BEATE GOBEL v. FOSSIL (EAST) LTD

HCA 2530/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2530 OF 2003

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J U D G M E N T

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Introduction

1.  This is an appeal from Master Hui in interpleader proceedings.  The subject matter of the action concerns claims by watch component manufacturers.  The Plaintiff, Frau Göbel, a German lady, has sued the Defendant, a substantial watch maker and trader in the sum of US$100,910.

2.  It is important to understand the background to this matter in order to follow the issues which fall to be determined by me in resolving the appeal.

3.  The Plaintiff, is a director, together with another German Herr Lutz Schaper, of the 1^st Claimant, Meliga (HK) Limited, in the interpleader proceedings.  For a number of years the Defendant has sourced watches from the 1^st Claimant for which it has been invoiced by the 1^st Claimant and paid it against those invoices.  Since about 1997, New Sounds Industries Limited, the 2^nd Claimant, which is a manufacturer of a range of watch components, has supplied these products to the 1^st Claimant.  As a result of that trading relationship there came a time when the 1^st Claimant became indebted to the 2^nd Claimant in an amount of the order of US$ 4 million represented by 523 unpaid invoices.  The business relationship of these two Claimants has been regulated by two agreements in writing, the first dated 24 September 1998 and the second on 23 March 2001.  Suffice it to observe, for present purposes, that both agreements contained an arbitration clause, the nature and scope of the arbitration proceedings being contained in two further agreements in writing made consequent upon the main agreements of September 1998 and March 2001.  I will need to return to the significance of these agreements presently. 

4.  I should say that many of the components supplied by the 1^st Claimant to the Defendant were purchased by the 1^st Claimant from the 2^nd Claimant.  In order to reduce and, hopefully completely extinguish the debt owed by the 1^st Claimant to the 2^nd Claimant an arrangement was arrived at between these two parties and the Defendant which is referred to in the papers as the “tripartite” or “three parties” agreement dated 24 July 2001.  Just prior to this agreement being entered into the 2^nd Claimant had brought an action against the 1^st Claimant to recover from it the outstanding debt to which I have already referred.  Having regard to the tripartite agreement, which I will describe in a moment, this action was not proceeded with.  The nature of the tripartite agreement was that the 2^nd Claimant would in effect take over the supply of watches and components ordered by the Defendant from the 1^st Claimant.  This was done in the following way.  The 2^nd Claimant would have access, free of charge, to watch components from the 1^st Claimant’s warehouse and obtain any other watch components at its own cost and then deliver these to a watch assembly company who would manufacture the watches, also at the 2^nd Claimant’s cost.  The finished product would then be delivered to the Defendant who would be invoiced for these watches by the 1^st Claimant, whose invoices would be marked “please pay to the [2^nd Claimant]”.  This is what took place with the effect that these payments went to reduce the 1^st Claimant’s indebtedness to the 2^nd Claimant. 

5.  This agreement is evidenced by a letter from the 1^st Claimant to the Defendant, signed on its behalf by the Plaintiff in her capacity as a director of the 1^st Claimant, this letter being dated 24 July 2001 [page 227] a copy of which was sent to the 2^nd Claimant.  This agreement was acknowledged in writing by the Defendant on 15 November 2001 [page 228].

6.  The agreement was carried into effect and so much can be seen from the numerous invoices [pages 100-114] which bear the instruction to the Defendant, by the 1^st Claimant, to make payment to the 2^nd Claimant.  This having gone satisfactorily there then came a series of invoices similarly endorsed by the 1^st Claimant which were disputed by the Defendant because, put simply, it was said that what was delivered was less than the goods in the invoices.  These disputed invoices are at pages 116-122.  These invoices were replaced by the 1^st Claimant [pages 124-131] which did not bear the endorsement contemplated under the tripartite agreement .  It is these invoices which amount to US$100,910.  A letter dated 10 September 2001 accompanying these particular invoices [page 133], from the 1^st Claimant (again signed on its behalf by the Plaintiff) drew attention to the fact that there was no such endorsement and requested that the Defendant should pay the invoices direct to the 1^st Claimant.  The response to this request came on 15 November 2001 (ibid) from the Defendant acknowledging the existence of the tripartite agreement and requiring an acknowledgment from the 2^nd Claimant that it was agreeable to these invoices being paid to the 1^st Claimant as opposed to itself.

