FINE MASTER LTD v. NIPPON CIRCUITS LTD

HCA919/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 919 OF 2010

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J U D G M E N T

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Introduction

1. The plaintiff’s claim is for unpaid proceeds of goods sold and services provided in the amount of $1,760,085.41.  Such goods and services were provided to Nippon (Boluo) Electronics Co Ltd (“Nippon Boluo”).  By a “confirmation letter” dated 9 March 2009 (“the confirmation letter”) signed and issued by the defendant, the defendant confirmed to the plaintiff that it would be responsible for the settlement of all the purchase orders placed by Nippon Boluo with the plaintiff.

2. At all material times, Nippon Boluo was wholly owned by Nippon Products Ltd (“Nippon Products”).  Both Nippon Products and the defendant were wholly owned subsidiaries of NCP Holdings.

Issues

3. The plaintiff’s claim against the defendant is based on the confirmation letter.  Owing to the importance of this letter, it is set out below for close examination:

“To : Fine Master Ltd. (ie the plaintiff)

From : Nippon Circuits Ltd. (ie the defendant)

Date : 9 March 2009

Re : Invoice settlement arrangement

We, Nippon Circuits Ltd., hereby writing to confirm that we are responsible for the settlement of all the purchase orders placed by Nippon (Boluo) Electronics Co., Ltd. Please direct all the invoice to our office, address: Room 803-4, 8/F., Wah Wai Centre, 38-40 Au Pui Wan Street, Fotan, Shatin, N.T. for our handling.

Regard,

For and on behalf of

Nippon Circuits Ltd.

[Stamp and signed]”

4. The plaintiff’s case is that this is a guarantee issued by the defendant to pay for all the past and future unpaid proceeds of goods sold and services supplied by the plaintiff to Nippon Boluo (“the said proceeds”).

5. On six occasions between 4June and 31 December 2009, the defendant made payments by way of bank transfers to the plaintiff as part payments of the said proceeds.

6. By a document entitled “admission upon accounts being checked” dated 14 January 2010 (which is a statement of account) signed by the plaintiff and Nippon Boluo, Nippon Boluo admitted that the outstanding debts owed by it to the plaintiff totalled $2,313,262.99. 

7. On 7 April 2010, the defendant made payment by way of a cheque for $553,177.58, reducing the outstanding amount to $1,760,085.41, the amount claimed in this action.

8. The defendant raises three defences, namely,

(1)   The guarantee in the confirmation letter is not binding on the dependant as it lacks consideration;

(2)   Alternatively, even if consideration had been provided, the guarantee was superseded by the “admission upon accounts being checked” dated 14 January 2010; and

(3)   In the further alternative, the defendant only acted as an agent of Nippon Boluo to sign the guarantee, to make the part payments to the plaintiff, and to handle the outstanding debts owed by the Nippon Boluo to the plaintiff.

9. A question also arises on the proper interpretation of the confirmation letter, whether it is to guarantee the payment of proceeds of goods sold and services supplied up to the date of the confirmation letter or only for those supplied after the execution of the confirmation letter, or whether for both past and future proceeds.

Witnesses

10. The plaintiff called two witnesses, being its director Mr Ng Man Cheung and a former finance manager of the defendant, Mr Chau Kuen Eddie.

11. The defendant, on the other hand, only called one witness, Mr Yu Hung Chi, allegedly an assistant to the directors of the defendant. 

12. Both Mr Ng and Mr Chau have personal knowledge of the subject matter of this action whereas Mr Yu does not.  According to Mr Yu, he worked for the company that took over the Nippon group consisting of NCP Holdings, Nippon Products Ltd, Nippon Boluo and the defendant.  He was the assistant to a director of the company responsible for taking over the Nippon group.  His employment to deal with the affairs of the Nippon group started in the latter half of January 2010, later than the date of the date of the statement of account of 14 January 2010.  His knowledge about the subject matter of this action was derived from what Mr David Mak (a director of the defendant) told him and some of the Nippon group’s documents that he had read. His company had asked Mr David Mak to give evidence in this case but as Mr David Mak had sold out his interest in the Nippon group he was not willing to be a witness for the defendant.

