Hon Hai Precision Industry Co Ltd v. Bestronics (International) Co Ltd and Another
Read the full judgment text of HCA 206/2006 on BabelCite. This High Court CFI judgment.
1. Chiu Chi Hung and his younger brother, Chiu Chi Sing , was running a business in about 1985 in the name of Bestronics (International) Co. Chiu Chi Hungsaid it was a small firm and they had employed only one staff to do the secretarial work. In 1994 the company was incorporated as a limited company and that is the 1 st defendant herein. Up till now, according to Chiu Chi Hung, Bestronics has only one employee.
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HCA 206/2006 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO. 206 of 2006 ____________ BETWEEN
____________ Coram: Hon Yam J in Chambers Dates of Hearing: 20th and 21st September 2006 Date of Judgment: 21st September 2006 Date of Reasons for Judgment: 12th December 2006 ----------------------------------------------------- REASONS FOR JUDGMENT ----------------------------------------------------- 1.Chiu Chi Hung and his younger brother, Chiu Chi Sing, was running a business in about 1985 in the name of Bestronics (International) Co. Chiu Chi Hungsaid it was a small firm and they had employed only one staff to do the secretarial work. In 1994 the company was incorporated as a limited company and that is the 1st defendant herein. Up till now, according to Chiu Chi Hung, Bestronics has only one employee. 2.Bestronics started its business with the plaintiff company since 1986. The plaintiff company, Hon Hai (鴻海), is a subsidiary of a Taiwan listed company. 3.The 1st defendant was the distributor of the plaintiff’s products such as connecters and cables for personal computers. They sourced customers for the plaintiff and were paid commission in return. They also placed orders for the plaintiff’s products and sold to their own customers. 4.In 1992 the 1st defendant set up their own logistics company, “Hai San” Cargo Transport Co. Ltd.( 海山), and provided logistics services in relation to the plaintiff’s goods delivered to the 1st defendant. That was the case until about late 2002 when the plaintiff basically discontinued using Hai San as its freight carrier and decided to use another company, “ValuePlus” Global Logistics Ltd., instead. 5.Until then, the turnover of the business between the plaintiff and the 1st defendant had grown much bigger. Chiu Chi Hungsaid during the period around 1998 to 2003, it was agreed between the two parties that invoices issued by the plaintiff to Bestronics for the goods ordered, and the invoices issued by Hai San to the plaintiff for the logistic services payments, would be mutually set off. Normally on a monthly basis the plaintiff would e-mail to the 1st defendant statements listing out the invoice numbers for the purchase orders placed by the 1st defendant. The 1st defendant then settled the invoices by telegraphic transfer. Chiu Chi Hung said he relied on the plaintiff’s statements as being accurate. In other words, they could have checked each and every item from their own record, but apparently from the small establishment in the 1st defendant, they did not check the statements item by item and month by month as they were not keeping a full record themselves. 6.The 1st defendant in making the payment would set out which invoices of the plaintiff would be set off by which invoices of Hai San and the amount outstanding after the aforesaid set off. 7.However, the plaintiff did not prepare its accounts on the same basis as the 1st defendant. According to Chiu Chi Hung, the plaintiff paid Hai San a small lump sum without indicating which invoices they were settling. There are bound to be some discrepancies between the accounts of the plaintiff and the 1st defendant. 8.In 2003 the plaintiff and the 1st defendant signed a non-exclusive “Distributor Agreement” and the effective date was between 1st April 2003 to 31st December 2003. The plaintiff’s case is that between March and September 2003 the unpaid purchase price for goods sold and delivered amounted up to $34,466,604.77. Since that amount was not paid, the plaintiff by their solicitor’s letter dated 11th November 2003 demanded payment. 9.The 1st defendant originally by their solicitor’s letter dated 20th November 2003 denied in total their liability under the Agreement. They alleged that the Agreement, so signed by the 1st defendant, had never been signed by the plaintiff and, therefore, the Agreement should be void. Not a word was said as to whether goods were sold and delivered to the 1st defendant as alleged by the plaintiff. However, they asked for copies of all invoices, delivery vouchers and receipts for the consideration of the 1st defendant. 10.By 24th March 2004, the 1st defendant wrote to the plaintiff and agreed that the total amount of payment made by the 1st defendant to the plaintiff up to the 15th December 2003 as shown in their own record is the same as the records provided by the plaintiff. 11.However, they said that: “after detailed examination of the goods receipt documents from our forwarder, Hai San, some invoices totalling HK$963,610.38 issued by your company were without any document evidencing that we had received the goods as indicated on the same. The summary of these invoices be set out in the attached list.” 12.In other words, of the claim of $34 million odd, they only discovered a sum of just less than $1 million was not supported by documents supplied by the plaintiff. 