7.  That acknowledgement was not forthcoming, the 2^nd Claimant saying that these invoices as well were covered by the tripartite agreement being virtually identical to the disputed invoices which did bear endorsement for payment to it.  The 1^st Claimant’s case was, and is, that these are not covered by the agreement, what had previously been paid to the 2^nd Claimant by the Defendant having extinguished its indebtedness to the 2^nd Claimant.  That analysis is one to which I need to return presently.

The Interpleader

8.  In order to complete this introductory narrative I should say that this disputed amount was assigned in writing by the 1^st Claimant to the Plaintiff, the assignment under deed starting at page 63 and confirmed by a resolution by the 1^st Claimant’s board of directors which is at page 66.  It is on this basis of the Plaintiff has now sued that the Defendant for this amount.  The Defendant accepts that it is liable to pay this amount, it having received the items covered by these invoices but it is unable to say whether that payment should be to the 1^st Claimant or the 2^nd Claimant having regard to the terms of the tripartite agreement.  In such circumstances it applied to interplead and was allowed to do so by the Master on 3 December 2003 who directed the Defendant to pay the amount into court with a direction that these two competing Claimants should state their cases on the claim which they now have done. 

A Separate Action by the 2^nd Claimant against the 1^st Claimant

9.  A month following this action against the Defendant, on 16 August 2003, the 2^nd Claimant (as Plaintiff) sued the 1^st Claimant (as Defendant) for the outstanding amount US$100,910 in respect of these five invoices.  That was before the Defendant in the present action had sought to interplead.  The 1^st Claimant having been sued on this amount, relying on the arbitration clause which covered its trading agreements with the 2^nd Claimant, applied for and obtained a stay of the action so that the matter could go before an arbitrator.  That plea was upheld by Deputy High Court Judge Muttrie on 13 February 2004.  His order was appealed by the 2^nd Claimant to the Court of Appeal which dismissed the appeal on 6 January 2005 holding that the judge was correct to have stayed the action.

The Proceedings before Master Hui

10.  Master Scott having directed that the Plaintiff and the Claimants state their cases as to the money now in court the matter came before Master Hui who, on 10 October last, having decided that he was able to dispose of the matter summarily, directed that this amount should go to the 2^nd Claimant, as opposed to the Plaintiff, the 1^st Claimant accepting that having assigned the debt to the Plaintiff was in no position to maintain a claim.  The Master held that this money, and the invoices to which it related, was covered by the terms of the tripartite agreement.  Presumably, he was satisfied that there was no issue worthy of trial.  From this order the Defendant now appeals to me.

The Appeal

11.  Having taken no part in the hearing before the Master because it accepted that it had no claim to the money, the 1^st Claimant now seeing that the money is to go to the 2^nd Claimant and not to the Plaintiff as it would have wished, has filed a summons, and evidence in support, to be heard on the appeal.  The Plaintiff welcomes this appearance, but the 2^nd Claimant takes the sharpest objection contending that the 1^st Claimant, on having assigned this debt to the Plaintiff and therefore having no claim to the money in court, has no locus in this matter, be it at first instance before the Master, before whom it did not appear and a fortiori now on appeal before me.  I will determine this issue first.

Does the 1^st Claimant have Locus?

12.  Mr Lau, for the 1^st Claimant, has repeated the argument as to why the money in court is not caught by the tripartite agreement which is the identical argument put forward by the Plaintiff, so that to this extent the 1^st Claimant’s presence in the appeal adds nothing to what I will have to resolve between the Plaintiff and the 2^nd Claimant.

13.  The more important point, it seems to me, is that Mr Lau’s other ground, which concerns the effect of the Court of Appeal’s decision, upholding the judge at first instance, that the dispute between the 2^nd Claimant and his client, Plaintiff and Defendant respectively in that action, will need to go to arbitration.  That action, as I have already explained, concerns precisely the amount now in court and he says that I should therefore direct, failing an order favourable to the Plaintiff which he supports, that this money should remain in court pending the arbitration which the Court of Appeal has directed in that case.  This is also the Plaintiff’s fall-back position on the appeal, she preferring of course, an order that the money should go to her now, without the need to await the arbitration.

14.  The high point of this argument, it seems to me, is that where the 2^nd Claimant has initiated that other action, claiming this identical amount which it has now been required to arbitrate on, it is wrong to allow the 2^nd Claimant to proceed with this same claim in this action and obtain summarily the very amount which it has sought in the other action.  Nobody has suggested that to do so is tantamount to being an abuse of the court’s process, which would be far too strong a characterisation in circumstances where the 2^nd Claimant is only reacting to the Plaintiff’s claim for this same amount from the Defendant and who has been allowed to interplead.  And so the 2^nd Claimant’s part in this is merely reactive to what has been initiated by the Plaintiff who has brought this action.

