WINNERS' WORKSHOP PRODUCTION CO LTD v. OCEANIC TECHNOLOGY DEVELOPMENT LTD

DCCJ 4413/2006

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 4413 OF 2006

--------------------

BETWEEN

---------------------

JUDGMENT

Background

1.  The dispute turns on the sale and purchase of the facilities, renovations, furnishings and machinery at sixth floor, Phase 1, Fountain Set Building at 3A Hung Cheung Road in Tuen Mun ("Factory").

2.  Mr. Jacky Wong ("Wong") acting on behalf of the Plaintiff ("Winners") entered into various agreements with Mr. Law Leung ("Law") acting on behalf of 2 companies, the Defendant ("Oceanic") and Full Profit International Industrial Ltd. ("Full Profit"). It is not disputed that Oceanic and Full Profit are associated companies, both under the control and beneficial ownership of Law. The agreements relate to the sale by Oceanic to Winners of the facilities, renovations and furnishings in the Factory ("Facilities") for the manufacture and production of discs commonly known as CD-Rs and DVD-Rs ("Products") on the one hand, and the sale by Full Profit to Winners of specified machinery situated in the Factory ("Machinery") for the manufacture of the Products on the other hand. The sale of the Facilities was at the price of $1.8 million, whereas the sale of the Machinery was at the price of $12 million.

3.  It is not disputed that the 3 written agreements were signed. 2 relate to Winners’ purchase of the Facilities from Oceanic, and one relate to Winners' purchase of the Machinery from Full Profit. The agreement relating to the Machinery is dated 1 August 2005. The 2 agreements relating to the Facilities are respectively dated 28 July 2005 and 1 August 2005. The terms of the 2 agreements relating to the Facilities are identical, save for the last clause (6). The dispute does not turn on the difference in the clauses. Oceanic claims that the earlier agreement dated 28 July 2005 was by agreement superseded by the later one dated 1 August 2005. Winners claims that both the agreements relating to the Facilities were in fact signed on 28 July 2005, and that after the signing of the first agreement, Law requested that another one be signed, to be dated 1 August 2005. According to Winners, there was no discussion on the earlier one dated 28 July 2005 being superseded. However, it is clear from the evidence that no dispute turns on the difference in contents of the two agreements relating to the Facilities.

4.  Wong claims that the agreement for the sale and purchase of the Facilities was part and parcel of the agreement for the sale and purchase of the Machinery, and that he had dealt with Law acting through Oceanic and Full Profit, such that the understanding between the parties was that there was to be a sale and purchase of all the Facilities and Machinery within the Factory, for the total price of $13,800,000. This is not disputed by Law, who explained that the transaction had to be separated by virtue of the fact that the Machinery had been purchased in the name of Full Profit, whereas the tenancy of the Factory with its furnishings, decorations and production facilities were held in the name of Oceanic. According to Wong, however, he was informed by Law that the Machinery had been pledged to a bank, to which the price for the sale of the Machinery had to be paid, and that by separating the sale of the Facilities, the price of $1,800,000 specified in the agreement for the sale of the Facilities can be paid over to Law through his wife.

5.  Under the agreement for the sale and purchase of the Facilities, the total price of $1,800,000 was agreed to be paid by two installments. The first installment of $1,375,000 was paid upon the signing of the agreement, whereas the payment of the balance of $425,000 was by a cheque postdated to 15 August 2005. By agreement, the balance was varied to $400,000, to take into account the delay of delivery of vacant possession of the premises where the Facilities and Machinery were situated. It is not disputed that the $1,375,000 was paid by a cheque dated 29 July 2005.

6.  Winners claims that there was an oral agreement made between Wong and Law on about 15 August 2005 ("Variation Agreement"), whereby it was agreed that because some of the Machinery had been removed by Law, and the Facilities and Machinery were in an "unsatisfactory condition" (paragraph 6 of the Statement of Claim and paragraph 7 of the Reply), the balance of the purchase price for the Facilities, in the sum of $400,000, would not be payable, and that the cheque (postdated 15 August 2005) which had been issued by Winners on 9 August 2005 would be returned to Winners. In reliance on the Variation Agreement, Winners seeks a declaration that it is entitled to set off the sum of $400,000 against the price of the Facilities. It also seeks the return of the cheque for $400,000.

7.  Law denies the existence of the Variation Agreement, and counterclaims for payment of the balance of the purchase price due for the Facilities, in the sum of $400,000.

