Perfect Share (Holdings) Ltd v. Medipro International Ltd and Another
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DCCJ 2674/2012 IN THE DISTRICT COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION CIVIL ACTION NO 2674 OF 2012 ------------------------ BETWEEN
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------------------- JUDGMENT -------------------- Background and agreed facts 1.On or about 5/2012, the plaintiff received a promotional email from the 1st defendant, offering for sale EXILIS brand beauty machines at $128,000 (for body) and $158,000 (for body and face). 2.Later, there were telephone exchanges and meetings between Mr Fong, the plaintiff’s witness, and Ms Tsang, the 2nd defendant and 1st defendant’s witness. Ms Tsang delivered promotional materials for EXILIS brand machines to Mr Fong. 3.In one of these telephone conversations or meetings, Ms Tsang explained to Mr Fong that the $158,000 (for body and face) price was not for a new machine, but for one used for demonstration (hereinafter referred to as the “Demo Machine”). 4.On 10.5.2012, Mr Fong send a SMS to Ms Tsang confirming purchase of 4 new EXILIS machines, for $240,000 each, and the Demo Machine, for $158,000. 5.After further negotiations, the order was increased to 10 new machines at $200,000 each, for a total purchase price of $2,000,000.00 (hereinafter referred to as the “Machines”). 6.On or about 18.5.2012, the parties entered into a written contract, called an “Invoice”, for the aforementioned sale and purchase transaction of the 10 new machines (hereinafter referred to as the “Contract”). 7.On the same day of the Contract, Ms Tsang entered into a Deed of Guarantee in favour of the plaintiff (hereinafter referred to as the “Guarantee”), guaranteeing the due performance of the 1st defendant’s liability under the Contract. 8.Pursuant to the terms of the Contract, the plaintiff paid the 1st defendant $1,000,000 as deposit. 9.In addition to the sale and purchase of the Machines, the Contract also required the plaintiff to promote a laser beauty machine for the 1st defendant. The plaintiff was required to insert the 1st defendant’s company name, logo and an image of the laser machine in all of the plaintiff’s print advertisement for a 3 months period (hereinafter referred to as the “Promotion Obligation”). 10.The Contract also included two annexure, referred to as “annex.1” and “annex.2”. 11.“annex.1” had 2 pages, page 1 was simply a photograph of a model with the name “EXILIS Reshape your body” in bold letters and page 2 was photograph of an EXILIS machine. 12.“annex.2” also had 2 pages, page 1 was the 1st defendant’s company logo and page 2 was a photograph of a GlobalCure SC6 Laser machine. 13.Either one day prior to the date the parties entered into the Contract (based on Mr Fong’s evidence) or on the same day the parties signed the Contract (based on Ms Tsang’s evidence), the 1st defendant send the Demo Machine to the plaintiff with a delivery note that stated:-
14.Delivery of the Machines was to be completed by two batches of 5 machines each. The Contract stated the delivery time as:-
15.On or about 27.6.2012, the plaintiff wrote to the 1st defendant alleging breach of the delivery date of the first batch of Machines and terminated the Contract. 16.On or about 23.7.2012, the 1st defendant delivered 6 unbranded machines labelled “Ultra Sonic Generator” to the plaintiff. The plaintiff refused to accept the 6 unbranded machines, stating they were not the agreed EXILIS brand machines and the Contract had already been terminated on 27.6.2012. The claim 17.The plaintiff claims return of their $1,000,000 deposit, interest and costs against: the 1st defendant, pursuant to the term of the Contract; and the 2nd defendant, pursuant to the terms of the Guarantee. The defence and counterclaim 18.The 1st defendant denies it was in breach of the Contract and counterclaims against the plaintiff for $200,000, costs for the sixth unbranded machine; $5,800 per month for storage fees of the six unbranded machines, commencing from 23.7.2012; and restitution of the Demo Machine. 19.In the Statement of Defence and Counterclaim, Ms Tsang originally alleged that the Guarantee was unenforceable in law because: (1) it was without consideration; and (2) it was not a deed because there was no seal affixed. 20.In view of the clear and unambiguous language in the consideration clause of the Guarantee and the settled law in relation to what constitutes a seal, Mr Yu, counsel for both defendants, wisely abandoned both defences on the Guarantee. The issues 21.Mr Yu submitted there are 3 issues at dispute:-
22.I agree with Mr Yu’s submission, these three issues are the issues at dispute on the plaintiff’s claim and the defendants’ defence and counterclaim for $200,000; the 1st defendant however, has an additional counterclaim: Restitution of the Demo Machine. 23.On the restitution part of the counterclaim, there is one additional issue:-