15.  Mr Patrick Chong, on behalf of the 2^nd Claimant, has addressed a series of highly persuasive submissions to the effect that the 1^st Claimant, having assigned this debt to the Plaintiff, can have no locus in this matter.  Mr Lau, accepts that upon assignment of the debt to the Plaintiff it can have no claim to this money.  Reference has been made to The “Halcyon The Great” [1984] Lloyd’s LR283 which supports the proposition that once an assignment has been made, the assignor loses the right to arbitrate, and also to Deposit Protection Board v Dalia [1994] 2 AC 367, which is to the effect that after a legal assignment only the assignee can be said to have any entitlement against the Defendant (the debtor); per Simon Brown LJ (as he then was).  Although the decision of the Court of Appeal was overturned by the House of Lords, this part of the judgment of Simon Brown LJ was left undisturbed.  It also follows that once the debt is assigned, the debtor ceases to be liable to the assignor (the 1^st Claimant in this case) but becomes liable instead to the assignee.  So much is clear and the principal is re-stated in Treitel “Law of Contract” 11^th Edition page 681.

16.  Mr Patrick Chong, drawing the effect of all of this together, submits that if there is an arbitration no award could be made in favour of the assignee (the 1^st Claimant).  This being so the 1^st Claimant can have no possible locus in this issue before me, which it appears to have accepted before the Master by not appearing.  If it is right that the 1^st Claimant has no locus then I should not allow it to appear, file evidence as it seeks to do, and be heard on the appeal.

17.  Mr Lau, as I have already said, accepts that his client can have no claim to this money and so to this extent it must be right that I can make no order in its favour on the interpleader claim.  But, as I follow Mr Lau’s submission, what he wishes to do is to weigh in, in favour of the Plaintiff on the merits, which the Plaintiff is perfectly capable of doing through Mr Matthew Chong, who appears for her, failing which he also wishes to intervene at this stage to require the 2^nd Claimant to establish its claim to the money by finishing what it has started in the other action where it sued the 1^st Claimant for this amount.  This is the identical position taken by the Plaintiff before me on the appeal.

18.  I uphold Mr Patrick Chong’s submission that the 1^st Claimant can have no locus in this claim, as it is presented in this form before me, it having assigned its debt to the Plaintiff.  This being so I can see no warrant for allowing the 1^st Claimant to appear on the appeal and this would also have been my view had it sought to do so at first instance.  All its rights to this amount went once it assigned this debt.  I will deal with the issue of costs arising for this decision after I decide how to dispose of the appeal as it relates between the Plaintiff and the 2^nd Claimant.

How should I Proceed?

19.  I have been troubled by the fact that the 2^nd Claimant, who has after all had decided to sue the 1^st Claimant in the other action for this amount and has now been required to arbitrate by the judge, and by the Court of Appeal who upheld him, in order to establish its entitlement to the money should now, in these proceedings be seen to be attempting to get hold of this amount from the Plaintiff, the assignee of the debt, with whom it has no arbitration agreement.  If it were to be allowed to succeed by this “side door” offered to it by the Plaintiff, who has brought this action against the Defendant, it will render the other action otiose.  One way of looking at the matter would be to say that this does not matter at all because the 1^st Claimant has, in any event, assigned this debt and if the 2^nd Claimant succeeds before me it will then have to abandon its claim in the other action subject to any argument as to be costs in that action. 

20.  The other way of viewing this is to say that so far as the 2^nd Claimant’s entitlement to this amount, it has brought its action against the 1^st Claimant (after the assignment of the debt) and been required to arbitrate to determine that entitlement.  As a matter of proper form it ought to be bound by the course that he has embarked upon.  Although the action before me was started before the 2^nd Claimant’s action against the 1^st Claimant, the decision of the Court of Appeal in that action, directing arbitration, was made before this matter had come on before the Master from whose order I am considering this appeal.

21.  I view the resolution of this issue as a matter of discretion on my part.  I have decided that it would be correct to press on in these proceedings and not adjourn them to abide the outcome of the other action and the arbitration.  So far as the 1^st Claimant is concerned, where it has assigned the debt, there can be no prejudice.  If the 2^nd Claimant succeeds in these proceedings then it has no alternative but to discontinue the other action.  It cannot have a double entitlement to the same amount of money.  As I have said that will only leave over an argument as to the costs of that action between the 1^st and 2^nd Claimants in these proceedings, as Plaintiff and Defendant in that action.

