XCHRX NICHIMEN CO., (HK) LTD. v. LONG & WIDE DEVELOPMENT LTD.

HCA162/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.162 OF 2001

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J U D G M E N T

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1. This is an appeal by the plaintiff against the master's refusal of summary judgment. The plaintiff's claim is for goods sold and delivered evidenced by eight invoices. The invoices were issued pursuant to five contracts made between December 1999 and February 2000 between the plaintiff and the defendant. The contract numbers are : LNH3058, LNH3059, LNH3083, LNH3084 and LNH3085. Each of these contracts provided for the sale of cold rolled steel sheet in coil by the plaintiff, FOB Nagoya, and were to be paid for "by L/C at sight to be opened prior to shipment". The eight invoices are : LNH3058C/00, LNH3059C/00, LNH3083A/00, LNH3084A/00, LNH3085A/00, LNH3083B/00, LNH3084B/00 and LNH3085B/00. They add up to US$2,680,485.07. However, the plaintiff's claim is for US$2,447,321.90 under these eight invoices. The difference is explained by the fact that of the invoice amount of US$936,226.11 for invoice numbers LNH3058C/00 and LNH3059C/00, only US$742,856.16 remains outstanding.

2. The defendant relies on three defences :

(1) the invoices have been paid;

(2) the defendant merely acted as agent; and

(3) accord and satisfaction arising of the Credit Agreement dated 14 December 1998.

3. The plaintiff relies on a written memorandum signed by Mr Law Kwai Wah, the managing director and general manager of the defendant, dated 4 July 2000 ("the memorandum"). The memorandum is in the defendant's own stationary. It reads :

" We hereby acknowledge our outstanding to your company as of 30th June 2000 is as follows:

..."

There followed the eight invoices as well as some additional sums for interests. It also recorded the fact in relation to invoices LNH3058C/00 and LNH3059C/00 only US$742,856.16 remained outstanding out of the original US$936,226.11. There is no dispute that the memorandum was signed by Mr Law.

4. It is common ground that in respect of the five contracts, three Letters of Credit were issued on the application of one Foshan SMC Long & Wide Steel Company Limited ("Foshan"). The eight invoices were amongst the documents presented for payment under those Letters of Credit and they were paid. It is also common ground that the invoices were addressed to Foshan. However, the plaintiff's case is that notwithstanding apparent payment of these invoices, they were entitled to sue on them.

5. This has been explained in the second affirmation of Mr Hideaki Kitano, the director and general manager of the metal department of the plaintiff :

"5. I wish to clarify why the 3 (sic) subject Invoices were still outstanding despite the Defendant arranging 3 Letters of Credit for the same.

6. The Defendant was a long-term customer of the Plaintiff for over 10 years. The Plaintiff used to supply steel products to the Defendant on open credit for a certain period of time, usually for 70 days, and up to a limit of US$2.5 million (previously it was US$1.4 million until the Agreement signed between the parties dated 14th December 1998 to increase it from US$1.4 million to US$2.5 million).

7. After the initial 70 days' credit period expired for each invoice, the Defendant was required to settle the payment for that invoice immediately. Towards the end of 1998 and early 1999, the Defendant had difficulty in complying with such requirement of settling the invoices by the due dates under various invoices issued by the Plaintiff to the Defendant. So it was arranged between the parties that the Defendant would pay the Plaintiff by way of Letters of Credit applied by third parties for subsequent invoices issued by the Plaintiff to the Defendant. For the purpose of merely negotiating each of the Letters of Credit (applied by third party) with the bank, the Plaintiff, in complying with the requirement of the same, had to issue a separate invoice in the name of the third party applicant of the Letter of Credit. The Plaintiff however maintained that it had no contractual relationship with the third party applicant of the Letter of Credit.

8. Since the credit period for payment of earlier invoices had expired, the same had to be settled first leaving the later invoices (although Letters of Credit had been applied for the same) outstanding. Otherwise, the Plaintiff would not continue to supply steel to the Defendant because there would be old invoices with outstanding unpaid beyond the credit period of 70 days, which was not allowed under the policy of the Plaintiff in continuing its supply of steel to the Defendant. This practice or arrangement for payment continued to run by agreement since December 1998. The Defendant was fully aware of and agreed that the payment made in subsequent Letters of Credit for subsequent invoices were to satisfy the earlier invoices to which no payment has been arranged at all."

6. The defendant has filed two substantive affirmations, both by Mr Law. In neither did Mr Law explain how it was that he came to sign the memorandum. It is common ground that by 30 June 2000, payment had been effected under the Letters of Credit ostensibly, for the eight invoices. One would expect some explanation.

