GUANGDONG NATIVE PRODUCE CO LTD v. TAM TZE YING t/a SUN YING TRADING CO

    FACV No. 18 of 2007

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

FINAL APPEAL NO. 18 OF 2007 (CIVIL)

(ON APPEAL FROM CACV NO. 304 OF 2006)

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Between

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J U D G M E N T

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Mr Justice Bokhary PJ:

1.  At the conclusion of the hearing, we dismissed the appeal with costs (which were not resisted) indicating that we would give our reasons later. They are now given by Mr Justice Chan PJ for the Court.

Mr Justice Chan PJ:

2.  This is an appeal as of right from the Court of Appeal (Tang VP, Yuen JA and Fung J) which upheld the decision of Deputy High Court Judge L. Chan who gave judgment in favour of the respondent (“the Plaintiff”) against the appellant (“the Defendant”) in the sum of US$2,683,726.39 (or the equivalent of Hong Kong currency) together with interest on US$790,000 at judgment rate from 1 January 1993 until the date of actual payment.

The outstanding debt

3.  The sum awarded represented the outstanding amount owed by the Defendant to the Plaintiff arising in the following circumstances. Between April and May 1988, pursuant to the requests of the Defendant (who was sued as trading in the name of Sun Ying Trading Company), the Plaintiff procured the issue of letters of credit for the purchase of a large quantity of video cassette recorder parts (“VCR parts”) from South Korea for delivery to a government department in Jiangmen City in the Mainland. In return for the Plaintiff complying with such requests, the Defendant agreed, among other things, to pay the purchase price of the VCR parts under the letters of credit and 1% of the amount of the letters of credit to the Plaintiff as handling fees; and to be responsible for all the bank charges, expenses, interest, storage charges and other expenses (“the related charges”). It was accepted that what remained outstanding which was the subject matter of this action was the purchase price of the last 9000 sets of VCR parts and the related charges which had accumulated through the years.

The main issues at the trial

4.  At the trial, the Defendant disputed liability mainly on the basis that he was merely acting as an agent and conduit for the Mainland government department in purchasing these goods and was thus not responsible to the Plaintiff for payment. This was rejected by the trial judge holding that the Defendant had assumed personal liability, having regard to all the documentation including in particular the various letters of request sent by the Defendant’s company to the Plaintiff which clearly supported the Plaintiff’s case and the oral testimony of the witnesses. There was no appeal against this finding.

5.  Two other issues were raised at the trial. The first was whether there was a novation whereby the Defendant was released from liability to the Plaintiff. If there was, the Defendant would no longer be held liable. The second issue was whether the Defendant had acknowledged liability to the Plaintiff in a confirmation letter dated 19 July 1994. If he had not done so, the Plaintiff’s claim would have been statue-barred when he commenced this action. The trial judge held against the Defendant on both issues. The conclusions of the trial judge were affirmed by the Court of Appeal.

The issues in this appeal

6.  The Defendant now seeks to challenge the concurrent findings on these issues. They form the two grounds of appeal relied on by the Defendant in the present appeal.

7.  With regard to concurrent findings of fact, this Court will not interfere unless there are wholly exceptional circumstances. In order to successfully challenge such findings, it is necessary to show that there is some miscarriage of justice or violation of some principle of law or procedure. See Sky Heart Ltd v Lee Hysan Co Ltd  (1997-1998) 1 HKCFAR 318, 334. As Bokhary PJ added at p.336, the prime function of this Court is to review questions of law of general public importance and this is not altered by appeals as of right under s.22(1)(a) of the Hong Kong Court of Final Appeal Ordinance (Cap 484).

8.  While Sir John Swaine SC, leading Mr B.K. Ho for the Defendant, accepted these propositions, he argued that this was a case where challenge to the findings should be permitted in that in relation to the first issue, the lower courts were wrong in their construction of the relevant documents and in relation to the second issue, they had overlooked an important aspect of the evidence.

