PHILIPP DOODT AND OTHERS v. HUANG SHIHU AND OTHERS

bjbj 2482/2017 [2020] HKCFI 241 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO 2482 OF 2017 ____________ BETWEEN Philipp Doodt A.Y.N. Fashion Accessories Limited A.Y.N. (Deutschland) GMBH & Co. KG All You Need Support Limited Plaintiff 2nd Plaintiff 3rd Plaintiff 4th Plaintiff and Huang Shihua Hua Sheng Da Zipper (Shenzhen) Company Limited HSD Zipper International Company Limited Defendant 2nd Defendant 3rd Defendant ____________ Before: Deputy High Court Judge Blair in Chambers Date of Hearing: 16 January 2020 Date of Judgment: 22 January 2020 JUDGMENT This is the hearing of the Plaintiffs (Ps) appeal from the decision of Master Queenie Lau of 18 September 2019, whereby Ps summons dated 27 February 2019 was dismissed. The Summons sought an order that the defendants (Ds) do make an interim payment to Ps pursuant to RHC O.29, Part II, on the grounds that Ds have no genuine or arguable defence and Ps will obtain judgment for substantial sums and damages if the action proceeds to trial. There are a number of parties. On the one side, are the Ps who were Ds agents for the selling of zippers to clothing manufacturers in Europe, particularly Germany and the Netherlands, working on a commission basis. On the other side are Ds who are in the business of manufacturing the zippers in Shenzhen. The relationship between them involved a number of companies, and two of the principals that is, Mr Phillip Doodt, a German national, who is the 1st P, and Mr Huang Shihua, a Hong Kong resident, who is the 1st D. The Ps companies have the prefix AYN and the Ds companies have the prefix HSD. According to Ds, the two sides cooperation dates back to 2007. Ds say that around 2012, AYNF (the 2nd P which is a Hong Kong company) appeared to be in financial hardship. Subsequently, a Shareholders Agreement was entered into between Mr Huang and Mr Doodt dated 16 January 2012. HDSI (the P) is a Hong Kong company which is the joint venture entity, half of HSDI. Huang, Doodt and various of the companies also entered into a Co-operation Agreement also dated 16 January 2012 for HSD to refer all European buyers/customers to HSDI and for HSDI to pay commission for such sales. Subsequently, Huang, Doodt and various of the companies entered another Agreement dated 1 August 2014 to set out new terms and conditions for the parties cooperation regarding the joint venture. Commission for such sales to Germany and the Netherlands was 7%. It orporated in Hong Kong, was to be paid 2% commission of the HSDI turnover for providing bookkeeping IT, design and HR services to HSDI (clause 4.11(b)(1)). It is further relevant to note that whilst in the usual course payment by customers would be paid via HSDI, it is not in dispute that by reason of clauses 3.1 .1 and 3.1.6 of the Shareholders Agreement, HSDI g back to 2012 which was being repaid over time under Appendix 3 of the 2014 Agreement. The parties cases In summary, Ps case is that their claims against Ds are simple and straightforward based on breaches of the 2014 agreement under which Ps side was granted the exclusive right to distribute products produced by Ds side with a percentage commission on customers orders. The case falls under 3 heads: First, in breach of the 2014 Agreement, Ds (i) failed to pay Ps commission on customers orders from March/April 2017 onwards, (ii) proposed to Ps to enter into a new agreement to replace the 2014 Agreement on much less favourable terms, and (iii) dealt with customers namely Hugo Boss directly, and thereby evinced an intention not to be bound by the contract. Second, by a letter dated 12 July 2017, Ps accepted Ds e until 30 June 2024 at the earliest. Ps submit that a number of the defences are only recently put forward on the change of Ds legal team, and have no merit. The precise amount of such sums and damages will have to be assessed at a subsequent hearing or trial. The claim for an interim payment is based on a report by an expert, Professor Dr Gerhard Schewe, forecasting loss of future profits, applying various models by extrapolating from previous business performance and commission payments. Ps invite the Court based on Professor Schewe s report to order interim payments by HSD and Mr Huang to the P companies in a total sum of HK$26,800,000. This figure represents the two thirds of Professor s Schewe s capitalisation of estimated future commission receipts up to 2024 (giving credit for sums admittedly owing to Ds by ther the 2014 Agreement contains typographical errors on whether HSD or HSDI is the paying party of the 7% commission and/or whether the 2014 agreement contains implied terms to the effect that commission was not payable before customers paid, and whether the delay in payment amounted to repudiation in circumstances where it was Ps side that first withheld payment to HSD through HSDI in December 2016. On the 2nd alleged breach , it is far from clear that Ds in an affirmation contesting an application for security for