SUNRISE GROUP CORPORATION v. HONEST FAME (HONG KONG) LTD

HCA 232/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 232 OF 2014

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REASONS FOR DECISION
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1. This was the defendant’s application by summons dated 4 November 2014 to set aside the final judgment dated 17 June 2014 entered upon the defendant’s failure to give notice of intention to defend. At the conclusion of the hearing, the defendant’s application was dismissed with costs in favour of the plaintiff with certificate for counsel, such costs to be summarily assessed.

BACKGROUND FACTS

2. The plaintiff is a chemical enterprise headquartered in the PRC.  It has been trading in a type of raw chemical for industrial applications known as Mono Ethylene Glysol (“MEG”) since 2009.

3. The defendant is a Hong Kong company whose sole shareholder and director is Fan Hai Yin (“Fan”) who is shown on the defendant’s annual return as having an address in Shanxi in the PRC.  The defendant is a specialised trader of polypropylene and polyethylene (“PP”).

4. The plaintiff’s action is based on a written sales contract dated 19 June 2013 (“the contract”) under which the plaintiff agreed to purchase from the defendant 1000 MTS (+/-5%) of MEG fibre grade (“the goods”) at the price of US$965,000.  The plaintiff opened an irrevocable letter of credit in favour of the defendant but the defendant failed to ship the goods to the plaintiff.

5. Clause 12 of the contract provided that if the buyer could not open the letter of credit to the seller or the seller could not deliver the goods to the buyer, 20% of the total contract value should be paid to the seller or to buyer as penalty.  Accordingly, the plaintiff claimed US$193,000 from the defendant.

6. Upon the defendant’s failure to give notice of intention to defend, the plaintiff obtained a default judgment.  Then in July it issued garnishee proceedings against HSBC regarding the defendant’s accounts and served a statutory demand on the defendant’s registered office on 5 August 2014.  When that went unsatisfied, a winding up petition was issued on 1 September 2014.

7. As a result of the winding up proceedings, and the freezing of the defendant’s bank accounts as a result, the defendant became aware of the default judgment in early September 2014 but it did not take out the present summons until the day prior to the call over hearing of the winding up petition on 5 November 2014.

THE DEFENDANT’S GROUNDS FOR ITS SETTING ASIDE APPLICATION

(1)  The default judgment was irregular

8. Both the writ and amended writ were served on the defendant at the defendant’s registered office.  It was the address of its company secretary SBC Corporate.  It is trite law that service of the writ on the registered office of a body corporate would be good service.  It is sufficient to prove that the writ was left at the registered office without showing with whom.

9. Mr Ng, counsel for the defendant, sought to contend that it has not been shown that the writ had been ‘left at’ the registered address.  He relied on an email exchange dated 18 September 2014 between Fan and one Mary Yan asking the latter (who is said to be the manager of SBC International, Hangzhou) to confirm with her Hong Kong colleagues again at the defendant’s registered office whether any letter of the court was received to which the reply was “Repeated inquiry’s reply: Up till now, still not received letter.”

10. Mary Yan was not based at SBC’s Hong Kong office which is the registered office of the defendant in Hong Kong and clearly she did not have any personal knowledge of what documents had been left at that office.  The defendant’s contention that the writ/amended writ was not duly served on the defendant is hopeless, absent evidence from staff at SBC’s Hong Kong office/the defendant’s registered office in Hong Kong to the contrary. 

11. In the affirmation filed in support of the setting aside application, the defendant also put forward the ground that the company secretary was not authorised to accept any documents delivered to the defendant’s registered office except government communications.  Wisely, at the hearing, this line of argument (which was doomed from the start) was not advanced.  It is again well‑established that inadequate internal administrative arrangements by the company cannot and does not affect the validity of the document that has been properly served at its registered address.

12. In the circumstances, I have no hesitation in holding that the default judgment was a regular judgment.

(2)  Merits

13. The defendant advanced three grounds to establish that it had a meritorious defence.

(a)  Whether contract was genuine

14. The first line of defence raised was that the contract could not be genuine because the defendant had never entered into such a contract. 