22.  As to the Plaintiff, she wishes to press on and obtain a successful outcome which is her preferred position, failing which she would not object to an adjournment to abide the arbitration.  In this regard she cannot really have it both ways and I propose to hold her to her preferred position which is to decide her claim to the money on its merits.  The 2^nd Claimant wishes me to proceed in this way and so it can have no complaint.  Mr Patrick Chong has addressed an argument to the effect that the Plaintiff has lost the right to arbitrate by taking a step in the action, but it seems to me this is not a point that calls for consideration by me.  As I understand the Plaintiff’s position all that she would require in this regard, as a full back position is for me to adjourn the proceedings pending the resolution of the arbitration ordered by the Court of Appeal between the two Claimants in their other action.  That is something I would have jurisdiction to do but for the reasons that I have just given I am declining to take that course.

The Merits

23.  The Master proceeded to deal with the matter summarily presumably on the basis that having considered all of the evidence he found that there was no triable issue as between the Plaintiff and the 2^nd Claimant.  He must have been satisfied that the 2^nd Claimant’s case was unanswerable and gave judgment to the 2^nd Claimant for the amount in court.  My powers under Order 17 RHC, and the Master was exercising the same powers, range from deciding the matter summarily on a basis akin to Order 14 proceedings if I considered the evidence favoured one or the other of these two parties unanswerably, to directing a trial of their completing claims under O.17 r.11.

24.  The Plaintiff’s case is that it is entitled to this amount as assignee of the 1^st Claimant.  There is no issue as to this.  I am satisfied that this a valid assignment.  Mr Patrick Chong accepts this and indeed has already successfully relied on this to dispose of the 1^st Claimant’s participation in these proceedings.

25.  What the Plaintiff is asking me to decide is whether these five invoices come under the purview of the tripartite agreement in which case the amount in court would belong to the 2^nd Claimant or whether they fall outside this arrangement in which case the Defendant would have been liable to pay the 1^st Claimant, whose entitlement has been assigned to the Plaintiff, with the result that she must have the money.  The Master judged that there was no question that these came under the tripartite agreement and therefore that the money should go to the 2^nd Claimant.

26.  The Plaintiff’s case is a simple one.  It is submitted on her behalf that because the invoices did not bear the endorsement directing payment by the Defendant to the 2^nd Claimant, that these invoices were payable to the 1^st Claimant by the Defendant and not to the 2^nd Claimant.  This submission comes from the letter of 24 July 2001 by the 1^st Claimant to the Defendant which in its material terms is as follows:

“We will right (sic) [meaning, no doubt, “write”] the invoices to you and mark on each invoice to whom you should give the cheque for payment.  This will be only [to the 2^nd Claimant] for the outstanding orders which he have today.”

Mr Matthew Chong for the Plaintiff submits that on a proper reading of the tripartite agreement the 1^st Claimant had the right to determine which invoice fell within the ambit of the tripartite agreement and which did not.  It was the 1^st Claimant who contracted with the Defendant for the supply of watches and who was therefore liable to the Defendant as to the quality of the watches.  The tripartite agreement merely regulated the payment arrangements for the 1^st Claimant’s invoices to the Defendant but did not alter the various contractual arrangements as between each other.

27.  Mr Patrick Chong’s principal submission in this regard is that notwithstanding the absence of the endorsement, these five invoices represent the identical items manufactured by the 2^nd Claimant and covered by the “disputed” invoices which bore the endorsement.  They covered the same purchase orders and these purchase orders represent items sourced and manufactured before the tripartite agreement came into effect and they are therefore caught by the agreement which served as a device whereby the 1^st Claimant would defray its outstanding, in round figures, US$4 million debt to the 2^nd Claimant.

28.  Mr Patrick Chong accepts that where there may be a genuine dispute as to US$1,100, which is the difference between the original disputed invoice total and the replacement invoices which are without the endorsement, the court may prefer to leave this small amount in court ordering the payment out to his client of the sum of US$99,810.  He submits that there can be no basis upon which the 2^nd Claimant cannot be entitled to this sum.