13.The plaintiff then applied for summary judgment after it issued its writ on 27th January 2006. The 1st defendant at first alleged that there were strong suspicions that some of the invoices produced by the plaintiff were forgeries. However, when the matter was argued before me, Mr Gerald McCoy appearing with Mr Newman Lam for the 1st defendant have very properly withdrawn such an allegation of forgery. They embarked on a number of items showing irregularity and discrepancies in the documents and cast doubts on the accuracy of the total sum of $34 million odd claimed. The Issue 14.The question before the court now between the plaintiff and the 1st defendant is whether the 1st defendant has shown any triable issue to any part or parts of the total sum claimed. The Plaintiff’s Case 15.In order to understand the 1st defendant’s various defences, one must first of all consider how goods were delivered to the 1st defendant from the plaintiff when ValuePlus became the carrier. The shipping documents were made in a set of five called the waybill. These five copies are:
16.The plaintiff have factories both in Shenzhen and Kunshan (near Shanghai). The logistic delivery of goods would differ from goods coming from Shenzhen and goods coming from Kunshan. They would both be delivered to ValuePlus warehouse in Hong Kong. 17.When goods originate from the plaintiff in Shenzhen, the various copies of the waybill would be used as follows:
18.When goods were shipped, ValuePlus would take out the second, fourth and fifth copies of the waybill and would ask the driver who collected the goods to sign and chopped on the first and third copies. Hence, only the first and third copies would have any signature or chop from the 1st defendant or its carrier, Hai Sanwho came to collect the goods. The plaintiff said that, due to the large number of transactions per day, it is not impossible that the aforesaid formalities were not strictly followed in every transaction. 19.Further, when the waybill was given by ValuePlus to the representative of the 1st defendant for acknowledgment of receipt of goods, the waybill would come with two or three further documents, namely:
20.Thus the 1st defendant could check the actual goods received against the documents for all relevant information including the product numbers, the weight and quantity, the goods and the purchase order of the 1st defendant to which the goods relate. 21.The representative of the 1st defendant or its agent would then sign and affix a little circular chop of the 1st defendant on the first and third copies of the waybill. He would take away the third copy for the 1st defendant’s record, whilst ValuePlus would retain the first copy, and then send it to the 1st defendant when payment was requested from them. ValuePlus would retain a photocopy of the first copy for its own record. 22.When the plaintiff’s goods were delivered from Kunshan to Hong Kong, the plaintiff would bear the logistic charges from Kunshan to Hong Kong. In that case the waybill would be prepared by ValuePlus in the plaintiff’s factory in Kunshan as follows:
23.After the goods have arrived in Hong Kong, the services provided by ValuePlus would be paid by the 1st defendant. The original of the third to fifth copies of the waybill would accompany the goods up to Shenzhen, and then they would be collected by ValuePlus Shenzhen and would not arrive ValuePlus Hong Kong. 24.Hence, before the third copy of the waybill leaves Kunshan, ValuePlus Kunshan would scan the third copy and send it by e-mail to ValuePlus Hong Kong. ValuePlus Hong Kong would then print out a copy in advance, and ask the driver from the 1st defendant or its logistic company, Hai San, to acknowledge receipt on that printed copy upon the collection of goods in Hong Kong. That printed copy would then serve as the record of ValuePlus Hong Kong when it demanded payment from the 1st defendant for charges of ValuePlus in respect of services provided after the goods arrived in Hong Kong. Similarly, the representative of the 1st defendant acknowledged receipt on the printed copy of the waybill which would be accompanied by a packing list and an invoice. Sometimes a shipping notice would be attached as well. This document would therefore contain all the relevant information of the goods as aforesaid for the 1st defendant’s checking. 25.The invoice for goods originated from Kunshan would only be a proforma invoice (i.e. ultimately the demand for payment would not be based on this invoice and it was produced for the clearing of customs only.) These invoices would bear the prefix “EOA”. Eventually for goods from Kunshan, a final invoice would replace the proforma invoice, on which actual payment would be based. That final invoice would bear a prefix of “SZZ”. 26.In light of the aforesaid logistics operation, I shall now consider each and every item of the defences raised by which the 1st defendant queried the accuracy of the plaintiff’s case in respect of those invoices amounting to less than $1 million. The 1st Defendant’s defences 27.The 1st defendant by the affirmation of Chiu Chi Hung raised several items of irregularities among the airway bills supplied by the plaintiff as follows (A/5/45-46):
