ROYAL SELANGOR (HK) LTD v. HK XINDONGFANG (WING SUN) TRADING CO LTD

DCCJ 6870/2003

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 6870 OF 2003

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J U D G M E N T

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Background

1. By an agreement in writing dated 4.11.1997 ("the 1st Agreement"), the Plaintiff agreed to employ the Defendant as its agent to promote the sale of the Plaintiff's pewter products in various stores in Guangdong Province, the People's Republic of China. Under the 1st Agreement, the Defendant was responsible, inter alia, to collect sale proceeds of goods sold on behalf of the Plaintiff. The various stores in Guangdong were entitled to withhold 35% (or such percentage as agreed) of the sale proceeds as their commission (提成). It is common ground that all the shops withheld 35% and not any other percentage as far as this case is concerned. The Defendant was therefore responsible to collect 65% of the sales proceeds ("the net sales proceeds") on behalf of the Plaintiff. The Defendant's Mainland representative at the time was one Zhongshan City Wing Sun Trading Company Limited ("ZSWS") (中山市旺順貿易有限公司), an affiliated or associated company of the Defendant.

2. Under the 1st Agreement it was further agreed that the Defendant was entitled to have commission fees (佣金 / 服務費) equivalent to 33% of the net sales proceeds collected. Certain expenses were included in the said commission fees.

3. Sometime in mid-2000, the Plaintiff and the Defendant agreed to increase the Defendant's commission rate to that of 35% of the said net sales proceeds.

4. By another agreement in writing dated 1.7.2001 ("the 2nd Agreement"), the commission fees payable was changed to that of 22% of the net sales proceeds. The Defendant's Mainland representative changed to one Zhongshan Dong Yi Trading Company Limited ("Dong Yi") (中山東藝貿易有限公司), another affiliated or associated company of the Defendant. Under this 2nd Agreement the Plaintiff agreed to be responsible for various business expenses. What were to be included in the commission fees payable to the Defendant were also altered.

The Claim and Counterclaim

5. The Plaintiff claimed against the Defendant for the sum of $519,198.04 being the net sales proceeds less the applicable commission fees. The Defendant did not agree with the amount claimed, alleging that for certain invoices the Defendant was entitled to 35% commission instead of 22%. The Defendant also alleged the Plaintiff failed to take into account various expenses the Defendant had paid on the Plaintiff's behalf. By the Defendant's reckoning, the sum owed by the Defendant amounted to RMB226,208.98.

6. Additionally, the Defendant counterclaimed against the Plaintiff for RMB420,669.20 being the commission fees at the rate of 35% in respect of goods originally imported into Guangdong but transported to Shanghai according to the Plaintiff's instructions. The Defendant also sought damages against the Plaintiff for the Plaintiff's alleged breach of agreement in terminating the Agency Agreement.

Admitted facts

7. This case involves a large number of documents and many different figures. I am grateful to both Mr. Kwan (counsel for the Plaintiff) and Mr. Chan (counsel for the Defendant) for putting their heads together to narrow down the issues to be tried. There are two sets of admitted facts in this case.

8. The admitted facts are, in gist, as follows:

(a)	The total net sales proceeds involved in this case amount to RMB886,086.65 but a sum of HK$50,475 representing goods returned by customers and decoration fees need to be deducted;
(b)	For the following invoices - no. 1470 to 1482 and no. 1489 - both parties agreed the applicable commission rate was 35%. However, for no. 1639, the Defendant was liable for the full sales price of $3,900 as the goods were purchased directly by the Defendant. Of these invoices, the total amount payable by the Defendant to the Plaintiff was HK$145,204.00;
(c)	The Defendant could deduct a total sum of HK$99,571.32 from the amount due to the Plaintiff to take into account the following expenses: shops charges (商埸費用), Customs Import Tax (進口關稅), additional transportation charges (額外運輸費用) and Value Added Tax ("VAT") on import (進項增值稅);
(d)	The Defendant arranged for the transportation of goods valued at RMB1,201,912.00 (sales price) according to the Plaintiff's instruction to Shanghai between December 2001 and April 2002;
(e)	The Plaintiff's stock at Dong Yi and various shops as at 30.4.2002 are admitted; and
(f)	After 1.7.2001 the Plaintiff had imported goods amounting to RMB1,696,728.00 (sales value) to be sold at the various shops with the Defendant acting as its agent.

