Philipp Doodt and Others v. Huang Shihu and Others
Read the full judgment text of HCA 2482/2017 on BabelCite. This High Court CFI judgment was delivered on 22 January 2020.
1. This is the hearing of the Plaintiffs (Ps) appeal from the decision of Master Queenie Lau of 18 September 2019, whereby Ps’ summons dated 27 February 2019 was dismissed. The Summons sought an order that the defendants (Ds) do make an interim payment to Ps’ pursuant to RHC O.29, Part II, on the grounds that Ds have no genuine or arguable defence and Ps will obtain judgment for substantial sums and damages if the action proceeds to trial.
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HCA 2482/2017 [2020] HKCFI 241 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO 2482 OF 2017 ________________________ BETWEEN
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________________________ J U D G M E N T ________________________ 1.This is the hearing of the Plaintiffs (Ps) appeal from the decision of Master Queenie Lau of 18 September 2019, whereby Ps’ summons dated 27 February 2019 was dismissed. The Summons sought an order that the defendants (Ds) do make an interim payment to Ps’ pursuant to RHC O.29, Part II, on the grounds that Ds have no genuine or arguable defence and Ps will obtain judgment for substantial sums and damages if the action proceeds to trial. 2.There are a number of parties. On the one side, are the Ps who were Ds’ agents for the selling of zippers to clothing manufacturers in Europe, particularly Germany and the Netherlands, working on a commission basis. On the other side are Ds who are in the business of manufacturing the zippers in Shenzhen. 3.The relationship between them involved a number of companies, and two of the principals that is, Mr Phillip Doodt, a German national, who is the 1st P, and Mr Huang Shihua, a Hong Kong resident, who is the 1st D. The Ps’ companies have the prefix AYN and the Ds’ companies have the prefix HSD. 4.According to Ds, the two sides’ cooperation dates back to 2007. Ds say that around 2012, AYNF (the 2nd P which is a Hong Kong company) appeared to be in financial hardship. 5.Subsequently, a Shareholders’ Agreement was entered into between Mr Huang and Mr Doodt dated 16 January 2012. HDSI (the 3rd P) is a Hong Kong company which is the joint venture entity, and which functioned as the trading vehicle. It was the entity that took customer orders and received payments for them. HSD, on the other hand, was the manufacturer of the products ordered by the customers; it also arranged for shipment of goods on behalf of HSDI. 6.Huang, Doodt and various of the companies also entered into a Co-operation Agreement also dated 16 January 2012 for HSD to refer all European buyers/customers to HSDI and for HSDI to pay commission for such sales. 7.Subsequently, Huang, Doodt and various of the companies entered another Agreement dated 1 August 2014 to set out new terms and conditions for the parties’ cooperation regarding the joint venture. Commission for such sales to Germany and the Netherlands was 7%. It is this 2014 Agreement with which this case is primarily concerned, and in particular whether (as they claim) Ps brought it to an end by accepting Ds’ repudiatory breach in July 2017. 8.Under the terms of the 2014 Agreement, AYNS (the 4th P) a company incorporated in Hong Kong, was to be paid 2% commission of the HSDI turnover for providing bookkeeping IT, design and HR services to HSDI (clause 4.11(b)(1)). 9.It is further relevant to note that whilst in the usual course payment by customers would be paid via HSDI, it is not in dispute that by reason of clauses 3.1 .1 and 3.1.6 of the Shareholders Agreement, HSDI can only pay HSD if both sides consent. The Ps’ side has withheld such consent since December 2016. 10.Finally, in terms of factual background, By July 2017, the state of account between the parties was as follows:
The parties’ cases 11.In summary, Ps’ case is that their claims against Ds are simple and straightforward based on breaches of the 2014 agreement under which Ps’ side was granted the exclusive right to distribute products produced by Ds’ side with a percentage commission on customers’ orders. The case falls under 3 heads:
12.Ps submit that a number of the defences are only recently put forward on the change of Ds’ legal team, and have no merit. 13.The precise amount of such sums and damages will have to be assessed at a subsequent hearing or trial. The claim for an interim payment is based on a report by an expert, Professor Dr Gerhard Schewe, forecasting loss of future profits, applying various models by extrapolating from previous business performance and commission payments. 14.Ps invite the Court based on Professor Schewe’s report to order interim payments by HSD and Mr Huang to the P companies in a total sum of HK$26,800,000. This figure represents the two thirds of Professor’s Schewe’s capitalisation of estimated future commission receipts up to 2024 (giving credit for sums admittedly owing to Ds by Ps). 15.In summary, Ds’ case is that it cannot be said that there are no triable issues as to whether Ds repudiated the 2014 Agreement entitling Ps to terminate it. 16.Ds’ side was a substantial net creditor vis-à-vis Ps’ side at the time of the purported termination of the 2014 Agreement. Thus, for Ps to maintain this interim payment application, they have to rely on the alleged lost opportunity to earn “forecast commissions” post-termination. 17.On the “1st alleged breach”, there are triable issues as to whether the 2014 Agreement contains typographical errors on whether HSD or HSDI is the paying party of the 7% commission and/or whether the 2014 agreement contains implied terms to the effect that commission was not payable before customers paid, and whether the delay in payment amounted to repudiation in circumstances where it was Ps’ side that first withheld payment to HSD through HSDI in December 2016. 18.On the “2nd alleged breach”, it is far from clear that Ds’ representation demonstrates an unequivocal intention to refuse to perform the 2014 Agreement. 19.On the “3rd alleged breach”, there are triable issues as to the significance of the fact that AYNS shut down HSDI’s IT system, and whether HSD’s direct dealing with Hugo Boss was just an emergency response to the shut-down. 20.If Ps’ claim for lost future profits are excluded, Ds’ counterclaims far exceed Ps’ claim against Ds by at least 4 times over. Since Ps’ loss of future profits claim is based on speculative and weak expert evidence, Ps have failed to prove that they would obtain judgment for substantial damages against Ds over and above Ds’ set-off and counterclaim. 21.In any event, Ps’ admitted “dire financial situation” (this term is used by Ps themselves in an affirmation contesting an application for security for costs) casts serious doubt over their financial ability to repay the HK$26,800.000 interim payment presently sought. This is exacerbated by the fact that Ps are located outside Hong Kong. Ds submit that interim payment should be refused on this additional ground. The legal principles 22.I was told that Ps also took out a summons for summary judgment under RHC O.14, but that Ds objected on the grounds of lateness, with the result that only the interim payment summons is before the court. 23.There is no dispute as to the applicable legal principles. As summarised by Au J in Guo Jing Jing v Art Master Investment Ltd (unrep., HCA 1008/2009, 11 December 2009) at §88) the Court may order an interim payment under O29, r11 on two conditions:
24.In determining the amount of an interim payment, the court must adopt a fairly broad approach, with minimum expense to the parties, and make an estimate, on the evidence that has been adduced, of the likely award of damages and award a reasonable proportion of that estimate: Top One International (China) Property Group Co Ltd v Top One Property Group Ltd (unrep., CACV 269/2011, 20 July 2012) at §18. 25.As held in Tse Tsz Chong v Law Sze Man [2015] 1 HKLRD 1120 at §35, after an estimate is made, the court should take account of the financial ability of the plaintiff to repay any overpayment, any hardship on the defendant’s side, and other matters relevant to the just exercise of the court’s discretion. I would add that, consistently with this approach, the more certainly it can be established that at the end of the day the plaintiff would recover at least the amount of the proposed interim payment, the less weighty a factor the plaintiff’s impecuniosity will be, particularly if caused by the defendant’s non-payment. The same applies where recovery would be more difficult from a plaintiff outside Hong Kong. Discussion as to arguable defence 26.It is convenient to begin with the second limb of the Guo Jing Jing test, namely that the court must be satisfied that the defendant has no arguable defence, such as one that would warrant the grant of unconditional leave in an O.14 application. In view of my conclusion on the first limb which is set out below, it is not strictly necessary to address this question. However, it has been fully canvassed in both the evidence and the written and oral submissions of counsel, and it was dealt with by the Master, and it is right that I should express my own conclusions. 