CHAN SO CHI v. LI KAM MING

DCCJ15044/2001

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 15044 OF 2001

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J U D G M E N T

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1. This is an action for $226,888.84 being the amount allegedly owed by the defendant to the plaintiff on a running account for the delivery of various quantities of processed paper ordered by the defendant over a period from October 1998 to October 1999.

2. At the time of these events, both parties were in a fairly modest way of business in the paper trade. The plaintiff has been in business since 1987. He owned a factory in Hong Kong which he subsequently moved to Guangdong which did paper processing. This covered printing, coating, laminating, dye-cutting, pasting and binding. The factory also manufactured cartons and gift boxes as well as processing paper into a variety of paper-based products.

3. The defendant, who has since ceased business, operated a factory more concerned with printing processes. They used each other's services for a number of years although it is not disputed that the plaintiff received many more orders from the defendant than the other way round. Given this two-way traffic of orders, it was sensible and convenient that they should operate a running account against which the defendant would set off the plaintiff's orders to him, leaving over a balance owing to the plaintiff, having regard to the greater volume and value of orders placed by the defendant with the plaintiff.

4. It is not disputed that the defendant was given 60-day credit terms which the plaintiff says were extended to 90 days at the defendant's request in order to accommodate his cash flow difficulties. The defendant would periodically make payments to reduce the outstanding balance owed to the plaintiff. Complaint is made that the defendant was a slow payer and had to be pressed on occasions to keep the outstanding balance down to manageable proportions.

5. Turning to the particular circumstances which have given rise to the action, it is the plaintiff's case that by the latter part of 1999, the defendant had an outstanding balance of well in excess of $400,000 with the plaintiff, which the plaintiff wished to have settled as soon as possible. By then, both parties had made separate printing and processing arrangements so that there was no further business transacted between them.

6. The plaintiff and his wife, Madam Chung, who did the accounts and who has also given evidence, have said that they went to see the plaintiff about repayment. On 29 December 1999, he had been sent an up-to-date reconciliation statement to which he had raised no objection and he had issued a post-dated cheque dated 27 February 2000 for $25,000. That left over a balance of $471,888.84. The defendant said that he would settle this by three cheques, presumably post-dated, in early March 2000.

7. The plaintiff and his wife went to see the defendant to collect these cheques. According to them, the defendant gave them six cheques to the value of $155,000. One was for $30,000 and the other five for $25,000 each. This did not satisfy the plaintiff who demanded that he should receive more. The defendant was thereby prevailed upon to give two more, $25,000 each, making a total of $205,000 with the promise that he would pay off the remainder of the balance as soon as possible. The first cheque, $30,000, was dishonoured on first presentation and subsequently paid on being re-presented. The other seven cheques were paid on their due dates.

8. Dissatisfied with the fact the defendant had not been able to pay this debt in full, even by post-dated cheques, the plaintiff went to his solicitors who sent a letter before action at the end of March, which was not answered. A writ was issued shortly afterwards in April 2000 originally for the entire outstanding balance of $441,888.84 but subsequently amended down to the present amount claimed as all eight post-dated cheques were paid.

9. The plaintiff says he thought it wise to act quickly because the defendant had told him that he had a number of other creditors who were pressing him for payment and he wished to act quickly before the defendant became overwhelmed by indebtedness.

10. The defendant's version, and this is his pleaded case, is that since about mid-1998, he had noticed that the plaintiff had been overcharging him, particularly with reference to the making of moulds and delivery charges. He had objected to this over a period of time since then. He confronted the plaintiff over the telephone concerning the level of overcharging, told him that he would not pay the balance that was being claimed. He said that all he would pay was $205,000 by means of post-dated cheques.

11. Initially, the plaintiff refused to agree but eventually relented and said that he would settle the dispute at this figure by eight post-dated cheques provided that he was given possession of all late cheques at the same time, which is what happened when he and his wife went to collect them.

12. The primary defence, therefore, is one of accord and satisfaction, the parties having agreed to settle their differences at $205,000 by means of eight post-dated cheques, all of which have been honoured. Failing that, the defendant says that the plaintiff's accounting system is in such disarray that I cannot be satisfied that the amount in the writ is what is owing, with the effect that the action must fail for want of proof of the debt.

13. Given this background, I now need to refer to some of the evidence that relates to these issues. The starting point to the parties' business association goes back to a quotation from the plaintiff prepared by Madam Chung dated 17 June 1996 which is at annex I to her witness statement which set out the plaintiff's charges for the work that the defendant required. Upon receipt of this, the defendant placed orders with plaintiff.

14. In November 1996, Madam Chung was approached by a member of the defendant's staff and asked to reduce prices in line with what other factories were charging. After some discussion, this was agreed by Madam Chung who reduced her prices for pasting and coating. She issued a revised quotation to take effect from October 1996. This supplemental quotation is annex III to her witness statement. It is on the basis of these two quotations that the defendant has been charged.

15. In October 1996, November 1996 and March 1997, Madam Chung was asked for specific reductions by the same member of the defendant's staff, someone called Ah Wing, which she acceded to and amended these particular invoices downwards. Save for that, she has never been asked for further reductions. Invoices were issued to which were attached signed delivery notes evidencing delivery by the plaintiff to the defendant's customers'. Reconciliation statements were also sent to the defendant.