13. As Mr Yu admits that his knowledge of the matters in issue was derived from hearsay, without any opportunity given to Mr Ken To, counsel for the plaintiff, to cross-examine the source, little weight should fairly be given to his evidence.  His evidence is quite inconsequential on the issues that require determination, save for his admissions specifically referred to below.

Facts undisputed or as found by me

14. For over eight years, the plaintiff, being a company incorporated in Hong Kong, had supplied electronic components and related services to Nippon Boluo, a company registered on the Mainland.  As stated before, the defendant and Nippon Products were wholly owned subsidiaries of NCP Holdings, and Nippon Boluo was wholly owned by Nippon Products.  Thus, the defendant and Nippon Boluo were associated companies.  Nippon Boluo obtained goods and services supplied by the plaintiff, from which it manufactured electronic goods that were sold by the defendant.  The proceeds of the goods and services provided by the plaintiff to Nippon Boluo would be paid by the defendant on behalf of Nippon Boluo.  That had been the practice between the parties and Nippon Boluo.

15. In about February 2009, the amounts outstanding were quite substantial, wherefore the plaintiff took out risk insurance to cover the risk.  At the request of the insurer, the plaintiff requested the defendant to issue a confirmation so as to reduce the risk covered by the insurer.  As a result, the defendant issued the confirmation letter dated 9 March 2009.

16. As said before, between 4 June 2009 and 31 December 2009, the defendant made a total of six part payments to the plaintiff.  Mr Yu agreed that these part payments were made to fulfil the defendant’s obligations under the confirmation letter.

17. On 14 January 2010, the plaintiff and Nippon Boluo signed the said admission upon accounts being checked, whereby Nippon Boluo admitted that the outstanding amounts owed to the plaintiff came to $2,313,262.99.

18. Since early 2010, because of the increase of the indebtedness, the plaintiff urged the defendant to make payments.  The defendant repeatedly asked for a longer payment period and discount from the plaintiff.  The defendant also explicitly asked the plaintiff not to take any legal action against it.

19. Mr Yu provided more background information about why the confirmation letter was issued by the defendant to the plaintiff.  He said that in 2008 and 2009, as a result of the global financial crisis, the Nippon group faced serious financial difficulties.  In order to appease suppliers who chased the group for payment of overdue debts and to ensure ongoing supply of goods and services, guarantees similar to the confirmation letter were provided to them to guarantee payments.  The confirmation letter was issued to ensure the plaintiff’s ongoing supply of goods and services to Nippon Boluo.  This arrangement was important for the survival of the group given the inter-dependence of the group companies.  If Nippon Boluo did not receive raw materials for manufacturing, the defendant might not have any products to fulfil its customers’ orders.  The evidence of Mr Chau Kuen Eddie, who was the finance manager of the defendant at the material time, is to the same effect.

20. On 7 April 2010, the defendant made another part payment to the plaintiff in the amount of $553,177.58.  Again, Mr Yu accepted in cross-examination that that was done pursuant to the confirmation letter.

21. Despite further repeated demands, the plaintiff was unable to obtain any further payment from the defendant.  On 21 June 2010, the plaintiff took out this action against the defendant.

Guarantee - consideration

22. There is no serious dispute that the intended purpose of the confirmation letter is in the nature of a guarantee.  What the defendant alleges is that there was no consideration for the guarantee.  It is argued that since the goods and services supplied by the plaintiff were towards Nippon Boluo and for its benefit, the defendant had no contractual relationship with the plaintiff and therefore such goods and services provided by the plaintiff did not constitute any consideration from the plaintiff to the defendant.  Moreover, as the goods and services of the plaintiff had already been supplied before the guarantee was given, at the most they amounted to past consideration which is not valid consideration under the law.  Moreover, even if the plaintiff did forbear to sue Nippon Boluo, that forbearance was not caused by or due to any request made by the defendant.

23. In this respect, it is relevant to look at the law as encapsulated in Chitty on Contracts, 31^st Ed, General Principles, paras 44-022, 44-023 and 44-024 of which state as follows:

“Where the surety guarantees some future debt or transaction, the consideration may be a promise on the part of a creditor to grant the credit or enter into the transaction, or the actual act of doing so. Even if (as is commonly the case) the surety derives no benefit from the transaction, the creditor suffers a detriment which is sufficient consideration.

