SCHÄFER TOY CO GMBH v. LAM WING PING AND ANOTHER

DCCJ 2411/2013

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 2411 OF 2013

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JUDGMENT

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1.  The plaintiff claims against the defendants for damages arising from a breach of agency agreement. The 1^st and 2^nd defendants counterclaim against the plaintiff for damages arising from a breach of an oral agreement made between the 1^st defendant and one Mr Schafer.

Background

2.  Mr Schafer is the director of the plaintiff (“Schafer Toy”).  The 1^st defendant (“Ms Lam”) beneficially owns the 2^nd defendant, though the extent of the beneficial ownership is disputed.

3.  In or around 2005, Mr Schafer and Ms Lam entered into an agreement which subsequently resulted in Schafer Promotion Marketing GmbH (“SPM”) placing orders with Golden Dragon for various goods.  The nature and the terms of the agreement are the crux of the parties’ dispute.

4.  Mr Schafer claims SPM and Golden Dragon entered into an agency agreement, the terms of which are pleaded at paragraphs 4 and 5 of the Statement of Claim.  In summary, SPM agreed to appoint Golden Dragon as its agent to place orders with suppliers, to procure the delivery of the goods to the customers, and to receive payments from customers.

5.  However Ms Lam contends Mr Schafer and herself entered into an oral agreement to set up Golden Dragon.  It was agreed the beneficial ownership of Golden Dragon be divided as follows: 75% to be owned by Mr Schafer and 25% to be owned by Ms Lam. The profit would be split in the same percentage. Ms Lam further claims there was an oral agreement whereby Golden Dragon was entitled to charge a 10% commission on the purchase price of each shipment.

6.  It is not disputed during the period of cooperation between SPM and Golden Dragon, SPM did transfer money to Golden Dragon. However the nature and extent of transfers are disputed.

7.  In his witness statement, Mr Schafer claims the transfers were loans to Golden Dragon (though this was denied in his evidence in court). Mr Schafer explained the purpose of making the transfers was to sustain Golden Dragon’s operation. He further explained he agreed to make the transfers because the continual operation of Golden Dragon was important to SPM’s business in Asia. He adamantly denies such transfers were capital injections into Golden Dragon.

8.  Ms Lam claims the parties agreed Mr Schafer was responsible for making capital contributions to Golden Dragon whereas Ms Lam was responsible for providing her “effort and labour”. The transfers made by SPM to Golden Dragon were not loans but capital contributions to Golden Dragon as per their oral agreement.

9.  It is not disputed SPM assigned all its rights in respect of the debts owed to it by Golden Dragon to Schafer Toy by way of a Deed of Assignment dated 6 March 2014.

10.  Schafer Toy claims Golden Dragon received payments from customers on behalf of SPM in the total sum equivalent to HK$598,569 and has failed to remit the same back to SPM/ Schafer Toy. Furthermore, Golden Dragon has failed to settle the production costs in respect of the payments received.

11.  Ms Lam denies these allegations and claims Golden Dragon is entitled to retain the sums to pay its operational expenses pursuant to their oral agreement.

12.  In its Re-Amended Counterclaim, Golden Dragon claims Schafer Toy owes outstanding commission to Golden Dragon in a sum exceeding HK$1 million.

The issues

13.  The issues of this case are as follows:-

1) Was there an agency agreement in the terms as pleaded in paragraphs 4 and 5 of the Statement of Claim?

a) Whether Golden Dragon or Ms Lam was required to remit the balance of the customer payments to Schafer Toy after deducting the production costs?

2) Was there an oral agreement between Mr Schafer and Ms Lam in the terms pleaded in paragraphs 4 and 21 of the Amended Defence and Re-Amended Counterclaim?

a) Did Mr Schafer beneficially own 75% of Golden Dragon?

b) Was it agreed that Golden Dragon could receive a 10% commission on the purchase price of each shipment?

c) Were Golden Dragon and Ms Lam entitled to use the customer payments to settle Golden Dragon’s operational costs?

3) Did Schafer Toy owe Golden Dragon a total sum of US$511,749.79 and EUR50,946.80 representing the outstanding commission on the shipments of goods?

Was there an agency agreement between the parties as pleaded by Schafer Toy

14.  The parties do not dispute SPM appointed Golden Dragon to receive customer payments and that Golden Dragon placed orders with suppliers for SPM customers. The crux of the dispute is whether Ms Lam or Golden Dragon was required to remit the balance of customer payments after deducting production costs.

