KO HUNG KONG v. FONG CHUNG YIK

1994, No. A158

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

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J U D G M E N T

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1. This case demonstrates yet again the difficulties associated with a joint venture in China. On 16th October 1992, the Plaintiff orally agreed with the Defendant to sell to the Defendant at a price of $300,000 his 2,500 shares in Euroline Limited. These shares represented a 50% shareholding in that company. These shares also represented the Plaintiff's interest and investment in Longcheng Clocks & Watches Products Company Limited, a joint venture in China. Euroline was the foreign partner in the joint venture with a 52% share holding. The other shareholder was Haicheng Township No. 2 Construction Company (the Chinese partner). The Plaintiff was also a director of the joint venture.

2. On the same day, the Plaintiff executed the documents necessary to transfer his ownership of his Euroline shares to the Defendant. He also took steps that day and over the next two weeks to arrange for the Defendant to become a director of the joint venture instead of the Plaintiff. In spite of demands for payment, the Defendant did not pay the Plaintiff other than some small payments totalling $60,000. Accordingly, the Plaintiff now claims damages against the Defendant for breach of the oral agreement, damages which have been quantified at $240,000.

3. Also on 16th October, immediately after the share transfer documents had been executed, the Plaintiff, at the request of the Defendant, wrote out what he termed a "Letter of Declaration" as proof of the agreement between them. This Declaration recorded the Plaintiff's agreement to sell the Euroline shares "and all the investment shares in and loan to" the joint venture. These words were picked up by the Plaintiff's solicitors in their letter before action on 15th December 1992 when they referred to the Plaintiff's "shareholding in and his right to recover debts due from" the joint venture. Therefore, in his defence when the trial began, the Defendant asserted that the Plaintiff was in breach of their agreement because he had failed to transfer to the Defendant his shares in the joint venture. The Defendant also asserted that the payments totalling $60,000 received by the Plaintiff were not in part performance of their agreement but loans to the Plaintiff. The Defendant, therefore, counterclaimed for repayment of this sum.

4. It was apparent to me from the outset that there was never any question of the Plaintiff holding shares directly in the joint venture. The joint venture agreement and the joint venture's Articles of Association militated against such a shareholding. I indicated as much to Miss Yeung who appeared for the Defendant and who, at the close of the Plaintiff's case, conceded that there was no such shareholding. At counsel's request, I gave leave to re-amend the defence so that the alleged failure to transfer the Plaintiff's shares in the joint venture was deleted, and there was substituted a plea that, because the Plaintiff had failed to arrange for transfer of the directorship of the joint venture to the Defendant, the Defendant was not obliged to pay the price.

5. Accordingly, only two issues fell to be decided. First, had the Plaintiff done all that he could reasonably be expected to do to arrange for the Defendant to become director of the joint venture. Second, were the payments by the Defendant to the Plaintiff amounting to $60,000 part-payment of the price for the Plaintiff's shareholding in Euroline, or were they simply loans to the Plaintiff.

6. According to the Plaintiff, in 1991 a certain Mr. Ng Wah Bong had the idea of a joint venture in China to make watch cases and spare parts for watches and clocks. As the Plaintiff came from Longhai County, Fujian where he had old friends and acquaintances that seemed an appropriate location for the joint venture. Longhai County gave approval for the joint venture which was set up between Euroline and the Chinese partner. The Joint Venture Agreement was signed on 10th November 1991. Mr. Ng and the Plaintiff were appointed directors of the joint venture. The joint venture capital was to be $650,000 of which Euroline was to subscribe $335,000.

7. Mr. Ng made no contributions to Euroline, alleging that machinery which he had intended to contribute had been detained in Po Shan. The Plaintiff subscribed about $600,000 by selling his flat for about $400,000 and raising loans in excess of $100,000. He also rented an office for Euroline. The Plaintiff used the money to supply machinery, raw material and "running" capital to the joint venture. The Plaintiff and Mr. Ng's sister on behalf of Mr. Ng each had a 50% shareholding in Euroline and each were appointed a director.

8. Between April and August 1992, Mr. Ng took delivery from the joint venture and disposed of parts worth approximately $2 million. No money for these parts was however collected and paid to the joint venture.

9. By September or October 1992, the joint venture was in difficulty. The Plaintiff had a meeting at his home with Mr. Ng and Mr. Liu Tak Cheong who came from the same native place as the Plaintiff. The Plaintiff and Mr. Liu were on good terms and had known each other for about 10 years. At the meeting, Mr. Liu said "The factory is not doing well. How about selling it to me. I am in the same trade, namely watches".