7. The Statement of Claim, which is endorsed on the writ, is dated 11 January 2001. The Order 14 summons was issued on 1 February 2001. On 3 March 2001, in connection with an application for extension of time to file an affirmation, S.K. Lam, Alfred Chan & Co., solicitors for the defendant wrote :

"Our client's ground of opposition is based on an Agreement dated 14th December 1998 entered into between our respective clients. Pursuant to such agreement, your client agreed to accept the shares of Foshan SMC Long & Wide Steel Co. Limited as consideration for repayment of the loan facilities owed to yours. In the premises, the above action is not appropriate in these circumstances of which it will be the main ground of opposition in a coming hearing."

This is the accord and satisfaction defence. There was no mention of the defence of payment.

8. In paragraph 12 of Mr Kitano's second affirmation, he said :

"12. The Defendant is raising for the very first time in its Defence filed herein that the 3 subject Invoices were already paid by the 3 Letters of Credit because the Master raised at the hearing why the Plaintiff was suing for the price under the invoices when the same had been paid by Letters of Credit. The outstanding sum was undisputed by the Defendant even in its affidavit filed in opposing the Order 14 application. The Defendant failed to deal with why they had signed such a Memorandum of Acknowledgement of Debt that the balance under the 3 subject Invoices were outstanding to the Plaintiff."

9. The first affirmation filed by Mr Law was on 24 April 2001. In that affirmation, the defence of agency and accord and satisfaction were raised. The hearing before the learned master took place on 27 April 2001. The Defence was filed on 29 May 2001.

10. One must wonder why such an obvious defence was not raised by the defendant. Indeed, prior to the writ, a statutory demand was served on the defendant in August 2000. There was no response to the statutory demand.

11. In an application for summary judgment, the defendant has the obligation to satisfy the court that there is a triable issue. A defendant's affidavit must "condescend upon particulars". Here, in relation to Mr Kitano's allegations, there is in substance no more than a general denial. What Mr Law said in his second affirmation is :

"The 1st and 2nd Affirmations of Hideaki Kitano dated 25th April 2001 and 17th July 2001 have been read and explained to me by the Defendant's legal advisers. I deny all of his allegations except for what I expressly admit herein."

This would not do. The memorandum was left totally unexplained.

12. In Mr Law's second affirmation filed for the purpose of the appeal, he has produced some documents to show that the eight invoices have been paid. They are three "Statement of Bills for Collection Settlement" issued by the Bank of Tokyo-Mitsubishi Ltd all dated 22 May 2000. These three documents contained handwritten notes on them which showed that the net proceeds of these payments were treated as payments for the following invoices : LNH3058A/00, LNH3058B/00, LNH3058C/00, LNH3058A/00, LNH3059B/00 and LNH3058B/00. It is to be noted that these are not the eight invoices pleaded.

13. Mr Kitano has produced a running account (Exb.HK-6) which shows quite clearly how the debit balance of US$2,447,321.90 was arrived at. Invoices numbers LNH3058A/00, LNH3058B/00, LNH3058C/00 and LNH3059B/00 appeared on this running account.

14. Mr Kitano has this to say in paragraphs 9 and 10 of his second affirmation :

"9. As at 30th June 2000, the Defendant was indebted to the Plaintiff in the principal sum of US$2,447,321.90. On 3rd July 2000, I went to the Defendant's office and brought along with a draft Memorandum of Acknowledgement of Debt setting out the particulars of the 3 outstanding Invoices and initial interest and the over due interest by the Defendant thereunder. There is now produced and shown to me a copy of the running account of the Defendant with the Plaintiff marked exhibited 'HK-6' which shows that the balance of the outstanding amount under the 3 subject Invoices.

10. Mr. Law Kwai Wah of the Defendant then amended and approved the draft Memorandum of Acknowledgement of Debt and he asked me to delete the figure for 'interest of the previous Contract', which I agreed to at his request. There is now produced and shown to me a copy of the said draft Memorandum of Acknowledgement of Debt marked exhibit 'HK-7' with my handwritten amendments."

15. The defendant has not dealt with any of these allegations at all.

16. Mr Vincent Chun who appears on behalf of the defendant argues that the eight invoices had been fully satisfied by payment under the Letters of Credit. He has reminded me of the legal principles on appropriation. He argued that when the plaintiff sent its invoices to be paid under the Letters of Credit, the plaintiff had appropriated the payments thereunder to the invoices. Hence, the plaintiff can no longer sue in respect of the goods, the subject of these invoices. With respect, I do not agree.

17. The plaintiff relies on the agreement which Mr Kitano has outlined in paragraphs 5 to 8 of his second affirmation. If the agreement is established, the plaintiff's causes of action for goods sold and delivered as evidenced by the eight invoices remain intact. In other words, the parties have agreed that the eight invoices were not to be considered as having been paid under the Letters of Credit. What I have to consider is whether the defendant has satisfied me that there is a triable issue in relation to such an agreement.