Issues

8.  The issue for determination at trial is whether there was a Variation Agreement. This is essentially a question of the credibility of the 2 witnesses alleged to be parties to the Variation Agreement, namely Wong and Law. In essence, Winners’ claim is that the Variation Agreement was an agreed compromise made between Wong and Law of Winners' claim that 2 of the Machinery sold to Winners had been removed by Law, and further, that the Facilities and Machinery sold by Oceanic were defective and incapable of supporting Winners' production, contrary to the understanding reached between Wong and Law at the time when the relevant agreements were made.

9.  I accept the submissions made by Counsel for Winners, that so long as the compromise is honestly made, irrespective of whether the claim sought to be compromised is valid or doubtful, Winners' forbearance to sue on its purported claim against either Oceanic or Full Profit constitutes valuable consideration to render the compromise enforceable.

10.  Counsel for Winners further relies on para. 2-16 of The Law and Practice of Compromise, 6th Edition, 2005 :

"The assertions, denials and counter-assertions compromising the dispute need have no foundation in fact or in law provided they are made in good faith. If the party to a compromise attempts to escape its consequences by alleging that the claim had no legal or factual foundation, the court will decline to investigate such an allegation."

11.  Whether the Facilities and/or Machinery are indeed defective or unsatisfactory, whether Winners has a valid claim on the basis of the Facilities falling short of any standard represented by Law prior to the sale, or on the basis of part of the Machinery having been removed, are not the primary issues determinative of Winners' claims against Oceanic in these proceedings. They are relevant only in determining the credibility of Winners' assertions regarding the making of the Variation Agreement. For that reason, I do not consider that there is much point in the argument made by Counsel for Oceanic that Winners had failed properly to plead the alleged defects in the Machinery or the inadequacies of the Facilities. Oceanic has not in any way been surprised by these claims. They have been referred to in the further and better particulars of the Statement of Claim and in the witness statements, and Oceanic has been able to challenge such claims in evidence.

Whether there was a Variation Agreement

12.  At the conclusion of the evidence, it was not disputed by Wong and Law that the parties had contemplated the sale of the Machinery by Full Profit and the sale of what was described as the Facilities by Oceanic as one transaction. Law accepted that on its face, Clause (6) of the agreement for the sale of the Facilities dated 1 August 2005 expressly provides that if the agreement between Winners and Full Profit for the sale of the Machinery was invalidated, Oceanic had to return the amount paid to Winners under the agreement for the sale of the Facilities.

The Machinery Claim

13.  In relation to Winners' claim that 2 items of the Machinery purchased under the agreement with Full Profit were removed by Law, it was argued by Oceanic that the agreement makes no express reference to the 2 machines in question (namely, the 純水機 and the 曬網機), and that they were not included in the agreement. In this regard, I accept Wong's evidence that the agreement between the parties was for the sale and purchase of all the Machinery, facilities and settings within the Factory. The agreement governing the Machinery itself also provides for the sale and purchase of "the entire Machinery for 3 production lines as are within the Factory" (於乙方工廠內以下3條ODME生產線的機器全套), including the machines itemized in paragraph (6) of the agreement (my emphases). Wong claims that Law had warranted prior to the agreements that the Facilities were sufficient and able to support 40 injection moulds to be used in Winners' 20 production lines, together with the 3 production lines Winners agreed to purchase from Oceanic and Top Profit. Wong claims that prior to the signing of the agreements, he had been to the Factory to look at the Facilities and the Machinery, but there was no detailed inspection. Wong claims that prior to the delivery of the Factory to Winners, he had seen the 2 machines in question in the Factory.

14.  Law does not dispute during his testimony in court (despite a denial in the Defence) that he had removed the 2 items of Machinery in question. He claims that this was due to a "misunderstanding". Law claims that he had informed Wong that the 2 machines were not included in the agreement, and that he would be removing them. Wong denies there was such discussion. Law accepts, however, that his entire production lines were sold, and that all the items of Machinery within the production lines were required for production.

