KINNEX INTERNATIONAL LTD v. KINGPIN TRADING LTD

HCMP 533/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

MISCELLANEOUS PROCEEDINGS NO 533 OF 2016

(ON AN INTENDED APPEAL FROM DCCJ 1546/2012)

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D E C I S I O N

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Hon Barma JA (giving the Decision of the Court):

1. This was an application for leave to appeal by the plaintiff, Kinnex International Limited, against the judgment of Deputy District Judge W Y Ho dated 3 July 2015. Kinnex has also applied for a stay of execution of the judgment, and of a summons taken out by the defendant, Kingpin Trading Limited, for an account to be taken pursuant to the judgment, pending the determination of the intended appeal.

2. The dispute between the parties arose out of an agreement by which they agreed to cooperate to sell household goods to third parties.  It appears that the defendant’s main role was to identify and liaise with customers, while the plaintiff was to be mainly responsible for arranging for production of the items to be sold.  The defendant was to have a 55% interest in the business, and the plaintiff a 45% interest.  The first customer was to be VanGo convenience stores, operated by China Resources Vanguard (Hong Kong) Company Limited.  In July 2011, the defendant instructed the plaintiff to issue purchase orders for the production of six batches of goods to be sold to VanGo.  These were ordered and delivered to VanGo on a consignment basis, some goods were sold, and unsold goods were returned and subsequently disposed of at auction by the defendant.  However disputes arose between the parties in relation to payment for the production cost.

3. The plaintiff claimed that under their agreement, the defendant was to pay for 55% of the production costs within 30 days of the issue of purchase orders, but had failed to do so.  It says that the defendant also failed to settle three further invoices (for artwork and packaging materials) issued by the plaintiff, failed to supply sales reports relating to sales made by VanGo and failed to distribute the plaintiff’s 45% share of the profits to the plaintiff.  The plaintiff also alleged that the defendant had failed to provide a copy of the consignment agreement with VanGo, or copies of sales reports from VanGo.  By its Re-Amended Statement of Claim, the plaintiff claimed damages for these alleged breaches.

4. For its part, the defendant contended that it had not agreed to pay 55% of the production costs within 30 days of the issue of purchase orders, and that the actual agreement was for all expenses incurred by the parties to be paid in accordance with the agreed proportions on an “open book” basis, which required the party claiming payment to produce relevant documentation (invoices, receipts and other vouchers) to substantiate the payments it claimed to have made.  The defendant claimed that the plaintiff had never provided such supporting document, and that the defendant had consequently not yet incurred an obligation to reimburse the plaintiff for 55% of the value of the purchase orders.  The defendant further alleged that the plaintiff had wrongly demanded full payment of the production costs from it (and not just the 55% to which it would have been entitled after provision of the necessary supporting documents).  The defendant alleged that the plaintiff had wrongfully treated the agreement as terminated, thus repudiating it, although the repudiation was not accepted by the defendant, which remained willing to pay the appropriate amount to the plaintiff on provision of proper supporting documentation.  Finally, the defendant denied any other breach of the agreement – it said that it had provided a copy of the VanGo consignment agreement, and that it had never received sales reports from VanGo despite pressing VanGo for these.  The defendant counterclaimed against the plaintiff on the basis of the plaintiff’s alleged breach of contract, and sought damages for such breach, together with an account to be taken as between the parties to establish the amount payable as between them.

5. The judge found, after a careful consideration of the evidence, including the parties’ contemporaneous e-mail exchanges, that it had in fact been agreed that reimbursement of expenses was to be on the “open book” basis, and that as the plaintiff had not provided the relevant supporting documentation, the defendant had not yet become obliged to reimburse the plaintiff for 55% of the cost of the purchase orders and other expenses.  The judge further found that there had been no agreement for settlement of the amount of the purchase orders within 30 days of their being issued (not least because this would have been inconsistent with the obligation to provide supporting documentation before being entitled to be reimbursed).

6. The judge went on to find that the defendant had provided the VanGo consignment agreement to the plaintiff, and that as it had never received satisfactory sales reports from VanGo, it was not in breach for not having provided these to the plaintiff.  On the other hand, he found that the plaintiff had unjustifiably demanded full payment (and not just 55% reimbursement) of the purchase orders, and had wrongly treated the defendant’s justified failure to make payment as a repudiatory breach of contract entitling the plaintiff to treat the contract as discharged, thereby placing itself in repudiatory breach.  However, as the defendant did not accept this repudiation of the contract, the judge held that the contract remained on foot.  He accordingly made an order for an account to be taken to establish where the balance of the payments due to and from the parties truly lay.  He also awarded the defendant HK$100 as nominal damages for the plaintiff’s breaches, and ordered that the plaintiff should pay the defendant’s costs of the proceedings.

7. Dissatisfied with this outcome, the defendant applied unsuccessfully to the judge for leave to appeal.  It now renews its application before this court.  As we have noted, it also seeks a stay of execution of the judgment below pending the hearing of its appeal.

8. In its draft notice of appeal, the defendant raises four broad grounds of appeal, as follows:

(1)  The judge should have held that notwithstanding his finding that the plaintiff was in breach of contract, the contract remained alive for the benefit of both parties as the defendant had not accepted the plaintiff’s repudiation of the contract and had indicated that it was still prepared to have an account taken in order to ascertain the correct amount payable as between the parties.  In the circumstances, the judge should have held that the plaintiff had succeeded on its alternative case as pleaded in paragraph 20B of the Re-Amended Statement of Claim and paragraphs (a) and (c) of the prayer for relief, and ordered an account and inquiry to be undertaken to establish the amount payable by the defendant to the plaintiff.