27.The parties dealt with this part of the case by reference to three alleged breaches of the 2014 Agreement. 1st alleged breach 28.It is not in dispute that Ds failed to pay Ps commission that fell due under the 2014 Agreement between March and July 2017 in the sum of HK$424,741.95. Unless Ds can justify this, they are in breach of contract, though a separate question arises as to whether such breach was repudiatory. 29.Ps’ case is that such breach alone entitled it to bring the contract to an end, though it presents the failure to pay commission as part of a “package” with the other two matters relied on, one relating to the proposal of a new agreement by Ds, and the other to Ds dealing direct with Hugo Boss. 30.As a matter of factual history, Ps’ solicitors wrote to Ds on 26 June 2017 at some length demanding compliance with the 2014 Agreement, including payment of commissions. There was no reply to that letter at the time. On 12 July 2017, Ps’ solicitors wrote to Ds to the effect that their clients accepted the breaches as repudiating the 2014 Agreement, alternatively electing to terminate pursuant to clause 7.2. 31.Ds take a number of points in this regard. 32.First, it is contended that the references in clause 5 of the 2014 Agreement to HSD being liable to pay commissions to Ds’ side was an obvious mistake, since such references are inconsistent with other provisions in the agreement referring to HSDI being the paying entity (in particular, clause 7.4 and Appendix 3). Ps counter with some force that, short of rectification, which is not claimed, Ds cannot seek to go behind clause 5 because it is the operative clause. Ps may be right about this, but it clearly raises an issue which cannot be determined summarily. 33.Cogently, however, Ps contend that, even taking Ds’ argument at its highest, it does not absolve Ds from liability to pay the commission, but merely shifts the liability to pay commission from one party to another (i.e. from HSD to HSDI). Ds objected that Ps must abide by their pleaded case that the obligation rested upon HSD. However, as was pointed out on behalf of Ps, in their defence Ds plead a positive case that the paying party was HSDI. There is no reason why the Court should not reduce the amount of the interim payment payable by HSD and correspondingly increase the amount payable by HSDI if it is otherwise due. 34.Ds respond by reference to the White Book which states that for the court to grant an interim payment, “[p]roof of success to the necessary standard against a particular defendant is required before an order can be made against him” (§29/11/3, p.795). 35.This is obviously correct. But it does not stand in the way of a plaintiff saying that if there is an issue to be tried as regards the liability of defendant A, it will rely for summary judgment purposes on the defendants’ own admission as to the liability of defendant B. There is no substance in this point. 36.Second, Ds rely on proposed implied terms pleaded by way of re-amendment in paragraph 11.8 of the Defence. In short, this is to the effect that commission is not payable until HSD receives full payment for the cost of manufacturing the goods. Ds rely on the fact that under the Shareholders’ Agreement, the consent of Ps’ side is needed for HSDI to make payments to HSD. It follows, Ds submit, that Ps’ side must give consent for HSDI to pay HSD’s manufacturing costs and expenses before HSD’s liability to pay Ps’ side arises. Such implied terms are obvious and necessary to give business efficacy to the 2014 Agreement because as a matter of business sense, it is hard to imagine that a manufacturer would agree to pay a “sales commission” to the agent when it has not recovered payment for its costs. Clause 2.2 of the Shareholders’ Agreement requires both sides to “use their best endeavours to promote and develop the business of [HSDI] to the best advantage”. Hence, the unexpressed intention of the parties must be that, if HSD were to be the commission paying entity, its cost must be paid before its liability to pay “sales commission” arises. It is unthinkable, Ds submit, that HSD must pay commission out of its own pocket. This cannot be what was intended by the parties. 37.The test for the implication of contractual terms has recently been considered by the Court of Appeal in Lo Yuk Sui v Fubon Bank (Hong Kong) [2019] HKCA 261. After considering recent authority, at §32 the Court refers with approval to the summary of the law in Nazir Ali v Petroleum Company of Trinidad and Tobago [2017] UKPC 2 at [7]:
