LI SIU MING v. KWAN YUK LIN, ROSALINE AND ANOTHER

DCCJ2127/2004

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 2127 OF 2004

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JUDGMENT

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1. This is an application for summary judgment under Order 14 of the Rules of the District Court.

2. The plaintiff and the 2nd defendant were shareholders and directors of Kinetic Consultants Ltd. ("Kinetic"). Each of them held 50 shares, which represented 50% of the capital. By an agreement ("Agreement") dated 2 January 2004 made between the plaintiff as vendor, the 1st defendant (the wife of the 2nd defendant) as purchaser and the 2nd defendant as guarantor, the plaintiff sold his shareholding to the 1st defendant for $800,000.00. The Agreement provided for a down payment of $300,000.00 and three instalment payments, and that if any instalment went unpaid, the whole sum should become due. The down payment and one instalment of $100,000.00 were paid but the 1st defendant's cheque for the 3rd instalment of $200,000.00 was dishonoured. The plaintiff now seeks summary judgment against the 1st defendant for the unpaid balance of $400,000.00, and judgment against the 2nd defendant as guarantor for the same sum.

3. The defendants' case is that the purchase price of the shareholding was based on the receivables of the company. Under the Agreement the plaintiff warranted that he had not purportedly on behalf of Kinetic and without the authority of its Board given any guarantee, indemnity or other security to third parties. However, he had, without the authority of Kinetic and in breach of the terms and conditions of the Agreement, verbally agreed with one of its clients, Keith To Architects Ltd. ("KTAL") that any outstanding fees relating to five invoices issued to that client would be treated as a bad debt. These invoices amounted to $228,620.26. Accordingly, Kinetic had suffered a loss. Kinetic had made inquiries of the plaintiff about this, but he had not responded; therefore the 1st defendant's solicitors had demanded a full account of any similar commitments the plaintiff had made, and at the same time the 1st defendant had withheld further payments pending the outcome of investigation into the matters. The defendants say that the loss to Kinetic affects the interests of the 1st defendant as a shareholder and she is therefore entitled to withhold payment of the remaining instalments pending the resolution of the claim against Keith To. The defendants counterclaim for declaratory relief to this effect. They also say that the 2nd defendant is not bound by the guarantee.

4. It is argued for the defendants that the question of whether the plaintiff made this agreement with KTAL is a triable issue. In addition, although fraud is not pleaded, material facts suggesting it have been raised, namely the fact of the agreement with KTAL, coupled with the fact that in the past the plaintiff had been designed, in KTAL's brochure, as an associate of that company. This would amount to "some other reason for trial". The defendants also rely on breach of the Agreement (for the 2nd defendant) and they say that this too is a reason for trial. Again this is not pleaded. They also say that there was a partial failure of consideration, in that the price was formulated on the basis of the receivables, and if there was an agreement between the plaintiff and KTAL, its effect would be to reduce the value of the receivables.

5. With regard to the allegations of an agreement between the plaintiff and KTAL, it appears from the correspondence that Kinetic wrote to the latter on 19 January 2004 seeking settlement of the five invoices, which related to jobs for which Kinetic had given quotations between 1997 and 2001 and amounted in total to $266,620.26. They followed this up with a letter dated 18 February 2004 seeking payment of the total. KTAL on 27 February 2004 replied in the following terms:

We refer to your recent invoices in connection with various assignments between us. We would like to clarify as follows:

1. All the agreements were made between your Mr Mike Li who we understand has resigned as a director of Kinetic Consultants Ltd. in January 2004.

2. Since 1995, Kinetic has been the only Building Services Consultant that we partnered with.

3. The fee scale that we offered to Kinetic has been generous for normal full service aiming at getting the best service for our clients.

4. However, the service you provided had not been fully satisfactory and most of the post contract service had not been provided.

5. As per our agreement, all fees shall be settled 'back to back' upon receipt of Client's payment. To our record, we have settled your fees promptly.

6. Most of the assignments had not been completed and the clients have not settled our bills.

7. Before Mr Mike Li resigned as a Director of Kinetic, he verbally agreed that any outstanding fees could be treated as bad debt.

As such, we clarify that we do not owe you any fee up to this moment. Your invoices are returned herewith.

6. Kinetic on 2 March 2004 sought clarification from the plaintiff, but no reply was forthcoming. Kinetic's solicitors, Chan Leung and Cheung then sent KTAL a letter before action dated 18 March 2004. On 22 March KTAL replied, denying liability and referring to its letter of 27 February 2004.

7. Subsequently, however, KTAL changed its position. On 20 April 2004 it wrote to Chan, Leung and Cheung to the effect that it did not deny that there were sums owed to Kinetic under the projects to which the invoices related; that according to its past dealings with Kinetic, the debts would only be paid after it had received payment from its clients; that the sums in the invoices were not agreed and were subject to verification, and most importantly the following:

When we mentioned in paragraph 7 of our letter dated 27/2/2004 to the Company that Mr Mike Li verbally agreed that any outstanding fees could be treated as a bad debt, we meant that Mr Mike Li had mentioned to us, and not agreed with us that the sums set out in the said invoices had been treated by the Company as a bad debt. Such representation by Mr Mike Li does not prejudice the Company's right to recover the said sums from us.