Issues

9. With the assistance of counsel I have identified the following issues in this case.

Re the Claim

*	Under the 1st Agreement, which party was responsible for the VAT on sale?
*	What was the intention of both parties, if any, when they entered into the 2nd Agreement regarding goods imported before 1.7.2001 but sold on or after that date?
*	What was the commission rate applicable for goods imported prior to 1.7.2001 but sold after that date - 22% or 35%?
*	What was the amount of net sales proceeds due from the Defendant to the Plaintiff?
*	Should the following sums (Maintenance Charges for Dykes (堤圍費), Income Tax (所得稅), Building Tax (承建稅) and Additional Education Charges (教育附加費)) be deducted from the net sales proceeds payable to the Plaintiff?

Re Counterclaim

*	Whether there was any agreement regarding commission in respect of goods originally imported into Guangdong but sent to Shanghai?
*	If so, what were the terms?
*	Was the Plaintiff entitled to terminate the Agency Agreement by its notice dated 29.5.2002?

Evidence

10. The Plaintiff called Mr. Chan Wai Ming ("Chan") and Ms. Wu Shuk Fun ("Wu") as witnesses and the Defendant called Mr. Tam Kwok Yim ("Tam").

Re the Claim

11. There is no dispute that the Plaintiff, as a Hong Kong Company, could not directly do business with retail shops in Guangdong. The Plaintiff could not import its goods to the Mainland nor in any manner deal with any authorities (such as Customs or Tax Department) in the Mainland. The Plaintiff therefore agreed to employ the Defendant as its agent. The Defendant, another Hong Kong company, again could not directly deal with shops or authorise in the Mainland. The Defendant, in turn, arranged to have its affiliated or associated company ZSWS to be its Mainland representative to do the actual work under the 1st Agreement.

12. Sometime in 2001, another affiliated or associated company of the Defendant, Dong Yi, was set up and it became the Defendant's Mainland representative, doing the actual work under the 2nd Agreement.

13. Although there is disagreement as to whether the Plaintiff directly issued invoices to the various shops in Guangdong for goods sold it is clear from the evidence that sales reports were provided periodically by the various shops to the Defendant's Mainland representative (ZSWS under the 1st Agreement and Dong Yi under the 2nd Agreement). The Mainland representative then issued invoices to the shops, asking for payment of the net sales proceeds. After collecting the net sales proceeds the Mainland representative then remitted the same to the Defendant. The Defendant then deducted its commission and any other expenses to be borne by the Plaintiff before handing over the balance of the net sales proceeds to the Plaintiff.

14. According to Chan, the sales arrangement involved all three parties, i.e. Plaintiff, Defendant and the relevant retail shop. After the Plaintiff and the relevant shop signed a document known as Memorandum of Intention (意向書) indicating their intention to do business, the Plaintiff employed the Defendant as it agent to facilitate the business deal. The Defendant then arranged for its Mainland representative to sign the actual sales agreement with the shop on behalf of the Plaintiff. At the beginning there was only one outlet. The number of outlets/shops grew in time.

15. Chan referred to the terms of the 1st agreement, in particular clause 5, and testified that as far as the Plaintiff was concerned, the 35% commission paid to the Defendant already included the Customs Import Tax (關稅), VAT on import (進項增值稅), VAT on sales (銷售增值稅) and transportation charges within Guangdong. All the Plaintiff had to do was to notify the Defendant when there were goods to be taken to the Mainland; to provide relevant delivery and packing documents; and to have someone present at the time of delivery to check and count the goods (clause 3 of the 1st Agreement).

16. Chan said it was not possible for the Plaintiff to sign any sales agreement with the shops or to issue invoices directly to the shops. When the shops sent out the sales reports to the Defendant's Mainland representative, faxed copies of the same were sent to the Plaintiff as well. The Plaintiff then, based on the said sales reports, issued invoices to the Defendant, asking for the net sales proceeds payable less the commission.

17. Chan said that sometime in Mid-2001, the Defendant informed the Plaintiff that ZSWS would cease business. Chan's understanding was that Tsang Wai Kwong (the one who signed the 1st Agreement on behalf of the Defendant) had left the Defendant resulting in the closure of ZSWS. Chan denied that he had suggested to the Defendant to set up another company to take over the business of ZSWS.

18. Chan agreed that Dong Yi was indeed set up in 2001. Chan understood the shareholders of Dong Yi (or some of them) were the same as those of ZSWS. It was then necessary to enter into a new agreement in July 2001, naming Dong Yi as the Defendant's Mainland representative.

