CHIIN CHWANN CO. LTD. v. EUROTRUCK LTD.

HCA4991/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.4991 OF 1999

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J U D G M E N T

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1. The plaintiff is a vehicle parts supplier, incorporated in Taiwan. The defendant is a member of the Ankor group of companies, incorporated in Hong Kong. At the relevant time, its business was the supply of buses. It imported chassis made by Iveco S.p.A. of Italy, had bus bodies built on to them, and then sold the buses. One of the companies which it employed to build the bus bodies was Delta Automotive Pte. Ltd ("Delta"), a company incorporated in Singapore. The plaintiff supplied parts and components, and particularly seats, for these bus bodies. The defendant also employed a local coach-building company called Leader Engineering Co. Ltd ("Leader").

2. The plaintiff's case is based on a series of seven agreements which it says it had with the defendant and Delta. The First Agreement was reached in about January 1996, when it first began to supply parts and components to Delta on the introduction of the plaintiff. The Agreement was that in the event of Delta failing to pay for parts and components, the defendant would pay the plaintiff for them, and then offset what it had paid to the plaintiff against what it had to pay to Delta for the bus bodies.

3. The Second Agreement came in October 1997. Delta had made some buses, and delivered them to Hong Kong. The defendant's customer wanted leg rests fitted to the seats though this was not in the original specifications. The plaintiff supplied the defendant with the leg rests at a price of US$1,800. The goods were sent to the Leader Engineering Co. Ltd, for installation on the buses. The plaintiff issued Invoice No.97102001 to the defendant for US$1,800. Delta however agreed to reimburse the defendant for this.

4. The Third and Fourth Agreements came in December 1997 and March 1998. Delta ordered two loads of components which the plaintiff delivered, and invoiced Delta for US$48,930 and US$28,278 for them.

5. The Fifth Agreement came in May 1998 when Delta ordered components worth US$53,219 from the plaintiff which were not delivered.

6. At this time, Delta was in financial difficulties. The plaintiff therefore on 19 May 1998 demanded payment from the plaintiff of a number of invoices which it had issued for goods supplied to Delta; but the defendant did not pay them. These were:

Invoice	Amount			Issued to	Date
97102001	$1,800			Eurotruck	21/10/97
97122201	$48,930			Delta	20/12/97
98030501	$28,278			Delta	5/3/98
98032101	$24,562			Eurotruck	21/3/98
98052801	$4,000			Eurotruck	15/4/98
98042201	$23,648			Eurotruck	22/4/98
98052801	$64,419			Eurotruck	28/5/98

7. The total of these invoices is US$195,637.00.

8. Then on 23 May 1998 there was a meeting in Singapore between representatives of the plaintiff, the defendant, Delta and KPMG Peat Marwick, who were appointed liquidators of Delta on 28 May. At this time, Delta was working on an order of 10 buses for the defendant. The agreed price was S$660,000. At this meeting the Sixth Oral Agreement was made, whereby it was agreed that the defendant would take the unfinished buses and pay S$192,200 for them, and at the same time would pay off Delta's indebtedness to the plaintiff.

9. The Seventh Agreement came on 5 June 1998 when, on the plaintiff's case, the defendant orally agreed to pay a total of US$132,227 to the plaintiff to settle various sums outstanding from Delta, by one instalment of US$47,538 payable on 16 June and the balance of US$84,689 payable on 6 July 1998. It is agreed that the defendant paid on 17 June 1998. This was followed by the Eighth Agreement on 14 August 1998 whereby the defendant agreed to pay the balance of US$84,689 in two instalments, and confirmed this in writing. However, it was never paid.

