GOLDFUL DRAGON KNITTING FACTORY LTD v. TRADEVENTURE INTERNATIONAL LTD

HCA 985/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 985 OF 2006

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D E C I S I O N

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Background

1.  This is the Defendant’s appeal against the order of Master Andy Ho made on 18 January 2007 entering summary judgment under Order 14 rule 1 of the Rules of the High Court against the Defendant in the amount of US$4,863,131.50 together with interest and costs. 

2.  The Plaintiff and the Defendant are companies incorporated under the laws of Hong Kong.  The Plaintiff carries on business as a garment manufacturer.  The Defendant carries on business in garment trading.  They had business transactions prior to 2005.  It is common ground that between 7 January and 5 November 2005, the Plaintiff sold and delivered knitwear products to the Defendant in the total value of US$24,632,637.90.  The purchases were supported by invoices issued by the Plaintiff, the authenticity of which is not in dispute.  The Defendant even admitted making partial payments up to US$19,769,506.40.  Based on the Defendant’s admission, the Plaintiff amended their statement of claim reducing their claim to the amount as adjudged by Master Ho. 

3.  For the purpose of this appeal, the Defendant filed a second affirmation of Miss Lee Sau Lai Sandy deposing to some additional facts.  The Plaintiff filed a third affirmation of Mr Wong Tsan Sang in reply.

4.  The Defendant’s defence is that the sales and purchases of the knitwear products between the parties were governed by an oral agreement entered into between Mr Wong Tsan Sang on behalf of the Plaintiff and Miss Lee Sau Lai Sandy on behalf of the Defendant in November 2004.  Under that oral agreement, the Defendant would place purchase orders for knitwear products to be manufactured in the People’s Republic of China (the “PRC”) for sale by the Defendant to their customers in the United States on the following terms and conditions:

(a)        the Defendant would arrange for the manufacture of the knitwear products by knitwear manufacturers in the PRC nominated by the Defendant;

(b)       the Defendant would arrange for the supply of yarn, accessories and other raw materials for manufacturing the knitwear products by the Defendant’s nominated knitwear manufacturers;

(c)       the Plaintiff would make prompt payments for the yarn, accessories and other materials to the suppliers and the manufacturing costs of the knitwear products to the Defendant’s nominated knitwear manufacturers;

(d)       the Plaintiff would arrange for transportation of the knitwear products from the PRC to Hong Kong and pay freight and other ancillary charges; and

(e)        the Defendant would be entitled to deduct 3% of the price of each purchase order as commission for their services to be rendered under (a) and (b) above.

In breach of the above oral agreement, the Plaintiff failed to make prompt payments for the knitwear materials to the yarn suppliers and manufacturing costs to the knitwear manufacturers.  At the requests of those knitwear material suppliers and manufacturers; and with the knowledge and consent of the Plaintiff, the Defendant made payments on behalf of the Plaintiff in the total amount of US$4,432,042.82.  Furthermore, at the requests of the Plaintiff, the Defendant had supplied to the Plaintiff a quantity of yarn panels for manufacture of the knitwear products in the total value of US$56,997.85 and paid freight and other charges in respect of the transportation of the knitwear products from the PRC to Hong Kong in the total sum of US$336,089.97.  The Defendant claims that after deducting the 3% commission from the invoiced prices, the amounts thus paid on behalf of the Plaintiff exceeded the outstanding balance of the unpaid invoiced prices net of 3% commission by US$700,977.28. The Defendant counterclaims for that amount together with interest and costs.

The applicable legal principles on an Order 14 application

5.  The legal principles applicable to an application for summary judgment under Order 14 of the Rules of the High Court are well-known: see Hong Kong Civil Procedure 2007 Note 14/4/9.  To resist such an application, a defendant only needs to satisfy the court that there is a triable issue or question, or that for some reason there ought to be a trial.  What the defendant says does not have to be believed but has to be capable of belief.  As is often put, unless it is obvious that the defence put forward is frivolous and practically moonshine, summary judgement should not be granted.

6.  Leave to defend should be given where a defendant raises any substantial question of fact which ought to be tried: see Hong Kong Civil Procedure 2007 Note 14/4/11.  Thus, where an oral contract is sued on and its terms are in dispute and that a breach of the terms of the oral contract by one party results in the other party being entitled to a remedy by way of set off, summary judgment must be refused: Mathind v E Turner & Sons (1992) 23 Con LR 16, CA. 

