Sky Golf Enterprise Ltd v. Sino Promise (HK) Ltd

HCA 1122/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1122 OF 2009

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BETWEEN

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Before: Mr Recorder Patrick Fung SC in Court

Date of Hearing: 28^th November to 1^st December and 14^th December 2011

Date of Handing Down Judgment: 1^st March 2012

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J U D G M E N T

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Introduction

1.This is a claim by the Plaintiff against the Defendant for breach of a sole distributorship agreement dated 28^th January 2008 and signed between the Plaintiff and the Defendant in Hong Kong (“the Agreement”).

2.The Agreement actually consisted of three documents each of which was signed between the Plaintiff and the Defendant and dated 28th January 2008 as follows : -

(i) a one-page document in English (“the English Portion”);

(ii) an eight-page document in Chinese (“the Main Portion”); and

(iii) another one-page document in Chinese (“the Supplemental Portion”).

The Plaintiff pleaded and argued on the basis that the said three Portions constituted one single agreement.  The Defendant pleaded on the basis that the said three Portions were three separate agreements to a certain extent argued likewise.

3.My view is that all the said three Portions constituted one single agreement made on the same occasion, although it really does not matter whether it was one agreement or three agreements.  I shall proceed to deal with them as one single agreement.  I shall refer to the relevant terms of the Agreement hereinafter.

4.The Plaintiff claims substantial damages and an indemnity against the Defendant.

5.The Defendant denies any breach of the Agreement by itself and counterclaims for damages and a refund on the ground of breach of the Agreement on the part of the Plaintiff.

6.I shall go into the details of the claim and the counterclaim below.

Background

7.The Plaintiff is a company incorporated in Hong Kong.  It has carried on business in the trade of golf-related products and merchandise.

8.The major or controlling shareholder and chief operator of the Plaintiff is a Mr Tang Chi Wing Dennis (“Mr Tang”).

9.According to Mr Tang, he and some friends started the business of the Plaintiff in 2002. He himself graduated from the University of Hong Kong, the Hong Kong University of Science and Technology and the Chinese University of Hong Kong and is a qualified engineer both in England and in Hong Kong.  He is also a qualified golf professional and teaches golf on a part-time basis.

10.The Plaintiff is mainly responsible for the administration and dealing with customers side of the business, whilst manufacture of products is carried out in Shenzhen on the Mainland, either by another company incorporated on the Mainland by the name of Sky Production Company Limited (天恩服飾(深圳)有限公司)(“Sky Production”) which is owned or controlled by the Plaintiff and Mr Tang, or through sub-contracting to other manufacturers.

11.The Defendant is also a company incorporated in Hong Kong.  It has carried on the business of, inter alia, a distributor of merchandise.

12.It is common ground that the major or controlling shareholder (through another limited company) of the Defendant is a Mr Ko Yuk Ting (“Mr Ko”) who is also its chairman and fund provider.

13.The Defendant and Mr Ko also carry on their business through another company incorporated on the Mainland by the name of Sino Promise Fashion (Fu Zhou) International Trade Company Limited (中諾時尚(福州)有限公司)(“the Fuzhou Company”), which is owned or controlled by the Defendant and Mr Ko.

The Esprit Licence Agreement

14.By a Licence Agreement dated 10^th February 2006 and made between Esprit International (“Esprit”) and the Plaintiff (“the Licence Agreement”), in return for royalties to be paid, Esprit granted a licence to the Plaintiff to use the mark “Esprit Golf” in the manufacture, distribution and sale of golf-related goods in Asia for an initial term between 1^st April 2006 and 31^st December 2008 which was renewable for another term between 1^st January 2009 and 31^st December 2011.

The Agreement

15.Pursuant to the licence granted to it under the Licence Agreement, the Plaintiff entered into the Agreement with the Defendant.

16.The one-page English Portion of the Agreement was signed by Mr Tang on behalf of the Plaintiff and Mr Ko on behalf of the Defendant.  It provided, inter alia, as follows : -

“SG (Esprit Golf) agrees to Sino Promise (HK) Ltd (Contract Dealer) the China (PRC) (excluding HK, Macau, Taiwan) Country-wide exclusive dealer contract for Esprit Golf Products with sales and distribution right from 1 Jan 2008 – 31 Dec 2010.

Schedules of Wholesales Purchase (RMB) for Contract Dealer to SG:

Season	Minimum Guarantee Wholesales Purchase (RMB)
08 SS	RMB3,000,000
08 FW	RMB5,500,000
09 SS	RMB6,500,000
09 FW	RMB7,500,000
10 SS	RMB8,500,000
10 FW	RMB9,500,000

Location of contract signed, Hong Kong.

Details of agreement shall refer to Chinese version of Agreement as final. 

Attached BR Copies.”

It was said by Mr Tang in evidence that this English Portion was for the purpose of informing Esprit what was going on.

17.The eight-page Main Portion of the Agreement was again signed by Mr Tang and Mr Ko respectively.  I shall set out the relevant terms below.

18.The Preamble provided as follows : -

“甲、乙雙方本著互惠互利，共同發展的原則，按照中華人民共和國經濟合同法有關規定，就乙方特許經營銷售 "ESPRIT GOLF"系列品牌(以下簡稱貨品)。經雙方友好協商，訂立本特許經銷合同(以下簡稱 "合同" )。達成以下約定，供雙方共同信守執行。

(備注:天恩服飾(深圳)有限公司與中諾時尚(福州)國際貿易有限公司做為甲乙雙方在中國大陸境內的全資子公司，將全權代表甲乙雙方履行本合同內的所有條款，并承担合同內的責任義務)”

19.The relevant parts of Clause 1 provided as follows : -

“一、 協議總則

…………………………………………………………………

5. 在乙方保証同意遵守甲方制定的各項經營規定的條件下，甲方批准授權乙方為獨家在中國大陸境內銷售經營ESPRITGOLF系列產品的經銷商。從合同簽訂日起，甲方在中國市場的所有銷售行為，需通過乙方實行。 (注: 甲方2008年四月份之前生產產品的庫存處理問題，按本合同補充協議)

