TALENT WEAVING DYEING & PRINTING LTD v. ABLE BILLION TEXTILES LIMITED

HCA 1495/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1495 OF 2011

_________________

________________________

J U D G M E N T

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1. This is the trial of the plaintiff’s claim against the defendant for damages for wrongful conversion of 20 lots of textile fabrics that had been manufactured by the plaintiff’s factory in the Mainland.

2. The defendant does not appear at the trial and its solicitors have come off the record shortly before the trial commenced.

Plaintiff’s claim

3. The plaintiff is a Hong Kong company and carries on business as a fabric and textile trader and manufacturer.  The plaintiff’s wholly‑owned subsidiary in the Mainland (referred to as “Talent PRC”) operates a factory in the City of Zhangjiagang in Jiangsu Province (referred to as “the PRC Factory”). 

4. The case of the plaintiff is that by 13 agreements of various dates between July and November 2010, the plaintiff had placed orders with the PRC Factory through Talent PRC and (in the case of the 8^th lot) through Changzhou Wanshun Textile Group Co (常州萬順紡織集團) for the production of fabrics of different description.  The fabrics were intended for onward sales to the plaintiff’s customers, namely, Mango Punto FA SL (“Mango”), Intraport Plc (“Intraport”) or Marks & Spencer (“M&S”), and Luen Thai Macao Commercial Offshore Limited (“Luen Thai”), the latter being the factory for Levi Strauss (Hong Kong) Limited (“Levi”).

5. Pursuant to the 13 agreements, the PRC Factory produced the fabrics.  The goods were then delivered in 20 lots between September 2010 and March 2011.  The plaintiff’s case is that it has become the owner and therefore was entitled to possession of the 20 lots of fabrics upon their production and delivery.

6. The plaintiff alleges that the defendant has wrongfully taken the goods and caused them to be consigned to the forwarders for shipment to the customers, purporting to be goods of the defendant.  It is alleged that the defendant did so in association with a director of the plaintiff (Mr Fu) and some of the plaintiff’s staff. 

7. The plaintiff claims for the loss of the goods and damages quantified as their market value at the respective dates of their conversion, less the amount received from the defendant under three payments.

Relationship of the parties

8. The plaintiff was set up in 2005 by Miss Clara Yiu (“Miss Yiu”), Mr Chau (“Chau”) and Mr Fu (“Fu”). 

9. The plaintiff has all along been Talent PRC’s sole agent in Hong Kong for selling the yarn‑dyed fabrics manufactured by the PRC Factory. 

10. At present, Miss Yiu and Chau are the directors of the plaintiff, while Fu had been a director for some time between November 2009 and August 2011.

11. Since the establishment of the plaintiff in 2005, Chau has spent most of his time working in Talent PRC and the PRC Factory.  Miss Yiu herself has also spent most time in Talent PRC since about April 2007. The operation of the Hong Kong office was entrusted to Fu.  Fu was in charge of the sales and merchandising department with the assistance of one Miss Ryder Choi (“Miss Choi”). 

12. The PRC Factory has been the nominated textile mill for a number of the well‑known fashion brands.  The business of Talent PRC and the plaintiff has expanded over the years with considerable growth in sales revenue and profits. 

13. Miss Choi was engaged by the plaintiff as a sales consultant through her wholly-owned corporate vehicle Ever Concept in about 2007.  She earned commission and consultancy fees through Ever Concept.  As a sales consultant, Miss Choi was responsible for liaising with customers of the plaintiff, including the aforementioned Mango and M&S.

14. At one point, Miss Yiu, Chau and Fu considered it desirable for the plaintiff to form a new company with Miss Choi (through Ever Concept), which was to act as a further extension of the trading arm of the PRC Factory. A company called Alitex was thus set up.  The business of Alitex however did not really get under way and the company was eventually deregistered.

Diversion of the plaintiff’s business  

15. At the trial, I have received oral testimony from Miss Yiu, Miss Cheung (a merchandiser of the plaintiff), and Chau.  On the basis of their witness statements and oral testimony, I am satisfied that the following facts and matters have been duly proved. 

16. In about May 2010, Miss Choi acquired the company Able Billion Enterprises Limited (“Able Enterprises”) and has become its sole shareholder.  She further caused the defendant to be incorporated in June 2010. Miss Choi is the sole director of both Able Enterprises and the defendant. Fu has become one of the defendant’s bank signatories.

