NEO DWC LLC v. P.I.C. TECHNOLOGY LTD AND OTHERS

HCA 1271/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1271 OF 2009

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J U D G M E N T

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Introduction

1.  I have before me four summonses.  The first in time is for an order to continue a Mareva injunction.  This is dated 26 May 2009 and is to be found at pages 60 to 62 of the Bundle of Court Documents [“CD”].  The next in time, dated 18 June 2009, is one by the Defendants for leave to withdraw certain admissions made by them in an Admission Form 16C and in a letter of defence served by them on 3 June 2009.  This is at CD/63-67.  The third summons is one dated 21 July 2009 [CD/71-72] also taken out by the Defendants for the Plaintiff to provide security for costs, it being an overseas company.  Finally, I have before me a summons taken out by the Plaintiff dated 16 January 2010 [CD/75-79] for judgment in default of defence to be entered against all 4 defendants.

2.  At the three-day hearing before me the corporate defendants did not appear and were not represented.  The 4^th Defendant, Mr Bowitz, who lives in Germany, attended and argued his case in support of his summons for security for costs to be provided by the Plaintiff and for the admissions to be withdrawn and also in opposition to the Plaintiff’s two summonses.

The background to the dispute

3.  This is by no means a straightforward dispute.  So much becomes immediately apparent from a perusal of the endorsement to the writ [CD/3].  The claim by the Plaintiff, (a company incorporated in the United Arab Emirates [“UAE”]), alleges fraudulent misrepresentation, deceit, breach of contract, infringement of intellectual property rights including breach of trademark, copyright and passing-off.  The monetary claim is for the relatively modest sum of USD1,349,567.20 although in addition, there is a claim for an account and for general damages to be assessed following an inquiry, as well as injunctions associated with the breach of copyright and passing-off claims.  At this stage it is right to say that the copyright and passing-off claims are not being pursued in the Statement of Claim although they are mentioned in the writ.

4.  I will now endeavour to relate the Plaintiff’s case in summary form and indicate, as best as can be followed from the present material, what the defences are.

5.  The 1^st and the 3^rd Defendants are HK-registered companies.  The 2^nd Defendant is a company registered in Singapore and the 4^th Defendant, who has a controlling interest in all of them, is a German citizen resident at Wiesbaden in Germany, although for part of the time that is relevant in this action he had lived in Hong Kong.

6.  The Plaintiff’s case is that the three corporate defendants are the 4^th Defendant’s alter ego through which he has engaged in the manufacture of mobile telephones.  I take the narrative of the relationship of these parties as it is related in the Statement of Claim, although I am very conscious of the fact that much of the factual content is disputed as are the conclusions that the Plaintiff would wish to draw from those facts. Accordingly, I will set out what is there in as neutral way as I am able to.  The Statement of Claim [CD/44-59] is dated 5 November 2009 (filed on 20 November 2009).

7.  Mr Patel, the Plaintiff’s principal, became acquainted with the corporate defendants calling themselves the PIC group through their website.  The PIC group held itself out to be a group with extensive experience in the development and manufacture of mobile telephones and as owners of a PRC manufacturing plant capable of producing mobile telephone moulds and in assembling and manufacturing mobile telephones.  The website also depicted the products which the PIC group had put together and manufactured.  As a result of what he saw on the website Mr Patel contacted the 4^th Defendant and the two met for the first time on 14 October 2006.

8.  It is alleged that at this first meeting and subsequently Mr Bowitz told Mr Patel that PIC had offices and associates in Singapore, South America and Europe and that the group had done many projects for leading mobile telephone companies together with its partner, a Mr Liu, who owned a PRC factory called Aplustec.  As a result of their initial meeting the Defendants and the Plaintiff began working on the development of the Neo 808i mobile telephone which the Plaintiff wished to launch onto the market and from January 2007 the Plaintiff started to place orders for this model of telephone with the first three Defendants.

9.  A written manufacturing agreement was entered into dated 1 February 2008 between the Plaintiff and the first three Defendants under which these Defendants were to supply and manufacture for the Plaintiff the mobile telephones designed by it.