24.In view of the fact that the main claim and counterclaim are quite separate from the restitution counterclaim, I will deal with them separately. THE MAIN CLAIM AND COUNTERCLAIM Issue (1): Was the subject matter of the Contract EXILIS brand RF Ultrasonic machines? 25.As usual, the basic burden of proof is on the plaintiff, therefore I will deal with the plaintiff’s argument first. The plaintiff’s argument: 26.Mr Wong, counsel for the plaintiff, argued that since the Contract was in writing, the first thing we should look to is the terms of the Contract itself. 27.The subject matter of the Contract was described in line 2 of the “Description” column of the Contract as: “RF/Ultrasound machine (annex.1)”. Since the defendants agreed that “annex.2” described the subject matters of the Promotion Obligation, there can be no dispute that both “annex.1” and “annex.2” were intended to be supplemental documents to the primary contract document. 28.The supplemental document “annex.1” consists of 2 pages. The first page is a photograph of a female model with the words “EXILIS Reshape your body” in large and bold letters. The second page is a photograph of an EXILIS brand machine. 29.It is trite that the general legal principle is that a document to which the primary document is expressed to be supplemental may itself be looked at in its entirety for the purpose of construing the primary document and a document executed contemporaneously with, or shortly after, the primary document to be construed may be relied upon as an aid to construction, if it forms part of the same transaction as the primary document. (The Interpretation of Contract 5th ed. Para 3.02-3.03.) 30.Therefore, in view of the fact that the words “EXILIS” and a photograph of an EXILIS brand machine were clearly shown on “annex.1”, the supplemental document, the subject matter of the Contract must be EXILIS brand RF/Ultrasound machines. 31.I agree with Mr Wong’s submissions and therefore the plaintiff has satisfied its basic burden of proof. The burden now shifts to the defendant. The defendants’ arguments: 32.Mr Yu submits that before we turn our attention to the terms of the Contract, there are five factors that should form part of the background matrix in its interpretation. These five factors are:-
33.I will deal with these five factors first. (a) Selling an EXILIS machine at $200,000 each in 2012, did not make commercial sense. 34.Mr Yu argued since the wholesale cost of an EXILIS machines in 2012 was more than $200,000, selling them at $200,000 did not make any commercial sense. 35.Ms Tsang testified that in 2012 the wholesale costs of an EXILIS machines was well over $200,000. When transportation fees and other handling costs are added, selling them at $200,000 per unit would have led the 1st defendant to a loss, which does not make any commercial sense, therefore the subject matter of the Contract could not be EXILIS brand machines. 36.Mr Fong, on the other hand, testified that since the termination of the Contract, the plaintiff was able to purchase around 60 EXILIS machines directly from the manufacturer BTL Corporation for less than $200,000 per unit, therefore the wholesale costs for an EXILIS machine in 2012 must be below $200,000 and selling them at $200,000 was reasonable. 37.The burden of proving the wholesale costs of EXILIS machines in 2012 is of course on the defendants. 38.Although Ms Tsang testified in 2012, shortly before the date of the Contract, the authorized representative for EXILIS machines was in fact MEDIPRO Limited and not the 1st defendant MEDIPRO International Limited, Ms Tsang however, admitted to being a director of MEDIPRO Limited. 39.As director of the authorized representative in 2012, there should be no trouble for Ms Tsang to obtain and file evidence of EXILIS machines’ wholesale prices in 2012. Yet no such evidence was filed. 40.In addition to Mr Fong’s testimony, it is undisputed that the 1st defendant advertised for sale an EXILIS machine for $158,000; and Mr Fong’s SMS to Ms Tsang confirming purchase of 4 new EXILIS machines for $240,000 each and the Demo Machine for $158,000. 