costs) casts serious doubt over their financial ability to repay the HK$26,800.000 interim payment presently sought. This is exacerbated by the fact that Ps are located outside Hong Kong. Ds submit that interim payment should be refused on this additional ground. The legal principles I was told that Ps also took out a summons for summary judgment under RHC O.14, but that Ds objected on the grounds of lateness, with the result that only the int ment under O29, r11 on two conditions: First, the court must be satisfied that the plaintiff would , on the material before the judge at the time of the application, obtain judgment for substantial damages against the defendant, not would be likely to , and the standard of proof is a high one, on the balance of probabilities. Second, the court must be satisfied that the defendant has no arguable defence, such as one that would warrant the grant of unconditional leave in an O.14 application. In determining the amount of an interim payment, the court must adopt a fairly broad approach, with minimum expense to the parties, and make an estimate, on the evidence that has been adduced, of the likely award of damages and award a reasonable proportion of that estimate: Top One International (China) Property Group Co Ltd overpayment, any hardship on the defendant s side, and other matters relevant to the just exercise of the court s discretion. I would add that, consistently with this approach, the more certainly it can be established that at the end of the day the plaintiff would recover at least the amount of the proposed interim payment, the less weighty a factor the plaintiff s impecuniosity will be, particularly if caused by the defendant s non-payment. The ant has no arguable defence, such as one that would warrant the grant of unconditional leave in an O.14 application. In view of my conclusion on the first limb which is set out below, it is not strictly necessary to address this question. However, it has been fully canvassed in both the evidence and the written and oral submissions of counsel, and it was dealt with by the Master, and it is right that I should express my own conclusions. The parties dealt with this part of the case by reference to three alleged breaches of the 2014 Agreement. 1st alleged breach It is not in dispute that Ds failed to pay Ps commission that fell due under the 2014 Agreement between March and July 2017 in the sum of HK$424,741.95. Unless Ds can justify this, they are in breach of contract, though a separate question arises as to whether such breach was repudiatory. Ps case is that such breach alone entitled it to bring the contract to an end, though it presents the failure to pay commission as part of a package with the ting to terminate pursuant to clause 7.2. Ds take a number of points in this regard. First, it is contended that the references in clause 5 of the 2014 Agreement to HSD being liable to pay commissions to Ds side was an obvious mistake, since such references are inconsistent with other provisions in the agreement referring to HSDI being the paying entity (in . from HSD to HSDI). Ds objected that Ps must abide by their pleaded case that the obligation rested upon HSD. However, as was pointed out on behalf of Ps, in their defence Ds plead a positive case that the paying party was HSDI. There is no reason why the Court should not reduce the amount of the interim payment payable by HSD and correspondingly increase the amount payable by HSDI if it is otherwise due. Ds respond by reference to the White Book which states that for the court to grant an interim payment, [p]roof of success to the necessary standard against a particular defendant is required before an order can be made against him 29/11/3, p.795). This is obviously correct. But it does not stand in the way of a plaintiff saying that if there is an issue to be tried as regards the liability of defendant A, it will rely for summary judgment purposes on the defendants own admission as to the liability of defendant B. There facturing the goods. Ds rely on the fact that under the Shareholders Agreement, the consent of Ps side is needed for HSDI to make payments to HSD. It follows, Ds submit, that Ps side must give consent for HSDI to pay HSD s manufacturing costs and expenses before HSD s liability to pay Ps side arises. Such implied terms are obvious and necessary to give business efficacy to the 2014 Agreement because as a matter of business sense, it is hard to imagine that a manufacturer would agree to pay a sales commission to the agent when it has not recovered payment for its costs. Clause 2.2 of the Shareholders Agreement requires both sides to use their best endeavours to promote and develop the business of [HSDI] to the best advantage . Hence, the unexpressed intention of the parties must be that, if HSD were to be the commission paying entity, its cost must be paid before its liability to pay sales eiterate that the process of implying a term into the contract must not become the re-writing of the contract