XCHRX AGFA HONG KONG LTD. v. KING DRAGON INDUSTRIAL LTD. AND OTHERS

HCA 13016/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.13016 OF 1999

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J U D G M E N T

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Appeal against condition

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

2. The plaintiff's claim against the defendants is for the sum of US$7,235,958.18 and HK$7,203,461. The master ordered the 1st defendant to pay into court on or before 31 January 2000 the sum of HK$20 million as the condition for all the defendants defending the action. The plaintiff accepted that the defendants should be given leave to defend, the only issue is on the condition. The defendants' case is that no condition should be imposed.

Facts

3. The plaintiff is a manufacturer and distributor of printing equipment and chemicals. The 2nd-4th defendants are directors of the 1st defendant. The plaintiff's cause of action against the 1st defendant is pursuant to a credit agreement dated 23 October 1997 alternatively 23 October 1995. The plaintiff further relies on an alternative cause of action on goods sold and delivered by it to the 1st defendant. The claim against the 2nd-4th defendants are based on the guarantees signed by them which were undated.

The defence

4. The 1st defendant's defence is that since 1995, the plaintiff had supplied goods to the 1st defendant on "cash on delivery" basis. In July 1996, the plaintiff and the 1st defendant agreed that the 1st defendant could have 90 days credit to pay for the plaintiff's goods.

5. The 1st defendant sold the goods to customers in the Mainland. In January 1997, the parties agreed that the 1st defendant would act as the middleman for the plaintiff in the selling of the plaintiff's products in the Mainland ("the distribution agreement"). At that time, the plaintiff wanted to expand the Mainland market. Under this agreement, the 1st defendant would not have to bear any risk in sales fluctuation or bad debts from the Mainland customers. The 1st defendant's duties were to distribute the plaintiff's products in the Mainland and to collect proceeds of sale from these customers. The 1st defendant would be remunerated for its service.

6. The plaintiff encouraged the 1st defendant to extend further credit to these customers to speed up the expansion in the Mainland market. As a result, the 1st defendant increased the credit limit to the customers to HK$30 million in July 1997. By the end of 1997, it was HK$45 million. By early 1998, the limit was HK$60 million. The credit period was extended to 120 days. At the same time, the 1st defendant had continued to make payment for its earlier purchase from the plaintiff and had repaid the outstanding credits. The 1st defendant said that it is not liable to the plaintiff because the amounts claimed are due from the Mainland customers and not from it personally.

Date of the credit agreement

7. There were initially some disputes on the date of the credit agreement. The plaintiff's case is not that there are two agreements signed by the 1st defendant but rather the year on the agreement should read as "1995" instead of "1997". The original of the credit agreement was produced in court and the year appeared to be "1995" instead of "1997". In any event, the 1st defendant accepted in the affirmations that the credit agreement was executed in October 1995. It said that the document is only an account opening form rather than a credit agreement. It is not necessary for me to dwell on the credit agreement because even if there are triable issues on this agreement, the plaintiff relies on the alternative claim of goods sold and delivered.

Goods sold and delivered

8. The plaintiff's case on goods sold and delivered is clearly supported by documents, such as delivery notes, invoices and monthly statements. It is not disputed that the amounts set out in the monthly statements are due.

Distribution agreement

9. The 1st defendant stated that it has raised a bona fide defence on the distribution agreement. Its work in the Mainland was closely monitored by the plaintiff. On many occasions the plaintiff's representative was present when the 1st defendant's sales representative met the Mainland customers. The 1st defendant was instructed to supply list of the Mainland customers to the plaintiff. The plaintiff used the list to verify whether the customers were genuine or not, and whether goods were sold to them. The 1st defendant was required to submit to the plaintiff reports and estimates of sales of the plaintiff's products. The plaintiff had also sent a firm of accountant to check on the 1st defendant's account in late 1997. The 1st defendant also produced a distribution agreement made between the plaintiff, the 1st defendant and a Mainland company in which it was stated that the plaintiff was responsible for prompt supply and ultimate liability of the quality of the goods.

Shadowy defence

10. Conditions can be imposed in an Order 14 application where the defence is shadowy. Recognizing what the 1st defendant has said, in my view, the defence is still a shadowy one. The most glaring feature of the so-called distribution agreement between the plaintiff and the 1st defendant is the complete lack of details and written documents evidencing the agreement. The distribution agreement with the Mainland customer is not the distribution agreement in issue.

11. The 1st defendant's case is that the plaintiff wanted it to increase its investment in the Mainland with the ultimate goal of doubling the sales of the plaintiff's products in the Mainland. At the end of 1996, the credit balance of the 1st defendant was maintained at $15 million. This was increased manifold in the next two years. For such an important task as assigning the 1st defendant to be the plaintiff's agent in the Mainland market where the credit level to the customers was at the beginning of 1998 in the region of HK$60 million, common sense and business sense dictated the requirement of a written document setting out the rights and obligations of the parties. For example, what was the duration of this agreement? How was it to be determined? How was the 1st defendant to be remunerated for what it had done? Even if the 1st defendant was not responsible for the bad debts of the customers, who should pursue them in the first place? As a matter of fact, the 1st defendant did not even say in its defence or affirmations on how the remuneration was to be calculated.

12. The response of the 1st defendant to the absence of written agreement is that there was likewise no written agreement when the payment term between the parties was changed from "cash on delivery" to "credit" basis. The plaintiff is not even sure about the date when the credit agreement was signed. There is also no document recording the increase of the credit level granted by the plaintiff to the 1st defendant.