乙方ESPRITGOLD	2008	2008	2009	2009	2010	2010
營運店最低數量要求	春夏	秋冬	春夏	秋冬	春夏	秋冬
一線商場店(60M2+)	8	18	30	45	60	100
球場銷售點	10	30	40	50	60	100

* 春夏上貨為每年2-7月份，秋冬上貨為每年8月到次年1月份。

6. 由本合同生效之日起計 (以下簡稱"經銷期")，即2008年1月1日始至2010年12月31日止。協議期限屆滿，乙方有在同等條件下續簽協議的優先權。雙方一致同意續簽的，乙方須提前十二個月向甲方書面申請，本協議自動順延三年。屆時如有部份變更協議意向，可以另行協商簽訂。”

20.The relevant parts of Clause 2 provided as follows : -

“二、 雙方責任

(一) 甲方責任

甲方根據本合同及經營守則中規定向乙方提供有關的指導和協助，其中包括:

1、 甲方保証擁有 "ESPRIT GOLF品牌" 商標的使用權以及再受權權力，并承担相關責任。…………………………..

(二) 乙方責任

……………………………………………………………………

3、 乙方在簽訂本協議書后，須在三個工作日內向甲方繳交 "品牌合作保証金" (人民幣) 30萬元整 (含5萬加盟開戶費)。若因乙方原因提前終止合同或違反合同所規定之任一條款，甲方將扣除乙方所有的品牌合作保証金，并保留向乙方追討其它損失的權力。…………………………….”

21.The relevant parts of Clause 3 provided as follows : -

“三、 供貨折扣及結算

1、 甲方以中國統一零售價的2.5折 (2.8折含增值稅) 將ESPRIT GOLF服裝系列 (衣服) 提供給乙方。并嚴格要求乙方在合同規定的場地內必須以中國統一零售價進行銷售。

甲方以中國統一零售價的3.0折 (3.3折含增值稅) 將ESPRIT GOLF配件系列 (帽，傘，腰帶，皮具，袋子等) 提供給乙方。并嚴格要求乙方在合同規定的場地內必須以中國統一零售價進行銷售。………………………………………………………...

11、自本合約生效日起每十二個月為一年度，乙方必須依照甲方的指定清單備足轉季貨品首次補貨，折扣后訂貨金額首批補貨春夏季不得低于RMB300萬元，秋冬季不得低于RMB550萬元; 看下附件總表，否則，甲方可以終止本協議，無須承担任何責任。

*   春夏上貨為每年2-7月份，秋冬上貨為每年8月到次年1月份。生產期為60-90天

**   訂貨生產期為60-90天，訂貨訂金為總金的30%，貨品生產完畢，乙方即支付貸款的60%，貨品按指定日期到達乙方后，由乙方確認數量與質量均無誤后，乙方將在收到貨品后的十日之內將剩餘的10%貸款支付。(發票甲方待相關貸款付清后開出，乙方有權保留貸款內相關增值稅款底扣部份，待甲方提供相關發票時支付。) ”

22.The relevant parts of Clause 7 provided as follows : -

“七、 商標和商業名稱

…………………………………………………………………………

3、 乙方同意在本合約期滿或提前終止時，立即停止使用ESPRIT GOLF品牌標識:”

23.Clause 12 provided as follows : -

“十二、爭議解決

雙方就本合同或其附件的解釋發生爭議時，應通過友好協商進行解決。如果在協商開始后三十(30)天內，爭議不能協商解決，任何一方均有權向法院提起上訴依法裁決。”

24.Clauses 14 and 15 provided as follows : -

“十四、 本合同經甲乙雙方授權人簽署并支付保証金后即時生效。對未盡事宜，雙方可簽訂補充協議，補充協議具有同等法律效力。

十五、 合同簽署地區: 香港”

25.The one-page Supplemental Portion which was also signed by Mr Tang and Mr Ko respectively related to the taking over by the Defendant of some stores in Shenzhen previously operated by the Plaintiff the details of which do not appear clearly at all.

26.It is be noted that nowhere in the Agreement was there an application of law provision.  At the beginning of the trial, I inquired with Counsel on both sides as to whether any party would wish to argue that the law applicable to the Agreement was other than Hong Kong law and they both replied in the negative.  I shall therefore decide this matter according to the principles of Hong Kong law.

Summary of the Plaintiff’s Main Case

27.The Plaintiff’s main case can be summarized as follows : -

(i) The Plaintiff made it known to the Defendant as the appointed sole distributor at a very early stage the relevant terms of the Licence Agreement and emphasized that the Plaintiff would be relying on the Defendant to fulfill the terms of the Agreement so that the Plaintiff could in turn fulfill its own obligations towards Esprit under the Licence Agreement.

(ii) Pursuant to the Agreement, the Defendant paid to the Plaintiff the contract deposit in the sum of RMB300,000.00 on 15^th February 2008, which was a bit out of time, but the Plaintiff is taking no issue on such lateness.

(iii) In January 2008, before the signing of the Agreement, the Plaintiff had given to the Defendant a full set of the approved Esprit Golf merchandise for the Spring/Summer 2008 (SS 2008) season so as to enable the Defendant to place orders in good time.

(iv) Starting from 20^th February 2008, the Defendant placed various orders for SS 2008 goods, some of which were subsequently returned to and accepted by the Plaintiff.

(v) Despite the fact that the orders for the SS 2008 goods were placed not in January 2008 in accordance with the said Clause 3.11 of the Agreement, the Plaintiff again takes no issue on the same.

(vi) Pursuant to the said Clause 3.11, the Defendant should have placed orders for goods for the Fall/Winter 2008 (FW 2008) season amounting to at least RMB 2 million by April 2008 and RMB 3.5 million by July 2008.

(vii) The Defendant had failed to place orders for the minimum amount of FW 2008 goods or make payment of the minimum amount for such goods and was thus in breach of the Agreement, despite the fact that the relevant samples had been supplied to the Defendant in good time.

(viii) In August 2008, the Plaintiff accepted the Defendant’s repudiation of the Agreement by conduct by suspending delivery of goods to the Defendant.

(ix) Alternatively, the Plaintiff accepted the Defendant’s repudiation of the Agreement by letter dated 3^rd December 2008.