19. Chan said that at that time the Plaintiff's business had expanded. The Plaintiff had to establish counters at various shops at different outlets and to supply salespersons to serve at the counters. The Plaintiff also wanted to have more control on how the business was to be run. Consequently the terms of the new 2nd Agreement between the Plaintiff and the Defendant were altered quite significantly.

20. Under this 2nd Agreement, the Plaintiff was responsible to pay the following business expenses: decoration charges of the shop counters, salaries and commissions payable to salespersons who served at the counters, half of the salary of a supervisor (who was also an employee of the Defendant's Mainland representative, and with the Defendant paying the other half), the transportation charges from Hong Kong into Guangdong, the transportation charges of goods returned from Guangdong to Hong Kong, Customs Import Tax and VAT on sales (clause 3 of the 2nd Agreement).

21. Chan said that as the Plaintiff agreed to bear a lot more expenses, both parties agreed for the commission rate to be reduced to that of 22%. Chan said at the time no one had said anything about whether the new agreement (2nd Agreement) only applied to goods imported after 1.7.2001. Such thought had never entered his mind either. As far as the Plaintiff was concerned, it was the date of sale that was of relevance. The Plaintiff therefore prepared the invoices on the basis that for those sales up to end of June 2001 the 35% rate was applicable; whereas for those sold on or after 1.7.2001 the new rate of 22% applied.

22. Chan testified in court that as the Plaintiff would only look at the date of sale and not the date of importation, had the goods sold on or after 1.7.2001 been imported before 1.7.2001, the Plaintiff would have been in a more advantageous position as the Defendant would have been responsible for the various charges under the 1st Agreement but could only charge commission at 22% under the 2nd Agreement.

23. Chan added, however, that such benefit would have covered a short period. On the other hand, with the Plaintiff having to bear all sorts of expenses and still have to pay commission of 22% to the Defendant, such a deal was not as beneficial to the Plaintiff. Chan said that it was not possible to reduce the commission to zero so the Plaintiff just had to bear it for the sake of doing business.

24. It should be noted that in his witness statement (which he adopted as his evidence) Chan gave a different assertion. In his statement he said for goods sold after 1.7.2001 the Plaintiff would be prepared to deduct taxes paid by the Defendant should the Defendant provide evidence of proof so there is no question of the Plaintiff being 'unjustly enriched'.

25. Regarding the following charges, namely Maintenance Charges for Dykes (堤圍費); Income Tax (所得稅); Building Tax (承建稅); and the Additional Education Charges (教育附加費), the Plaintiff's stance was that those were running costs of Dong Yi which had nothing to do with the Plaintiff. The Plaintiff disputed the Defendant's allegation that Dong Yi was set up solely to deal with the Plaintiff's goods at the Plaintiff's request or that the officer of Dong Yi at Shenzhen was established upon the Plaintiff's request.

26. Tam, on the other hand, gave a rather different version. He said that when the Plaintiff and the Defendant entered into the 1st Agreement, Chan told him that the Plaintiff had already made arrangements with the various shops regarding the VAT on sales. The Defendant did not have to bear the VAT on sales. The Defendant paid the Customs Import Tax and VAT on import. He accepted that under the 1st Agreement these were the Defendant's responsibilities so the Defendant had never asked the Plaintiff to pay.

27. Tam said the law relating to taxation changed in the Mainland sometime in 2001. As a result of the change ZSWS found it not worthwhile to do business and had to close down. Tam explained that in the past, while ZSWS was responsible for VAT on sales regarding electrical appliances sold in the Mainland, it was possible not to pay such VAT on sales by using other invoices issued by other company of companies (for the same type of goods) to 'counter' (對冲) the invoices lodged with the relevant Tax Department.

28. Tam further testified that under the new taxation legislation, ZSWS would have the pay the VAT on sales immediately - whether it managed to collect the sales proceeds or not. He said that the profits margin of ZSWS was very small and having to pay VAT on sales would not have made it worthwhile for ZSWS to continue doing business. Tam emphasised that such 'counter' (對冲) procedure did not happen in the business deals between the Plaintiff and the Defendant as the Defendant was not responsible for the VAT on sales.

29. Tam said he informed Chan of the plan to close ZSWS, saying that the Defendant would stop acting as the Plaintiff's agent. Chan then asked the Defendant to set up another company in the Mainland to continue the business of ZSWS. As a result Dong Yi was established by the same people who used to run ZSWS. The parties then signed the 2nd Agreement.

30. Tam said there was a discussion between him and Chan and it was the intention of the parties that goods imported before 1.7.2001 would continue to be governed by the 1st Agreement notwithstanding that they were sold after that date.