The Plaintiff’s Reply 28.The plaintiff, however, in reply to all these allegations of the 1st defendant, made various points by way of evidence and submissions of Mr Benjamin Yu, SC, appearing with Mr Bernard Man, counsel for the plaintiff. Speaking generally, the 1st defendant could not, because of its small-sized establishment, say that they could not be sure whether this amount of $34 million was outstanding because apparently they have not been able to keep full and proper accounts and record. Instead, they relied on the plaintiff. 29.When the first demand of the plaintiff was made through solicitors, the first reaction of the 1st defendant was a blank denial. But their denial only centred on the fact that they have not signed the Distributor Agreement (which turned out to be wrong). They did not deny that there was business relationship between the two parties, and goods were sold and delivered to the 1st defendant. The demand of the plaintiff came about because the 1st defendant had not made the payment after the final payment made on 4th July 2003. 30.The ensuing correspondences between the parties are quite telling. By the 1st defendant’s letter dated 24th March 2004, as aforesaid, the 1st defendant said they had conducted “detailed examination” of goods receipt documents from Hai San and, based on their documents only, they suggested that the total amount of a little bit less than $1 million according to invoices issued by the plaintiff, was without any document evidencing receipt. However, that was before the 1st defendant was supplied by the plaintiff with copies of invoices and acknowledgment of receipts in November 2004 (B/11/202). 31.Thereafter, the 1st defendant was trying very hard to pick holes in all the documents supplied by the plaintiff as the 1st defendant asserted that it has lost its own documents. 32.Counsel for the plaintiff submitted, which I accept, on an “Order 14” summons for summary judgment, it is not for a plaintiff to prove his case beyond any shadow of doubt. Rather it is for a defendant to adduce sufficient evidence to persuade the court that there is a fair or reasonable probability of it having a real or bona fide defence; see Banque de Paris v. Costa de Naray [1984] 1 Lloyd’s Report 21. 33.The aforesaid seven points made by the 1st defendant were answered by the plaintiff by evidence and submission. They are as follows:
34.Further it is quite clear from what the 1st defendant did not say. It was never alleged that goods were not sold and delivered by the plaintiff to the 1st defendant nor the 1st defendant had paid for them or any part or parts thereof. 35.The 1st defendant only raised the points that it had already paid for items 1-10 of the particulars in the schedule to the amended Statement of Claim. However, the plaintiff has demonstrated clearly that the accounts of the 1st defendant was wrong since they did not take into account that certain payments were made for part of an invoice and now the plaintiff is only claiming the remaining balance which is left unpaid. The 1st defendant did not put in any evidence to contradict that. 36.In an application for summary judgment it is for a defendant to condescend upon particulars in order to establish that it has triable issues on merit. I consider that the 1st defendant herein has failed to demonstrate that it has any defence on merits. On the contrary, all the points raised by the 1st defendant are without merit and some of them have proven to be definitely wrong. 37.In short, in my view the plaintiff is entitled to the amount as claimed in the Statement of Claim. The Guarantee 38.The plaintiff further claims against the younger brother, Chiu Chi Sing, the 2nd defendant as a guarantor of the Distributor Agreement, i.e., the 2nd defendant signed a guarantee in respect of the performance of the 1st defendant. It is provided in the Distributor Agreement under clause 10.7 as follows :
Thus two guarantors are required, one is the responsible person of the 1st defendant personally and the other one is the parent company of the 1st defendant. 39.The 1st defendant was held by the parent company called Tanon Technology Limited. Shareholdings of the two companies are as follows :
40.The first reaction of the 2nd defendant to the initial claim of the plaintiff through its solicitors was that he had never signed such a guarantee at all. It then turned out from the documents that he had actually signed as the responsible person of the 1st defendant in his own name. He then put forward defence that the parent company, Tanon, the defendant had never signed the joint guarantee and therefore he is discharged. 41.The document, however, shows under the printed column for the parent company of the 1st defendant, Chiu Chi Sing, the 2nd defendant, had actually signed for and on behalf of the 1st defendant instead of Tanon. The photostat copy at B/9/122 clearly shows that the 2nd defendant himself apart from signing as the 乙方負責人, the responsible person of party B, i.e., the 1st defendant, in his own name, he further signed under another column as the responsible person of the 乙方母公司, i.e., the parent company of party B. However, the name of the 1st defendant and not Tanon was typed out and the chop affixed thereon is the chop of the 1st defendant and not Tanon. 