SHENZHEN ENVIROTEC ELECTRONICS CO LTD v. CELLPLUS (H K) LTD

HCA 786/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 786 OF 2004

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AND

HCA 1034/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1034 OF 2004

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BETWEEN

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(Consolidated by Order of Master de Souza dated 12 November 2004)

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J U D G M E N T

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Introduction

1.  CellPlus seeks interim judgment against Team Products for the following amounts:-

(1)	US$2,259,900.33 on goods delivered before 1 April 2004;
(2)	US$1,588,554.18 on orders cancelled by Team Products on 1 April 2004; and,
(3)	US$281,428 on goods despatched from a factory to Team Products on 4 and 10 April 2004.

CellPlus maintains other claims against Team Products in this action.  But CellPlus accepts that those cannot be determined summarily and must await trial.

2.  Team Products denies that any amounts are due.  It raises the following defences:-

(1)	CellPlus misrepresented to Team Products that it was a manufacturer of goods rather than a trading company.  That misrepresentation induced Team Products to agree a higher price for the goods delivered before 1 April 2004 than Team Products otherwise would.  Team Products claims to set-off the mark-up between the price at which CellPlus would have sold the goods had it been a manufacturer or factory and the actual sale price. Team Products says that this set-off amounts to at least US$1,015,975.50 and could run up to over US$4 million.
(2)	Team Products claims to have cancelled outstanding orders for goods by e-mail dated 1 April 2004.  It alleges a contractual term between itself and CellPlus, arising out of a course of dealing, to the effect that purchase orders may be cancelled without penalty at any time, subject only to an obligation to reimburse CellPlus for out-of-pocket expenses and tooling charges.  Team Products therefore disputes that payment is due on the cancelled orders.
(3)	Team Products denies having received the goods said to have been despatched on 4 and 10 April 2004.

3.  The question is whether Team Products’ defences are viable.  If CellPlus is entitled to interim judgment for any amount, an issue arises over how much to allow against such sum in respect of a claim for legal set-off advanced by Team Products.

Background

4.  Shenzhen Honesty Electronics Co. Ltd. (Honesty) is a company associated with Mr. John Su.

5.  Envirotec Asia Limited (Envirotec-HK) is a Hong Kong company in which Ms. Debbie Wang and Mr. Su hold equal shares.

6.  Shenzhen Envirotec Electronics Co. Ltd. (Envirotec-PRC) is a Mainland company of which 70% is owned by Shenzhen Jinhong Industrial Joint Stock Co. Ltd. (Jinhong) and 30% is owned by Envirotec-HK.  Jinhong appears to be a company associated with Mr. Su.

7.  Ms. Wang claims that she and Mr. Su agreed that Envirotec-PRC would be owned by each of them equally.  Ms. Wang says that, despite promising to rectify the registration of shareholder interests in Envirotec-PRC, Mr. Su did not do so.  Mr. Su denies Ms. Wang’s version of events.  The rights and wrongs of Ms. Wang’s and Mr. Su’s contentions will be an issue at the forthcoming trial of this action.

8.  Typically, Team Products ordered goods (in particular, pest repellers) from CellPlus.  CellPlus would cause corresponding orders for the goods to be placed with Envirotec-PRC.  In due course Envirotec-PRC would ship the finished goods from its factory to Team Products.  Upon receipt of the goods, Team Products on-sold them to third parties, such as Wal-Mart.

Discussion

A. Issue 1: Misrepresentation

9.  A claim in misrepresentation needs to establish the following:-

(1)	an unambiguous representation of an existing state of fact;
(2)	falsity of the representation;
(3)	reliance on the representation; and,
(4)	damage caused by the representation.

10.  Team Products pleads (at Defence and Counterclaim §5(5)) that by a fax dated 13 November 2001 Cell Plus represented that “it had become a manufacturer, in a new joint venture manufacturing concern, over which factory CellPlus had control”.

11.  The fax of 13 November 2001 from CellPlus to Team Products reads:-

“	As we both know, the relationship between our two companies, TEAM PRODUCTS and CELLPLUS, is one built on a commitment to excellence and trust by both parties.
	CELLPLUS has had opportunity over the years to uniquely understand the values and standards of TEAM  PRODUCTS.  The importance you place on maximizing manufacturing process, diminishing unnecessary inefficiencies, minimizing costs, and receiving unparalleled support are just a few key factors that have guided our relationship.
	In recognizing these points, as well as the importance of maintaining high quality, streamlined, and stable manufacturing environment in China, CELLPLUS (Hong Kong) limited has entered into new joint venture agreement with its mainland-based factory, HONESTY ELECTRONICS.  We are certain that this will best serve TEAM PRODUCTS.  Most importantly, that TEAM PRODUCT's orders will always be the factory's #1 priority.
	CELLPLUS has been working in concert with this particular factory on a close basis manufacturing pest repellers since November, 2000, playing a significant managerial and strategic role from that time.
	China’s admittance to the WTO, its appointment of 2008 Olympic Games host, its increasing market liberalizations, and our one year hands on relationship with this factory, were the determining factors influencing this decision that it was time to enter the market on more formal legal basis.
	The new company, for which we will maintain legal control, is called ENVIROTEC ASIA LIMITED operating out of Shenzhen, China.  My control of this factory will ensure that all of our interests are professionally served.
	....”