(2)  The judge should not have ordered the plaintiff to render any account to the defendant, as he had not found that there was any duty on the plaintiff’s part to account under the agreement, or that there was a partnership between the parties so as to oblige the plaintiff to account to the defendant.

(3)  The judge had erred in holding that the plaintiff had been in breach of contract by wrongfully purporting to terminate the agreement in December 2011 or by issuing a debit note for the full amount of the purchase orders (and not just 55%) at the end of December 2011.

(4)  As the defendant had accepted that it was prepared to pay whatever amounts might be due to the plaintiff, and had not suffered any loss by reason of the plaintiff’s alleged breaches of contract, the judge should have declined to grant the declaration that the plaintiff had breached the contract, as it would serve no useful purpose, refused to award even nominal damages to the defendant, and (particularly as the plaintiff would be the party to receive monies from the defendant following the account and inquiry that had been ordered) found the plaintiff to have been the substantially successful party in the litigation and ordered costs in the plaintiff’s favour, rather than against the plaintiff.

9. The plaintiff’s written submissions in support of its application for leave to appeal focussed on the grounds 1 and 4.  Before us, Mr K M Chong, appearing for the plaintiff confined his oral submissions to an amplification of ground 1.

10. Despite Mr Chong’s submissions, we are unable to agree that ground 1 has any reasonable prospect of success.  The essence of this ground is that, on the findings made by the judge, he should have found that the plaintiff was entitled to succeed on its alternative case.  That alternative case was pleaded as follows in the Re-Amended Statement of Claim:

“20B. Alternatively, if it is found that the Plaintiff’s purported acceptance of the Defendant’s repudiation of the Agreement was wrongful … the Agreement is still subsisting. The Plaintiff is entitled to 45% of the total sales revenue of the Goods, 55% of the production costs of the Goods, 55% of total other disbursements … and 45% of the unsold Goods or the proceeds of sale thereof … which are due and owing by the Defendant but have remained unpaid.”

The relief sought by the plaintiff was damages, interest and further or other relief.  Mr Chong submitted that on the basis of this pleading and the relief claimed, the judge should have ordered an account to be taken in favour of the plaintiff.

11. We cannot agree.  Paragraph 20B of the Re-Amended Statement of Claim asserts that the amounts claimed were presently due and owing, so that the defendant was in breach of contract by having failed to pay them.  However, the major issue between the parties was whether or not any sum had yet become due and payable.  The defendant’s case, which the judge upheld (and it was not suggested that he was palpably wrong to do so) was that payment would not be due in accordance with the payment terms alleged by the plaintiff (30 days after issuance of purchase orders) but only after provision of supporting documents to justify the expenditures allegedly incurred (the “open book” basis).  Accordingly, the plaintiff had failed to establish that it was entitled, as things stood, to any immediate payment, and therefore could not succeed in its claim to damages.  As is apparent from the prayer for relief, it sought only an award of damages (and interest thereon), and had not sought the taking of an account in its favour, so as to work out the amount payable, after which payment might be ordered.  The general words “further or other relief” do not suffice for this purpose.  We therefore do not consider that this ground is reasonably arguable.

12. None of the other grounds are reasonably arguable either.

13. So far as ground 2 is concerned, it was entirely proper for the judge to order an account to be taken in order to ascertain what amount was due and to whom.  Given the “open book” basis of reimbursement, it was for the plaintiff to supply the necessary documentation to enable the amounts payable to it to be ascertained and verified.  As the plaintiff had not done this by the time of the trial, there was every reason for a full account to be ordered to be taken, with both parties being required to put forward the material in their respective possession to enable that to be done.

14. As for ground 3, it seems to us that having found that the defendant was not in breach of contract, the judge was justified in finding that the plaintiff’s purported acceptance of the defendant’s alleged repudiation of the contract (through the alleged breaches which the judge did not accept to be breaches in fact) was itself a breach of contract by the plaintiff.

15. Finally, so far as ground 4 is concerned, given that the substantial issues at trial turned on the ascertainment of the actual terms of the contract, and which party was in breach in the light of those terms, we are of the view that the judge was well justified in granting the declaration sought, and, having found that the plaintiff was in breach of the contract in a way which did not cause the defendant any loss, simply awarding nominal damages to the defendant.  So far as the costs of the proceedings are concerned, it is clear that the defendant was the substantially successful party, as its contentions as to the true terms of the contract were upheld, and the plaintiff’s were rejected.

16. For the foregoing reasons, we are satisfied that the proposed appeal does not have any reasonable prospect of success, and we therefore refuse leave to appeal.  It follows that the application for a stay pending appeal must also be dismissed.

17. So far as costs are concerned, these should follow the event, and we shall order that the plaintiff is to pay the defendant’s costs of these applications.  In accordance with our normal practice, we shall assess these costs on a gross sum basis.  The defendant has put in a statement of costs, but despite reminders from the court has failed to supply an updated statement of costs to take into account any costs related to the oral hearing of the applications.  In these circumstances, we shall simply assess the costs on the basis of the costs statement provided, and having considered the parties’ submissions, will assess the defendant’s costs in the amount of HK$90,000.