RIVER VALLEY INVESTMENTS LTD v. WONDERFUL MIND LTD

DCCJ 651/2011

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 651 OF 2011

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JUDGMENT

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Introduction

1.  This is a dispute between the parties in respect of an outstanding payment for a share transfer.

2.  The major dispute between the parties was whether there was an oral supplemental agreement to vary the terms of the final payment for the share transfer as contended by the defendant, but denied by the plaintiff.

3.  Mr Tam Kai Nin (“Mr Tam”) testified for the plaintiff. Mr Cheuk King and Mr Cheuk Yau Ping testified for the defendant.

4.  This case turns largely on the credibility and reliability of the witnesses’ evidence.  In resolving conflict of evidence of the witnesses, I take into account the inherent plausible or implausible of a party’s case, as well as to what extent a party’s case was supported or contradicted by other evidence (both documentary or otherwise). (Big Island Construction (HK) Limited v Wu Yi Development Company Limited, unreported, HCA 1957 of 2005, 28 July 2011, paragraph 24)

Background fact

5.  By a sale and purchase agreement dated 28 November 2008 (“the Agreement”), the plaintiff agreed to sell all its shares (the “Shares”) in Adrian Environmental & Waste Technologies Limited[1] (“the Company”) to the defendant for a consideration of HK$5,000,000.

6.  Prior to the Agreement, the Company was managed by Mr Tam (who is the owner of the plaintiff) and Mr Cheuk King.

7.  The defendant is a company owned by Mr Kwan, who, in his personal capacity, was also a shareholder of the Company at the time of the Agreement.

8.  The Agreement was negotiated by Mr Tam on behalf of the plaintiff, and Mr Cheuk King on behalf of the defendant.  It was signed by Mr Tam on behalf of the plaintiff and Mr Kwan on behalf of the defendant, both of their signatures were attested by solicitors.

9.  Pursuant to the Agreement, the transfer of the Shares was to be completed on the same day of the Agreement, and the defendant shall pay to the plaintiff the purchase price of HK$5,000,000 in the following manner:-

(1)  the sum of HK$500,000 at the signing of the Agreement;

(2)  the balance of HK$4,500,000 was to be paid by 5 monthly instalments as follows:-

	Date of Payment	Amount (HK$)
1st Instalment Payment	30/12/2008	500,000
2nd Instalment Payment	30/1/2009	1,000,000
3rd Instalment Payment	28/2/2009	1,000,000
4th Instalment Payment	30/3/2009	1,000,000
5th Instalment Payment	30/4/2009	1,000,000

(3)  the defendant shall deposit with the plaintiff 5 post-dated cheques in respect of the payment for the 1^st to 5^th Instalment Payments.

10.  On the same date of the Agreement, the plaintiff received the initial payment of HK$500,000 and 5 post-dated cheques for the 1^st to 5^th Instalment Payments issued by the defendant.

11.  The Shares was transferred to the defendant on the same day.

12.  The 1^st Instalment Payment and the 2^nd Instalment Payment were uneventful.

13.  There were some variations in the manner of payment in respect of the 3^rd and 4^th Instalment Payments, which I will elaborate below.  Notwithstanding the variation of the mode of payment, these two Instalment Payments have been settled.

14.  The dispute between the parties is in respect of a sum of HK$800,000 out of the 5^th Instalment Payment. 

15.  The defendant’s case was that there was an oral agreement (“Supplemental Agreement”) to the effect that the sum of HK$800,000 was withheld and applied to set off against the payments owed by Hang Kee Construction & Engineering Co Ltd (“Hang Kee”) (a company owned by Mr Tam) and Yiu Chak Construction Engineering Ltd (“Yiu Chak”) (a company owned by Mr Chuek Yau Ping, the son of Mr Chuek King).

16.  The plaintiff denied that there was such Supplemental Agreement. 

Hang Kee and Yiu Chak

17.  I shall explain at this juncture the dealings between Hang Kee and Yiu Chak.

18.  As mentioned above, Hang Kee is owned by Mr Tam.  Yiu Chak is owned by the son of Mr Cheuk King.

19.  Hang Kee was the main contractor of a project numbered HY/2005/16 commissioned by the Highway Department (“the Project”).  Yiu Chak was engaged as its sub-contractor for the supply and laying of bituminous pavement materials for the Projects (“Subcontract Agreement”).  As shown from the quotation dated 8 December 2008, the quoted fee was about HK$804,615 (subject to actual measurements).