12.  I am unable to read the fax as a representation to the effect alleged by Team Products.  Indeed, I do not see how Team Products’ case fulfils the requirements of an actionable misrepresentation.

13.  Nowhere does the fax say that CellPlus itself “had become a manufacturer”.  All the fax says is that CellPlus had entered into a new joint venture agreement with Honesty.

14.  That is what has happened.

15.  Before 2001 CellPlus had been engaged in business with Honesty.  Honesty’s factory made pest repellers on CellPlus’ order.  In 2001 CellPlus entered into a joint venture arrangement with Mr. Su of Honesty for the formation of Envirotec-HK and Envirotec-PRC.  The arrangement was (among other things) intended to facilitate manufacture of pest repellers in Envirotec-PRC’s Mainland factory to meet Team Products’ orders.

16.  The previous paragraph gives a neutral account of events.  In this litigation, Mr. Su, Honesty and Envirotec-PRC dispute the exact terms (including shareholding) agreed between Mr. Su and Ms. Wang.  But there is no argument over the fact that Envirotec-PRC was formed in order (among other things) to manufacture pest repellers ordered by Team Products.

17.  Nor is there anything in the fax representing that goods would be sold to Team Products at factory prices.  Such a representation (if it had been made) would relate to future conduct.  It is doubtful whether a representation of that sort would be actionable at common law.

18.  But assume that such a representation can be sued upon.  Even then, all the fax says is that Ms. Wang has entered into a joint venture agreement to ensure efficient manufacture of quality products to meet Team Products’ orders.  Presumably, Team Products was satisfied by the ensuing production.  Save that it has not paid for the goods delivered, it has accepted the goods manufactured without demur.

19.  It appears to be suggested in Team Products’ Defence and Counterclaim (at §8(2)) that the fax represented that the result of the new joint venture between Ms. Wang and Honesty was that Envirotec-HK and CellPlus would own the Mainland factory in which pest repeller was manufactured.  I do not see how the allegation can be made out.  Details about the joint venture agreement are not given in the fax.

20.  It is true that the fax refers to Ms. Wang being in “control”.  This may have been because, rightly or wrongly, Ms. Wang believed when writing the fax that she would own 50% of Envirotec-PRC.

21.  But assume that Ms. Wang wrongly thought that she had a 50% shareholding in Envirotec-HK and at best Ms. Wang was only ever entitled to something less.  Even then, how could a misstatement as to her control over the factory induce a belief in any reasonably objective reader of the fax, that CellPlus would only charge manufacturer’s prices to Team Products?

22.  The reality was that CellPlus stood in no fiduciary relation towards Team Products.  When bargaining over price, CellPlus was entitled to seek the maximum that it believed it could extract from Team Products.  Team Products’ acceptance of the price put forward by CellPlus would have meant that such price represented a fair value for the goods ordered.

23.  Such dealing is common among businessman.  There is nothing in the fax to suggest that the negotiations between CellPlus and Team Products followed anything other than a conventional commercial pattern.

24.  Mr. Burns (appearing for Team Products) says that he does not rely solely on the 13 November 2001 fax as the source of the alleged misrepresentation.  He submits that the misrepresentation also arises from the fact that Team Products conventionally only bought goods directly from factories and from a course of dealings between CellPlus and Team Products.  In substance, however, it was plain that Mr. Burns was relying solely on the November fax to fuel the misrepresentation defence.

25.  A representation cannot emanate from the fact that Team Products conducted itself in a particular way in the past with third party factories.  An actionable representation must arise out of some statement or conduct by CellPlus addressed towards Team Products.

26.  Nor is it enough to get over the hurdle of summary judgment vaguely to allege a “course of dealing” between Team Products and CellPlus as the source of misrepresentation.  A defendant in Team Products’ position must condescend to particulars of the alleged course of dealing.  There are no such particulars in Team Products’ pleading or affidavits.

27.  In my judgment, the alleged misrepresentation simply cannot be made out.  Team Products’ defence of equitable set-off (which relies on setting-off alleged damages for misrepresentation against CellPlus’ claim for goods sold and delivered) must fail.

28.  In light of my conclusion, I do not need to decide whether in law the pleaded misrepresentation is so connected with CellPlus’ action for payment as to give rise to a claim for equitable set-off.