15.  Ms Lam explains that by reason of an underlying agreement between herself and Mr Schafer, Golden Dragon was entitled to deduct its operational costs from the customer payments. Ms Lam claims it was agreed that the balance would be used by herself and Mr Schafer for withdrawals, dividend distribution, and further development of Golden Dragon.

16.  Mr Schafer adamantly denies any beneficial interest in Golden Dragon and claims that the relationship between SPM and Golden Dragon is one of mere agency.

17.  It is therefore important to consider whether the relationship between SPM and Golden Dragon was one of mere agency such that Golden Dragon was obliged to remit the balance of the customer payments to SPM in the manner as pleaded in the Statement of Claim.

18.  I have considered Mr Schafer and Ms Lam’s evidence.  For reasons set out in this judgment, I find both Mr Schafer and Ms Lam’s to be incredible and unreliable witnesses.  I shall first set out my findings on Mr Schafer’s evidence. 

19.  I find Mr Schafer’s assertion that there was nothing more than an agency agreement between the parties to be incredible and unbelievable for reasons set out below.

20.  Firstly, the email correspondence shows Ms Lam asked Mr Schafer for approval of various matters relating to the operations of Golden Dragon, for example, the office expenses, size of the office, office rent, staff wages, the format and content of Golden Dragon’s business cards, and the purchase of company computers.  Mr Schafer, using his SPM email account, replied to those emails and gave his input.  Below are examples of Mr Schafer’s email responses:-

1) 30 November 2006: Mr Schafer asked Ms Lam for the dimensions of the office she intended to rent for Golden Dragon.

2) 24 February 2007: Mr Schafer suggested the number of staff Ms Lam should hire for Golden Dragon.

3) 12 March 2007: Mr Schafer approved the number and price of computers Ms Lam intended to buy for Golden Dragon.

4) 7 June 2010: Mr Schafer asked Ms Lam for a breakdown of Golden Dragon’s office expenses.

5) 22 December 2010: Mr Schafer told Ms Lam she must tell him whether she needed the engineer hired by Golden Dragon to work with the factory.

6) 27 August 2011: Mr Schafer asked Ms Lam to send him Golden Dragon’s costs breakdown so he could work on the costs structure of Golden Dragon and see how he could reduce the costs.

21.  From a reading of the emails, it is clear Mr Schafer was not merely giving advice to Ms Lam.  The wording of the emails was such that Mr Schafer required Ms Lam to provide information such as the office layout plans and the accounts of Golden Dragon when requested.  I therefore rejected Mr Schafer’s explanation that he was merely giving “friendly advice” to Ms Lam on how to operate Golden Dragon.

22.  Secondly, Mr Schafer’s explanation as to why he made transfers of money to Golden Dragon is contradictory to his witness statement and the email correspondence. The emails show Mr Schafer voluntarily assumed the responsibility of paying Golden Dragon’s office expenses.  This is reiterated in the email dated 3 August 2013 where he said had the responsibility to pay the office expenses of Golden Dragon and to pay for Ms Lam. However, in his witness statement, he explained the transfers to Golden Dragon were a loan.

23.  Furthermore, his explanation of the nature of the transfers is inherently inconsistent.  As stated above, Mr Schafer explained in his witness statement the transfer of monies were loans to Golden Dragon. However when cross-examined as to various transfers made to the Golden Dragon (excluding the initial transfer of US$30,000), Mr Schafer explained some were for shipments and some were not actually made.  He denied that any of those transfers were a loan to the Golden Dragon.  

24.  Thirdly, Mr Schafer’s explanation as to why he made extensive transfers to Golden Dragon over a period of 7 years is unbelievable.  From his evidence in cross-examination, he does not deny he made transfers in the total sum of US$90,708 for Golden Dragon office expenses (equivalent to approximately HK$707,522.40 if exchange rate is HK$7.80: US$1).  The fact that Golden Dragon required financial support for a period of 7 years shows Golden Dragon’s inability to operate in a profitable manner. Even if SPM had an interest in ensuring the continual operation of Golden Dragon, I am of the view it is highly improbable for any reasonable businessman to make substantial transfers over a period of 7 years to a company of which he has no interest in for the mere purpose of ensuring its sustainability.