17. In the usual course of business of the plaintiff, customers would contact the plaintiff’s sales staff and/or Miss Choy to obtain quotations of fabrics to be manufactured by the PRC Factory.  The process would involve the plaintiff’s staff in liaising with Talent PRC and/or the PRC Factory for obtaining quotations, reverting to the customers with to seek confirmation of the price, quantity and details of the fabrics to be produced, and eventually placing orders with Talent PRC or the said Changzhou Wanshun (in the case of the 8^th lot) for the production of the fabrics. 

18. Such orders were given by way of various “釆購單合同” in the name of the plaintiff, and production would then follow according to the specifications in the purchase orders.  These “釆購單合同” therefore constituted the various agreements between the plaintiff and Talent PRC and/or the PRC Factory for production of the fabrics in question.

19. Sometime since about July 2010, with the collusion of the plaintiff’s sales staff, the defendant managed to cause transactions with the plaintiff’s customers to be wrongfully diverted to the defendant.  This is evident from the email correspondence exhibited to Miss Yiu’s witness statement.  The correspondence clearly shows that customers had been asked to issue purchase orders to or to amend them in favour of the defendant as supplier.  The customers were also provided with information of the defendant’s contact details, bank account numbers, as well as the desired method of payment.  Miss Choy’s involvement is clearly evident from some of the correspondence. 

20. Among the documents before the court is a letter dated 1 December 2010 which was signed by Fu on the plaintiff’s letterhead.  The letter falsely represented to the plaintiff’s customers that the defendant would gradually take up “the account payee functions currently carried out by [the plaintiff]”.  Fu, however, was never authorised by the plaintiff to issue such a letter, and he did so without the knowledge of either Miss Yu or Chau. 

21. A similar letter, also dated 1 December 2010, and allegedly bearing Chau’s signature was referred to by the defendant in the Amended Defence.  This letter went further than Fu’s by telling the customers that the defendant would gradually “take up the account” of the plaintiff.  I accept the plaintiff’s evidence that Chau was out of Hong Kong between 9 November and 9 December 2010, and did not in fact sign this or any other similar letter. I also accept that Miss Yiu was likewise out of Hong Kong from mid‑November to 3 December 2010.  I accept that the letter in question was not authentic and was not issued with the consent or knowledge of Miss Yiu or Chau.

22. Needless to say, no reliance can be placed on either of the letters mentioned in the last two paragraphs.

23. The plaintiff was alerted to the fraud in March 2011 when Miss Yiu was informed by a friend that Fu appeared to have set up his own textile and fabric trading business and had held himself out as representative of another company which was not the plaintiff.  Later in October 2011, Fu was seen at a trade cocktail party wearing a name badge that described himself as a consultant of the defendant.

The 13 agreements

24. The plaintiff’s claim in this action covers the goods produced under 13 agreements (“釆購單合同”).  Pursuant to the 13 agreements, Talent PRC delivered the fabrics to the forwarder in 20 lots between September 2010 and March 2011, intending for them to be consigned to the plaintiff’s customers.  Particulars of the 13 agreements and the 20 lots of delivery are as follows:

Date of Agreement /	Quantity of Fabric	Date of Delivery from Talent PRC
“采購單合同”
1st : 22.7.10	55,900 MTD	1st Lot: pre-9.9.10
		2nd Lot: pre-17.9.10
		3rd Lot: pre-29.9.10
2nd: 24.7.10	7,200 MTD	4th Lot: pre-15.9.10
3rd: 26.7.10	220,700 MTD	5th Lot: pre-17.9.10
		6th Lot: pre-29.9.10
		7th Lot: pre-14.10.10
4th: 31.7.10	9,500 MTD	8th Lot: pre-15.9.10
5th: 19.10.10	9,000 MTD	9th Lot: pre-25.11.10
6th: 15.10.10	10,000 MTD	10th Lot: pre-2.12.10
		11th Lot: pre-17.12.10
7th: 1.11.10	6,000 MTD	12th Lot: pre-17.12.10
8th: 11.11.10	22,700 YDS	13th Lot: pre-19.1.11
		14th Lot: pre-27.1.11
9th: 11.11.10	36,256 YDS	15th Lot: pre-12.1.11
		16th Lot: pre-9.3.11
10th: 11.11.10	11,536 YDS	17th Lot: pre-12.1.11
11th: 11.11.10	20,188 YDS	18th Lot: pre-19.1.11
12th: 11.11.10	17,922 YDS	19th Lot: pre-12.1.11
13th: 11.11.10	5,974 YDS	20th Lot: pre-12.1.11

25. I am satisfied that when delivery was made by the PRC Factory respectively of the 20 lots of fabrics, the plaintiff was the owner of the goods and, accordingly, was entitled to possession of them. 

