YEUNG CHUNG HAY v. INTERNATIONAL PAINT LLC

CACV 115/2006 & CACV 116/2006

CACV 115/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 115 OF 2006

(ON APPEAL FROM HCSD NO. 24 OF 2005)

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BETWEEN

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CACV 116/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 116 OF 2006

(ON APPEAL FROM HCSD NO. 25 OF 2005)

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BETWEEN

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J U D G M E N T

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Hon Tang VP (giving the judgment of the Court):

1.  These appeals were ordered to be heard together.  The appeals are against the refusal of Deputy Judge To to set aside the statutory demands dated 13 July 2005.

2.  The statutory demands were for the identical amounts of Euro 65,305.45.

3.  The appellants are partners in the firm which traded in the name of V-Mark Trading Co. (“V-Mark”), and incurred the liability to pay the amount demanded as such.

4.  The application to set aside the statutory demand is based on the appellants’ claim that they have a genuine and serious cross-claim which equals or exceeds Euro 65,305.45.

5.  It is the appellants’ case that they are owed commissions by the creditor (LLC) which are evidenced by 99 invoices issued in 2003 and 2004.  The bulk of such invoices related to what the appellants described as BFE, Buyers Furnished Equipment, business.

6.  Speaking loosely, the creditor is a part of a group of companies which manufactured and sold aerospace paint for aircrafts and V-Mark was their sole distributor in the PRC.

7.  According to Mr Graham Windsor, who made an affirmation dated 6 January 2005 on behalf of the creditor, in or about 1989, the Akzo Nobel Aerospace Coatings Inc. (“ANACI”) took over from Sikkens BV (“Sikkens”) certain business, including a small aerospace coating business.  After this acquisition, an affiliate of the group first started to do business with V-Mark with products exported from the Netherlands.  The creditor is the successor by merger to ANACI.

8.  This is what Mr Windsor said in his affirmation:

“5. I am informed by LLC’s attorney in the United States that LLC is a limited liability company organized and existing under the laws of the State of Delaware in the USA, whilst INC was a corporation incorporated under the laws of the State of South Carolina in the USA. LLC belongs to the Akzo Nobel group of companies (‘the Group’), as did INC before it was merged into LLC. LLC has an affiliate organized in the Netherlands that is part of the Group, Akzo Nobel Aerospace Coating BV (‘ANACBV’). LLC and ANACBV both engage in the business of manufacturing and selling aerospace products such as paints/coatings to buyers around the world for use on aircrafts. There are many different companies within the Group, some of which are incorporated in the Netherlands and others incorporated or organized in the USA and in other countries, and which operate many different businesses. On 1.1.2005, INC merged into LLC and the name of the surviving limited liability company is LLC…

6. On about 1.7.1993, Akzo Coatings International BV (a Group company) and Dexter Corporation (a US corporation that is not a part of the Group) formed a joint venture company incorporated in the Netherlands known as AD Aerospace Finishes VoF (‘AD’). AD operated an aerospace coatings business outside the Americas during the period from about 1.7.1993 which continued until about late 1998 when the joint venture business under AD was terminated and taken over by ANACBV (see below). AD business was conducted separate from and independent of the Group during the said period.

7. Starting from about 1.4.1994, V-Mark Trading Co. was acting as the distributor of AD under a renewed arrangement whereby V-Mark Trading Co. would purchase aerospace products from AD for resale to prospective buyers in China (see paragraph 21 below). From my search of the old file records, I am only able to locate a copy of the Distributor Agreement dated 1.4.1994 signed by AD but not by V-Mark Trading Co. (‘Distributor Agreement’). There is now produced and shown to me marked ‘GW-3’ a copy of this Distributor Agreement. Although I am not certain as to whether V-Mark Trading Co. had actually signed the Distributor Agreement, I verily believe the parties proceeded all along and treated the Distributor Agreement as signed governing the terms of their business relationship. V -Mark Trading Co. issued purchase orders for aerospace coating products directly to AD. Each time a sale and purchase was concluded under the Distributor Agreement, AD would issue an invoice direct to V-Mark Trading Co. for settlement.”

9.  It will be noted that the creditor relied on the Distributor Agreement dated 1 April 1994 (“1994 Agreement”).  However, there was an earlier agreement, namely, a Distributorship Agreement dated 1 January 1985 (“1985 Distributorship Agreement”), made between Sikkens and V-Mark.

