NKOK, INC v. MAYLOK TOYS INDUSTRIES CO LTD AND ANOTHER

DCCJ 2010/2019

[2023] HKDC 7

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 2010 OF 2019

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BETWEEN

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JUDGMENT

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Introduction

1.  This is a dispute arising from the manufacture and production of certain toy molds. The pertinent (although not the only) question that the court needs to resolve is the ownership of these toy molds.

2.  The plaintiff (“P”) is a company incorporated in California carrying on the business of designing and wholesale of toy products. Mr Kohsche Koh (“Kohsche”) is its President.

3.  Lian Huat Hang Limited (“LHH”) acts as P’s agent to arrange for the production and manufacture of the toy products and the toy molds. This is known to all parties involved. For the purpose of this action, there is no practical need to distinguish between P and LHH.

4.  The 1^st defendant (“D1”) is a Hong Kong company carrying on the business of sourcing, manufacturing and exporting toy products. Mr Choy Ngan Hing (“Choy”) is a director of D1.

5.  The 2^nd defendant (“D2”) is a Hong Kong company affiliated with D1. D2 provides administrative support to D1 by issuing debit notes in its own name and collecting and receiving payment for such debit notes on behalf of D1.

6.  At the trial, P is represented by Mr Isaac Chan and Ds are represented by Mr Timothy Lam. I am very grateful to both counsel for their effective presentation of the case and succinct submissions.

Background facts

7.  The following facts are not disputed between the parties unless otherwise indicated.

The Procurement Agreement in overview

8.  Some time in 2005, P began to have a commercial relationship with D1 (the “Procurement Agreement”) for the procurement and/or production of certain toy products (as listed in Schedule 1 to the Statement of Claim, the “Toy Products”) together with the tools and molds for the manufacturing of these Toy Products (the “Toy Molds”).

9.  The parties implemented the Procurement Agreement without incident for around 10 years. During that time, the procurement and production processes of the Toy Molds, and in due course the mass production of the Toy Products, involve multiple steps. For present purposes they are largely as follows:

(1) P would give instructions to D1, and D1 would arrange (with factories in Mainland China), for the making of the physical prototype of the Toy Molds;

(2) The design of the Toy Molds and prototype would require P’s approval (in the case of a licensed Toy Product, the third party licensor of the Toy Product);

(3) The “tooling costs”, namely the costs of production of the prototype and the Toy Molds, are subject to P’s approval;

(4) Upon P’s approval of the physical prototype and price, D2 (on behalf of D1) would issue a debit note concerning the tooling costs to LHH and this would be settled by P / LHH;

(5) Upon approval of the Toy Molds, P would place orders with D1 for the mass production of the Toy Products based on the Toy Molds, and D1 would charge a 3% commission on the factories’ invoices for the mass production of the Toy Products;

(6) D1 would engage factories in the Mainland for the mass-production of the Toy Products. D1 would sign a written agreement (模具托管及生產協議, the “Chinese Mold Agreement”) with the factory in question, which provides that D1 has the right to claim back the possession of the Toy Mold(s) of the Toy Product(s), and the factory engaged may only use the Toy Mold(s) for the production of Toy Product(s) under the authorisation or instruction of D1.

10.  There is however a significant dispute now on 2 specific aspects of the Procurement Agreement:

(1) D1 argues that it has a significant input leading up to the production of the Toy Molds, in particular concerning the design aspect by “transforming” or “converting” primitive 2D drawing of the Toy Molds prepared by P into elaborate 3D designs before the prototype and the Toy Molds are produced. On the other hand, P says that D1’s work is merely clerical or mechanical similar to that of a procurement agent;

(2) D1 also argues that it was expressly agreed between the parties it would be the exclusive supplier/seller of the Toy Products that are manufactured based on the Toy Molds created or procured by D1. In other words, for the Toy Molds created or procured by D1, they may only be used for the mass production of Toy Products “through” D1, and in turn D1 would earn a 3% payment on the invoiced amount of such Toy Products[1].

11.  The significance of these 2 disputes is this. On Ds’ case, D1 would not charge against P its own time and resources spent for the (allegedly significant) work up to the production of the Toy Molds; it would only charge a 3% commission as and when there is a mass production of the Toy Products using the Toy Molds. As the argument goes, without the alleged exclusivity, P may “bypass” D1 in the mass production of the Toy Products after the Toy Molds were procured and produced by D1, effectively using the Toy Molds “for free” without having to pay for D1’s efforts.

The 80-Series Molds and the 80-Series Products

12.  More relevant for the purpose of this trial, by emails dated 16 March 2010 and 1 April 2015, P placed procurement / production orders with D1 for the production of certain Toy Products (as listed in Part II of Schedule 1 to the Statement of Claim, the “80-Series Products”[2]), together with the tools and molds used for the manufacturing of the 80-Series Products (the “80-Series Molds”).

13.  D1 then placed corresponding procurement and/or production orders with various factories in Mainland China for the production of the 80-Series Molds. In due course, after the 80-Series Molds were satisfactorily manufactured, P through LHH placed procurement and/or production orders with D1 for the mass production of the 80-Series Products. The 80-Series Molds were then delivered to the production factories. D1 therefore entered into various Chinese Mold Agreements with these factories, including 美泰玩具工藝實業 (“Mei Tai”) and 美奇寶塑膠電子實業有限公司 (“Mei Qi Bao”).