7.  If a defence of set off is raised, the amount of the defendant’s cross-claim is known and is capable of being set off at law against the plaintiff’s claim, the defendant is entitled to unconditional leave to defend: see Axel Johnson Petroleum A B v M G Mineral Group A G [1992] 1 WLR 270, CA at 274E-275B and see Hong Kong Civil Procedure 2007 Note 14/4/14. 

8.  Where there are unexplained features in both the claim and defence, no tentative assessment of strengths should be made, but unconditional leave to defend should be given: see Hong Kong Civil Procedure 2007 Note 14/4/9.

9.  The above legal principles are not in dispute.  Mr Pow SC submits that the defence and counterclaim is “practically moonshine”.

The late revelation of the defence

10.  The general thrust of Mr Pow SC’s submission is that the alleged oral agreement and payments made on behalf of the Plaintiff were not raised until filing of the defence, which is suggestive of recent concoction and moonshine.  He referred to the letter dated 16 March 2006 from the Defendant’s then solicitor in reply to the Plaintiff’s solicitor’s letter before action.  In that letter, the Defendant’s then solicitor wrote as follows:

“We are instructed that your client had received from our client US$393,083.81 being freightage and garment accessory reimbursement.  And on or around 21^st December 2005, your client had received US$447,820.28 from our client.  We are instructed to deny our client owing the indebtedness alleged by your client.  …”

11.  It is true that the oral agreement was not raised in that letter as one would have expected otherwise if such an oral agreement had really existed.  However, the letter referred to the amount of US$393,083.81 being freightage and material reimbursements is consistent with two of the terms of the oral agreement pleaded.  Indeed, the amount claimed by the Defendant in their Defence and Counterclaim for freight and ancillary charges and value of yarn panels supplied to the Plaintiff was $393,087.82, which is only US$4.01 more than that referred to in that letter.  This takes away much of the colour which Mr Pow SC painted on that letter. 

12.  Mr Pow SC also argues that if the Defendant’s case is true, as of the date of the Plaintiff’s letter before action on 27 February 2006, not only had the Defendant fully paid for the invoices, the Defendant had even over-paid the Plaintiff in the sum of US$700,977.28.  He submits that it is utterly inconceivable that the Defendant’s then solicitor would have mentioned not a word about the over-payment in the reply to the letter before action.  This is a forceful argument.  However, by itself, it is not determinative of lack of credibility of the Defendant’s case.  In the light of the evidence tendered by the Defendant, the inference that the Defendant’s defence is practical moonshine cannot be drawn.  The letter could be reflective of a lack of full and detailed instructions or lack of proper account keeping than of bad faith on the part of the Defendant.  There could be many plausible reasons to explain the Defendant’s failure to give full instructions to their then solicitor.

The oral agreement offends the parole evidence rule

13.  Mr Pow SC submits that each transaction between the parties was embodied in a purchase order issued by the Defendant setting out the terms of the purchase.  It must be noted that there were numerous transactions between the parties.  In monetary terms, the knitwear products supplied under those transactions amounted to almost US$25 million.  It is not uncommon for parties engaged in a continuous relationship such as this may operate under some sort of an umbrella agreement and it is arguable that the purchase orders in respect of each of the transactions are evidence of that umbrella agreement which do not exclusively provide for all the terms of that agreement.

14.  Returning to Mr Pow SC’s submission, according to the Plaintiff’s Reply and Defence to Counterclaim and as evidence by the purchase orders, not all the knitwear products ordered were to be produced in the PRC but most of them were products with Hong Kong as the place of origin.  Hence, Mr Pow SC submits that the alleged terms under the oral agreement that the Defendant would purchase knitwear products to be manufactured in the PRC and arrange for their manufacture by factories in the PRC nominated by the Defendant with raw materials, yarn and accessories to be supplied by suppliers nominated by the Defendant plainly contradict the written terms of the purchase orders. 

15.  The three schedules attached to the Plaintiff’s Reply and Defence to Counterclaim shows that there were more than three-hundred purchase orders of which only about one-third were for knitwear products made in the PRC.  It is not known whether those purchase orders represented about one-third of the total quantity of knitwear products purchased.  However, it is not an insubstantial quantity.  It is also common knowledge that goods may be described as of Hong Kong origin despite that some of the manufacturing processes were carried out outside Hong Kong.  In the circumstances, it is not incredible that some not insubstantial manufacturing process were carried out in the PRC in respect of the remaining about two-thirds of the knitwear products of Hong Kong origin.  Thus, the fact that the majority of the knitwear products ordered were of Hong Kong origin does not preclude the existence of the oral agreement.

