Lai Kit Leng t/a Ou Kei Hong or Ou Kei Hong, Macau v. China Sports Equipment Trading (HK) Co Ltd
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DCCJ 3883/2004 IN THE DISTRICT COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION CIVIL ACTION NO. 3883 OF 2004 ------------------ BETWEEN
Coram : Her Honour Judge H.C. Wong in Court Dates of Hearing : 21st to 24th November 2006, 27th November 2006, 18th – 20th December 2006, 11th to 12th January 2007, 30th January 2007, 8th February 2007 Date of Handing Down Judgment : 17th May 2007 ______________________ JUDGMENT ______________________ 1.The Plaintiff is a sole-proprietor registered in Macau carrying on the business of trading in table tennis products and sportswear. The Defendant is a company incorporated in Hong Kong in the table tennis equipment business. In 2001, the Defendant was appointed as the sole agent for the German brand of “Donic” table tennis products in the People’s Republic of China, including Hong Kong and Macau. 2.The Plaintiff’s claim is based on a written agreement dated 31 May 2001 made between the Defendant as the principal and the Plaintiff as the agent for the entire series of “Donic” table tennis products and the production of sportswear and accessories bearing the Donic trademark in the People’s Republic of China for a period of 3 years from 1 June 2001 to 31 May 2004 inclusive (“the Agreement”). 3.The Plaintiff claims against the Defendant for breaches of the Agreement that:-
4.The Plaintiff claims against the Defendant for loss of profits under 3 purchase orders. The Plaintiff further claims against the Defendant the sum of $87,539.68 being the amount owed by the Defendant to the Plaintiff after setting off the Plaintiff’s orders with the Defendant against the Defendant’s orders with the Plaintiff on 12 December 2003. 5.The Defendant’s defence is as follows:-
The Plaintiff’s Case 6.The Plaintiff Madam Lai is a sole proprietor operating a business registered in Macau in the name of Ou Kei Hong or Ou Kei Hong, Macau. She is and was assisted by her husband Mr. Huang Jie Yu (“Huang”). The Plaintiff Ou Kei Hong began its business of importing and selling the Japanese brand of “Butterfly” table tennis products in Macau since 1993. From July 1995 onwards, Madam Lai and Huang began to introduce Butterfly table tennis products into China through the Plaintiff, Ou Kei Hong (hereinafter referred to as “OKH”). 7.It was Huang’s evidence that in mid 1997 he and Madam Lai intended to establish a limited liability company in China to promote the Butterfly brand of table tennis products. They caused to register at the Commerce and Industry Bureau in Zhongshan a company named Zhongshan Ou Kei Recreational & Sporting Supplies Co. Ltd.（中山巿奧奇文體用品有限公司）(“ZSOK”) on 27 June 1997. Restricted by Chinese law and regulations against the registration of companies in China by foreign nationals, that only Chinese citizens were permitted to register as shareholders of a Chinese registered limited company, ZSOK was registered in the names of Madam Lai’s brother Li Zhi Chao (“Z.C. Li”) and a member of staff, Lee Koon Fei, as shareholders. Huang claimed the real beneficial owners and operators of ZSOK were himself and his wife Madam Lai because they had put up the majority of the funding for the operation and establishment of ZSOK. Furthermore, it was the two of them who had from the beginning negotiated the contract of agency with Butterfly’s head office in Japan and the sale, development and promotion of the Butterfly brand were conducted by Huang and Madam Lai solely. They claimed that Li Zhi Chao had never taken part in these agency negotiations although he began to take a more active role in the business after ZSOK was incorporated. 8.Both Huang and Madam Lai have been former professional table tennis players in the Guangdong Province table tennis team. Due to their efforts in the development of Butterfly table tennis products in China and their network in China, they claimed they came to know Mr. Li Kuang Tsu (“Mr. Li”), the managing director of the Defendant, who was a former national table tennis player and coach in China and Hong Kong. 9.In early 2000, knowing that the German table tennis company “Donic” was looking for a sole agent in China, Mr. Li approached Huang and Madam Lai to prepare a marketing promotion plan in China to assist the Defendant in obtaining the sole agency from Donic. In return, Mr. Li promised to appoint OKH to be the sole agent in Macau and Mainland China of Donic products. As a result, the Plaintiff submitted a proposal to Mr. Li on 6 March 2000. Madam Lai and Huang believed that the proposal drafted by the Plaintiff had assisted the Defendant in obtaining the Donic sole agency for Hong Kong, Macau and the PRC in May 2001. 10.On 31 May 2001, the Defendant appointed the Plaintiff as its Donic sub-agent in China. On 5 June 2001, the Defendant issued a certificate of sole agency in the PRC to OKH. The certificate was countersigned by Huang on behalf of OKH (p. 100 of Bundle A). The certificate further stated that all the sale activities and promotions of Donic table tennis products imported to China would be handled by ZSOK, a subsidiary of OKH. 11.The 31 May 2001 Agreement signed by Mr. Li on behalf of the Defendant and Huang on behalf of the Plaintiff provided that the contract period was for 3 years from 1 June 2001 up to 31 May 2004 with an option to renew for 2 years. Clause 5 of the Agreement further conferred on the Plaintiff a license to produce and manufacture Donic sportswear, sports bags and racket covers (“Donic sports accessories”) at the payment of US$4,000 in the first year, thereafter at a license fee to be agreed annually (“the supplemental agreement”). Based on the aforesaid arrangement, Madam Lai claimed that the Defendant at the request of the Plaintiff issued on 3 June 2001 a sub-agency certificate to ZSOK on 5 June 2001 to enable it to import into China Donic products. Under clause 5 of the Agreement, on 8 April 2002 the Defendant issued a supplemental agreement authorising ZSOK to manufacture and sell Donic sports accessories in China. Under the Agreement and supplemental agreement, the Plaintiff would order from the Defendant Donic products and sell through ZSOK in different parts of China. Furthermore, it would manufacture through factories in China Donic accessories to be sold in China. Further, the Defendant would order sports accessories from the Plaintiff and the costs of which would be set off against Donic products ordered by the Plaintiff. 