10.  It is pleaded in paragraph 15 of the Statement of Claim [CD/47-48] that the 4^th Defendant (Mr Bowitz) had made various representations to the Plaintiff on behalf of the first three Defendants.  Given their importance I will set these are here:

“(i) The 4^th Defendant orally represented to the Plaintiff numerous times that the Defendants were direct licence holders of the MTK chipset, a key operational component of the Plaintiff’s mobile phones; the 4^th Defendant also sent to the Plaintiff a specification sheet of the NEO phone to be manufactured by the 1^st, 2^nd, and 3^rd Defendants for the Plaintiff, which states that the operating platform is MTK6217 (“the MTK Representation”);

(ii) The 4^th Defendant orally represented to the Plaintiff numerous times, as is reflected by the terms of the Agreement and nature of the Agreement being a Manufacturing Agreement, that the 1^st, 2^nd, and 3^rd Defendants were manufacturers with their own manufacturing capacity, and would be personally performing the manufacturing obligations for the Plaintiff’s mobile phones under the Agreement (“the Performance Representation”); and

(iii) The 4^th Defendant orally represented to the Plaintiff numerous times that either himself or the 1^st, 2^nd, and 3^rd Defendants owned the PRC factory Aplustec (“the Factory Representation”).”

11.  It is the Plaintiff’s case that it would not have entered into the agreement with the Defendants had they not been direct licence holders of the MTK chipset which is a key operational component of the Plaintiff’s mobile telephones.  Secondly, it is averred by the Plaintiff that it would not have contracted with the Defendant’s had it not been told that the Defendants were manufacturers with Aplustec their own factory in the PRC.

12.  Consequent on their agreement, the Plaintiff placed a number of orders with the Defendants.  There was a first 808i order being a consolidation of various smaller orders dating back to January 2007, for 31,000 units of the NEO 808i telephone for a price of USD2,852,000.  This amount has been paid in full by the Plaintiff.  It is pleaded by the Plaintiff that 6,794 units to the value of USD624,048 remain outstanding.  Secondly, the first Ellipse order, this being a different model to the 808i, for 10,000 units was placed for USD1,034,000 which was also fully paid.  888 of these units to the value of USD91,819.20 remain outstanding.

13.  The Plaintiff’s case is that during the course of manufacture and delivery of these orders the 4^th Defendant, in order to persuade the Plaintiff to place further orders and to pay for these before delivery of the first two orders, assured the Plaintiff that the outstanding 6,794 units had been manufactured and were ready to ship but that full payment for this order was required to pay sub-contractors before the order was released and that the delays that had occurred were due to problems experienced by Aplustec with its component suppliers who required 90 days to supply parts for the 808i and the Ellipse models.  This assurance by the 4^th Defendant persuaded the Plaintiff to place a second 808i order for 9,000 of this model for a total price of USD828,000 for which it paid a deposit on account of USD248,400.

14.  Subsequently, it became clear that the 4^th Defendant’s assurances were untrue inasmuch as the outstanding 6,794 models under the first 808i order were not ready for delivery as was the case for the second 808i order.  In those circumstances, the Plaintiff cancelled the second 808i order and demanded the refund of its deposit of USD248,400.  The demand for the refund was declined and the Plaintiff was provided instead with a credit note to be applied to new orders by the Plaintiff.

15.  A second Ellipse order was placed by the Plaintiff for 15,000 of this model at a cost of USD1,551,000.  It paid a deposit of 30%, being USD465,300 made up cash of USD385,300 and USD80,000 from the credit note.  This order was cancelled by the Plaintiff when it became clear that the Defendants were unable to deliver what was still outstanding from the first Ellipse order.  The Plaintiff’s deposit of USD465,300 for the second Ellipse order remains outstanding.

16.  The financial position pleaded by the Plaintiff is that it has paid a total of USD1,349,167.20 to the Defendants against goods which it has never received which the Defendant’s refuse to refund and for which it now sues for the return of.

17.  The Plaintiff has pleaded [paras. 26-30 CD/51-53] its investigations into the non-delivery of the mobile telephones which it had ordered from the Defendants.  It asserts the following facts at paragraphs 27 and 28:

“27.   Through its investigation, the Plaintiff discovered that:-

(i)  The Aplustec factory was a completely separate entity from the Defendants and not owned by the Defendants in any way;

(ii) The Aplustec factory had not been engaged to manufacture the Plaintiff’s Neo 808i phones; instead the 4^th Defendant had engaged the Aplustec factory to manufacture knock-off “NEOi 809” mobile phones (see paragraph 28 hereinbelow);

(iii) The Aplustec factory had experienced no delays or problems and would only have taken 30 days to acquire components from its suppliers and a mere 4 weeks thereafter to manufacture the Neo 808i phones;

(iv) None of the Defendants were directly licensed by MediaTek Inc to use the MTK chipset.

