XCHRX COSCO-FEOSO (SINGAPORE) PTE LTD. v. SENLAVEER (PACIFIC) CO. LTD.

HCA10136/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.10136 OF 1999

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

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

J U D G M E N T

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

1. This is the plaintiff's appeal against the decision of the master granting the defendants unconditional leave to defend the action.

The plaintiff's claim

2. The Statement of Claim pleaded that :

"1. By an agreement made partly in Chinese writing and partly orally, alternative evidenced in inter alia a document entitled 'Repayment Agreement' dated 2nd February 1999 ('Repayment Agreement'), the 1st and 2nd Defendants acknowledged and declared that it owed the Plaintiff the debt of US$808,208.50 ('the Debt').

Particulars

(a) It was expressly provided that the Debt arose from an agreement dated 7th April 1998 and numbered C/CF/SL 009/98 ('Fuel Supply Agreement') where the Plaintiff agreed to supply and the 1st Defendant agreed to purchase certain fuel oil.

(b) Pursuant to the Fuel Supply Agreement the Plaintiff duly supplied the 1st Defendant certain quantity of fuel oil.

(c) The US$808,208.50 was the outstanding price for the fuel oil sold and supplied by the Plaintiff to the 1st Defendant.

2. In so far as the Repayment Agreement was made in writing, it was contained in the document entitled 'Repayment Agreement' dated 2nd February 1999. In so far as the Repayment Agreement was made orally, it was made between TAN SING HWA acting for the Plaintiff and the 2nd Defendant acting for himself and the 1st Defendant."

3. The plaintiff stated that under the Repayment Agreement, the 1st defendant would pay the debt in the following manner :

(1) USD108,208.50 on or before 15 March 1999;

(2) Seven monthly instalments of not less than USD100,000 between 15 April 1999 to 15 October 1999.

The 2nd defendant would guarantee by his personal assets the repayment of the debt by the 1st defendant to the plaintiff.

4. The 1st defendant had failed to pay any of the instalments. The plaintiff is claiming the sum of USD408,208.50 from the defendants. These were the instalments that were due at the time of the issuance of the writ. The plaintiff further seeks damages to be assessed. The plaintiff further seeks a declaration that the 2nd defendant had given a guarantee to the plaintiff for the repayment of the debt by the 1st defendant. Alternatively, the plaintiff claims that it was the true intention of the parties that the 2nd defendant had given such a guarantee and that the Repayment Agreement as drawn up does not reflect the true intention of the parties and that the parties entered into the Repayment Agreement under a common mistake in the belief that the Repayment Agreement embodied a term that the 2nd defendant would provide the guarantee. The plaintiff asks for a rectification of the Repayment Agreement.

The defence

The contract

5. Although the Repayment Agreement referred to a contract numbered C/CF/SL 009/1998 dated 7 April 1998, the date that appeared in the copy of the contract produced by the plaintiff was not legible. The defendants stated that the contract was entered into on 15 January 1998 and they produced a contract of that date.

6. The 2nd defendant is a director of the 1st defendant. The defendants admitted that the 1st defendant had entered into the contract but stated that the 1st defendant entered into the contract with the plaintiff as an agent for a company called Economic Development Corporation of Fuzhou, a company incorporated in the mainland of the People's Republic of China ("the Fuzhou Company"). Mr Kwok, the person in charge of the Fuzhou Company had asked the 1st defendant to assist in locating sellers of gas oil and he had asked the 2nd defendant to take part in the negotiation on behalf of the Fuzhou Company. The defendants stated that during the negotiation with Mr Song Wei ("Mr Song") of the plaintiff, the 2nd defendant had made it very clear that it was the Fuzhou Company which was interested in purchasing the fuel and the 1st defendant was simply acting as an agent to assist in the negotiation. The plaintiff was well aware that the 1st defendant entered into the contract as an agent only.