26. However, unknown to the plaintiff at the time, these deliveries were wrongfully taken by the defendant who, as shipper, consigned the fabrics to various customers.  Particulars of the defendant’s wrongful consignments, as evidenced by the various bills of lading, are as follows:

Date of D’s consignment / Name of purchaser / Place of delivery
1st Lot:  13.9.10 - Mango - Semarang, Indonesia
2nd Lot:  20.9.10 - Mango - Semarang, Indonesia
3rd Lot:  5.10.10 - Mango - Semarang, Indonesia
4th Lot:  17.9.10 - Mango - Haiphong, Vietnam
5th Lot:  20.9.10 - Mango - Semarang, Indonesia
6th Lot:  5.10.10 - Mango - Semarang, Indonesia
7th Lot:  15.10.10 - Mango - Semarang, Indonesia
8th Lot:  17.9.10 - Mango - Haiphong, Vietnam
9th Lot:  29.11.10 - Mango - Semarang, Indonesia
10th Lot:  6.12.10 - Intraport - Colombo, Sri Lanka
11th Lot:  21.12.10 - Intraport - Colombo, Sri Lanka
12th Lot:  21.12.10 - Intraport - Colombo, Sri Lanka
13th Lot:  24.1.11 - Luen Thai/Levi - Manila, Philippines
14th Lot:  12.2.11 - Luen Thai/Levi - Manila, Philippines
15th Lot:  15.1.11 - Luen Thai/Levi - Manila, Philippines
16th Lot:  12.3.11 - Luen Thai/Levi - Manila, Philippines
17th Lot:  15.1.11 - Luen Thai/Levi - Manila, Philippines
18th Lot:  24.1.11 - Luen Thai/Levi - Manila, Philippines
19th Lot:  15.1.11 - Luen Thai/Levi - Manila, Philippines
20th Lot:  15.1.11 - Luen Thai/Levi - Manila, Philippines

Defendant’s pleaded case rejected

27. The defendant does not dispute the taking and consignment of the 20 lots of goods: see paragraph 51(1) to (15) of the Amended Defence.

28. The defendant’s pleaded case is that the consignments were made pursuant to an arrangement agreed to by the parties in early 2010.  According to the defendant, because of differences between Miss Yiu and Miss Choi, especially over the calculation of net profits, Fu (acting for Chau) proposed to Miss Choi that she should form her own company to accept purchases from customers and could then place orders with the plaintiff (“the Alleged Arrangement”).  It was pleaded that by the Alleged Arrangement, the plaintiff would be able to reduce its expenses incurred by the sales office in Hong Kong.

29. First and foremost, as the defendant has not appeared at the trial, no one on behalf of the defendant has testified to confirm the existence of Alleged Arrangement. 

30. In any event, I accept Chau’s evidence that he has never made the alleged proposal to Choi, whether directly or indirectly through Fu.  I also accept the evidence of Miss Yiu that the reason put forward by the defendant to justify the Alleged Arrangement is doubtful.  By interposing, supposedly, an independent operation of the defendant, it is likely that the operating costs as a whole would increase rather than reduce.  There is in any event little explanation how the expenses of the Hong Kong office could be reduced or how the re-organisation would benefit the overall operation. 

31. I accept (in particular from evidence of Miss Cheung) that the plaintiff has never made any agreement with the defendant to sell to the latter fabrics produced by the PRC factories.  Insofar as there are documents which purport to show a trading relationship between the plaintiff and the defendant such as customers’ orders, defendant’s proforma invoices (to customers), defendant’s orders (購貨單) (to the plaintiff), plaintiff’s invoices and “pricing calculations”, as the veracity of the such documents has not been tested in cross‑examination, no weight should be accorded to them.  Instead, I accept the plaintiff’s evidence that such documentation were in fact made to conceal the defendant’s wrongdoings from the plaintiff. 

32. Miss Yiu has further raised a number of other queries about the commerciality of the Alleged Arrangement.  I do not think it is necessary for me to express a view on such queries.  It suffices to say that the defendant’s case based on the Alleged Arrangement, not being supported by evidence and not tested by cross‑examination, must be rejected.