10. As the Plaintiff was no longer on good terms with Mr. Ng but Mr. Liu was, the Plaintiff agreed to sell his interest in the joint venture which was represented by his shareholding in Euroline. The price was $300,000. His directorship in the joint venture would also be transferred to Mr. Liu. Mr. Liu was confident that he and Mr. Ng would get on and that he would be able to recover money from Mr. Ng.

11. The Plaintiff knew that Mr. Liu did not have sufficient funds for the purchase. He asked Mr. Liu who was actually buying. Mr. Liu said the Plaintiff should just sign the papers and that Mr. Liu would pay him. The Plaintiff then arranged for accountants to prepare the necessary documents in favour of Mr. Liu.

12. On 16th October, Mr. Liu, Mr. Ng and the Defendant came to the Plaintiff's home. The Defendant is Mr. Liu's uncle. The Plaintiff knew the Defendant well. The Defendant said that he was putting up the money for the purchase and that his name should be used. The Plaintiff phoned the accountants and informed them of the change. All four then went to the accountants' office where the Plaintiff signed documents including company minutes approving the transfer of shares and the appointment of the Defendant as a director of Euroline, a formal transfer of the shares and Bought and Sold Notes. All the documents were in fact dated 2nd November but nothing turns on this.

13. As the formal documents would not be available for the Defendant for about two weeks, the Defendant wanted something to show that the Plaintiff was no longer a shareholder of Euroline and that he was replaced as a director of the joint venture. The Plaintiff willingly prepared the "Letter of Declaration". It was signed by the Plaintiff, Defendant, Mr. Ng and Mr. Liu. Staff of the accountants' office also witnessed this document.

14. After leaving the accountants' office, all four men took the MTR. While travelling on the MTR, the Defendant asked Mr. Ng something about the Plaintiff's withdrawal and the Defendant replacing the Plaintiff in the joint venture. Mr. Ng said there would be no problem and on an Euroline letterhead wrote a note to the board of the joint venture confirming that the Defendant "was appointed as the director acting for the foreign party of" the joint venture from 16th October, while the previous director the Plaintiff "shall resign from today's date". It was signed by Mr. Ng as "appointee" or "appointor". Euroline's chop was added under Mr. Ng's signature.

15. In the course of the evidence, there was a considerable examination of Mr. Ng's position in the joint venture. It was the Plaintiff's contention that Mr. Ng held the post of Legal Representative and in that capacity had power to appoint a director. It is certainly true that exhibit P1, which appears to be some sort of preliminary documentation to the Joint Venture Agreement itself, provides that the "Legal Representative shall be the Managing Director". There was no evidence that Mr. Ng was in fact Managing Director. In any event, the Articles of Association of the joint venture provide for the appointment of directors. Article 18 provides for a board of six directors "of which three shall be appointed or replaced by each party". The Chinese partner and Euroline, therefore, each had power to appoint up to three directors. Article 20 then provided that replacement of members of the Board of Directors "should be reported in black and white to the Board". It is apparent to me, therefore, that as Mr. Hung submitted, all that was required for a change of director was for one party to determine upon such a change and to notify the Board. I accept, however, as the Plaintiff said in evidence, that certain formalities had to be gone through in China, principally some form of registration with the customs authority there.

16. On the same evening, according to the Plaintiff, he faxed Mr. Ng's letter to the Board of the joint venture. It is the Plaintiff's case that the joint venture replied by fax on 19th October in which it acknowledged the letter signed by Mr. Ng and recorded that "we decided to agree to (the Defendant) replacing (the Plaintiff) as a director". The fax continued "it is expected that (the Plaintiff) and (the Defendant) would attend our company and the various departments concerned to effect the aforesaid changes in accordance with the regulations". This fax was impressed with the joint venture's chop. It is recorded as having been copied to Euroline, Mr. Ng, the Plaintiff and the Defendant.

17. Both the authenticity and effect of this document were challenged by the Defendant. I see no reason to doubt either. First, it seems entirely in keeping with the Articles to which I have just referred and which do not appear to require a formal Board Meeting to appoint a replacement director. Second, although neither the Defendant nor Mr. Liu said that they had seen the document before, I think it highly improbable that the Plaintiff would either have had the foresight to manufacture it, or later have manufactured it for the purpose of these proceedings.

18. It is the Plaintiff's pleaded case that he should have been paid $300,000 on 17th October alternatively within a month thereof. The Plaintiff said that he pressed the Defendant for payment. In cross-examination, for the first time, he said that he in fact agreed with the Defendant that he should be paid $200,000 before going to China to effect change of directorship and the balance of $100,000 on return from China. When he pressed the Defendant for payment of the first instalment, the Defendant said that they were clansmen and that it would be better to wait until after going to China. The Plaintiff accepted this arrangement.