41.I agree with Ms Tsang that selling a product at a loss does not make any commercial sense. This applies even for goods used for demonstration purposes. Demonstration units may be discounted from the usual retail prices, but for the same commercial reason, these discounted prices seldom represent a loss. 42.Before I came to any conclusion on this argument, I have considered Ms Tsang’s testimony that the 1st defendant purchased the Demo Machine from MEDIPRO Limited, the former authorized representative for EXILIS machines, as a demonstration machine; however, Ms Tsang also admitted her sister is the director of the 1st defendant. Therefore, even though MEDIPRO Limited and the 1st defendant are two separate legal entities, the close relationship between these two limited companies meant for the purpose of determining this argument, they should be considered as one. 43.Accordingly, when the 1st defendant advertised the Demo Machines for sale at $158,000, commercial sense dictates even at that price, the sale was not at a loss. In other words, unless there is evidence to the contrary, the same commercial sense advanced by Ms Tsang, dictates that the wholesale price for an EXILIS machine in 2012 cannot be more than $158,000. 44.Looking at all of the evidence, or more particularly the lack thereof, I find there is no evidence to support selling EXILIS machine for $200,000 each did not make commercial sense. This factor gave the defendants no help. (b) The subject matter of the Contract was machines with similar technology as EXILIS machines and not EXILIS machines. 45.Mr Yu argued that no brand name was placed on the Contract because the parties’ agreement was after signing the Contract, Ms Tsang would search (“搜羅”) the market for machines with similar technology as “EXILIS” and that would be the goods sold. 46.In essence, the argument is the plaintiff agreed to pay the 1st defendant $2,000,000 for machines sight unseen, without knowing: the name of the device, the manufacturer, where it was made, any of its performance data, safety record or testing results. 47.This argument would also necessary meant at the time of contract, the defendants themselves did not know what goods they were selling to the plaintiff. 48.The allegation that the plaintiff agreed to purchase goods worth $2,000,000 and paid the 1st defendant $1,000,000 in deposit, when the plaintiff did not know what it was buying and the defendants did not know what they were selling, with the whole transaction based solely on Ms Tsang’s assurance she will look for machines with similar technology as EXILIS machines, is so fantastic, it borders on ludicrous. This factor is of no help to the defendants either. (c) “annex.1” was included solely for the purpose of denoting the technology involved in Radio Frequency and Ultrasound technology. 49.Mr Yu argued that the parties agreed “annex.1” was included solely for the purpose of denoting the technology involved in Radio Frequency and Ultrasound technology and not the brand name EXILIS. 50.Ms Tsang testified that she was concerned when she found “annex.1” attached to the Contract and Mr Lau, the plaintiff’s in-house legal advisor, ensured her that the 2-page “annex.1” was “ for reference only” and intended to denote the technology involved in Radio Frequency and Ultrasound and not the brand name “EXILIS” (確認和作出參考的只是RF射頻系统及Ultrasound超聲波震動的技術, 而並非EXILIS的牌子本身). 51.Ms Tsang’s explanation simply did not make any sense; “annex. 1” did not mention Radio Frequency technology, Ultrasound technology or any other technology at all. Page 1 of “annex.1” was simply a photograph of a model with the name “EXILIS Reshape your body” in bold letters and page 2 was a photograph of an EXILIS machine. 52.Mr Fong, who was present at the time, testified that Mr Lau never said those things to Ms Tsang. In addition, Mr Fong testified that it was Ms Tsang who requested the brand name “EXILIS” not to appear on the face of the Contract. 53.Mr Fong stated Ms Tsang said because the 1st defendant was no longer the authorized representative for EXILIS and fearing the current authorized representative may interfere with the transaction and to avoid legal difficulties, she requested the brand name “EXILIS” not appear on the Contract. 54.At first, the plaintiff did not agree with Ms Tsang’s request, but parties later agreed to add “annex.1” on the Contract to ensure the goods provided by the 1st defendant were EXILIS machines. 55.Mr Fong’s explanation is much more believable. I find “annex.1” was not included in the Contract solely to denote Radio Frequency and Ultrasound technology. This factor also offered the defendants no help. (d) The parties had only discussed RF/Ultrasound machines and EXILIS brand was never mentioned. 56.Here, Mr Yu argued the parties only discussed RF/Ultrasound machines and EXILIS was never mentioned. 57.The defendants stated in para 5(e) in the Statement of Defence that the plaintiff had never requested and the 1st defendant had never agreed to provide any specific brand of medical equipment. 58.Mr Fong testified that he discussed purchasing only EXILIS machines during all negotiations with Ms Tsang. 59.During her cross-examination, Ms Tsang’s answer was very uncertain about the meaning of para 5(e) of the Statement of Defence and tried to qualify it by saying it meant during the negotiation of the Contract only. 60.It is trite that human memories are not reliable and contemporaneous documentations are much better in reflecting what actually occurred. 61.The contemporaneous documents exchanged between the parties showed they had all along discussed only EXILIS machines. These documents includes:-
