INTERNATIONAL AIR EQUIPMENT INC LTD. v. AMERICAN AIR SUPPLY (ASIA) CO. LTD.

HCMP 4745/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 4745 OF 1998

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D E C I S I O N

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Background:

1. This interpleader summons was taken out by Ryoden (China) Co Ltd (hereinafter called "Ryoden") against International Air Equipment Inc Limited (formerly known as American Air Supply Inc. Limited and hereinafter called "AAS Inc") and American Air Supply (Asia) Company Ltd (hereinafter called "AAS (Asia)").

2. Ryoden was the air-conditioning contractor of Phase II of Metropolitan Plaza in Chong Qing in the People's Republic of China (" the PRC"). It sub-contracted its air-conditioning work under the project to Fair (China) Engineering Co Ltd (hereinafter called "Fair").

3. Ling Chor Keung is a director of AAS (Asia) incorporated in April 1996. It deals in air-conditioning equipment and accessories. It has a factory in Dongguang in the PRC called Feng Jun Decoration and Furniture Manufacturing Factory (hereinafter called "Feng Jun Factory") and two associated factories called Ling Ji Metal Works Enhancement Factory and Ling Ji Spraying & Baking Factory. These factories together serve as the manufacturing arm of AAS (Asia).

4. At about the same time as the incorporation of AAS (Asia) in 1996, Ling entered into some sort of an arrangement with Law Ying Fai, whereby Law would market his products. Since then, AAS (Asia) supplied certain air-conditioning accessories, mainly air grills, diffusers and dampers, to Zhen Tung Engineering (H.K.) Co Ltd, the air-conditioning contractor for Metropolitan Plaza Phase I project in Chong Qing. The accessories were approved by the project consultant and were manufactured by AAS (Asia)'s three factories in the PRC.

5. There is some dispute as to the nature of arrangement between Ling and Law. Ling said it was a contract of employment while Law said it was just an association or co-operation arrangement and that this arrangement broke down in 1998 as a result of some dispute between him and Ling. On 12 January 1998, AAS Inc was incorporated with Law's friend, Ms Nora Loo and his father as the first directors.

6. There is no dispute that Royden placed orders with AAS Inc for accessories and a staff of Fair in Chong Qing, on behalf of Royden, acknowledged receipt of the accessories supplied pursuant to those orders on four delivery notes of AAS Inc. The price for those accessories formed the subject matter of the present proceedings. The issue is who was the true supplier or owner of those goods before they were delivered to Fair.

The claim of AAS Inc:

7. According to Law, his co-operation arrangement with Ling broke down as Ling refused to pay him his share of the profits. He ceased working for AAS (Asia) in January 1998, but nevertheless continued to look after two projects in Beijing for AAS (Asia). In about mid-January 1998, through his friend, Lee Yan Ho, he learned that Ryoden was appointed as the contractor for air-conditioning work for Phase II of Metropolitan Plaza and that Ryoden sub-contracted the work to Fair. At his first meeting with Tang Chock Woon, the project director of Fair, he made it expressly clear to Tang that he represented himself and AAS Inc. He negotiated the orders from Fair on behalf of AAS Inc and not AAS (Asia).

8. However, this aspect of Law's evidence is contradicted by Tang, the project director of Fair, both in terms of timing and in terms of Law's capacity and by documents from AAS (Asia) bearing Law's signature. According to Tang, as early as November 1997, Tang had been negotiating with AAS (Asia) for the supply of accessories for the Phase II project, as AAS (Asia)'s products had been approved by the project consultant for Phase I. He received at least three quotations from AAS (Asia) signed by Law as its general manager. Two were dated 12 November 1997 and one was dated 19 November 1997. The negotiations continued on that basis for sometime with Law acting for AAS (Asia). Eventually, at a later stage, Law told him that the company's name had been changed to AAS Inc. The logo of AAS Inc was same as that of AAS (Asia) and Tang did not pay much attention to the alleged change of name. He continued dealing with Law as if he were representing AAS (Asia) as before. He placed orders with AAS Inc for the accessories, which were subsequently delivered to Fair's construction site at Phase II of Metropolitan Plaza in Chong Qing.

