IP MAN SUN AND ANOTHER v. HUI CHEONG AND ANOTHER

HCA2370/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2370 OF 2002

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BETWEEN

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JUDGMENT

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1.  The plaintiffs in this action are brothers. They have been in the jade business for many years. The 2^nd defendant is the uncle of the 1^st defendant and they were (and are) also in the jade business. For a number of years, starting from about 1986 to 1993, the plaintiffs and the defendants were co-operating in their business (“the Business”). This action was started because the plaintiffs say that the Business has not been properly concluded with the settlement of accounts and the payment of what is due to them by the defendants. The defendants not only deny owing any money to the plaintiffs, they have also filed a counterclaim against the plaintiffs on the basis that various sums of money should be paid to them by the plaintiffs arising from the Business (“the Counterclaim”).

2.  In a nutshell, this action primarily involves looking at the records of the Business and determining whether there is any outstanding balance due and who is entitled to the same.  Regrettably, the dispute in this action is extensive, starting with the nature of co-operation between the plaintiffs and the defendants (whether it amounted to a partnership) and spreading over to numerous controversies over various details concerning the records.  

3.  Four witnesses had been called in this trial—the 1^st plaintiff (“Ip”), both of the defendants (respectively “C Hui” and “CS Hiu”) and CS Hui’s daughter (“Ms Hui”). 

The nature of the co-operation

4.  It is logical to deal with this issue first. There is a particular significance arising from the determination of this issue. It can readily be seen that the plaintiffs’ claims are quite stale and a limitation period defence naturally comes to mind.  The defendants’ position in this regard has not been consistent.  At the beginning of this trial, Mr Koo, who appears for the defendants, accepted that such a defence does not apply should this court find that the Business was operated under a partnership between the plaintiffs and defendants, because that partnership continued until the commencement of these proceedings (it was implicitly accepted that, under a partnership, the plaintiffs’ causes of action arose on dissolution of the same).  Mr Koo, however, tried to resile from that position in the course of his final submission.  With respect, the concession was rightly made by the defendants—see Lindley & Banks on Partnership, 19^th ed., paras. 23-36, p.700.

5.  The evidence adduced by the parties concerning their co-operation does not differ to a great extent.  Where there is controversy on the evidence, I shall make that clear.  During the years of co-operation and from time to time, Ip travelled abroad with C Hui to buy raw jade stones for trade.  A number of these trips were made to Yunnan, China.  On a few occasions, trips were made to Chiang Mai, Thailand and CS Hui went along.  Most of the stones were uncut and judgment had to be made as to the value of the stones.  It was common in the trade that stone buyers would co-operate in making purchases so as to spread the risk that the stones might turn out not to be worth the estimated value.  There is a difference here between the evidence of the parties.  It is the plaintiffs’ case that a simple oral partnership agreement was made between them and the defendants at the beginning of their co-operation[1].  On the other hand, the defendants said that there was no such agreement and their co-operation was on an ad hoc basis.  They were free to co-operate or not to co-operate on any purchase.  Indeed, they were free to co-operate with other purchasers. 

6.  However, it is undisputed that the co-operation was normally on the basis of 1/3 and 2/3, i.e. the plaintiffs were responsible for 1/3 of the purchase price and other costs, and were entitled to 1/3 of the profits.  Similarly, the defendants’ share was 2/3. 

7.  The stones were purchased in lots and some lots contained a large number of stones.  It is undisputed that the purchased stones were sent to the defendants’ shop in Hong Kong called Mei Mei Jewelleries (“Mei Mei”).  They were resold as soon as possible.  For the stones which could not be sold within a short period of time, most of them were cut and made into jade jewelleries (mostly bangles) or ornaments at Mei Mei which also operated a workshop.  The finished products were sold at Mei Mei and, from about September 1992 onwards, also at a new shop of the defendants called Wonbow Development Ltd (“Wonbow”). 