62.I have carefully considered Ms Tsang’s argument that the promotional CD-ROM and training DVD were delivered to the plaintiff because the 1st defendant lend the Demo Machine to the plaintiff and the plaintiff’s staffs had to learn the operation of the EXILIS machine. 63.Ms Tsang’s argument would make sense if only the training DVD was delivered but I can see no reason a promotional CD-ROM for EXILIS be send to the plaintiff after the Contract, if the purpose was only to help the plaintiff’s staffs operate the Demo Machine. 64.It makes much better sense if the subject matter of the Contract was EXILIS machines and the plaintiff’s staffs needed the promotional material in the CD-ROM to promote EXILIS machines to their customers. I reject Ms Tsang’s argument on this point. 65.Furthermore, no contemporaneous documents exchanged between the parties mentioned or contained information on any other brand name or technology, but all of them mentioned EXILIS. I therefore find the parties did discuss EXILIS brand machines and this factor also fails to assist the defendants. 66.Now we turn to the Mr Yu’s main argument on interpretation of the terms of the Contract. 67.Mr Yu argued that the contract terms under the “Description” column should be read as follows:-
The “machine” in the sentence: “The machine name to be confirmed” referred to the “RF/Ultrasound machine”, meaning the Machines were not EXILIS machines, but the name of these machines was to be confirmed after they have been sourced by the Ms Tsang on a later date. 68.Mr Wong, on the other hand, argued that the same terms should be read as follows:-
The “machine” in the sentence: “The machine name to be confirmed” referred to the machine in: “Include post our company logo & machine image” ie the “GlobalCure SC6 Laser” and not the “RF/Ultrasound machine”. 69.Mr Fong gave evidence that the phase “The machine name to be confirmed” was included due to Ms Tsang’s concern that the name “GlobalCure SC6 Laser” may not be suitable for the 1st defendant’s promotional purposes and asked this phase be included so the 1st defendant will have the option of changing the name “GlobalCure SC6 Laser” to a more catchy name later. 70.Before deciding which reading of the “Description” column is more reasonable, it is helpful to reproduce that part of the Contract here:-
71.When you look at the “Description” column, one important detail becomes immediately clear - the sentences were separated into 2 groups by their font size: group (1) is headed by the words: “RF/Ultrasound machine” in large bolded font size and group (2) by the words: “GlobalCure SC6 Laser”, in the same large bolded font size. 72.Because of the two distinctly different groupings of the sentences in the “Description” column, I find it is more reasonable to read “The machine name to be confirmed” as referring to the machine in the same group (2), ie the “GlobalCure SC6 Laser” than the machine in group (1), i.e. the “RF/Ultrasound machine”. 73.Also, there is no dispute that the two sentences: “Promotion in MTR (AD) for 3 months (Size at least: 1/6)” and “Include post our company logo & machine image” referred the details of the promotion for the “GlobalCure SC6 Laser” in the sentence immediately above them. 74.The word “machine” appeared in group (2) twice. First in the sentence: “Include post our company logo & machine image”; and immediately in the next sentence: “The machine name to be confirmed”. 75.It is more natural and reasonable that the “machine” in the sentences: “Include post our company logo & machine image” and “The machine name to be confirmed” were referring to one of the same machine, ie “GlobalCure SC6 Laser” when they appeared in sentences immediately after each other; instead of another machine, mentioned in a sentence 7 lines above it, i.e. the “RF/Ultrasound machine”. 76.To add force to his argument, Mr Yu also submitted that the “Demo” in the phase “Demo in your centre for 3 months”, referred to the Demo Machine. Meaning the parties’ agreed irrespective when the Machines are delivered, the Demo Machine would only be on loan for 3 months. 77.Ms Tsang testified in addition to the condition stated on the delivery note, because the parties did not know when delivery can be made, the parties agreed 3 months as an upper limit to the lending. 78.Mr Fong disagreed and said the parties always agreed the Demo Machine should be returned when the Machines are delivered, no 3 months lending limit were ever discussed. The phase “Demo in your centre for 3 months” actually reflected the parties’ agreement that the plaintiff’s staffs will demonstrate the laser machine at the plaintiff’s centre during the 3 months Promotional Obligation period. 