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

CACV 304/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 304 OF 2006

(ON APPEAL FROM HCA NO. 11053 OF 1999)

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J U D G M E N T

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Hon Tang VP (giving the Judgment of the Court):

1.  At the request of the defendant, the plaintiff procured the opening of letters of credit for the purchases of video cassette recorders (“VCR”) parts for shipment from South Korea to Jiangmen city in the Mainland.

2.  After trial, Deputy Judge L Chan ordered the defendant to pay to the plaintiff:

“… US$2,683,726.39 or the equivalent of the Hong Kong currency together with interest on US$790,000 at judgment rate from 1^st January 1993 until the date of actual payment …”

3.  This is the defendant’ s appeal.

4.  Mr Ronny Wong, SC, appeared for the defendant in the appeal, but not at the trial.

5.  Two points were taken on behalf of the defendant.  First, the defendant contended that there had been a novation or transfer of the liability of the defendant to a Mainland entity called Sun Kong (“Sun Kong”) such that the defendant has been discharged thereby.  The full name of Sun Kong is Guangdong Jiangmen Sun Kong Trading Company.

6.  Secondly, that the plaintiff’s claim has been barred by limitation and that the judge ought not to have found that the defendant had acknowledged its indebtedness by the confirmation letter dated 19 July 1994.

Background

7.  The defendant is a sole proprietorship, and one Mr Tam Tze-ying is the sole proprietor.

8.  The judge held that Mr Tam also owned and controlled Sun Kong.

9.  The request to procure the opening of letters of credit was made by the defendant to the plaintiff in return for which the defendant agreed to pay the plaintiff 1% of the amount as handling fee.  The defendant would be responsible for all expenses including bank charges and interest.  As a result of the letters of credit issued, a large quantity of VCR parts were purchased.

10.  The defendant’s case at trial was that it had merely lent its name to be used by the Reception Department of the Jiangmen City People’s Government, and it was not liable for repayment.

11.  Moreover, it was common case that in respect of the quantities of VCR parts purchase, it was only in relation to the last 9,000 sets, that full payment had not been made and that was the result of certain policy changes in the Mainland.  Furthermore, in relation to these 9,000 sets it was the defendant’s case that it was not involved at all.

12.  On such factual issues, the learned judge, after a trial which lasted 7 days, held against the defendant.  Mr Wong was right in not trying to re-open such factual issues which have been resolved against the defendant.  The only issues on appeal are the two points to which we have already referred.

Novation

13.  The basis of the novation argument is a document dated 4 January 1993 which was signed by the plaintiff and Sun Kong.  It is in the following terms:

「甲、乙雙方根據乙方与新英貿易公司的協議精神，乙方同意承擔原由新英貿易公司代辦，江門巿對外經濟發展公司和江門巿工業產品進出口公司所進口的錄像機，並承擔該批商品所欠甲方的貸款。到1992年12月31日止為USD4,248,822.00，並訂立還款條件如下：

1.  乙方從1993年開始分期五年償還所欠甲方的貸款。

2.  甲方接受乙方如屆時償還現金有困難時，不足部分可以用同等價值的土地或物業償還。

3.  甲方同意如乙方還款時，美元或港幣有困難，可以接受人民幣還款，匯率由雙方認可。

4.  本協議如有未盡事宜，甲乙雙方可經過協商作適當修改。

5.  本協議一式二份。甲乙雙方各執壹份，從雙方簽定之日起生效。」

14.  Briefly stated the effect of this document is that, Sun Kong agreed to pay the plaintiff, US$4,248,822.00 by instalments over 5 years starting from 1993.

15.  The defendant submitted that the 4 January 1993 document should be considered together with the agreement dated 30 May 1988 which was made between Sun Kong and the defendant.

16.  We need only refer to the first paragraph of the agreement dated 30 May 1988, which is as follows:

「一、原由新英貿易公司代聯繫此事，現移交給江門新港貿易公司負責與江門巿接待處，粵海土產有限公司、江門巿外經發展公司、江門巿工業產品進出口公司聯繫，因此而產生的權利和義務亦由江門巿新港貿易公司享受和承擔。」

17.  Essentially, the 30 May 1988 agreement purported to record that Sun Kong would be entitled to all rights and be responsible for all liabilities regarding the shipment of VCR parts.  We should also mention that this document also purported to show that the defendant was merely acting as agent in the matter, a contention which the learned judge had rejected.