31. Tam claimed that all the goods sold from July 2001 to March 2002 (covered by invoices 1614-1625, 1687-1695, 1748-1757) were imported before 1.7.2001 so the 35% commission rate applied.

32. Tam at first based this assertion on the allegation that since the inception of Dong Yi, only two lots of goods were ever imported into the Mainland - one lot on 3.12.2001 and the other in March 2002. He referred to the Demand Note/payment Notice (Bundle 1 pp.199-202). Concerning Customs Import Tax and VAT on import to support his allegation.

33. Upon being shown delivery notes indicating the Plaintiff had delivered goods to the Defendant's Kwun Tong office after 1.7.2001on a number of occasions (Bundle 3. pp. 957, 959, 960 etc) Tam admitted that the Defendant did receive those goods and that they were sent to the Mainland via other company or companies. (It should be noted from the admitted facts that the Plaintiff imported goods amounting to RMB1,696,728.00 to be sold at various shops with the Defendant acting as its agent).

34. Tam then mentioned, for the first time, the so-called 'first-in, first-out' (先入先出) accounting principle. Tam claimed that in June 2001 there was a stock-taking and a list was prepared. At the time goods valued at RMB2,585,000 were in stock. According to the said principle, Tam said that the Defendant would 'treat' goods sold after 1.7.2001 as goods imported before 1.7.2001 until the goods sold reached this value of RMB2.85 Million. The Defendant would therefore be entitled to commission at 35%.

35. This accounting principle, according to Tam, only applied to the sale of goods. That is to say, for goods sold after 1.7.2001 which were 'treated as' goods imported before 1.7.2001 (and therefore governed by the 1st Agreement), if it is shown that the goods were in fact imported after 1.7.2001, the Plaintiff would then be liable to pay the various expenses and charges under the 2nd Agreement.

36. Tam's attention was drawn to the Defence and his witness statement, which, when read in conjunction with a document of Dong Yi for the total sales of 2002 (東藝2002年各商場銷售總表) (Bundle 1 p.163) show that the Defendant had adopted Dong Yi's calculation of commission at 22% for sales from November 2001 to May 2002. Tam at times confirmed that the figures were correct, at others he claimed that the accountant had made a mistake in adopting the 22% for the calculation.

37. Regarding the Maintenance Charges for Dykes (堤圍費), Income Tax (所得稅), Building Tax (承建稅) and the Additional Education charges (教育附加費), Tam admitted the Plaintiff had never agreed to pay such charges. Tam's view was that since the setting up of Dong Yi and the establishment of an office in Shenzhen were done at the request of the Plaintiff to deal solely with the Plaintiff's goods, and that these were government charges based on 'profits' made, the Plaintiff was liable to pay such sums.

Re the Counterclaim

38. I will now turn to the evidence regarding the counterclaim.

39. There is no dispute that goods valued at RMB1,201,912.00 were transferred from Guangdong to Shanghai by the Defendant at the request of the Plaintiff. It is also agreed that the Plaintiff had fully paid the transportation charges.

40. According to Chan, there was never any agreement between the Plaintiff and the Defendant regarding any commission to be charged by the Defendant on these goods. Chan said that since the Defendant failed to make payment, the Plaintiff wanted to reduce the stock-holding of the Defendant so goods were sent to Shanghai by batches. Either Chan or Wu gave instructions to Wong Mei Lin ("Wong"), an employee of the Defendant's Mainland representative (who was also the supervisor whose salary the Plaintiff and the Defendant shared equally) to effect the transfer. Chan said he did not discuss with Tam regarding the transfer. As far as the Plaintiff was concerned, the transfer was 'stock internal transfer', not sale.

41. Wu's evidence supported Chan's save that she admitted the first lot of goods transferred to Shanghai were 'old' stock that did not sell well in Guangdong.

42. Tam, however, testified that there was a discussion between him and Chan at the Defendant's office in Kwun Tong. Chan orally agreed that for the goods transferred to Shanghai the Defendant would be entitled to 35% of the sales value as commission. Tam said as there were no shop-sales the commission was not based on the net sales proceeds.

43. Tam claimed that after the first two lots of goods were sent to Shanghai he already requested Chan to pay the commission. Chan, however, did not chase Tam for the outstanding net sales proceeds payable to the Plaintiff at that time. It was only after the third lot of goods were transferred to Shanghai and that Tam has chased Chan again for the commission that Chan chased Tam for payment of the net sales proceeding exceeding HK$ 1/2 million.