25.  Fourthly, the documentary evidence placed before this court is directly contradictory to Mr Schafer’s assertion of a mere agency relationship between the parties. In addition to the emails set out above, Mr Schafer in his capacity as the director of SPM sent emails to potential suppliers representing Golden Dragon as SPM’s Hong Kong office. Moreover, the business cards of Golden Dragon have the words “A member of the SPM group” printed on it. These words were added with Mr Schafer’s approval. Hence the contemporaneous documents clearly show SPM regarded Golden Dragon as part of its corporate structure and not merely as an agent company.

26.  Mr Schafer explained these measures were adopted to encourage suppliers’ confidence in Golden Dragon because Golden Dragon was a new company at the time.  I find this explanation unbelievable. Golden Dragon was a new company and had no business track record. SPM on the other hand was a well-established company with a good reputation.  If the only concern was to instill confidence in suppliers, it is sufficient for SPM or Mr Schafer to give positive or good comments on Golden Dragon and Ms Lam.  There is no need to represent Golden Dragon as part of its corporate structure and there is no need to lend SPM’s corporate goodwill to an unrelated company of which Mr Schafer claims to have no beneficial interest in. To make such representations would be to expose SPM to potential risk to its reputation in the event Golden Dragon fails to perform its obligations. I am of the view that even if it was in SPM’s interest to promote Golden Dragon to potential suppliers, it is unbelievable SPM would represent Golden Dragon to be part of its corporate structure for the sole purpose of assisting Golden Dragon to instill confidence in suppliers.

27.  By reason of the matters set out above, I find Mr Schafer’s evidence to be unreliable and incredible on the true relationship between SPM and Golden Dragon. I therefore do not accept the relationship between SPM and Golden Dragon was merely one of agency.

28.  In respect of the purported term agreed between the parties that Golden Dragon was to remit the balance of customer payments to SPM after deducting the production costs, I do not accept the parties had come to such an agreement. In an email dated 27 September 2011, Mr Schafer permitted Ms Lam to use customer payments to pay the wages of Mr Zhang, the engineer. This email shows that Mr Schafer allowed Golden Dragon to deduct expenses other than production costs from the customer payments.  Hence I do not accept Golden Dragon could only deduct production costs from customer payments and I do not accept Golden Dragon was required to remit the balance of customer payments to SPM after deducting the production costs.

29.  In respect of the assertion that SPM had overpaid a sum of EUR150,000 to Golden Dragon in commission payments, I noted this fact has not been pleaded in the Statement of Claim or the Amended Reply and Amended Defence to Re-Amended Counterclaim.  I therefore do not accept this assertion.

30.  In summary, by reason of the matters set out above, I find Mr Schafer to be an unreliable and incredible witness and I do not accept his evidence.  In particular, for reasons given above, I do not accept the following:

1) Golden Dragon was merely an agent company appointed by SPM to place orders with suppliers, to procure the delivery of the goods to the customers, and to receive payments from customers.

2) Golden Dragon was only permitted to deduct production costs from customer payments it received.

3) Golden Dragon was obliged to remit the balance of the customer payment to SPM after deducting the production costs.

Was there an oral agreement between Mr Schafer and Ms Lam in the terms as pleaded in the Defence

31.  It is not disputed the company annual returns show the legal ownership of Golden Dragon is solely vested in Ms Lam Wing Chun.  

32.  As correctly cited by Defence Counsel, “The onus is then on the party who contends that the beneficial interests are divided between them otherwise as the title shows to demonstrate this on the facts.   See Stack v Dowden [2007] 2 AC 432, at §4-5 (per Lord Hope) and §68 (per Baroness Hale).” (see paragraph 43, Macau Universal International Ltd v Ding Xiao Hong and others, unrep, HCA 992/2011, 20 August 2014).

33.  Hence the burden is on Ms Lam and Golden Dragon to prove the beneficial ownership of Golden Dragon was divided between Mr Schafer and Ms Lam in the ratio of 75:25.  

34.  Although I do not accept there was an agency agreement between SPM and Golden Dragon in the terms as pleaded in the Statement of Claim, this does not mean I must automatically accept the existence of various oral agreements as pleaded by the defendants. It is for the defendants to prove on a balance of probabilities that there were oral agreements in the terms as pleaded in the Amended Defence and Re-Amended Counterclaim.