(x) By reason of the breach or repudiation of the Agreement by the Defendant, the Plaintiff in turn was unable to fulfill its own obligations towards Esprit under the Licence Agreement, including the obligation to pay royalties.  This caused Esprit to terminate by letter dated 16^th September 2008 the licence granted to the Plaintiff under the Licence Agreement.

(xi) The Plaintiff has thus suffered loss and damage.

Summary of the Defendant’s Main Case

28.The main case of the Defendant as pleaded in the Amended Defence and as far as I can understand it can be summarized as follows : -

(i) The Plaintiff only gave very little information to the Defendant about the Licence Agreement and certainly did not make it known to the Defendant that it was relying on the Defendant fulfilling the Defendant’s obligations under the Agreement to enable it to fulfill its own obligations under the Licence Agreement.

(ii) The samples for the SS 2008 goods were delivered by the Plaintiff to the Defendant late.

(iii) Although the Defendant placed orders for the SS 2008 goods in February 2008, the Plaintiff was only able to deliver a part of the goods ordered up to late May 2008 and a part of the same were found to be defective.

(iv) As a result, there was an agreement between the Plaintiff and the Defendant in May 2008 for the purchase by the Defendant of “Substitute Stocks”.

(v) Furthermore, the Plaintiff further delayed in delivering the SS 2008 goods ordered and some of them were again found to be defective.

(vi) Regarding the FW 2008 goods, the Plaintiff never gave samples of the same to the Defendant.

(vii) Subsequently, on 21^st October 2008, the Plaintiff and the Defendant through their respective subsidiaries, Sky Production and the Fuzhou Company, entered into an agreement described as “the October Agreement” so that the Defendant might produce FW 2008 goods and with the Defendant paying RMB 1 million to the Plaintiff.

(viii) It was an implied term of the Agreement that the Agreement would be terminated once the licence granted by Esprit to the Plaintiff had ceased.

(ix) The licence granted by Esprit to the Plaintiff did cease.

(x) There was also an agreement between the Plaintiff and the Defendant dated 25^th March 2008 pleaded as “the March Agreement” in paragraph 5 (f) of the Amended Defence.

(xi) The Defendant also counterclaims for the refund of the sum of RMB300,000.00 being the contract deposit and the sum of RMB357,245.00 partly in relation to the March Agreement and the Supplemental Portion of the Agreement.

The Witnesses and the Evidence

29.I should point out that quite a lot of the evidence and submissions put forward by the parties, especially the Defendant, relate to the SS 2008 goods which strictly speaking are not relevant to the claim by the Plaintiff.  I shall concentrate mainly on the evidence relating to the FW 2008 goods.

30.The Plaintiff called only one witness, Mr Tang, to give evidence on its behalf.  He did so by video link for the reason that he was stranded in Shenzhen and not allowed to return to Hong Kong as a result of proceedings instituted by the Defendant in the Fuzhou Intermediate People’s Court against the Plaintiff and Sky Production regarding the dispute between them in this litigation.

31.The Defendant also called only one witness, a Mr Lin Ximing (Vincent) (“Mr Lin”), to give evidence on its behalf.

32.There was filed on behalf of the Defendant a Witness Statement by a Ms Chan Mo Ching (Kitty) (“Ms Chan”) dated 25^th May 2010.  In the end, the defence decided not to call her to give evidence.

33.The Defendant never filed any Witness Statement by Mr Ko despite his position as described above.  I asked Mr Lam, Counsel for the Defendant, as to why Mr Ko had not been made a witness.  Mr Lam replied and said that “Mr Ko was too busy”.  Furthermore, he said that Mr Ko had not really been implicated in the pleadings or the Witness Statements of Mr Tang.  I find such response by the defence amazing.  I shall have more to say about the absence of Mr Ko and Ms Chan below.

34.I shall proceed to analyse the relevant parts of the evidence below.

35.According to Mr Tang who gave a Witness Statement and a Supplemental Witness Statement and also gave oral evidence, the following took place : -

(i) After the Licence Agreement had been signed, the focus of Esprit and the Plaintiff was on developing the Mainland China market.

(ii) In the course of 2006 and 2007, the Plaintiff invested a lot of human resources and money into developing the Mainland Market.  It established a production line and employed professional fashion designers to design golf garments.  The money invested amounted to some HK$3 million.  The factories, designs and quality had to be approved by Esprit. 

(iii) By the second-half of 2007, the Plaintiff had already established a number of outlets at golf courses and department stores in Hong Kong and on the Mainland selling exclusively Esprit Golf products.

(iv) By mid-2007, the Plaintiff was already negotiating with Esprit for an extension of the Licence Agreement after the end of 2008.  Sales projections by the Plaintiff covering 2009 – 2011 and even up to 2014 had been submitted to Esprit.  Acceptance of the same had been indicated by Esprit.

(v) In about November 2007, Mr Tang was introduced by some friend to Mr Ko.  Mr Ko told Mr Tang that the Defendant was already the sole distributor for Bally Golf on the Mainland.  Mr Ko said that the Defendant had very substantial resources and it could convert the stores of Bally Golf outlets into outlets for Esprit Golf products.  Mr Ko mentioned that at that time the Defendant was involved in some disputes about the sole distributorship of Bally Golf.  Hence he was looking for a substitute for Bally Golf for the Defendant.  Mr Tang therefore negotiated with Mr Ko on the basis that the Plaintiff could give the Defendant part of the distributorship whilst the Plaintiff would remain responsible for the design and production of Esprit Golf products.

(vi) In December 2007, there were many meetings and telephone communications between Mr Tang on the one hand and Mr Ko and his assistant Kitty and Mr Lin and his assistant Kimberley on the other hand.

(vii) In December 2007, Mr Ko requested Mr Tang to show him the details of the Licence Agreement as proof that the Plaintiff had indeed been granted a licence by Esprit.  Mr Tang did so. Furthermore, Mr Lin, Mr Ko and Kitty had been shown the full range of current products as well as the samples approved by Esprit for the SS 2008 and FW 2008 garments at the Plaintiff’s or Sky Production’s factory-cum-sampling room in Shenzhen. Subsequently, Mr Ko indicated that he would like the Defendant to be the sole distributor.  Mr Tang agreed.