10. The defendant's case is that there was never any guarantee agreement in early 1996. The leg rests valued at US$1,800 delivered to Leader were not the subject of any agreement between the parties; they were a matter between the plaintiff and Delta. The rest of the invoices are a matter for Delta. The only agreement made in Singapore on 23 May 1998 was that the defendant would take and pay Delta for the unfinished buses, and would buy seats for them directly from the plaintiff, in order to finish them. There were 10 sets of seats. Nine sets were delivered, after which the defendant paid HK$368,419.50 as the price of the nine sets. There was no Seventh Agreement and the letter on which the plaintiff relies as evidence of the Eighth Agreement was written by an officer of the defendant under a mistake, and following misrepresentations made to him that an agreement had been reached.

11. The witnesses in this case are Mr Tsai Kin Hai, PW1, the managing director of the plaintiff; Mr William So Chie Chian, PW2, the managing director of Delta; Mr Frederick Ho Kam Chuen, PW3, who was at the relevant time the sales manager of the defendant for the purposes of selling buses, as well as the director of one Leader Engineering Co. Ltd; Mr David Yeung (or Young) Wai Chung, DW1, who was the defendant's general manager in 1996 at the time of the alleged first oral agreement; and Mr Lau Wing Yuen, DW2 who was the defendant's financial controller. Mr Lau in fact represented the defendant at the trial, having obtained leave from a master to do so. In addition, there were two persons who did not give evidence, but who figure prominently in the case, namely Mr Patrick Wong Ming Yin, who was the defendant's general manager in 1998, and Mr Luiz Antonio Souza, who was a director of the defendant, in charge of its finances, at that time.

The First Oral Agreement

12. It is pertinent to note from the outset that the plaintiff's pleaded case is not what it originally was. In the Statement of Claim dated 24 March 1999 there were no averments of any oral guarantee agreement in January 1996. The First Agreement was that of October 1997 and was stated to be between the plaintiff and the defendant. Delta simply did not come into the picture. The agreements in December 1997 and March 1998 were stated to be between the plaintiff and the defendant, with the goods delivered to Delta, and Delta instructed to pay for them on the plaintiff's behalf. The next agreement for goods worth US$53,219 was averred to be between the plaintiff and the defendant. There was no mention of any tripartite agreement in May 1998 between the plaintiff, the defendant and Delta. As to the June meeting, the averments are that the defendant then agreed to pay for all the goods ordered, including those shipped to Delta, according to the timetable.

13. The plaintiff's case as it then stood was supported by witness statements of Messrs Tsai and Ho dated July and August 1999. The Statement of Claim was amended on 26 April 2000, after leave had been given to set the case down for trial. Supplemental statements of the plaintiff's witnesses, reflecting the amended case, were filed in July 2000.

14. Evidence for the plaintiff on this agreement comes primarily from Messrs Tsai and Ho although Mr Ho claimed to know of its existence. They say that there was a meeting in January 1996 Mr Yeung's office, when the latter introduced Mr Tsai to Mr So, to see if he could supply spare parts to Delta for the buses that Delta was making for the defendant. Mr Tsai says that Mr Ho was also present, but this does not appear from the evidence of Mr Ho himself or Mr So. Delta was a new company and Mr Tsai thought its finance was not steady. It was agreed that the plaintiff would supply parts to Delta and if Delta did not pay, the defendant would pay the cost of the parts directly to the plaintiff and subtract the money from what it owed Delta. In fact, Mr Yeung agreed this on behalf of the defendant.

15. According to Mr Tsai, the agreement covered not only parts supplied for fitting to buses which Delta would build for the defendant, but all parts supplied. According to Mr So, the defendant and Delta had similar arrangements in respect of other parts suppliers.

16. Mr Yeung gave evidence. No witness statement had been filed, although he had written a letter to Mr Lau denying the existence of the alleged agreement, and the contents of this letter were known to the plaintiff. His evidence was quite simply that no such agreement had ever been made.

17. Mr Lau's evidence was also that there was no such agreement. The defendant was never responsible for settling the invoices of suppliers to Delta, on Delta's behalf. There was a general bus-body agreement between the defendant and Delta which provided that if there was any dispute as to the specifications Delta had to rectify these at its own cost before the balance of its fees was paid.