12.In February 2003, Huang and Li Zhi Chao (“Z.C. Li”), due to differences in opinion, decided to split up the Donic distributions in China with Huang in charge of Part I, and Z.C. Li in charge of Part II. On 13 January 2003, Huang and Z.C. Li put their agreement into writing and signed the agreement of re-arrangement of operations of ZSOK. Subsequent to the re-arrangement agreement of ZSOK, the Defendant was informed of the re-arrangement and accepted the re-arrangement of the operations of ZSOK into Parts I and II in the PRC. The Meeting on 28 May 2003 13.In view of the authorization by the Defendant to produce Donic sports accessories in the second year expiring at the end of June 2003, a meeting was held in Zhongshan on 28 May 2003 between Mr. Li, his daughter Miss Li with Huang and Z.C. Li. At the meeting, the Defendant demanded an increase of annual agency fee to HK$90,000; in addition, the Defendant demanded a guarantee/security deposit of HK$90,000 for Donic products and for sports accessories of $100,000. Huang denied there was any agreement reached of the Donic products and sports accessories security/guarantee deposits at the meeting. 14.The Plaintiff claimed that as the Agreement did not provide for the payment of security or guarantee deposit for Donic products and Donic accessories, the Defendant is not entitled to charge the said sum. Consequently, the Plaintiff did not respond to the demands of the Defendant. The Defendant’s failure to supply orders placed by the Plaintiff 15.Madam Lai claimed that at the October 2003 Chinese Sports Goods Expo in Beijing, there was a dispute between Huang and Z.C. Li when they were sharing the same Donic exhibition stand. And because the Guangzhou company had put up a stand exhibiting and promoting products from a different table tennis brand at the same Expo and had allowed its staff to wear uniform of that brand to work at the Donic stand, it had caused much displeasure to Mr. Li of the Defendant who accused the Plaintiff of breaching commercial ethics. 16.Subsequently, when the Plaintiff placed two separate orders for Donic products on 15 and 23 October 2003 and a further order in early February 2004, the Defendant failed to fulfil these orders. 17.On or about 27 November 2003, the Plaintiff received from the Defendant a memorandum dated 28 May 2003 setting out the terms and conditions of the 1 July 2003 to 30 June 2004 license fee and security/guarantee deposits discussed at the 28 May 2003 meeting. The Defendant requested the Plaintiff to sign the document and return it to the Defendant. Madam Lai and Huang considered the charging of security deposits on Donic products and sports accessories to be unreasonable and unacceptable, they refused to sign the document. On 5 December 2003, they notified the Defendant that the Plaintiff would not sign the said memorandum; as a result, the Defendant began to stop supplying any further Donic products to the Plaintiff. Termination of ZSOK as the Plaintiff’s sub-agent in China 18.Because of the differences between Huang and Z.C. Li, the Plaintiff decided to terminate the appointment of ZSOK as Donic’s sub-agent in the PRC by a letter dated 27 February 2004. On 28 February 2004, the Plaintiff further informed and notified the Defendant that OKH was terminating the Agreement. On 8 March 2004, the Defendant issued a letter to the Plaintiff, informing the Plaintiff that it would terminate the Agreement. On 8 March 2004, the Defendant by letter further notified the Plaintiff that upon the expiry of the agency on 31 May 2004 the Defendant would not be renewing the agency agreement with the Plaintiff. 19.Despite repeated requests from the Plaintiff to the Defendant on the three orders placed on 13 and 23 October 2003 and February 2004, the Defendant failed to supply the goods ordered to the Plaintiff. 20.The Plaintiff claimed that due to the Defendant’s failure to supply Donic products to the Plaintiff during the term of the agency, the Plaintiff suffered a loss of profits. Furthermore, the Plaintiff suffered further damage due to the Defendant’s failure to renew the Donic agency at the expiry of the Agreement on 31 May 2004. Instead, the Defendant continued to supply to ZSOK Part II at Z.C. Li’s requests. The Plaintiff claimed the Defendant had breached the Agreement between the Plaintiff and the Defendant. The Plaintiff further claimed that the Defendant still owed the Plaintiff the sum of $87,559.68 for goods ordered by the Defendant from the Plaintiff. The Plaintiff claimed against the Defendant for profits on the three unfulfilled orders which is equivalent to HK$523,290.60 based on a 35% profit over the cost of the goods ordered at EUR158,695.50. The Defence Case 21.It is the Defendant’s evidence that in or about February 2001, the German company Donic Sportartikel-Vertriebs-GmbH (Donic) orally agreed to appoint the Defendant as its sole agent for Donic table tennis products and table tennis accessories in the People’s Republic of China including Hong Kong and Macau. A written agency agreement was signed by Donic and the Defendant in or about 6 May 2001. 22.Mr. Li, chairman of the board of directors of the Defendant, went with his daughter Miss Li, the marketing and sales manager of the Defendant, to Zhongshan to negotiate with ZSOK on the purchase of Y&T table tennis robots in or about mid-January 2001. He met with Huang who represented to Mr. Li and Miss Li he was the chairman of the board of ZSOK. Mr. Li Zhi Chao represented to them that he was the managing director of ZSOK. The Defendant produced the business cards of Huang and Z.C. Li which gave the aforesaid titles of Haung and Z.C. Li at ZSOK. The meeting resulted in an agreement in writing on the 1 March 2001 between ZSOK and the Defendant in relation to the supply of Y&T table tennis robots from 1 March 2001 to 28 February 2002. The written agreement was signed by Huang on behalf of ZSOK and Mr. Li on behalf of the Defendant. 23.Upon the signing of the written agreement between Donic and the Defendant on 6 May 2001 when the Defendant was conferred the sole agency for Donic equipment and products for a period of 3 years in the People’s Republic of China, Macau and Hong Kong, Donic further authorised the Defendant to produce accessories in the Donic brand including sportswear, bags and racket covers at the payment of a license fee of US$4,000 for the first year, thereafter the yearly license fee to be mutually agreed. The said authorisation was granted in the first year from 1 July 2001 to 30 June 2002. Subsequently, the authorisation was extended to 30 June 2003 and later extended for a further year to 30 June 2004. 24.According to the evidence of Miss Li and Mr. Li, in the course of the business relationship between the Defendant and ZSOK over the supply of Y&T table tennis robots to the Defendant, the Defendant came to learn that ZSOK was the agent of the Japanese brand “Butterfly” table tennis equipment, sportswear and accessorises in the PRC, it had also been authorised by the owner of “Butterfly” Tamasu Co. Ltd. of Japan to manufacture Butterfly sportswear and accessories. The Defendant was told that ZSOK’s Butterfly agency would expire in November 2002. Acknowledging the table tennis product network within the PRC had already been developed by ZSOK, the Defendant decided to approach ZSOK as its sole agent for Donic in the PRC not including Hong Kong and Macau. 