10.  The appellants’ case on their right to be paid a commission on BFE business is not very clear.  According to Mr Anthony Cheung, who appeared on behalf of the appellants, the contractual relationship that the appellants relied on, arose first under the 1985 Distributorship Agreement, under which V-Mark was entitled to a “compensation of 15% of the invoice value” of Sikkens’ products sold by Sikkens itself in the PRC Article 2.2.  In related proceedings, namely HCA 1365 of 2005, the creditor as plaintiff sued the appellants as 1^st and 2^nd defendants, for goods sold and delivered in the sum of US$186,417.32, on the basis that the creditor had taken over the rights, assets and liabilities of ANACI.  In the appellants’ defence and counterclaim in that action, it relied on the 1985 Distributorship Agreement and a Supplemental Agreement which was “entered into by ANACI and V-Mark in or around November 1996 for BFE transactions of airlines in the Peoples’ Republic of China”, as follows:

“19.  It was a term of the Supplemental Agreement that in addition to the Distributorship Agreement, V-Mark would conduct marketing activities in the Peoples’ Republic of China for the promotion of products of ANACI in BFE transactions.

20.    It was a term of the Supplemental Agreement that if any airline in the Peoples’ Republic of China directs their aircraft manufacturer to use ANACI’s products in their BFE transactions, ANACI would inform V-Mark of such transactions and then pay V-Mark a commission upon the manufacturer’s delivery of any aircraft(s) painted with paint products of ANACI.

21.    In or around November 1996, V-Mark successfully convinced or procured China South Airlines to use ANACI’s paints in its BFE transaction of 20 Airbus aircraft. ANACI agreed to pay USD16,000 to V-Mark as the commission thereof pursuant to the Supplemental Agreement, which was evidenced by a letter issued by Graham Windsor, a representative of ANACI to V-Mark dated 15^th November 1996.

22.    V-Mark and ANACI had agreed to changes in the rate of commission in BFE transactions over the years. The latest commission rates for ANACI’s paints used in BFE transactions are:

(i)  ANACI should pay V-Mark US$800 for each single aisle aircraft on which the ANACI’s paints are used; and

(ii) ANACI should pay V-Mark US$1,600 for each twin aisle aircraft on which the ANACI’s paints are used.

23.    With the marketing efforts of V-Mark, on numerous occasions, airlines in the Peoples’ Republic of China elected to use ANACI’s paints in their BFE transactions, and then aircrafts painted with paint products supplied by ANACI were delivered to airlines in the Peoples’ Republic of China. In breach of the Supplemental Agreement, ANACI did not inform or pay commission of such transactions to V-Mark.”

11.  The appellants counterclaimed a total sum of US$273,025.27 as commission.

12.  A more or less similar version could be found in the 3^rd affirmation of Chong Kar Ning, filed on 6 January 2006:

“17.   In or around 1996, V-Mark and AD noted that the BFE market was emerging.  However, at that time, certain AD’s products were not used by the China Aviation Supplies Import & Export Corporation (‘CASIEC’), which was the state owned import and export corporation having the overall sourcing power for Chinese airlines.  Upon V-Mark’s effort to convince the management of CASIEC to use AD’s products (I personally took part in the communication with CASIEC), CASIEC wrote a letter to Airbus n 13^th November 1996 to inquire whether Airbus could use AD’s products in their BFE mode new aircraft purchases.  There is now produced and show to me marked ‘CKN-7’ the copy of letter issued by CASIEC to Airbus dated 13^th November 1996, and my letter to Mr. Windsor dated 13^th November 1996.

18.    As a result of the success of V-Mark in convincing CASIEC to use AD’s products, I personally had a telephone conversation with Mr. Graham Windsor of AD, who was the contact person of AD in Malaysia, and it was agreed that for BFE transactions, although V-Mark was not selling the products to the airlines directly, V-Mark should be entitled to a payment of USD800 for each aircraft painted in AD’s system.  After the telephone conversation, Graham Windsor, on behalf of AD, issued a fax dated 15^th November 1996 to V-Mark confirming that for this kind of BFE transactions, AD would pay USD800 to V-Mark for each aircraft using AD’s paints.  There is now produced and shown to me marked ‘CKN-8’ the copy of AD’s letter dated 15^th November 1996 to V-Mark.  It was one of the substantial BFE transactions since 1990s.

