SHING CHEONG PAPER MERCHANTS LTD v. VITA PRINTING CO LTD AND ANOTHER

DCCJ 5554/2006

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 5554 OF 2006

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

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

------------------------  

D E C I S I O N

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

1.  This is an application for summary judgment under Order 14 of the Rules of the District Court, Cap. 336. The claim is for the price of goods (paper) sold and delivered to the 1^st Defendant (“D1”). The 2^nd Defendant (“D2”) is sued as the guarantor of D1. The amount involved is $210,617.60 (“the Amount”) and is covered by various invoices issued by the Plaintiff dated from October to December 2005.

2.  The 2 Defendants do not deny liability for the Amount. Their liability is, of course, joint and several. They say, however, that they have a Counterclaim against the Plaintiff. The Counterclaim does not concern transactions relating to the Amount. 

3.  The Counterclaim is based on matters stated in paragraphs 4 to 15 below. The Counterclaim is for RMB 40,201.69 (paragraph 12 below) and other damages to be assessed (see draft Amended Defence and Counterclaim at Hearing Bundle page 194 to 199).

4.  D1 was established in Hong Kong in 1997. It is in the paper processing business i.e. processing paper to make items such as “paper card boxes” (paragraph 4 of the affirmation of D2, “the Affirmation”. See Hearing Bundle page 41 to 57). D2 is a Director of D1. In 1998, D1 set up and operated a factory in Shenzhen, Mainland China, called She’an Vita Printing Factory (“the Factory”). The Factory did the actual paper-processing work.

5.  D1 would buy paper for the Factory from suppliers including the Plaintiff. The Plaintiff would import paper into Mainland China to a Fu Tat Paper Products Factory (“Fu Tat”) in Shenzhen Bao’an District. Fu Tat would then deliver the paper to the Factory to fulfil the orders placed by D1.

6.  Mainland Chinese Customs (“Customs”) imposed duty of  17% (at least) on imported paper. Customs, however, operated a quota system. Under this system, merchants would be allotted quota. These merchants could use the allotted quota to import paper. The paper would then be exempt from import duty. D1/ the Factory was allotted quota under this system.

7.   “The 1^st Defendant would not import raw materials into the PRC on its own. Instead, it would purchase raw materials from suppliers in Hong Kong or in the PRC. In order to provide the ordered raw materials to the Factory…free from duty…, Quotas in terms of kilograms for importing duty free raw materials have to be assigned or transferred to the suppliers by the Factory first. It is required by…Customs that sufficient Quotas …have to be assigned prior to the delivery of the ordered raw materials. Assigned Quotas are not reversible…For the sake of convenience and to save administrative costs and time, Quotas would be assigned in excess or in an amount much larger which is sufficient for several purchases by the Factory” (paragraph 6 and 7 of the Affirmation).

8.  “Between June 2002 and December 2005, quotas were repeatedly assigned by the 1^st Defendant to the Plaintiff, total of which is 1,075,327 kilograms. By the end of December 2005, only 981,356 kilograms of paper raw materials were actually delivered by the Plaintiff to the 1^st Defendant. In other words, by the end of January 2006, 93,971 kilograms of paper products…is outstanding…” (paragraph 24 of the Affirmation). Defence case is that “The Plaintiff at all material times, in the whole course of dealings in the period from 2002 to present, well understood and understands its obligation to provide duty free materials to the 1^st Defendant, indirectly through the Factory upon the assignment of the Quota. From time to time between 2002 and 2006, the 1^st Defendant would assign Quota to the Plaintiff in excess or if it is of the view that the Quota assigned would not be enough for the purchase order to be placed” (paragraph 12 of the Affirmation). “The Plaintiff had to provide same quantity of duty free raw materials on request of the 1^st Defendant, amount of which has to meet the Quota assigned.” According to the Defence, this obligation of the Plaintiff was acknowledged by a Mr. Yeung (then sales executive of the Plaintiff) and the Plaintiff (paragraph 13 of the Affirmation).

9.  “Since in or about August 2005, the 1^st Defendant placed purchase orders on (sic) the Plaintiff for paper raw materials by facsimile as usual. However, the Plaintiff frequently contended that they were not able to provide most of the goods ordered by the 1^st Defendant because of out of stock and the 1^st Defendant therefore had to cancel the orders. As the 1^st Defendant had to satisfy its own clients’ order(s) by further processing the materials, the 1^st Defendant had no alternative but ordered the raw materials from other suppliers…This resulted in that there were excess quotas assigned to Fu Tat…the Plaintiff’s inability to provide the goods ordered prolonged, was so frequent and as a result seriously disrupted the operation of business of the 1^st Defendant and provision of its processed goods…” (paragraph 17 to 19 of the Affirmation).

10.  “In or about February 2006, the 1^st Defendant saw that the Plaintiff no longer showed intention to provide duty free materials on the 1^st Defendant’s request. Since then the Factory ceased to assign Quotas to Fu Tat and 1^st Defendant did not place orders on (sic) the Plaintiff” (paragraph 22 of the Affirmation).

11.  The 1^st Defendant had to purchase paper (raw materials) from suppliers other than the Plaintiff with its limited remaining unassigned quota.