25.On or about 1 March 2001, during a visit by Mr. Li and Miss Li to Zhongshan meeting with Huang and Z.C. Li, Mr. Li informed them that the Defendant had been appointed by Donic as the sole agent of Donic equipment, sportswear and accessories in the people’s Republic of China including Hong Kong and Macau. 26.The Defendant claimed that at the end of April 2001, Madam Lai and Huang visited the Defendant’s office in Hong Kong and represented to Mr. Li and Miss Li that ZSOK was the subsidiary of the Plaintiff and that Huang was both the managing director of the Plaintiff and the chairman of the board of directors of ZSOK. Miss Li further claimed that Madam Lai and Huang informed them that since they were holders of identity cards of Macau, for taxation purposes and legal protection they requested the Defendant to enter into the agency agreement with the Plaintiff who would be acting on behalf of ZSOK. That was why the Agreement was signed between the Plaintiff and the Defendant with Huang as the managing director for the Plaintiff and Mr. Li on behalf of the Defendant on 31 March 2001. 27.The Defendant relied on a supplemental agreement dated 8 April 2002 between the Defendant on one part and ZSOK on the other part. The supplemental agreement authorised the manufacturing and sales of Donic sportswear, sports bag, and table tennis racquet covers to be manufactured by ZSOK under clause 5 of the Agreement of 31 May 2001. The Defendant further produced invoices issued by the Defendant to Huang of ZSOK to show that the intention of the Defendant was to enter into an agency agreement with ZSOK. 28.The Defendant further relied an import tax payment form from the Customs and Excise Bureau of Zhongshan dated 14 November 2002 as evidence that the form was issued under the name of ZSOK and that ZSOK had paid the import tax on the Donic equipment and products imported to China. Based on the aforesaid, the Defendant claimed that the Plaintiff had misrepresented to the Defendant Huang’s position as the chairman of the board of ZSOK. The Defendant claimed that was the basis the Defendant had signed the agency agreement with the Plaintiff. The Memorandum of 28 May 2003 29.It is Miss Li’s evidence that the memorandum was drafted by her on the Defendant’s behalf and it was faxed over to both Huang and Z.C. Li before the meeting on 28 May 2003. 30.Prior to the meeting of 28 May 2003, Miss Li received a letter from Huang representing Part I of ZSOK dated 13 May 2003 informing her that as the Donic sportswear contract for the period of 1 June 2002 to 31 May 2003 would be expiring soon, he offered on behalf of ZSOK Part I, an annual license fee for Donic accessories in the sum of HK$60,000. 31.Miss Li confirmed that the supplemental agreement for the production of Donic accessories had been extended in the second year and the expiry date was 30 June 2003. At the 28 May 2003 meeting, Miss Li claimed that Huang and Z.C. Li had agreed to the terms set out in the draft memorandum prepared by her stating that the license fee for the sportswear and accessories payable to the Defendant by ZSOK for the period of 1 July 2003 to 30 June 2004 to be $180,000; in addition, a deposit of the same amount for the sportswear and accessories and a further deposit of $200,000 for the Donic equipments/products. Miss Li claimed that Huang and Z.C. Li agreed at the meeting to each paying half of the sums demanded by the Defendant. She further claimed that pursuant to clause 2 of the memorandum of 28 May 2003, the deposits would be refunded to ZSOK if clause 4 of the memorandum was complied with at the end of the period. 32.Clause 4 of the memorandum provided that upon the expiry of the supplemental agreement on 30 June 2004, should the Agreement be not renewed, ZSOK would terminate its production of “Donic” sportswear and accessories, and the remaining stock of sportswear and accessories would have to be disposed of within two months; further, ZSOK would terminate all sales of accessories bearing the Donic trademark after 30 August 2004. 33.The Defendant argued that since Huang denied he had agreed to the terms of the memorandum on 28 May 2003, the previous year’s arrangement having expired on 30 June 2003, ZSOK should have terminated all production and sale of Donic sportswear and accessories on 30 June 2003 and further concluded all sales of Donic products within two months of 30 June 2003. 34.Miss Li, however, claimed that Mr. Huang did agree to the terms of the memorandum at the meeting on 28 May 2003. After the meeting, he had only asked for payment by instalments. Consequently, Miss Li faxed over a letter on 9 June 2003 to Huang of ZSOK Part I, setting out a schedule for instalment payments between 1 July 2003 and 30 June 2004 in respect of the license fee and Donic accessories and equipment deposits. 35.According to Miss Li, Huang, on behalf of ZSOK Part I, had failed to pay any of the security deposit for the accessories and equipment. Huang had settled only a sum of $87,559.68 on the license fee. The equipment deposit of $100,000 and the $90,000 accessories deposit were never settled. Z.C. Li, on the other hand, had duly paid up his share as agreed. 36.In or about the end of November 2003, the Defendant requested Z.C. Li and Huang to sign a copy of the 28 May 2003 memorandum to confirm the supplemental agreement in respect of the Donic equipment and sports accessories for 2003-2004. After obtaining the signatures of Z.C. Li of ZSOK Part II and Mr. Li Kuang Tsu of the Defendant, Huang told Miss Li he would sign the memorandum when it was delivered by hand to Huang within one week. However, Huang kept the copy of the memorandum which had been signed by the Defendant and by ZSOK Part II and refused to return it to the Defendant. Conduct of infringement by the Plaintiff 37.It is the Defence case that Huang and Madam Lai went to Germany to meet with the executives of Donic Sportartikel Vertriebs GmbH, the German company that owned the Donic brand in December 2003. The Defendant claimed this constituted a breach of contract because the purpose of their visit to Germany was to obtain a direct agency for the supply of Donic products behind the back of the Defendant. 38.The Defence further claimed that in breach of the Agreement, Huang and Madam Lai disclosed the terms of the Agreement of 30 May 2001 to a third party in early 2004. Furthermore, the Plaintiff submitted a three year sole agency proposal to Donic in Germany in an attempt to obtain the sole agency from Donic directly upon the expiry of the agency agreement between the Defendant and the Plaintiff. 39.The Defence therefore claimed that the motive behind the Plaintiff placing an order which exceeded ZSOK Part I’s usual orders by 6 times in February 2004 at a value of EUR120,705 was in anticipation of the early termination of the Agreement later that month. 40.The Defence claimed that the Plaintiff and Huang continued to sell Donic accessories and equipment after the expiry of the sportswear and accessories supplemental agreement on 30 June 2003. Furthermore, the Plaintiff continued to sell Donic products and equipments after the expiry of the Agreement and the two months period specified under the memorandum. 