18. Mr Lau said in his witness statement that the defendant never had any direct dealings with the plaintiff before Delta went into receivership, though as is apparent from the 1996 invoices referred to below, as well as the so-called second oral agreement, that cannot be entirely correct.

19. Mr Tsai and Mr So were cross-examined at length about this agreement. What emerged was that there was no formal arrangement, or none that anyone could point to, for implementing it. There seem to have been no proper accounting arrangements. Mr Tsai said that he gave no periodic statement to the defendant of what Delta owed to the plaintiff. Mr So, who could not even remember how many times he had invoked the agreement, said that he would simply negotiate by telephone or in person with the defendant for payment of an outstanding invoice issued by the plaintiff. However there was no question of any credit note to cover the non-payment of the invoice issued to him; he would just send that back to the plaintiff. He did not know if the plaintiff would re-issue the invoice to the defendant.

20. As to why the first agreement was never originally pleaded or covered by any witness statement, Mr Tsai said that he had originally forgotten it but his memory had been refreshed by two invoices dated in August 1996, for goods supplied directly from the plaintiff for fitting to buses which Delta had built. Mr Lau was able to produce some other documents relating to these invoices, including a calculation made by Mr Ho, and both he and Mr So were cross-examined at length on these. They maintained that these were an instance of the operation of the guarantee agreement. However the simple fact is, as Mr Lau put it to Mr So in cross-examination, that there was nothing in the invoices to show that they were not for goods shipped directly to the defendant, and paid for directly by the plaintiff. It appears from Mr Ho's evidence that the goods concerned were mainly upgraded seats, which a customer wanted to have fitted in place of those fitted by Delta. It was his understanding that the seats were physically sent to Singapore and there fitted by Delta. However, Mr So could not, it appears, remember much about this transaction. He could not remember if he had failed to pay the plaintiff for the seats and he could not remember if the money paid by the defendant had been deducted from the final payment to Delta.

The Second Oral Agreement

21. There is ample evidence on the plaintiff's side that the plaintiff sold directly to the defendant some bus seat leg rests at a price of US$1,800. Buses made by Delta had already been delivered to Hong Kong but the customer wanted leg rests fitted, and so this was done by Leader. The plaintiff's witnesses say that this extra fitting, over and above the job specifications, was to be paid for by Delta. The job specifications were altered by Mr Ho and communicated to Mr So who signed the alteration in agreement.

22. Mr Lau says that the defendant paid Delta the full agreed price for the buses concerned. He would have been informed of any fitting of leg rests to the completed buses, and since this would have been the responsibility of Delta in any event he would have held back payment until Delta had rectified the problem.

The Third and Fourth Oral Agreements

23. These were for goods supplied directly to Delta. The plaintiff relies on invoices to Delta, and the same letter from the liquidator indicates that these two invoices appeared to be outstanding. Mr Lau says in his statement, which he adopted, that the school bus seats referred to in Invoice No.9712201 would never have had anything to do with the plaintiff, which only had tourist buses, and not school buses, built on its Iveco chassis.

The Fifth Oral Agreement

24. Mr Tsai says that this was for US$53,219 for goods ordered by, but not shipped to Delta. It appears, again from the liquidator's letter, that Invoice No.98052801 was outstanding for this sum. An invoice with that number for US$64,419 was included with Mr Tsai's letter of 19 May to the defendant. This is the only invoice before me. It is for seats worth US$52,820 and glass holders worth US$399, the total of which is US$53,219 plus rubber carpet worth US$11,200. I will deal with this in more detail below.

The Sixth and Seventh Oral Agreements

25. According to the plaintiff's witnesses, this took place at Mr So's office on 23 May 1998. Present were Mr Tsai, Mr Patrick Wong of the defendant and Mr Ho, in his capacity as the defendant's sales manager and a director of Leader, Mr So himself, and two officers of KPMG Peat Marwick, which was appointed liquidator of Delta on 28 May.