35.  The factors this court should consider when assessing dispute of facts between the parties are set out in paragraphs 16 to 20 in the case of Big Island Construction (HK) Ltd v Wu Yi Development Co Ltd, unrep, HCA 1957/2005.  In particular, paragraphs 19 and 20 of the judgment state:-

“19. If one version is found to be improbable, it does not necessarily lead to the acceptance of the other when, owing to the unsatisfactory state of the evidence, the court is not satisfied that the latter is probable.  There are judicial utterances to the effect that in such scenario, the judge would be forced to say “I just do not know” on which side of the line the decision ought to be drawn.  However, such judicial utterances should not be understood to mean that the court will or should shy from making a finding.  What the court will do is to resort to deciding the matter on the burden of proof: The Popi M, supra, per Lord Brandon at p.956A; see also Yau Wah Yau v Commissioner of Inland Revenue, supra, per Tang JA (as he then was) at paras.42 to 46.  Applying In re B (Children), supra, the court will treat the matter of which the party carrying the burden of proof but failing to discharge it, as having not taken place.

20.  If neither version is improbable, rejection of one may justifiably lead to the acceptance of the other : Datec Electronics Holdings Ltd and others v UPS Ltd, supra, per Richards LJ at para.83 (upheld on appeal); Ide v ATB Sales Ltd, supra, per Thomas LJ at para.6.”

36.  I have considered the defendants’ pleaded case in light of Mr Schafer’s concession of having made substantial transfers of money to Golden Dragon, the emails showing Mr Schafer’s input on Golden Dragon’s operational matters, and the emails written by Mr Schafer admitting they were working as “partners”. Having considered the evidence before this court, I find the defendants’ are unable to prove their pleaded case on a balance of probabilities. I set out my reasons below.

37.  Firstly, I find Ms Lam’s evidence to be contradictory to the assertion that she and Mr Schafer beneficially owned 25% and 75% of Golden Dragon respectively. The following are examples of the contradictions in her evidence:-

1) When confronted about matters relating to the Mic-O-Mic trademark, Ms Lam conceded she had not consulted or discussed her actions with Mr Schafer before she issued notices to their suppliers in China (including Fortune) prohibiting productions in violation of the trademark.  When she came to know of Mr Schafer’s objection to her actions, she not only ignored his requests but deliberately acted in defiance of his instructions. If Mr Schafer was the majority beneficial shareholder of Golden Dragon, Ms Lam is obliged to discuss such matters with Mr Schafer before committing to any course of action. Furthermore, if Mr Schafer was the majority beneficial shareholder, Mr Schafer has the final say in the actions to be taken by Golden Dragon. Ms Lam’s actions in this regard show she did not regard Mr Schafer as the majority beneficial shareholder of Golden Dragon.

2) In the email dated 21 December 2012 Ms Lam sent an email to Mr Schafer in which she asserted Golden Dragon to be “my company”.  The email is clear in that Ms Lam asserted sole ownership of Golden Dragon.  The description used by Ms Lam is directly contradictory to her claim of being the minority beneficial shareholder in the company. Under cross-examination, Ms Lam explained the use of “my company” is a reference to Golden Dragon which actually belongs to Mr Schafer and herself. However I reject this explanation. The wording and the context of the email is clear in that Ms Lam asserted Golden Dragon to belong to her.  

3) Mr Schafer had repeatedly voiced his disapproval of employing Mr Zhang as Golden Dragon’s engineer.  However Ms Lam did not terminate Mr Zhang’s contract and continued to employ him in spite of Mr Schafer’s repeated disapproval.  Ms Lam explained in court that though she believed Mr Schafer could make suggestions on the employment of Mr Zhang, Mr Schafer was only giving advice and she was the person who decided whether the suggestion should be executed.  This answer is clearly inconsistent with the assertion that Mr Schafer is the majority shareholder of Golden Dragon.

4) By an email dated 23 July 2012, Mr Schafer asked Ms Lam to close down Golden Dragon since it seemed to be operating at a loss.  However Miss Lam did not close down Golden Dragon and kept it in operation.  If Mr Schafer was the majority shareholder, Ms Lam should have followed the instructions of Mr Schafer and closed down Golden Dragon in 2012.

38.  Secondly, I note there is no supporting evidence to show the beneficial ownership of Golden Dragon was divided between Mr Schafer and Ms Lam.

1) The company annual returns and the audited accounts of Golden Dragon show there is only one shareholder in the company. None of those documents show Mr Schafer and Ms Lam have a beneficial interest in Golden Dragon.

2) Ms Li Jin Bi gave evidence as to her impression of who was the owner of Golden Dragon. She stated she was under the impression Mr Schafer was the boss of Golden Dragon.  Ms Li Jin Bi made no mention of having the impression Ms Lam was also an owner of Golden Dragon.