14.  D2 (on behalf of D1) issued 2 debit notes in relation to the “tooling costs” of the 80-Series Molds, particulars of which are set out in paragraph 14 of the Statement of Claim. P (through LHH) has fully settled these debit notes except such part as underpinning the counterclaim (see further below)[3].

The eruption of the dispute between the parties

15.  In 2015, it was discovered that D1 had overcharged P for the production of some Toy Products based on invoices that were artificially marked-up. D1 says that this was done by a staff known as Mr Gordon Kwo (“Gordon”) without Choy’s knowledge. The overcharged amounts were subsequently refunded to P. Gordon also resigned from D1 and proceeded to set up his own company Gordon (Hong Kong) Trading Limited (“GTL”).

16.  This incident turned the relationship between the parties sour. P stopped placing orders with D1 in around 2016. In 2017, D1 found that P engaged other factories in the Mainland to utilise the Toy Molds procured by D1 for mass production of Toy Products (ie D1 was “bypassed”). There was then a “race” for the parties to get back the Toy Molds from the various factories, with D1 relying heavily on the Chinese Mold Agreement for its demand (against the factories) for the return of the Toy Molds.

17.  Eventually, D1 was able to take possession (and it still remains to be in possession) of the 80-Series Molds (28 pieces in total, with 21 pieces from Mei Tai and 7 from Mei Qi Bao), as particularised in paragraph 18 of the Statement of Claim.

The respective pleaded cases of the parties

P’s claim

18.  P says that it has always been the true owner of the Toy Molds (including the 80-Series Molds), and hence it is entitled to their possession. Reliance is placed on the established modus operandi whereby D1 would arrange for the production of the Toy Molds at the specific instructions of P and at P’s costs (which were fully paid). Effectively, D1 was P’s agent in the production of the Toy Molds and the Toy Products.

19.  P contends, both as a key aspect to the alleged agency and in any case as a necessary incidence of P’s alleged ownership of the Toy Molds, that the Procurement Agreement contains the following implied terms:

(1) Upon P / LHH placing orders with D1, D1 shall procure the production of the Toy Products and the Toy Molds;

(2) D1 shall deliver the Toy Molds to P or its nominee (at least when directed to do so);

(3) D1 shall not interfere with P’s use and enjoyment of the Toy Molds and the further production of the Toy Products, including by using the Toy Molds in doing so.

20.  P also says that the Chinese Mold Agreements were concluded with the factories by D1 on P’s behalf.

21.  On P’s case, D1’s refusal to return the 80-Series Molds to P is therefore wrongful. P therefore claims the following reliefs:

(1) A declaration that P is the rightful owner of the Toy Molds;

(2) An order for delivery up by D1 to P the 80-Series Molds;

(3) Damages;

(4) Further or alternative to (3), an account of all profits made by D1 from the unauthorised and wrongful retention of the 80-Series Molds;

(5) Further or alternative to (1) to (4) above, D2 be ordered to pay the sum of HK$551,141.92[4] or any other sum found to be due to P on the ground of restitution and/or unjust enrichment.

22.  I pause here to deal with a pleading point raised by Ds. Properly understood, P’s claim is for conversion and detinue of the Toy Molds (especially the 80-Series Molds)[5], and more specifically on the basis that D1 was P’s agent in the procuring and manufacturing of the Toy Molds (and hence P is the owner of the Toy Molds). I agree with Mr Chan that the material facts constituting conversion and detinue[6] and agency[7] are sufficiently pleaded and set out.

Ds’ defence and counterclaim

23.  The cornerstone of Ds’ case is the alleged exclusivity as mentioned in paragraphs 10 and 11 above. I note again that such alleged exclusivity is, on Ds’ pleaded case and explained in Choy’s witness statement, said to be concluded expressly between the parties arising out of “several discussions”[8]. Furthermore, it was the express agreement between the parties that D1 shall have the exclusive rights to use and keep the Toy Molds, but only to use them for the manufacture of Toy Products ordered by P or LHH[9].

24.  Following on from such alleged exclusivity, Ds contend that the Procurement Agreement[10] contains the following implied terms (the “Implied Terms Alleged by Ds”)[11]:

(1) P (or its agent) has no right to own, use, assign and/or reproduce the Toy Molds for toy products production; and

(2) The Toy Molds created and produced under the Procurement Agreement would be in the exclusive possession, control and/or custody of D1.

25.  It is important to record at this juncture that, in paragraph 10 of the (original) Defence and Counterclaim (which responds to P’s plea that it is at all times the owner of the Toy Molds), Ds plead a non-admission. In other words, Ds have no positive case on the ownership of the Toy Molds. Yet there is a positive denial that P is the owner of the Toy Molds (see paragraphs 10(b), 20(n) and 21 of the original and Amended Defence and Counterclaim). Ds say that there has been no agreement between P and D1 (which I understand to mean that there was no explicit agreement) as to the ownership of the Toy Molds[12].

26.  In 2017, upon D1’s discovery that P had caused some Mainland factories to use the Toy Molds for the production of Toy Products without D1’s involvement, D1 demanded the factories to return the Toy Molds (which some of the factories did). D1 admits that it is now in possession of the 28 pieces of the 80-Series Molds as explained in paragraph 17 above but denies that such possession is wrongful.

27.  Ds further claim that, even if the 80-Series Molds belong to P, Ds are entitled to exercise a lien over the 80-Series Molds by reason of certain outstanding debit notes due to D1/D2. In this regard, Ds counterclaim for an outstanding amount of RMB113,843.00 (concerning 9 debit notes as particularised in the Schedule to the Amended Defence and Counterclaim).