19. It is the Plaintiff's case that on 16th October or the following day, he agreed with the Defendant to go to China to carry out the formalities necessary for the transfer of directorship in the joint venture to the Defendant. The Plaintiff was short of funds and could not afford to fly. He therefore went by sea a few days before the Defendant. The arrangement was to meet on 23rd October. The Defendant, however, did not appear. The Plaintiff was able to contact Mr. Lam by telephone. Mr. Lam said that the Plaintiff should wait another two days for the Defendant and, if the Defendant did not then appear, the Plaintiff should return to Hong Kong. Later, the Plaintiff said that he was able to speak to the Defendant on the telephone. The Defendant informed him that he was too busy to return to China.

20. On his return to Hong Kong, the Plaintiff contacted the Defendant. He pointed out that he had performed his part of the bargain by going to China and should therefore be paid. The Defendant said he did not have the money at the time and would pay by instalments. The first instalment to be some $30,000 or $50,000 and payment to be complete by Chinese New Year. The Defendant also suggested arranging to go to China again later on. The Plaintiff was prepared to return to China again but said the Defendant would have to pay the Plaintiff's fare because the Plaintiff was now short of money.

21. Thereafter, the Plaintiff continued to press the Defendant for payment. He was unsuccessful in obtaining any substantial payment. The Defendant did however make small payments, totalling $40,000, on occasions when the Plaintiff indicated a specific need, such as the illness of his father or the death of his uncle. As far as the Plaintiff was concerned, these payments were all on account of the $300,000.

22. It was on the occasion of his uncle's death that the Plaintiff first received a hint that all was not well between him and the Defendant. On that occasion, the Defendant paid the Plaintiff $8,000. The Defendant said, however, that he had sold the shares to Mr. Ng so that the matter was nothing to do with him any further. The Plaintiff replied that if the Defendant had sold to Mr. Ng that was between the two of them. As far as the Plaintiff was concerned, he had sold his shares to the Defendant and would go after the Defendant for payment.

23. The Plaintiff went to China in early December. There, he met an accountant from the firm which had arranged the transfer of his Euroline shares, and also a solicitor. He explained to them what had occurred. As a result of this meeting, the letter before action was written on 15th December.

24. As a result of the letter, the Plaintiff met the Defendant, Mr. Liu and Mr. Ng in a restaurant in Tai Wo Hau toward the end of December. At the meeting, Mr. Ng explained that while there was no problem about transferring the directorship to the Defendant, the joint venture was not prepared to export any more goods on credit and required some form of guarantee or letter of credit in the sum of $2 million. It was agreed that the parties should go to Shenzhen at the beginning of January to meet the general manager of the joint venture, Mr. Lam Yick Fai, in order to resolve matters. The Plaintiff also agreed to return to China to work for the Defendant for a few months at a salary of $5,500 per month.

25. On 30th December, the Plaintiff had sent a letter by fax to the Defendant. It was essentially consistent with the Plaintiff's version of the meeting in the restaurant. The Plaintiff asserted that there was no difficulty about the change of directorship but, because of problems about payment for goods, the joint venture was not prepared to allow Euroline any further goods. Presumably as a result of this letter, the Defendant remitted a further $20,000 to the Plaintiff's bank account. The Plaintiff acknowledged payment the following day. Then, on 6th January, the Plaintiff sent a further letter by fax to the Defendant, apparently having been unsuccessful in trying to reach him by telephone. In that letter, the Plaintiff said "due to your absence from our last rendezvous at Fujian, as what was said the other day, you are still not familiar with some situation" at the joint venture. The Plaintiff reminded the Defendant to come to Shenzhen on 8th January to meet Mr. Lam and resolve problems.

26. The Plaintiff, Defendant and Mr. Liu went to Shenzhen on 8th January but Mr. Lam did not appear. They returned the following day and saw Mr. Lam in a hotel. Mr. Lam, in essence, repeated what Mr. Ng had told the parties the month before. There was no difficulty about the Defendant becoming a director. Before any further goods were exported to Euroline, however, a $2 million letter of credit was required.

27. About ten days after the meeting in Shenzhen, the Plaintiff spoke to the Defendant. The Defendant said that if it was necessary for him to give $2 million before he could get goods, he would back out of the deal. He said that Mr. Ng did not have any money so that he would have to handle the whole $2 million himself.

28. The Plaintiff received no further payment or other satisfaction and accordingly commenced these proceedings.

29. The Defendant's account of this transaction was, it must be said, somewhat vague. It is quite clear to me that he was led into the transaction by his nephew, Mr. Liu, who had been employed at the joint venture and who was familiar with the personnel and factory there. Mr. Liu was plainly the driving force behind the transaction, no doubt perceiving that profits could be generated. As far as the Defendant is concerned, his evidence of the events of 16th October largely corresponds with that of the Plaintiff. Thereafter, accounts diverge. According to the Defendant, the more important matter to him was the directorship of the joint venture. For this, he awaited arrangements to be made by the Plaintiff. He said there was no agreement that they should meet in China later in October. He was not aware that the Plaintiff had been to China. When pressed for payment, the Defendant said that he was awaiting transfer of the directorship to which the Plaintiff simply said alright, alright, and that he would make the necessary arrangements.

