XCHRX HIN FULL DEVELOPMENT LTD. t/a NEW CONCEPT DEVELOPMENT CO. v. TOY BIZ INTERNATIONAL LTD. & ANOTHER

HCA1077/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.1077 OF 2001

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J U D G M E N T

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1. This is an appeal by the 2nd defendant from the order of Master Wong on 5 October 2001 dismissing the 2nd defendant's Summons dated 20 July 2001 by which the 2nd defendant sought to discharge an order of Master Ho granting leave to the plaintiff to issue a Concurrent Writ for service out of the jurisdiction against the 2nd defendant in the United States of America; to set aside the service of that Writ upon the 2nd defendant and a declaration that the Court has no jurisdiction over the 2nd defendant in respect of the subject matter of the claim or the remedy sought in the action.

2. Upon the ex parte application of the plaintiff, Master Ho made an order on 27 April 2001 granting leave to the plaintiff to issue a Concurrent Writ of Summons against the 2nd defendant and to serve a copy of it accompanied by a prescribed form of acknowledgment of service out of the jurisdiction upon the 2nd defendant at the 2nd defendant's address in the United States of America.

3. The 2nd defendant, through its solicitors Messrs Baker & McKenzie acknowledged service of the Writ on 9 July and on 20 July issued the Summons already referred to above.

4. That Summons was heard and dismissed by Master Wong on 5 October. The 2nd defendant now appeals against that order.

The plaintiff's claim

5. The plaintiff is a company incorporated in Hong Kong and carrying on the business of developing electronic technology and manufacturing electronic products. The defendants are part of the Toy Biz group of companies well known in the toy business internationally and in Hong Kong. The 1st defendant is the Hong Kong subsidiary of the 2nd defendant which is incorporated in the U.S.A. and which holds 99% of the 1st defendant.

6. In May 1998, the plaintiff in cooperation with two other persons invented and developed a technology known as elastic/silicone sensor technology. This technology has since been protected by U.S. Patent No.6,053,797 under the name of "Elastomer Sensor Technology Interactive Toy". That patent has been assigned to and is held by one Eastgate Innovative Inc. ("Eastgate"), a Canadian company.

7. In mid 1998 and with the consent of Eastgate, the plaintiff, through K.T. Cheung approached Jeff Hsieh, a director as well as the Executive Vice President and General Manager of the 1st defendant to promote the patented technology to the defendants for their design and production of toys. That resulted in Jeff Hsieh indicating interests on the part of the defendants and requesting K.T. Cheung of the plaintiff to present and demonstrate the patented technology to the 2nd defendant at its New York Office. Jeff Hsieh further indicated that if the Chief Executive of the 2nd defendant was satisfied with such presentation and demonstration by the plaintiff, the defendants would place orders with the plaintiff for the IC electronic modules applying the patented technology which could be used as components for the defendants' products.

8. For the demonstration in the New York Office of the 2nd defendant, Jeff Hsieh arranged for one Alfred Ng of Long Sure Industries Ltd ("Long Sure") to accompany K.T. Cheung and the representatives of Eastgate to go along upon the representation by Jeff Hsieh to the plaintiff that Long Sure was the agent of the defendants.

9. At a dinner meeting after the demonstration at the New York Office of the 2nd defendant, Paul Nelson, the Vice President of the 2nd defendant indicated to the representatives of the plaintiff and Eastgate that the defendants were interested in developing products using the IC electronic modules applying the patented technology and that Jeff Hsieh should work out the details of an agreement on behalf of the defendants with Eastgate and the plaintiff.

10. Subsequently, it was agreed between the representatives of Eastgate and the plaintiff with Alfred Ng of Long Sure as the agent for the defendants that :

(a) The plaintiff shall manufacture IC electronic modules applying the patented technology for the products designed by the defendants;

(b) Eastgate shall in turn license to the plaintiff the exclusive right to manufacture and sell such IC electronic modules for application of the patented technology;

(c) The defendants shall obtain the supply of such IC electronic modules from the plaintiff and have the right to design, develop, produce and sell their products making use of such IC electronic modules as components;

(d) Royalty based on the quantity of IC electronic modules ordered by the defendants was to be paid to the plaintiff and by the plaintiff to Eastgate. Apart from royalty, the plaintiff was to obtain profits from its production and sale of the IC electronic modules to the defendants;

(e) A down payment was to be made by the defendants to the plaintiff and by the plaintiff to Eastgate.

