PAC-FUNG FEATHER CO. LTD. v. MARK PU SIAO HING AND ANOTHER

HCA5382/1993

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.5382 OF 1993

------------------

------------------------------

J U D G M E N T

------------------------------

The claim

1. The plaintiff claims against the defendants two sums of money, namely US$5,583.24 and US$111,132.60.

The plaintiff's case

2. The plaintiff's case is that it had entered into a contract with the 1st defendant in February 1992 in which the 1st defendant was employed as its manager. The 1st defendant, as the manager, had arranged for fabrics to be supplied to the plaintiff from a weaving mill in the Mainland, namely Wuxi 2nd Cotton Mill ("Wuxi") and for payment of the fabrics to be made to the supplier. The plaintiff had discovered that there was short delivery of the fabrics, and as a result of which, the plaintiff had made over-payment. The 1st defendant admitted the short delivery and over-payment of US$85,583.24. The 1st defendant returned US$80,000 to the plaintiff but kept US$5,583.24 on the ground that he had incurred expenses which the plaintiff was obliged to reimburse him. The plaintiff now seeks to recover US$5,583.24.

3. As to the sum of US$111,132.60, payment for the fabrics had to be made in US dollars, the 1st defendant informed the plaintiff that the exchange rate of US$ to RMB was US$1 to RMB6.30. The plaintiff had paid US$721,682.77 for the goods. However, later, it discovered that the conversion rate from US$ to RMB was much higher. The 1st defendant had actually paid US$610,550.17 to the supplier, as a result, he had kept the difference of these two sums, namely US$111,132.60.

4. The case against the 1st defendant is based on breach of fiduciary duty by reason of his role as a manager of the plaintiff, and that he had wrongly deducted US$5,583.24 and kept US$111,132.60 as secret profit. As to the role of the 2nd defendant, it was a company under the control of the 1st defendant. Because exports from the Mainland requires quotas, the arrangement for the supply of fabrics from Wuxi required quotas being obtained from other corporations which had the quotas. The 1st defendant told the plaintiff that for convenience, the 2nd defendant should be used in the payment of the fabrics. The plaintiff agreed to this proposal and money for the supply of fabrics was paid into the account of the 2nd defendant. Hence, the 2nd defendant was also joined as a party. The plaintiff alleged that the defendants had converted the money to their own use and hold them on trust for the plaintiff.

The defence

5. The 1st defendant said that he was entitled to deduct US$5,583.24 as reimbursement for expenses he had incurred in carrying out his duties and he genuinely believed the exchange rate was US$1 to RMB6.30. He said that he was entitled to keep the sum of US$111,132.60.

Role of the 1st defendant

6. A number of issues are raised in this action. The first is about the role of the 1st defendant that he had assumed with the plaintiff. The 1st defendant accepted that the content of the contract was what he had intended but he seemed to suggest that he had not agreed to be a manager of the plaintiff because in the past, he had only agreed to be an adviser or consultant for his clients.

7. The written contract between the parties specifically stated that the 1st defendant was "to act as the manager for (the plaintiff) with regard to China development and affairs". Despite the 1st defendant's suggestion that the word "manager" was added after the contract was signed, I find that he was indeed employed by the plaintiff as a manager and that the contract correctly set out the agreement between the parties. His role is clearly set out in the contract which involved, among other things, in him establishing and managing a joint venture company with Wuxi for weaving fabrics and also establishing and managing a joint venture, a feather washing mill, in the Mainland. As Mr Fan Shi Hoo of the plaintiff stated that the 1st defendant was the manager not in the sense of working in the plaintiff's office but rather managing the activities set out in the contract. In any event, irrespective of the description of the 1st defendant, he was clearly an agent and servant of the plaintiff and, as such, owns a fiduciary duty towards the plaintiff.

The responsibilities

8. The 1st defendant admits that he personally was not allowed to keep secret profits from the plaintiff, however, he confined this obligation to the responsibilities specified under the contract. He said that his responsibilities were to arrange for the setting up of the joint ventures in the Mainland.

9. Under the contract, the 1st defendant was to be paid an annual fee of HK$1 million which was to be paid to him on 12 monthly basis. The plaintiff had fulfilled this obligation. While the contract no doubt required the 1st defendant to arrange for the setting up of a joint venture between Wuxi and the plaintiff, which he managed to accomplish at the beginning of 1993, in my view, this was not the only responsibility he had assumed for the plaintiff. His responsibility included arranging for supply of fabrics from Wuxi to the plaintiff. The contract specifically stated that his responsibilities are :

"1. Joint venture with WUXI 2ND COTTON MILL - 'WING FAITH HOLDINGS'."

Then, it lists out the various heads of responsibility, and then in items (5) and (6), the terms stated that :

"- To establish export channels with visa for griege and bleached fabrics.

- To establish export channels with quota for the U.S. ready-made goods market."