Analysis

29.  This is a matter which in my judgment is capable of a summary answer in circumstances where the facts are not susceptible to a reasonable dispute.  I am completely satisfied that as between the 1^st and 2^nd Claimants this sum of money is owed by the 1^st Claimant to the 2^nd Claimant.  These items, the subject of the relevant purchase orders, were manufactured and sourced by the 2^nd Claimant to the 1^st Claimant’s order and so as between the two of them the 2^nd Claimant must be paid.  The question here is whether this is the appropriate forum for this debt to be satisfied or whether this should be done in the other action on a straight contractual dispute between the two of them.  These items having been supplied to the Defendant by the 1^st Claimant, the Defendant is now obliged to pay for them.  The question is whether the correct answer is to say that the amount in court should go to the Plaintiff as the 1^st Claimant’s assignee, leaving it to the 2^nd Claimant to pursue the Plaintiff and/or the 1^st Claimant in separate proceedings (most conveniently the existing other action) in which it could also join the Plaintiff as a 2^nd Defendant, or whether I am able to reflect the entitlement as between the 1^st and 2^nd Claimant’s in this type of proceeding.

30.  I need to give careful consideration to the parameters of this dispute.  The Plaintiff, as assignee, says that the Defendant owes her this amount for watches and parts supplied to its order on a contract between itself and the assignor (the 1^st Claimant).  The tripartite agreement is merely a device, on the side-lines to this, for the convenience of the 1^st and 2^nd Claimants to pay off the 1^st Claimant’s debt to the 2^nd Claimant.  This having been said I believe the matter goes further than the tripartite agreement and I am able, in the interpleader proceedings, to decide the contractual dispute between the 1^st and 2^nd Claimant which will bind the Plaintiff, as the 1^st Claimant’s assignee, rather than require this matter to be litigated under the umbrella of a separate action.  This after all is the object of the procedure by which the two Claimants have attached themselves to this present action.  It is to decide the contractual dispute between the two of them rather than to decide whether these invoices are caught by the tripartite agreement with the need for a direction by way of endorsement on the invoices directing the Defendant to pay the 2^nd Claimant, the absence of which would require direct payment to the 1^st Claimant.  In my judgment, I am not bound to give effect to that arrangement today.  What I am able to do and should do, is to decide as between the two Claimants whether this sum is owed by the 1^st Claimant to the 2^nd Claimant for work done by the 2^nd Claimant to the 1^st Claimant’s order.  In other words I am able to go to the heart of the matter and provide an answer to that core question.

31.  Analysed in this way I uphold Mr Patrick Chong’s submission that these invoices fundamentally represent a debt by the 1^st Claimant owing to the 2^nd Claimant.  The evidence in this regard, for the reasons which I have already given which reflect Mr Patrick Chong’s analysis of the relevant invoices and purchase orders which lie behind the invoices, is all one way.  There is no question that the 1^st Claimant owes this debt to the 2^nd Claimant.  The claim is unanswerable and I will direct that the monies in court, save for the sum of US$1,100, should go to the 2^nd Claimant.  I uphold the Master’s order save for this amount because it seems to me that as to this US$1,100, disputed as it was by the Defendant, raises a triable issue as to whether these items were delivered to the Defendant.  To this limited extent the appeal must be allowed but I am in entire agreement with the Master as to the basis upon which he came to his decision.  The sum of US$99,810 will be released to the 2^nd Claimant, the balance will remain in court until further order pending a decision by the parties as to how that should be disposed of.  I cannot imagine that they would wish to have a contest over this very small amount.  I would expect a consent summons to be forthcoming concerning the disposal of this sum shortly.

Costs

32.  The 1^st Claimant must pay the 2^nd Claimant its costs of and occasioned by its summons to take part and the appeal and to have admitted for that purpose the affirmation evidence in support of the summons.  As between the 1^st Claimant and the Plaintiff I will say that there should be no order for costs, on the basis that the Plaintiff was content to have the 1^st Claimant’s participation in the appeal.

33.  As to the costs of appeal itself these will be to the 2^nd Claimant against the Plaintiff.  For the assistance of the taxing Master I will indicate that the 1^st Claimant’s participation in the hearing of the appeal in support of its summons was as full as that of the actual parties to the appeal itself and so I can see no reason to make any distinction between the Plaintiff’s and the 1^st Claimant’s liability for costs on the hearing itself.  These orders for costs will be orders nisi.  As this judgment is being handed down the parties will be at liberty to argue for a different form of order in respect of costs within 14 days of the date of the judgment.  In order to save costs I will take written submissions on this issue.