13. In my view, it is not correct that there is no written document recording the granting of the credit to the 1st defendant. The 1st defendant accepted that it signed the credit application form in 1995. In later years, the plaintiff had increased the credit limit but it remained to be part of the existing credit arrangement of the parties. By contrast, the distribution agreement would drastically change the nature of the existing relationship between the parties when the plaintiff would ultimately be responsible for the risk of not recovering the price of the goods sold by the 1st defendant on its behalf.

14. In my view, even just for the reasons I have stated earlier, conditions should be imposed when leave was granted to the 1st defendant to defend the action.

Accountant report

15. There are other shadowy features of this case which justify the condition to be imposed. The contemporary documents all point to the relationship of a buyer and seller. The accountant's report of 2 March 1998 stated that the report was based on the books and records of the 1st defendant. Under the entry on current liabilities, the plaintiff was stated to be the trade creditor of the 1st defendant. The report was supplied to the 1st defendant and was produced by it as an exhibit. No challenge was made by the 1st defendant on the accuracy of the report. If the 1st defendant was merely acting as an agent for the plaintiff, why should the plaintiff be described as its trade creditor?

Minutes of meeting

16. On 4 May 1999, a meeting was held between the plaintiff and the 1st defendant. Two of the directors of the 1st defendant were present at this meeting, namely, the 3rd and 4th defendants. The minutes of this meeting recorded that the demand letter from the plaintiff's lawyers was discussed. The minutes recorded that the 3rd and 4th defendants in response merely referred to the financial difficulties of the 1st defendant. There was no denial by them that the 1st defendant was not liable at all for the debts.

17. All that the defendants now said about the minutes is at paragraph 8 of the affirmation of the 3rd defendant :

"I had never seen the said minutes before the same was shown to me by my solicitors. In the related meeting, apart from the transfer of the Guangzhou properties, the parties failed to make any other agreements. In fact, the said meeting ended in rather unfriendly atmosphere."

There was no challenge on the accuracy of the minutes.

Transfer of property

18. The plaintiff's case is that the 1st defendant had proposed to settle part of the debt by transferring a property in Guangzhou to the plaintiff. The 1st defendant's case is that the property in fact belonged to the customer in the Mainland. It was at the plaintiff's request that the property was transferred to the 4th defendant first. No documents were produced by the defendants on the transfer.

Settlement agreement

19. The plaintiff produced a letter from the 2nd defendant, written on the letterhead of the 1st defendant, enclosing a settlement agreement in which the 1st defendant acknowledged that the plaintiff had sold goods to it, and that the balance of the price of the goods owing by the 1st defendant at 23 November 1998 was at HK$65,866,170.83. The 1st defendant promised to pay part of the debt at HK$21,500,000 by 14 monthly installments commencing on 30 November 1998, and the balance before 30 December 1999. The signature of the 2nd defendant appeared on the signature column of the 1st defendant.

20. It is accepted that the plaintiff did not deal with the circumstances in which it received the two documents from the 1st defendant. However, the defendants' response to these two documents is indeed surprising. All that the 2nd and the 3rd defendants said about these documents is simply that they had not seen these documents before. The 2nd defendant's affirmation was exhibited to the 3rd defendant's affirmation and not filed as a separate document. One would expect that the defendants should at least disclose whether they had ascertained if anyone from the 1st defendant had indeed prepared the letter and the agreement or sent them to the plaintiff. After all, the letter actually contained a reference number of the 1st defendant. There was not even a denial that the signature that appeared in the agreement was that of the 2nd defendant.

The counterclaim

21. The 1st defendant counterclaimed for breach of the distribution agreement. No particulars were given as to the damages. Furthermore it is not connected to the claim itself.

Condition correctly imposed against the 1st defendant

22. In my view, the condition was correctly imposed against the 1st defendant and its appeal is accordingly dismissed.

Position of 2nd-4th defendants

23. Regarding the 2nd-4th defendants, I have difficulties in accepting that in principle the right of a defendant to defend is conditional upon someone else fulfilling the condition. The 1st defendant is after all a separate entity from the other defendants. Mr Bell, counsel for the plaintiff, accepted my view but urged conditions should be imposed on the 2nd-4th defendants separately. In my view, no condition should be imposed against the 2nd-4th defendants. There clearly is a triable issue as to whether there was consideration for the guarantees. The guarantees were undated. Mr Pang of the plaintiff said that he believed that the guarantees were provided in January 1998. On the other hand, the 2nd-4th defendants stated that the guarantees were signed in August 1998. There was no credit given to the 1st defendant after August 1998. Forbearance to sue is, of course, a form of consideration, but there was no express promise on the plaintiff's part. The issue whether there was an implied promise is clearly not a matter that can be resolved at an Order 14 application. Furthermore, the 2nd-4th defendants' liability would depend on whether the amount was personally owed by the 1st defendant.

24. Accordingly, I will allow the appeal of the 2nd-4th defendants.

Costs

25. The master ordered that the costs of the Order 14 application be paid by the defendants to the plaintiff in any event.

26. I will vary this order. As the defendants had been given leave to defend by the master, the appropriate order for costs before the master should be costs in the cause, with an additional order that in the event that the 1st defendant does not comply with the condition and judgment is entered against it, then the costs of the action relating to the 1st defendant should be borne by it.

27. In relation to the costs of the appeal, as the 1st defendant failed in its appeal, the plaintiff is entitled to have the costs of the appeal against the 1st defendant. The 2nd-4th defendants are entitled to their costs of the appeal because they are successful in removing the condition imposed against them.

28. The apportionment of the costs of the appeal is that the 1st defendant should be responsible for three quarters of the costs of the appeal while the plaintiff is liable to the 2nd-4th defendants one quarter of the costs.