18. Mr Chan explains the memorandum in this way in his skeleton argument :

"The Memorandum of Acknowledgement dated 4-7-2000 is only an admission of quantum by a layman and no more." (Original emphasis)

19. But with respect, that does not explain why the defendant should admit that there were sums outstanding in relation to these eight invoices which tallied completely with the plaintiff's claim. Nor does it explain why the defendant should acknowledge "our outstanding to your company as of 30 June 2000" in the sum US$2,447,321.90. I ignored the additional sums representing interests in relation to the eight invoices which also appeared on the memorandum. Mr Law has said nothing about the allegation that the memorandum was based on an earlier draft which has been exhibited as HK-7. Nor the allegation that HK-6 has been shown to him. Moreover, the fact that it was "an admission of quantum by a layman" supports the plaintiff's case that there was a running account. The Credit Agreement also supports the case that there was a running account. In all the circumstances, I do not believe the defendant has discharged its obligation to satisfy me that there is a triable issue here.

20. I turn to consider the other defences. One defence is that the defendant is a mere agent. Mr Chun has referred me to Pan Asia Textiles Ltd v Fidus Co. [1987] 2 HKC 233 at 235E where this appears :

"The status and capacity of the asserted or purported parties to a contract is to be determined by reference to the provisions of the contract looked at in its entirety. It is not sufficient and it is certainly not conclusive to have regard only to the terms in which the actual signatories to the contract are described. All to the fact that no qualifying description of their status accompanies their signatures."

21. Looking at the contracts, I see nothing to show that the defendant was not meant to be personally liable. It was described as the buyer. If one may look beyond the actual contracts themselves, the memorandum is an acknowledgement of personal liability. The Credit Agreement itself is also consistent with personal liability. Otherwise, why should the defendant be given credit facilities? Above all, I see nothing out of the ordinary for a Hong Kong company to undertake personal liability for the purchase of raw material to be supplied to a mainland entity. The different legal system in Hong Kong makes it very likely that a supplier would prefer to contract with a Hong Kong company.

22. The last defence is accord and satisfaction. In relation to this, one needs to return to the Credit Agreement :

" For the purpose of further expanding and development of Steel Businesses Between both parties concern, especially the supplying of Cold Rolled Steel Sheet in Coil to Foshan SMC Long & Wide Steel Co., Ltd., 4th /F, No.15, Wufeng 4 Road, Foshan City, Guangdong, P.R. China.

Party A agree to increase his credit facility up to US$2.5 Million to Party B. In which the terms of use are same as the previous credit facility of US$1.4 Million and remain unchanged.

In case of Party B could not fulfill the repayment of the captioned credit Facility on time, Party B agree to transfer Party A some of his benefit and/Or shears of Foshan SMC Long & Wide Steel Co., Ltd., as compensation.

In this case Party B is responsible to get an approval of the board meeting of Foshan SMC Long & Wide Co., Ltd. and the amount of compensation shall be equivalent to the outstanding of facility which Party A gave Party B."

23. According to the defendant, the defendant's obligation to pay money has been discharged by accord and satisfaction in that there was the purchase of a release from the payment obligation by means of another valuable consideration, namely, the promise to transfer shares which the plaintiff has accepted by the Credit Agreement itself. Whether this is so is a matter of construction of the Credit Agreement. I am as well able to construe the Credit Agreement now as at the trial. I do not construe the Credit Agreement as an agreement by the defendant to take shares instead of payment. I agree with Mr Clifford Smith SC, who appeared on behalf of the plaintiff, that properly construed, the Credit Agreement provided that the defendant's shares in Foshan were available as a security or alternative payment to the plaintiff. It does not oblige the plaintiff to forego payment and to accept shares.

24. The defendant has produced documents to show that he has taken steps to procure or obtain the approval of the Board of Directors of Foshan on or about 7 June 2000 to "giving up two posts of directors on the side of the defendant in Foshan company". It has not been said that it was done with the knowledge or agreement of the plaintiff. It is self-serving and does not take the matter further.

25. Lastly, I turn to the claim for interests. They have been admitted and acknowledged by the defendant in the memorandum of 4 July 2000 and I do not see why they should not be payable.

26. For the above reasons and with the benefit of full and helpful submissions made by counsel for the plaintiff and the defendant and the further evidence filed on appeal, I am able to differ from the learned master and have come to the conclusion that judgment should be entered in favour of the plaintiff as claimed by it in its Order 14 summons dated 1 February 2001 together with the costs of this action which, of course, include costs here and below.