12.  The 1^st Defendant also had to purchase/ import paper by paying import duty on various occasions from December 2005 to January 2007. The duty paid amounted to RMB 40,201.69 (paragraph 34 of the Affirmation).

13.  The 1^st Defendant was notified by Customs in or about September 2006 that the quota system would cease in August 2007 because of change of policy. “…the 1^st Defendant is obliged to balance the quotas assigned to its supplier(s) with the quantity of materials actually imported…failure of which penalty of RMB5,000 per 1,000 kilograms of the pitfall (sic) of the balance would be levied on the 1^st Defendant and its supplier separately and severally” (paragraph 10 of the Affirmation). I understood this to mean that the penalty would be imposed for any unused quota.  

14.   The practice of Customs was to “replenish” quota used. Since quota for 93,971 kilograms of paper remained unused with the Plaintiff, the 1^st Defendant did not get this benefit (paragraph 36 of the Affirmation).

15.  Administrative fees for the unused quota remaining with the Plaintiff were wasted (paragraph 37 of the Affirmation).

16.  The Counterclaim seems to proceed on the basis of: a) the Plaintiff is bound to supply paper (whenever) ordered by D1 or b) the Plaintiff is bound to supply paper ordered by D1 to the extent that the quantity ordered is within the quota of assigned but unused quota (see paragraph 8 and 9 above). It is not easy to see how there can be any such obligation. Surely, parties are at liberty to agree or disagree on such matters as price, delivery date etc. Was there a Master Agreement binding the parties to perform in a particular manner and for a particular duration? If so, Defence never even alluded to it. On the affirmation evidence before me, I cannot see how the mere fact of D1 placing an order with the Plaintiff meant that the Plaintiff was bound to accept it and supply the paper ordered. If the Plaintiff were bound as Defence alleged, is D1 also bound to order from the Plaintiff only and not from any other supplier? If there were such mutual obligation, one would expect something in writing to that effect. Nothing in writing was produced or even suggested by the Defence. At best, Defence merely made what I consider a bare allegation that the obligation of the Plaintiff to supply paper was acknowledged by a Mr. Yeung (then sales executive of the Plaintiff) and the Plaintiff (see paragraph 8 above).

17.  Based on Defence case, assigned quota left unused entails dire consequences on D1/ the Factory. Therefore, I find it incredible that quota will be assigned in excess of the quantity of paper ordered. The explanation of “For the sake of convenience and to save administrative costs and time” appeals as hollow and not worthy of credence.

18.  Defence said that D1, under the name of the Factory, maintained an account with Customs. A manual , commonly known as a Contract, was issued by Customs. In the Contract, the quota in terms of quantity in kilograms, description and origin of paper (raw materials) allowed to be imported into Mainland China free of duty was stipulated (paragraph 8 of the Affirmation). The Contract was exhibited and marked as “CST-1” (Hearing Bundle page 60 to 64). I note, however, that there is nothing in the Contract (or in any other document) about replenishment of used quota. There is nothing to show any of the alleged assignment of (excess) quota to the Plaintiff/ Fu Tat (save for an alleged internal record kept by D1 i.e. Exhibit “CST-5”, Hearing Bundle page 76 to 81). There is strangely no documentation evidencing the imposition of penalty by Customs for unused quota (see paragraph 13 above). Though Defence displayed under Exhibit “CST-9” (Hearing Bundle page 127 to 192) a bundle of delivery notes evidencing transactions that allegedly resulted in D1/ the Factory having to pay import duty of RMB 40,201.69 (see paragraph 12 above), there is nothing on the face of those documents indicating duty had been paid. Defence never said, for example, that the stated price already included the import duty. No receipt from Customs was ever produced. There is no explanation from Defence concerning the absence of any of the documentation mentioned in this paragraph. No particulars have been given about  the alleged wasted administrative fees for the unused quota remaining with the Plaintiff.

19.  “ ‘Is what the defendant says credible?’ If so, he must have leave to defend, if not, the plaintiff is entitled to summary judgment. The issue is not whether the defendant’s assertions are to be believed, it is whether those assertions are believable” (per Godfrey J.A. in Ng Shou Chun v Hung Chun San (1994) 1 HKC 155 at 158). “Unless it is obvious that the defence put forward by the defendant is ‘frivolous and practically moonshine’, Order 14 ought not to be applied”: see Codd v Delap (1905) 92 LT510 per Lord Lindley at page 511” (per Godfrey J.A. in Man Earn Limited v Wing Ting Fong (1996) 1 HKC 225 at 228).

20. Based on considerations mentioned in paragraphs 16 to 18 above, I have come to the conclusion that assertions by the Defence are “unbelievable” and that the Counterclaim is “frivolous and practically moonshine.”

21. I order summary judgment for the Plaintiff against the 2 Defendants jointly and severally. There will be interest on the judgment sum of $210,617.60 (i.e. the Amount) at judgment rate from 11 April 2006 until payment in full (10 April 2006 was the last deadline given to D2 to pay sums outstanding including the Amount. See Hearing Bundle page 31 to 40). I make an order nisi that costs of this action (including costs of the present summons for summary judgment) be paid by the 2 Defendants jointly and severally, such costs are to be taxed if not agreed.