28.  In addition, since P has wrongfully (ie in breach of the alleged exclusivity) caused the Toy Molds procured by D1 to be used by other factories (in particular GTL) for the mass production of Toy Products, D1 accepts P’s repudiatory breach of the Procurement Agreement and claims damages, or alternatively an account of the orders which had utilised the Toy Molds but in circumstances where D1 was “bypassed”.

Conversion and detinue: legal principles

29.  The relevant principles may be found in Chun Sang Plastics Co Ltd v Commissioner of Police [2018] 2 HKLRD 511 as follows:

“16. The tort of conversion exists to protect proprietary or possessory rights in property; it is committed by an act inconsistent with those rights and it is a tort of strict liability. In Kuwait Airways Corp v Iraqi Airways Co (No 3) [2002] 3 All ER 209, Lord Nicholls said (at p 222):

... Mere possession of another’s goods without title is not necessarily inconsistent with the rights of the owner. To constitute conversion detention must be adverse to the owner, excluding him from the goods. It must be accompanied by an intention to keep the goods. Whether the existence of this intention can properly be inferred depends on the circumstances of the case. A demand and refusal to deliver up the goods are the usual ways of proving an intention to keep the goods adverse to the owner, but this is not the only way.

17. Lord Hoffmann in the same case added (at p 243):

And the person who takes is treated as being under a continuing strict duty to restore the chattel to its owner.

DETINUE

18. Detinue is in reality a continuation of the tort of conversion in the persistent withholding of goods and a refusal to re-deliver them...”

30.  According to Clerk & Lindsell on Torts (23^rd Edition) at §16-07: -

“Forms of conversion

... conversion is an act of deliberate dealing with a chattel in a manner inconsistent with another’s right whereby that other is deprived of the use and possession of it. As will appear, the defendant need not intend to question or deny the claimant’s rights; it is enough that his conduct is inconsistent with those rights.”

31.  At §16-08(v), the learned authors cited the wrongful retention of goods as a mode of conversion, and “wrongfully” for those purposes means without the actual permission of the owner.

32.  Where a person receives or takes possession of another person’s chattel without authority and has an intention of asserting dominion over them or deals with the chattel in a manner inconsistent with the rights of the owner or proprietor, such a person is guilty of conversion. In most cases where there is unlawful detention of a chattel a claimant can constitute an action in detinue along with the tort of conversion: Tort Law and Practice in Hong Kong (3^rd edition) at §7.046.

33.  An action for detinue lies where the defendant who has received a chattel from the claimant has wrongfully detained the chattel or where the defendant does not return it or withholds it against demand by the claimant. This tort protects a person’s right to possession. A claim in detinue lies where a person has a right to immediate possession and where the plaintiff makes a demand for return of her chattel and the defendant refuses to deliver up the detained chattel: Tort Law and Practice in Hong Kong §7.022.

34.  Ownership right is crucial to maintain a claim for conversion. The concept of ownership in respect of chattels consists of a number of rights over property, such as the rights of exclusive enjoyment, of destruction, alteration and alienation and of maintaining and recovering possession of the property from all other persons: Halsbury’s Laws of Hong Kong, Personal Property, Vol 42, 2^nd edition at p 505.

35.  As to the forms of relief available, Clerk & Lindsell §16-90 provides as follows:

“Forms of relief available

… Conversion lay only for damages (normally the value of the goods plus consequential loss). Detinue, by contrast, could yield a judgment either for specific restitution or for delivery up of the chattel or payment of its value as assessed at the date of judgment, together with damages for its detention.”

Issues to be tried

36.  In the Agreed List of Issues, the parties identified 5 issues that require determination:

(1) Who is the owner of the Toy Molds (“Issue 1”);

(2) Whether D1 has a right to retain the 80-Series Molds without having to deliver the same to P (“Issue 2”);

(3) Whether D1 and/or D2 are entitled to the outstanding balance of RMB113,843.00 (“Issue 3”);

(4) If Issue 3 is positive, whether D1 and/or D2 are entitled to a lien over the 80-Series Molds (“Issue 4”); and

(5) Whether D1 is entitled to an account as pleaded in the counterclaim (“Issue 5”).

37.  It will be seen from these issues that P no longer pursues any monetary remedies against Ds. This is confirmed by Mr Chan for P.

The interlocutory applications

38.  By summonses dated 7 June 2022, Ds apply to amend their Defence and Counterclaim and to adduce a supplemental witness statement of Choy. P objects to the amendment application but is content for the supplemental witness statement to be adduced.

39.  In addition, P also filed 2 additional lists of documents on the eve of the trial, being the 2^nd Supplemental List and the 3^rd Supplemental List. P wishes to rely on these additional documents at trial.

40.  After hearing submissions from the parties at the start of the trial, I made the following orders:

(1) Leave to Ds to amend their Defence and Counterclaim as per the draft annexed to the summons;

(2) Leave to Ds to adduce the supplemental witness statement of Choy;

(3) Leave to P to rely on the documents disclosed in the 2^nd and 3^rd Supplemental Lists of Documents.