11. The parties further agreed that K.T. Cheung should work out the details of an agreement with Jeff Hsieh back in Hong Kong.

12. Subsequently, in Hong Kong, Jeff Hsieh acting for the defendants and K.T. Cheung acting for the plaintiff agreed that :

(a) the plaintiff shall obtain a licence from Eastgate to manufacture and sell IC electronic modules for application of the patented technology up to 31 December 2000;

(b) the defendants shall place purchase orders with the plaintiff up to 31 December 2000 for such IC electronic modules and have the right to design, develop produce and sell their products making use of such IC electronic modules as components;

(c) the price of such electronic modules payable by the defendants to the plaintiff was fixed at 18% on top of the total material costs plus bonding costs of HK$1.4/pcs. The defendants guaranteed that up to 31 December 2000 the defendants shall place purchase orders with the plaintiff at a minimum total price of US$5,000,000. A sum of HK$1,800,000 was to be paid up front to the plaintiff for the price of the purchase orders to be placed by the defendants;

(d) the defendants to pay the plaintiff a royalty of 1.5% of the price of such IC electronic modules ordered by the defendants.

("the Oral Agreement").

13. According to Jeff Hsieh, Long Sure would prepare and sign a letter with the plaintiff to evidence such agreement. Jeff Hsieh further told the plaintiff that Long Sure was used because it was for the tax planning of the defendants and the purchase orders would be placed by the defendants in any event. As a result, a Licence Agreement in writing was entered into between the plaintiff and Long Sure dated 28 July 1998 ("the Licence Agreement").

14. Pursuant to the Oral Agreement, the plaintiff obtained a licence from Eastgate and performed all its obligations needed vis-à-vis Eastgate. The upfront payment of HK$1,800,000 from the defendants were also paid to Eastgate as advanced payment. The plaintiff had also duly delivered all the IC electronic modules ordered by the defendants.

15. However, the plaintiff claims that the defendants were in breach of the Oral Agreement in that they had failed to place purchase orders with the plaintiff up to a total purchase price of US$5,000,000. (equivalent to HK$39,000,000). The particulars given show that the defendants purchase orders up to the end of 2000 came to only HK$15,129,305.55.

16. Accordingly, the plaintiff claims damages, loss of profits and loss of royalty for such breach by the defendants.

The present application and appeal

17. By its Summons dated 20 July 2001 (of which this appeal is a re-hearing), the 2nd defendant seeks :

(a) to discharge the order of Master Ho given on 27 April 2001 granting leave to the plaintiff to issue a Concurrent Writ for service out of the jurisdiction and to serve a copy of the Writ upon the 2nd defendant;

(b) to set aside the service of the Writ upon the 2nd defendant in the United States of America; and

(c) a declaration that the Court has no jurisdiction over the 2nd defendant in respect of the claim or remedy sought.

18. The stance taken by the 2nd defendant is that there has never been any contract between the plaintiff and the 2nd defendant. Whatever contract there may be is between the plaintiff and Long Sure. It is further contended that Jeff Hsieh was not acting as the agent of the 2nd defendant (nor for that matter the 1st defendant either) but was only acting as the agent of Long Sure in his dealings with the plaintiff in relation to the transactions the subject matter of the plaintiff's claim.

19. In putting forward that position, the 2nd defendant relies upon not only the evidence of Jeff Hsieh given on affidavit but also the written Licence Agreement entered into between the plaintiff and Long Sure.

20. Moreover, the 2nd defendant also relied upon the fact that there is a separate agreement between Long Sure and the 2nd defendant (in which the plaintiff is not a party) in respect of the same subject matter but which is not a back-to-back agreement with the Licence Agreement, in particular the terms of which do not provide for the guaranteed minimum order which appears in the Licence Agreement.

21. My attention has also been drawn to a clause in the Licence Agreement which provides for termination if there is any change of directorship in Long Sure. It is submitted that this demonstrates that the Licence Agreement was personal to Long Sure and excludes the possibility that the plaintiff was dealing with the 2nd defendant.

22. Reliance was also sought by the 2nd defendant on the parol evidence rule which prohibits the plaintiff from relying on oral evidence to vary or contradict the terms of a written agreement being the Licence Agreement.