38.Thus Lo Yuk Sui v Fubon Bank reaffirms in Hong Kong the common law necessity test for the implication of terms in the commercial context. 39.In this case, the relevant commission provision is found in clause 5.2 which provides that “… HSD shall pay a commission that equals to 7% of the amount of the relevant orders to AYND on or before 10th day of the month immediately after the month in which payment in relation to the relevant order shall be rendered by the relevant customer in full or the month in which the relevant order was fully settled or actual full settlement of the price of the relevant order, whichever is the earlier.…”. 40.Ds’ case as to implication is not arguable because: (1) The implied term is not necessary to make the contract work. Whilst the parties might have agreed to hold commission until the manufacturer got paid the cost of manufacture, they did not so agree. (2) Further, the contract provides in clause 5.2 for the timing of payment of commission, and terms cannot be implied to contradict what the parties have expressly agreed. 41.In that regard, Ds’ third point is that given that the amount of unpaid orders was HK$2,160,377.01 as of 30 April 2017 and HK$2,209,604.18 as of 31 May 2017, “it is by no means clear whether the liability to pay commission had yet arisen”. This point seems to go with the last one. In any case, as it was fairly put to me by Mr Benny Lo, counsel for Ds, though Ds do not admit Ps’ unpaid commissions number of HK$424,741.95, they do not dispute it either. In my view, it is sufficiently clear so as not to raise a triable issue. 42.Fourth and finally under this head, Ds submit that it cannot be said that HSD/HSDI’s withholding of commission to Ps for around 3 months was a repudiatory breach such that it evinced Ds’ intention not to be bound by the 2014 Agreement altogether. This is because by the time of the late payment of commission in 2017, Ps and Ds had worked together and run HSDI for about 5 years. Non-payment of commission for about 3 months is clearly a minute fraction of the commission paid over the past years, it is submitted. Ds have all along acted in good faith in seeking to continue the ongoing business relationship, having previously helped Ps out. The only reason why on this occasion commission was “withheld for the time being” was “due to Ps’ ungrateful and wrongful deeds”. 43.The test for repudiatory breach is not in dispute. As summarised by Mimmie Chan J in Ipson Renovation Ltd v IO of Connie Towers (unrep., HCCT 26/2014, 16 December 2016) at §45, for there to be a repudiation or renunciation of a contract, there must be a clear and absolute refusal to perform it in some essential respect. Further, any purported acceptance of repudiation must be unequivocal. The test of whether there is a renunciation is whether the actions of the party in default are such as to lead a reasonable person to conclude that he no longer intends to be bound by its provisions. The party in default may intend to fulfil the contract but may be determined to do so only in a manner substantially inconsistent with his obligations, or may refuse to perform the contract unless the other party complies with certain conditions not required by its terms. In such a case, the authorities show that the contract has been sufficiently renounced. The critical question is whether, by its words or conduct, a party has evinced an intention not to perform the contract, which a reasonable person in the position of the other party would regard as clear and absolute. See further Chitty on Contracts (33rd ed) §24-018. 44.In my view, the position is as follows. The fact that the contract had been performed for five years in the past is irrelevant, because the question relates to continuing performance. By June 2017, commission payments had been withheld for some 3 to 4 months (it varied slightly as between plaintiff). On 26 June 2017 (as noted above) Ps’ solicitors wrote to Ds asserting that the withholding of commissions was “in blatant breach” of the 2014 Agreement and demanding performance. There was no response to that letter. On 12 July 2017, Ps’ solicitors wrote a further letter accepting the continuing breach as a repudiation of the 2014 Agreement. (Ds plead a letter a letter dated 7 August 2017 issued by their PRC lawyers, but this was not produced, and in any case came after the repudiatory breach had been accepted as putting an end to the contract.) 