Summary on liability

33. The defendant’s act of taking the fabrics and shipping them to the customers clearly amounted to conversion of the goods: Clerk & Lindsell on Torts, 20^th edition, paras 17‑09, 17‑10 and 17‑15.  I am satisfied that the plaintiff has established its case that the defendant is liable for the conversion of the 20 lots of fabrics.

Quantum

34. Normally, the measure of damages for conversion is the market value of the goods at the time the defendant expropriated them because generally this measure represents the amount of the basic loss suffered by the claimant:  Kuwait Airways Corporation v Iraq Airways Co (Nos 4 and 5) [2002] 2 AC 883, per Lord Nicholls at para 67; also Clerk & Lindsell on Torts, ibid, para 17‑92.  As the object of awarding damages for conversion is to compensate the claimant for the value of the goods in his hands, prima facie the amount he could have got for the goods will be the proper measure of his damages: The Law of Damages, Tettenborn, 2^nd edition, para 15.12. 

35. In this case, in the absence of any evidence from the defendant to the contrary, I would accept that it is appropriate to use the price set out on the defendant’s own invoices to the customers as evidence of the market value of the goods:

Lot No	Quantity of Fabric	Unit Price (US$)	Market Value (US$)
1st	27,387.50 MTD	3.38	92,569.75
2nd	28,235.00 MTD	3.38	95,434.30
3rd	1,391.00 MTD	3.38	4,701.58
4th	7,550.50 MTD	3.14	23,708.57
5th	94,350.10 MTD	2.25	212,287.73
6th	127,582.30 MTD	2.25	287,060.20
7th	631.40 MTD	2.25	1,420.65
8th	8,500.00 MTD	3.14	26,690.00
9th	7,850.00 MTD	2.35	18,447.50
10th	5,938.00 MTD	2.26	13,419.88
11th	3,870.50 MTD	2.26	8,747.33
12th	5,610.00 MTD	2.26	12,678.60
13th	18,152.00 YDS	2.60	47,195.20
14th	4,291.00 YDS	2.60	11,156.60
15th	24,534.50 YDS	2.55	62,562.98
16th	11,507.00 YDS	2.55	29,342.85
17th	11,396.50 YDS	2.03	23,134.90
18th	20,440.80 YDS	2.55	52,124.04
19th	18,260.00 YDS	2.03	37,067.80
20th	6,099.50 YDS	2.55	15,553.73
		Total: US$1,075,304.19
		(or HK$8,387,372.68) (Conversion: US$1 to HK$7.8)

36. The defendant has to‑date paid three sums, totalling $1,719,310.58, to the plaintiff in respect of the goods: 

(i) Cheque no 206112 for the sum of HK$175,403.78 drawn for VI010545 (9^th lot), VI009754 (3^rd lot) and VI009923 (7^th lot);

(ii) Cheque no 206124 for the sum of HK$1,392,313.57 drawn for VI011290 (19^th lot), VI011287 (15^th lot), VI011285 (17^th lot), VI011284 (18^th lot) and VI011283 (13^th lot);

(iii) Part of cheque no 206144 in the value of HK$151,593.23 drawn for VI011489 (12^th lot) and VI011488 (11^th lot).

37. In the circumstances, I am satisfied that the plaintiff is entitled to damages in the sum of $6,668,062.10, plus interest.

Conclusion

38. I would accordingly order that the defendant do pay the plaintiff:

(i) Damages in the sum of $6,668,062.10.

(ii) Interest on the above sum at the rate of 6% per annum (being 1% above HSBC’s best lending rate), from the respective date of conversion of each of the 20 lots of goods (as mentioned in paragraph 26 above) until date of this judgment, and thereafter at judgment rate until payment.

(iii) Costs of this action to be taxed if not agreed, including all costs reserved in respect of any interlocutory applications (with certificate for counsel, where applicable).

HCA 1495/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1495 OF 2011

_______________________________

_______________________________

DECISION

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The application

1.  This is the plaintiff’s application to strike out paragraphs 47-54, 56-59, the preamble of paragraph 60 and second sentence of paragraph 66 of the witness statement of Fu Ka Fai, which was filed on 28 September 2012 [B152-195] and also paragraphs 33-35 of the witness statement of Tam Yee Ling Elaine filed on the same date [B196-213]. (the “impugned paragraphs”)

2.  Mr. B. Lo, counsel acts for the plaintiff and Mr. S.W. Lee, counsel acts for the defendant.

Grounds in support of and against the application

3.  The plaintiff relies upon the ground that the impugned paragraphs consist of irrelevant allegations on the plaintiff’s internal affairs having no bearing on the plaintiff’s claim of conversion against the defendant and that they are scandalous and constitute an unfair and prejudicial attack against the integrity of the plaintiff’s witnesses.[1]