29.  The misrepresentation defence is principally directed towards CellPlus’ claim for goods sold and delivered to Team Products before 1 April 2004.  Mr. Burns in submission suggested that questions as to who was in breach of contract when, somehow gave rise to an equitable set-off.  I do not think there is any substance in that contention.  Aside then from misrepresentation and a vague alternative submission of equitable set-off, no other defence is raised by Team Products against the claim on goods already delivered.  It follows that CellPlus should at least have interim payment in the amount of US$2,259,900.33.

30.  I record that Team Products originally couched its claim for misrepresentation as one for deceit.  Before me Mr. Burns fairly acknowledged that on currently available evidence he could not sustain the allegation of fraud.  The suggestion of deceit was thus withdrawn.

B. Issue 2: Cancellation

31.  By an e-mail dated 1 April 2004 Team Products purported to cancel all outstanding orders with CellPlus.

32.  It is unnecessary for me to consider the merits of Team Products’ case on cancellation.  This is because it appears to me that CellPlus' claim for payment of the price due on the cancelled orders is flawed.

33.  CellPlus says that the purported cancellation in April 2004 amounted to an anticipatory repudiatory breach.  CellPlus says that it accepted that breach and is entitled to total price of the cancelled contracts.

34.  I doubt that CellPlus is entitled to the price as opposed to the profit that it would have earned on the sale of the cancelled goods.

35.  There is no evidence before me that CellPlus paid Envirotec-PRC or anyone else for the manufacture of some or all of the goods cancelled.  It follows that the measure of CellPlus’ damages cannot be the total value of the goods.  Instead, the measure of its loss must prima facie be the profit foregone.

36.  CellPlus (it seems on first impression) would only be entitled to the price if Cell Plus had not accepted Team Products’ alleged repudiation, but instead remained ready, willing and able to fulfil the cancelled contracts.  There is no evidence that such is the situation here.

37.  Ms. Wee (appearing for CellPlus) says that in the unique circumstances of this case CellPlus is entitled to judgment for the price.  The unique circumstance is that, having cancelled its orders with CellPlus, Team Products turned around and placed an order for some or all of the cancelled goods with Envirotec-PRC.

38.  Insofar as Ms. Wee maintains that CellPlus must be entitled to the price rather than lost profit, the claim on the cancelled goods must go to trial.  It must at least be arguable that price is the wrong remedy.

C. Issue 3: Non-delivery

39.  CellPlus claims to have despatched 2 purchase orders (Nos. 7867 and 7868).  There is evidence that the goods corresponding to those orders in fact left the factory for Team Products.

40.  Team Products, however, denies receiving the relevant goods.

41.  The goods under the purchase orders were sold FOB.  Accordingly, at the earliest, CellPlus would only have fulfilled its delivery obligation when the goods were shipped on board a vessel.

42.  No bills of lading for the goods have been exhibited to me.  There is no evidence in the affidavits filed to show that the goods were shipped, as opposed to merely sent out from a factory.  Consequently, I am unable to say at this stage that CellPlus met its FOB obligation on the 2 purchase orders. 

43.  This matter must therefore go to trial.

D. Issue 4: Legal set-off

44.  Team Products claims a net Volume Incentive Rebate (VIR) of US$714,765.87.  Team Products’ entitlement to VIR is said to have been agreed in January 2004.  Team Products contends that it is entitled to a legal set-off of this liquidated amount against any sum due to CellPlus.

45.  CellPlus disputes Team Products’ entitlement to any of the VIR claimed.  For instance, CellPlus says the January 2004 agreement for VIR was void for lack of consideration.  But CellPlus accepts that this issue can only be resolved by trial.

46.  For these proceedings, CellPlus has drawn my attention to its exchange of e-mails with Team Products in February 2004.  There Team Products confirmed in effect that the total net outstanding under the alleged January 2004 agreement was US$687,026.67.  From that amount, CellPlus says $77,653.77 withheld by Team Products towards VIR must be deducted.  This leaves a net balance (on the assumption that a claim for VIR is valid) of US$609,372.90. 

47.  I agree with CellPlus.  From Team Products’ confirmation of VIR figures by the February 2004 e-mails, it seems unarguable that US$609,372.90 is the maximum net amount of VIR (if any) that could be due.

Conclusion

48.  CellPlus’ appeal is allowed in part.

49.  There will be interim judgment in CellPlus’ favour against Team Products for US$2,259,900.33 in respect of the claim in Amended Statement of Claim §§27 and 28.  Interest will run on that amount at 1% over US$ prime from date of writ until today and thereafter at the judgment rate.

50.  Team Products will have unconditional leave to defend otherwise.

51.  There will be a stay of execution in respect of US$609,372.90 of the amount adjudged due to CellPlus.

52.  I will now hear counsel on costs and any consequential orders.