16.  Furthermore, it should also be noted that on the contracts issued by the Defendant to the Plaintiff or its associated factory, it is stated clearly that the content labels and care labels are “to be ordered by us (i.e. the Defendant) on your (i.e. the Plaintiff’s) behalf”.  This term is wholly consistent with the alleged term under the oral agreement that the Defendant would arrange for the supply of accessories to be used in the manufacture of the knitwear products.

Defendant’s entitlement to 3% commission on the price of each purchase order

17.  Mr Pow SC submits that the alleged right of the Defendant to deduct 3% of the purchase price as commission tentamounts to adding to or varying the terms of the purchase orders.  Again, it is arguable that the purchase orders may not set out exclusively all the terms of the oral agreement.  The Defendant’s assertion is not an empty one but is supported by credible evidence.

18.  The Defendant produced eleven payment vouchers dating between 24 January and 15 December 2005.  Those vouchers show the payments were made by cheques to settle the Plaintiff’s invoices after deducting 3% of the invoiced price as commission.  In each payment voucher is recorded the cheque number and date of the cheque issued in settlement of the Plaintiff’s invoices.  Mr Pow SC argues that those payment vouchers are internal documents of the Defendant and are self serving.  Be that as it may, the eleven payment vouchers tally with the payment schedule prepared by the Plaintiff which shows the various amounts received from the Defendant by letters of credit and cheques and the dates of the receipts.  The total amount received from the Defendant was US$19,769,506.40. which is not in dispute.  The payments schedule shows there were seven payments by cheque.  Four of the payments recorded in the Defendant’s payment vouchers tally with four payments by cheques recorded in the payment schedule prepared by the Plaintiff.  Interestingly, the total amount paid under the remaining seven payment vouchers was US$40,613.60 which corresponds with the total of two payments by cheque recorded in the Plaintiff’s payment schedule and correct to the cent.  Very interestingly, the remaining payment by cheque as recorded in the Plaintiff’s payment schedule is referenced in a dialogue on the internet between the Defendant’s and the Plaintiff’s staff: see paragraph 25 below.   All those payments could not have been mere coincidences and suggest that there is some truth in the Defendant’s claim of 3% commission.  The particulars of the Plaintiff’s invoices allegedly settled by those cheques were recorded in the Defendant’s payment vouchers.  The correctness of those particulars could have been easily verified by the Plaintiff.  But the Plaintiff chose not to file any evidence to contradict the Defendant’s and offered no explanation as to how those payments could have been calculated otherwise without deducting 3% of the invoiced price as commission. 

19.  Furthermore, according to the evidence of the Defendant, the Defendant had sent statements of account as at 27 September 2005 and 21 October 2005 and a contra statement as at 15 December 2005 to the Accounts Department of the Plaintiff.  All the statements show a deduction of 3% as commission on the invoiced price (see paragraphs 28 to 31). 

20.  I am satisfied that the Defendant has demonstrated that there are serious disputes as to the Defendant’s entitlement to commission which should be explored further after discovery and determined at trial.

The Plaintiff’s agreement to arrange for transportation of the knitwear products from the PRC to Hong Kong contradicts the terms of the purchase orders

21.  Mr Pow SC submits that the term under the alleged oral agreement that the Plaintiff would arrange for transportation of the knitwear products from the PRC to Hong Kong and to pay freight and other ancillary charges plainly contradicts the written term of the purchase orders that the knitwear products were sold FOB Hong Kong.  Mr Coleman SC’s answer is that under the terms of an FOB contract, the seller is responsible for the cost of transportation of the goods from wherever they were to Hong Kong and the cost of loading the goods on the ship.  If the transportation cost had been paid by the Defendant pursuant to the oral agreement, the cost was recoverable as contra charges which is what the Defendant’s case is about.  I agree that Mr Coleman SC’s point is at least arguable.  Furthermore, though not so argued by Mr Coleman SC, a substantial quantity of the knitwear products purchased were of Hong Kong origin, a description which permits part of the manufacturing process to be carried out in the PRC.  It may well be the parties’ arrangement that while the finished knitwear products were sold on FOB Hong Kong terms, the Plaintiff would pay for transportation of the semi-finished products between its nominated factories in the PRC and the Plaintiff’s factory in Hong Kong.  Such arrangement is consistent with the oral agreement.