7. In support of their claim that the actual contracting parties were the plaintiff and the Fuzhou Company, the defendants produced the following documents : a sales contract ("the sales contract") between the plaintiff and the Fuzhou Company dated 17 April 1998 in which the Fuzhou Company agreed to buy from the plaintiff 7,200MTS of gas oil at USD137.50/MT, for the price of USD990,000; an invoice dated 22 April 1998 issued by the plaintiff to the Fuzhou Company in the sum of USD808,208.50 in respect of gas oil at 5,877.880MTS at USD137.50/MT; and an irrevocable letter of credit in which the Fuzhou Company was the applicant and the beneficiary was the plaintiff for the sum of USD990,000. This last document referred to the sales contract in the description of goods and services.

The Repayment Agreement

8. In respect of the Repayment Agreement, the defendants' case is that after the contract between the plaintiff and the Fuzhou Company was concluded, the 2nd defendant received a debit note No.DN 030/98 from the plaintiff in July 1998. He was surprised and enquired it with Mr Song. Mr Song told him that the irrevocable letter of credit opened by the Fuzhou Company had not been honoured. He wanted the 2nd defendant to assist by requesting the Fuzhou Company to pay the amount and interest under the contract. The 2nd defendant stated that the debit note for payment of the interest to the 1st defendant was issued by the plaintiff by mistake. The debit note produced by the defendants was No.DN 030/98 for the sum of USD24,246.26. It was stated to be interest incurred for overdue payment in respect of invoice No. CF/FS 042/98 for the sum of USD808,208.50. This invoice was the one issued by the plaintiff to the Fuzhou Company.

9. The defendants stated that Mr Song kept on begging the 2nd defendant to help by demanding payment from the Fuzhou Company on the plaintiff's behalf. Due to the good working relationship between them the 2nd defendant agreed. He contacted Mr Kwok and issued an invoice in the name of the 1st defendant to the Fuzhou Company setting out the amount which was due to the plaintiff. The defendants now accept that there was no need for the 1st defendant to issue the invoice to the Fuzhou Company as the amount was not due and payable by the Fuzhou Company to the 1st defendant. The reason given for issuing this invoice was because he was a layman and he wished "to set out the amount clearly". After that the plaintiff issued a further debit note to the 1st defendant for the interest incurred. The defendants again forwarded this document to the Fuzhou Company. Thereafter, he could not locate Mr Kwok anymore.

10. Because of the default by the Fuzhou Company, Mr Song experienced serious pressure from his supervisors. He found it very difficult to chase payment from the Fuzhou Company which was incorporated in the PRC. In order to solve his immediate problem, Mr Song asked the defendants to agree in writing to pay the amount owing by the Fuzhou Company to the plaintiff, so that he could report this to his supervisors as a delaying tactic. This was rejected by the 2nd defendant.

11. In the following few months Mr Song kept on repeating his request to the 2nd defendant. In late December 1998, Mr Song told the 2nd defendant that he would lose his job and everything if the payment could not be recovered. And he needed the 2nd defendant's help desperately. The 2nd defendant finally agreed to help. Mr Song said that the 1st defendant could issue a simple letter confirming that the 1st defendant owed the amount due under the contract to the plaintiff. The 1st defendant accordingly issued a letter promising to repay the money in early 1999. The letter was dated 26 January 1999 addressed to Mr Song of the plaintiff and stating that :

"Regarding Contract No.C/CF/SL 009/98 signed between us in respect of 5,877.880MTS of diesel oil at unit price of USD137.50 per metric ton amounting to a total sum of USD808,208.50, we will pay all outstanding sum in early 1999. Thank you!"

12. In late January 1999, Mr Song asked the 2nd defendant to sign a draft Repayment Agreement. Mr Song said that it was only a matter of formality and the plaintiff would not act upon it in any event. The 2nd defendant said that after perusing the draft Repayment Agreement, "I find it as another confirmation for the repayment of the money due under the contract. Upon the promise and representation by Mr Song that the plaintiff would not act on the Repayment Agreement, I therefore signed it on the 1st defendant's behalf." The 2nd defendant stated that he had never agreed to act as a guarantor in his personal capacity. The intention of the Repayment Agreement was only a formality used by Mr Song on the plaintiff's behalf to pacify his company that the 1st defendant had promised to pay as a guarantor.

13. Thereafter, the 1st defendant received several letters from the plaintiff demanding repayment. The 2nd defendant talked to Mr Song about his worries and Mr Song pacified him by saying that there would be no problem. The 2nd defendant further wrote to the plaintiff and promised to repay at a later date.