28. Upon further investigations on the knock-off “NEOi 809” phones, the Plaintiff discovered that:-

(i)  The “NEOi 809” phones were knock-off of the Plaintiff’s NEO 808i in the sense that they were not only almost identical in design and shared a very similar name, but also entirely identical on a technical level, including having the same FCC ID (Federal Communications Commission identifier code which is unique to each specific device and non-transferrable) as the one assigned to the Plaintiff’s NEO 808i phone;

(ii) The “NEOi 809” phones were being offered for sale, unbeknownst to the Plaintiff, under the NEOi brand name on Swiss Air and Lufthansa flights;

(iii) When confronted by the Plaintiff on this matter, the 4^th Defendant denied being responsible for this and blamed entities in Shanghai as the ones responsible for manufacturing the knock-off phones; and

(iv) However, notwithstanding that the “NEOi 809” phones somehow contained the same confidential technical information of the Plaintiffs NEO 808i phones, the website http://www.emxi.com selling the “NEOi 809” phone was administered by the 4^th Defendant, and contained references to the 1^st, 2^nd, and 4^th Defendant, with the 4^th Defendant being stated to be the one responsible for developing the “NEOi 809” phones.”

18.  Drawn from these allegations, the Plaintiff pleads that it has been the victim “of a premeditated and fraudulent scheme of the 4^th Defendant, utilising the 1^st, 2^nd and 3^rd Defendants as his corporate vehicles, to defraud the Plaintiff of its money, product information and brand name.” [para. 31 CD/53]

19.  In plain language, it is submitted on behalf of the Plaintiff that it has been taken for a ride by the 4^th Defendant who made a series of very serious misrepresentations, knowing these to be false, to induce the Plaintiff to place very valuable orders with the Defendants requiring it to pay over USD1.3 million.  The simple and crucial facts were and are that the Defendants did not have a direct licences for the all-important MTK chipset, nor did they have their own factory which would have helped them in controlling manufacturing capacity and delivery dates to the Plaintiff’s advantage.  As a result of these lies, the 4^th Defendant not only persuaded the Plaintiff to place the first orders but also the second orders compounded by the further falsehood that the outstanding units were completed and ready for delivery.

20.  In addition to all of this, which has resulted in the Plaintiff being out of pocket in excess of USD1.3 million and short on the units that it ordered, the Plaintiff further complains that the Defendants have exploited, and in effect stolen, its technical data by producing the NEOi 809 “knock-off” telephone by exploiting its brand name in selling the “knock-off” telephones as the NEOi 809.

21.  Based on all of these allegations the Plaintiff has asked for the various heads of relief, which I have already summarised in the prayer of the Statement of Claim.

22.  It has already obtained its Mareva injunction which is seeks to continue, but the amounts held by the injunction are well short of the pleaded monetary claim of USD1,349,167.20 let alone any further damages that it is asking the court to assess and award to it.

The Defendant’s stance

23.  The Defendants started in the litigation by being represented by a very experienced firm of solicitors in commercial litigation of this sort.  Regretably, they no longer appear for the Defendants, having been given leave by the court to cease acting for them.  Mr Bowitz (the 4^th Defendant) is now in dispute with them over their representation and their fees.  For present purposes this is not something I can have regard to.

24.  Mr Bowitz has prepared a very lengthy letter which sets out his and the other Defendants stance in relation to the very serious allegations made against him and through him against the other corporate defendants.  In the course of the three days over which this matter has been argued before me both Mr Yin, for the Plaintiff, and Mr Bowitz have taken me, on occasions in minute detail, through the documentation relating to the technical aspects of the mobile telephones and the other features of the dispute.

25.  Suffice it to say that Mr Bowitz denies any wrongdoing and he has provided, as best he can, what he says are proper explanations for the delays.  As to the misrepresentations, he says that the position was never misrepresented by him to Mr Patel or indeed to any one else.

26.  This is therefore a case where, if there is to be a trial, most of the issues will be in dispute save for the payments that have been made by the Plaintiff which are plain on the evidence.