The Defects Claim

15.  I will collectively refer to Winners' complaints regarding the unsatisfactory condition of the Facilities and the Machinery as the "Defects Claim". Essentially, it is claimed that the Facilities could not support Winners' production lines as originally envisaged, and that the Machinery could not function properly. In support of the latter, Winners relies upon an inspection report dated 14 August 2005 compiled by Keith Wong, the engineer of Winners. Keith Wong had inspected the Machinery together with a representative of Oceanic/Full Profit from 1 August 2005. He claims that the inspection had taken a course of about 11 days. The Machinery was made subject to test runs, and according to Keith Wong, defects were detected in the Machinery of each of the 3 production lines, the conclusion being that it was not possible to start production with the Machinery. It was also discovered after 1 August 2005 that 2 machines were missing.

16.  Keith Wong gave evidence at the trial to confirm the results of his inspection. His evidence is that the damage in the Machinery was mainly caused by lack of maintenance and a long period of non-use. Keith Wong also confirmed that Winners had to take machinery from its other factory premises to replace the defective Machinery in order to start production in the Factory.

17.  Further, Wong claims that contrary to what Law had warranted, the Facilities were not sufficient to support the 40 injection moulds of his production lines. On Winners' case, it had to incur costs in repairing the defective Machinery, expanding the Facilities, and replacing the 2 machines which had been removed by Law. According to Winners, the total costs incurred, representing its damages, were $1,102,500, as evidenced by the 5 sets of invoices produced in evidence.

The terms of payment

18.  I accept Wong 's evidence in relation to the terms of payment for the Facilities and the Machinery under the agreements. Of the total price of $12,800,000 agreed for all the Facilities and the Machinery to be sold, a deposit of $1,375,000 was paid under the agreement for the Facilities by cheque issued on 29 July 2005, with the balance of $12 million to be paid under the agreement for the Machinery on 15 August 2005, and the balance of $425,000 (later reduced to $400,000) to be paid under the agreement for the Facilities, also on 15 August 2005.

19.  On Wong 's evidence, the $12 million had to be paid to the bank to which the Machinery had been pledged. The balances were, on Law 's instructions, to be paid by cheque to Law 's wife, Mdm. Fong. According to Wong, this was to facilitate Law in obtaining the benefit of at least a part of the total payment of $12,800,000. Wong 's evidence is that Law had explained that he was in heavy debt, and that the rent for the Factory had been outstanding and unpaid for about a year prior to the signing of the agreements in question.

20.  It is not in dispute that the Machinery and Facilities sold under the agreements were to be tested after the agreements were signed, and upon delivery up of the Factory together with the Machinery and Facilities within to Winners. This is evidenced and supported by the provisions of clause (3) of the agreements, which provides for inspection to take place by 1 August 2005, and it is not disputed between the parties that as delivery of possession of the Factory was delayed, Winners only took possession and commenced inspection of the Machinery and Facilities on 1 August 2005.

21.  Wong 's evidence is that he had agreed with Law that a balance of the total purchase price would only be due and payable on 15 August 2005, in order to give Winners time to inspect the Facilities and Machinery. At the time when the agreements were signed, Wong had learnt from Law that production at the Factory had ceased for almost 6 months because of Law's financial difficulties. Wong claims that envisaging that there might be some problems in the Facilities and Machinery, he had agreed with Law that Winners would need the time up to 15 August 2005 to inspect the Facilities and Machinery purchased, and that it was understood that if there were problems, adjustments could be made to the total purchase price before the postdated cheques became due on 15 August 2005.

22.  Wong claims therefore that under the agreed terms of payment, the sum of $400,000 due on 15 August 2005 was intended and agreed between Wong and Law as a guarantee or security (保證金), in the sense that final agreement and adjustments as to the total purchase price could be made by 15 August 2005, after inspection of the Machinery and Facilities, and when the postdated cheques fell due.

The meeting in August 2005

23.  Wong 's case is that his son, Keith Wong, had kept him informed of the results of the inspection of the Machinery and Facilities, and that upon discovery of the defects, he had contacted Law and informed him of these problems. According to Wong 's evidence, he had a meeting with Law on 14 or 15 August 2005, at the UCC Café in Whampoa. Wong claims that he informed Law of the Defects Claim, and explained to Law at the meeting that the total costs of repairing the Machinery and Facilities and of replacing the 2 machines which had been removed were over $1 million. He sought a reduction in the total purchase price. According to Wong, Law indicated that he had no money to pay over $1 million, and it was agreed instead that the balance of $400,000 would be considered as a set-off ("當 $400,000 無數").