8.  In respect of the stones which were not cut and remained unsold (“the Remaining Stones”), according to the defendants’ case, they were divided between them and the plaintiffs.  The Remaining Stones constitute one of the controversies which this court will have to resolve and it will be dealt with below.  There were also some leftover materials after the stones were cut.  According to the defendants, such materials were not of significant value.  They would try to sell them and what was left was thrown away or divided between them and the plainiffs.  There is no controversy concerning such materials.

9.  It is undisputed that the decisions on what purchases were to be made, the resale prices and which stones were to be cut were all made with the consent of both sides.

The records of the Business

10.  In respect of the records of the Business, it is agreed that Ip had the responsibility to record the purchases.  It is convenient here to go into a little detail concerning the recording system adopted by Ip.  It should be made clear, however, that the defendants say that the records made by Ip were his own documents and the accuracy of the same is not accepted.  Firstly, the trips were identified by numbers, e.g. the purchase trip made in January 1990 was identified as “90-1”.  In respect of the lots of stones purchased during any particular trip, they were identified using alphabets, e.g. the first three purchases made during 90-1 were identified as “HK(A)”, “HK(B)” and “HK(C)”.  As regards the stones of the individual lots, they were further identified with numbers, e.g. for 90-1, HK(A), there were 73 pieces of stone and they were identified as “(1)”, “(2)”, “(3)”, etc.  The designated “codes” were marked on the stones for identification.  Ip kept such records in booklets[2], each one recording the purchases made on a particular trip.

11.  Ip was also responsible for recording the subsequent disposal of the stones.  For instance, records of resale and what were made from the stones after cutting were recorded by him in other booklets, again with one booklet covering the stones purchased on a particular trip. Other information like the distribution of proceeds were also recorded in these booklets.  Hence, take the 90-1 trip as an example, there were two booklets—one for the purchases and the other for the resale, etc.  From 1991 onwards, for ease of inspection, Ip copied the records from the booklets onto a larger book, with one book for each year. 

12.  As for the Remaining Stones, they can be identified, according to Ip, from his records because he had put a “x” against the stones which were resold and a Chinese character “cut” against those which were cut up.  Hence, the Remaining Stones would be those without a marking. 

13.  In respect of the sale of the jewelleries and ornaments, records were kept of the same at Mei Mei and Wonbow.  From time to time, Ip attended those shops and copied the sale records so that they could be used for distribution of the proceeds between the plaintiffs and defendants. 

14.  According to CS Hui, records in the form of pieces of paper were kept of the Remaining Stones but they had been lost over the years.  No record was kept of the materials left behind after cutting. 

Distribution of proceeds

15.  From time to time, the parties had the proceeds of sale of the stones or the jewelleries and ornaments distributed.  In doing so, an accounting exercise had to be carried out because, e.g. some of the proceeds were received by the plaintiffs and some by the defendants.  I have no difficulty accepting the defendants’ case that, in general, the distributions were carried out as soon as possible so as to enhance the cash flow.  Ip’s evidence is that for those stones which had been taken into account in a settlement exercise, he would highlight the relevant entries in his records with colour so as to make that clear.  Therefore, by identifying the relevant entries which had not been highlighted, Ip would be able to tell which of the stones (or their proceeds) are yet to be accounted for. 

Finding on the nature of co-operation

16.  The above encapsulates the simple manner in which the co-operation between the parties was conducted.  I have no doubt that, as the defendants maintain, their relationship with the plaintiffs was largely based on trust.  On the other hand, equally I have no doubt that the relationship was one of partnership. 

17.  The fact is that the co-operation had lasted a number of years.  Although I have not been told the total number of these purchase trips, it appears that there were quite a number of them.  There were no less than 11 of these trips made between January 1990 and May 1993.  Further, whilst the modus operandi of the Business was unsophisticated, there was a system in place which suggests there was an established relationship.  It was clearly a joint venture entered with a view to profit.  Although I accept the defendants’ contention that the parties were free to co-operate with other purchasers and that, in respect of any particular purchase, they were free to agree to a different sharing ratio (there was at least one purchase which was not shared in a 1/3: 2/3 ratio[3]), it is telling that C Hui agreed in cross-examination that, where there was nothing said in respect of the sharing ratio, the usual 1/3: 2/3 ratio would apply.  This again reflects an established relationship and, more likely than not, something would have been said at the beginning of the relationship to establish it.  Hence, this court accepts the plaintiffs’ evidence in this regard.