19.    BFE transactions continued to become a considerable part of business between V-Mark and AD (and AKZO) afterwards.  There is now produced and shown to me marked ‘CKN-9’ the correspondence between V-Mark and AD and AKZO, and payment confirmation from V-Mark’s banker.  It is shown from the documents that AD advised V-Mark on 14^th October 1998 that ‘commission’ was payable to / would be paid to V-Mark for 12 aircrafts delivered under new Airbus purchase (under BFE mode, using AD’s paints).  An AKZO group company called V.O.F. AKZO NOBEL DEXTER AEROSPACE later paid a sum of USD3,000 for the 6 aircraft already delivered.  On 16^th August 2000, V-Mark issued a chaser a letter to AKZO requesting them to pay the remainder of USD3,000, and other BFE compensation payable by AKZO.

20.    A point to note for such type of BFE transactions is the whole transaction can take place without the knowledge of V-Mark.  The China airlines were not placing the orders with V-Mark, because what they needed to do was to request the aircraft manufacturer, say Airbus, to use AKZO Group’s paints, and then the aircraft manufacturer will contact an AKZO Group company for purchasing paints.  Therefore, V-Mark’s marketing effort is in convincing the airlines to use AKZO Group’s products.  V-Mark could only know that such transaction had taken place either by enquiring with the relevant Chinese airlines, or AKZO / AD informed V-Mark such transaction had taken place.  This is also shown in the transaction as mentioned in paragraph 19 above.

21.    In such circumstances, the operation of BFE transactions heavily rely on the dignity and good faith of the parties, especially before the age of internet, as V-Mark sometimes had difficulties in gathering information about the number of aircraft using AD / AKZO products.”

13.  It is the appellants’ case that they had never entered into the 1994 Agreement with AD.  Under the 1994 Agreement, in relation to which the creditor was only able to produce a copy signed by AD, two points should be noted:

(1)     it does not provide for payment or any commission or compensation to the appellants in relation to either BFE or direct sales made by AD to airlines in the PRC;

(2)     it provided for the termination of the Agreement if a party should violate any material provision of the Agreement and the default is not corrected within 15 days after the receipt of a written notice to correct the default.  A material term for the purpose of this appeal is the requirement that the distributor should pay the invoices 90 days after the date of the invoice.

14.  We are of the view the appellants’ case that they had not entered into 1994 Agreement is not believable.

15.  The letter of 18 April 2002, the caption of which referred to the 1994 Agreement, under which V-Mark agreed to pay by instalments which led to the statutory demands, was signed by Mr Chong on behalf of V-Mark.

16.  The letter of 29 January 2004 to V-Mark which referred in its caption to the 1994 Agreement, was responded to by a letter dated 2 February 2004 signed by Mr Chong.

17.  Moreover from the corporate restructuring referred to in Mr Windsor’s affirmation, it is highly improbable that there would have been no new distribution agreement.

18.  So we believe we must proceed on the basis that although the creditor was unable to produce the copy of 1994 Agreement signed by or on behalf of V-Mark, the parties had entered into the 1994 Agreement and had conducted business on the basis of it.

19.  Mr Anthony Cheung, however, argued that even if we were of the view that the relationship of the parties was governed by the 1994 Agreement, that is not fatal to the appellants’ claim for commission.  He submitted we could imply such a term.  We do not agree. Such a term is not necessary to give the 1994 Agreement business efficacy.  Mr Cheung also submitted that one could gather from the documents or the conduct of the parties that there was an agreement to pay commission in relation to BFE business.  For example, he referred to the correspondence in 1996 with Mr Windsor which showed payment of commission of USD 800 for each of 20 aircrafts.  However, the correspondence relied on, especially the letter dated 15 November 1996 from Mr Windsor to Mr Chong, stated expressly the agreement to pay that commission:

“… will only cover the aircraft currently on order under one contract, i.e. 28/c for China Southern, equal USD 16,000.”

20.  Mr Chong also relied on the following:

(i)      a letter dated 14 October 1998, where Mr Windsor said, in relation to 6 aircrafts to different airlines in PRC:

“… in conclusion, 6 aircrafts had been delivered and the further 6 will be delivered by the end of the year, and it has been decided that we will pay the commission due on all the aircraft, delivered and to be delivered in 1998 12 x USD 500, equals USD 6,000.”