18.  In relation to the 4 January 1993 agreement, the evidence of PW1, Mr Liu Wangsi, who was at the material time, the general manager of the plaintiff, as well as PW3, Liu Baiyue, who was in charge of recovery of this indebtedness, was that the plaintiff never agreed that Sun Kong would replace the defendant as the debtor.

19.  In relation, in particular, to the evidence of PW3, the learned judge said:

“64.   … I accept his evidence that he had never agreed to release the defendant from liability though he was happy to accept repayment or settlement from any other party. …”

20.  The learned judge then concluded:

“Was there novation?

65.    I do not accept the defendant’s argument of novation by the agreement dated 4 January 1993.  It was the defendant’s evidence that he did not know that the plaintiff would make this agreement with Sun Kong; he only learned about it afterwards.  He also said that he had nothing to do with this agreement.  Furthermore, if he should have been released by the novation agreement, I do not think he would have affixed his chop on the confirmation letter.  The wording of the agreement and the circumstances leading to its making also do not suggest a novation.  The terms do not suggest a replacement of debtor or the release of the defendant.  Sun Kong was also not providing any security for the payment to be made by it within five years.  The defendant was residing in Hong Kong but Sun Kong was an entity in Jiangmen.  It was a lot more convenient to sue the defendant in Hong Kong than to go to Jiangmen to sue Sun Kong.  I see no reason why the plaintiff would have accepted Sun Kong as a replacement for the defendant.”

21.  In all the circumstances of this case, we see no reason to disagree with the learned judge.

22.  Mr Kenneth Chan, who appears for the plaintiff, has referred us to Chitty on Contracts, (29^th ed), at para. 19-085:

“Novation.  There is no doubt that with the consent of both contracting parties all contracts of any kind may be transferred, and the term ‘novation’ has been introduced from Roman law to describe this species of transfer.  Novation takes place where the two contracting parties agree that a third, who also agrees, shall stand in the relation of either of them to the other.  There is a new contract and it is therefore essential that the consent of all parties shall be obtained: in this necessity for consent lies the most important difference between novation and assignment.”

23.  It is true that as Mr Wong submitted novation occurred by operation of law, often not expressed as such, but by drawing inference from conduct of the parties, which gave rise to the making of a substitute contract, replacing the old, either between the same parties, or between different parties.  This happened most often in the past due to the changes in partnerships or winding up of insurance companies.

24.  Mr Ronny Wong relied on the dictum of Lord Selborne LC in Scarf v Jardine (1882) 7 AC 345 at 351 where he said:

“… In the Court of first instance the case was treated really as one of what is called ‘novation,’ which as I understand it means this – the term being derived from the Civil Law - that there being a contract in existence, some new contract is substituted for it, either between the same parties (for that might be) or between different parties; the consideration mutually being the discharge of the old contract”.

25.  Looking at the agreement dated 4 January 1993, we are not satisfied that the parties intended that on the making of the agreement, the liability of the defendant towards the plaintiff should be discharged.  The agreement did not expressly so provide.  Nor would its language require such a reading.  In the circumstance of this case, as explained by the learned judge, there was really no reason why the plaintiff should have agreed to the substitution of Sun Kong for the defendant.  The learned judge’s view that the plaintiff was in fact trying to get payment from anyone who was willing to agree to pay was the more probable explanation.

Confirmation letter

26.  The confirmation letter is dated 19 July 1994 and is a document addressed to the defendant which requested the defendant to confirm that it was indebted to the plaintiff in the sum of US$2,683,726.39 by way of principal and interest up to the end of 1992.  It is a two-page document and contained calculations which supported the figure of US$2,683,726.39.

27.  The judge held as a matter of fact that the confirmation letter had been chopped with the authority of the defendant.  In this respect, he relied principally on the evidence of PW2, Madam Tsui Kin-king, who was the plaintiff’s Deputy Accounting Manager from 1992 to 1995, although she later worked for the defendant from 1995 to January 1998.  This is what the judge said about her evidence:

“PW2, the confirmation letter and who owned Sun Kong

56.    PW2, Madam Tsui Kin King, was the plaintiff’s deputy accounting manager from 1992 to 1995.  She gave very clear evidence that she had prepared the final draft of the confirmation letter and had personally delivered it to the defendant’s office.  Though she did not personally hand the letter to the defendant, she had asked the defendant, over his mobile phone, to affix his chop on the letter for confirmation.  She also repeated that the defendant had told her that he had to check the figures before confirming the correctness.  However, after PW3, Mr Liu Baiyue, had directed that there would be litigation if the defendant did not confirm the debt, the confirmation letter, bearing the defendant’s chop mark, soon appeared on her desk.  She had also received a call from a female staff of the defendant who sought her confirmation of her receipt of the letter bearing the defendant’s chop mark.”

