XCHRX EUROASIA DOCKYARD ENTERPRISE AND DEVELOPMENT LTD. v. FOREDRAGON SHIPPING LTD.

A7554/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.7554 OF 1998

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DECISION

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1. This is the Defendant's appeal from the decision of the Registrar giving summary judgment in favour of the Plaintiff.

Factual background

2. The Plaintiff was and is in the container business, providing services to shipping companies. It is common ground that the Defendant company operated as a middle-man. It had its own clients, for whom it would, as agent, arrange services which would actually be provided by the Plaintiff. The Defendant derived its profit from the difference between the fees paid to it by its clients and the service charges which it would have to pay the Plaintiff.

3. However (and this is common ground) by July 1995, the Defendant owed the Plaintiff some $13.15m. in outstanding service charges.

Proceedings

4. The Statement of Claim, which was issued in 1998, included in a schedule a Statement of Account from 31 December 1994 to 31 July 1995 showing the Defendant's indebtedness in the sum of HK$13,150,503.10.

5. The Defence and Counterclaim alleged that by an agreement made in September 1995 between the Plaintiff and the Defendant and China Merchants Godown, Wharf & Transportation Co. Ltd. ("CM Godown") a company associated with the Plaintiff, it was agreed, amongst other things, that the Plaintiff would "take over the business of the Defendant as from 25 September 1995".

6. The Defendant alleged that as a result of this, the Plaintiff had received payments made by the Defendant's clients, and it alleged that the Plaintiff has failed to account to the Defendant for the profits realised by the Plaintiff from the Defendant's contracts with its clients after deducting reasonable charges for services performed by the Plaintiff. The Defendant claimed a set-off and counterclaim.

7. As the present proceedings are proceedings in which the Plaintiff is applying for summary judgment, it is necessary for the Defendant to satisfy the Court that it is entitled to a set-off if it were to avoid judgment being entered against it on the claim.

Set-off

8. At the hearing before me, two aspects of set-off were raised:-

(i) the Defendant claimed to set-off a sum of $2,928,174.91 admitted by the Plaintiff to have been received by it between November 1995 and February 1996; and

(ii) the Defendant claimed to set-off an unliquidated sum, which in the Defence and Counterclaim, is said to be the profits realised by the Plaintiff from the Defendant's contracts with its clients after deduction of the Plaintiff's reasonable charges. I note that there is no pleading of trust or agency or that the Plaintiff is otherwise an accounting party, and it seems to me from the pleading that the Defendant is simply claiming the difference between its clients' payments and the Plaintiff's service charges. It was not claiming, on top of that difference, an account of any profits that might have been made by the Plaintiff with that difference.

Set-off of the sum of $2,928,174.91 received

9. The Plaintiff's own evidence (paragraph 9, Zhang Shixiang) shows that between November 1995 and February 1996, five cheques for the total sum of $2,928,174.91 were drawn in favour of the Plaintiff on the Defendant's account. There was no evidence that the sum (or any part thereof) was applied to any other debt owing to the Plaintiff - so there is at least a triable issue that the Plaintiff should deduct this sum of $2.9m odd from the claim.

Arrangements in April and September 1995

10. Before it can be determined whether there is any triable issue of set-off arising from the alleged arrangements of April and September, it is first necessary to understand what the Defendant alleges the arrangements to be.

11. There were two documents (dated 19 April and 20 September) which were signed by the Defendant of the one part and by the Plaintiff and CM Godown of the other part. Both documents had been drafted by the parties personally, and unfortunately they are not expressed as clearly as one would have hoped.

12. The Defendant alleges, in addition to the set-off defence, that the April 1995 document evidenced a compromise, so that the Plaintiff could no longer sue on the original debt. In my view, the April document only shows an indulgence being given by the Plaintiff and CM Godown to the Defendant: to pay the 1993-4 arrears by instalments and to give a 2-month credit period for 1995 bills for services. I can see no evidence of any consideration moving from the Defendant. As such, I would accept the submissions of Mr Zimmern, counsel for the Plaintiff, that the Defendant has failed to make out a triable issue that the April arrangement was a compromise.

13. Notwithstanding the indulgence given, it is clear from the schedule to the Statement of Claim that no payments were made by the Defendant after April.

An agreement was then made in September.

14. In this agreement, it is recited that $15.48m was payable to Plaintiff and CM Godown up to 1 September, of which $1.8m was attributable to charges payable to the Plaintiff for services it had rendered to 3 major clients of the Defendant between August and September. The parties agreed that:-

(i) the Defendant would pay the sum of $1.8m before September,

(ii) from then on, the Plaintiff was to receive all moneys payable to the Defendant from the 3 major clients, and

(iii) all withdrawals from the Defendant's bank accounts would have to be validated by the Plaintiff.

Alleged take-over

15. The Defendant says that amounted to a take-over by the Plaintiff of the Defendant's business (or at least its business with those 3 clients), so that the Defendant is entitled to set-off the profits made from that business.

16. In the Defence, the Defendant had not quantified the amount of profit so made. On this appeal, however, it seeks to rely on the Plaintiff's evidence of the turn-over for these 3 clients, which was said to be nearly $15.4m odd. I understood from Mr So's submission that the Defendant claims to be entitled to set-off the whole of that $15.4m because the Plaintiff has failed to adduce any evidence of its charges; alternatively, that the Defendant is entitled to set-off the profit it would have made as middle-man.

