Goldwood Development Ltd. v. Chow Hing Yuk t/a Hing Yuk Mould Factory

DCCJ14771/2000

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 14771 OF 2000

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Judgment

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Judgment in this case has been withheld pending certified translation of one important document adduced at the trial. This is now available and I render judgment as follows.

In this action, the Plaintiff claims against the Defendant $150,000. The causes of action pleaded were :-

(1) a dishonoured cheque drawn by the Defendant in favour of the Plaintiff for $150,000, and

(2) $150,000 being the balance of price to be refunded for defective goods sold by the Defendant but rejected by the Plaintiff.

2. At the commencement of the trial, Mr. Chong, counsel for the Plaintiff, abandoned the cause of action on dishonoured cheque. The remaining cause of action, it will be seen, turns on the evidence.

3. It is common ground that the Plaintiff in 1996 purchased from the Defendant 6 sets of moulds for making CD jewel cases at a total sum of $300,000. The moulds were delivered by the Defendant to a plastics factory in Mainland China called Xingguang ("Xingguang") in September 1996 in accordance with the instructions of the Plaintiff. The Plaintiff also duly paid the price of $300,000 to the Defendant. Xingguang was the sub-purchaser from the Plaintiff of the 6 sets of moulds for $400,000.

4. Between September 1996 and January 1997, the moulds had to be repaired twice. According to the Plaintiff, the moulds had to be repaired because they were not fit for the purpose. The Defendant's case, however, is that the repairs were occasioned by misuse. Evidence for the Plaintiff stated that by the end of December 1996 or January 1997 the moulds could not be remedied and so they were treated as rejected whereupon the Defendant agreed to refund the purchase price of $300,000.

5. Indeed, the Defendant drew a cheque for $300,000 in favour of the Plaintiff and delivered the same to the Plaintiff. This cheque, according to the Plaintiff's only witness, was subsequently replaced by two cheques each for $150,000. One of these two cheques was honoured and paid upon presentation. The other cheque, however, bounced.

6. According to the defence case, there was no real defect with the moulds. The Defendant believed Xingguang rejected the moulds because Xingguang discovered that the moulds were sold to them for $400,000, i.e. at a profit of $100,000 by the Plaintiff. Xingguang would only pay $300,000 to the Defendant for the moulds. The Plaintiff, allegedly, was displeased and took it out on the Defendant. The Defendant was threatened by people claiming to be acting on behalf of the Plaintiff. In order to pacify the Plaintiff, the Defendant drew the $300,000 cheque and delivered it to the Plaintiff on the express condition that the cheque was not to be presented for payment until the Defendant had received payment from Xingguang. Subsequently, a sum of $150,000 was paid into the Defendant's account. Therefore, the $300,000 cheque was exchanged for two $150,000 cheques so that $150,000 could be paid over to the Plaintiff leaving one $150,000 cheque still to be held by the Plaintiff pending further payment by Xingguang.

7. The Plaintiff's case suggests a further twist to the version stated by the Defendant. The moulds, after being rejected by the Plaintiff, were resold by the Defendant to another plastics factory called Heping ("Heping") at $300,000. The aforementioned sum of $150,000 paid into the Defendant's account was paid by Heping. The Defendant, on the other hand, said that he knew nothing about Heping. In fact the Defendant had no control over the moulds which were held in Mainland China by Xingguang.

The Quality of the Evidence

8. The Plaintiff called a former accounting staff ("PW1") as its only witness. The gist of PW1's evidence is as already mentioned above. In addition, PW1 stated clearly that she had no direct dealings with the moulds. She did not see the moulds. She was, in my view, in no position to prove that the moulds were defective. Moreover, she was not privy to the circumstances in which the Defendant drew the $300,000 cheque.

9. There are, however, parts of her evidence supported by non-controversial historical documents that I believe must be true. Specifically, PW1 said that Xingguang and the Plaintiff had a long trading relationship such that the two enterprises kept a running account for settlement without actual money payment. Also, the Plaintiff did sell the six sets of mould to Xingguang at $400,000 which was debited against Xingguang in the running account and then on 31 January 1997 $400,000 was credited back to Xingguang because Xingguang refused to pay. What strikes me as odd is that the Plaintiff readily accepted Xingguang's refusal to pay $400,000, thereby resulting in loss of $100,000 profits, and then the Plaintiff is only content with suing the Defendant for the balance of the price the Plaintiff paid the Defendant for the moulds.