15. Apart from the bare assertions made by Li Bo (a business partner of the defendant who participates in external sourcing, sales and business contact of the defendant) that carry little weight being self-serving, the defendant relied heavily on what was said to be the defendant’s ‘usual business practice’, that the terms of the contract were ‘out of line’ insofar as the value of the contract and the type of goods being traded were concerned and also because of the absence of evidence that the defendant had ever dealt in MEG which was said to require special storage. 

16. It was also said that in the present case the contract was made electronically whereas Li’s evidence (Li 1 at §37) was to the effect that the usual trading practice of the defendant involving an intermediary/broker was for the seller and buyer to enter into a paper contract without the involvement of the intermediary and the defendant’s seal would be affixed to the paper contract. 

17. As regards the value of the contract, it is a non‑point given that while the defendant did not often enter into transactions of a value comparable to that of the contract, the evidence shows that it did enter into one or more such transactions every year for the years 2012 through 2014.

18. While I accept that the defendant specialised in PP products, it was nevertheless a trader in chemicals.  Its evidence did not go so far as to rule out the possibility of supplying MEG if Zhong Xiaolv (“Zhong”) (the defendant’s intermediary who had inquired if the defendant would supply MEG) could find an “upstream supplier”.  Moreover, if such a supplier could be found, storage would not be an issue.

19. That the contract was made electronically would not prevent it from taking effect if the contract could be established.  The defendant’s evidence was directed to its own usual practice.  It did not show an industry practice.  That the defendant could have departed from its usual practice cannot be ruled out.  If the transaction was sufficiently attractive from the defendant’s point of view, there would not appear to be any compelling reason for it not to take up the trade.  What is determinative is the quality of the evidence that establishes the existence of a concluded contract. 

20. In that regard the plaintiff has adduced evidence establishing the events that occurred on 2 and 3 July 2013 through exhibiting contemporaneous QQ records, QQ being a service for instant messaging. From those records, it is possible to re‑construct the exchanges, in chronological order, that took place between Zhong and Hotwind (the latter being the plaintiff’s intermediary) as well as the exchanges between Zhong and Zhang Weiwei (“ZWW”) of the plaintiff. 

21. Those exchanges will be considered in greater detail in the next section under the heading “Want of Authority”.  For present purposes, it suffices to state that I am satisfied that the evidence shows that there was a concluded contract between the plaintiff and defendant.

22. By denying the authenticity of the contract simply because it was in electronic form, the defendant is effectively saying that the contract was forged.  There is no evidence of any prior dealings between the plaintiff and defendant.  The connecting link between them was the defendant’s intermediary Zhong.

23. So, if (as would appear to be the insinuation behind this line of defence) the plaintiff had forged the defendant’s chop and signature that appears on the contract, one would have to ask from whom and how could the plaintiff have obtained a copy of the chop and the signature of “Ervin.Gao” as the authorised signatory for forging purposes?

24. On Zhong’s evidence, he had dragged and dropped through QQ to Hotwind on 2 July 2013 the contract template in MS Word format.  He received the amended contract template in MS Word format from Hotwind later the same day (the templates are “01.doc” and “02.doc” respectively of exhibit “ZX‑1”).  But neither of those documents bore the defendant’s chop.

25. Taking an overall view of the matter and looking at it objectively, I consider the first line of defence raised to be inherently improbable.  The absence of any evidence to show that the plaintiff had in its possession a copy of the defendant’s chop with the signature of “Ervin.Gao” as its authorised signatory significantly undermines the allegation that the contract was not genuine.  I do not consider it remotely likely that the first line of defence could be established at trial.

(b)  Want of authority

26. The defendant asserts that Zhong’s role was to act as an intermediary only and that he had no authority to conclude a contract on the defendant’s behalf with the plaintiff.

27. But what do the documents show?  The events that took place in July (particularly on 2 and 3 July 2013) and the first half of August are particularly relevant and they are set out below in chronological order.

(1) During the morning of 2 July 2013 ZWW of the plaintiff made known to its consultant Hotwind its requirements for a shipment of MEG including the price at which it was prepared to contract.  Hotwind’s staff Yang Mingzhu (“YMZ”) contacted Zhong by way of QQ and negotiations ensued.  During that conversation Zhong made several references to his “boss”.  Subsequently on the same day Zhong confirmed to YMZ on the telephone that the price would be US$965 as well as the other terms agreed for the goods.  YMZ had not at that stage disclosed the identity of the buyer to Zhong.  