30. As far as the payments to the Plaintiff were concerned, he made them as loans to help the Plaintiff at the time of financial difficulty.

31. In respect of the meetings at the restaurant in late December and in Shenzhen in January, the Defendant said that both Mr. Ng and Mr. Lam made it plain that the provision of a $2 million letter of credit was a condition to be met before the Defendant could become a director. It was because of this unexpected call for a substantial payment before he could become a director that the Defendant felt that he was not obliged to pay the Plaintiff.

32. Mr. Liu also gave evidence. His evidence of how the oral agreement came about largely corresponded with that of the Plaintiff. His evidence of the two meetings supported the Defendant's account. In one material aspect, however, his account did not support that of the Defendant. Mr. Liu agreed in cross-examination that shortly after the "Letter of Declaration" was made on 16th October, the Plaintiff and the Defendant agreed to meet in China in October. It is, however, true that Mr. Liu did not agree that he had telephoned the Plaintiff in China.

33. As I understood it, the Defendant's reason for not travelling to China was not so much lack of co-operation on the part of the Plaintiff, but a failure on the part of the Board of the joint venture to give him notice to attend a meeting there. I make allowance for the fact that the Defendant had no clear idea of exactly what he was buying from the Plaintiff. Apart from the Euroline shares, there were no other shares to be transferred. The transfer of directorship was something of a formality, albeit a matter of importance which constituted, even on the Plaintiff's case, part of the bargain. Nonetheless, I found it surprising that, once the issue was clarified, the Defendant who had not previously focused on this aspect of the case should raise and attach such importance to the need for a Board Meeting of the joint venture to approve his directorship.

34. In my judgment, the Defendant's account of the transaction was far too vague and bore all the hallmarks of somebody seeking an excuse to extricate himself from what he later found to be a bad bargain. The Plaintiff's account, on the other hand, contained a wealth of detail and portrayed a much more probable scenario. I accept that, in the details, the Plaintiff's account wavered from time to time but essentially his account remained unshaken. The Plaintiff's account also is consistent with such documents as are available, including the Plaintiff's own correspondence. Again, I find it unlikely that the Plaintiff generated this correspondence with litigation in view.

35. I also note that the requirement for a letter of credit is more consistent with the Plaintiff's assertion that this was to be provided before more goods could be supplied to Euroline. A letter of credit is generally related to the sale and purchase of goods. If the Chinese side of the joint venture were simply looking for money, no doubt some sort of cash injection would have been sought from the Defendant. In any event, the Defendant had obtained the real passport to the joint venture, namely the Plaintiff's shares in Euroline. By virtue of those shares, he had access to any profits generated by the joint venture and Euroline. And it is plain that, under the Articles of the joint venture, he could have become a director.

36. I should mention that both parties sought to introduce by way of hearsay notices their version of what was said by Mr. Ng and Mr. Lam at the 2 meetings. In the circumstances of this case, I attach no weight to these statements. I also reject the Plaintiff's attempt to introduce his version of Mr. Liu's part by way of hearsay notice.

37. I am satisfied and so find that the transfer of the directorship in the joint venture to the Defendant was a term of the oral agreement between the parties. I also find that, in order to give effect to the agreement, there was an implied term that the Plaintiff would do all that was reasonable to effect that transfer. I find that notice of that transfer was given to the joint venture and that, to give effect to it the Plaintiff, pursuant to a further agreement with the Defendant, travelled to China in order to complete the formalities necessary for the transfer. I further find that the Defendant failed to co-operate in this respect either in October or subsequently.

38. Accordingly, I find the Defendant to be in breach of the oral agreement concluded on 16th October. The Plaintiff suffered loss and damage from that breach which I quantify at $240,000.

39. I find that the payments totalling $60,000 by the Defendant to the Plaintiff were on account of the price of the Plaintiff's shares and not by way of loans to the Plaintiff.

40. Accordingly, there will be judgment for the Plaintiff for $240,000. The Defendant's counterclaim is dismissed.

41. I make an order nisi that there be interest on the sum of $240,000 at the rate of 9% from 1st November 1992 (by when the Plaintiff had returned from his abortive trip to China, had fulfilled his part of the bargain and was entitled to payment) until the date of this judgment and hereafter at the rate prescribed by the Chief Justice.

42. I also make an order nisi that the Plaintiff has the costs of this action, including the costs, if any, occasioned or thrown away by the re-amendment to the defence.