18.  However, even if I were to ignore the plaintiffs’ evidence, I find that incontrovertible evidence demonstrates there was a business in common or a community of interest in the adventure of the parties such that the test for partnership has been satisfied (see Chan Sau Kut t/a Yat Fung Construction & Engineering Co. & Anr v Gary & Iron Construction & Engineering Co., unrep., HCA6006/82, paras. 11 to 15). 

19.  I am unable to accept Mr Koo’s submission that the relationship in question was merely one involving repeated joint purchases and that co-ownership of the stones did not turn into a partnership. I find that submission artificial and one which does not reflect the reality of the situation.  I also bear in mind paras. 5-10, p. 84 of Lindley & Banks which is relied upon by Mr Chan, who appears for the plaintiffs.

20.  For completeness, I agree with the submissions of Mr Chan based on Sections 3(1) and 4(c) of the Partnership Ordinance, Cap. 48.  I have also considered Mr Koo’s submissions based on Sections 4(a) and 4(b) of the same Ordinance.

The plaintiffs’ claims

21.  There are two parts to the plaintiffs’ complaint.  It is alleged that in respect of the purchases made during eight trips from January 1990 to July 1992[4], the accounts have not been squared in that (1) some of the proceeds from the sale of jewelleries have not been distributed; and (2) the value of the Remaining Stones has not been accounted for by the defendants.  It is accepted by the plaintiffs that some of the jewelleries in question were in fact sold via Man Cheong Jade Company (“Man Cheong”), a shop operated by another brother of Ip and C Hui. Those proceeds, which amount to HK$125,588, have been received by the plaintiffs and will have to be taken into consideration in settling the partnership account.

22.  Aside from the absence of partnership, two main defences have been advanced by the defendants, namely, (1) that the plaintiffs’ records (upon which their claim is based) are incomplete, inaccurate or unreliable; and (2) all the accounts had been settled some years ago.  In particular, the three 1990 purchases (90-1, 90-6 and 90-11) and the three 1991 purchases (91-3, 91-7 and 91-12) were settled in around July/September 1992 and the remaining 92-3 and 92-7 accounts were settled by around early 1993. 

Credibility

23.  The aforesaid defences turn upon the credibility and reliability of the witnesses and I shall deal with these issues now. 

24.  Ip was one of the most difficult witnesses I have come across in the sense that he had real difficulty in following simple questions and in expressing himself in simple or easily understood terms.  He was in the witness box for the better part of three days and, because of the said difficulties, I paid particularly close attention to his evidence.  I do not take the view that he was a dishonest witness.  I believe that he is unsophisticated and genuinely had difficulties in understanding the questions he was asked because he did not think in the same way as the cross-examiner.  Much by the same token, he had great difficulty expressing himself clearly because he was used to speaking in loose terms, as opposed to giving accurate answers to specific questions. 

25.  To his credit, Ip was quite forthcoming and straightforward in answering some of the questions aimed at contradicting his case.  I have no difficulty in accepting Ip’s evidence concerning the records he kept.  However, the matters in dispute go back many years.  It was accepted by Ip that he no longer (perhaps with rare exceptions) had an independent recollection over the matters.  I therefore give due consideration to the criticisms made by Mr Koo over the reliability of Ip’s records.  I would disallow any item of claim where such criticism is found to be valid.  In other words, whilst I accept that Ip had acted honestly in compiling his records, I agree that the possibility of mistakes in the records cannot be ruled out. 

