XCHRX AGFA HONG KONG LTD. v. LAM WAI MING t/a FAR EAST RESOURCES (HK) TRADING CO. (a firm) AND OTHERS

HCA 9715/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 9715 OF 1998

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R U L I N G

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1. There are two applications before the court. The first is the plaintiff's summons for summary judgment against the 1st and 2nd defendants for the sum of $37,429,215.25 or alternatively the sum of $31,979,493.58 being part of the plaintiff's claim in the Amended Statement of Claim. The second is a summons by all three defendants for leave to amend the Re-Amended Defence and Counterclaim.

The plaintiff's claim

2. The plaintiff is a supplier of films and photographic paper and equipment. Its claim against the 1st and 2nd defendants is based upon a running account in respect of goods sold and delivered to them which at 30 April 1998 stood at $37,429,215.25. Its alternative claim is based upon an alleged admission by the 1st and 2nd defendants in a letter dated 20 March 1998 of indebtedness in the sum of $31,979,493.58. The plaintiff alleges that its business dealings had originally being with the 1st defendant but since the incorporation of the 2nd defendant, the 2nd defendant had either taken over the trading of the 1st defendant or alternatively the 1st and 2nd defendants were trading jointly and severally with the plaintiff.

The case for the 2nd defendant

3. The 2nd defendant's case is that it never had any contractual relationship with the plaintiff whatsoever.

The case for the 1st defendant

4. The 1st defendant's primary case is that it had been expressly agreed that the responsibility for the running account was ultimately that of the plaintiff. Towards the end of 1992 the sales manager of the plaintiff, Mr Frank Tang, had discussions with the 1st defendant during which he had proposed that the plaintiff's share of the China market be increased by extending credit to PRC customers. This would be done by the plaintiff itself extending credit to its PRC customers but in the words of the 1st defendant "for its own account system would note such credit through me by way of the plaintiff maintaining a running account with credit of up to HK$30 million in my name. In effect the credit was not being extended to me but through me to the plaintiff's PRC customers."

5. Tang had assured the 1st defendant that he only needed to pay the plaintiff out of the net available proceeds of the money actually collected from PRC customers and if PRC customers did not pay for the plaintiff's goods supplied through him on credit under the running account, then the plaintiff would not pursue him for the payments. Tang had said that the $30 million was a "bottom lining" fund which the plaintiff was willing to spend and lose in order to increase its market share in the PRC. This proposal was according to the 1st defendant accepted by him and has been referred to as the "marketing agreement". He alleges that he is under no obligation to pay the sums claimed by the plaintiff as they represent sums he had been unable to recover from PRC customers.

6. The 1st defendant's "fall back" position which is the subject of the application to amend the Re-Amended Defence and Counterclaim is that even if the running account was at the risk of the 1st defendant, there was an implied term of its arrangements with the plaintiff that the plaintiff would not act in a manner which would disable the 1st defendant from collecting moneys due from the PRC customers. It is alleged that the plaintiff was in breach of that implied term by appointing new distributors directly which enabled customers in the PRC to obtain goods from the new distributors without paying the old distributors. This resulted in the 1st defendant being unable to recover money from these old distributors. Furthermore, it is alleged that the 1st defendant is entitled to an indemnity from the plaintiff in respect of any default by PRC customers.

7. The 1st defendant further alleges that there have been repayments of amounts outstanding under the running account, being amounts paid by customers in the PRC directly to the plaintiff which have not been taken into account in the figures put forward by the plaintiff.

8. In the light of my decision in relation to the 1st defendant's "fall back" case, I consider it would be inappropriate to comment on the 1st defendant's primary case beyond saying that if that contention had been the only one advanced by the 1st defendant, then my decision in this application might well have been different.

9. In so far as the 1st defendant's "fall back" case is concerned, namely the allegation of the implied term, the 1st defendant will face formidable obstacles in establishing such a term. Such a term would only be implied if it was necessary in the business sense to give efficacy to the contract, not simply because in all the circumstances it would be reasonable to imply such term.

10. Miss Eu has argued with considerable force that by appointing new distributors, the plaintiff was not disabling the 1st defendant from obtaining repayment from its customers as those customers would still be under a legal obligation to pay the 1st defendant. At most it was making it more difficult for the 1st defendant to recover.