44. There is no dispute that the first demand in writing from the Plaintiff to the Defendant (in the bundle) was dated 27.3.2002 (Bundle 3 p. 814).

45. On 8.5.2002 the Plaintiff wrote to the various shops informing them not to pass the net sales proceeds to Dong Yi (Bundle 1 p.53).

46. On 18.5.2002 the Defendant wrote to the Plaintiff, for the first time, regarding these goods. Tam used the expression of goods 'transferred to' (調往) Shanghai and asked for commission in the sum of HK$403,048 based on the written Agency agreement between the parties (雙方簽訂的代理協議 ) (Bundle 1 p. 56).

47. The Plaintiff wrote to the Defendant on 29.5.2002, terminating the Agency Agreement on account of the Defendant's breach in failing to pay the sales proceeds (Bundle 1 p.57).

48. The Defendant, in a letter dated 4.6.2002 (Bundle 1 p.86) mentioned the 'sale of stock to Shanghai' (存貨賣往上海) when demanding for commission in the sum of RMB381,321.50 based on the 'Agency Agreement signed between both parties' (雙方簽訂的代理協議 ).

49. On 5.6.2002, the Defendant claimed damages against the Plaintiff on the Plaintiff's wrongful unilateral termination of the Agency Agreement (Bundle 1 p.58). In this letter Tam mentioned the 'sale' (銷售) of goods to Shanghai.

Findings

50. The two agreements are what can be termed "home-made" agreements. It is not easy to reconcile some of the terms and expressions used. For instance, the 1st Agreement was described as the Agency Agreement for Transportation of Goods (貨運代理協議書) while the 2nd Agreement, at the preamble, stated that it was an agreement which was an appendix (附件) to the Document appointing the Defendant as the Agent for Guangdong ( [原告] 委任 [被告] 為廣東代理委任書). Both the Plaintiff and the Defendant agreed that the expression of 'Document appointing the Defendant as the Agent for Guangdong' referred to the 1st Agreement even though the 1st Agreement was not such an instrument.

51. The evidence clearly shows that when the Plaintiff and the Defendant signed the 2nd Agreement, they both had in mind the 1st Agreement still being valid. Quite how the 2nd Agreement was to be an 'appendix' to the 1st Agreement I do not understand - since most of the terms have been changed, and rather significant changes at that!

52. The main issue is whether it was the intention of the parties that for goods imported before 1.7.2001 the 1st Agreement applied notwithstanding that the sales were done on or after 1.7.2001 (as alleged by the Defendant); or, that the 2nd Agreement applied to any sale effected on or after 1.7.2001 irrespective of when the goods were imported (as alleged by the Plaintiff).

53. It is clear that the intention of the parties, as indicated by their past conduct, was that the Defendant would act as the Plaintiff's agent for sales of goods in Guangdong Province. I place special emphasis on Guangdong Province as it has a bearing on the counterclaim.

54. While I appreciate it was not spelt out under clause 5 of the 1st Agreement that the commission payable to the Defendant included the VAT on sale, there is no mention of VAT on import under that clause either. Tam nevertheless admitted and accepted the Defendant was responsible for VAT on import under the 1st Agreement.

55. Tam's assertion that Chan had told him the Plaintiff had made arrangements with the shops regarding the VAT on sales was never put to Chan when Chan was cross-examined. It was never put to Chan that the Defendant was not responsible for the payment of VAT on sales under the 1st Agreement either.

56. I have already mentioned that the Plaintiff, being a Hong Kong company, could not directly deal with any shops or government authorities in the Mainland. Tam agreed that the Plaintiff could not make payment of the VAT on sales directly to the relevant Tax Department.

57. Tam's assertion that the Plaintiff had arranged with the shops regarding VAT on sales is inherently improbable. One would immediately see that the 35% commission withheld by the shops (商場提成) could not have included any VAT on sales. If the said commission already included the VAT on sales one would have expected such commission to be reduced under the 2nd Agreement since the Plaintiff shouldered the VAT on sales as from 1.7.2001. There is no dispute that the commission withheld by the shop remained at 35% after 1.7.2001!

58. There is also no evidence before me to suggest somehow the shops made payment of VAT on sales to the Tax Department. The evidence shows that as far as payment of VAT on sales was concerned, it was made by the Defendant's Mainland representative (though Tam emphasised that he was talking about electrical appliances, not the Plaintiff's goods).

59. I find it reasonable and irresistible to infer that in respect of the sale of the Plaintiff's goods, if VAT on sales were to be paid at all, the Defendant's Mainland representative would have to make the payment - just as in the case of the electrical appliances.