9. Law said that he had known Wong Ding Bun of Shantau China Trading Goods and Materials Co in Shenzhen (hereinafter called "Shantau") since 1995, though he had never dealt with Shantau before. Wong had shown him some samples of his products and he considered Shantau a competent supplier of air-conditioning equipment. The samples Tang requested were provided by Shantau. He ordered the accessories from Shantau to fulfill the order from Fair. The price quoted by Shantau was RMB321,750 which he considered very attractive. Because of the shortness of time, it was agreed that deposit would be payable after production had commenced.

10. Again, Law's evidence about the samples is contradicted by Tang. Tang produced some samples, which he said was given to him by Law in the course of their negotiation. Those samples are wrapped in plastic sheets with card board corner protectors bearing the name, address, logo, telephone number and fax number of AAS (Asia).

11. Law said that the agreement with Shantau was made orally. There was not a single piece of written document or invoice. Law arranged for his brother to bring cash in Hong Kong dollars to Shenzhen to pay Shantau on four separate occasions, namely 28 February, 17 April, 30 May, and 13 June 1998. There was not a single receipt. According to Law, the total lack of documentation was to evade tax. Law could not produce evidence of delivery and the identity of the carrier delivering the accessories from Shenzhen to Chong Qing. He said it was all arranged by Shantau. He could only produce the four delivery notes belonging to AAS Inc and signed by a staff of Fair as evidence of receipt of the goods by Fair.

12. The total absence of documentation from his supplier whom he had never dealt with before and for a transaction of this magnitude renders his account inherently incredible. Even if that was done to evade tax, Law could at least have adduced evidence of withdrawal of funds from Hong Kong for his various payments to Shantau. There is no evidence of the address of Shantau. He could not produce any certificate of origin, certificate of quality and quantity issued by the manufacturer of the goods and a complete set of catalogue required by Ryoden. I reject his explanation that the absence of documentation was to evade tax in the PRC.

13. By way of contrast, Ling was able to produce documentary evidence of sourcing of the raw material used for making the accessories and delivery notes from the carrier delivering the accessories from Feng Jun Factory to Chong Qing and acknowledged by Fair (see below). Tang is a dis-interested witness. I have no reason to doubt his honesty. His evidence cast serious doubts on the credibility of Law's evidence that he had made it clear that he represented himself and AAS Inc in his dealing with Tang and that he supplied Tang with samples from Shantau.

14. For the above reasons as well as those which will become apparent when analysing the claim of AAS (Asia), I do not consider Law a credible witness and reject his evidence.

The claim of AAS (Asia):

15. The case of AAS (Asia) is that Law or AAS Inc sold the goods of AAS (Asia) to Fair. Through Law's misrepresentation, Tang thought he was dealing with AAS (Asia) under a new name. Hence all documentation, such as Ryoden's purchase orders, and delivery notes were in the name of AAS Inc. Again, through Law's deceitful arrangement, the goods supplied to fulfill the orders had been misappropriated from Feng Jun Factory owned by AAS (Asia). In short, Law dishonestly sold AAS (Asia)'s goods in the name of AAS Inc.

16. Ling was tipped off about Law's dishonesty when he received through the mail a copy of letter from Fair to AAS Inc in respect of an order for similar products. He went to Feng Jun Factory to make enquiries. There he obtained a fax copy of a packing list and delivery notes dated March 1998 faxed by Law to the manager of Feng Jun Factory, Chan Bor, Exhibits D-2 and D-3 respectively. While the delivery notes were printed on the letter head of AAS Inc, the header of the fax showed that it was faxed from the office of AAS (Asia). This suggests that Law faxed the packing list to Chan Bor for him to deliver the accessories from Feng Jun Factory to fulfill the order of AAS Inc. This also rebutted Law's allegation that he had ceased working with AAS (Asia) since January 1998.