The term of the alleged oral agreement that the Plaintiff would make prompt payment to its own manufacturers and suppliers is extraneous to the written terms of the purchase orders

22.  Mr Pow SC submits that it goes without saying that the Plaintiff would be responsible for the manufacturing cost of the knitwear products and the term of the alleged oral agreement that the Plaintiff would make prompt payment to the Defendant’s nominated manufacturers and suppliers who are the Plaintiff’s own manufacturers and suppliers is extraneous to the written terms of the purchase orders.  Mr Coleman SC submits that the oral agreement must be viewed under the surrounding circumstances.  The knitwear products were to be sold to JC Penney Purchasing Corporation, an outlet for quality goods in the United States.  JC Penney Purchasing Corporation demands high standards in respect of goods it purchases for retail.  Under such circumstances, it is not unusual for its supplier, such as the Plaintiff, to have a close monitor on the manufacturing process and the quality of the knitwear products, including specifying the manufacturing factories and suppliers of raw materials and accessories.  Equally important is the monitoring of the delivery schedule.  In the circumstances, it is not unusual for the purchaser, such as the Defendant, to ensure that the manufacturer would promptly pay its sub-contractors down the production line so as to ensure on-time delivery.  It is also not incredible that the Defendant would have secured such terms in the oral agreement as alleged and paid the sub-contractors upon the Plaintiff’s failure to make prompt payment.  I think the Defendant has demonstrated an issue to be tried.

Whether the knitwear products were manufactured by the Defendant’s nominated manufacturers

23.  Mr Pow SC submits that on the basis of the export certificates, the Combined Forms for Export/Import of Goods under Outward Processing Arrangement, 內地海關及香港海關陸路出/*進境載貨清單 (i.e. import/export declarations) and export licences of the finished goods to the USA, the knitwear products were manufactured by the Plaintiff’s own subsidiary Kingsberg Knitting Fashion Co Ltd (東莞運展針織時裝有限公司) in the PRC and the Defendant’s allegation that the knitwear products were manufactured by the Defendant’s nominated knitwear manufacturers is just moonshine.  The Defendant has demonstrated that there was at least one dialogue on the internet on 24 March 2005 in which the Defendant’s nominated knitwear manufacturer 深圳市金德開紡織品有限公司 (“Kam Tak Hoi”) discussed with the Plaintiff’s factory manager, Mr Andrew Yiu, about a purchase order.  This is consistent with sub-contracting from the Plaintiff’s own subsidiary to the Defendant’s nominated manufacturers.  It also explains why the import/export licences were under the name of the Plaintiff’s subsidiary.  The Defendant’s evidence is credible.  There are clear disputes on the facts which should be explored by further discovery.  Summary judgment is inappropriate at this stage.

Whether accessories and raw materials were supplied by the Defendant’s nominated suppliers

24.   The Defendant produced a table showing payments made to six named yarn suppliers.  Each payment bears reference to an invoice number of the Plaintiff.  Mr Pow SC argues that the invoice numbers show that the alleged payments were unrelated to those purchase orders which required the knitwear products to be manufactured in the PRC.  I am not sure of the validity of Mr Pow SC’s argument of limiting the supplies to purchase orders in respect of knitwear products to be manufactured in the PRC only.  At least there is no argument that the yarn was not supplied to the Plaintiff in respect of the various non-PRC invoices which formed the subject matter of the Defendant’s counterclaim.  It is also not in dispute that it is permissible to have part of the manufacturing process performed outside Hong Kong even for goods described as of Hong Kong origin.  Such criticism does not make the defence incredible.  Mr Pow SC criticised another table showing payments made to other suppliers as apparently having little or no relevance to the supply of yarn.  I agree with those criticisms.  However, the Defendant has demonstrated substantial payments made in respect of the six major yarn suppliers.

25.  Furthermore, the Defendant has demonstrated at least there was one occasion during an internet dialogue between Miss Rita Liao of the Defendant and Mr Anthony Lau of the Plaintiff on 5 December 2005 in which Miss Rita Liao informed Mr Anthony Lau that the Defendant had deposited the sum of US$311,845.20 by cheque into the Plaintiff’s account and the Plaintiff was instructed to keep US$146,016.82 and pay the balance of HK$1,282,682.50 to Kam Tak Hoi’s agent in Hong Kong, Century Link (HK) Ltd (興順(香港)有限公司) for yarn supplied by Kam Tak Hoi.  This payment of US$311,845.20 is also recorded in the payment schedule prepared by the Plaintiff.  The Plaintiff could offer no explanation for this dialogue.  I think the Defendant has demonstrated genuine dispute of facts and this issue deserves to be fully explored by way of discovery and if necessary adjudicated at trial.