28.  The learned judge found her to be a truthful witness.  He also accepted the evidence of PW3, Mr Liu Baiyue, who was in charge of the recovery.  The learned judge described him as a straightforward witness and accepted his evidence that:

“64.   … It was also his idea that if the defendant did not confirm the indebtedness in the confirmation letter, he would sue the defendant.”

29.  Mr Wong submitted that the learned judge was wrong in so finding.  Mr Wong accepted that on the evidence available to the defendant, he could not suggest that the confirmation letter was a forgery.  However, he submitted that there were two versions of the confirmation letter.  One version, which also bore the date, 19 July 1994, did not bear the chop of the plaintiff or the defendant (“the unchopped version”).  The other version is that relied on by the plaintiff which bore the chops of both the plaintiff and the defendant.

30.  We will just give a few examples of the differences between the two versions identified by Mr Wong.

31.  In the unchopped version, the name of the defendant did not appear.  It appeared on the chopped version.  There are also typographical errors, for example

(i)      at the sixth line of the chopped version, the word character 「後」in「先後」has been omitted;

(ii)      in the eighth line, the word「機」has been omitted from「台機」;

(iii)     in the tenth line, the word「資」in「資金」was missing from the chopped version.

(iv)     More importantly, perhaps, there were differences in the supposed interest rate payable, but we understand they did not affect the final figure, namely, US$2,683,726.39.

(v)     the difference in the final line of the unchopped version which reads:

「請貴司核對並盡快清理全部貨款本息」

32.  Whereas, in the chopped version, the defendant was asked to chop to confirm:

「請貴司核對，蓋章確認並盡快清理全部貨款本息」

33.  Mr Wong made the point that having regard to the differences, though minor, it is obvious that the two documents were not produced from the same file.  We do not know that is obvious at all.  Mr Wong submitted that the confirmation letter was designed to meet the limitation point.  However, Mr Wong has rightly accepted that on the available evidence, it would be irresponsible to put forward a positive case of forgery.  We do not believe the careful comparison between the two versions threw any doubt on the correctness of the learned judge’s conclusion.

34.  Mr Wong referred us to the evidence of PW2 where she said in respect of the confirmation letter:

「前後經過四、五次嘅修改同埋核對」(There had been 4 or 5 amendments including checking.)

35.  It was never suggested to her in evidence (and quite rightly so) that the confirmation letter was a forgery.  We do not believe that the differences between the two versions has undermined the reliability of PW2’s evidence.

36.  Mr Wong submitted that the learned judge was wrong in concluding that the defendant had a good reason to agree to the confirmation letter because the amount shown in the confirmation letter was actually less than what the defendant was liable to pay to the plaintiff.

37.  The learned judge said:

“66.   The defendant also argued that the calculations of interests in the confirmation letter were unreasonable and no reasonable debtor in his right mind would have accepted it.  However, the amount of indebtedness in this letter was below the actual indebtedness by more than US$1 million.  The calculations might have been illogical and wrong, but they were used to justify a compromise.  It was substantially in favour of the debtor and there was every reason for the debtor to accept it, despite the wrong calculations.”

38.  For that conclusion, the judge relied on Exhibit P2, which as Mr B K Ho, who appeared for the defendant in the court below, informed us, was the result of the joint effort of the plaintiff and the defendant, and that Exhibit P2 was designed to show as close as possible actual payment by the plaintiff of bank interest in respect of the letters of credit, and hence the amount due and payable by the defendant.  According to Exhibit P2 the amount payable by the defendant exceeded the amount stated in the confirmation by more than US$1 million.

39.  In any event, it was not Mr Wong’s case that the defendant could demonstrate that the figure shown in Exhibit P2 was incorrect.  So, on the material before us, we have no reason to doubt the general accuracy of Exhibit P2.  Nor the correctness of the judge’s conclusion that the amount which the defendant was required to confirm to be owing to the plaintiff was indeed less than the defendant’s actual indebtedness to the plaintiff at the material time.

40.  Furthermore, the fact that PW3 had threatened to take proceedings against the defendant if the confirmation letter was not confirmed, might have provided a good incentive to the defendant to actually confirm.

41.  For the above reasons, we are of the opinion that the learned judge’s judgment cannot be faulted.  We therefore, dismiss the appeal with costs, such costs to be taxed if not agreed.