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

cacv 342/2004

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 342 of 2004

(on appeal from DCCJ NO. 2127 of 2004)

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REASONS FOR JUDGMENT

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Hon Rogers VP:

1.  This was an appeal from a judgment of HH Judge Muttrie given on 8 September 2004 whereby he granted summary judgment under Order 14 of the Rules of the District Court.  At the conclusion of the hearing of this appeal this court allowed the appeal and gave the defendants unconditional leave to defend.  The order for costs in the court below was left undisturbed and the costs in this court were ordered to follow the result of the trial of the action.

Background

2.  This action concerns a claim made against the defendants under a contract dated 2 January 2004 (“the Agreement”).  The 2^nd defendant was a co-shareholder with the plaintiff in Kinetic Consultants Ltd (“Kinetic”).  Both parties owned 50% of the shares.  The plaintiff agreed to sell his 50% of the shares to the 2^nd defendant’s wife, the 1^st defendant.  The price was HK$800,000.  That was to be paid in four instalments namely $300,000 as at the date of the Agreement and a further $100,000 on 28 February 2004.  The two remaining instalments of $200,000 each were to be paid on 15 April and 31 August 2004.  The claim against the 1^st defendant is for failure to pay the last two instalments and the claim against the 2^nd defendant is in respect of the guarantee which he gave as part of the Agreement.

3.  Schedule 3 of the Agreement set out the warranties which the plaintiff gave.  Two of those appear to be relevant:

"3.	Commitment with third parties
	The Vendor has not purportedly on behalf of the Company and without the authority of the Board given guarantee, indemnity or other security to third parties.
	…
5.	Contract of significance
	(A)	The Vendor has not purportedly on behalf of the Company and without the authority of the Board cause the Company to enter into:
		(i)	any contract which is not in the ordinary course of the Company’s business;
		(ii)	any contract which is of a long term and non-trading nature; or
		(iii)	any agreement otherwise than by way of bargain at arm’s length; or
		(iv)	any contract which materially restricts the freedom of the Company to carry on its business.
	(B)	The Vendor has not purportedly on behalf of the Company and without the authority of the Board created charges or rights of security or third party rights of any kind whatsoever over any of the assets of the Company."

4.  As part of the Agreement the plaintiff assigned a shareholder’s loan that had been made to Kinetic of $482,999.27.  The plaintiff also acknowledged that Kinetic was entitled to all the contracts which were listed in Appendix III.

5.  In January 2004 Kinetic invoiced Keith To Architects Ltd (“KTAL”) in respect of five of those contracts in Appendix III for a total sum that has been adjusted to $228,620.26.  It appears there is at least sufficient evidence at this stage for the defendants to aver that the plaintiff was an “Associate” of KTAL.   The claim for the amount invoiced was met with a reply from KTAL by letter dated 27 February 2004 not only alleging that the work had not been satisfactorily performed but continuing as follows:

"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 assignment 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 a bad debt.”

6.  By a later letter addressed to the defendants’ solicitors dated 20 April 2004 KTAL wrote as follows:

"1.	We do not deny that there are sums (‘Debts’) owed by as to the Company under the projects to which invoices numbers 99145, 98064, 99267, 98068 and 98094 relate.
2.	According to our dealings with the Company, the Debts will be due by as to the Company only after we have received payment from our clients.
3.	The respective sums set out in the said invoices have not been agreed by us and are subject to verification by us.
4.	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 bad debt.  Such representation by Mr Mike Li does not prejudice the Company’s right to recover the said sums from us."

7.  The defence filed on behalf of the defendants relied upon the allegation that the plaintiff had agreed with KTAL that the “Debts” were to be treated as bad debts.  The judge below correctly dismissed that argument on the basis of factual evidence.  When taken as a whole, the correspondence does not show that there was an agreement to treat the “Debts” as bad debts and there is nothing else to show that the plaintiff had waived those “Debts” on behalf of Kinetic.

8.  However, as Mr Li, who appeared in this court but not in the court below and who was not responsible for the defence, has pointed out there are other matters which are now clear.  The evidence which was admitted in this court includes evidence as to what took place at a recent trial of the claim by Kinetic against KTAL.  That trial took place in the District Court in respect of the 5 invoices and judgment has yet to be delivered.  It would seem that the major defence raised by KTAL was that the invoices raised by Kinetic would only be payable on receipt of the corresponding amounts by KTAL from their customers.  That evidence was clearly admissible in this court at this stage of the proceedings as it has arisen since the hearing of the Order 14 application in the court below.  On the basis of that evidence this court is left in the position that it may be held that there was a back to back agreement which had been agreed to on behalf of Kinetic by the plaintiff who was at that time also an Associate of KTAL. 

9.  In those circumstances it would be arguable that the warranties under Schedule 3 would have been breached.  In particular, it could be argued that by agreeing to a back to back arrangement, the plaintiff had given a form of indemnity to KTAL and also made a contract which was not in the ordinary course of the Company’s business.  It could also be said that by agreeing to a back to back arrangement the plaintiff had given a right to KTAL over some of the assets of the Company, namely the accounts receivable.  Finally it could also be argued that because the plaintiff was, at the least arguably, an Associate of KTAL, the Agreement to the back to back arrangement was not at arm’s length.

10.  In those circumstances it appeared that the defendants had an arguable case.  To a large extent the defendants have been the cause of their own misfortune in the way the case has been prepared and presented.  The judge below came to the correct decision on the basis of the evidence and argument before him.  In many ways the defendants are fortunate that the District Court case brought by Kinetic against KTAL has taken place at the time it did.  It gives credence to the argument that there is a factual dispute which might be decided in the defendants’ favour.  It was in those circumstances that, although this appeal was allowed, the defendants were not successful in obtaining a reversal of the costs order below and the costs in this court were made subject to the outcome of the trial.

Hon Le Pichon JA:

11.  I agree.