39.  I have considered whether Mr Schafer assumed duties of a director and whether Mr Schafer was a shadow director or de facto director of Golden Dragon.  Although the email correspondences tend to indicate Mr Schafer gave some input on Golden Dragon’s operational matters, it is clear Ms Lam rejected and ignored some of the suggestions made or opinions given by Mr Schafer.  In fact, she expressly stated in court she did not regard Mr Schafer’s suggestions to be necessarily binding and that she was free to decide whether his suggestions should be implemented.

40.  By reason of the matters set out above, I find Ms Lam’s evidence to be inherently inconsistent and her assertions to be unsupported by evidence. Having considered her evidence, I find Ms Lam to be an unreliable and incredible witness. I do not accept her evidence. I therefore do not accept there were oral agreements as pleaded by the defendants in paragraphs 4 and 21 of the Amended Defence and Re-Amended Counterclaim.  

Whether SPM owed Golden Dragon the sums of US$511,749.79 and EUR50,946.80 representing commission due to Golden Dragon

41.  Golden Dragon’s pleads the sums of US$502,009.58, US$9,740.21 and EUR50,946.80 represent the commission due from SPM/ Schafer Toy.  

42.  Schafer Toy pleads in paragraph 8 of the Amended Reply and Amended Defence to the Re-Amended Counterclaim it never owed such sums to Golden Dragon. However under cross-examination, Mr Schafer admitted that SPM did owe US$502,009.58 and EUR50,946.80 (collectively referred to as “the said sums”) to Golden Dragon, as per the document entitled Confirmation for Audit Purposes but the said sums represent outstanding delivery monies not outstanding commission payments.

43.  I find Golden Dragon unable to prove the said sums represent outstanding commission owed to it for the following reasons:

1) There is no documentary evidence to support Ms Lam’s contention that the said sums represent outstanding commission payments. There has been no break down or accounting documents to show how the commission is calculated so as to arrive at the said sums.

2) Under cross-examination, Ms Lam conceded Mr Schafer might have paid off parts of the said sum or that part of it would have been set off. She further conceded that the outstanding sum might have changed though this is not shown in the documents. Hence even on Ms Lam’s own evidence, it is unclear whether the whole of the said sum continues to be outstanding as at the date of the trial.

44.  As for the sum of US$9,740.21 , I find Golden Dragon unable to prove this sum is owed by SPM/ Schafer Toys. The sum of US$9,740.21 has been calculated on the commission rate of 10%. However the defendants’ case on the agreed rate of commission is inconsistent. Ms Lam conceded the commission rates could possibly fluctuate for “bigger orders”.  This concession is contrary to the defendants’ pleaded case.  The defendants all along pleaded a commission rate of 10% for all shipments. There is no pleading of a fluctuating rate of commission dependent on the size of the orders. Moreover, Ms Lam has not explained or set out clearly which order and which invoices have different commission rates.  Hence it is unclear to this court what the proper rate of commission should be for the invoices in which commission is purportedly outstanding.

45.  In such circumstances, I find the Golden Dragon unable to prove on a balance of probabilities that the sum US$9,740.21 properly and correctly represents outstanding commission due to Golden Dragon.

46.  By reason of the matters set out above, I do not accept Ms Lam’s evidence and do not accept the following:

1) The sums of US$511,749.79 and EUR50,946.80 continue to be outstanding as at the date of the trial.

2) The sums of US$511,749.79 and EUR50,946.80represent outstanding commission due to Golden Dragon.

3) There was an agreement that Golden Dragon could charge a 10% commission on all shipment of goods

Summary

47.  By reason of the matters set out above, I find both Mr Schafer and Ms Lam to be unreliable and incredible witnesses. Their evidence is unbelievable and contradictory to the documentary evidence produced to the court. I therefore did not accept either of their evidence.

48.  In such circumstances, I find Schafer Toy unable to prove its claim against the defendants on a balance of probabilities.  I also find the Golden Dragon unable to prove its counterclaim against Schafer Toy.  I therefore order both the plaintiff’s claim and the 2^nd defendant’s counterclaim be dismissed.

49.  Since both Schafer Toy and Golden Dragon did not succeed in proving their respective claim, I make a costs order nisi that there be no order as to costs as between the plaintiff and the 2^nd defendant.

50.  I further make a costs order nisi that the plaintiff shall pay the costs of the 1^st defendant, with certificate for counsel, to be taxed if not agreed.

51.  Unless any party applies to vary the costs order within 14 days hereof, the costs orders shall become absolute.