in a way which the court believes to be reasonable, or which the court prefers to the agreement which the parties have negotiated. A term is to be implied only if it is necessary to make the contract work, and this it may be if (i) it is so obvious that it goes without saying (and the parties, although they did not, ex hypothesi, apply their minds to the point, would have rounded on the notional officious bystander to say, and with one voice, Oh, of course ) and/or (ii) it is necessary to give the contract business efficacy. Usually the outcome of either approach will be the same. The concept of necessity must not be watered down. Necessity is not established by showing that the contract would be improved by the addition. The fairness or equity of a suggested implied term is an essential but not a sufficient pre-condition for inclusion. And if there is an express term in the contract which is inconsistent with the proposed implied term, the latter cannot, by definition, meet these tests, since the parties have demonstrated that it is not their agreement. Thus Lo Yuk Sui v Fubon Bank reaffirms in Hong Kong the common law necessity test for the implication of terms in the commercial context. In this case, the relevant commission provision is found in clause 5.2 which provides that HSD shall pay a commission that equals to 7% of the amount of the relevant orders to AYND on or before 10th day of the month immediately after the month in which payment in relation to the relevant order shall be rendered by the relevant customer in full or the month in which the relevant order was fully settled or actual full settlement of the price of the relevant order, whichever is the earlier. . Ds case as to implication is not arguable because: (1) The implied term is not necessary to make the contract work. Whilst the parties might have agreed to hold commission until the manufacturer got paid the cost of manufac the amount of unpaid orders was HK$2,160,377.01 as of 30 April 2017 and HK$2,209,604.18 as of 31 May 2017, it is by no means clear whether the liability to pay commission had yet arisen . This point seems to go with the last one. In any case, as it was fairly put to me by Mr Benny Lo, counsel for Ds, though Ds do not admit Ps unpaid commissions number of HK$424,741.95, they do not dispute it either. In intention not to be bound by the 2014 Agreement altogether. This is because by the time of the late payment of commission in 2017, Ps and Ds had worked together and run HSDI for about 5 years. Non-payment of commission for about 3 months is clearly a minute fraction of the commission paid over the past years, it is submitted. Ds have all along acted in good faith in seeking to continue the ongoing business relationship, having previously helped Ps out. The only reason why on this occasion commission renunciation is whether the actions of the party in default are such as to lead a reasonable person to conclude that he no longer intends to be bound by its provisions. The party in default may intend to fulfil the contract but may be determined to do so only in a manner substantially inconsistent with his obligations, or may refuse to perform the contract unless the other party complies with certain conditions not required by its terms. In such a case, the authorities show that the contract has been sufficiently renounced. The critical question is whether, by its words or conduct, a party has evinced an intention not to perform the contract, which a reasonable person in the position of the other party would regard as clear and absolute. See further Chitty on Contracts (33rd ed) 24-018. In my view, the position is as follows. The fact that the contract had been performed for five years in the past is irrelevant, because the question relates to continuing performance. By June 2017, commission payments but this was not produced, and in any case came after the repudiatory breach had been accepted as putting an end to the contract.) Ds point to a letter dated 26 June 2017 from HSD s Global Marketing Director to the effect that Mr Huang believed that the parties could continue to work together, and would offer deserved commission. However, Ps were entitled to insist on contractual commission. I agree with Ps submission that non-payment in these circumstances amounted to a clear repudiation or renunciatio of [HSDI] to the best advantage does not affect this conclusion. 2nd alleged breach In view of this conclusion, I need say little about the evidence relating to discussions between the parties as to alternative contractual arrangements. Suffice it to say that over the relevant period, Ps were open to the idea that a new contract be entered into, and at one point Ds produced a draft which Ps say was materially disadvantageous compared the existing agreement. Although both sides seek to rely on this evidence, Ps submitting that it shows that Ds were intent on disavowing the existing contract, and Ds submitting that it shows that Ps accepted existing arrangements were not working, nothing seems to turn on it. The parties did not in the event agree an alternative contract, and Ps were entitled to rely on the existing contract. 