An overall view of the defence case

26.  An overall view of the defence case is that the parties had all along conducted themselves in accordance with the oral agreement.  The Defendant deducted 3% of the invoiced price from the Plaintiff’s invoices as commission and settled the balance by letter of credit or by cheque.  The parties maintained a running account showing the amounts payable by the Defendant, the amounts paid and the amount chargeable against the Plaintiff pursuant to the terms of the oral agreement. 

27.  The Defendant produced two monthly statements dated 27 September 2005 and 21 October 2005 and a contra statement dated 15 December 2005 which they alleged had been given to the Plaintiff.  The Plaintiff denied having received those statements and doubted their authenticity.  I have analysed those statements carefully and compared them with the payment schedule prepared by the Plaintiff.

28.  The September 2005 statement is an eight-page statement with more than three hundred entries.  It shows a total amount of US$7,319,417.33 paid by the Defendant by letters of credit and other amounts chargeable by the Defendant against the Plaintiff for its various services.  Six of the payments by letter of credit correspond exactly in amount and approximately in time with the payments shown in the payment schedule prepared by the Plaintiff.  There is a seventh payment recorded in the statement as partial payment in the amount of US$1,011,616.95 and a corresponding payment in the amount of US$1,493,754 recorded in the payment schedule on approximately the same date.  I assume that was an apportionment.  Thus, the Defendant’s September 2005 statement tallies with the Plaintiff’s payment schedule.   The statement also shows the price of knitwear products purchased from the Plaintiff net of 3% commission in the amount of US$226,373.73.  The balance due to the Plaintiff was zero as the amount paid and chargeable by the Defendant equals the net amount of purchases due to the Plaintiff.  All those payments and receipts are not in dispute.  The various entries are referenced to the Plaintiff’s factory invoices and debit notes. 

29.  The October 2005 statement is a similar statement of two pages.  It shows a total amount of US$5,998,308.29 paid by the Defendant by letter of credit and other amounts chargeable against the Plaintiff.  Again, six of the payments by letter of credit correspond exactly in amount and approximately in time with the payments shown in the payment schedule prepared by the Plaintiff.  The statement also shows the price of knitwear products purchased from the Plaintiff net of 3% commission in the amount of US$6,211,816.03.  This statement shows a balance in the amount of US$213,507.74 in favour of the Plaintiff.  The Defendant’s payment voucher dated 21 October 2005 shows that a cheque drawn on the Hong Kong Bank No 119016 in that amount was issued to the Plaintiff.  The payment schedule prepared by the Plaintiff also shows a corresponding amount received on 23 November 2005.  Thus, the Defendant’s October 2005 statement also tallies with the Plaintiff’s payment schedule.

30.  There are thirteen entries in the December 2005 contra statement.  It shows a balance in the amount of US$447,820.28 due to the Plaintiff after setting off invoiced price of knitwear products net of 3% commission.  The Defendant’s payment voucher dated 15 December 2005 shows that a cheque drawn on the Heng Seng Bank No 032121 in that amount was issued to the Plaintiff.  The payment schedule prepared by the Plaintiff also shows a corresponding amount received on 22 December 2005.  The amount paid by the Defendant is consistent with the existence of the oral agreement.

31.  All the payments and receipts I referred to in the three statements are not in dispute.  The various entries in the September 2005 and October 2005 statements are referenced to the Plaintiff’s factory invoices and debit notes.  It is difficult to fabricate statements of that kind.  It is likely that the statements are genuine.  If they are not, the falsity could have been easily proved by the Plaintiff producing its own copies of invoices and debit notes.  The Plaintiff chose not to file evidence is rebuttal.  Those statements support the Defendant’s assertion of their entitlement to deduct 3% the invoiced price as commission under the alleged oral agreement.  The contra statement and payment made by the Defendant is consistent with the term under the alleged oral agreement that the Plaintiff would pay for freight for the knitwear products from the PRC to Hong Kong and other ancillary charges. 

32.  On the whole, the Defendant’s case is capable of belief, to say the least.  There may be some gaps in the Defendant’s pleading which needs to be perfected.  But the Defendant has demonstrated there are genuine disputes as to facts and that there are issues to be tried.  Summary judgment is inappropriate.

Conclusion

33.  For the above reasons, I am satisfied that the Defendant has a real and bona fide defence and counterclaim against the Plaintiff.  Accordingly, I allow the Defendant’s appeal and set aside the order of the master.  I grant the Defendant unconditional leave to defend.

34.  As the appeal is allowed upon the new evidence filed by the Defendant, it is appropriate that the costs of the appeal and the costs of the application before the master be costs in the cause, with certificate for two counsel.