26.  Neither of the defendants has impressed me as a good witness.  To begin with, there are inconsistencies in their earlier affirmation and pleading compared with the contents of their witness statements.  Such inconsistencies have not been properly explained.  CS Hui was unable to provide a satisfactory answer to almost all the important questions which he was asked in cross-examination.  When he was pressed on the details, e.g. how the accounts were squared with the plaintiffs, he said that they were taken care of by a staff named Tse or C Hui and that he was only responsible for paying the money.  I find such an answer lacking in credibility. I give due allowance for the fact that CS Hui is not a sophisticated person and that the events took place many years ago.  On the other hand, I am unable to accept that, as a businessman, CS Hui was so disinterested in the accounts of his business. 

27.  Further, the defendants’ contention that the accounts for the 1990 and 1991 purchases were all settled by 1992 is contradicted by the admissions made by both CS Hui and C Hui in evidence that it was not the case.

28.  When it came to C Hui giving evidence and being asked about the details concerning the settlement of accounts, he similarly said that he was not clear about the matters and that they were handled by someone else. 

29.  Overall, the defendants’ evidence strikes me as lacking in credibility.  It is unlikely that neither of them had kept a close eye on the money side of the Business.  In addition, I get the impression that they are simply taking advantage of the fact that the events took place a long time ago and the plaintiffs may not be able to prove what is owed to them. 

30.  Ms Hui’s evidence is not challenged in cross-examination.  There is a point which should be mentioned, namely, she had contradicted Ip’s evidence concerning the allegation that, when he examined the sales records at the defendants’ shop, she told him which of the entries belonged to the Business.  I do not see anything sinister in this contradiction.  The events took place a long time ago and the contradiction is probably the result of faulty memory. 

31.  However, I believe that the uncontroversial evidence concerning the inspection of the defendants’ sales records by Ip in as late as 2001 goes some way to support the plaintiffs’ case that there remained various purchases the accounts of which had not been settled.  I see no other explanation for the inspection of the records by Ip or indeed why the defendants allowed him to do so if the accounts were all settled. 

Proceeds from sale of jewelleries

32.  Having dealt with the credibility issue, I can now turn to the first of the plaintiffs’ claims.  I am grateful to both counsel for providing a “Scott Schedule 1” setting out the particulars of the claim and the specific answers advanced by the defendants in connection with each item of claim.  There are altogether 452 items of claim and I took the view that it was essential for the relevant documents to be identified and the defendants to be specific about why the various items should be disallowed.  The exercise has proved to be a useful one.

33.  In light of my findings on credibility, I shall deal with these matters succinctly.  I reject items 315, 333, 396 to 398, 409 and 410.  As pointed out by Mr Koo, the records suggest that these items were the subject matters of joint venture with third parties.  It is doubtful whether the sums in question should be fully accounted for by the defendants as part of the partnership income.  Given the state of the evidence, I would err in favour of the defendants. 

34.  I also reject items 433 and 434 because it was recorded[5] that a “distribution” had been made.

35.  With respect, I reject the rest of Mr Koo’s criticisms of the records as stated in Scott Schedule 1.  They do not cast any doubt in my mind as to the reliability of the records assessed in light of Ip’s evidence. 

36.  Nevertheless, I shall specifically deal with two of those criticisms.  Firstly, it was said that some of the plaintiffs’ records were not reflected in the sales records of the defendants.  Mr Koo conceded that this is a forensic point and not one based upon the evidence of the defendants.  The problem with such a point is that it was never explored in evidence and the unfairness is self-evident.  Further, I accept Mr Chan’s submission that it is the defendants’ own case[6] that their sales records are incomplete and therefore the point goes nowhere. 

37.  Secondly, it has been said that the records relied upon by the plaintiffs did not specify who received the sale proceeds. Again, I agree with Mr Chan that the goods were sold at the defendants’ shops and they must have received the proceeds. 

38.  Finally, as noted in para. 21 above, some of the proceeds were received by the plaintiffs and will have to be reconciled in the final account of the partnership.