41.  I said I would give reasons for these orders in this Judgment. These are my reasons.

42.  Regarding the amendment application, the proposed changes are mostly cosmetic in nature. Mr Chan for P specifically objects to the proposed changes in paragraphs 10(a) and 20(o) on the basis that these are substantive amendments. The proposed amendments to paragraph 10(a) are as follows (the underlined parts are the proposed amendments):

“10. ... The 1^st and 2^nd Defendants assert that:

(a) There has been no agreement other than the one pleaded in paragraph 6 hereinabove between the Plaintiff and the 1^st Defendant as to the ownerships of the Injection Molds...”

43.  The terms pleaded in paragraph 6 of the original Defence and Counterclaim are the Implied Terms Alleged by Ds.

44.  In my view, the proposed amendments only seek to clarify a plea that has always been there, namely that there was no agreement concerning ownership of the Toy Molds save and except those pleaded in the Defence and Counterclaim. It does not add anything substantive and P is not prejudiced.

45.  By the proposed changes in paragraph 20(o), in addition to a general lien over the 80-Series Molds, Ds also seek to rely on a particular lien.

46.  I accept Ds’ submission that the proposed amendment only concerns the legal consequence of whether a lien (and if so which type of lien) arises. The material facts giving rise to the alleged lien have already been pleaded, and the proposed amendments should not take P by surprise.

47.  As for P’s late discovery of documents, some of these new documents in fact originated from D2, so I am of the view that there is no real prejudice for P to rely on them. Another class of document includes invoices that expressly provide for P to be the owner of the Toy Molds which D1 apparently acknowledged and performed. Substantially identical invoices have already been disclosed and are in the trial bundles, so the new documents are merely additional examples and do not cause any real prejudice to Ds. Lastly, there is a confirmation letter (確認書) apparently showing that some of D2’s debit notes that are allegedly outstanding (and hence forming part of the counterclaim) were actually settled[13]. I consider that I should allow P to rely on this document since it goes to the heart of the counterclaim (specifically Issue 3), and it is an important document that the court should consider in securing the just and proper resolution of the dispute and in adjudicating the parties’ substantive rights. I also adjourned the trial early on Day 1 to allow Mr Lam sufficient time to consider all these new documents and to take instructions. I am of the view that this is the most practical course to take and it sufficiently balances the prejudice that Ds might suffer from the late discovery. In the end, both parties were happy to carry on with the trial from Day 2, and no point was taken in relation to these interlocutory matters in closing submissions.

Credibility of the factual witnesses

48.  Kohsche (via video-link) and Mr Stephen Hsu (“Hsu”) gave evidence for P. Choy is the only factual witness called by Ds.

49.  I bear in mind the well-known principles in assessing credibility: see Lee Fu Wing v Yan Po Ting Paul [2009] 5 HKLRD 513 at §53 per Deputy High Court Judge Thomas Au (as he then was). I should generally place weight on contemporaneous documents and inherent probabilities.

50.  I have also taken into account the demeanour of the witnesses when giving evidence, but I remind myself that the matter before me is a trial of the issues as put before the court, not a trial of the character of the parties or the witnesses: Sun Legend Investments Ltd v Ho Yuk Wah [2011] 14 HKCFAR 541 at §§57-58.

51.  I should first start by observing that given the nature of the dispute (particularly as to the ownership of the 80-Series Molds), I do not consider that the outcome of this case significantly turns on the credibility of the factual witnesses.

52.  That said, after fully considering the closing submissions of the parties regarding the credibility of the factual witnesses, I tend to agree with Mr Chan that Kohsche and Hsu have been trying their best to tell the truth, although their evidence was a bit clumsy at times. I also agree that their evidence is not really contradicted on the key issues. I find them both to be credible.

53.  On the other hand, Choy’s evidence is distinctly less impressive. At this stage I will give an example to explain why I find his evidence less reliable.

54.  As I noted above, in both the Amended Defence and Counterclaim (where Choy signed the statement of truth) and in Choy’s witness statement, D1’s alleged exclusivity is based on an express agreement. Choy completely abandoned this contention in cross-examination. In my view, the alleged express exclusivity is a core part of Ds’ original case and Choy’s evidence given under cross-examination is a very significant departure from it.

55.  I will set out further reasons for rejecting parts of Choy’s evidence when specific issues are analysed below, but insofar as there is a conflict between the evidence of the factual witnesses, I generally prefer the evidence of Kohsche and Hsu to that of Choy.

Issue 1 - Who owns the Toy Molds?

56.  The starting point must be that it is entirely artificial to suggest that no one owns the Toy Molds. Given the way they were procured, manufactured and paid for, realistically the owner can only be one of P or D1. This will necessarily be the case even where, at least at the initial stage of the commercial relationship, neither P nor D1 has had explicit or express discussions on the ownership issue.

57.  As I noted above, Ds do not advance a positive case on the ownership of the Toy Molds. Rather, during cross-examination Choy refrained from asserting that D1 is the owner the Toy Molds, but said that he would leave the question of ownership for the court to determine.

58.  It is in my view unhelpful (as Mr Lam sought to do) to refer to any presumption or inference as if there is a starting point that the person in possession of a chattel is the owner unless the contrary is shown. In order to resolve Issue 1, the simple question is whether I am satisfied, on the balance of probabilities, that P has proved itself to be the owner of the Toy Molds considering all the circumstances of the case.