42.Another copy of a similar document at B/23/279 had clearly shown that in the column of the parent company of party B, the 1st defendant’s name and chop was affixed thereon. This original document is the only original, I was told, available to the plaintiff and was produced to the court. The chop of the 1st defendant was very clear and affixed in this column. However, the 2nd defendant did not sign thereon but he signed in the lower column as the responsible person of the 1st defendant. 43.On the ground that the parent company, Tanon, had not signed as a joint tenant, Mr Chan Chi-hung, SC, counsel for the 2nd defendant, had ably argued that the one who had signed a joint guarantee (連帶保證人) should be discharged. He relied on a number of cases and textbooks. I shall start with the cited textbook of Rowlatt on Principal and Surety5 ed. :
44.Mr Chan for the 2nd defendant, relied on a number of cases. The most spectacular one which will illustrate his point, I think, is the case of Ellesmere Brewery Co. v. Cooper cited in the case of James Graham Ltd. V. Southgate-Sands (C.A.) and another [1986] 1 QB 80 at pp.89-90:
Thus, Mr Chan submitted since Tanon had not signed as another joint guarantor, the 2nd defendant should be discharged. At least it is arguably so at this stage. 45.Mr Yu, counsel for the plaintiff, however, submitted that “in order for such a defence to be made out, there must be evidence that the additional guarantee must be obtained, rather than that there is a mere contemplation that such guarantee might be obtained. He relied on the textbook of O’Donovan & Phillips, The Modern Contract of Guarantee (English edition) para 3-90:
46.Thus, similarly, Mr Yu submitted that even in respect of the equitable jurisdiction, it is necessary to prove that the guarantor took it as a condition for its own execution that the other co-surety would execute the guarantee. It would not be sufficient if the guarantor did not insist that the co-surety should execute. See Traill & anor v Gibbons (1861) 2F & F 352, 360 (Erle CJ). 47.I do not see any serious contradiction between the submissions of the two counsel for the two parties. In short, if the guarantee anticipated that there would be two joint tenants, but only one joint tenant signed, the other did not, then, unless there are other evidence to the contrary, the one who signed would be discharged because he would anticipate that the other guarantor would be a joint guarantor. However if there is evidence that the one who signed the guarantee would not care or would not consider that it is a condition that the other joint guarantor would sign and jointly guarantee with him in respect of the performance of an agreement, then the guarantor who signed would have been considered as bound by the guarantee even if the other one had not signed since he had not expected the presence of the other one to be an important condition for his own liability. 48.The evidence before me did not support the version put forward by the 2nd defendant and the legal consequence as submitted by Mr Chan on his behalf. The 2nd Defendant, Chiu Chi Sing, said that there are two versions of the written agreement received from the plaintiff. His staff member, without naming whom (but we should remember that he only had one staff in a small office) filled in his details under the column of the responsible person of party B, including his name and ID number. He then signed all four hard copies in two versions and asked his staff to send them to Tanon, the parent company of the 1st defendant. 49.However, we must remember that it was a small office whereby Tanon and the 1st defendant occupied the same office. It is not a case of a big corporation whereby one branch of the corporation did not know what the other branch of the same corporation was doing. 50.The 2nd defendant further said that he also signed provisionally on the space for the parent company pending decision by it in particular his brother, Chiu Chi Hung. It is true as I have pointed out earlier that from the photostat copy at B/122, his signature was found in the column intended for the parent company of party B, i.e., the 1st defendant. The copy also shows that the responsible person therefor was the 2nd defendant, Chiu Chi Sing himself. However, in a different column, the chop and the name of the parent company was described in the name of the 1st defendant with its chop affixed thereon. (It is not possible at this stage on the photostat copy to ascertain whether his signature thereon was on top of the chop and the writing or whether the chop and the writing was printed out later on after he had signed as he had said.) 51.However, the 2nd defendant did not condescend on any particulars in this important aspect. Chiu Chi Hung is absolutely silent as to what had happened to his decision and why he could have decided to use the 1st defendant as a guarantor to guarantee its own performance instead of, as required by the plaintiff, engaging the parent company as a guarantor. Chiu Chi Sing, the 2nd defendant, then said that he only found out in or around November 2003 “that Tanon had decided not to be the guarantor and therefore the name and details of the 1st defendant instead of Tanon were entered in the space with Tanon was supposed to execute and the chop of the 1st defendant instead of Tanon was put in the space for joint guarantors.” 