27.  It should be said that the case itself, certainly from the Plaintiff’s point of view, is beginning to take a rather unpromising aspect.  The corporate defendants are companies with no readily realisable assets in terms of what the Plaintiff, if ultimately successful, can expect to obtain from its judgment against these companies, two in Hong Kong and the other in Singapore.  The 4^th Defendant, whilst not judgment-proof, has no assets in Hong Kong and as a German resident may prove hard and expensive to pin down in producing assets belonging to him against which a judgment might be productively executed, and all of this with the litigation in its very early stages.  From that rather unpromising situation I now turn to consider each of the summonses on their merits.

28.  I propose to take first the Plaintiff’s summons to enter judgment in default of defence which, if successful, would put an end to the matter save for the continuation of the Mareva injunction which would follow as a matter of course.

29.  Next I propose to consider the Defendants’ summons for security for costs.  Even if I were to enter judgment in the Plaintiff’s favour in default of defence, in the event of an appeal, I would need to consider the Defendants summons for security.  I will then deal with their summons to withdraw admissions made on their behalf and finally the continuation of the Mareva injuction.

Judgment in default of defence

30.  The notice to enter judgment in default of defence dated 11 January 2010 [CD/75-79] is taken out under order 19 r. 7 RHC.  There is a difficulty in this matter in that the corporate defendants have not appeared and are not represented.  Mr Bowitz, as director, has not sought leave from the Master to represent the two Hong Kong companies nor has he made any appropriate application to represent the 2^nd Defendant being the Singapore registered company.  Plainly, they must all be in a highly precarious position given their non-appearance and representation before me and the absence of a defence from each of them.  Mr Bowitz does not represent them although everything that he has said on the merits of the case in answer to what Mr Yin has said on the Plaintiff’s behalf stands both in his favour as it does in their favour.  I will return to consider their position in the light of my ruling on this summons in respect of Mr Bowitz case as the 4^th Defendant.

31.  Since the cessation ONC as his and the other defendants solicitors it is Mr Bowitz who has written to the court.  What he has said purports to stand as his replies to the case against him and the other three defendants.

32.  What he has written comes in a series of affirmations CD/291-379.  The substantive affirmations are all dated 11 December 2009.  I have already referred to the fact that they provide a detailed response to the Plaintiff’s case and undoubtedly engage every aspect of the facts and matters relied on in the Statement of Claim.

33.  Given that Mr Bowitz is now without representation and says that he cannot afford a lawyer  I am left in the position of having to rule that his affidavits, appearing at CD/291-279 supra will stand as his defence in this action.  It simply would not be right to ignore what appears there simply because the material contained in the affirmations is not in the form of a formal pleading as would have been prepared by his solicitors had they continued representing him.  Accordingly, I order that these affirmations do stand as his defence.

34.  Mr Yin has taken on the burden of trying to demonstrate that what has been raised in the affirmations simply does not stand up to scrutiny and that the matters raised by Mr Bowitz are bound to fail and that, accordingly, I should not allow these affidavits to stand as a defence.  It is this which has resulted in my having to consider, on occasions in minute detail, the documents that have been filed in court mostly exhibits to affidavits in support of the Mareva injunction and the defendants response when they were still represented by solicitors.

35.  The burden on Mr Yin is an onerous one.  I have to take the pleaded facts in the affirmations of Mr Bowitz at face value.  They represent detailed explanations of what has happened and why orders placed by the Plaintiff have not been completed.  Mr Bowitz has dealt with everything material.  Mr Yin says, in terms, that Mr Bowitz is a crook and has been found to be  one by the United States authorities.  This may well be the case, although Mr Bowitz has tried to explain to me what had happened to cause his difficulties in the United States.  The task that Mr Yin faces is akin to an application by a Plaintiff under order 19 r. 18 RHC to strike out a defence.  In the face of what Mr Bowitz has related in his affirmations it is simply not open to me to say that what he has asserted is doomed to fail and that for this reason it would be pointless to let these affirmations stand as his defence.  This is a reasonably complicated commercial dispute which will need to proceed to trial.  I am bound to say that even if Mr Yin had come under Order 14 RHC for summary judgment, a less onerous task than under order 19 r. 18, what Mr Bowitz has raised would entitle him to unconditional leave to defend.

36.  In such circumstances and for all of these reasons, the application to enter judgment in default must stand dismissed.