59.  In my judgment, it is clear that P is the true owner of the Toy Molds, for a number of reasons set out below.

The Toy Molds were procured and manufactured under P’s instruction and were paid for by P

60.  It is not in dispute that P initiated the procurement and production the Toy Molds for the eventual mass production of the Toy Products. Even on D1’s case, the Toy Molds were commissioned by P and their design and specifications have to be approved by P. The tooling costs of the Toy Molds had to be agreed to by P before they were produced. I consider that the Toy Molds were for all practical purposes procured and produced under P’s instruction.

61.  It is also common ground that, subject to the allegedly unpaid debit notes, P (or LHH on P’s behalf) has always been settling the “tooling costs”. In other words, P has throughout been paying for the production costs of the Toy Molds.

62.  There is nevertheless a small twist regarding the issue of payment of tooling costs. There is a dispute as to whether 2 of the 80-Series Molds, being #80961 (fire truck) and #80962 (garbage truck), have been fully paid by P. It arose because the corresponding debit note no B-100413[14] contains a handwritten note indicating that, whilst the debit has been fully settled, the payment only corresponded to the models “80901 Fire Engine” and “80902 (Garbage)”.

63.  I accept Kohsche’s and Hsu’s explanation that due to clerical errors, the handwritten note incorrectly refers to 80901 and 80902 when the numbers should be 80961 and 80962:

(1) Firstly, the description on the debit note refers to “TOOLING CHARGE - 4 FUNCTIONS FIRE & GARBAGE TRUCK”, and it clearly matches with the description of the products under the numbers “80961” and “80962”;

(2) Secondly, Hsu confirmed that there had never been models “80901” and “80902” but only “80961” and “80962”. Ds have adduced no evidence to contradict him;

(3) Thirdly, as confirmed by Choy himself in cross examination, all the outstanding sums allegedly owed by P to D1 have been set out in full in the counterclaim. The debit note no B-100413 does not form part of the counterclaim;

(4) D1 never raised any protest that the tooling charges of the Toy Molds for those 2 models were not fully paid, even when the molds were eventually used in 2016 for mass production of the Toy Products[15].

64.  I therefore find that D1 was P’s agent in the procurement and/or production of the Toy Molds. In this regard, I place weight on the following matters:

(1) The degree of control exercised by P over the design and production of the Toy Molds is strongly indicative that D1 was P’s agent: Bowstead & Reynolds on Agency (22^nd edition) §1-018;

(2) D1 admits that P had paid for all the production costs of the Toy Molds as “reimbursement”[16]. Reimbursement is a classic right of an agent against its principal: Bowstead §7-057, and D1’s use of the term itself is revealing as to how D1 viewed its relationship with P;

(3) Choy confirmed that D1 had been fully transparent to P as to the production and tooling costs of the Toy Molds (which required P’s agreement). Such transparency is consistent with an agency relationship between P and D1.

65.  The establishment of an agency relationship between P and D1 is an important consideration on the question of ownership of the Toy Molds (at least ownership as between P and D1). Given that the Toy Molds were procured and produced by D1 on behalf of P and as P’s agent, it is in my view highly unlikely for D1 to be the real owner of the Toy Molds in the absence of express discussions or unequivocal acts.

The 2016 purchase orders

66.  In May to August 2016, D1 repeatedly accepted and performed P’s orders (placed through LHH) (the “2016 POs”) which contain a specifically-inserted declaration of ownership over the Toy Molds in favour of P as follows (the “Additional Term”):

“Requested by Kohsche: By accepting this order, [D1] and [D2] acknowledge and agree that all tools and molds paid by [P] are owned by [P]. [D1] and [D2] shall take all reasonable steps necessary to place its agents and factories on notice that [P] is the owner of the tools and molds used in the manufacture of products for [P] and shall include language in the purchase orders it issues to agents and factories clearly stating that all tooling and molds used for the manufacture of products for [P] are owned by [P] and no other person or entity, and any other language directed to be inserted. No other writings or documents between the parties shall modify the terms of this purchase order unless specifically stated in a writing signed by [P].”

67.  Choy explained in his witness statement[17] that D1 did not agree to the Additional Term at all and it is contrary to the established practice since 2006. Choy also said that he had protested to both P and LHH and informed that D1 would not agree to the Additional Term.

68.  I reject such explanation. There is no dispute that D1 had performed each of the 2016 POs. There was therefore clear acceptance of them. If D1 really protested and objected to the inclusion of the Additional Term, as a rational businessman it is almost certain that the objection would have been recorded in writing (I note that the parties have been in regular email exchange at the material time). At the very least, D1 could have crossed out the Additional Term on the 2016 POs to indicate its objection. None of that happened. It is even more incredible when the incident was not one-off; there were repeated acceptance and performance of orders that contain the Additional Term. When pressed with the matter during cross-examination, Choy was unable to give any real answer.

69.  In my judgment, D1’s repeated acceptance and performance of the 2016 POs (which contain the Additional Term) constitute D1’s plain admission and acknowledgement of P’s ownership of the Toy Molds.

D1’s effort and/or input in the design and production process

70.  As mentioned above, D1 argues that it has a significant input leading up to the production of the Toy Molds, in particular concerning the design aspect by transforming or converting primitive 2D drawings of the Toy Molds prepared by P into elaborate 3D designs before the prototype and the Toy Molds are produced. P’s case is that D1’s work is merely clerical or mechanical.