52.This is highly incredible and amounted to a moonshine in terms of summary judgment application. Both the two brothers had been businessmen for a long time. It is inconceivable that they had decided to engage the 1st defendant to guarantee its own performance instead of, as required by the other party, engaging the parent company to guarantee the performance of a subsidiary company. The high probability of inference is that the 1st defendant had made the mistake and had typed out the name of the 1st defendant and affixed the chop of the 1st defendant instead of the parent company, Tanon. Chiu Chi Sing actually signed for and on behalf of the 1st defendant. 53.In other words, in either case (i.e. whether there was a mistake or intentionally the 1st defendant decided to guarantee its own performance instead of involving the parent company Tanon), Chiu Chi Sing knew or should have known that the 1st defendant was guaranteeing the performance of the 1st defendant itself and that the other one who was the joint guarantor was the 2nd defendant himself. He is therefore reckless as to whether there would be another joint guarantor which would be the parent company. 54.He is after all one of the two directors of Tanon but he said he did not know why Tanon decided not to be a guarantor and he was not a party to that decision. As I have said before, his elder brother Chiu Chi Hung did not explain at all as to the state of affairs there and then. 55.In the end I find the defence of the 2nd defendant very shadowy on facts and I consider that he is only entitled to conditional leave to defend. 56.The alleged amount of liability is however conceded by the plaintiff to be a lesser sum of $30,614,696.81, since the guarantor is only liable for goods sold and delivered on and after 1st April 2003. Thus items 1-119 in the schedule should not be counted on his head as they were done before the Distributor Agreement. Postscript 57.The 2nd defendant was granted 21 days to file an affirmation as to what condition he could comply with. He did not do so. The plaintiff therefore issued a summons and asked for the full amount outstanding for the guarantor to be paid into court as a condition. 58.The 2nd defendant acting in person now, did not resist this application. He just raised 3 points which he considered to be not his liability, namely:
59.At the hearing of that subsequent summons, I have decided that in respect of (1), there is no reason why he is not liable as he is guaranteeing the performance of the 1st defendant. When the 1st defendant is liable, he is also liable. 60.In respect of the interest and costs, I shall consider it more fully herein below. Interest 61.The plaintiff also claims interest from 11th November 2003 (i.e. seven days after the first demand letter issued by its solicitors) up to the date of the writ on 27th January 2006 (i.e. a long period of nearly two years and three months). Parties put in submissions in this respect. 62.During this period the 1st defendant would be withholding the money from the other and could have made use of the same for his own use. In any event, the plaintiff was kept out of the money which ought to have been paid to him. 63.The plaintiff was kind enough to allow a negotiation and in spite of the fact that the first reaction of the 1st defendant was denying liability in toto. Then the 1st defendant asked for time since its own record was incomplete. They asked for documents and the plaintiff has been most obliging and supplied them with all the necessary documents for them to check. In spite of that the 1st defendant could only come up, as aforesaid, with the sum of less than $1 million which they considered to be doubtful. But then the 1st defendant was not offering to pay the balance sum of $33 million odd. 64.All in all, I do not consider that the plaintiff should be deprived of interest on the enormous outstanding sum for this long period of time. However, I consider the commercial reality, as urged upon me by counsel for the 1st defendant, and I would award a lesser rate for the same period of time at five per cent p.a. After all, the plaintiff also got liquidated damages of US$10,000 according to the terms of the Distributor Agreement. 65.Accordingly, the plaintiff is further entitled to interest at five per cent p.a. from 11th November 2003 up to 27th January 2006 on the two different judgment sums entered respectively against the 1st and the 2nd defendants. 66.The defendants shall also pay the plaintiff’s costs of the action including this application for summary judgment to be taxed, if not agreed. The extent of the 2nd defendant’s liability to costs is only a matter of taxation. There is no reason why he should not be liable to costs at all.
Mr Benjamin Yu, Senior Counsel, leading Mr Bernard Man, instructed by Messrs Anthony Siu & Co., for the Plaintiff Mr Gerard McCoy, Senior Counsel, leading Mr Newman Lam, instructed by Messrs Chak & Associates, for the 1st Defendant, on 20th September 2006 Mr Newman Lam, instructed by Messrs Chak & Associates, for the 1st Defendant, on 21st September 2006 Mr Chan Chi-hung, Senior Counsel, instructed by Messrs Cheung & Choy, for the 2nd Defendant |