20.  In early 2009, there was some dispute between Hang Kee and Yiu Chak.  It was Hang Kee’s case that the quality of Yiu Chak’s works was not up to standard, and it would only make payment to Yiu Chak after the completion of works to the satisfaction of the Highway Department.

21.  Yiu Chak on the other hand complained that Hang Kee failed to make payments according to the Subcontract Agreement due to Mr Tam’s own cashflow problem.  It was also alleged that Yiu Chak has threatened to stop works unless Hang Kee or Mr Tam put some money with them on deposit.

The 3^rd and 4^th Instalment Payments

22.  Against this background, I now turn to the 3^rd and 4^th Instalment Payments.

23.  There was an agreement between the plaintiff and the defendant about the 3^rd Instalment Payment to the effect that the sum of HK$1,000,000 due on 28.2.2009 was to be settled by swapping the relevant post-dated cheque with:-

(1) A cheque in the sum of HK$500,000 issued by the Company;

(2) A cheque in the sum of HK$300,000 issued by the Company;

(3) The balance of HK$200,000 was to be treated as a payment to Yiu Chak to settle such part of the sum owed by Hang Kee.

24.  There was a written document dated 2 March 2009 recorded the above arrangements for the 3^rd Instalment Payment. The parties did not dispute this arrangement. There was also documentary evidence showing that the Company has paid to Yiu Chak the sum of HK$200,000 on 10 March 2009.

25.  As to the 4^th Instalment Payment, there was again arrangement for swapping of the post-dated cheque with the following cheques issued by the Company (not the defendant) to Mr Tam’s wife:-

(1)  two cheques in the total sum of HK$600,000 dated 30 March 2009;

(2)  A cheque in the sum of HK$400,000 post-dated 15 April 2009.

26.  There was also a written document dated 28 March 2009 recording the above arrangement.  No dispute arose from this arrangement.

The 5^th Instalment Payment

27.  This is where the parties differ.

28.  The defendant’s case was that on or about 30 April 2009 (which was the due date for the payment of the 5^th Instalment Payment), the parties have an oral agreement as follows:

(1) “The plaintiff agreed to pay HK$800,000 on behalf of Hang Kee to Yiu Chak as payment and/or deposit for the supply and laying of bituminous materials under the [Subcontract Agreement] in consideration that Yiu Chak would undertake to complete all the remaining works of the Projects; and

(2) ... the said total payment of HK$800,000 should be set off from the [5^th Instalment Payment];

(3) To give effect to the Supplemental Agreement, the Company paid on behalf of the defendant HK$800,000 to Yiu Chak, and the said payment was used by Yiu Chak to set off the works completed under the [Subcontract Agreement][2].”

29.  The plaintiff denied that he has agreed to the Supplemental Agreement. The plaintiff maintained that the defendant was in default of payment of the outstanding HK$800,000 under the Agreement.

Whether there was the Supplemental Agreement?

30.  The burden is on the defendant to prove the existence of the Supplemental Agreement.

31.  There was no dispute that there was no written record of the Supplemental Agreement.

32.  Mr Tam said he has never agreed to the Supplemental Agreement and therefore he did not sign anything to that effect. If he has agreed to the Supplemental Agreement, he would certainly make written record as he did for the variation of the payment mode for the 3^rd and 4^th Instalment Payments. 

33.  There was an unsigned document dated 30 April 2009 stated that Mr Tam took one cheque issued by the Company in favour of Mr Tam’s wife in the sum of HK$200,000 being the amount of the final balance (尾數款項) of the sale of the Shares by the plaintiff.