26. At this time the defendant had placed an order with Delta for 10 airport shuttle buses at a total price of S$660,000. They were not finished. They needed in particular the plaintiff's 19 sets of seats shown on Invoice No.98052801. Mr Tsai would not deliver them unless he was sure of being paid. Delta owed the plaintiff US $132,227, under the Second, Third and Fourth Oral Agreements. It was agreed that the defendant would buy the unfinished buses from Delta for S$192,200. The plaintiff would also pay what Delta owed to the plaintiff. The agreement was approved by the liquidator's officers.

27. Mr Ho made a note of the agreed figures which actually appears to be in the form of an invoice or an estimate for Leader to do the job of finishing the 10 buses. It shows that S$190,200 was indeed to be paid to Delta, and that S$217,000 was to be paid to "Ming Hai" which Mr Ho says is a sister company of the plaintiff. A further S$40,000 was to be paid to Leader. Delta owed this to Leader for after sales service which Leader had carried out on the buses it had built. Mr Ho did not explain the figure of S$217,000 but applying his exchange rate of Singapore to Hong Kong dollars of 1:4.7 and then applying the US dollar rate it appears to be about US$132,000.

28. The witnesses all seem to agree that this arrangement was made in order to get Mr Tsai to deliver the seats. Without them the buses could not be finished. No other company but the plaintiff could supply those same seats.

29. That the liquidator's officers should have agreed to such an arrangement seems very surprising to me. It appears to be a fraudulent preference, the sort of thing a liquidator would apply to the court to have set aside. However there is no evidence about the relevant Singaporean law. It is noteworthy, however, that while the figure of $190,200 appears in a letter from Delta to the liquidator and a letter from the defendant to Delta, both dated 25 May 1998, there is no mention in those letters or in any other document apart from Mr Ho's note, of anything to be paid to any other company.

30. Turning to the Seventh Oral Agreement, according to Mr Tsai this was between himself, Mr Wong, Mr Ho and Mr Lau on 5 June 1998. It was agreed that the defendant would pay the three outstanding Invoices, i.e. Nos.97102001 for the leg rests, 9722201 and 98030501 which had been issued to Delta, and US$53,219 of 98052801; the balance of US$11,200 to be paid by Leader. The timetable for payment was also agreed.

31. Curiously, although Mr Tsai says that Mr Ho was at this meeting, there is no evidence to this effect from Mr Ho. According to Mr Lau's statement, he had a meeting about this time with Mr Tsai, who was still trying to get the defendant to pay all the invoices listed on his letter of 19 May. At this meeting the sale of the seats, to finish the buses, was discussed and agreed.

32. This part of Mr Lau's statement is incorrect, as is his assertion that the plaintiff and the defendant had not direct dealings before Delta went into liquidation. However that is perhaps understandable because it seems he made his statement from the financial records originally.

33. What he said under cross-examination was that Mr Wong brought Mr Ho to his office. He knew already of the agreement to buy the seats, reached in Singapore. This was the only agreement he knew about. Mr Ho told him that Delta had not paid the plaintiff a certain sum; but he knew this anyway from Mr Tsai's earlier letter.

34. He and Mr Tsai discussed payment terms. Mr Tsai wanted to be paid before he shipped the seats. It was agreed that the defendant would pay for the 10 sets of seats, but not for anything else.

35. In fact, nine sets of seats were delivered on about 7 June. There is a fax from Mr Ho to that effect. The packing lists are before me and show, included with the seats, glass holders such appear on the invoice. Mr Lau says he does not know anything about these; they were not for his buses.

36. It is not in dispute that the defendant paid HK$368,419.50 into the plaintiff's bank account on 16 June 1998. Mr Lau says that this was the price of the nine sets of seats delivered. The other set was delivered later and was to be paid for later. In fact the figures agree with this. The invoice shows a price of US$52,820 for 10 sets; nine sets would therefore cost US$47,538 or HK$368,419.50 at an exchange rate of 7.75. This actually agrees with the plaintiff's pleadings.