24.  Law denies that a meeting took place at UCC Café on 14 August or 15 August 2005, as claimed by Wong. He admits that there was a meeting on about 22 August 2005, at a café near the office of Winners' workshop in Hunghom. Law claims that Wong informed him at the meeting that Winners was not satisfied with the Machinery purchased, that some machines were damaged, and that Winners had to incur $200,000 as repair costs. Law claims that Wong informed him that Winners would not honour payment under the cheque for the sum of $400,000, and that the sum should be set-off against the repair costs it had incurred. Law claims that he did not agree to this, and that the meeting ended.

25.  Overall, I find Wong to be more direct in his evidence. By comparison, Law was evasive as to questions asked of him as to whether production had ceased at the Factory, in which regard he gave inconsistent answers, and as to the background of the signing of the 3 agreements dated 28 July 2005 and 1 August 2005. On balance, I prefer Wong 's evidence as to the meeting in August 2005, to that of Law. Given the background of the agreements and the evidence concerning the inspection of the Machinery and Facilities, it is inherently more probable that Wong would seek adjustments to be made to the total purchase price payable under the agreements for the Machinery and the Facilities.

26.  Counsel for Oceanic had attacked Wong's case on the Variation Agreement, on the basis that as evidenced by the dates of the invoices relied upon by Winners as evidence of its damages and the costs it had to incur for the repairs and additional works required for the Facilities, Wong had known by 9 August 2005 that Winners was likely to incur expenses exceeding $680,000. It was submitted that in the circumstances, it is incredible that Wong would : (1) agree on 9 August 2005 to issue the cheque for $400,000, being the balance of the purchase price under the agreement for the sale and purchase of the Facilities; and (2) agree on 15 August 2005 to the cheque for $12 million dated 15 August 2005 to be cashed, and not set-off Winners' alleged damages against the $12 million instead.

27.  As summarized in paragraphs 18 to 22 above, I accept Wong's evidence that he agreed to issue the postdated cheque for $400,000 on 9 August 2005 because it had been agreed, at the time when the material agreements were signed, that the parties would wait for inspection of the Machinery and the Facilities to take place, and to agree on adjustments to be made to the purchase price only on 15 August 2005, when the postdated cheques were due. On Wong's case, "final" agreement on the purchase price was to take place on 15 August 2005. It is also Wong's evidence, which I accept, that because agreement had been reached at the UCC Café on 14 August 2005 for Winners to set-off the $400,000, he agreed to bear the additional costs and damages incurred, and did not look to the $12,000,000 for compensation. On Wong 's evidence, a deal had been struck at the UCC Café on 14 August 2005, and on that basis, he agreed to the $12 million cheque being cashed but instructed his bank, on 16 August 2005, to stop payment of the cheque for $400,000.

28.  On the other hand, if Wong had not made complaints to Law in relation to the Defects Claim, and there had been no agreement reached at the meeting on 14/15 August 2005, I find it incredible that Law would have refrained from presenting the cheque for $400,000 on 15 August 2005 when it fell due. In fact, there is no evidence of either Oceanic or Mdm. Fong (to whom the cheque for $400,000 was issued) making any demand for payment of the sum of $400,000, until 26 August 2006.

29.  The explanation Law gave was that Wong had telephoned him some time after Winners' issue of the cheque for the $400,000 on 9 August 2005, asking him not to present the cheque, and promising to issue another cheque in the name of another company. No replacement cheque was ever received, and according to Law 's evidence, the next development was the meeting on 22 August 2005. I find it unbelievable that Law would have made no complaint concerning the unpaid balance of the purchase price between 9 August 2005 and 22 August 2005, when the replacement cheque was not received, and that he took no action to present the original cheque on 15 August 2005 when it fell due.

30.  On the entirety of the evidence, I find it more credible than not that the Variation Agreement was made, as alleged by Wong, and that both Law and Wong had agreed and accepted that in view of the defects in the Machinery and in the Facilities, as complained of by Wong, and the 2 machines removed, the balance of the purchase price of $400,000 would not be payable by way of settlement of any claim which Winners may have against Oceanic, Full Profit and/or Law.

Conclusion

31.  In view of my findings, I will grant the declaration sought by Winners, and dismiss Oceanic's Counterclaim. Since the cheque for $400,000 is over 6 months due, it is no longer necessary for it to be returned.

32.  I will make a costs order nisi that Oceanic is to pay Winners' costs of the original action and of the Counterclaim, with certificate for Counsel, to be taxed if not agreed.