10. After the contract was signed and before the joint venture was established, the plaintiff had bought fabrics from Wuxi through the 1st defendant. The obligation of the 1st defendant towards the plaintiff in terms of fiduciary duty clearly extended to the purchase of the fabrics.

11. The 1st defendant admitted that he was the one who carried out the arrangement, namely obtaining the fabrics and negotiating on the price, although in cross-examination, he tried to qualify this by saying that he handled this "mostly" himself. Also in cross-examination, he said that as his role was involved in the setting up of the joint venture, he could not handle so many purchasing orders required by the plaintiff in his personal capacity, so he introduced the 2nd defendant to take over this work. I do not accept this to be the case. This is not pleaded in the defence and was not raised in the witness statement of the 1st defendant. The 1st defendant is, as Mr Chan, counsel for the plaintiff, described, a sophisticated businessman. Clearly, he was the one who managed to obtain the supplies. The evidence just does not support a case that the 2nd defendant had taken part in the placing of orders for the fabrics.

Overpayment

12. The case on the exchange rate is a simple one. Although the 1st defendant stated that he genuinely believed in the exchange rate of US$1 to RMB6.30, he had also admitted that the actual amount of US dollar paid to the supplier was less than the amount of US dollar he had received from the plaintiff. The difference which was kept by him is in the nature of a secret profit which he must account to the plaintiff. There was no agreement that the 1st defendant was entitled to keep the difference. The 1st defendant pleaded that the plaintiff had terminated the contract on 15 February 1993 and certain shipments were made after 25 February 1993; as an independent third party who arranged for the export of fabrics from China to the plaintiff in Hong Kong, the 1st defendant was entitled to retain any profits he may have made from the shipments.

13. Again, the 1st defendant had not specified the basis on which he was entitled to retain the profit. Clearly, in view of the fiduciary duty imposed by the existing relationship, any other financial arrangements which the 1st defendant wished to rely must be expressly spelt out. In my view, the position between the parties is still governed by the fiduciary duty owing by the 1st defendant to the plaintiff. I cannot see how some of the shipments made after 25 February 1993 can make any difference to the plaintiff's claim. The actual payment was made on 25 February 1993.

14. The 2nd defendant was merely an instrument of the 1st defendant in carrying out the transactions. The 2nd defendant physically received the money and retained the difference, it must likewise account to the plaintiff of the sum of US$111,132.60. It was clearly an agent for the plaintiff.

Expenses

15. As to the question of the expenses, the position between the parties must be governed by the terms of the contract. Under the Terms and Conditions of the contract, paragraphs 3 and 4 provided that :

"3. MARK SIAO HING PU will be responsible for the following expenses :

a. All expenses related to office rental in Shanghai & Ningbo until the existing Shanghai office is no longer feasible and new office premise needs to be leased.

b. All office equipments for both offices.

c. All travelling expenses related to the above duties.

d. All gifts to the relevant partners and officials.

4. All entertainment expenses relating to the above said projects will be reimbursed by PAC-FUNG CO. LTD upon presenting the receipts."

16. Both the defence and the witness statement referred to the 1st defendant's claiming reimbursement under the contract. The contract just does not allow any other expenses to be reimbursed. Mr Mok, counsel for the defendants, argued that an implied term exists and referred to paragraph 7-058 of Bowstead and Reynolds on Agency, 16th Edn. This implied term is not pleaded at all. In fact, the 1st defendant, at the end of his cross-examination, stated that there was an oral conversation in which the plaintiff agreed to reimburse him for expenses in relation to the purchase of the fabrics. This, again, is not previously pleaded or raised in the witness statement, nor was this put to the plaintiff. I do not accept this to be the case.

17. Three debit notes were referred to by the 1st defendant. The 1st defendant had not shown that the expenses covered by these debit notes were expenses within paragraph 4 of the contract, namely entertainment expenses relating to the supply of fabrics. The 1st defendant was extremely vague on these matters and was not even sure if the sums in the supporting documents matched the debit note he relied. The burden is on the 1st defendant to establish that he is entitled to be reimbursed of these expenses. I am not satisfied that the 1st defendant could deduct these expenses.

Amendment

18. Mr Mok seeks to amend paragraph 23 of the defence by substituting the 2nd defendant as the one entitled to keep the profits. In view of my decision, no useful purpose is served by this amendment and I will not allow the application to amend.

Others

19. There were suggestions that the plaintiff had not renewed the contract and that he had reneged on a promise to allot the 1st defendant a share in the joint venture. These are not issues germane to this case and I do not have to deal with them.

Conclusion

20. In my view, the plaintiff has established its case and I will give judgment for the plaintiff on these two sums. As to the question of interest, there was delay by the plaintiff in the prosecution of this case. The action was commenced in June 1993. About three years were wasted due to inactivity. The plaintiff is entitled to interest on these two sums from the date of the service of the writ for five years, at the averaged judgment rate from June 1993 to June 1998. It is, of course, entitled to interest at judgment rate from the date of the judgment to payment.

21. Costs

Costs of the action be to the plaintiff.