37.  As I have said, what Mr Bowitz has set out in his affirmations purport to stand for himself and for the three corporate defendants.  What should I do about them where they have not appeared and are not represented?  In the circumstances, I do not think it would be right to enter judgment in default of defence against them on what would be a technicality albeit a fundamental one.  I am going to give Mr Bowitz 49 days (7 weeks) from the date of this judgment to apply for and obtain an order from the court to represent the two Hong Kong companies as their director and to make an appropriate application on behalf of the Singapore company to secure formal representation of them by him before this court.  Once he has done so, I will allow the affirmations which he has affirmed to stand as their defences as well.  Unless that important formality is complied with, I would have thought that the Plaintiff would be entitled to its judgment in default.  This, therefore, is all that I wish and need to say about the summons save for costs which I will deal with at the end of the judgment.

Security for costs

38.  Prima facie the Defendants are on strong ground for such an order where the Plaintiff is an overseas company and where the Defendants have already accumulated a considerable liability for costs when represented by their former solicitors.  This summons under order 23 r. 1 RHC is at CD/71-74.  The authorities show that the Order confers a discretion on the court whether or not to order the giving of security.  I need to look at all the circumstances of the case.  One important circumstance is the merits although as was made clear by Browne-Wilkinson VC in Porzelack v Porzelack [1987] 1 WLR 420, the merits either way would need to be particularly strong before their impact could be felt in the exercise of the court’s discretion.

39.  Whilst the Plaintiff does have a compelling case against these Defendants it is, at this stage, not one that I am able to say is so likely to succeed that I should take the merits into account as a reason for not ordering security.

40.  Nevertheless, I feel that I ought to have regard to two features which do militate against the order that is asked for by Mr Bowitz.  Firstly, the fact that the Plaintiff has paid the Defendants over USD1.3 million without, by any means, receiving anything like the telephones that it had ordered and paid for.  And so, the Defendants do have this money on account as it were.  The giving by them of a credit note in these circumstances is no substitute for the refund that was asked for by the Plaintiff and refused by the Defendants.  Secondly, I consider that Mr Bowitz’s recent conduct in relation to the provision of an address for service either here or in Germany has been most unhelpful.  He has, to say the least, being reticent in providing a residential address for himself in Germany nor an office address.  The post office box in Wiesbaden is no substitute.  So far as Hong Kong is concerned, he provided the address of an accounting firm in Times Square for service on the basis that this firm would do what is necessary on his behalf in terms of seeing to it that he received any communication from the Plaintiff’s solicitors and from the court, but his turned down to be ineffective.  The firm of accountants refused to accept service and the Plaintiff’s solicitors had to collect bundles that they had sent there for Mr Bowitz attention.  All of this therefore was a complete waste of time and expense for the Plaintiff and its solicitors.  I am not satisified that Mr Bowitz, on present form, has shown himself sufficiently co-operative with his opponents or the court.  If anything, at this stage, although he of course did turn up for the three-day hearing in March, I have the sense that he is trying to do as little as possible in co-operating to get on with the case against an opponent that is anxious to get on and bring the action to trial.

41.  To order the Plaintiff in this climate to give security would offend the court’s sense of justice and for these reasons I decline to order security for costs.  This summons will therefore stand dismissed.

The summons to withdraw admissions

42.  This summons is at CD/63-67 and is supported by Mr Bowitz affirmation of 19 June 2009 CD/153-159.  The forms which were sent in by Mr Bowitz, which he now seeks to withdraw, was before he and the Defendants were represented by solicitors.  The matter has moved on since then and it is clear that the Defendants are fully contesting the action.  I have not really heard any argument on this summons but in terms of the reality of the matter it is clear that the admissions, such as they are, should be treated as withdrawn and this is the order that I propose to make which I do in terms of the summons.

The Mareva injunction

43.  This summons is at CD/60.  It is beyond argument that this injunction should be continued.  There is no question that the Plaintiff has shown a serious question to be tried and overwhelmingly the balance of convenience favours the grant of the injunction.  In any event what is held under the order is well short of the full worth of the Plaintiff’s claim if ultimately successful.  I will order the injunction to continue until trial or further order.

Summary

44.  (i)  The summons for judgment in default will be dismissed except, in the case of the corporate defendants, that within 49 days (which is generous) Mr Bowitz obtains leave to appear on their behalf otherwise judgment will be entered against them in default of defence.

(ii) The application for security for costs will stand dismissed.

(iii) The application for admissions to be withdrawn is allowed.

(iv) The Mareva injunction will continue until trial or further order.

Costs

45.  This will be an order nisi.  Overall, honours have been shared.  I will say that the costs of each of these summonses will be in the cause.