23. In all the circumstances, it is submitted by the 2nd defendant that the plaintiff has failed to make out a good arguable case that the jurisdiction of the court has been established under Order 11, rule 1(1), in particular that the plaintiff has failed to establish a good arguable case that here was a contract between the plaintiff and the 2nd defendant, nor that there is any serious question to be tried between them.

Decision

24. It is clear from all that has been said above that there are serious disputes of facts between the plaintiff and the 2nd defendant. Where there are disputed facts between the parties, my task is primarily to look at the plaintiff's case rather than to attempt to resolve such disputes on affidavit.

25. In making the application, the 2nd defendant's defence is that Jeff Hsieh was not the agent of the 2nd defendant and there is no agreement between the plaintiff and the 2nd defendant. The Licence Agreement clearly supports that stance of theirs and the contents of the Licence Agreement clearly indicates that the 2nd defendant was not a contracting party with the plaintiff.

26. However, that is not the correct approach in such an application. The correct approach at this stage is for me to consider primarily the plaintiff's case, not the strength or merits of the defence in the light of the plaintiff's claim. This is particularly so where there are disputed facts between the parties.

27. Looking at the plaintiff's case against the 2nd defendant, it is quite simply that Jeff Hsieh, when he came to the oral agreement with K.T. Cheung of the plaintiff, was acting as the agent of both defendants; that the agreement was made between the plaintiff and the defendants, and that the Licence Agreement entered into between the plaintiff and Long Sure did not embody the Oral Agreement reached between Jeff Hsieh and K.T. Cheung but was done so at the request of Jeff Hsieh giving the reason that it was to assist the defendants with their tax planning. It is on the Oral Agreement that the plaintiff brings its claim - not on the Licence Agreement.

28. Nor can the parol evidence rule assist the 2nd defendant since it is not the plaintiff's case that the Licence Agreement embodies the true agreement agreed between the plaintiff and Jeff Hsieh on behalf of the defendants.

29. On the basis upon which the plaintiff's case is put, I am unable to see how the Master can be faulted for granting leave to the plaintiff to issue a Concurrent Writ for service out of the jurisdiction.

The proper forum

30. The plaintiff is incorporated in Hong Kong. So too the 1st defendant. On the other hand the 2nd defendant is an American company with its head office in New York. Although the 1st defendant may be described as a subsidiary of the 2nd defendant, they are separate legal entities from each other.

31. The contract upon which this claim is brought by the plaintiff is alleged by it to have been entered into here in Hong Kong.

32. There can be little doubt that as between the plaintiff and the 1st defendant, Hong Kong would be the proper forum for them to resolve their dispute.

33. In so far as the 2nd defendant is concerned, they have now adduced evidence to the effect that important witnesses who can refute the plaintiff's claim against the 2nd defendant have now left the employ of the 2nd defendant and whilst these witnesses are somewhere in the United States in the vicinity of New York, they cannot be compelled by the 2nd defendant to come to Hong Kong to testify.

34. In my view, the fact that these witnesses have left the 2nd defendant's employ and therefore difficult for the 2nd defendant to locate or secure as witnesses is not such a problem as to seriously affect the question of the proper forum. If the 2nd defendant wish to call them as witnesses, the 2nd defendant will still have to locate these witnesses and secure their co-operation/agreement to be witnesses whether the case is to be heard in Hong Kong or in the U.S.A. Even if they cannot be compelled to come to Hong Kong to give their evidence, that problem can, to some extent, be overcome by modern technology such as giving evidence by video-link.

35. What swings the balance to Hong Kong being the proper forum in my view is the fact that the contract is alleged to have been made in Hong Kong, the plaintiff and the 1st defendant are all Hong Kong companies and the fact that Jeff Hsieh is also in Hong Kong since he is central to the main issue in this case, namely, whether he was acting as the agent of the defendants (as alleged by the plaintiff) or whether he was acting as the agent of Long Sure (as alleged by himself and the defendants) when he negotiated the agreement with the plaintiff.

36. If the dispute between the plaintiff and the 1st defendant is to be heard and determined by the courts in Hong Kong, that is itself a very powerful reason why the dispute between the plaintiff and the 2nd defendant should also be determined in the same forum by the same judge since it is the same dispute albeit involving different parties.

Conclusion

37. For the above reasons, the 2nd defendant's application is dismissed with costs. The costs order being an order nisi.