The Novation issue

9.  The Defendant’s argument on novation was that by virtue of a document dated 4 January 1993 signed by the Plaintiff and one Jiangmen Sun Kong Trading Company (“Sun Kong”), there was a novation whereby it was agreed that Sun Kong would replace the Defendant as a debtor to the Plaintiff (“the January 1993 agreement”). It was said that by this January 1993 agreement, the Plaintiff had agreed to release the Defendant from liability and to look to Sun Kong for payment of the outstanding debt. The relevant part of the January 1993 agreement relied on by the Defendant which was said to have such effect was its preamble:

“Party A [the Plaintiff] and Party B [Sun Kong] in accordance with the spirit of the agreement agreed by Party B and Sun Ying Trading Company [the Defendant]”.

10.  That was a reference to a document dated 30 May 1988 which purported to record an agreement between the Defendant and Sun Kong. Apart from this single brief reference in the preamble, no detail in respect of that document was set out in the January 1993 agreement and no copy was annexed. According to that document, the Defendant’s responsibility in liaising with the Mainland entities in connection with the purchase of VCR parts and the opening of the letters of credit was transferred to Sun Kong and that the “rights and obligations resulting from such a change shall be enjoyed and shouldered respectively” by Sun Kong.

11.  The January 1993 agreement stated clearly that Sun Kong agreed to assume responsibility for the VCR parts which the Defendant had imported for two Mainland companies in Jiangmen City and responsibility for the payment of the outstanding purchase price owed to the Plaintiff amounting to US$4,246,822 as at 31 December 1992. It also contained an agreement by Sun Kong to pay this amount by instalments over a period of five years and that should it run into difficulties, any shortfall shall be allowed to be repaid by means of land or properties of equivalent value.

12.  It must be noted that the trial judge found that Sun Kong was in fact controlled by the Defendant. The evidence also showed that Sun Kong defaulted after having made only one repayment in September 1993 and that negotiations conducted for the transfer to the Plaintiff of land or property in the Mainland did not yield any result. This subsequently led to a confirmation letter dated 19 July 1994 which was affixed with the Defendant’s chop acknowledging the debt owed to the Plaintiff (“the confirmation letter”) with detailed calculations on what was the outstanding purchase price and what were the related charges. This confirmation letter will be discussed later when we deal with the second issue.  

13.  The trial judge rejected the novation argument for a number of reasons. First, he accepted the evidence of PW3, Mr Liu Baiyue (the Deputy General Manager of the Legal Department of the Plaintiff’s holding company) that he had never agreed to release the Defendant from liability although he was happy to accept repayment from any other party which could satisfy the debt. Secondly, it was the Defendant’s own evidence that he did not know that the Plaintiff would sign the January 1993 agreement with Sun Kong and had nothing to do with it. Thirdly, if the Defendant had been released by the novation agreement, he would not have affixed his company’s chop to the confirmation letter. Fourthly, the wording of the document and the circumstances leading to it did not suggest a novation: the terms did not suggest a replacement of debtor or the release of the Defendant. Finally, there was no reason why the Plaintiff would accept Sun Kong which had provided no security for the repayment of the debt and why Sun Kong which was a Mainland company rather than the Defendant should have been preferred as a debtor. 

14.  The Court of Appeal agreed with the trial judge’s conclusion and his reasoning on this issue. The court accepted that novation occurs by operation of law: this need not have been expressly stated and can arise by way of inference from the conduct of the parties where it can be said that there was a substitute contract to replace the old contract. However, looking at the January 1993 agreement, the court was not satisfied that the parties intended that the Defendant’s liability towards the Plaintiff should be discharged: the agreement did not expressly provide for a release of the Defendant and the language of the document did not call for such an inference.