60. Tam clearly admitted that while the 'old' taxation legislation was in force, it was possible for the Defendant's Mainland representative to avoid payment of VAT on sales by the so-called 'counter' strategy - using invoices issued by other company or companies. I do not accept Tam's evidence that such 'counter' strategy only applied to electrical appliances. I am satisfied, on a balance of probabilities, that such strategy were deployed in respect of the Plaintiff's goods as well.

61. I find that the commission of 33% in the 1st Agreement (which was later increased to 35%) already included the VAT on sales. I find that the Defendant's Mainland representative managed to avoid payment of all or most of the VAT on sales in respect of the Plaintiff's goods sold by shops under the 'old' taxation legislation when the 1st Agreement was in force. It was because of the tightening of the taxation legislation which made it impossible, if not extremely difficult, for the Defendant's Mainland representative to avoid making payment of VAT on sale that prompted ZSWS to cease business.

62. As to the circumstances of how Dong Yi came to exist, I accept Chan's evidence and reject that of Tam's. As far as the Plaintiff was concern, if the Defendant could not act as its Agent as a result of the closure of ZSWS, the Plaintiff would just have to find another agent. There is no evidence to show that only the Defendant could act as the Plaintiff's agent. I accept Chan's evidence that he did not suggest to Tam regarding the setting up of Dong Yi.

63. Even assuming the Plaintiff did make such a suggestion to the Defendant, it is one thing to merely suggest to one to set up another company, quite another to say that the one making the suggestion would have to bear government taxes payable by that new company to its own government, particularly in the absence of very strong evidence.

64. Tam's evidence that the Shenzhen office was set up as a result of the Plaintiff's request is also not credible. The evidence clearly shows that the Defendant was not claiming rental or other usual running costs (such as electricity and water charges) for the Dong Yi office in Shenzhen. The Defendant was not claiming salaries payable to Dong Yi's own staff either. That being the case, it is hard to see how the Plaintiff would become liable to for the said government taxes, even assuming they were taxes levied by the Mainland government on profits made.

65. Although there is no direct evidence before me, it is reasonable and irresistible to infer that Dong Yi did not do all the work for nothing, but expected to make a profit. After all, Tam did tell me that the new taxation legislation made it not worthwhile for ZSWS to continue due to the small profits made! I find it hard to believe that Dong Yi only existed to deal with the Plaintiff's goods and nothing else. Even if it were, any charges levied by the local government on profits made become, in my view, part of the running costs.

66. I find the Defendant failed to satisfy me, on a balance of probabilities, that the Plaintiff is liable for the following charges, namely Maintenance Charges for Dykes (堤圍費); Income Tax (所得稅); Building Tax (承建稅); and the Additional Education Charges (教育附加費)). The Defendant is not entitled to deduct these charges from the net sales proceeds payable to the Plaintiff.

67. As to how the 2nd Agreement came into existence, apart from the demise of ZSWS which I have already made my findings, I find Chan's version credible and reasonable. Where Tam's evidence is at variance with Chan's I reject Tam's. I find that there was never any discussion before or when the 2nd Agreement was reached regarding goods imported before 1.7.2001 but sold on or after that date.

68. Tam's assertions of the stock-list in June 2001 and the accounting principle of "first-in, first-out' were mentioned for the first time during cross-examination. I reject his evidence that he had mentioned such to Chan when the 2nd Agreement was reached.

69. I have already indicated that the Defence and Tam's own witness statement (read in conjunction with the document of Dong Yi for the total sales of 2002) clearly show that the Defendant had adopted Dong Yi's calculation of using 22% for the commission deductible for goods sold from November 2001 to May 2002.

70. It is clear that the Defendant, through Tam, constantly shifted its stance. Tam simply could not reconcile all the different versions he had given in court. Quite how the accountant who had told him (Tam) about the "first-in, first-out" principle ended up not adopting that very principle when preparing the said total sale of 2002 was never explained. I agree with Mr. Kwan's submission that the Defendant's case was 'totally disorganized, illogical and incomprehensible'. I am satisfied that Tam was blatantly telling lies.

71. I find that both parties intended to keep the 1st Agreement alive, so to speak, to cater for sales occurred before 1.7.2001. After all, the way the Plaintiff and the Defendant did business was that the Plaintiff only obtained the net sales proceeds months after the sale. There were bound to be (as indeed shown to be) sales done before 1.7.2001 which were not finalised between the Plaintiff and the Defendant when they entered into the 2nd Agreement.