10. The Plaintiff relied on a number of documents tending to show that the moulds were rejected for defective quality and were resold on the instructions of the Defendant to Heping. However, it must be noted that all these documents are self-serving or one-sided documents which do not bear proof of acknowledgement by the Defendant. For instance, there is one letter dated 13 June 1997 from Heping purportedly addressed and sent to the Defendant saying that Heping had purchased the moulds from the Defendant. See extract of that letter below. But there is no proof that the letter was in fact sent and the Defendant denies ever having seen it. For another instance, the Plaintiff produced copy receipts for the two $150,000 cheques that replaced the $300,000 cheque. These copy receipts are in the form of a photocopy of the cheque and in the space underneath the cheque impression one can see PW1's handwriting to the effect that the cheque represented a debt owing by the Defendant to the Plaintiff. The Defendant said that he has never got such receipts, much less accepted the contents of the note written by PW1.

11. Mr. Tong for the Defendant pointed out that the letterheads of Xingguang and Heping show the same telephone number, the same cable address and the same factory address. So, even if Xingguang and Heping were separate identities, it is safe to say that they were somehow related. The six sets of moulds delivered to Xingguang, even if transferred to Heping, never had to leave the same factory premises upon the transfer. Since Xingguang complained that the moulds were defective and beyond remedy, one wonders why Heping operating from the same premises as Xingguang would buy the moulds second hand for the same price at which the Defendant sold them to the Plaintiff.

12. More important, in a declaration dated 14 September 1999 by a Mr. Lin Muhu of Heping, it is stated that:-

"....... The products were launched in the market. Due to quality problems, the products could not be sold in the market. On June 13, the Company sent a fax to Mr. Chow Hing Yuk about the problem and proposed to him to accept the products produced by the Company with the moulds, to rectify or take back the moulds, and to refund the sum of HK$150,000 already paid for the moulds and compensate for the loss (for details see the entire contents of the fax dated June 13, 1997). It was not until August 1, 1997 that Mr. Chow Hing Yuk allowed the moulds to be sent by the Company to the Huiyang City Commercial Mould Factory in Guangdong Province (the factory was founded by Chow Hing Yuk) for rectification (for evidence see the receipt in which the Company's former name "Chaoyang City Electroacoustic Factory" was (written) as "Chaoyang New Acoustic Magnetic Tape Factory"). So far, the moulds are still in that factory. Since the mould sets supplied by Chow Hing Yuk do not comply with the quality standards, the Company has suffered substantial financial loss. The above contents are all true. Should there be any deception or concealment, (I'm) willing to be held liable to all consequences arising therefrom with no regret."

This declaration was produced as evidence for the Plaintiff. Mr. Chong for the Plaintiff says that the declaration is the equivalent of affidavit evidence in Hong Kong. One of the exhibits to this declaration is a letter dated 13 June 1997 written by the same Lin Muhu of Heping to the Defendant. The Defendant denied ever having received this letter. But that is not the point. The point is that this exhibit (Lin Muhu's letter dated 13 June 1997) glaringly contradicted the declaration. The relevant part of the letter reads:-

"Boss Chow Hing Yuk:

On a previous day (we) accepted the two sets of CD case moulds (four outer moulds and two inner moulds) which have been originally intended for the use by Xingguang (Group) Corp. You personally promised that the CD cases produced from such moulds would be sold to you at HK$0.62 case and that half of the HK$300,000 being charge of the moulds be paid first. Our factory has made a payment of HK$150,000 as agreed. So far over three containers of more than 900,000 cases of high quality products have been produced. The packing is also in accordance with the specifications that you instructed Kehui. And the boss Chen Qingyun had come to our factory to inspect the goods and seemed they were alright. However, so far (you) have not yet taken delivery of the products from our factory. Why? Please reply."

13. Clearly, Lin Muhu in June 1997 wrote that the moulds had been in use and during three months, presumably from March to June 1997, over three containers of 900,000 CD cases of high quality had been produced with the moulds. On the other hand, in September 1999, the same Lin Muhu said in a declaration that in June 1997 there were problems with the moulds which had to be rectified. Incidentally, "Kehui" mentioned in the letter was the person who acted on behalf of Xingguang. Kehui has also made a declaration on behalf of Xingguang as evidence for the Plaintiff. Why would Xingguang be involved in the alleged compensation trade between Heping and the Defendant?