15.  Sir John submitted that as a matter of construction, the lower courts were wrong in considering only the January 1993 agreement. It was argued that because of the reference in its preamble to the earlier document dated 30 May 1988, it was clear that the two documents were connected and should be read together and when they were read together, it was also clear that in 1988, the Defendant company’s “rights and obligations” in connection with the purchase of the VCR parts had been transferred to Sun Kong and by the January 1993 agreement, Sun Kong had assumed the responsibility to pay the Plaintiff; thus, it was submitted, by implication the Defendant’s liability towards the Plaintiff had been discharged. Counsel further submitted that the trial judge had wrongly admitted and accepted the evidence on the Plaintiff’s subjective intention not to release the Defendant.

16.  With respect, this submission cannot be sustained. Novation takes place where there is an agreement by three parties (such as in the case of a creditor, debtor and third party) whereby one party agrees to be substituted for another party in relation to the third party. See Chitty on Contracts, 29^th ed. Vol. 1, para. 19-085. The effect of a novation is not to assign or transfer a right or liability, but rather to extinguish the original contract or debt and replace it by another. It involves the release of liability on the part of one party under the original contract and the assumption of such liability by another party under the new contract. Chitty on Contracts, para. 19-087; and Scarf v Jardine (1882) 7 App Cas 345, 351. Thus, it is necessary to have the consent of all parties to achieve a novation and there must be a clear intention that the original contract or debt is discharged or extinguished by the novation.

17.  There was no question of consent by all three parties to the January 1993 agreement: the evidence showed that the Defendant did not even know the Plaintiff would make this agreement with Sun Kong. Nowhere in the January 1993 agreement was there any indication that the Defendant’s liability towards the Plaintiff was to be extinguished. Nor can this be implied from the language of the document. The mere reference in the preamble to the “spirit” of an earlier document is far from being sufficient to incorporate the terms of that earlier document into the January 1993 agreement, but even if it were, it is impossible to conclude that the May 1988 document and the January 1993 document when they are read together were to effect a release of the Defendant’s liability to the Plaintiff. It is wrong to say the trial judge or the Court of Appeal had considered only the January 1993 agreement; both had considered the wording of that document (and this must include its reference to the May 1988 document which was before the court) and the circumstances giving rise to this document (which must include evidence on the purpose for the Plaintiff entering into this agreement).  The reasons given by the trial judge and the Court of Appeal cannot be faulted. This ground of appeal must be rejected. 

The Confirmation letter issue

18.  The second issue centered on the confirmation letter dated 19 July 1994. This document was addressed to the Defendant’s company; it purported to set out what the unpaid balance of the purchase price was, how the interest and charges were calculated through the years and the final figure outstanding as at the end of 1992. The last sentence read as follows:

“Would your company please verify and check the above, and affix your company’s chop to acknowledge and confirm the same and fully repay all principal and interest of the goods money as soon as possible.”

Both the Defendant’s company chop and the Plaintiff’s chop appeared at the end of the document.

19.  This confirmation letter, as found by the trial judge, came about in the following circumstances. In June 1994, the Plaintiff was still owed a large sum of money consisting of the balance of the purchase price and the related charges. Ms Tsui Kin King (PW2) who was the Plaintiff’s then Deputy Manager was instructed to check the accounts in order to calculate the unpaid amount of the debt, interest and charges. The Plaintiff’s staff had also visited the Defendant’s office to check with the Defendant’s Accounts Department. Ms Tsui prepared a draft confirmation letter which she had amended 4 or 5 times. She personally delivered it to the Defendant’s office seeking his confirmation. She did not see the Defendant and so left the document there. She later spoke to the Defendant several times on the phone asking him to confirm the figures and to affix his chop on the letter indicating his acceptance. But the Defendant did not do so. Ms Tsui even went to the Defendant’s office on a number of occasions to chase him but could not see the Defendant. Finally, in July 1994, the Plaintiff threatened to commence proceedings against the Defendant if he did not confirm the debt. It was after this that the document was returned to Ms Tsui’s office with the Defendant’s company chop affixed on it. Ms Tsui later received a call from a female staff of the Defendant asking whether she had received the document bearing the Defendant’s chop.