“A guarantee even of a past debt or transaction will be valid if the creditor promises to forbear from suing or to give time to, the principal debtor, or if he actually does so at the request of the surety. The mere fact of forbearance, however, is not enough: there must be an actual promise to do so, or the forbearance must be at the request (express or implied) of the surety.

“In practice the surety frequently guarantees both past and future transactions in return for such an undertaking, as such a guarantee is good as to both sets of transactions, for consideration to be executed on one side is at all events prima facie consideration for all that is done on the other, and all the purposes are to be referred to all the considerations.”

24. According to the evidence of Mr Ng, whom I find to be an honest witness, the plaintiff had been doing business with the Nippon group since about the year 2000.  He had been dealing with Mr David Mak who had become a friend.  The plaintiff supplied goods and services to Nippon Boluo and the latter’s associate company in Hong Kong, the defendant (and on a few occasions, Nippon Products), would pay for the proceeds of such goods and services.  Nippon Boluo would manufacture electronic goods for the defendant who would obtain orders from customers to buy them and receive the price from the customers.  That had been the practice between 2000 and 2009.  At the end of 2008, because the proceeds of such goods and services had been outstanding for a long time and they were increasing, Mr Ng took out insurance against the risk of such proceeds not being paid.  The insurance company issued an insurance policy in that respect that was effective from 1 March 2009 to 28 February 2010.  The insurer also advised him to obtain a confirmation letter from the defendant that the defendant was responsible for paying such proceeds to the plaintiff.  As a result, he obtained the confirmation letter.  The confirmation letter implicitly confirmed what had been the practice between the plaintiff, Nippon Boluo and the defendant.  Mr Ng wished that the confirmation letter would also cause the defendant to lessen the delay of payment because the defendant should know that an insurance company was involved and if there was any default in payment causing the insurance company to take action, that would affect the defendant’s creditworthiness with the defendant’s bankers.

25. Mr Ng also stated that if the defendant did not provide the confirmation letter, the plaintiff would not have continued to provide goods and services to Nippon Boluo and would not have desisted from suing Nippon Boluo and the defendant.  Mr Billy Ma, counsel for the defendant, argues that it is not the plaintiff’s pleaded case nor was there evidence of any request from the defendant to the plaintiff for the continued provision of goods and services to Nippon Boluo or for the plaintiff’s desistence from bringing proceedings against Nippon Boluo or the defendant. 

26. The way I look at this matter is that there had been a long practice between all the three parties that the defendant was the payer for all such goods and services provided by the plaintiff to Nippon Boluo, and the confirmation letter was issued to confirm the practice in writing, albeit it was made at the request of the plaintiff and at the behest of the insurer.  The consideration, though not expressly stated, was as described by Mr Ng.  According to the long standing practice between the relevant parties, the defendant would pay for the goods and services supplied by the plaintiff to Nippon Boluo and the confirmation letter was a confirmation in writing of the same arrangement.  The arrangement was made with the consent of the defendant, Nippon Boluo and the plaintiff. Without the practice, or subsequently after the confirmation letter was issued on 9 March 2009, without the confirmation letter, the plaintiff would not have continued with the supply or forborne to sue Nippon Boluo or the defendant.  I am satisfied that there was good consideration for the confirmation letter.

Extent of coverage

27. It is not disputed by the parties’ counsel that extrinsic evidence is admissible to show whether the guarantee is guaranteeing past and future transactions, or past ones only.  The dispute relates to whether the guarantee in this action “for the settlement of all the purchase orders placed by Nippon Boluo” covers past and future purchases or only past purchases.  To me, it is clear enough that the word “all” without any wording to limit its meaning covers the entirety of the purchases, whether made before or after the issue of the guarantee.  The sentence that follows “Please direct all the invoice to our office ... for our handling” also lends support to the coverage of future purchases, to direct all the invoice to the defendant.  Had the intention of the defendant which issued the confirmation letter been limited to past purchase orders, I would have thought that a simpler form of wording like “all outstanding debts of” or “all balance owed by” Nippon Boluo instead of “all purchase orders placed by” Nippon Boluo would have been used.