71.  I do not consider that the question of ownership turns on the degree or quality of D1’s input (if any) in the design and production process of the Toy Molds. Even if D1 assumes significant responsibility in the design and production of the Toy Molds as it contends, it remains the case that the Toy Molds were procured and produced under P’s initiation and instruction. They were fully paid for by P. In the absence of any argument about intellectual property rights (none is raised in this case), it is clear to me that P is the owner of the Toy Molds whether or not D1 has had a significant input in the design and production process.

72.  D1 may have a better argument in that its effort in the design and production process will not be remunerated if P decides to bypass D1 in the mass production of the Toy Products after D1 has procured the Toy Molds. Obviously, the greater the effort D1 has allegedly put in, the greater the (perceived) injustice if D1 is bypassed. But this is not a question concerning the ownership of the Toy Molds. Rather it is about the adequacy or sufficiency of rewarding D1 for its work and effort under the Procurement Agreement. It is more adequately addressed when Issue 2 is considered below.

Conclusion on Issue 1

73.  For these reasons, I am satisfied that P is the true owner of the Toy Molds. It necessarily follows that P has sufficient standing to sue for conversion since, subject to Issue 2 addressed below, P has the immediate right to possess the Toy Molds: Clerk & Lindsell §16-43.

Issue 2 - D1’s contractual right to retain the Toy Molds

74.  The gist of Ds’ argument is based on the alleged exclusivity as explained above[18]. This, it is said, gives rise to the Implied Terms Alleged by Ds such that the Toy Molds created and produced under the Procurement Agreement would be in the exclusive possession, control and/or custody of D1 to the exclusion of P. It is argued that this remains the case even if the court finds that P is the owner of the Toy Molds.

75.  I bear in mind the trite legal principles concerning implication of terms. I will simply refer to Lo Yuk Sui v Fubon Bank (Hong Kong) Limited formerly known as International Bank of Asia Limited [2019] HKCA 261 at §§30-32.

76.  I have highlighted above that Ds’ case concerning the alleged exclusivity is based on an express agreement, a position Choy completely abandoned in cross-examination. There is accordingly no evidential basis in support of the alleged exclusivity, and this is sufficient to dispose of Issue 2 in P’s favour.

77.  But what about the perceived unfairness set out in paragraph 72 above where there is no exclusivity? In my judgment, there is nothing inherently unfair about D1 being bypassed after it has procured the Toy Molds for P. That was the contractual bargain between the parties and it is not for the court to rewrite the terms of their agreement. Ultimately, there is nothing commercially surprising or unwise for an agent (in this case, D1) putting in effort and time doing some preliminary work on a huge discount or even “for free” basically as a “bait” or a commercial incentive, with the hope or expectation (but falling short of a contractual entitlement) that it may ultimately be able to take a commission as and when the “main deal” eventually materialises (in this case, there being a mass production of the Toy Products based on the Toy Molds). To put the analysis in a different way, the 3% commission that arises (when there is mass production of the Toy Products) already reflects D1’s commercial risk in case P does not place an order for mass production of the Toy Products through D1 after the Toy Molds are procured and manufactured. Whether the 3% commission represents sufficient remuneration for D1’s work or adequate coverage of D1’s risk is a business decision and not a matter for the court.

78.  In any event, Ds face 2 insurmountable difficulties in relation to Issue 2:

(1) First, as submitted by Mr Chan, in the Amended Defence and Counterclaim §30, D1 purportedly accepted P’s (alleged) repudiation of the Procurement Agreement (which includes the alleged exclusivity and the Implied Terms Alleged by Ds). Hence, even on Ds’ own case, whatever contractual entitlement that it might enjoy (express or implied) has already come to an end. Subject to the question of lien, D1 has no ongoing contractual right to hold onto the Toy Molds where P is the true owner (as I have held);

(2) In circumstances where P is the true owner of the Toy Molds (as I have held), it is unreal for parties to have separately (ie regardless of the question of ownership) agreed that D1 shall nevertheless be contractually entitled to have exclusive possession, control and/or custody of the Toy Molds. The effect of this contractual term would be to permanently deprive P of the possession of the Toy Molds. I consider it highly unlikely that any owner of chattels would have agreed to such a peculiar arrangement.

79.  I therefore find that the alleged exclusivity and the Implied Terms Alleged by Ds do not exist. In any event, any such contractual entitlement already came to an end as a result of Ds’ acceptance of P’s (alleged) repudiation of the Procurement Agreement.

80.  For the sake of completeness, I do not accept that D1 had put in substantial resources and effort in the design and/or production of the Toy Molds. In both the Amended Defence and Counterclaim and Choy’s witness statement, it was repeatedly emphasised that it was D1 (not anyone else) who turned the “primitive” 2D toy designs into 3D drawings, but this is contradicted by the contemporaneous documents showing that the 3D drawings were in fact performed and charged by third parties but not D1[19]. I am not satisfied that D1 provided any substantive input in the design and/or production of the Toy Molds other than the usual duties as P’s procurement agent.

Issue 3 - Counterclaim for unpaid debit notes

81.  Issue 3 concerns an alleged outstanding amount of RMB113,843.00 regarding 9 debit notes as particularised in the Schedule to the Amended Defence and Counterclaim. P admits that a total sum of RMB28,300 under the debit notes B-NKOK-150629, B-NKOK-151212 and B-NKOK-160214 remain unpaid[20]. My focus is on the remaining 6 debit notes (the “Subject DNs”).

82.  It is not in dispute that these sums were intended to be “reimbursements”[21]. Accordingly, the Subject DNs were all related to third-party costs of the production of the Toy Molds but not for (for example) D1’s own profits or costs.