(viii) In January 2008, before the Agreement was signed, there was a discussion between Mr Tang, Mr Ko and Mr Lin at Mr Ko’s office in Kwai Chung about the terms of the sole distributorship agreement to be signed as well as the minimum level of goods to be purchased by the Defendant.  Mr Tang pointed out that Esprit had initially granted the licence up to the end of 2008 but would extend it further provided that the Plaintiff would reach the sales figures prescribed under the Licence Agreement. Mr Tang further said to Mr Ko and Mr Lin that if the Defendant were to place orders for the SS 2008 and FW 2008 garments as discussed between them, the Plaintiff would be able to fulfill the sales requirements for the period between 1^st July 2007 and 30^th June 2008 under the Licence Agreement.  Thus, if the Defendant were to become sole distributor, it must place sufficient orders to enable the Plaintiff to reach its own sales target.  Mr Ko indicated that he realized the importance of the sales figures for the purpose of securing an extension of the licence and that there would be no difficulty in the Defendant’s reaching the target.  He said that he already had a network of 40 outlets for Bally Golf and that his annual sales could be counted by tens of millions of dollars.  Mr Ko also showed materials and photos regarding his sales activities.  The parties thus reached agreement on the basis that the Defendant would be given the sole distributorship for the period between January 2008 and December 2011 and they both anticipated that the sales target would be met so as to obtain the grant of an extension of the licence from Esprit.

(ix) In fact, about the end of December 2007 or the beginning of January 2008, Kitty had been to the Plaintiff’s factory-cum-sampling room in Shenzhen to view the entire range of samples for the SS 2008 and FW 2008 products and to discuss with Mr Tang about some details of the proposed agreement.  Mr Tang showed her the Licence Agreement and also pointed out some important provisions to her.  The only parts of the Licence Agreement which he kept from her were those relating to the minimum sales level and the royalties, because those related to the Plaintiff’s profit margin and he wanted to keep those figures confidential.  Kitty did not insist on seeing those figures.  At the end, Kitty requested for a copy of the important pages of the Licence Agreement.  A copy was given to her which did not include the said provisions kept from her.

(x) In the early part of January 2008, the parties had reached agreement in principal.  Mr Tang had caused a draft of the proposed agreement to be sent to the Defendant which did not raise any issues on the same.  The Defendant arranged for Mr Lin and Kitty to view the samples for the SS 2008 and FW 2008 products and there were many discussions between the parties about the samples.  It appeared that the Defendant was only interested in the garments but not other golf-related products. 

(xi) Finally, the Agreement was signed between the parties. 

(xii) After the signing of the Agreement, Mr Tang kept on emphasizing to Mr Ko and Mr Lin the importance of meeting the sales target in order for the licence to be extended. 

(xiii) The Defendant did not place its first order for SS 2008 garments until 20^th February 2008. Difficulty was created for the Plaintiff because for many styles, the Defendant only ordered very small quantities.  This did not meet the “minimum order quantity” requirement.  (I shall have more to say about this below).

(xiv) As early as February 2008, there were discussions about the samples for the FW 2008 garments.  Mr Tang took Mr Lin to meet the Plaintiff’s German designer by the name of Marcel.  Mr Lin had indicated that he would like the styles to be more sporty than the samples already approved by Esprit and shown to the Defendant.  Pursuant to Mr Lin’s request, in April 2008, the Defendant had designed some new FW 2008 garments and the samples of the same had been approved by Esprit.  At the end of April 2008, Mr Tang informed the Defendant that it could begin to place orders for the newly-designed garments.  Mr Lin did not respond.

(xv) Subsequently, still at the end of April 2008, Mr Lin went to Shenzhen to look at the samples of the newly-designed garments, expressed his view and requested the Plaintiff to revise the samples.  The Plaintiff accordingly revised the samples and urged the Defendant to place orders in about May.  Mr Lin looked at the revised samples in Shenzhen and expressed satisfaction about the same.  On the same day, he placed some orders for some of the garments.  Subsequently, when the Plaintiff requested the Defendant to confirm the orders in writing, the Defendant did not respond.

(xvi) The Plaintiff was getting very anxious about the failure by the Defendant to place orders for the FW 2008 garments, because by the end of June, there would have to be discussions with Esprit for an extension of the licence.  On 6^th and 7^th June, Mr Tang and Marcel flew to Fuzhou with some samples to meet with Mr Lin for two days.  Mr Tang said to Mr Lin that if the Defendant were not to place orders for FW 2008 garments, the Plaintiff would have to report to Esprit to the effect that the sales figures for the second quarter of 2008 was zero.  In such circumstances, Esprit would possibly not extend the licence and great loss would result to the Plaintiff.  Mr Lin hinted to Mr Tang to make a false report to Esprit.  Mr Tang refused.  On 13^th June, the Plaintiff made out an order form for an order amounting to RMB 3 million which Mr Lin indicated at the said meeting would be placed by the Defendant and asked the Defendant to confirm it.  The Defendant refused to confirm such order.  On the contrary, by an email dated 16^th June, the Defendant requested the Plaintiff to further revise the samples before the Defendant would confirm the order.  The Plaintiff had no alternative but to further revise the samples and the same were submitted to the Defendant.

(xvii) On 4^th July, the Defendant received an order amounting to RMB 1.2 million.  At the same time, the Defendant sent to the Plaintiff 14 pieces of Bally Golf Fall Winter garment samples and asked the Plaintiff to copy their styles and re-design the Esprit Golf garment samples.

(xviii) The Plaintiff did as requested and submitted the further revised samples for the approval of Esprit.  On 9^th July, Esprit approved most of the same.  Mr Tang immediately informed Mr Lin and urged the Defendant to place orders quickly.

(xix) As a result of the demands for revisions of the samples and failure to place orders by the Defendant, the Plaintiff got into financial difficulties in July and could not pay to Esprit the royalties due in July.  It received warnings from Esprit. 

(xx) By the end of July, the Plaintiff had only received from the Defendant an order for FW 2008 garments amounting RMB 1.2 million.  This was far below the target specified in the Agreement. Furthermore, the minimum order quantity requirement was not met.  Hence, on 28^th July, Mr Tang sent an email to Mr Lin and made protest.  There was no reply from the Defendant.  The Defendant also did not pay any deposit for the order. 