14. In mid-April 1999, the 2nd defendant received a demand letter from the plaintiff's solicitors. He called Mr Song who informed him that the plaintiff was being controlled by a new management group and they decided to take action on the Repayment Agreement. The 2nd defendant strongly complained that it was unfair to the 1st defendant. However, Mr Song told him that he could do nothing for him anymore.

The principle

15. The principle in Order 14 application is whether the defence is credible. If it is, then the defendants is entitled to have leave to defend. If not, then the plaintiff is entitled to judgment.

Is the defence credible

16. The plaintiff submits that the defence is not credible. If the contract was between the plaintiff and the Fuzhou Company, why would the 1st defendant entered into the Repayment Agreement with the plaintiff and why would the 1st defendant agree by an earlier letter that it would repay the money due to the plaintiff. The plaintiff produced a series of letters written by the 1st defendant after the Repayment Agreement in which the 1st defendant asked for time to make the repayment. In the letter of 17 March 1999, it was stated that :

" ...As regards to the Repayment Agreement duly signed by us, we will seriously honour and abide by its terms. During this period, we are acting constructively with a view to gathering fund for purpose of making the first instalment payment in the sum of USD108,208.50 to you. However, we are hard hit by the present financial crisis and we are experiencing temporary difficulty in operating fund so much so that there would be a delay in our payment of the first instalment to you. We regret for the delay."

17. In the letter dated 26 March 1999, it was stated that :

" ... We earnestly hope that we may repay the money in accordance with the terms of our agreement. However, we are experiencing temporary shortage of fund and we find it difficult to make repayment to you at the end of this month. We regret very much for being so.

... We urge you to be sympathetic towards our present temporary financial difficulties and to grant us an extension of one month for repayment and we will guarantee the payment of the first instalment of the loan under the Repayment Agreement on the 15th day of April."

18. In the letter of 13 April 1999, it was stated that :

" ... As regards to our repayment due on the 15th day of April, we shall be grateful if you will kindly grant us an additional 15 days to pay since we are short in fund. We have every sincerity in repaying the loans due to you, as otherwise I would not have signed a personal guarantee. Because we have temporary difficulty in operating funds, we are making every effort to call up capital. We hope to have your understanding and support. We guarantee that the first instalment will be repaid before the 30th day of April."

The unusual feature

19. I agree that if the contract was between the plaintiff and 1st defendant, the 1st defendant should not have agreed to repay the sums by instalments and further asked for time to pay the instalments. If not for one unusual feature in this case, I would have hold that the defence is so incredible that judgment should be given to the plaintiff against the 1st defendant.

20. The unusual feature in this case is the sales contract that the plaintiff had entered into with the Fuzhou Company. This contract, together with the letter of credit issued by the Fuzhou Company in favour of the plaintiff and the commercial invoice issued by the plaintiff to the Fuzhou Company, are evidence in support of the 1st defendant's contention that the contract was actually made between the plaintiff and the Fuzhou Company. The contract dated 15 January 1998 referred to a purchase of 25,000 to 30,000 MTS of fuel each month. This envisaged a specific order to be placed afterwards. The sales contract dated 17 April 1998 and the commercial invoice dated 22 April 1998 appeared to indicate that this was in fact what happened.

Reason for the subsequent contract

21. The plaintiff explained the subsequent contract with the Fuzhou Company by relying on the opinion of Mr Wu Qi You who stated that :

"Companies from Fuzhou Economic and Technical Development Zone could not have business directly with a foreign company. It must go via a third party, who acts as Agent. Agent takes care of all the work arisen outside China including opening L/C, while real importer deals with internal matters such as declaring to Customs. Thus, applicant of L/C must not be the real Buyer in all cases. Aforesaid system is considered legal.

...

While declaring to Customs, company such as Economic Development Corporation of Fuzhou from Fuzhou Economic and Technical Development Zone has to fill in Import Cargo Customs Declaration Form and to attach Sales Contract together with B/L. On such Sales Contract, Buyer must be the same party as the applicant of L/C, so as to comply with Customs' requirement. Hence we believe that Sales Contract No.SC110802CF98ED provided by 'Defendant' is made up for Customs Declaration purpose."