83.  Mr Chan persuasively submits, and I agree, that in order to seek “reimbursement” from P, Ds must prove either (i) that those sums under the Subject DNs are sums that were actually paid out of pocket to the relevant third parties, or (ii) Ds were legally liable to the third parties for the relevant sums: Bowstead §§7-057, 7-059. Thus, properly understood, the Subject DNs per se are not evidence of either of the 2 situations and accordingly not evidence of indebtedness. It remains for Ds to prove that they have either made payment to the third parties or were legally liable to pay.

84.  There is no documentary evidence that the sums under the Subject DNs were actually paid by Ds. The only evidence is Choy’s bare assertion made during his examination in chief. I reject Choy’s evidence in this regard for the following reasons.

85.  First, the lack of documentary evidence from Ds is critical. It would have been straightforward for Ds to produce payment records or bank statements to show that the amounts were in fact paid if that were really the case.

86.  Second, it seems to me clear that Choy confirmed during cross examination that he had no personal knowledge on the matter. He only speculated that D1’s finance department arranged payment, because if this were not done the third parties would have chased D1. But this ignores the fact that indeed P arranged for payment in favour of the third parties (and so the third parties did not chase D1). In this regard, there is documentary evidence substantiating some of these payments from P:

(1) For example, regarding the debit note B-NKOK-151223 dated 23 December 2015 (being one of the Subject DNs) in relation to the tooling charges for model #81557, the amount payable as stated on the debit note is RMB73,100[22]. After a payment of RMB36,550 in January 2016, Ds’ counterclaim is for the remaining RMB36,550. On 2 May 2017, GTL issued a debit note to LHH (GTL's own debit note no. was DN-NKOK-1010) in the amount of RMB36,550[23], and there was a manuscript marking of “81557”. On 4 May 2017, LHH issued its own debit note to P, part of which covers the invoice DN-NKOK-1010 in the amount of US$5,375,00[24]. On the same day, GTL issued a receipt[25] to LHH for the full settlement of DN-NKOK-1010 and another debit note. There was then a payment slip dated 10 May 2017 showing payment of RMB36,550 which (according to P) originated from GTL to a third party factory in the Mainland[26] with a specific reference to “哥頓還款- NKOK模具款-81557”. I give weight to these documentary evidence and accept P’s evidence that it (through LHH and GTL) arranged direct payment to the third party factory in relation to D1’s debit note B-NKOK-151223 dated 23 December 2015;

(2) For similar reasons, I accept P’s evidence that, in relation to D1’s debit note B-NKOK-160211 dated 20 February 2015[27] (being one of the Subject DNs) regarding the tooling charges for model #82515, P (through LHH and GTL) arranged direct payment to the third party factory for the outstanding sum. In this instance, a confirmation letter (確認書) dated 22 May 2018 was signed by P, LHH, GTL and the third party factory (佳亨塑膠玩具廠) specifically recording that the third party factory was paid RMB16,500 by GTL on behalf of P/LHH, and D1’s debit note B-NKOK-160211 was annexed to the confirmation letter[28];

(3) I should also add that there is a discrepancy to the amount recorded to be paid to the third party factory (RMB16,500) and the amount claimed by Ds as appearing as outstanding on the debit note (RMB18,500). I accept the explanation provided by Hsu that the RMB2,000 discrepancy was due to the actual price for the molds being lower than the quoted price. In my view, the annexure of D1’s debit note B-NKOK-160211 to the confirmation letter reflects the parties’ intention that the payment recorded in the confirmation letter was for the discharge and settlement of that specific debit note.

87.  For these reasons, I reject Ds’ case that the Subject DNs were sums that were actually paid out of pocket by Ds to the relevant third parties.

88.  As to whether Ds incurred a liability to the third parties for the relevant sums, I agree with Mr Chan there is not a shred of evidence showing that there is any such liability. On Choy’s own evidence, the third party factories have not chased D1 for the outstanding payments. In any event, I accept Kohsche’s evidence that all the third party factories in fact knew that P was D1’s principal for the production of the relevant toy products, and it is well-established that when an agent makes a contract, purporting to act solely on behalf of a disclosed principal, whether identified or unidentified, the agent is not liable to the third party on it: see Bowstead §§9-001 to 9-002.

89.  For these reasons, there is no basis for Ds to be “reimbursed” for the sums claimed in the counterclaim in relation to the Subject DNs..

Issue 4 - Lien

90.  Ds rely on both general lien and particular lien.

91.  The question of general lien may be quickly disposed of. It is trite law that general liens are discouraged because they give special privileges as against other creditors and tend to upset the equitable distribution of assets on insolvency. A general lien can only exist: (a) as a common law right arising from general usage or (b) by express agreement: Jumbo Key Holdings Ltd v Hong Kong Equestrian Centre Ltd [2009] 3 HKLRD 260 at §8.

92.  In the present case, Ds have neither asserted nor proved that there was any general usage or express agreement between P and Ds for a general lien to arise. I therefore reject Ds’ claim for a general lien.

93.  As for a particular lien, in the present case, the only sum which relates to the 80-Series Molds that P seeks to repossess but remains unpaid is the RMB10,000 under the Debit Note B-NKOK-151212 concerning the tooling charges of “80021-3# 三款慣性卡通車通用車底”.