3rd alleged breach I need say little about Ds relations with Hugo Boss either. As Ds submit, the reason that they dealt directly Hugo Boss in June/July 2017 reflected the fact that HSDI was no longer functioning properly. Ps seem to have raised no real objection at the time. Pleaded set-offs/counterclaims Ds have the following set-offs/counterclaims against Ps that they submit ought to be taken into account: HK$1,728,948, being Ps admitted debt to Ds. This is admitted. US$401,798.2 and US$253.25, being losses suffered by HSD as a result of Philip Doodt s failure to consent to HSDI paying HSD s incurred manufacturing cost and related expenses. This turns on the alleged implied n the IT system on 23 June 2017, at a time when Ds were already in breach of their obligation to pay commission. Further, AYNS shut down the IT System because (as is admitted) HSDI stopped paying the 2% commission under Clause 4.11(b) of the 2014 Agreement which in effect funded the provision of IT services to HSDI. Having refused to pay the service fee, it is difficult for HSDI to complain that it was refused access to the IT System by AYNS. At best, this claim is shadowy. Conclusion h;F+ gdAA hVA# gd3c% yt[` h-J< gdFK gdFK gdFK gdk3 gdk3 gdk3 hIuX gdIuX hIuX For the above reasons, and respectfully differing from the Master, I am satisfied that Ds have no arguable defence, such as one that would warrant the grant of unconditional leave in an O.14 application. Discussion as to whether Ps would obtain judgment for substantial damages I turn to the first requirement under the Guo Jing Jing test, namely that the court must be satisfied that the plaintiff would , on the material before the judge at the time of the application, obtain judgment for substantial damages against the defendant. As noted above, the test is would and not would be likely to , and the standard of proof is a high one, on the balance of probabilities. Ps case is that as a result of Ds breach of contract, Ps have suffered substantial loss and damage for their loss of future opportunity to earn commission up to at least 30 June 2024, which is the minimum term of the 2014 Agreement. As noted above, for the purposes of the present hearing, Ps have instructed an expert, Professor Dr Gerhard S dely regarded as a reliable predictor for the development of sales, turnover or company success over time. He explains that various facts are taken into account for the calculation, including the latest turnover development, price development of the products, the current market situation, inflation forecast and the costs which would be incurred to generate the profits. In summary, and on a preliminary basis, Ps claims for outstanding sums due and damages against Ds are as follows: HSDI Huang (Clause 2.1) AYNF HK$4,235,353.00 HK$4,235,353.00 AYND HK$34,583,660.00 HK$34,583,660.00 AYNS HK$1,572,386.00 HK$1,572,386.00 Ps says that this calculation which totals HK$40,391,399 takes into account the amount admittedly owing by AYNF to HSD, and re of HK$26,800.000. On their side, Ds submit that Ps loss future profits claim is based on speculative and weak expert evidence, and that they have failed to prove that they would obtain judgment for substantial damages against Ds over and above Ds set-off and counterclaim. Ds submit that Ps expert evidence is simply guesswork and should be given no weight. No mention is made of the fact that HSDI was suffering losses of HK$3,363,739 as of April 2017 and may well have become insolvent. If this happened, HSDI would not have been able to pay any further commission. This factor was not taken into account in assessing the lost chance to earn commission. Ds submit that it is surprising that the expert should have relied on the S-curve concept model, which tracks the sales growth of businesses with a successful market penetration. Apple is one of the comparators referred to. This ignores the fact that Ds agency business, which depended upon HSDI, was on the brink of failure and liquidation. Finally, the amount of an interim payment, the court must adopt a fairly broad approach, and make an estimate on the evidence that has been adduced of the likely award of damages and award a reasonable proportion of that estimate (see Top One cited above). The exercise is not to be confused with the function of the future court in the final assessment of damages (see Tse Tsz Chong cited above). Despite Ds criticism, Professor Gerhard Schewe appears to be a well-qualified expert with a specialisation in clothing coming from a reputable University in Germany. He has produced a detailed report setting out the methodology and calculations he has used to reach his projection and capitalisation of the expected future income stream of commissions which could have been received up to the term of the 2014 Agreement in 2024. In my experience, this is the kind of