Mr Wu stated that he was familiar with the system of importing oil to China during 1997 to 1998. He was the business manager of the International Trading Company of Shanghai Petroleum Company which was managed by the Municipal Government of Shanghai. From 1987 until his retirement, he was the General Manager of the company and from 1987 he began to work with oil import (crude and products).

22. The plaintiff stated that the contract was entered into in order to overcome the regulations.

23. The defendants objected to the opinion of Mr Wu on the ground that he was not a qualified lawyer and he was not in a position to give an opinion on matters which clearly had a legal ramification. I agree. This being an Order 14 hearing, parties are not expected to file legal opinions on issues which obviously would need to be tested in cross-examination. More importantly, the existence of the contract between the plaintiff and the Fuzhou Company just does not fit into the scheme of things suggested by Mr Wu. In fact what Mr Wu said supported the defendants' case that the 1st defendant was an agent in this transaction because since the Fuzhou Company was a company in the Fuzhou Economic Zone, it could not enter into contract with foreign companies, namely, the plaintiff, and it would require an agent to enter into the contract.

24. Mr Mak referred to the invoice issued by the 1st defendant to the Fuzhou Company which in fact referred to a company called Fuzhou Sheng Yang Oil Co., Ltd, and not the Economic Development Corporation of Fuzhou Economic and Technical Development Zone. He submitted that what actually happened was that the 1st defendant sold the fuel to this company and in order to fulfill the requirements, the contract with the Economic Development Corporation of Fuzhou was entered into. This is never part of the plaintiff's pleaded case. In any event, this still does not seem to fit into the scheme envisaged by Mr Wu because the contract was not made between the Economic Development Corporation and the 1st defendant, but with the plaintiff. In my view, it is just not possible to determine this issue on affidavit evidence only.

25. What remains is that the reason why the contract between the plaintiff and the Fuzhou Company came into existence has not been explained. The plaintiff described the defendants' allegations against Mr Song as incredible and untrue. Mr Song had not filed an affidavit denying the allegations that were levelled against him by the defendants. The plaintiff did not state that it had been informed by Mr Song that the allegations were untrue.

Leave to defend to the 1st defendant

26. In Extraktionstechnik Gesellschaft Fur Anlagenbau Mbh v Oskar Estates Gazette Law Reports, 15 June 1984, Webster J stated that :

"...The present case was a classic instance in which, in principle, the court should give unconditional leave to defend. There were features of both claim and defence, as so was explained, which were disturbing because they bore the appearance of falsity and disreputable business dealings. Accordingly, the appeal would be allowed, judgment for the plaintiffs set aside, and unconditional leave to defend given to the defendant. Appeal allowed."

27. In this case, the matters disclosed in the affidavits certainly give an appearance of falsity and disreputable business dealings. If companies in the Fuzhou Economic Zone cannot deal with foreign companies directly, on what basis can the intervention of a third party be considered legal?

28. In the trial, the plaintiff may well be able to demonstrate that the evidence of the defendants is a complete fabrication. However, at this stage of the proceedings, one just could not come to such a conclusion. With the unusual feature of this case, I am not prepared to brush aside the reasons given by the defendants for entering into the contract with the plaintiff and its subsequent conducts as being so incredible that summary judgment should be given. The 1st defendant should have leave to defend.

The 2nd defendant

29. As far as the liability of the 2nd defendant is concerned, the only evidence in support of the plaintiff's claim is the letter of 13 April 1999 bearing the names of both defendants in which it was stated that "otherwise I would not have signed a personal guarantee." Even if this is referable to the Repayment Agreement, it is still unclear whether under clause 4 which stated that "party A is willing to use his personal assets as a guarantee" is referable to the 1st defendant or the 2nd defendant personally. Although the name of the 1st defendant and his identity card number appeared in the signature clause, the Repayment Agreement itself referred to two parties, namely, the plaintiff and the 1st defendant. For the purpose of an Order 14 application, the fact that someone signed his personal name below the name of his company does not conclusively show that he has assumed personal liability in the transaction. It is clearly not appropriate to grant a summary judgment for rectification.

Conclusion

30. In my view, the master was correct in her decision. The appeal is accordingly dismissed with costs nisi to the defendants.