41.The Defence adduced evidence from Mr. Feng Jian Hai, a manager of one of Z.C. Li’s companies. He was instructed by Z.C. Li in mid-September 2005 to conduct investigations in Guangzhou for infringements of Donic table tennis accessories and equipment. On 26 September 2005, he purchased a Donic trademark shirt and shorts from a shop called Guangzhou Yee Kei Sports Supplies Co. Ltd. located at Dong Shan District in Guangzhou. He discovered that the shirt and shorts purchased on 26 September 2005 was manufactured by Zhongshan Shichi Ou Kei Garment Factory and that the producer was Madam Lai without the authorisation from the Defendant. 42.Mr. Feng paid a second visit on 22 December 2005 to Guangzhou and located a shop at Guangzhou Dong Shan District Er Sha Sports Training Ground in the name of Guangzhou Dong Shan Sun Yee Kei Sporting Supplies Merchandising Office where he found table tennis accessories and equipment in the Donic brand available for sale. He purchased a table tennis racket, a shirt and shorts all bearing the Donic trademark. Again, the shirt and shorts bore the name of the factory and manufacturer as Zhongshan Shichi Ou Kei Garment Factory and the producer was Madam Lai. 43.On 28 December 2005, Mr. Feng was again instructed to visit a shop in the name of Zhongshan Sun Ou Kei Sporting Supplies Co., Ltd. at 中山巿悅來中路55號where he found table tennis equipment, sportswear and accessories bearing the Donic trademark available for sale. He purchased a table tennis racket, a shirt and shorts bearing the Donic trademark. Again the shorts and shirt were said to be manufactured by Zhongshan Shichi Ou Kei Garment Factory and the producer was Madam Lai. 44.The Defendant claimed that at a visit to the website www.tsp.com.cn (“the website”) on 15 August 2005, it found an advertisement of the Zhongshan Sun Ou Kei Sporting Supplies Co. Ltd. claiming to be the sole agent of Donic products, sportswear and accessories. The Defendant claimed that the website was maintained by one Miss He Xing Ling who was related to Huang and the registered sole proprietor of Zhongshan Shichi Ou Kei Garment Factory. The Defence claimed that the Plaintiff was in breach of the Agreement and infringed the Donic trademark of which the Defendant possessed the sole agency during the relevant period in the PRC, Macau and Hong Kong. The Defence further counterclaims against the Plaintiff damages for passing off table tennis products bearing the Donic trademark. The issues
Findings Parties to the Agreement 46.The Agreement was signed by the representatives of the Plaintiff and the Defendant on 31 May 2001 (p. 326 to 329 of Bundle C). Mr. Li Kuang Tsu signed on behalf of the Defendant as the chairman of the board of directors and general manger. On the other hand, the Plaintiff’s representative was Huang who signed as the managing director of the Plaintiff, Macau Ou Kei Hong. Both parties clearly set out their respective addresses and the authorised persons signing on behalf of the parties on the Agreement. 47.The Plaintiff’s Counsel, Mr. Ng, submitted that as the Agreement is the proper agreement signed between the two parties, the Defendant should not be allowed to adduce parole evidence. However, as the Defendant raised the defence of misrepresentation and novation of the Agreement, the background as to the parties entering into the Agreement has to be considered. 48.It is the Plaintiff’s case that the reason why the Defendant approached the Plaintiff was because Madam Lai and Huang’s background as former professional table tennis players, and upon retirement from professional competitions they had immigrated to Macau and had since 1993 set up a business as distributor and later agent for Butterfly table tennis products in Macau with a sales network in Mainland China. The first time Huang and Madam Lai had business contact with the Defendant was in January 2001, when Mr. Li Kuang Tsu of the Defendant met Huang for the supply of Y&T table tennis robots to be imported by the Defendant to Indonesia. 49.Against this background, it is understandable when the Defendant was looking for a reliable sub-agent in the PRC for Donic, Mr. Li invited Huang to submit a proposal for the Defendant’s consideration. After the March 2001 agreement signed by Mr. Li and Huang to supply Y&T table tennis robots to Indonesia, Mr. Li gained a better knowledge of Huang and ZSOK’s network for table tennis products in China. 50.As Madam Lai and Huang had a background in table tennis in China and with their experience in representing Butterfly table tennis products since 1993 in Macau and the PRC and with Mr. Li Kuang Tsu’s own background and reputation in the sport of table tennis, the negotiation for sub-agency understandably was conducted between Huang and Mr. Li. The fact that the Y&T table tennis robots supply contract was signed by Huang on behalf of ZSOK lend strong support to the aforesaid. 51.Given the regulation in China in the 1990’s and 2000 only allowed Chinese citizens resident in the PRC to register a Chinese company trading in China, Madam Lai and Huang decided to register ZSOK in the name of Madam Lai’s brother Z.C. Li as the legal representative holding 60% of the shares. They further appointed a member of staff, Mr. Lee Koon Fei, as the holder of the remaining 40% of the shares. Consequently, the two persons became the shareholders of ZSOK when they in fact were holding the shares in trust for Madam Lai and Huang. 52.I find the evidence of Madam Lai and Huang to be truthful and credible. I accept their evidence that ZSOK was initially incorporated by them and that in 2001 Z.C. Li was given 50% of the shareholdings after they successfully registered a limited company in Guangzhou and the Guangzhou company was transferred 50% of the shares in ZSOK, even though ZSOK was incorporated with the capital mainly from Madam Lai and Huang. Z.C. Li had no background in the sport of table tennis; previous to his involvement in ZSOK, he had been in the business of TV and audio equipments in Zhongshan. After that business folded up, he operated a bakery shop before embarking on the business of table tennis products. When Z.C. Li first began selling table tennis products in Zhongshan, he named the shop Ou Kei Sports Goods Shop (奧奇體育用品店). He admitted he was trading as an individual proprietor (個體戶) selling Butterfly tennis products. Z.C. Li further admitted that the reason why he was introduced to the Butterfly table tennis products was because Madam Lai and Huang had been selling the Butterfly table tennis products in Macau successfully. They had an arrangement to supply to Z.C. Li Butterfly products and Z.C. Li was only required to pay for the rental of his Zhongshan shop while Madam Lai and Huang would come over to Zhongshan to help him with the business in the PRC at the weekends. The business slowly picked up in 1996. ZSOK was established on 27 June 1997 and became a joint stock company so that it could issue invoices for profits tax purposes and sell to department stores in the PRC. Even though Z.C. Li claimed credit for establishing distributors all over the PRC, the agency for Butterfly equipment such as rackets and rubber linings was terminated by Tamasu Co. Ltd. in September 2000. The Butterfly sportswear manufacturing authorisation in China also terminated in October 2002. This explained why the Plaintiff and ZSOK were eager to obtain the agency of a new brand of table tennis products. 