XCHRX JB RESEARCH, INC v. STARLIGHT MARKETING DEVELOPMENT LTD. AND ANOTHER

HCCL 10/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 10 OF 2001

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REASONS FOR DECISION

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1. This is an application for summary judgment under Order 14, alternatively on admissions, for part of the sum claimed by the plaintiff in this action. By an amendment to the summons with leave at the commencement of the hearing the plaintiff alternatively sought an interim payment. Having heard the solicitor for the plaintiff and counsel for the defendants, I ordered that part judgment be entered for the plaintiff for the sum of US$534,042.15 with interest thereon at 1% above HSBC prime from 15 September 2000 to the date of judgment, with costs of the application to be taxed and paid forthwith. I now give my reasons for so doing.

2. The 2nd defendant is a joint venture vehicle incorporated pursuant to an agreement in writing between the plaintiff and the 1st defendant dated 4 August 1999 the principal object of which was to provide capital for the plaintiff to purchase their line of products from manufacturers in mainland China for supply to their customers in U.S.A. The plaintiff was to obtain orders from its customers, pass them to the 2nd defendant who would order the goods from the manufacturers. The latter would in turn ship the goods direct to the U.S.A. where the plaintiff would arrange delivery to the customers. Payment would be made by letters of credit by the 1st defendant, guaranteed by the plaintiff, to the manufacturers, and payments from the customers would be collected by a company of factors called CIT and remitted to the 2nd defendant. After reimbursing payments made to the manufacturers, and other fees payable to the 1st defendant under the agreement, which I shall look at shortly, the balance was to be paid to the plaintiff. The 2nd defendant was owned as to 51% by the 1st defendant and 49% by the plaintiff, and was managed and controlled solely by the 1st defendant from the 1st defendant's own offices.

3. The joint venture was intended to continue only until all goods ordered in 1999 had been sold, the proceeds collected, and all obligations satisfied. Under clause 4.2 of the agreement a complete accounting was to have been rendered to each party on the last day of each year. No such accounting has yet taken place although regular reports have been supplied by CIT.

4. Clause 4.5 of the agreement specifies what each party is entitled to under it and reads as follow:-

4.5 Compensation of Venturers No Venturer shall be entitled to any fees, salary or other compensation for its services to the Venture except that:

(a) Starlight shall be paid a fee of 11% of the amount of each letter of credit provided by Starlight to the Venture for it to place production orders;

(b) Starlight shall be paid a fee of 1.5% of the amount of the Ventures wholesale sales value;

(c) JB shall be paid all profits and bear all loss of the Venture after the Venture's payment of the two immediately preceding items.

5. Under clause 4.8(e) the plaintiff was entitled to draw cash from the 2nd defendant if available after payment of the amounts due to the 1st defendant, payment for the letters of credit and sums borrowed from CIT. There is no suggestion that the 1st defendant has not been paid the fees due to it under the agreement, but until the commencement of these proceedings the plaintiff had not drawn anything.

6. On 12 September 2000 the plaintiff's solicitors wrote to the 1st defendant setting out their calculation of what the joint venture owed to the plaintiff, and demanded payment of the sum of US$835,923.59 within 7 days. By an open letter sent by fax on 15 September, Mr Norman Chan of the 2nd defendant replied with his own calculation, and reconciliation of payments, which, with the further deductions he claimed the defendants were entitled to make, came to US$534,042.15, which he described as the "Total Amount Due". He concluded the letter by saying: "We are ready to remit the amount due and transfer the shareholding of the J/V Company after your acceptance of the figures".

7. It is the contention of Mr Deans for the plaintiff that this is a clear admission by the defendants that that sum at least is due, and it is on that basis that he sought part judgment for that amount, conceding that there were triable issues as to the balance.

8. The defence put forward by Miss Cheung for the defendants falls into two parts: first, she says that the letter of 15 September, being part of negotiations, is privileged and cannot therefore be an admission; second, she says that there may be further amounts to be deducted in respect of tax in the U.S.A., returned goods, remaining stock, and accounting costs, before calculating the profit due to the plaintiff under the agreement.

9. The first part, that the letter is privileged, I do not accept. While it is clear that attempts to negotiate and compromise will usually be protected by implied privilege, even though the correspondence is not marked "without prejudice", this equally clearly does not fall into such a category. It is important here to draw the distinction between negotiating and stating one's case. Here, the plaintiff's solicitors' letter is a letter before action, setting out what they claim their client is entitled to. The reply from the defendants is refuting their claim and stating what their case is as to the sum due. There is no attempt at compromise, the letters are setting the limits of the parties' claims, after which there may well be room for compromise between those limits. All the plaintiff is now saying is : " All right, let us have what you say is due, and we will proceed only as to the balance". On this basis there can be no question but that the defendant's letter was an open statement of their case and an admission as to a sum due.

10. The second part of the defence put forward is that the sum is probably wrong and that certain other payments may have to be deducted before any payment can be made to the plaintiff. I have to say that, although I will look at what Miss Cheung says is evidence of sums which may be due, this defence must fail in any event as the defendants are unable to give any particulars of any sums actually due, or even an estimate of any sum which might possibly be due. As it is the defendants' duty under Order 14 to condescend upon particulars, and state clearly and concisely what the defendants' defence is, and the facts relied on to support it, and as they have singularly failed here so to do, I would have to find for the plaintiff in any event. The highest that Miss Cheung has been able to put the defendants' case is that there may be sums which have to be taken into account.

11. The first of these is a payment for which the 2nd defendant might be liable in respect of U.S.A. tax, and in support of this they exhibit a letter from Deloitte Touche Tomatsu which they say shows that the 2nd defendant could be liable for up to 34% tax and further penalties for late filing of tax returns as none have so far been filed. It is not known upon what instructions and information this latter is based, but it can clearly be shown that it does not support any liability for tax. Under the heading "Discussion" the letter says that the 2nd defendant would be liable for tax if it sells to the US directly. It is apparent from the arrangement of the venture between the parties that this is not the case, it is the plaintiff who sells to the US directly, the 2nd defendant being merely the conduit through which orders are directed from the plaintiff to the manufacturers, and payments collected from CIT. There is no evidence of direct business with the US and consequently none of any potential tax liability. In any event, there is also clear evidence from the plaintiff that the profits have been included in their own tax returns and tax paid thereon. There is, of course, also no danger shown of possible liability for penalties for late filing, but if there were, it would be the responsibility of the 1st defendant, who had the management of the venture and was responsible for preparation of the accounts, which has not been done. The cannot raise their own default as a defence.

12. As to the matter of the returned goods and remaining stock, the defendants maintain that they are unable to particularise any possible further liability in respect of these as whether there is any such is within the knowledge of the plaintiff who have failed to provide any details. This latter complaint does not ring true in the light of the fact that the defendants have failed to prepare any accounts at all since the commencement of the joint venture, and there is no evidence that they have asked the plaintiff for such information until two months after these proceedings began. In addition there is no evidence that any such goods remain to be taken into account, and there are no particulars as to how the information would affect the sum due.

13. The final matter, which was not included in the defendants' affidavit but added almost as an afterthought by Miss Cheung, is the liability for the accountants' fees of preparation of the accounts. There is again no attempt even to estimate such a sum, and I cannot take into account another possibility, which is all it amounts to.

14. For these reasons I rejected the contentions put forward on behalf of the defendants and made the orders above.