report that one would expect to see lodged on behalf of plaintiffs making the kind of claim that Ps are making in the present case. But there are points that go the other way at the interim payment stage. As Ds say, the evidence suggests that the overall position of the joint venture had become difficult in 2016-7, a possible reason being that debts were building up on Ps side that were becoming unsustainable. That seems to have been the reason that from December 2016 onwards, Ps side withheld consent for HSDI to pay HSD (which contention that if the actual state of the business is factored in, a significant departure would be required from Professor Schewe s projections, even assuming his methodology. In fact, in his persuasive submissions, Mr Justin Lam on behalf of Ps accepted that the total figure upon which the claim for an interim payment is based over HK$40 million is high. That is undoubtedly correct in my view. He argued however that this is covered by awarding a reasonable proportion of that estimate, on a rough and ready approach. He suggested two thirds by analogy with cases of interim payment of costs, citing Re Lehman Brothers Asia Ltd [2010] 1 HKLRD 43 at 26-27 in support. This brings the figure down to HK$26,800.000. He did not suggest any other sum that might be awarded. However, the nature of the claim in the present case is different to that in the Lehman Brothers case, which concerned interim payments to provisional liquidators. The Court had fully itemised evidence as to their fees, and there w ons for nearly seven years from the time that the contract came to an end. Given the background between the parties, and the state that the relationship had reached at the time of termination, it is much less easy even adopting a fairly broad approach to make an estimate of the likely award of damages. The court cannot simply award the outstanding commission at the time of termination either, because taking into account the loan, the balance on the account was in favour of Ds. gdIuX gdIuX gdIuX gd*Ec gdWn }n}n XnXn n}n}n {tptib gdIuX gdIuX It is entirely correct that difficulties in calculation do not mean that an estimate of damages cannot be made. This follows from the Tse Tsz Chong case (see above) at 35. But there must be a satisfactory basis in the evidence for arriving at an estimate, and on the evidence I cannot accept either that HK$40 million is a sufficiently clear starting point, or that the position is cured by deducting a third, and no other possibility is suggested. I consider that Professor Schewe s report is a step in assessing Ps loss of future commissions. It will be a matter now for Ds to put forward their own evidence in the usual way. The appeal must fail therefore. Both sides have had partial success on this application, because though the appeal has not been allowed, Ds have not succeeded in showing triable issues on liability. On a nisi basis, I consider that costs should be in cause. (Sir William Blair) Deputy High Court Judge Mr Justin Lam, instructed by Tsang Chan & Woo Solicitors & Notaries, for the 1st to 4th plaintiffs Mr Benny Lo and Mr Jasper Wong, instructed by Liu, Chan & Lam, for the 1st to 3rd defendants - PAGE \* MERGEFORMAT - A B C D E F G H I J K L M N O P Q R S T U V A B C D E F G H I J K L M N O P Q R S T U V A B C D E F G H I J K L M N O P Q R S T U V A B C D E F G H I J K L M N O P Q R S T U V & #$ gdIuX |t|ti & #$ :pcbV :p9. yt[` & #$ & #$ & #$ & #$ [Content_Types].xml _rels/.rels theme/theme/themeManager.xml K Y, sQ}# theme/theme/theme1.xml $O}) Xp90 +PHI| PP yu 9xu5 fs+W VF7H q=. 8}d- qyI@ j!Q_ jyV` |PZ+ T ""p < 4V O&x$ A8>v ;EUC n 8r *~P(5 .}x E /,EE\} theme/theme/_rels/themeManager.xml.rels 5 6?$Q K(M&$R(.1 [Content_Types].xmlPK _rels/.relsPK theme/theme/themeManager.xmlPK theme/theme/theme1.xmlPK theme/theme/_rels/themeManager.xml.relsPK <?xml version="1.0" encoding="UTF-8" standalone="yes"?> <a:clrMap xmlns:a="http://schemas.openxmlformats.org/drawingml/2006/main" bg1="lt1" tx1="dk1" bg2="lt2" tx2="dk2" accent1="accent1" accent2="accent2" accent3="accent3" accent4="accent4" accent5="accent5" accent6="accent6" hlink="hlink" folHlink="folHlink"/> [Content_Types].xml dlyLho ;d]6 yJ.; _rels/.rels fLV:* ]m@= T;GI b9`5 drs/e2oDoc.xml `9~d ec.* Sil( I\Zv \^P"a (t<X drs/downrev.xmlL _^d:- J]_M r.vt= &(XEK [Content_Types].xmlPK _rels/.relsPK drs/e2oDoc.xmlPK drs/downrev.xmlPK [Content_Types].xml dlyLho ;d]6 yJ.; _rels/.rels fLV:* ]m@= T;GI b9`5 drs/e2oDoc.xml `9~d ec.* `g&8 (kpC $.-;^[8 ShOA jp#jWZCy7 Fh"9 drs/downrev.xmlL _^d:- J]_M r.vt= &(XEK [Content_Types].xmlPK _rels/.relsPK drs/e2oDoc.xmlPK drs/downrev.xmlPK [Content_Types].xml dlyLho ;d]6 yJ.; _rels/.rels fLV:* ]m@= T;GI b9`5 drs/e2oDoc.xml `9~d j(zP E%{_6 \$q (ky]3a jp#jWZCy7 ,W3m' )4>X drs/downrev.xmlL _^d:- J]_M r.vt= &(XEK [Content_Types].xmlPK _rels/.relsPK drs/e2oDoc.xmlPK drs/downrev.xmlPK [Content_Types].xml dlyLho ;d]6 yJ.; _rels/.rels fLV:* ]m@= T;GI b9`5 drs/e2oDoc.xml gJs)rL. 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