Mr Mike Li has not done anything on the Company's behalf to prejudice the Company's right to recover the Debts from us.

8. On 24 April 2004, in answer to a query from the defendants' solicitors, Messrs. Burke, Fung & Li, KTAL wrote as follows:

As mentioned in our letter dated 20 April 2004 to Messrs Chan, Leung & Cheung, Mr Mike Li had never agreed with us that the sums set out in the invoices...had been treated by the Company as bad debts. Mr Mike Li mentioned to our Mr Keith To in a social gathering between him and Mr Keith To that the sum set out in the relevant invoices were treated by the Company as bad debts. Mr Mike Li mentioned this in his personal capacity and not as a representative of the Company. It was our understanding that such oral statement was not intended to have ny legal effect or to bind the company in any way.

9. I note that this correspondence followed closely on a letter from the plaintiff's own solicitors to Burke, Fung & Li dated 19 April 2004 indicating that the plaintiff himself denied that he had ever agreed with KTAL that outstanding fees under the invoices would be treated as a bad debt.

10. Subsequently Kinetic sued KTAL on the invoices in Case No. DCCJ 2257 of 2004. KTAL in its defence at Paragraph 11 pleaded that in October 2003 Mr Mike Li had told Mr To that he had decided to resign as a director of Kinetic and would leave it upon agreement of a settlement deal with Mr Stephen Lun (the 2nd defendant herein). He went on:

When the balance of the Plaintiff's sub-consultant service were raised, Mr Mike Li told Mr Keith To that the balance of the fees would not be included in the amount to be settled between him and Mr Stephen Lun. Mr Mike Li also mentioned that they might consider the balance of the fees as bad debts. However, the Defendant understood that the balance of fee shall still be payable to the Plaintiff when corresponding balance of fee from the Clients were received.

11. If the plaintiff had made an agreement as the defendants say, then no doubt it would be in breach of the warranties given in Schedule 3 to the Agreement. However it is difficult to see how the defendants could establish that any agreement was made. Reference to it only appears in one letter from KTAL, who thereafter withdraws the allegation. The plaintiff himself denies it, in his affirmation.

12. What is more important is the question of causation of loss to Kinetic and resulting diminution in the value of the shares sold by the plaintiff. The Agreement is silent about the method by which the purchase price of the shares was calculated. No doubt it was based on the valuation of the assets and liabilities of the business. The assets would include the receivables, i.e. fees yet to be paid. There could be no guarantee, and none appears in the Agreement, that all the receivables would be received. The 1st defendant in buying the plaintiff's shares would necessarily take a risk that some clients might default or dispute the fees and some fees might not be recovered.

13. In fact the fees claimed from KTAL were never treated as bad debts and there is no evidence that the plaintiff ever made any arrangements within Kinetic to have them so treated. Kinetic has sued for the fees. KTAL disputes liability but on grounds which do not include the agreement originally relied on, or any attempt to set up anything said by the plaintiff as amounting to a waiver. If KTAL is successful wholly or partly in its defence on those grounds, there will be a loss to Kinetic but it will not be something for which Kinetic or the defendants can blame the plaintiff. That could only be done if KTAL were able to set up an agreement or waiver, which it does not seek to do. It may be argued that Kinetic could apply to amend its pleadings so as to aver an agreement or waiver, but I do not see how it could do so, or if allowed to do so, how such a plea could succeed in the face of its own contemporaneous statements, set out above. In Order 14 terms, in the face of the documents, any attempt now to rely on an agreement or a waiver would simply be unbelievable.

14. It follows that if there ever was such an agreement as that referred to in KTAL's letter of 27 February 2004, it could not cause or have caused any loss to Kinetic or the defendants. There is no triable issue. Also there is no other reason for a trial. To order a trial as to whether there was an agreement, which the plaintiff and KTAL later agreed to rescind, would be a pointless waste of time and costs. So the defendants have no defence to the plaintiff's claim.

15. There will accordingly be judgment in favour of the plaintiff against the defendants for $400,000.00. The interest awarded against the 1st defendant is at the contractual rate provided for in the Agreement. The same rate of interest is awarded, for the same period, against the 2nd defendant as guarantor because I cannot see that the two defendants should be treated differently on this. So far as costs are concerned, the Agreement provides for costs against the guarantor on the solicitor and own client basis. There is no such contractual provision for costs against the principal debtor. Bearing in mind what is said in the Hong Kong Civil Procedure 2004 at 62/App.10 to the effect that it is "almost wrong" to order costs inter partes to be paid on the solicitor and own client basis, and that the costs have been incurred against the two defendants together, with no difference between them, I do not see that there should be any difference in the costs awarded against them. I will therefore will award costs of the action and the Order 14 application against both defendants on the same basis, namely party and party. Since the judgment is to be handed down, the costs order is nisi.