37. There is no particular explanation from Mr Tsai as to why an initial payment of US$47,538 should have been agreed. To be fair, it was not put to him that this must represent payment for the nine sets of seats; but that is what it must represent.

38. It is clear that there must have been some discussion of the invoices generally between Mr Lau and Mr Tsai. Mr Lau it appears wrote on them; he wrote "Leader" against the entry for $11,200 on the latest invoice. He then wrote to the liquidators on 8 June 1998 to the effect that the plaintiff had told the defendant that Delta owed them US$195,637 for seats supplied for the Iveco buses, sending them the invoices, and asking for confirmation. The liquidators replied on 13 July 1998 that Delta appeared to owe the plaintiff US$132,227 on the four invoices concerned in this case (except that, as noted, No.98052801 was for US$53,219 only).

39. Mr Lau said that he had sent the letter on the instructions of his superior, Mr Souza. He was asked why he had sought this information at all, if the plaintiff's position was that it would only pay for the seats, and nothing else. His answer was that the company had to consider some possible ex gratia payment to the plaintiff. Such a payment might have been made, once all the buses had been delivered to and paid for by the customer.

40. I note here that Mr Tsai was asked about the other three invoices, on which he had sought payment from the plaintiff. He said that these had been paid by Leader. They were, according to him, for parts for bus bodies made by Leader for the plaintiff. Leader did not pay up so he tried to get the money from the plaintiff but when Leader paid he did not claim further against the plaintiff. There is actually no evidence from Mr Ho on this point.

41. Another curious little historical fact concerning the plaintiff's attempts to obtain payment is that by a solicitor's letter of 10 March 1999, the plaintiff claimed payment of Invoice Nos.97102001 (for the leg rests) and 98052801 (which included the seats) from Leader, on the basis that the parts had been delivered to Leader. Leader's reply was to direct the solicitors to the defendant.

The Eighth Oral Agreement

42. Evidence on this comes from Messrs Tsai and Ho. Mr Souza, who wrote the letter, has not given evidence. All we have is Mr Lau's hearsay of what Mr Souza told him later.

43. According to Mr Tsai he went to the plaintiff to demand payment of the agreed second instalment; he saw Mr Ho and Mr Souza; and payment was agreed in terms of the letter.

44. According to Mr Ho, Mr Tsai came looking for his money; he took him to Mr Souza. The latter said that money was very tight, but wrote the letter to the effect that the defendant would pay up if it got the balance due to it from Airport Shuttle, the customer. He said that Mr Tsai did not understand the content of the letter; only that he would get $84,000. Mr Ho did not explain it to him. Ultimately the defendant had received its money from Airport Shuttle. He also said that Mr Souza had asked him when he expected payment from the customer, and that he had looked in a file and said, from what he saw there, that it was clear that the defendant owed the plaintiff this money.

Evaluation

45. I found the evidence of the plaintiff's witnesses on the First Agreement most unsatisfactory. There was never any sensible explanation as to how this first agreement came to be overlooked when the action was started, from either Mr Tsai or Mr So. There was never any sensible explanation as to how, if there was a guarantee agreement, the parties would account for payments made under it. These were quite large concerns, and in particular the defendant was part of a larger group of companies with a central accounting and financial department. It is most unlikely that if there had been such an agreement, which itself seems strange especially if it entailed the defendant acting as a kind of banker for Delta to cover all its purchases from the plaintiff, that there would not have been some formal accounting arrangements between them to implement it.

46. It is of course true that the plaintiff wrote to the defendant on 19 May 1998 to the effect that because Delta had failed to propose any plan for settling outstanding payments, it would stop supplying them to Delta, hoping that the defendant would procure parts needed for its buses directly, and asking the defendant to pay some seven invoices directly and enclosing them or copies of them. Mr Tsai says that he wrote this letter because he knew that he could be paid under the guarantee agreement. However there is no reference to such agreement. Further according to Mr Tsai three of the invoices were ultimately paid, not by the defendant to whom they were addressed but by Leader.