(ii)      a fax dated 16 August 2000 from Mr Chong to Mr Windsor, where it was said:

“… it is agreed that Akzo will pay us commission of USD 6,000 (USD 500 x 12 8/c) for those delivered and to be delivered aircrafts in 1998.”

(iii)     a letter dated 15 September 1998, from V-Mark to Mr Windsor, where it was said that there was a great sum of commission due from Akzo:

“However, we do not know the exact commission amount, because we have no information on the contract sum signed between Akzo and those airlines.”

(iv)     the letter dated 11 July 2003, from V-Mark to Mr Windsor, where at page 5, it said:

“Regarding V-Mark’s commission for specifying Akzo paint on such new flit, Akzo is offering us only USD 500 per shipset and only for airbus aircraft.  Frankly speaking, we do have actual expenses to achieve the business.  Therefore, we sincerely hope that Akzo could seriously consider on following request:

For single aisle aircraft (both boeing and airbus), V-Mark commission: USD800 per shipset;

For twin aisle aircraft (both boeing and airbus), V-Mark commission: USD1,600 per shipset”

21.  But with respect to Mr Cheung, the correspondence do not support the case that there was an agreement to pay commission on each aircraft from the PRC which used the creditor’s paint, whether or not V-Mark was instrumental in persuading the carrier to specify the paint.

22.  Moreover, there was no reference to any such commission payable even as late as V-Mark’s letter of 2 February 2004, written in response to the formal notice given under the 1994 Agreement, requiring payment in full within 15 days of receipt.

23.  Instead, V-Mark’s letter referred to internal problems and bad Hong Kong economic situation and offered to pay the overdue invoices by instalments in 24 months.  It was this letter of 2 February 2004 which admitted the sum of Euro 65,305.45 and formed the basis of the statutory demand.

24.  Moreover, in an e-mail sent by V-Mark on 15 January 2004, which was copied to Mr Windsor, there was an express reference to payment of a sum of $50,000 outstanding from the Driessen’s commission.  Although, on the appellant’s case, by that date, there was a sum of about $50,000 outstanding, and that by 2 February 2004, as the judge noted, 47 of the invoices had been issued in the total sum of $52,507.67, there was no mention of any such commission payable until after the statutory demands.

25.  As Robert Walker LJ said in Re a Debtor (No.554/SD/98) [2000] 1 BCLC 103 at 114:

“Delay in putting forward a cross-claim may lead to an inference that it is not put forward in good faith, but only as a pretext in order to stave of bankruptcy.”

26.  It was on such evidence that the learned Deputy Judge concluded that there was no genuine cross-claim.  We agree.

27.  We turn to the question of mutuality.  The judge also held against the appellants that even if there was a genuine cross-claim, the cross-claim was by a company called V-Mark Trading Co Ltd.

28.  He came to that conclusion based on the 99 invoices which were produced.  The invoices were all issued in the name of V-Mark Resources Limited.  However, if the appellants’ cross-claim was genuine, it was a cross-claim by V-Mark, and not by V-Mark Resources Limited.  The Deputy Judge formed the view that Mr Chong’s explanation as to why the invoices were issued in the name of V-Mark Resources Limited, namely that V-Mark Resources Limited was the collecting agent, was unconvincing.  That may be so.  But it seems quite clear that the appellant case was, and had always been, that the person who was entitled to claim the payment of the commission was V-Mark itself.  The fact that the invoices were issued in somebody else’s name cannot alter that fact.  So had we been satisfied that the cross-claim was genuine, we would not have held that the cross-claim lack mutuality.

29.  Another point of mutuality arose out of the fact, that the creditor was the assignee of the outstanding balance which were owed to ANACBV.  There is a notice of assignment dated 18 April 2002.  Mr Fung argued, that insofar as the outstanding balance had been assigned to ANACI, the appellants would not have been entitled to set off as against such outstanding balance, any commission which became payable after the date of the assignment.  It is not clear when the claim for the unpaid commission, if genuine, arose.  Moreover, given the fact that the creditor had dealt with V-Mark and vice versa, on a group basis, had it been necessary to do so, we would have gone deeper into the question, in order to decide whether that would have precluded us from setting aside the statutory demand.  But since we have concluded that there is no genuine cross-claim it is not necessary to do so.

30.  The appeal is dismissed.  We make an order nisi that the creditor is to have the costs of the appeal to be taxed, if not agreed.