(xxi) In September 2008, Esprit terminated the licence granted to the Plaintiff.  Mr Tang duly informed Mr Ko and Mr Lin about the same at the end of September. 

(xxii) Despite the termination of the licence, the Plaintiff carried on negotiating with Esprit.  (Documentary evidence was produced by Mr Tang to show this in the course of Mr Tang’s evidence).  In view of such negotiation, Mr Tang took the view that there would be a winding-down period of one year to clear the Esprit Golf garments.  With a view to reducing the loss suffered by the Plaintiff in relation to the failure by the Defendant to order the minimum quantity of FW 2008 garments, the Plaintiff and the Defendant (through their respective subsidiaries Sky Production and the Fuzhou Company) entered into the “October Agreement” whereby the Plaintiff agreed to the Defendant producing FW 2008 Esprit Golf garments worth RMB 2,060,000.00 and with the Defendant paying RMB 1 million to the Plaintiff.  The Plaintiff, however, never received the said sum of RMB 1 million from the Defendant.  Not only did the Defendant not make payment of the said sum of RMB 1 million, it produced and marketed Esprit Golf garments which had not been approved by Esprit.  As a result, the Plaintiff received a warning from Esprit on 27^th November 2008.

36.As mentioned above, Mr Ko did not file any Witness Statement to contradict Mr Tang’s allegations nor did he give any evidence.  It would have been only natural for him to do so.  It is trite that it is open to the court to draw adverse inferences against a party for not calling a witness to refute the evidence of the other side when it should have done so and when there is no difficulty for it to do so.  As I observed above, I find the reason for not making Mr Ko a witness put forward by Counsel for the Defendant, namely, that he was “too busy” to be amazing.  In the circumstances, I draw the adverse inference against the Defendant that Mr Ko would not have been in a position to challenge the evidence of Mr Tang if he had been called.  See : Li Sau Keung v Maxcredit Engineering Ltd [2004] 1 HKC 434 at 443 per Le Pichon JA applied in Hoie Sook Fong v Ismail Halima [2009] 1 HKC 326 at §53 per Sakhrani J.

37.Regarding Ms Chan, although a Witness Statement by her was filed in which she alleged that Mr Tang had only showed her the one page in the Licence Agreement concerning the initial and renewal terms of the licence, she was not called to give evidence.  Again, I draw the inference that she would not have been in a position to challenge the evidence of Mr Tang if she had been called.

38.It is also to be noted that Mr Tang was not cross-examined on his evidence relating to the meetings and conversations between him on the one hand and Mr Ko and Mr Lin on the other hand before the signing of the Agreement.  Mr Tang was cross-examined only on which parts of the Licence Agreement he had shown to Kitty.

39.I now deal with the evidence of Mr Lin.  His Witness Statement dated 25^th May 2010 was filed.  As pointed out by Ms Cheung, Counsel for the Plaintiff, his Witness Statement is nothing more than a Chinese translation of the Amended Defence and Counterclaim.

40.The gist of Mr Lin’s evidence regarding the FW 2008 garments as contained in his Witness Statement and in his oral testimony is as follows : -

(i) The Plaintiff had never shown any or any complete FW 2008 samples to the Defendant despite requests by the Defendant.

(ii) The Plaintiff was late in delivering the SS 2008 garments ordered which consequentially caused difficulty to the Defendant.

(iii) Some of the SS 2008 garments ordered and delivered were of inferior quality and had to be returned to the Plaintiff.

41.I do not accept Mr Lin’s evidence that no samples or no complete samples of the FW 2008 garments were supplied by the Plaintiff to the Defendant for the following reasons : -

(i) I find him to be generally an evasive witness.

(ii) He dealt with the evidence of Mr Tang about Mr Tang and Marcel taking the FW 2008 garment samples to Fuzhou to discuss with him in an evasive manner.  When cross-examined by Ms Cheung, he had to concede that he did respond to the sample specifications of garments annexed to an email sent to him by Mr Tang on 13^th June 2008 which email recorded the meeting in Fuzhou and the parties’ discussions about the samples.

(iii) He then made the allegation in the witness-box that the samples supplied were incomplete which allegation was never made in his Witness Statement or in the email correspondence or any other contemporaneous document.

(iv) His allegation of no samples or no complete samples also does not sit well with the fact that the Defendant eventually tried to place an order for FW 2008 garments amounting to RMB 1.2 million.

(v) His allegation might have been supported by evidence given by Ms Chan and Mr Ko, but they were not called to give evidence.

(vi) I further agree with Ms Cheung’s submission that it would have been highly unlikely that the Defendant would have signed the Agreement and assumed an obligation to order millions of dollars worth of garments in the year 2008 without even having seen samples of the garments which it was supposed to order.

42.In all the circumstances, I accept the evidence of Mr Tang who I find to be a straightforward and honest witness.

My Findings

43.I find the following main facts : -

(i) The Plaintiff did show to the Defendant the important terms of the Licence Agreement before the Agreement was signed and did emphasise to the Defendant both before and after the signing of the Agreement that it was depending on the Defendant placing the minimum orders specified under the Agreement and making payment for the goods ordered to enable it to perform its own obligations owed to Esprit under the Licence Agreement.  The Defendant was further informed by the Plaintiff that such performance by the Defendant and, in turn, by the Plaintiff would enable the Plaintiff to obtain an extension of the licence from Esprit beyond 2008 so that the Plaintiff and the Defendant would be able to go through the contract period up to the end of 2010 under the Agreement.

(ii)          The Plaintiff did show and supply complete samples of FW 2008 garments to the Defendant before the signing of the Agreement and subsequently.  The Plaintiff also revised such samples subsequently according to the wishes of the Defendant.

(iii)         Despite (ii) above, the Defendant failed to place orders for FW 2008 garments with the Plaintiff as specified under the Agreement, namely, orders amounting to RMB 2 million by April 2008 and RMB 3.5 million by July 2008.  Instead, the Defendant only sought to place an order for FW 2008 garments amounting to RMB 1.2 million at the end of July 2008.  The Defendant also did not pay any deposit for such order.

(iv) The Defendant was therefore in breach of the Agreement.

(v) The Plaintiff accepted the repudiation of the Agreement by the Defendant.