53.Huang had written a proposal on behalf of the Plaintiff to the Defendant on the sale of Donic products in the PRC in March 2001. This proposal was amended subsequently and the final version was sent to the Defendant on 20 May 2001 (p. 325–122). It was written on the Plaintiff’s note paper. The proposal included the projected annual sales and estimated annual increase of sales during the three years of proposed agency in the PRC. It also referred to a request for certification of the sole agency of Donic products in China and an authorisation for manufacturing Donic brand of sportswear, racket covers and table tennis robots with a license fee of US$4,500 in the first year for sportswear, racket covers of US$1,000 and table tennis robots at US$2,000. 54.It is obvious that the Agreement of 31 May 2001 was based on Huang’s proposal to the Defendant of 20 May 2001 and the proposal was written on behalf of the Plaintiff. There is therefore strong evidence in support that the Agreement was intended to be signed between the Plaintiff and the Defendant. Otherwise the Defendant would not have used his own letterhead paper and named the Plaintiff as the contracting party specifying the Plaintiff to be the sole sub-agent for Mainland China on the Agreement. Furthermore, clauses 7 and 8 of the Agreement specified that the Plaintiff’s sole agency was to be effective only in the PRC and that the Plaintiff could sell Donic products in Macau but not to be the sole agent for Donic in Macau. 55.The certificate of sole agency in the PRC issued by the Defendant to the Plaintiff on 5 June 2001 signed by Mr. Li Kuang Tsu on behalf of the Defendant stated clearly that the Plaintiff’s sub-agency of Donic table tennis products in Mainland China was conferred to the Plaintiff and that the operations and import and export of Donic table tennis products would be handled by the Plaintiff’s subsidiary company ZSOK (p. 330 of Bundle C). This shows the Defendant well knew and accepted the Plaintiff’s position with ZSOK and the ZSOK’s role in the sub-agency. ZSOK as the subsidiary of the Plaintiff 56.According to the Plaintiff’s evidence, ZSOK was incorporated to promote and sell table tennis products in Mainland China because the Plaintiff as a Macau firm could not do so in Mainland China. Madam Lai and Huang claimed they had financed the business of ZSOK, that Madam Lai’s brother Z.C. Li had only put up the cost of decoration of his own shop in Zhongshan, and the Plaintiff was financing and promoting the business of ZSOK in the PRC. Consequently, the name cards printed by Z.C. Li for Huang at the time when ZSOK was the agent for Butterfly table tennis products named Huang as the chairman. At the time, they obviously did not consider it improper to name Huang as chairman of the board of directors of ZSOK even though under Chinese company law and the registration at the Industry and Commerce Bureau of Zhongshan, Z.C. Li was named as the legal representative of ZSOK and one of the 2 shareholders together Lee Koon Fei (李冠飛). Madam Lai claimed that during a short period in 2001 Guangzhou had relaxed its law allowing a non-resident to set up a company in Guangzhou. Consequently, Madam Lai and Huang incorporated the Guangzhou Yee Kei Sports Goods Co. Ltd. (廣州巿依奇體育用品有限公司) (“the Guangzhou company”). Madam Lai explained that in the year 2000-2001, ZSOK was litigating with the Tamasu company of Japan as owner of Butterfly and Z.C. Li as the responsible legal representative of ZSOK had the conduct of the litigation with Butterfly, consequently, Madam Lai and Huang decided to allow Z.C. Li to retain 50% of the shareholdings in ZSOK. At the 13 January 2002 meeting of the shareholders of ZSOK, a formal resolution was passed and Z.C. Li transferred to the Guangzhou company 10% of the shareholdings of ZSOK and Mr. Lee Koon Fei (李冠飛) transferred all his 40% shareholdings at ZSOK to the Plaintiff’s Guangzhou company. At the meeting, Huang who appeared as the legal representative of the Guangzhou company was appointed ZSOK’s governing representative (監事) replacing Mr. Lee (李冠飛) while Z.C. Li retained his position as the company’s executive director and legal representative. The transfer of shareholdings was duly registered at the Industry and Commerce Bureau of Zhongshan city. 57.Z.C. Li admitted that he had operated ZSOK as the agent for Donic jointly with Huang and Madam Lai. He claimed that Huang all along acted as the owner of the Plaintiff and the chairman of the board of directors of ZSOK in the operation of ZSOK’s agency for Donic products handling import, sales, promotion and manufacturing activities. He claimed ignorance of Madam Lai being the registered proprietor of the Plaintiff. 58.Based on documentary evidence produced and the evidence of witnesses in Court, it is clear that the Plaintiff had delegated Huang to be responsible for the promotion and sales for the Plaintiff and Madam Lai was responsible for the accounting and financial affairs of the Plaintiff. They were the responsible persons for the Plaintiff since 1993 selling table tennis products in Macau and Mainland China. From being a distributor of Butterfly table tennis products, the Plaintiff became one of the agents of Butterfly in Mainland China in the late 1990’s. Before becoming an agent of Butterfly and in order to expand the business to supply department stores all over China, the Plaintiff had to establish a vehicle by the incorporation of a registered company in China for invoices to be issued to comply with the customs and tax regulations in Mainland China. Not being a Mainland resident, they enlisted the assistance of Madam Lai’s brother Z.C. Li. The fact that Z.C. Li had adopted the same name in his shop Ou Kei Sports Goods Supplies Company for his shop in Zhongshan before the incorporation of ZSOK, and the name “Ou Kei” happened to be the name of Madam Lai and Huang’s son, lends strong support to the fact that Z.C. Li’s Zhongshan shop selling Butterfly table tennis products had the full support of his sister Madam Lai and Huang who would work in Zhonghsan during the weekends to develop the business in the PRC. 59.I accept the evidence of Madam Lai and Huang that ZSOK was incorporated using Z.C. Li as the legal representative naming Z.C. Li and the staff Mr. Lee as shareholders. They were in fact holding the company on trust for Madam Lai and Huang. Therefore, it is not surprising that in early 2001, major business decisions and operations of ZSOK in Mainland China of Butterfly products and Y&T table tennis robots were made by Huang and his wife Madam Lai. Even though Z.C. Li did