47. The fact that this First Oral Agreement was never originally pleaded, when it is obviously of major importance to the relationship between the parties, itself suggests that it has been made up later. There is no satisfactory evidence to support it and one of the persons who is said to have made the agreement denies it.

48. I do not believe that the First Oral Agreement ever existed.

49. As to the Second Agreement there is nothing to contradict the evidence that the leg rests were delivered to Leader for fitting. They must have been fitted to the completed buses. There is no dispute that this would have been a matter for Delta, either on Mr Lau's evidence of how business was done between them generally, or on Mr So's acceptance of it. Although the plaintiff seems to have issued Invoice No.97102001 to the defendant for these parts, correspondence from the liquidator to the defendant, on 13 July 1998 indicated that this same numbered invoice appeared to be outstanding by Delta to the plaintiff.

50. I am satisfied that the sum of US$1,800 was payable by Delta to the plaintiff.

51. The invoices concerned in the Second and Third Agreements were issued to Delta for goods shipped to Delta. In the absence of any First Oral Guarantee Agreement there would be no legal reason for the defendant to pay these, or that for US$1,800 for Delta.

52. The problems arise when we come to consider the agreements which are said to have been reached in the meetings in May and June 1998. There is no evidence to contradict what the plaintiff's witnesses say about the meeting in Singapore in May, but I have to say that it is very curious, if everyone thought that there was an agreement that the defendant was to pay the debt of a company in liquidation, amounting to US$132,227, that there would never have been anything about it in writing.

53. The plaintiff's witnesses have clearly concocted an untrue story about a guarantee agreement. Perhaps that was seen to be necessary in case any problems arose later out of what appears to be a scheme whereby the plaintiff and Leader would be paid in full instead of having to rank with other creditors in the liquidation of Delta. I do not know. But the point is that the rest of their evidence has to be looked at in the light of this untruth.

54. It is difficult to see why, if all the defendant needed from the plaintiff to get its buses completed was the seats (and although Mr Ho's note refers to other parts it does not appear that they came from the plaintiff) the defendant would have agreed to accept liability for US$132,227 in order to get its hands on US$58,000 worth of seats. It seems more likely that anyone in the defendant's position would agree to pay for what it got while leaving discussion of the rest of the claim open, in case outright refusal would result in complete disagreement.

55. What is quite clear is that the defendant did pay only for nine sets of bus seats. There is no explanation from the plaintiff's side as to why the agreement on which it relies should have included a specific payment which could only be for this.

56. It is also clear that Mr Tsai was casting around, both before and after the Singapore meeting, trying to collect the money he knew he would never see from Delta, from both the defendant and Leader.

57. Mr Lau says that the only agreement made in June was to pay for the bus seats. The rest of the plaintiff's claim seems to have remained under discussion with a view to a possible ex gratia payment at some later stage. Mr Lau relies on his own letter to the liquidators, for confirmation of what was outstanding, in support of this. In fact the terms of Mr Souza's letter also seems to support it because it says that payment is dependent on receipt of the balance due to it from Airport Shuttle. It is not an outright acknowledgment of debt.

Finding

58. I am not satisfied that the Sixth, Seventh and Eighth Agreements relied on by the plaintiff ever came into being. The only agreement between the parties was that for the purchase and sale of the 10 sets of bus seats.

59. Mr Lau says that no direct payment has ever been made for the remaining one set of bus seats. It would follow that the plaintiff should have judgment for the price of them.

60. There will therefore be judgment in favour of the plaintiff for US$5,282 or its equivalent in Hong Kong dollars, with interest thereon at the judgment rate from the date of the writ until payment.

61. As to costs, since the plaintiff has succeeded in part it should have at least some costs. It is now awarded an amount which was within the jurisdiction of the District Court at the time the writ was issued. Accordingly the costs (nisi) will be to the plaintiff on the District Court scale to be taxed if not agreed.