72. I have already found that there was no discussion as to what would happened to those goods imported before 1.7.2001 but sold on or after that date. I am satisfied neither party had addressed their minds to that issue.

73. After careful consideration of the terms of the 2nd Agreement, in particular when all the calculation were based on the net sales proceeds and not the quantity of goods imported or in stock, I find that all the terms stipulated in the 2nd Agreement came into effect as from 1.7.2001. The Plaintiff has to bear all the expenses and charges stipulated under the 2nd Agreement, which included the VAT on sales.

74. In my view, reading the terms of the 2nd Agreement, it matters not whether the goods sold on or after 1.7.2001 were imported before 1.7.2001. Once the Defendant could show the Defendant's Mainland representative (or its representative) had paid charges or expenses for the goods sold and such charges and expenses were the responsibility of the Plaintiff, the Defendant would be entitled to make the appropriate deductions. In other words, under the 2nd Agreement, upon collection of the net sales proceeds, the Defendant is entitled to deduct the 22% commission and all those expenses payable by the Plaintiff under that agreement, provided the Defendant could prove actual payments had been made.

75. It is clear that when preparing his witness statement Chan got the position right but got it wrong during trial. There is no question of any benefit or advantage to the Plaintiff in respect of goods imported before 1.7.2001 but sold on or after that date. I do not find it strange, however, that Chan made such contradictory assertions as there was no discussion and he had not address his mind to think about such scenarios.

76. I now turn to the goods transferred to Shanghai.

77. I find it incredible that for such an important agreement there is nothing in writing. After all, parties entered into two written agreements to govern their principal/agency relationship in respect of the Guangdong Province! One must also not forget that in the Defendant's original pleaded case, the claim for commission on the transferred goods were based on the 1st and 2nd Agreement. In both its letters dated 18.5.2002 and 4.6.2002 (Bundle 1 pp. 56 & 86)) reference was also made to 'the Agency Agreement signed between parties'. There was never any mention of a separate and distinct oral agreement between Chan and Tam until the Defendant sought an amendment on the first day of trial.

78. On Tam's version, the Defendant would have earned more commission by merely arranging for the transportation of the Plaintiff's goods from Guangdong to Shanghai than by arranging for the goods to be sold at various shops in Guangdong (with all the necessary documentation work and the collection of the net sales proceeds etc. as provided under the 1st and 2nd Agreements). Further, the commission of 35% was, according to Tam, based not on any net sales proceeds (as provided under the 1st and 2nd Agreement), but on the actual sales proceeds. I find Tam's mere assertion hard to believe.

79. On the other hand, on the face of it, it is difficult to see how there could have been no conversation between Chan and Tam regarding the transfer of goods valued at over RMB1 million to Shanghai. Chan said he found it difficult to locate Tam at the time as the Defendant had not paid over the net sales proceeds. I find Chan's assertion credible. It is a fact that the Defendant had failed to make payment for goods sold as far back as February 2001 (the invoices of which were dated June 2001, before the 2nd Agreement came into existence).

80. I note that throughout the trial, Tam constantly referred to the Defendant's Mainland representative as 'we' or 'us'. He clearly found it difficult to differentiate the Defendant (a Hong Kong company) and its Mainland representative. He admitted he himself was involved in both companies, though it had not been made clear in what capacities.

81. Tam admitted that Dong Yi did not even have the money to pay for the VAT on import (RMB12,923.57) and Customs Import Tax (RMB9,478.02) when goods of the Plaintiff were imported in March 2002, resulting in those goods being held at the Customs warehouse until early June (the demand notes from the Customs were dated 30.5.2002 (Bundle 1 pp 201-202).

82. In my view, there is a strong suspicion that the Defendant was unable to make payment when presented with the invoices from the Plaintiff. In any event, I find that the main reason the Plaintiff transferred goods to Shanghai was that the Plaintiff did not want to have large quantities of stock under the Defendant's control. I find that another reason for the transfer was to have the 'old' stock offered for sale in a 'new' environment. I find that the transportations were effected with either Chan or Wu giving instructions to Wong, though Tam was made aware of such transfer when he accompanied Wu to take stock one day in November 2001.

83. Furthermore, there was a provision in the 1st Agreement governing the transportation of goods out of Guangdong (clause 6). Parties had clearly contemplated such events happening as early as 1997. While I appreciate the Defendant's commission was based on sale of goods in Guangdong there was no guarantee that goods imported into Guangdong must stay in Guangdong under the 1st Agreement.