17. Upon realising the significance of these documents discovered from Feng Jun Factory, Counsel for AAS Inc sought an eleventh hour challenge of the authenticity of these documents. Apart from the header showing the identity of the faxing source and signature by a staff of Fair evidencing receipt of the goods, the delivery notes at Exhibit D-3 are identical to those produced and relied upon by Law as evidence of receipt of the accessories by Fair. One of the documents, delivery note number 1683 in particular, was printed on a piece of heat sensitive fax paper. It has been discoloured suggesting it to be an old document. While with modern technology it is possible to fabricate a header showing AAS (Asia)'s fax number and an ancient date, the old appearance of the document suggests that it is more likely than not that it is an original document created at about the date shown on the header. In despair, Counsel for AAS Inc suggested that some of the documents among these two Exhibits could have been reproduced from the exhibits attached in Law's affirmation. This could not be true because the signatures of Fair's employee do not appear on the documents in the Exhibits and more importantly one of the document, i.e. delivery note number 1683 had not been exhibited by Law in his affirmation. I accept the authenticity of these documents.

18. Then Ling went to Metropolitan Plaza in Chong Qing and met Yeung Charn Sum of Fair. There he was shown the air grills and diffusers delivered to the site. They were all wrapped in plastic sheets and card board corner protectors bearing the logo, name, address, telephone number and fax number of AAS (Asia). The carton boxes containing those goods also bore similar indicia of AAS (Asia). He produced some photographs showing some of those goods. The goods shown in the photographs are similar to the samples as produced by Tang which were obtained from Law.

19. Ling was able to provide documentary evidence of purchase of raw materials, including aluminium and other accessories. The authenticity of these documents is not in dispute. He was able to produce delivery notes from Wan Kam which showed that goods matching the description of AAS Inc's delivery note acknowledged by Fair were delivered from Feng Jun Factory to Chong Qing at the material times. Counsel for AAS Inc criticised that the delivery notes of Wan Kam as not fully corresponding with the delivery notes of AAS Inc. I do not consider there is much substance in the criticism. The delivery notes of Wan Kam were not packing lists and were not intended to be comprehensive. Receipt of those goods were acknowledged by Fair. It is unlikely that two lots of similar goods had been delivered to Fair, one lot by Shantau on behalf of AAS Inc and another lot by Wan Kam from Feng Jun Factory. At least no such suggestion has been made to Tang. The inference therefore is that the goods at the site in Chong Qing were delivered by Wan Kam from Feng Jun Factory and that they were air grills, air diffusers and dampers of the type described in the delivery notes of AAS Inc. This mutually supports Ling's evidence that the goods he saw in Chong Qing bore logo, name and other indicia of AAS (Asia). I am therefore satisfied that the goods delivered by Wan Kam were goods produced by AAS (Asia) which had been misappropriated by Law for the purpose of fulfilling Ryoden's orders placed with AAS Inc.

20. Ling had caused Chan Bor to be arrested by officers of the Dongguang Security Bureau to whom Chan made a confession implicating Law. I do not have to rely on that confession to reach my conclusion.

21. There are other disputes between Law and Ling over other collateral issues, such as the nature of the arrangement between Law and AAS (Asia), the amount of salary or profit or commission received by Law, etc. As the real issue is who was the owner of the goods delivered to Chong Qing and there are ample of credible evidence supported by uncontrovertable documentary evidence to enable me to reach a conclusion, I do not consider it necessary to determine those issues. If I have to decide on those issues, I would resolve them in favour of Ling, whom I found is an honest and credible witness.

Conclusion:

22. Having found that the goods delivered to Chong Qing in fulfilment of Ryoden's orders were goods belonging to AAS (Asia), I order that the proceeds now paid into Court by Ryoden be released to AAS (Asia).

23. AAS Inc deliberately used a name so strikingly similar to AAS (Asia) as to be calculated to deceive. With that name, Law did in fact deceive Tang into believing that the two companies were one and placed orders with AAS Inc. On my finding, the goods which were supplied to fulfill the orders had in fact been misappropriated from AAS (Asia). This is a bad case of theft. AAS Inc should not have contested AAS (Asia)'s claim at all. Justice would require that AAS Inc indemnify the costs of AAS (Asia). Accordingly I make an order nisi that AAS Inc shall pay the costs of AAS (Asia) on an indemnity basis, including the costs of $40,000 awarded to Ryoden for taking out the interpleader. All such costs are to be taxed, if not agreed.