45.Ds point to a letter dated 26 June 2017 from HSD’s Global Marketing Director to the effect that Mr Huang believed that the parties could continue to work together, and would offer deserved commission. However, Ps were entitled to insist on contractual commission. I agree with Ps’ submission that non-payment in these circumstances amounted to a clear repudiation or renunciation of the 2014 Agreement, which Ps were entitled to and did accept as putting an end to it. Contrary to Ds’ submission, clause 2.2 of the Shareholders’ Agreement which requires both sides to “use their best endeavours to promote and develop the business of [HSDI] to the best advantage” does not affect this conclusion. 2nd alleged breach 46.In view of this conclusion, I need say little about the evidence relating to discussions between the parties as to alternative contractual arrangements. Suffice it to say that over the relevant period, Ps were open to the idea that a new contract be entered into, and at one point Ds produced a draft which Ps say was materially disadvantageous compared the existing agreement. Although both sides seek to rely on this evidence, Ps submitting that it shows that Ds were intent on disavowing the existing contract, and Ds submitting that it shows that Ps accepted existing arrangements were not working, nothing seems to turn on it. The parties did not in the event agree an alternative contract, and Ps were entitled to rely on the existing contract. 3rd alleged breach 47.I need say little about Ds’ relations with Hugo Boss either. As Ds submit, the reason that they dealt directly Hugo Boss in June/July 2017 reflected the fact that HSDI was no longer functioning properly. Ps seem to have raised no real objection at the time. Pleaded set-offs/counterclaims 48.Ds have the following set-offs/counterclaims against Ps that they submit ought to be taken into account:
Conclusion 49.For the above reasons, and respectfully differing from the Master, I am satisfied that Ds have no arguable defence, such as one that would warrant the grant of unconditional leave in an O.14 application. Discussion as to whether Ps would obtain judgment for substantial damages 50.I turn to the first requirement under the Guo Jing Jing test, namely that the court must be satisfied that the plaintiff “would”, on the material before the judge at the time of the application, obtain judgment for substantial damages against the defendant. As noted above, the test is “would” and not “would be likely to”, and the standard of proof is a high one, on the balance of probabilities. 51.Ps’ case is that as a result of Ds’ breach of contract, Ps have suffered substantial loss and damage for their loss of future opportunity to earn commission up to at least 30 June 2024, which is the minimum term of the 2014 Agreement. As noted above, for the purposes of the present hearing, Ps have instructed an expert, Professor Dr Gerhard Schewe, to forecast the loss of future profits applying various models by extrapolating from previous business performance and commission payments. Ps say that:
52.In summary, and on a preliminary basis, Ps’ claims for outstanding sums due and damages against Ds are as follows:
53.Ps says that this calculation – which totals HK$40,391,399 – takes into account the amount admittedly owing by AYNF to HSD, and the sales cost. 54.Ps invite the Court to order an interim payment adopting as a rough proportion two-thirds, as is the general rule in cases of interim payment of costs (see Re Lehman Brothers Asia Ltd [2010] 1 HKLRD 43 at §§26-27), which results in a figure of HK$26,800.000. 55.On their side, Ds submit that Ps’ loss future profits claim is based on speculative and weak expert evidence, and that they have failed to prove that they would obtain judgment for substantial damages against Ds over and above Ds’ set-off and counterclaim. 56.Ds submit that Ps’ expert evidence is simply guesswork and should be given no weight. No mention is made of the fact that HSDI was suffering losses of HK$3,363,739 as of April 2017 and may well have become insolvent. If this happened, HSDI would not have been able to pay any further commission. This factor was not taken into account in assessing the lost chance to earn commission. 57.Ds submit that it is surprising that the expert should have relied on “the S-curve concept” model, which tracks the sales growth of businesses with a successful market penetration. Apple is one of the comparators referred to. This ignores the fact that Ds’ agency business, which depended upon HSDI, was on the brink of failure and liquidation. 58.Finally, Ds object that no mention is made of mitigation. It is assumed that the calculation should be made on the basis that Ps cannot obtain alternative work in the business using their experience and connections. 