the 51 months between October 1991 and December 1995. This is taken from the "Total Selling" figures for customers in Europe, as set out in the breakdowns for the amounts of trading and of factory manufacturing attached to the monthly trading profits and loss accounts. However, for the remaining 25 months, since the accounts disclosed do not contain any breakdowns of the sales, the plaintiff has not been able to ascertain the amount of export sales made to Europe.

29. In the schedule annexed to the Re-Re-Amended Statement of Claim, the plaintiff sets out the amount of commission claimed against the defendant as damages herein as HK$3,008,374.25, which has already taken into account the amount of commission received before the end of 1994. It appears from the oral testimony of Mr Leung that the table in paragraph II of this schedule contains some errors under the "Date" column. The last 2 entries in this column should have been "04/94 to 03/95" and "o4/95 to 12/95" instead of "04/94 to 12/94" and "01/95 to 12/95". An application was made and leave was granted to the plaintiff to further amend the Re-Re-Amended Statement of Claim to rectify these errors. Service of the Re-Re-Re-Amended Statement of Claim is dispensed with.

30. It appears from the schedule that the plaintiff's quantum of damages is worked out on the basis of a 79.47% of the total volume of export sales made by the defendant between October 1991 and end of 1995. The figures for the export sales were taken from the yearly trading profits and loss accounts supplied by the defendant. 79.47% is the percentage of the total amount of exports to Europe to the total amount of export sales in the 26 months with known breakdowns.

31. Counsel for the plaintiff submitted that it is appropriate and justified to adopt the 79.47% as the basis for identifying the export made to Europe from the total export made by the defendant for the 25 months, on which information on sales breakdowns is lacking. His reasons are firstly that the plaintiff has, by reference to the breakdowns for 26 months, shown a consistent pattern of 79.49% of the total exports being exports to Europe. Secondly, it is obvious from a comparison of the monthly and the yearly trading profits and loss accounts that there had been export sales in the 25 months with no breakdowns in that the amount of total exports in the yearly balances exceeds that in the monthly balances by some $860,000,000. Thirdly, the percentage is worked out from all the evidence available to the plaintiff and that the defendant has not adduced any evidence in this trial to rebut the plaintiff's calculations. Counsel therefore argued that the Court is entitled to infer that 79.47% of the export volume made in the 25 months was for Europe, and that it is both fair and reasonable for the plaintiff to be compensated on that basis.

32. On the first point of a consistent pattern, while it is true that in the 26 months with known breakdowns, 79.47% of the total export sales are sales to Europe, 79.47% is only the aggregate percentage or ratio, but not the average percentage. It does not support nor lead to the conclusion that there was a consistent pattern of 79.49% of the defendant's export sales being for Europe. Working on the summary table handed up by counsel at trial, the percentage sales to Europe bears to the total export sales in the 26 months fluctuates and ranges from 23.96% to 100%. The average percentage is 72.5% whereas the median is 62.98%. There is no pattern, let alone a consistent pattern, of 79.49% of the export sales being export to Europe.

33. I accept that there had been export sales in the 25 months for which there are no sales breakdowns. This is evident from the trading profits and loss accounts for these months. I also agree that it is likely that some parts of the sales made were for Europe. The question is what parts of the export sales are to be attributed to sales to Europe. I do not agree that, in the absence of concrete and cogent evidence, the Court can infer or conclude, with any degree of certainty, what the answer to this pertinent question is. Given the state of evidence, it is speculative to adopt or infer any percentage as the basis for ascertaining the volume of export sales to Europe in the 25 months with no breakdowns.

34. I appreciate that the plaintiff's case on quantum hinges on discovery, and the plaintiff is making the best out of the documents disclosed by the defendant. The absence of the defendant at the trial may have disadvantaged the plaintiff in the sense that it is deprived of the opportunity of seeking further information or clarification on the missing information from the defendant's witnesses. But these are not reasons for the Court assessing damages on a speculative basis.

35. Despite that the defendant has not adduced any evidence on the issue of quantum or at all, it remains for the plaintiff to prove to the satisfaction of the Court the amount of its loss as particularized in the pleading. I am not satisfied that the plaintiff has on the evidence made out a case that it is entitled to damages based on 79.49% of the total export sales achieved by the defendant between October 1991 and December 1995. The plaintiff is only entitled to damages represented by its commission entitlement on the known amounts of export sales to Europe. The total amount of export sales to Europe, as derived from the breakdowns of the amounts of trading and factory manufacturing for 26 months, comes up to HK$89,309,012. 2% of this is HK$1,786,180. After taking into account HK$930,726 of commission already paid by the defendant, the net amount of damages to be awarded to the plaintiff is therefore HK$855,454. The plaintiff is also entitled to interest on this amount at judgment rate from the date of judgment to the date of full payment.

Conclusion

36. For the reasons aforesaid, there will be judgment for the plaintiff for the sum of HK$855,454 together with interest thereon at judgment rate from date of judgment to the date of payment in full.

37. I also make an order nisi that the plaintiff shall have the costs of the action, to be taxed if not agreed. The order nisi to be made absolute after the expiration of 14 days after the handing down of this Judgment.