11. She has also pointed out that on the affirmation of Mr Lam Wai Ming the appointment of the new distributors took place as long ago as the second quarter of 1996. If there had been such an implied term one would have expected the 1st defendant to complain to the plaintiff at that stage. On the contrary, the running account showed the 1st defendant had continued his dealings with the plaintiff into 1998 and as late as 20 March 1998 was still asking to be involved in discussions with the plaintiff as to its business strategy. The 1st defendant thereby impliedly recognised that the plaintiff had the right to formulate its own strategy including the appointment of distributors directly.

12. Faced with arguments of this weight, I have nonetheless with some hesitation accepted the submissions of Sir John Swaine that it would be wrong to deprive the 1st defendant of the opportunity of seeking to establish the existence of such an implied term at trial. It would be open to a court to infer on evidence adduced at trial that the arrangements between the plaintiff and the 1st defendant went beyond that of an ordinary buyer and seller and that the plaintiff was directly and knowingly concerned in an unusual and intricate system of credit starting with the 1st defendant which went through PRC distributors to photo laboratories in the PRC, and that this system was instituted on the plaintiff's initiative and contrary to the advice of the 1st defendant in order to penetrate and seize a share of the PRC market for photographic products. Among the unusual features of the credit granted to the 1st defendant was its size, the fact that it bore no relationship to credit previously granted to the 1st defendant, that at least on the 1st defendant's evidence it was not granted at his request, but contrary to his advice and that no credit check on his ability to repay was apparently conducted. Without commenting on the weight of such an argument it could be submitted that by exposing the 1st defendant to such a large and unusual risk as part of its strategy to penetrate the China market, the plaintiff was under an unusual obligation not to undermine the 1st defendant's ability to repay, particularly in the light of what the parties may have appreciated to be the risks of the PRC market.

13. The 1st defendant has accordingly satisfied me that there is an issue which ought to be tried. I give him unconditional leave to defend this action.

14. In view of my comments, it follows that the 2nd defendant also has a triable defence and should be given unconditional leave to defend. Even if I had found that the 1st defendant had no probable defence, I nonetheless would have been satisfied that the 2nd defendant did have such a defence.

15. In so far as the 2nd defendant is concerned, I find that the assertions made in particular by Madam Angie To are believable. Madam To has advanced explanations for the features relied upon by the plaintiff as evidence that the 2nd defendant was at least jointly liable for the sum claimed. These explanations include explanations of

i) how the 1st defendant came to be involved with the 2nd defendant;

ii) how the 2nd defendant came to open letters of credit on behalf of the 1st defendant;

iii) how the 2nd defendant's name came to be entered on the plaintiff's running account between the 20 January 1997 and 11 December 1997;

iv) how the plaintiff came to be sent the 2nd defendant's business registration form;

v) how the incomplete "customer credit form" came to be on the plaintiff's file.

16. By saying that Madam To's explanations are believable, I am saying no more than that they are explanations that a court might believe. Amongst other matters she will have to explain why, despite her assertions of the 1st defendant was only involved in the 2nd defendant so as to satisfy the formal requirements of Hong Kong Company Law, he had originally held 60% of the shares, how it came about that the 2nd defendant's chop appeared on certain delivery notes and how the name of the 2nd defendant came to be together with that of the 1st defendant on the heading of the telefax message of 15 January 1997 (Exh. RA3). On the documentary evidence, it is understandable that the plaintiff should believe that it was dealing with the 2nd defendant as well as the 1st defendant.

17. The orders I make therefore are as follows:

Under the defendants' summons to amend of the 7 December 1999

i) the 1st, 2nd and 3rd defendants do have leave to Re-re-amend the Amended Defence and Counterclaim in the manner sought within 7 days.

ii) the plaintiff do have leave to amend its Reply and Defence to Counterclaim within 14 days thereafter.

Under the plaintiff's order 14 summons:

i) the 1st and 2nd defendants do have unconditional leave to defend the action.

Costs

18. I make the following order nisi as to costs which is to later effect unless either party makes an application to the court within 14 days of today

i) the costs of and occasioned by the defendant's summons of the 7 December 1999 be to the plaintiff in any event;

ii) the costs of the plaintiff and the 1st and 2nd defendants in the order 14 summons be in the cause.

(iii) Certificate for two counsel.