contribute to the promotion and expansion of the business of ZSOK in later years, in 2001, negotiations for the agency of Donic with the Defendant was clearly conducted by Huang on behalf of the Plaintiff and on behalf of ZSOK and agreements were signed by Huang only. 60.Based on this background, I am satisfied the Plaintiff regarded ZSOK as a subsidiary company to the Plaintiff. Based on the evidence of the Defendant’s certificate of sole sub-agency in Mainland China conferred on the Plaintiff naming ZSOK as the Plaintiff’s subsidiary in charge of all operations in the PRC, it is clear that the Defendant accepted the position as described by Huang and Madam Lai. 61.Since Madam Lai and Huang both regarded ZSOK as a company owned and controlled by both of them, they saw nothing wrong in the Plaintiff entering into the Agreement with the Defendant. On that basis, they had informed the Defendant that ZSOK would be in charge of the Mainland business. This position was not disputed by Z.C. Li though he claimed he did not know Huang and Madam Lai had negotiated with the Defendant and signed the Agreement in the Plaintiff’s name. The fact that he raised no objection throughout the years to the sub-agency from the Plaintiff to ZSOK showed that he was not in a position to oppose the Plaintiff being the contracting party to the Agreement and ZSOK as the sub-agent of the Plaintiff. 62.I find therefore there was no misrepresentation on the part of Madam Lai and Huang because they genuinely believed they were the true beneficial owners of ZSOK and they did have full control of ZSOK. There was no fraudulent misrepresentation so far as the Agreement with the Defendant is concerned. Novation 63.The Defendant raised the defence of novation. Mr. Wong, Councel for the Defendant, submitted that the Plaintiff had assigned her right under the Agreement to ZSOK, he referred and relied on the Agreement of 31 May 2001 and the supplemental agreement dated 8 April 2002 (p. 337 to 340 of Bundle C), the production authorisation certificate dated 21 October 2002 (p. 345 of Bundle C) and the production authorisation certificate dated 30 June 2003 (p. 383 of Bundle C), the internal adjustment agreement between Huang and Z.C. Li of 13 January 2003 dividing up the rights and liabilities under the Agreement (p. 352 to 353 of Bundle C), the memorandum of 28 May 2003 (p. 415 of Bundle C) and letters and invoices issued to ZSOK, plus the import tax payment form of the Customs and Excise Bureau of Zhongshan of 14 November 2002 (p. 351 of Bundle C). 64.So far as the supplemental agreement issued under clause 5 of the Agreement dated 8 April 2002 is concerned, pages 337 to 341 of Bundle C exhibited five supplemental agreements in respect of production and manufacturing of Donic sportswear, racket covers and sports bags. All five documents were dated 8 April 2002. The Plaintiff produced an expert report from Mr. Cheng Yau Sang, Patrick who is a forensic handwriting and document examiner who had been a chemist working at the Government Laboratory Forensic Science Division. Mr. Cheng had been accepted in the courts of Hong Kong as an expert in questioned documents and Chinese handwriting. His report stated that compared to the original of page 341 which was given to him as an original document bearing the original seal and Chinese signature in black roller ball point ink and the original violet blue-coloured oval stamp of the Defendant, he considered the documents on p. 337 and p. 338 to be forgeries. As the Defendant called no expert evidence that contradicted Mr. Cheng’s report, Mr. Cheng’s expert report was unchallenged. 65.On the other hand, Miss Li giving evidence on behalf of the Defendant claimed that although she no longer had any record of the supplemental agreement, she had obtained a copy of p. 338 from Huang on or about 9 May 2002 by fax. The authenticity of p. 341 addressed to the Plaintiff by the Defendant dated 8 April 2002 could not be challenged for the original is kept in the Plaintiff’s possession together with the other documents addressed to Huang. The authenticity of pages 337 and 338, on the other hand, is doubtful. Only p. 341 had been certified by Mr. Cheng to be reliable. 66.I find the Defendant have failed to rebut the presumption that the Agreement was entered with the Plaintiff as the principal. The Defendant has failed to show the Plaintiff had been replaced by ZSOK because the Plaintiff had by novation assigned her right under the Agreement to ZSOK. Breach of Confidentiality 67.The Defence claimed that the Plaintiff had breached the term of confidentiality under clause 18 of the agreement by disclosing the terms of the agreement to a third party. And by visiting the executives of Donic in Germany in late December 2003 attempting to deal directly with Donic’s German company, the Plaintiff had committed a breach of the Agreement, therefore under clause 16 of the Agreement, the Defendant is entitled to revoke the Agreement immediately. The Defendant claimed further that the disclosure of the terms of the Agreement was made by sending a facsimile transmission of the Agreement on 13 February 2004 to a Mr. Yeung Kin Wah in Germany (p. 425 to 428 of Bundle C). 68.On the other hand, the Defendant also claimed that it was the Plaintiff who terminated the agreement by letter dated 28 February 2004 (p. 430 of Bundle C). On 8 March 2004, the Defendant accepted the breaches and informed the Plaintiff it would terminate the Agreement and would not renew the agency agreement upon expiry of the Agreement on 31 May 2004. It is difficult to understand why the date of 31 May 2004 was referred to when notice of the date of termination of the agreement was 8 March 2004. In any event, it is clear that the Plaintiff’s termination by letter of 28 February 2004 was apparently accepted by the Defendant as indicated by the Defendant’s 8 March 2004 letter. The Supplemental Agreement for manufacturing and production of Donic accessories 69.The Agreement clearly provided that the Donic agency in the PRC to the Plaintiff was for a period of three years from 1 June 2001 to 31 May 2004. Clause 5 of the Agreement further provided for a supplemental agreement for manufacturing and production of Donic sportswear, racket covers and sports bags. Clause 5 specified that such manufacturing under the Donic brand would be authorised by Donic in Germany through the Defendant, the consideration for the first year was a license fee of US$4,000 plus 5% of the production costs to be paid to the Defendant. Clause 5 further provided that the second year and third year license fees were subject to negotiation at the expiry of the first year. It is understandable for the Defendant to impose a yearly term because a similar term appeared in his own agency contract with Donic, clause 1.5 on p. 318 stated:-