(vi) The said breach by the Defendant put the Plaintiff in difficulty with Esprit which led to Esprit terminating the Licence Agreement in September 2008.

(vii) As a result, the Plaintiff has suffered loss and damage for which the Defendant must be liable.

44.Having made my main findings above, I shall deal with some of the other issues which have arisen in the case hereinafter.

“Minimum Order Quantity” Requirement

45.In paragraph 9 of the Amended Defence and Counterclaim, it appears that one of the defences put forward by the Defendant was that, at least, in relation to the SS 2008 garments ordered, the Plaintiff was unable to deliver a part of them on time or at all and that this had forced the Defendant to purchase “Substitute Stocks” for the 2006 and 2007 seasons from the Plaintiff.

46.According to Mr Tang, the reason for the above was that, even with the order first placed by the Defendant on 20^th February 2008, there were only very few garments ordered for each style.  This did not meet with the “minimum order quantity” requirement and created great difficulty for the Plaintiff in the process of production.

47.Mr Tang explained that there was a trade usage applicable to all garment manufacturers in Quangdong Province that for each style of clothing ordered there must be a minimum quantity of 300 pieces.  Some factories would even demand that the minimum should be 1,000 pieces.  Since the orders placed by the Defendant in many instances consisted of only a few garments for some styles, it was very difficult for the Plaintiff or its sub-contractors to produce the same.

48.At first, I queried whether Mr Tang was in a position to give evidence of such trade usage, he not being an independent expert witness.  It was then pointed out to me that this was specifically allowed by the Orders of Registrar Lung made on 15^th September and 29^th October 2010 respectively.

49.Furthermore, there was no Witness Statement filed or evidence adduced by the Defendant to counter such evidence and Mr Tang was not challenged on the same in cross-examination.

50.Mr Tang gave evidence that he repeatedly told the Defendant about thus problem, including in an email dated 28^th July 2008.

51.In the circumstances, I find that the non-deliveries or late deliveries by the Plaintiff of goods ordered by the Defendant were caused by the Defendant not abiding by the trade usage as alleged by Mr Tang which I find to be proved.  I find that the same does not afford any defence to the Defendant.

Time of Acceptance of Repudiation

52.The Plaintiff alleges that it accepted the repudiation of the Defendant in August 2008 by conduct by not delivering the garments ordered.  Alternatively, the Plaintiff says that it accepted the repudiation expressly by letter dated 3^rd December 2008.

53.I find as a fact that the Plaintiff only accepted the repudiation of the Defendant by letter dated 3^rd December 2008 and not earlier.  The reasons are as follows : -

(i) According to Mr Tang and he was able to produce contemporaneous documents to show the same, the Plaintiff and Esprit were still negotiating for a continuation of the licence after its formal termination by Esprit by letter dated 16^th September 2008.

(ii) The Plaintiff did not inform the Defendant about the termination of the licence.  The Defendant only learnt about that from Esprit subsequently at the end of November 2008.

(iii) Furthermore, Mr Tang and Mr Ko caused Sky Production and the Fuzhou Company to enter into the “October Agreement” which according to Mr Tang was to remedy to a certain extent the  bad situation caused by the default on the part of the Defendant to place orders for FW 2008 garments in accordance with the Agreement.

54.I find that the October Agreement is of no consequence because the parties did not perform it.  The Defendant never paid the sum of RMB 1 million to the Plaintiff under the October Agreement.

55.I also find that it does not really matter whether acceptance of the Defendant’s repudiation by the Plaintiff occurred in August or December 2008.

Relief Claimed by the Plaintiff

56.I deal with the claims by the Plaintiff.

(i)    Purchase price unpaid for the SS 2008 garments delivered

57.Under this item the Plaintiff claims the sum of RMB 10,944.90.  Mr Tang has set out in a table entitled “Esprit Golf – Sino Promise Account Summary” the calculation.  The same has not been challenged by evidence or cross-examination.

58.I find the same proved.

(ii)   Loss of Profits and Royalties payable to Esprit etc.

59.Under this item, the Plaintiff claims the sum of RMB 24,886,365.  The same is pleaded in paragraph 26 as follows : -

“26. Subject to discovery, in relation to remaining term of the Contract, a sum of RMB 24,886,365 is claimed, as calculated as follows : -

(1) For Fall/Winter Season 2008 (based on the minimum value of order)

a. Costs of royalty payable to Esprit, design and brand management expenses	around RMB1,800,000
b. Loss of gross profit (50% of the minimum value of order, less item a)	around RMB1,850,000

(2) For 2009 and 2010 (based on the minimum value of order of RMB32,000,000)

a. Costs of royalty payable to Esprit, design and brand management expenses	around RMB10,472,730
b. Loss of gross profit (50% of the minimum value of order, less item a)	around RMB10,763,635
	=============
Total	RMB24,886,365”

60.I deal first with the claim for loss of gross profit.

61.In his Supplemental Witness Statement, Mr Tang gave evidence to the effect that he had obtained information about some big brand international companies producing garments for 2008 and 2009 which showed that their gross profit margin was between 36% and 60% and he would adopt the median of 47%.  He also obtained figures regarding some garment manufacturing companies on the Mainland for the first half of 2009 which showed that their gross profit margin ranged between 18.22% and 34.45% with an average of 26%.

62.He also reckoned that the design and brand management expenses should amount to about 25% of the gross income.

63.I take the view that design and brand management fees should be part of the gross profits and should not be separately assessed.

64.I also take the view that in calculating damages, the estimated net profits rather than the estimated gross profits should be looked at.

65.I propose to adopt the same approach as A. Cheung J. (as he then was) in the case of Ho Lai Chuen Cadia t/a Resolution Software Consultants v Xerox (Hong Kong) Ltd. unreported, HCA 6454/1997, 16^th January 2002 in which he said at paragraph 124 as follows : -

“Given the amount and quality of evidence before me, and the very speculative nature of the assessment of this item of damages, it would be naïve to pretend that the assessment can be done in any exact or scientific manner. Doing the best I can, and looking at the matter in the round, I award the Plaintiff damages representing its net loss of profit to be derived from the provision of service for the implementation of the Dispatch-1 project under the Order Confirmation in the sum of US$50,000, credit having been given to the alternative income of HK$1.2 to 1.3 million (or more precisely the estimated net profit derived therefrom) earned by the Plaintiff during the 15-month period.”