94.  The relevant principles for a particular lien to rise are set out in Re Oasis Hong Kong Airlines Ltd [2011] 2 HKLRD 471 at §§9-10 and I gratefully adopt them:

“(a) The person asserting the lien must be in possession of the chattel;

(b) The possession of the chattel must be “lawful”: the transfer of possession to the person asserting the lien must have been with the express or implied authority of the chattel’s owner;

(c) The possession of the chattel must be continuous. The surrender of possession of the chattel usually results in the extinction of the lien. The lien is not regained if possession of the chattel is regained.

(d) The person asserting the lien must have done work on the chattel in respect of which he asserts the lien;

(e) The work on the chattel must usually have been completed and the sum in respect of which the lien arises must be due to the person asserting the lien.

... This type of lien allows a person who has done work on a chattel to retain it until his charges for work done on the chattel have been paid. The workman cannot, as he may in the case of a general lien, retain the chattel until all monies owing to him have been paid...”

95.  The meaning of “lawful possession” in the second requirement above is such that “[a] lien cannot be acquired by a wrongful act. ... where the agent takes goods without authority, ... the agent acquires no lien.”: Bowstead §7-079.

96.  I accept Mr Chan’s submission that there are numerous difficulties to D1’s claim for a particular lien.

97.  First, D1 acquired possession of the 80-Series Molds from the factories “unlawfully”:

(1) It is not disputed that the 80-Series Molds were delivered to the various factories for mass production of Toy Products;

(2) On Ds’ case, D1 discovered that P had “circumvented” it to place orders directly with the factories, and demanded the factories to enter into the Chinese Mold Agreement in order to protect its rights pursuant to the alleged exclusivity and/or the Implied Terms Alleged by Ds as explained above;

(3) I have rejected the alleged exclusivity and the Implied Terms Alleged by Ds for reasons stated above. D1 therefore had no right to compel the factories to deliver the 80-Series Molds to its possession, whether under the Chinese Mold Agreement or otherwise;

(4) On this basis, D1’s current possession of the 80-Series Molds is “unlawful” and cannot found any basis for a particular lien.

98.  Second, D1’s possession of the 80-Series Molds was not continuous. Once they were delivered to the factory, and when the factory put the 80-Series Molds in use for mass production, D1’s possession of them necessarily ceased. The subsequent “regaining of possession” by D1 could not resurrect a particular lien.

99.  Third, D1’s work in respect of the production of the Toy Molds (including the 80-Series Molds) was no more than the usual duties as P’s procurement agent. Even on Ds’ own case, D1 never actually dealt with the physical Toy Molds itself but only had input to the design and the relevant 3D drawings. I am satisfied that D1 never have any work done on the chattel so as to allow a particular lien to arise.

100.  Fourth and in any case, the non-payment of the Debit Note B-NKOK-151212 only concerned the tooling charges of “80021-3# 三款慣性卡通車通用車底”. I cannot see any basis for D1 to assert a particular lien over the other 80-Series Molds.

101.  For these reasons, I reject Ds’ claim for a general or a particular lien over the 80-Series Molds.

Issue 5 - Account

102.  Given that I have rejected the alleged exclusivity and/or the Implied Terms Alleged by Ds, there is no basis for D’s claim for an account and it falls to be dismissed.

Conclusion and costs

103.  In view of my findings above, I am satisfied that P is the rightful owner of the Toy Molds, and I grant a declaration as sought by P.

104.  Further, and more specifically to the 80-Series Molds, by taking possession of them without P’s consent and refusing to deliver them up to P when requested, D1 has interfered with the use and enjoyment of P’s ownership over the 80-Series Molds which amounts to conversion and detinue.

105.  I do not find it necessary to decide whether terms are to be implied into the Procurement Agreement as alleged by P as explained in paragraph 19 above. Those terms simply reflect (i) the agency relationship between P and D1 in the procurement and production of the Toy Molds and (ii) the fact that P is the rightful owner of the Toy Molds. A declaration and an order for delivery up will be sufficient for the proper disposal of this action.

106.  I therefore grant judgment in favour of P with the following reliefs:

(1) A declaration that P is the rightful owner of the Toy Molds;

(2) An order for delivery up by D1 to P the 80-Series Molds currently in D1’s possession.

107.  On Ds’ counterclaim:

(1) P shall pay RMB28,300 (or the HKD equivalent at the time of payment) to D1;

(2) Subject to the above, the counterclaim be dismissed.

108.  I have not heard any argument on the applicable interest rate that should be granted on the monetary award under the counterclaim. There is also the question as to when interest shall start to accrue. I direct parties to lodge and serve written submissions on these matters within 28 days of the handing down of this judgment.

109.  As to costs, on a nisi basis:

(1) D1 do pay to P costs of the claim and counterclaim including all costs reserved with certificate for counsel, to be taxed if not agreed;

(2) There be no order as to costs between P and D2.

110.  In making the above costs order nisi, I have considered that D1 and D2 are represented by the same team of lawyers and they have been running the same factual case. There is therefore minimal costs incurred by D2 over and above what D1 would have to incur in any event. I therefore take the provisional view that there should be no order as to costs between P and D2, although in terms of the ultimate result P achieves nothing substantive against D2.

111.  If there is any application to vary the costs order nisi, it shall be taken out within 14 days and the matter will be dealt with on paper. Any party applying for such variation shall then set out its position and argument on variation in the written submissions to be lodged and served as directed in paragraph 108 above. The responding party will then have 14 days to lodge and serve written submissions in opposition.