79.The answer depends on whether the word “Demo” in “Demo in your centre for 3 months” meant the loan of the Demo Machine or demonstration of the laser machine during the Promotional Obligation. 80.I take notice that the delivery note clearly identified the Demo Machine as “This demo machine” but on the Contract, it was simply stated “Demo in your centre”. This is a significant inconsistency in terminology. 81.Add to the fact that the 3 months “Demo” requirement is exactly the same 3 months period for the Promotional Obligation, I find it is more reasonable to interpret the phase “Demo in your centre for 3 months” as referring to the plaintiff’s agreement to demonstrate the “GlobalCure SC6 Laser” machine during the 3 months Promotional Obligation than any maximum loan period for the Demo Machine. 82.Having considered all of the evidence of Mr Fong, Ms Tsang and the fact that the sentences were in 2 separate size groups, I find on balance, the phase “The machine name to be confirmed” referred to the “GlobalCure SC6 Laser machine” and not the “RF/Ultrasound machine”. Issue (1): Conclusion 83.I have considered all of Mr Yu’s arguments, all evidence submitted and the testimonies of Mr Fong and Ms Tsang, I am not convinced the defendants have satisfied their burden of proof. I find on balance, the subject matter of the Contract was indeed EXILIS brand machines. 84.Having decided the first issue in favour of the plaintiff, because the 1st defendant had never delivered any EXILIS machines to the plaintiff, there is no need to consider issues (2) and (3). 85.The plaintiff should have judgment for the claim and the first part of the defendants’ counterclaim should be dismissed. The only remaining issue is the restitution counterclaim. Issue (4): Does the plaintiff have a purchaser’s lien on the Demo Machine, entitling it to retain the same after termination of the Contract? 86.I now turn to the 1st defendant’s counterclaim for restitution of the Demo Machine. The parties agreed that the Demo Machine was only on loan to the plaintiff until:-
87.The plaintiff also admitted it had terminated the contract on 27.6.2012. Since delivery of the Machines would no longer be accepted by the plaintiff after termination, it is trite that based on that agreed term, the Demo Machine should be returned. 88.Mr Wong, however, argued that the plaintiff has a purchaser’s lien on the Demo Machine to secure return of its deposit. To this Mr Wong, submitted Whitebread v Watt [1902] 1 Ch.835 and Rose v Watson [1864] 10 HLC 672, as authority. 89.I do not agree the legal principle stated in Whitebread v Watt and Rose v Watson applies here. A purchase’s lien arises on the principle that in real property transactions, after execution of a sale and purchase agreement, the equitable estate of the property is deemed to have been transferred to the purchaser, with the vendor holding the legal estate on trust for the purchaser. When a part of the purchase price is paid by the purchaser, because of that trust relationship, the purchaser acquires an equitable lien on the property. 90.In Rose v Watson, Lord Cranworth explain the nature of a purchaser’s lien as follows:-
91.In Li Sze Fat v Cheng Ka Leung Tommy & Cheung Kin Ho HCA 14280/1998, Yuen J (as she then was) explained the nature of a purchaser’s lien as follows:-
92.Furthermore, in Nation Group Development Limited v The Bank of East Asia Limited CACV 356/2004, Yuen JA wrote, in para 14:-
93.Here we are solely dealing with a machine that was on loan from the 1st defendant to the plaintiff. The Demo Machine was not the subject matter of the purchase and sale, there was no trust and there was no transfer of title, legal or equitable. Issue (4): Conclusion 94.The principle of a purchaser’s lien clearly does not apply, the Demo Machine should be returned to the 1st defendant. Costs 95.It is of course not possible to be precise on these things, but Mr Wong and Mr Yu agreed overall, 90 % of the parties’ costs were spend on the main part of the claim and counterclaim, with approximately 10% spend on the restitution part of the counterclaim. 96.The plaintiff should have costs on the main part of the claim and counterclaim and the defendants should have costs on the restitution part of the counterclaim. After setting off the 10% costs in favour of the defendants, the plaintiff should have 80% costs of this action. 97.Although no difficult legal concept was involved in this matter, I am grateful for the assistance of Mr Wong and Mr Yu and I have no hesitation in granting certificate for counsel. Orders:
Mr Tim Wong, instructed by Huen & Partners, for the plaintiff Mr Leo Yu, instructed by Jim & Lok, for the 1st and 2nd defendants |
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