66.I look at the matter in the round and assess damages representing loss of profits suffered by the Plaintiff at a flat rate of 20%.  Thus : -

(i) In relation to 2008, the sum should be (RMB 5.5 million x 20% =) RMB 1,100,000.

(ii) In relation to 2009 and 2010, the sum should be (RMB 32 million x 20% =) RMB 6,400,000.

67.The two sums set out in paragraph 66 above have already taken into account the design and brand management expenses claimed.

68.As regards the claims for outstanding royalties claimed to be payable to Esprit, in the course of the evidence and in answer to my question, Mr Tang said that the Defendant had not yet received any claim or demand for royalties by Esprit.  More than 3 years have elapsed since the latter part of 2008.  In the circumstances, I am not inclined towards allowing anything under that claim.  I am, however, prepared to make an order for indemnity in favour of the Plaintiff against the Defendant in the event that Esprit really makes a claim against the Plaintiff for unpaid royalties in relation to goods produced under the Agreement.

(iii)  Claim for Unauthorised Sales of Esprit Golf Products

69.The Plaintiff also claims damages for alleged unauthorized sales by the Defendant of Esprit Golf products to be assessed.

70.I take the view that because the licence granted by Esprit to the Plaintiff is terminated, the Plaintiff does not have any substantial right to sue and it does not appear that it has suffered any loss and damage as a result of the same even if there had really been unauthorized sales.  It will be up to Esprit to take action either for infringement of trade mark or passing off or some similar tort.

71.In the circumstances, I will not allow this claim or the claim for an indemnity in relation to the same.

The Defendant’s Counterclaim

72.I now deal with the Defendant’s Counterclaim.

(i)    Refund of the Contract Deposit of RMB 300,000

73.This can be disposed of quite quickly.  In the Defendant’s Reply To The Closing Submission Of The Plaintiff dated 13^th December 2011, Mr Lam said in relation to this issue as follows : -

“[Paragraphs 118 to 120 of the Plaintiff’s Closing Submission]

111. This boils down as to whether P or D was in breach of the Contract.

112. If P was found to be in breach of the Contract, D would be entitled to the return of the said Contractual Deposit in the sum of RMB 300,000.

113. If D was found to be in breach of the Contract, D would not be entitled to the return of the said Contractual Deposit in the sum of RMB 300,000.”

74.I have already found that the Defendant was in breach of the Agreement.  The Defendant is therefore not entitled to a refund of the said deposit of RMB 300,000.

(ii)   Refund of payment in the sum of RMB 357,245

75.The Defendant counterclaims for the refund of the sum of RMB 357,245.  I am afraid that I have considerable difficulty in understanding this counterclaim.  I shall first examine the pleadings, submissions and evidence in relation to this counterclaim below.

76.In paragraph 19 of the Amended Defence and Counterclaim, it is pleaded as follows : -

“19. By reason of the matters pleaded in paragraphs 5(e), 5(f), 9(i), 9(j) and 10(c) herein, the Defendant is entitled to the refund of the payment in the sum of RMB 357,245, the particulars of which are as follows :

Purchase price of the Products paid by the Defendant	RMB 3,636,113
LESS :
(a) Mission Hill Products delivered by the Plaintiff	RMB 193,713
(b) Mission Hill Products returned to the Plaintiff	(RMB 157,089)
(c) Showroom Products delivered by the Plaintiff RMB	RMB 137,173
(d) Showroom Products returned to the Plaintiff	(RMB 86,125)
(e) Ordered Products delivered by the Plaintiff	RMB 2,539,586
(f) Defective Ordered Products returned to the Plaintiff	(RMB 635,240)
(g) Substitute Stocks delivered by the Plaintiff	RMB 1,337,660
(h) Substitute Stocks to be returned to the Plaintiff	(RMB 1,050,810)
(i) Defendant’s payment pleaded in
paragraph 10(b)(2) herein	RMB 1,000,000
Balance to be refunded to the Defendant:	RMB 357,245”

77.Paragraph 5(e) and (f) of the Amended Defence and Counterclaim pleads : -

“(e)  pursuant to the 2nd Agreement, the Defendant took over the operation of 2 shops which were previously operated by the Plaintiff, namely Mission Hill Golf Club in Shenzhen and DongXia, the PRC and the Defendant purchased the Products at such 2 shops (the “Mission Hill Products”) in the sum of RMB 193,713 on or about 5th March 2008.  A portion of the Mission Hill Products was subsequently returned by the Defendant to the Plaintiff on or about 26th June 2008 and 4th July 2008 respectively for refund in the sum of RMB 157,089 pursuant to the 2nd Agreement;

(f) pursuant to another agreement made between the Plaintiff and the Defendant on or about 25th March 2008 (“the March Agreement”), the Defendant purchased the Plaintiff’s Products in the sum of RMB 137,173 for displaying them in the Defendant’s showroom (the “Showroom Products”).  A portion of the Showroom Products was subsequently returned by the Defendant to the Plaintiff on or about 17th April 2008 for refund in the sum of RMB 86,125 pursuant to the March Agreement;”

78.Paragraph 9(i) and (j) of the Amended Defence and Counterclaim pleads : -

“(i) despite repeated demands made by the Defendant, the Plaintiff only delivered its last batch of the Ordered Products on or about 6th October 2008 with a total quantity delivered in the sum of RMB 2,539,586 but with a portion thereof in the total sum of RMB 635,240 was found to be defective and was returned to the Plaintiff; and

(j) despite repeated demands made by the Defendant, the Plaintiff only delivered its last batch of the Substitute Stocks on or about 4th July 2008 with a total quantity delivered in the sum of RMB 1,337,660 but a portion thereof in the sum of RMB 1,050,810 was unsold and is still retained by the Defendant pending the Plaintiff’s confirmation to refund as previously agreed.”

79.Finally, paragraph 10(c) of the Amended Defence and Counterclaim pleads : -

“(c) there was an implied term, by operation of law and/or common intention of the parties and/or business efficacy of the October Agreement that the Defendant should be entitled to set-off its overpayment to the Plaintiff against the Plaintiff for the said sum of RMB 1,000,000;”

80.To begin with, there is no evidence that the Defendant ever made payment of the sum of RMB 1,000,000 (pursuant to the terms of the “October Agreement”) to anybody.  Thus, I do not know how this sum can be put into the calculation in arriving at the figure of RMB 357,245 in the counterclaim.