59.I begin by reiterating that in determining the amount of an interim payment, the court must adopt a fairly broad approach, and make an estimate on the evidence that has been adduced of the likely award of damages and award a reasonable proportion of that estimate (see Top One cited above). The exercise is not to be confused with the function of the future court in the final assessment of damages (see Tse Tsz Chong cited above). 60.Despite Ds’ criticism, Professor Gerhard Schewe appears to be a well-qualified expert with a specialisation in clothing coming from a reputable University in Germany. He has produced a detailed report setting out the methodology and calculations he has used to reach his projection and capitalisation of the expected future income stream of commissions which could have been received up to the term of the 2014 Agreement in 2024. In my experience, this is the kind of report that one would expect to see lodged on behalf of plaintiffs making the kind of claim that Ps are making in the present case. 61.But there are points that go the other way at the interim payment stage. As Ds say, the evidence suggests that the overall position of the joint venture had become difficult in 2016-7, a possible reason being that debts were building up on Ps’ side that were becoming unsustainable. That seems to have been the reason that from December 2016 onwards, Ps’ side withheld consent for HSDI to pay HSD (which was manufacturing the zippers). I have already held that a term as to payment by HSDI cannot be implied into the agreement in that respect, but the non-payment could be potentially relevant to the projection of future commission flows. I cannot rule out Ds’ contention that if the actual state of the business is factored in, a significant departure would be required from Professor Schewe’s projections, even assuming his methodology. 62.In fact, in his persuasive submissions, Mr Justin Lam on behalf of Ps accepted that the total figure upon which the claim for an interim payment is based – over HK$40 million – is high. That is undoubtedly correct in my view. He argued however that this is covered by awarding a reasonable proportion of that estimate, on a rough and ready approach. He suggested two thirds by analogy with cases of interim payment of costs, citing Re Lehman Brothers Asia Ltd [2010] 1 HKLRD 43 at §§26-27 in support. This brings the figure down to HK$26,800.000. He did not suggest any other sum that might be awarded. 63.However, the nature of the claim in the present case is different to that in the Lehman Brothers case, which concerned interim payments to provisional liquidators. The Court had fully itemised evidence as to their fees, and there was no doubt what fees had been charged, the question being what they should be paid pending taxation. It was in those circumstances that the court awarded two thirds of the claim. 64.In the present case, by comparison, the claim is for projected commissions for nearly seven years from the time that the contract came to an end. Given the background between the parties, and the state that the relationship had reached at the time of termination, it is much less easy even adopting a fairly broad approach to make an estimate of the likely award of damages. The court cannot simply award the outstanding commission at the time of termination either, because taking into account the loan, the balance on the account was in favour of Ds. 65.It is entirely correct that difficulties in calculation do not mean that an estimate of damages cannot be made. This follows from the Tse Tsz Chong case (see above) at §35. But there must be a satisfactory basis in the evidence for arriving at an estimate, and on the evidence I cannot accept either that HK$40 million is a sufficiently clear starting point, or that the position is cured by deducting a third, and no other possibility is suggested. 66.I consider that Professor Schewe’s report is a step in assessing Ps’ loss of future commissions. It will be a matter now for Ds to put forward their own evidence in the usual way. 67.The appeal must fail therefore. 68.Both sides have had partial success on this application, because though the appeal has not been allowed, Ds have not succeeded in showing triable issues on liability. On a nisi basis, I consider that costs should be in cause.
Mr Justin Lam, instructed by Tsang Chan & Woo Solicitors & Notaries, for the 1st to 4th plaintiffs Mr Benny Lo and Mr Jasper Wong, instructed by Liu, Chan & Lam, for the 1st to 3rd defendants |
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