17. I am not sure what the Defendant means when it pleads that the Plaintiff had "taken over" the business of the Defendant. None of the Defendant's shares were transferred to the Plaintiff, nor did the Plaintiff appoint anyone to the board of the Defendant. Nor was anyone appointed as receiver.

18. It is quite clear that the arrangement was to provide for direct payment by the three clients to the Plaintiff, so that the Plaintiff would be sure to receive its fees for the services rendered to at least these three clients of the Defendant's, and to stop the Defendant's debt from further snowballing.

Balance from client's direct payment

19. However, direct payment from the three clients to the Plaintiff meant that the Plaintiff would receive money over and above the service charges it charged the Defendant for the services. The evidence shows that from August 1995 to August 1996, the direct payment by the three clients to the Plaintiff amounted to nearly $15.4m. What would happen to the balance (which was the Defendant's profit margin) was not set out in the September Agreement.

20. The parties apparently were unable to agree on this balance. In December 1995, the Defendant had apparently written to the Plaintiff to complain that it (the Defendant) had not been receiving funds for its normal operating expenses, and to seemingly imply that it may as well close down. The Defendant asked the Plaintiff to elect how to proceed in 1996:- either (1) to continue with the existing arrangement which the Defendant described as a "take-over", or (2) for the Plaintiff to receive the Defendant's profit margin in reduction of the Defendant's debt.

21. There was apparently no reply from the Plaintiff until an undated letter in 1996 (which must have been after August 1996). This was drafted by the Plaintiff and sent to the Defendant, and purported to record an agreement by the parties that the Plaintiff would pay the Defendant 10% of the total income from the three clients as commission. (It would appear from paragraph 14 of Mr Zhang's evidence that the Plaintiff has indeed applied 10% of the total income in reduction of the Defendant's debt).

22. However, the Defendant did not sign the document as drafted; instead it added the remark that the figure had not been certified, and that the letter was signed under the terms and conditions mentioned in the Defendant's letters to the Plaintiff dated 22 December 1995 (referred to above) and 31 August 1996 (which was not produced).

23. So, it would appear that there was no agreement between the parties as to what to do with the balance.

24. The Defendant says that it is entitled to set-off this amount of nearly $15.4m. or at least part of it. Mr Victor So counsel for the Defendant submits that the only set-off he asserts is an equitable set-off.

Equitable set-off

25. It is common ground that an equitable set-off arises only if there is a close connection between the Plaintiff's claim against the Defendant and the latter's claim against the former, and where it would be manifestly unjust to allow the Plaintiff to enforce its claim against the Defendant without permitting the Defendant to enforce its claim against the Plaintiff.

26. In my view, the Defendant has an arguable case that it is entitled to set-off its claim to the difference between what its clients paid direct to the Plaintiff, and what the Plaintiff charged the Defendant for its services (i.e. the Defendant's profit margin). It is true that the Plaintiff's claim is for services rendered pre-September 1995, whilst the payment by the clients direct to the Plaintiff was under the September Agreement for post-September services, but the Plaintiff's claim was the only reason for the Plaintiff's obtaining direct payment from the Defendant's clients. So there is in my view at least an arguable case that there is a close connection between the Plaintiff's claim and the Defendant's claim.

27. Mr Zimmern sought to argue that there had been an exclusion of the right to set-off. He points to a sentence in the September Agreement to the effect that "such transfer of the payment shall not mean that [the Defendant] has already settled the aforesaid debt of $15,393,422.20". However as held in the Connaught Restaurant case quoted in Esso Petroleum Co Ltd v Milton [1997] 1 WLR 938, clear words are required to rebut the presumption that a party does not intend to abandon rights of set-off. In my view, that sentence is not clear enough to prohibit the Defendant from setting up a right to set-off.

28. Further Mr Zimmern submitted that the Defendant has acknowledged its indebtedness to the Plaintiff by requesting a confirmation of balances in an amount which did not take into account the set-off. That is correct, but until the Plaintiff provided the turn-over of the three clients in its Affirmation in opposition, the Defendant was unaware of the amount.

29. As to the amount which the Defendant should be able to set-off, the Defendant has claimed that it could set-off the entire amount received (i.e. nearly $15.4m.) I do not think that such a claim would be arguable - it is common ground that the Plaintiff had provided the services to the clients, for which the Plaintiff is entitled to payment, and it could hardly be just and equitable for the Defendant not to pay the Plaintiff for its services.

30. The Plaintiff has however failed to quantify the charges. Doing the best I can at this stage, I would take the profit margin at 35%, being the rate asserted by the Defendant in its letter of December 1995. Applied to the amount of $15,393,422.20, that would come up to $5,387,697.77. Together with the $2,928,174.91 paid to the Plaintiff by the 5 cheques, that comes up to $8,315,872.68. I do not see any substantive defence to the rest of the Plaintiff's claim.

Order

31. I would therefore give unconditional leave to the Defendant to defend in the sum of $8,315,872.68 and give judgment to the Plaintiff for the balance of the claim. To that extent the Registrar's order would be set aside. As the Plaintiff is entitled to summary judgment on part of the claim but the Defendant has succeeded in overturning the Registrar's decision in part on appeal, I would make an order nisi that the costs below be to the Plaintiff and the costs of the appeal be to the Defendant.