20.  The defence at the trial was that the Defendant had never seen this document before and had not affixed his company chop on it and had not authorized any person to do so.

21.  The judge found Ms Tsui to be a truthful witness. He also accepted the evidence of Mr Liu (PW3), the Plaintiff’s staff who was entrusted to take charge of the recovery of the debt and who testified in support of Ms Tsui. There were discrepancies between the figures stated in the confirmation letter and the amount actually claimed by the Plaintiff. However, the trial judge did not consider these to have adversely affected the Plaintiff’s claim. 

22.  In the Court of Appeal, senior counsel then representing the Defendant submitted that while he could not suggest that the confirmation letter was a forgery, the trial judge was wrong to have accepted the evidence in relation to that letter. The basis of his argument was this. There was another document obtained by the Defendant’s Mainland lawyer (from a Mainland entity involved in the purchase of the VCR parts) which was very similar to the confirmation letter produced by the Plaintiff. That document was also dated 19 July 1994, but did not have the name of any addressee or bear the Defendant’s chop, and the last sentence did not ask the recipient to affix its company chop to acknowledge and confirm the debt. There were also a number of typographical differences between this document and the confirmation letter. The trial judge, it was submitted, should not have accepted the evidence of Ms Tsui. The Court of Appeal did not believe that the differences between the two documents would undermine the evidence of Ms Tsui or cast any doubt on the correctness of the trial judge’s conclusion.

23.  Sir John submitted that on the face of the document, whether it be the confirmation letter produced by the Plaintiff or the “twin copy ” found by the Defendant’s Mainland lawyer, it was clearly meant to be a reply by the Plaintiff to a letter dated 25 March 1994 from Sun Kong to the Plaintiff. The existence of this “twin copy”, it was said, tended to support the Defendant’s allegation that he had never seen the confirmation letter before and had not affixed his company chop on such letter and had not authorized any one to do so. This evidence, counsel argued, had so undermined the evidence of Ms Tsui that she should not have been believed. Both the trial judge and the Court of Appeal had erred in accepting her evidence and relying on the confirmation letter. Counsel agreed that notwithstanding the previous concession by the Defendant’s counsel before the Court of Appeal that it could not be suggested that the confirmation letter was a forgery, the defence ran by the Defendant did as a matter of logic amount to an allegation of forgery. 

24.  We are not satisfied that there is any ground for interfering with the concurrent findings made by the courts below that the Defendant had acknowledged his liability to the Plaintiff by means of this confirmation letter. It is not sufficient for the Defendant to merely say that his denial amounted to an allegation of forgery. Forgery was not pleaded. Nor was it put to any of the witnesses for the Plaintiff. No evidence was adduced to substantiate this allegation.

25.  There were good reasons for the Plaintiff to be concerned about the correctness of the amount owed by the Defendant and to insist that the Defendant, having deferred payment for so long, should acknowledge and confirm his liability. Ms Tsui’s evidence was supported by her former superior Mr Liu. There was no other witness called by the Defendant to contradict her. In these circumstances, the trial judge was perfectly entitled to believe her. So was the Court of Appeal. Bearing in mind that Sun Kong had also agreed to assume liability to pay under the January 1993 agreement and had raised queries about the accuracy of the accounts in a letter dated 25 March 1994, it is not surprising that the Plaintiff might have also sent a copy of the draft confirmation letter containing detailed calculations of figures to Sun Kong.  In our view, the “twin copy” was just a red herring which did not have any impact on the credibility of Ms Tsui. The discrepancies and typographical differences between the confirmation letter and the “twin copy” are consistent with Ms Tsui’s evidence that she had made 4 to 5 amendments to her draft. The lower courts were entitled to act on the confirmation letter as an acknowledgement by the Defendant of his liability towards the Plaintiff. There is nothing in this second ground of appeal.

Conclusion

26.  For these reasons, the appeal must be dismissed with costs.