81.The evidence of Mr Lin does not throw light on the matter either.  Paragraph 16 of his Witness Statement is merely an English translation of paragraph 19 of the Amended Defence and Counterclaim.  What he has put in paragraph 10(c) of his Witness Statement is again in fact an English translation of paragraph 10(c) of the Amended Defence and Counterclaim.  That means that he is purporting to give expert evidence on the construction of the “October Agreement” as a matter of law.  I do not know how he is able to do that especially when he is not even a lawyer.

82.Mr Lin has also not elaborated on this counterclaim for the refund of RMB 357,245 in his oral testimony.

83.The initial submissions of Mr Lam, Counsel for the Defendant, also do not throw much light on the matter : -

(i) In paragraph 34 of the Defendant’s Written Opening dated 21^st November 2011, he merely says : -

“34. D also counterclaims refund of RMB 357,245, namely surplus of payment made by the D versus goods received by D. [paragraph 19 of the ADCC at [32].”

(ii) In paragraph 246 of the Defendant’s Closing Submission dated 5^th December 2011, he merely says :-

“246. D also counterclaims refund of RMB 357,245, namely surplus of payment made by the D versus goods received by D. [paragraph 19 of the ADCC at [32].”

84.In the Closing Submissions of the Plaintiff dated 7^th December 2011, Ms Cheung dealt with this part of the Counterclaim as follows : -

“F2B. Refund of payment in the sum of RMB 357,245

121. This claim has not been made out by D, on the evidence or even as a matter of coherent pleading.

(1) First, this “claim” is not properly made out even on its face. How can D claim to be entitled to RMB 1,050,810 as item “(h) Substitute Stocks to be returned to the Plaintiff”? Same applies to the payment that should have been made under the October Agreement of RMB 1,000,000 but which was not.

(2) Secondly, in any event it is not D’s evidence or case that these were actually returned! Lin admitted in XXN that “these goods were never returned, and D continued to sell them for 1 year after the Esprit letter”.

(3) Further, D’s case is that it allegedly entered into an agreement with 天來for the manufacture of RMB 2.06M worth of goods on 24.10.2008 [389-392]. Thus, even as at 24.10.2008, D would admit that it did not have any goods left to sell, nor to return, and thus had to allegedly sign a new agreement with 天來.

(4) Similarly, Lin admitted that the RMB 1,000,000 required to be paid under the October Agreement was actually never paid!”

85.In the Defendant’s Reply To The Closing Submission Of The Plaintiff dated 13^th December 2011 which was only produced in the morning of the day on which I heard Counsel’s closing submissions, Mr Lam says in reply as follows : -

“[Paragraph 121 of the Plaintiff’s Skeleton Submission]

114. It is agreed that the RMB 1,000,000 meant to be paid by D to P was by set off, namely shown in paragraph 19(i) of the ADCC [32].

115. In respect that D is entitled to RMB 1,050,810 as paragraph 19(h) of the ADCC, it was pleaded that these were substitute goods to be returned to the P.

116. The substitute goods could be returned by D to P before 1.12.2008

117. By the letter dated the 27.11.2008 [394] from D to P, it clearly stated in paragraph 3 therein that D applied to return those substitute goods in the sum of RMB 1,050,810.46. Please also see paragraph 10(e) of ADCC [30].

118. When cross examined by P’s Counsel, Lin replied that these goods were never returned as Tang refused to accept.

119.  Lin’s reply under cross examination was that D could sell them within 1 year after receipt of the letter from Esprit.”

86.Ms Cheung sought leave of the Court to reply on the document referred to in paragraph 85 above because she was taken by surprise and should have the last word as Counsel for the Plaintiff.  I gave her leave.  In the Points Of Reply To D’s Written Document Handed Up To The Court At The Hearing On 14.12.2011, Ms Cheung says at paragraph 41 as follows : -

“Paragraphs 114 – 115

41.   Tang’s witness statement §38 [1/97] explicitly states that the October Agreement was for the purpose of compensating P for the losses it suffered in relation to D’s failure to place orders for Fall/Winter 2008.  D’s counsel chose not to cross-examine on this point.  Thus it has been admitted by D.”

87.Suffice it for me to say that I agree with the submissions of Ms Cheung.  In my judgment, the Defendant has not made out any case on the evidence and in law on the counterclaim for the refund of RMB 357,245.  The most important factor in the Defendant’s calculation is the sum of RMB 1 million which on the pleading in paragraph 19 of the Amended Defence and Counterclaim had been paid by the Defendant under the “October Agreement”.  On the evidence, the said sum had in fact never been paid.  The Defendant has also not shown how the alleged implied term as pleaded in paragraph 10(c) of the Amended Defence and Counterclaim had arisen as a matter of law.

88.In the circumstances, I also dismiss this part of the Counterclaim.

89.Furthermore, I do not see how the Defendant can claim damages under any other head in the Counterclaim.

Conclusion

90.In the result, the Plaintiff succeeds on its claim and the Defendant fails on its Counterclaim.

91.I make the following orders : -

(i) Judgment be entered for the Plaintiff against the Defendant for damages in the sum of RMB 7,510,944.90 with interest thereon at 5% per annum from 4^th December 2008 until the date of judgment.

(ii) An order that the Defendant do indemnify the Plaintiff in respect of any royalties which the Plaintiff ought to pay to Esprit under the Licence Agreement but which the Plaintiff was unable to pay to Esprit as a result of the breach and repudiation of the Agreement on the part of the Defendant.

(iii) The Counterclaim is dismissed.

(iv) An order nisi that the Defendant do pay the Plaintiff the costs of and incidental to the Plaintiff’s claim and the Defendant’s Counterclaim.

92.It remains for me to thank Counsel for their assistance in this matter.

Ms Elizabeth Cheung, instructed by C.L. Chow & Macksion Chan for the Plaintiff

Mr Joseph Lam Siu-wah, instructed by C.C. Lee & Co. for the Defendant