28. Mr Ma argues that the wording of “all the purchase orders placed by” Nippon Boluo should be contrasted and compared with “purchase orders to be placed” and since “to be” was not used, the coverage is limited to past orders (or proceeds).  I do not agree that as a matter of interpretation, “all” the purchase orders must necessarily exclude purchase orders “to be placed”.  Even accepting Mr Ma’s argument that the wording of the guarantee itself is inconclusive, an ambiguity would arise, which would in turn give rise to the application of contra proferentum.  Since the confirmation letter was drafted and issued by the defendant, the ambiguity will be construed against the defendant in favour of the plaintiff.

29. Para 12-085 of Chitty, ibid states:

“…in the case of a guarantee, if the party who drafts it uses ambiguous language, such ambiguity may be taken more strongly against himself.”

30. Moreover, after the guarantee was issued, further goods and services were supplied by the plaintiff to Nippon Boluo.  This is admitted by Mr Yu in his viva voce evidence.  This must been done on the faith and strength of the guarantee issued by the defendant in favour of the plaintiff.  Indeed, in the emails that passed between Mr Ng and Mr David Mak, there had not been any dispute as to the defendant’s liability or to the quantum of the outstanding amount, save that the defendant repeatedly asked the plaintiff for a discount or for settlement by instalment payments.  To me, this is good and reliable evidence of an admission of liability and quantum and I am satisfied that there can be no challenge on both of these two aspects.  The $1,760,085.41 claimed is also supported by the statement of account dated 14 January 2010 arriving at $2,313,262.99 that was reduced by the subsequent payment of $553,177.58.

Supersession by the later document

31. As mentioned before, another defence is that even if consideration had been provided, the guarantee was superseded by the “admission upon accounts being checked” dated 14 January 2010.  There are no particulars of this defence and no basis or explanation has been given in evidence to show how it arose.  If the defence is based on the argument or allegation that the confirmation letter only guarantees payment for past purchase orders that had been placed before the date when it was issued, namely, 9 March 2009, and Mr Ma confirms that this is so, then because of my ruling in paragraph 27 above, I do not need go further.

32. According to Mr Ma’s closing submissions, this defence is based on the fact that the defendant was not involved in the statement of account of 14 January 2010, which was only signed between the plaintiff and Nippon Boluo, and as such it would amount to a material variation of the original surety, if such was provided by the confirmation letter, and hence discharge the defendant’s liability under it. This is not the defence of “supersession” as pleaded and in any event it is an argument without merit.  The statement of account of 14 January 2010 was merely for checking the accounts between the plaintiff and Nippon Boluo to ascertain the exact amount owed.  It was most probably produced for showing to the new management that took over the Nippon group the exact amount of indebtedness owed to the plaintiff.  It was not and could not be a variation, let alone a material variation, of the original surety.

Agency

33. The defence of the defendant being an agent in issuing the confirmation letter and in making the part payments is similarly unmeritorious.  It seems to me that the idea of agency raised as a defence was derived from the fact that although the indebtedness was incurred by Nippon Boluo, the defendant paid it on behalf of Nippon Boluo.  This idea is not and cannot be tantamount to an agency in law that will exonerate the defendant from liability.  Factually, apart from the fact that there is not a single word in the confirmation letter itself alluding to anything that is indicative of the true concept of an agency, there was no mention of it in the emails exchanged that can in any way assist the defendant in this allegation.

34. The defendant raises an allegation to support is defence of agency.  It is alleged that the payment of $553,177.58 made to the plaintiff by the defendant was due to the repeated interference and harassment caused to the defendant by the plaintiff and its legal advisers and also due to the repeated requests by Nippon Boluo, and that the defendant made the payment to the plaintiff as agent for Nippon Boluo. There is no evidence of such “repeated interference and harassment”, and even if there were demands for payment, I do not consider that the defendant would succumb to such demands and on the other hand take the position of fighting this case on the balance of the proceeds.  If the money was paid at the request of Nippon Boluo, it would anyway be an internal arrangement inside the Nippon group, to which no evidence is specifically directed, which would not create an agency to debar the plaintiff’s claim.

Conclusion

35. In the circumstances, I give judgment for the plaintiff in the sum of $1,760,085.41 as claimed.  I also order interest to be paid by the defendant at the judgement rate from 21 June 2010, the date of the writ, until payment.  I make an order nisi that the plaintiff have the costs of this action.