84. Although such a provision was not repeated in the 2nd Agreement, the conduct of the Plaintiff in paying for the transportation charges to Shanghai indicated that the Plaintiff was acting as if that clause was still valid. In any event, it was not the Defence case that it had been deprived of the opportunity to earn commission as a result of a substantial quantity of goods being transferred out of Guangdong. The Defendant claimed there was an agreement for commission at 35% of the sale price.

85. Whether the Plaintiff was acting properly by simply transferring the goods to Shanghai when the Plaintiff and the Shanghai company are, in law, two different entities; or whether the transfer was 'stock internal transfer' or sale, are, in my view, immaterial.

86. It is not in dispute that Chan had made demands for money owed (even on the Defendant's version, Chan had made such a demand orally within a few days after the third lot of goods were transferred to Shanghai). There is nothing to show that the Defendant had responded in writing to the written demand made by the Plaintiff on 27.3.2002 (Bundle 3 p. 814). If the Defendant's assertion were true, in the face of Plaintiff's written demand, one would have expected the Defendant to at least mention the fact that the Defendant was entitled to a set off!

87. I find there was no mention of commission based on the goods transferred to Shanghai by the Defendant until 18.5.2002 - after the Plaintiff had notified the shops not to pass the net sales proceeds to Dong Yi. Even then, the Defendant did not mention any oral agreement between him and Chan.

88. I am satisfied that there was never any suggestion or intention that the Defendant would get 35% commission based on the sales price of the goods transferred to Shanghai. I totally reject Tam's assertion that there was an oral agreement reached with Chan. The Defendant's counterclaim is entirely without merit or substance and I have no hesitation in dismissing it.

89. As fairly conceded by Mr. Chan, the Defendant's allegation that the Plaintiff was in breach in unilaterally terminating the Agency Agreement would only stand if the Defendant succeeds in its counterclaim against the Plaintiff in respect of the goods transferred to Shanghai. The Defendant was clearly in breach of the 2nd Agreement in failing to make payment within two months (Clause 6) and the Plaintiff was fully entitled to exercise its rights to terminate the agency relationship with the Defendant.

Judgment Sum

90. Both counsel agreed (having regard to the admitted facts and the agreed exchange rate from RMB to HK$ under the 1st and 2nd Agreement) that should the Plaintiff succeed in its claim and the Defendant failed in its defence and counterclaim the Plaintiff is entitled to a judgment sum calculated as follows:

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Judgment & Order

91. For these reasons I give Judgment for the Plaintiff and dismiss the Defendant's counterclaim.

Costs

92. As the Plaintiff succeeds in its claim and the Defendant fails in its counterclaim, costs should follow the events.

93. At the end of the trial I have indicated to counsel that I would give a Nisi costs order. I noted at the time this case was transferred from the High Court so I also indicated to counsel that I was minded to allow costs at the High Court scale for those part of the proceedings in the High Court.

94. I have since perused the files and I found that the Writ was originally issued out of the District Court Registry on 6.6.2002 (DCCJ 3454 of 2002). It was on 17.10.2003 that the case was transferred to the High Court upon the joint application by the Plaintiff and the Defendant. I do not have access to the High Court file (HCA 4067 of 2003) so I do not know what had taken place before the case was transferred back to the District Court and given its present case no (DCCJ 6870 of 2003).

95. Since the Plaintiff started its case in the District Court it would be safe to assume that it was as a result of the Defendant's counterclaim that the case was transferred to the High Court at the time. As the case would not have been transferred but for the counterclaim, which I have found to be without substance or merit, I am minded to order that any costs as a result of the transfer to be borne by the Defendant, and in accordance with the High Court scale for costs incurred while the case was at the High Court.

96. I will make the costs order a Nisi one so that parties can come back before me for variation, if they so wish.

ORDER

1. Judgment for the Plaintiff against the Defendant in the sum of HK$356,409.72, with interest at judgment rate from date of Writ until date of full payment.

2. The Defendant's Counterclaim is dismissed.

3. Costs of the Claim and the Counterclaim be to the Plaintiff, to be taxed if not agreed. For the avoidance of doubt, the costs payable by the Defendant to the Plaintiff include the costs of the transfer to and from the High Court and the proceedings in the High Court, if any. Should there be a need for taxation, the costs incurred while the case was at the High Court are to be assessed in accordance with the High Court scale.

4. The said costs order is a Nisi costs order, to be made absolute if no application is made within 21 days from the date of this order.

Dated this 21st day of June 2004.