(2) YMZ then advised her colleague Yang Qiong (“YQ”) that a seller for MEG had been found and YQ conveyed that information to ZWW of the plaintiff.  The QQ records show that at about 16:26 hours YQ obtained from the plaintiff its contact details and at the same time gave ZWW Zhong’s contact number.

(3) Shortly thereafter, at about 17:15 hours, ZWW made contact with Zhong providing him with the plaintiff’s contact information. Zhong then prepared a draft document “Sunrise Contract.pdf” which he sent to ZWW at about 17:25 hours.  Upon the plaintiff’s request, Zhong also forwarded to ZWW the defendant’s business registration certificate and proof that it was an offshore company. 

(4) Zhong then sent the plaintiff a copy of the draft contract that had been stamped on the front but which did not contain the amendments that had been agreed.  Zhong explained that the person responsible for fixing the stamp had left by the time the amendments were agreed.  He promised that another stamped contract with the amendments would be sent the following morning.  He requested that further amendments should not be made to the contract itself but through the letter of credit.  The plaintiff agreed and asked Zhong to provide the plaintiff with the full Chinese name of the company.

(5) Following that exchange, ZWW caused an email written in Chinese to be sent to Zhong recording the terms of the contract and naming the seller (ie the defendant) by its English name as Zhong had yet to provide its Chinese name.

(6) ZWW made contact with Zhong the following morning and by 11:25 hours ZWW received the final contract. 

(7) Meanwhile the plaintiff sent to Zhong the draft of the proposed letter of credit for approval.  He was advised by Zhong later that afternoon that approval from Shanxi (where the parent company of the defendant was based) was required.  Further negotiations between the plaintiff and Zhong on the terms of the letter of credit ensued with all outstanding problems resolved by 5 July 2013.  The letter of credit was then issued accordingly.

(8) Following those negotiations, from about 6 August 2013, the plaintiff asked for information regarding the shipment.  By 22 August the plaintiff was extremely anxious as it had already sold that batch of goods but was unable to make contact with Zhong who had deleted ZWW from his QQ contact list in September 2013.

28. Against that evidence is Zhong’s version to the effect that when he was contacted by Hotwind he turned down the plaintiff’s offer and that he never confirmed with the plaintiff a contract numbered HF20130619PC01. Faced with the contemporaneous QQ records, Zhong did not deny that the exchanges took place.  Rather, he queried their completeness without particularizing what, according to him, was missing in terms of substance and alleged that he was unable to locate the conversation records provided by ZWW and YMZ.

29. It is undeniable that Zhong was responsible for the initial as well as subsequent drafts of the contract as is apparent from the exchanges that took place between ZWW and Zhong on 2 July 2013 between 17:20 and 17:56 hours as shown in the QQ records.  The email that was sent to Zhong at 18:01 hours stated the seller’s name in English.  If he had not been acting for the defendant, one would have expected a clear denial when the parties resumed contact on 3 July 2013.  That did not happen.  Further, what was the point of sending ZWW the certificate from Shanxi Beirui and the defendant’s certificate of incorporation to ZWW?  It simply does not make any sense.

30. In my view, given the overwhelming documentary evidence, the prospects of the defence of want of authority succeeding are remote.

(c)  Penalty

31. The third ground advanced was that clause 12 of the contract is in truth a penalty rather than liquidated damages.  It was submitted that 20% of the contract price was in essence ‘in terrorem’, not being a genuine estimate of the damages for breach.  It was said to be indiscriminate because it applied to both the inability to open a letter of credit and delivery when the breach might have been technical causing minute losses.

32. While a fixed amount was for different events, in my view, there was good reason for so doing because the two obligations reflect the parties’ respective fundamental obligation undertaken by entering into the contract.

33. It is accepted in the present case that as a result of the defendant’s breach, the plaintiff had to buy from a third party and had to pay US$1,118 per ton instead of US$965 per ton as provided in the contract.  In other words, it had to pay approximately 16% more for the goods.  It is also accepted that the price of the commodity in question is subject to significant fluctuations.  In those circumstances it is highly unlikely that a provision for 20% of the contract price in the event of non‑performance by a party could reasonably sensibly be viewed as a penalty.

CONCLUSION

34. None of the three grounds of defence had any merit.  Accordingly, the defendant’s application fell to be dismissed.