16. There was no dispute about the method of charging. No invoices were challenged and neither were the reconciliation statements. Invoices were sent either monthly or every few months as were the reconciliation statements. The plaintiff's evidence is not precise as to this. What he has accepted is that the invoices, when they got to the defendant, would have related to transactions that had been completed some weeks and even months prior to the invoice date. The plaintiff's case is that the defendant was habitually a slow payer and credit terms were extended to 90 days to assist him.

17. Things began to go wrong two years into the business relationship when the defendant became suspicious about being overcharged on transport costs and on the cost of making moulds. As to transport, the plaintiff and his wife have said that the cost of transport was based on distance and the size of the consignment. Size would determine the type of vehicle that would be employed. The rates were those fixed by the mainland transport contractor.

18. As to mould cutting, Madam Chung has given a detailed explanation of the basis of charging. Once the amount of the arrears had got to over $471,000, Madam Chung had to have a serious discussion about this. She has referred to the reconciliation statement which she faxed to the defendant's office on 29 December 1999. Amendments downwards were made and agreed to by the defendant's son, and this forms the basis of the claim for the outstanding balance.

19. A point has been taken by Mr Wu, for the defendant, that the defendant's son, who had left school in 1996, was too junior to negotiate and bind the defendant on a matter such as this. He was a trainee in the business and a general factotum rather than someone who could agree accounts. Be that as it may, this then led up to the crucial agreement relied on by the defendant whereby the outstanding balance had been negotiated down by him to $205,000 and agreed by the plaintiff.

20. Before I come to this, I should say that the plaintiff's accounting system strikes me as very impressive. All the documents such as invoices and statements have been produced in evidence. These have been prepared by Madam Chung. She is a full-time clerk in the Housing Department, so could only do the plaintiff's books in the evenings and at the weekends.

21. Having regard to that, Mr Wu has questioned her opportunity to have proper first-hand knowledge of the particular transactions that are the subject matter of the invoices that she has prepared and the reconciliation statements that came from them. My view is that this is to overstate her difficulties. She worked on the books on a daily basis and at weekends. She could of course speak to her husband about these matters and no doubt had ready access to the plaintiff's members of staff, all two of them, who dealt with the business. I have no doubt that she had a tight grip on what was going on.

22. From this, I must now consider the circumstances surrounding the alleged settlement agreement. The defendant says that he "taxed down" the gross figure of over $440,000 to $205,000 by employing a formula that he used for costing transport charges and mould-making at 10 per cent and 3 per cent respectively of his turnover. This resulted in his assessment that he only owed $205,000. He had prepared no schedule or documents to show how this was done but despite this, he was able to persuade the plaintiff and his wife of the correctness of his method.

23. I reject his evidence as to this aspect of the case. It is inherently unlikely that the plaintiff and his wife, who kept the fullest possible records, which they have produced in evidence, would have been prepared to forgive over half of the debt on the basis now advanced by the defendant when as recently as the end of December 1999, Madam Chung had agreed the outstanding amount with the defendant's son.

24. Not only is it suggested that the plaintiff agreed to discount his claim by over $225,000 but that he was also prepared to have it paid by eight post-dated cheques over a period of months, expiring in November 2000. This does not begin to ring true in its inherent probabilities and, in any event, I find as a fact that there was no such agreement. I accept the plaintiff's and his wife's evidence and I reject the defendant's account.

25. I should also observe that I am prepared to hold that the defendant's son would have had authority to deal with the accounts. Originally, it had been suggested that he left school in 1998 but in re-examination, the defendant said that he had left in the summer of 1996 after his Certificate of Education exams. He had been in the business some time by the time that he had discussions with Madam Chung in late 1998.

26. He worked in his father's business, and I am satisfied that he would have been well up to speed on all aspects of the family business by that time. This was, after all, a small business. The account was faxed on 29 December 1999 and it could have been checked by the defendant himself. No challenge was made to it by February and March 2000. In my view, this is significant.

27. Having rejected the defendant's account that a settlement had been agreed to at $205,000, I now turn to the second line of defence, as it were. Does the plaintiff's accounting support the outstanding amount claimed? I am completely satisfied that Madam Chung has kept accurate records. Whilst invoices were rather late in coming, I have no doubt that they were correct and that the proper basis for charging was applied.

28. In fact, I am satisfied that the defendant welcomed the fact that the invoices were late in coming because there is no doubt in my mind that he was in financial difficulties from mid-1988 as in fact he explained to the plaintiff whose evidence on this matter I also accept. The fact that the defendant has now closed his business speaks for itself. He says that he had no customers. So he closed down.

29. Madam Chung has gone through the way in which she charged for the plaintiff's services with care and precision. I have been struck by her mastery of the facts. I have no doubt the charges are proper in all respects and that there is no answer to the claim.

30. Mr Wu has drawn attention to the fact that the letter before action makes no reference to the eight post-dated cheques. That is perhaps unfortunate. The fact is that the first cheque had by then not been presented, and I accept the plaintiff's account that he needed to get in quickly before the defendant's other creditors started to think of litigating over what the defendant owed them. I am afraid that this has been an unattractive attempt by a debtor to wriggle out of his just indebtedness to his creditor by not being frank over an alleged settlement and then trying to pick holes in the account which I am certain is an accurate one.

31. There must be judgment to the plaintiff in the sum of $226,888.04.