34.  Mr Tam’s evidence was that this unsigned document was prepared by Mr Cheuk King.  He did not agree to it and therefore he did not sign it.  Despite the disagreement, he took the cheque in the sum of HK$200,000. Mr Tam explained that since the defendant did owe the plaintiff the 5^th Instalment Payment, and the money was there, he has of course taken it first.  To protect his own right, he retained the HK$1 million post-dated cheque.  If he has agreed to the Supplemental Agreement, he would not and should not have kept the post-dated cheque.   If he has agreed to the Supplemental Agreement, he would not bank in the post-dated cheque a few days later.

35.  Mr Cheuk King, however, said that the unsigned document was prepared by Mr Tam and was faxed to the office of Mr Cheuk King.    

36.  I do not accept this evidence of Mr Cheuk King.  If the document was indeed prepared by Mr Tam, which presumably signified his consent to the arrangement, there was no reason why Mr Tam refused to sign it.  In particular, Mr Cheuk King accepted in cross-examination that Mr Tam is a careful person and would put everything in writing.  If there was indeed the Supplemental Agreement, the logical conclusion was that Mr Tam would make a written record of the arrangement.  However, there was none.

37.  Mr Cheuk King sought to explain why he did not get back the post-dated cheque as he had for the 3^rd and 4^th Instalment Payments by saying that Mr Tam did not bring it with him and promised to return it the following day, but he did not.

38.  If that was actually the case, Mr Cheuk King, as a businessman, should have chased Mr Tam subsequently for the return of the post-dated cheque, but he did not.  Further, when Mr Tam banked in the post-dated cheque for the 5^th Instalment Payment, Mr Cheuk King should have complained or put down the Supplemental Agreement in writing. Mr Chuek King did none of these.

39.  It is further noted that Mr Tam has signed on the copy of the HK$200,000 cheque he has taken on 30 April 2009 to acknowledge his receipt of the same.  This further support the case that Mr Tam would not shy from acknowledging what he did or what he agreed by countersigning the same.

40.  The defendant contended that Yiu Chak was in a better bargain for the placing of deposit by Hang Kee, since Yiu Chak was threatening to cease the works if the plaintiff did not make the payment.  First of all, the Supplemental Agreement was not made by Yiu Chak.  Furthermore, if Yiu Chak has indeed a better bargain, it made better sense for Yiu Chak or the Company to insist on the plaintiff to acknowledge in writing its consent to the Supplemental Agreement but there was none.

Other documents

41.  The defendant sought to rely on the following documents to support its case of the existence of the Supplemental Agreement:-

(1)  A letter dated 4 May 2009 from Yiu Chak to the Company (“4 May Letter”) and a letter dated 15 May 2009 from Yiu Chak to the Company (“15 May Letter”); and

(2)  An email from Hang Kee to Yiu Chak dated 8 February 2010 (“Email”).

42.  The 4 May Letter was written by Yiu Chak to the Company.  The first paragraph stated that the Company agreed to be responsible for the outstanding payment in respect of any contract sum owed by Hang Kee to Yiu Chak.  It then goes on to state that since Hang Kee required Yiu Chak to continue the works in the Project, Yiu Chak required the Company to pay HK$800,000 as deposit.  The deposit was to set off all outstanding sum owed by Hang Kee and future contract sum for works to be completed.  If the amount of contract sum exceeds the deposit, Yiu Chak would stop the work until Hang Kee or the Company paid the contract sum in advance.

43.  The 15 May Letter was a letter between Yiu Chak and the Company concerning the treatment of HK$800,000 as an interest free loan from Yiu Chak to the Company.  No other parties were copied of it.

44.  First of all, these two letters are self-serving statements.  It was stated on the face of the 4 May Letter that the same was copied by fax to the plaintiff, Hang Kee and the defendant. However, Mr Tam said he never received the same (whether on behalf of Hang Kee or the plaintiff).   Yiu Chak chose not to send this letter to the defendant’s own fax number, but used the fax number of the Company.  Mr Chuek King and Mr Cheuk Yau Ping accepted that the defendant and Mr Kwan would not receive the letter directly, but they said Mr Cheuk King would inform Mr Kwan of the defendant subsequently.