70.There is no doubt the supplemental agreement on the manufacturing and production of Donic accessories under license from the Defendant who had obtained its right directly from Donic in Germany was independent of the Donic equipment and products import terms. 71.On the construction of the Agreement, even though the supplemental agreement on Donic accessories should fail in the third year because the parties could not reach an agreement on the license fee or royalties payable on the manufacture of accessories, the rest of the Agreement on Donic equipment and products could carry on until the end of the 3 year contract provided clause 12 had been complied with. 72.I accept Mr. Wong’s submission and his reliance on the case of May and Butcher Limited v. the King [1934]2 King’s Bench 17 where the agreement between the parties stated “the price or prices of sale of old tentage shall be agreed from time to time and at such delivery periods as should be similarly agreed”; the English Court held that it was a mere contract to agree and no contract had ever come to existence. Therefore, in the present case, in respect of the third year license for the manufacturing and production of Donic sportswear and accessories under clause 5, when the Plaintiff refused to accept the terms imposed by the Defendant, there was no agreement reached, as a result, production and manufacture of Donic sportswear and accessories should stop completely at the expiry of the second year which the Defendant accepted to be at the end of June 2003. The Memorandum of 28 May 2003 73.It is the Defendant’s case that Huang and Z.C. Li both agreed to the terms set out in the memorandum of 28 May 2003. Miss Li claimed that a copy of this memorandum was sent before the meeting to both Huang and Z.C. Li of ZSOK. That at the meeting, both of them agreed to the terms laid down in the memorandum. 74.Huang, on the other hand, claimed that at the meeting, he did not express any agreement or disagreement to the terms proposed by the Defendant. He claimed that the Defendant posted the memorandum to him and demanded for payment on 27 November 2003. He claimed he had never seen the memorandum before that date. After a discussion with his wife, Madam Lai, they decided not to sign the memorandum because they considered the terms laid down to be unreasonable and unacceptable. However, the documents exhibited presented a different picture, it can be seen that in the intervening period the Defendant had repeatedly sent invoices and reminders to the Plaintiff referring to the $90,000 license fee for Part I of ZSOK and the sum of $190,000 refundable security deposit for the equipment and sportswear. The Plaintiff did not deny that Huang had received these documents. 75.Based on the invoices and accounts exchanged between the Plaintiff and the Defendant in the latter part of 2003, it is quite clear that the Defendant had been demanding payment of the license fee and deposits for the third year. The Defendant had further deducted from the accounts payable to the Plaintiff the sum of $90,000 as the accessories license fee with the apparent consent of Huang. The only evidence of Huang’s objection to the charging of the $90,000 license fee appeared in his letter dated 28 February 2004 (p. 430). The fact remains the Plaintiff had never paid the $190,000 security deposit for the equipment and accessories and had refused to sign the memorandum of 28 May 2003. Consequently, there cannot be any concluded agreement to the third year license under the conditions laid down by the Defendant in the memorandum. Huang may or may not have expressed acceptance of all of the terms and conditions at the 28 May 2003 meeting, since the Plaintiff failed to pay the deposits subsequent to the meeting and subsequent to the receipt of the memorandum of 28 May 2003 had refused to sign it, clearly, the Plaintiff had no intention to accept all of the terms set out in the memorandum. Termination of the Agreement 76.The first notice of termination of the Agreement was sent by Huang under his letter of 28 February 2004 informing the Defendant to stop supplying to ZSOK Donic equipment and products; he further gave notice that the Plaintiff had terminated the license to manufacture Donic sportswear and accessories from 27 February 2004 onwards. This termination was accepted by the Defendant because the Defendant stopped delivery of the outstanding orders from the Plaintiff placed in October 2003 and February 2004. Nowhere in the 28 February 2004 letter, however, did Huang complain about the Defendant’s failure to supply Donic products and equipment to the Plaintiff, he had only demanded the return of the $90,000 license fee. On the construction of the terms of the Agreement, there is no provision for a deposit or security sum to be paid other than the guarantee of annual purchase amount of Donic products under clause 12. The Defendant is therefore not entitled to demand a deposit on the Donic products. In any event, termination of the Agreement took place when the Plaintiff gave notice on 28 February 2004. Option to renew 77.The Plaintiff claims against the Defendant for damages incurred due to the Defendant’s failure to renew the Agreement for two further years under the Agreement. Since it was the Plaintiff who terminated the Agreement on 28 February 2004, the Plaintiff cannot now claim against the Defendant for failure to renew under the option in the Agreement because the Agreement had already been terminated by the Plaintiff on 28 February 2004. 78.It is further not opened to the Plaintiff to complain that the Defendant continued to supply Donic products to Z.C. Li after the Plaintiff terminated the Agreement on 28 February 2004 because the Defendant after that date was free to enter into a new agency agreement with anyone of its choice. Under clause 6 of the Agreement, it stated that the Defendant was forbidden to sell Donic products to anyone other than the Plaintiff but it may do so if the Plaintiff failed to comply with any of the terms under the Agreement. Upon the termination of the Agreement, it is no longer binding on the Defendant. As clause 16 of the Agreement provided that should the Plaintiff be unable to comply with any one of the clauses in the Agreement, it would constitute a breach of Agreement and the Agreement would be repudiated. This clause should be read together with clauses 5 and 12. Clause 5 authorised the Plaintiff to manufacture Donic sportswear, sports bags and table tennis racket covers at the payment of a license fee. The license fee or royalty for the second and third year were subject to negotiation after the first year. Under clause 12, the Plaintiff guaranteed a yearly purchase of Donic products and equipment of not less than US$200,000. In the second year, a guarantee purchase of US$230,000 and in the third year a guarantee purchase of US$270,000. That on the completion of those sale figures, the contract would be automatically extended for one year even though under clause 13 the effective date of the Agreement was from 1 June 2001 to 31 May 2004. 