The Remaining Stones

39.  In light of my findings on credibility, I reject the defendants’ case that all the Remaining Stones had been divided between the parties.  I have taken into account Mr Chan’s criticism, which is well founded, that not a single document has been produced by the defendants in support of this part of their case. 

40.  The details of this claim are set out in “Scott Schedule 2”.  Mr Koo has made no comment on that document save in respect of items 39, 42 and 63. Against these items, the records show respectively a tick, the word “cut” and a cross.  Those markings cast doubt on these items and I disallow them. 

41.  As regards the value of these stones, Mr Chan has adopted the acquisition value because, for obvious reasons, the stones are not available for inspection and valuation.  I bear in mind that these stones were plainly not the most valuable ones, otherwise they would have been sold some time ago.  On the other hand, there is the inflationary effect since the early 90s and the unavailability of the stones is attributable to the defendants.  In the premises, I accept the valuation adopted by Mr Chan. 

The Counterclaim

42.  I believe that I can deal with the various claims made by the defendants quickly.  Mr Koo has made no final submission in respect of the Counterclaim save as to the claim for the sum of HK$349,000. 

43.  Firstly, it is alleged that the plaintiffs were overpaid a sum of HK$714,101 as a result of previous settlement of accounts. When challenged in cross-examination, neither of the defendants sought to justify their case and explain how the overpayment came to be made.  This reflects poorly on their credibility.  There is no merit in this claim and it is rejected. 

44.  Secondly, it is alleged there was an agreement that the goods sold at Wonbow were subject to a commission charge of 5% and, as a consequence, the plaintiffs are liable to bear 1/3 of the commission charges.  This is disputed by the plaintiffs who say that there was never such an agreement.  I tried to look for a good reason why there was a different treatment for the goods sold at Wonbow compared with those sold at Mei Mei and I can find none.  Further, there is no documentary support for this allegation at all.  In contrast, the plaintiffs’ records at B/19 evidence the fact that a 5% commission was paid to Man Cheong in respect of the goods it sold. Furthermore, I have found against the defendants on their credibility.  In the premises, I also reject this part of the counterclaim.

45.  Thirdly, there is a claim for 1/3 of the expenses incurred for the cutting and processing of the stones into jade products in the sum of HK$166,667 (HK$500,000 divided by 3).  This item is only disputed as to quantum but the plaintiffs are quite entitled to put the defendants to prove their claim.  Regrettably, there is no proper breakdown by the defendants of this claim.  The claim as pleaded is that the total expenses were “no less than HK$500,000”.  There is no proper evidence on the quantification of this claim.  However, given the undisputed fact that expenses were incurred in the production of the jade products, it would be unjust to disallow this claim in its entirety.  Doing the best I can and bearing in mind that the number of jade bangles produced was fairly substantial, I am prepared to award HK$100,000 under this head against the plaintiffs as their share of the expenses. 

46.  Finally, there is a sum owed by the plaintiffs to the defendants as a result of a previous settlement exercise, namely, HK$349,000.  There is no dispute that this sum will have to be set off against the sum owed to the plaintiffs by the defendants. 

Conclusions

47.  I have, in substance, carried out the accounting exercise prayed for by the plaintiffs.  Mr Chan does not in the circumstances press for relief (1) to (4) pleaded in the Amended Statement of Claim.  I will leave it to the parties to do the arithmetics and identify the net sum payable to the plaintiffs by the defendants (“the Net Sum”) in the light of this court’s findings.  Accordingly, judgment in the Net Sum should be entered against the defendants in favour of the plaintiffs. 

48.  I award interest in favour of the plaintiffs on the Net Sum which is to run from the date of the writ at half judgment rate until today and thereafter at judgment rate until payment.  I have discounted the pre-judgment interest rate given the long delay in bringing this action to trial. 

49.  I make an order nisi that the costs of this action be borne by the defendants and the costs of the Counterclaim be borne by the plaintiffs to be taxed if not agreed. 

50.  Last but not least, I thank counsel for their assistance.