45.  As to the content of the 4 May Letter, it was never the defendant’s case or the evidence of Mr Cheuk King that the Company would be responsible for all the outstanding fee owed by Hang Kee to Yiu Chak.  This was not part of the Supplemental Agreement contended by the defendant. It does not make commercial sense when the defendant’s own case was that Mr Tam was in financial difficulty at that time. 

46.  The 4 May Letter also stated that Yiu Chak requested the deposit of HK$800,000 by that letter, which was after the Supplemental Agreement.  If that was the case and in the absence of other documents, on what basis did Mr Cheuk King come up with the figure of HK$800,000 at the time of the Supplemental Agreement? 

47.  The 4 May Letter made no mention of the Agreement or the Supplemental Agreement. It did not record the core terms of the Supplemental Agreement, for example, the withholding of HK$800,000 from purchase price of the Shares.

48.  The 15 May Letter referred to the 4 May Letter and stated that Yiu Chak confirmed that the sum of HK$800,000 was loaned to the Company interest free. The loan could be used to set off the price for purchasing asphalt by Yiu Chak from the Company, in other words, it covered all purchases whether in relation to Hang Kee’s projects or not. This was not the term of the Supplemental Agreement.

49.  Even if these letters were taken as true, I am not satisfied that they support the existence of the Supplemental Agreement or the consent of Mr Tam or the plaintiff to the Supplemental Agreement.

50.  The defendant also relied on the Email from Mr Tam which referred to a “deposit” (訂金).  The defendant contended that this indicated Mr Tam’s acknowledgment of the existence of the HK$800,000 deposit. 

51.  Mr Tam however said that the word “deposit” in the Email referred to another sum of HK$300,000 which Mr Tam has placed with Yiu Chak in February 2009.  If the plaintiff has indeed placed HK$800,000 deposit for the works to be done by Yiu Chak, there was no reason for it to state in the Email that it would make payment of the final balance within 7 days from the presentation of invoice because the HK$800,000 together with the HK$200,000 that have already paid to Yiu Chak out of the 3^rd Instalment Payment far exceeded the contract sum to be paid to Yiu Chak.  I accept the plaintiff’s evidence on this point.

Delay in recovering the HK$800,000

52.  The defendant contended that the plaintiff only sought to recover the outstanding sum 20 months after the sum was due.  The defendant suggested that if there was no Supplemental Agreement, one would expect the plaintiff to take action shortly after the sum was due.

53.  The plaintiff denied and contended that Mr Tam has chased Mr Kwan for the sum prior to engaging lawyers to issue the demand letter.  The plaintiff explained that it chased after Mr Kwan because he is the responsible person of the defendant, but not Mr Cheuk King.

54.  I do not consider the time when the plaintiff took action to recover the sum suggest one way or the other in the present context.

Kwan not called as a witness

55.  Both parties made the point that adverse inference should be drawn against the other for not having called Mr Kwan to give evidence.  I do not agree. 

56.  Although the defendant was owned by Mr Kwan, there was no dispute that in relation to matters concerning the Agreement, Mr Cheuk King represented the defendant. Further, it was not disputed that Mr Kwan has not taken part in the negotiation in relation to the Agreement and the settlement of the 1^st to 5^th Instalment Payments.

57.  In the absence of the testimony of Mr Kwan, the parties did not have the benefit of Mr Kwan’s evidence to substantiate those parts of their contentions that relate to Mr Kwan.  I will not draw any adverse inference in this relation.

Dispute in respect of the Subcontract Agreement

58.  During the course of trial, both parties referred to the dispute between Hang Kee and Yiu Chak in respect of the Subcontract Agreement.  At best, these only provide background information to the present case.  I do not intend to go into details at this stage as that may potentially become another litigation.

Conclusion

59.  Having considered all the evidence (both oral and documentary), I am satisfied that the plaintiff has not entered into the Supplemental Agreement with the defendant. I order that the defendant shall pay to the plaintiff the sum of HK$800,000 with interest at the judgment rate from the date of the writ until payment.

60.  Costs being follow the event.  I make a costs order nisi that the defendant shall pay the costs of the plaintiff in this action on party and party basis to be taxed if not agreed, with certificate for counsel.  This costs order nisi will become absolute unless any party applies to vary it within 14 days.