79.It was because of clause 16 and the Plaintiff’s failure to agree to the terms laid down by the Defendant on 28 May 2003 under clause 5 of the Agreement that Madam Lai and Huang decided to visit the Donic executives in Germany in December 2003. Knowing that clause 16 stated non compliance of any term under the Agreement would affect the continuation of the Agreement and the agency would be terminated, Huang and Madam Lai admitted they were reluctant to notify the Defendant that they could not comply with the terms laid down by the Defendant in the 28 May 2003 memorandum. Even though Miss Li had agreed to allow Huang to pay by instalments in a letter dated 9 June 2003, the Plaintiff failed to comply with those terms except for the first payment on 23 June 2003. It was clearly a last resort when they visited the executives of Donic in Germany in December 2003 trying to gain the sympathy of the Donic executives and enlist the assistance of a friend in Germany to intervene on their behalf. Their efforts failed, that was why on 28 February 2004, Huang wrote a letter to terminate the Agreement. As a result, the Plaintiff cannot now turn round and claim against the Defendant for failure to supply Donic products and equipment to the Plaintiff on three of their orders in October 2003 and February 2004 when part of the October orders were filled and the February order was extraordinarily large and most important of all the Plaintiff had committed a breach of the Agreement by visiting Donic in Germany in December 2003 and disclosed the Agreement to a 3rd party. Furthermore, it was the Plaintiff who had terminated the Agreement in the first place. The Plaintiff’s claim for $87,559.68 80.The Plaintiff denied receiving the memorandum of 28 May 2003. On the other hand, Huang did not deny receiving the letter dated 9 June 2003 from Miss Li setting out the schedule for payment by instalments (p. 375). Huang wrote on a fax copy of the telegraph transfer of HK$165,333.43 to Miss Li on 23 June 2003 that the payment included the first payment by instalment in the sum of HK$37,333.43 as the sportswear license fee (p. 380). This demonstrated the Plaintiff’s acceptance of the instalment terms from the Defendant and payment of the $90,000 license fee for the third year even though the second to fourth instalments on the security deposit were never paid. 81.Consequently, when the Plaintiff continued to manufacture and sell Donic sportswear after 30 June 2003, it meant the Plaintiff had accepted the revised license fee from US$4,000 to HK$180,000 by conduct of payment on 23 June 2003. Therefore, the Plaintiff is not entitled to recover the said sum. The Defendant’s Counterclaim 82.The Defendant claimed that the Plaintiff had passed off sportswear and accessories in the Donic brand and was in breach of the Donic trademark. 83.It is the Plaintiff’s defence that the Defendant had refused to accept any return of Donic products and equipment after the termination on 28 February 2004, therefore, the Plaintiff’s distributors were still selling old stock and slow-going stock purchased during the agency. The Plaintiff further claimed that she had sold her shares in the factory manufacturing sportswear and accessories to one Miss He (何杏玲). The Plaintiff denied it had infringed the Donic trademark. The Plaintiff admitted on the other hand, that two of the shops operated by the Guangzhou company in Guangzhou were still selling old stocks and old sportswear and accessories produced before the termination of the license a few months after the termination. 84.Clause 5 of the Agreement did not specify the time within which the Plaintiff was to dispose of the Donic sportswear and accessories after termination of the license issued under the clause 5. Neither did the Agreement specify the time within which the Plaintiff was to dispose of all Donic equipment and products upon termination of the Agreement. Consequently, there was no breach of the Agreement even if the Plaintiff was selling old stocks ordered before the termination of the agreement within a reasonable period after the termination of agency. The memorandum of 28 May 2003 may have specified the period of two months within which the Plaintiff had to dispose of all Donic sportswear and accessories upon termination of the contract and that the Defendant had no obligation to accept return stocks; the memorandum, however, was never signed or accepted by the Plaintiff. 85.Clause 17 of the Agreement specified that the Donic trademark and license belonged to Donic’s German company, even though the Defendant claimed it was authorised under its own agency agreement with Donic and the Defendant may take up legal action against infringers of the Donic trademark, I agree with Mr. Ng that there is no evidence at the time of the filing of the counterclaim the sole agency between Donic and the Defendant had been extended after the expiry of the Agreement on 31 May 2004. Furthermore, the sale of Donic products and accessories were done through shops in Guangzhou and Zhongshan which may have been operated by the Guangzhou company, but the Guangzhou company is not a party to this action. 86.It is not disputed that the alleged infringing activities were said to have taken place in the PRC and the acts were not committed directly by the Plaintiff. As there was no expert evidence adduced at the trial to establish that trademark infringing activities and acts of passing off are actionable torts in the PRC, it is not a matter for this Court to adjudicate on. 87.As to the allegation that Miss He was responsible for putting up a website distributing Donic products, sportswear and accessories, there was no conclusive evidence that the website had anything to do with the Plaintiff or that the website was under the control of the Plaintiff. Conclusions 88.For reasons set out in para. 80 above, I am not satisfied the Plaintiff had shown that the Defendant had unlawfully withheld the sum of $87,559.68. The payment had the apparent consent of the Plaintiff because Huang did make the license payment on 23 June 2003. As it was the Plaintiff who terminated the agency on 28 February 2004, the license fee is not recoverable. I find the Plaintiff has failed to prove the Defendant to be liable to compensate the Plaintiff for the loss of profits for the three undelivered orders in October 2003 and February 2004 because the Agreement was terminated on 28 February 2004. For the same reason, the Plaintiff is not entitled to any damages for the Defendant’s failure to renew the Agreement with the Plaintiff. I dismiss the Plaintiff’s claim. 89.I further find the Defendant had failed to show the Plaintiff had infringed the Donic trademark or passed off Donic accessories and sportswear after the expiry of the Agreement. The Defendant’s counterclaim is dismissed. Costs 90.Costs nisi – there will be no orders as to costs. Should the parties wish to be heard further on costs, an application shall be made within 14 days of this judgment, failing which the order will be absolute.
Mr. Alan Ng M.S. instructed by Messrs. Mike So, Joseph Lau & Co. for the Plaintiff. Mr. Tim Wong instructed by Messrs. Boughton Peterson Yang Anderson for the Defendant. |