14. The Defendant himself gave evidence. He relied on a written statement ("the security statement") admitted by the Plaintiff that accompanied the $300,000 cheque. The security statement reads:-

"letterhead of Hing Yuk Mould Factory)

Letter of CERTIFICATION

As Hing Yuk Mould Factory has produced two styles of 2 CD moulds for Goldwood Development Limited, including four sets of transparent CD outer case moulds and two sets of CD (illegible) moulds. All the above CD moulds totaling 6 sets have now been delivered, at the direction of Goldwood Development Limited, to the factory of the Shantou City Chaoyang Heping Xingguang (Group) Corporation. For the time being, the abovesaid moulds are still kept in the factory of Xingguang (Group) Corporation.

Since some disputes have arisen between both parties over the productions of the said batch of moulds, which up to now is not (deletion) yet resolved, and Hing Yuk Mould Factory admitted having received from Goldwood Development Limited the full sum for the moulds in the amount of HK$300,000.00. Hing Yuk Mould Factory now, in accordance with the request of Goldwood Development Limited, prior to a full and satisfactory compromise between both parties can be resolved regarding the said batch of moulds, Hing Yuk would issue a post-dated cheque in the sum of HK$300,000.00 to be pledged in the hands of Goldwood Development Limited, until a full and satisfactory solution has been reached by both parties when Hing Yuk Mould Factory would inform Goldwood Development Limited how the said post-dated cheque should be death with. By the reasons aforementioned, therefore Hing Yuk Mould Factory hereby certifies and declares the purpose and reason of issuing the said post-dated cheque.

The said cheque being of National Commercial Bank (cheque) no. 157113.

Dated the (illegible) date of March 1997"

In my view, the security statement that qualified the cheque in question clearly said that the $300,000 cheque was a conditional tender, not out and out payment. Indeed, when the Defendant received payment of $150,000 from a Mainland Chinese party, the $300,000 cheque was retired and replaced by two cheques for $150,000 each so that $150,000 could be paid over to the Plaintiff. In other words, the conduct of the Plaintiff corroborates the Defendant's case that the remaining $150,000 by cheque was no more than a guarantee for payment over when a Mainland purchaser (whether Xingguang or Heping) of the moulds pays.

15. Mr. Chong for the Plaintiff contended that the Defendant's story is inherently unbelievable. With respect, I cannot agree. The version given by the Defendant tallies with commercial reality. The Defendant's own performance in the witness box is unassailable. I have no reason to disbelieve the Defendant. In any event, the Plaintiff carries the burden of proof.

Conclusion

16. It is not possible to determine what went on between the Plaintiff, Xingguang and Heping behind the Defendant. Nonetheless, the fact remains that the Defendant supplied six sets of moulds at $300,000 to the Plaintiff and received payment for them. The moulds are now in China in a factory that appears to have split identities. Even the Chinese party which has admittedly taken over the moulds states that the moulds were worth $300,000 but that party has only paid $150,000. The $150,000 has been passed on to the Plaintiff by the Defendant. So the Plaintiff has been short changed, not by the Defendant, but by the Chinese party. If the Plaitniff succeeds in this action, the loss of half the price of the moulds would be shifted from the Plaintiff to the Defendant. If the Plaintiff fails in this action, it is not left without avenue of redress. The Chinese party apparently said that it would pay to the Defendant for the balance of the price of the moulds by compensation trade. This arrangement alleged by the Chinese party is highly suspect and is denied by the Defendant. Moreover, there is no evidence that the Defendant received the balance of the price in money or by compensation trade.

17. There are so many holes in the Plaintiff's case that I cannot accept the version of events canvassed on its behalf. Specifically, I do not believe the moulds were defective. Evidence for the Plaintiff indicates that the moulds rejected by Xingguang were usable and had in fact been used to produce high quality products by Heping sharing the same factory premises with Xingguang. It follows that Xingguang had no right to reject the moulds. On this basis, the Plaintiff was wrong to accept rejection and make the Defendant the scapegoat.

18. Putting the Plaintiff's case at its highest, all that the Defendant agreed was to let the Plaintiff have a cheque for $300,000 as security that he would paid over money to be received from the Chinese party having the moulds. Both the Plaintiff and the Defendant have acted in accordance with this agreement, i.e. the Defendant subsequently paid over $150,000 received from China and leaving another cheque for $150,000 (in place of the $300,000 cheque) to continue to stand as security. Such agreement, if binding on the parties, does not even place the Defendant in the position of secondary guarantor. A secondary guarantor is liable to pay if the creditor cannot obtain satisfaction of judgment against the primary debtor. The Defendant here does not undertake secondary liability, he only guaranteed transfer of payment to be received. In the circumstances, the Plaintiff had no right to payment from the Defendant until the Defendant has received payment from the primary debtor.

Order

Accordingly, the Plaintiff's claim is dismissed with costs to be taxed if not agreed. There is certificate for counsel.