4.  The defendant opposes this application on the ground that the matters raised in the impugned paragraphs are relevant to the issues of the present case.[2]

The legal principles

5.  The following legal principles are not in dispute:

a.  this court has the jurisdiction to strike out or expunge any scandalous matter in the witness statements: Wong Luen Hang v. Chan Yuk Lung (unreported) HCA 2654/2007; 28 August 2008 per Fung J. §§13-14

b.  evidence that bears no relevance to the pleaded issues in dispute is scandalous and is inadmissible and liable to be struck out;

c.   evidence given by way of witness statements pursuant to Order 38 rule 2A shall not make inadmissible evidence admissible.  HKCP (2013) vol. 1 §38/2A/13;

d.  witness statement which is inconsistent with the party’s own pleadings should be struck out, and to decide relevance, the court will only refer to the pleadings: HuaTyan Development Ltd. v Zurich Insurance Co. Ltd. (unreported) HCA480/2009; 20 July 2012 by Chung J.;

e.   scandalous parts of witness statements by reference to the pleaded issues should be struck out: Vastco Textile Ltd. v Super Glory Corporation Ltd (unreported) HCA1678/2009; 11 October 2011 by DHCJ M. Chan (as she then was);

f.    evidence that is beyond the ambit of the pleaded issues is scandalous and should be struck out: John Simpson Warham v Cathay Pacific Airways Ltd (unreported) HCMP4400/2001 & Others ; 10 December 2008 by Reyes J.

The factual background

6.  The burden is on the plaintiff to show to the court that those impugned paragraphs are scandalous and should be struck out.

7.  The plaintiff claimed against the defendant for damages on the ground that the defendant, had, without the consent of the plaintiff, wrongfully converted the plaintiff’s goods to its own use by (a) taking and consigning them for shipment to customers in its own right and (b) failing to pay to the plaintiff the market value of the goods.  The plaintiff therefore claimed damages in the total sum of HK$6,668,062.15.  The defendant admits that it had taken and consigned the goods for shipment to customers in its own right, but alleges that it was done pursuant to a proposal made in early 2010 (which was later agreed upon) by Mr. Chau Kwai Cheong (one of P’s directors; “Chau”), via Mr. Fu Ka Fai (another of P’s directors; “Fu”), to Ms. Ryder Choi ( a sales agent of P and the director and beneficial owner of Defendant “Choi”) that Choi should form her own company (D) to take customer orders, which would then place orders with P to make the fabric products for sale to such customers (the “2010 arrangement”).[3]

Discussion

8.  Mr. Lo submits that defendant’s only pleaded case on the reasons that led to the alleged arrangement is two-fold, namely: (a) differences on profit sharing between P and Choi leading to the 2010 arrangement; and (b) that (by way of the 2010 arrangement) P would be able to reduce the expense of its Hong Kong sales office (the reason for plaintiff to agree to the 2010 arrangement). On these bases, the defendant argues that there was no wrongful conversion.[4]

9.  Mr. Lo therefore argues that the impugned paragraphs are not relevant to those issues above and they should be struck out.

10.  Mr. Lee, however, refers me to the judgment of Barma J. (as he then was) in Chan Woon Fui v Chan Wing Suen & OthersHCCW 350/2004(unreported); 11 July 2005 to note that it is not this court’s function to dispose of the disputes of fact between the parties and the pertinent question is “whether they should be permitted to remain in the affirmation.”  See paragraph 17.  Paragraph 4 of this judgment has also set out the court’s power to strike out either the whole or any part of the witness statement or affidavit which is scandalous, irrelevant or oppressive.

The impugned paragraphs

11.  Paragraphs 47 - 54 of Mr. Fu’s witness statement contain serious allegations of fraud upon the bank for credit facilities by the Plaintiff’s shareholders and directors.  These allegations of fact were not pleaded in the Defence, which Mr. Lee has not disputed and, as such, they are irrelevant for the trial.  To retain such allegations in the witness statement will attract unnecessary arguments at trial and will waste time and costs.  The remarks by Reyes J. in John Simpson Warham v Cathay Pacific Airways Ltd (unreported) HCMP4400/2001 & Others; 10 December 2008 by Reyes J. is apt – the defendant is not allowed to make grievances outside the pleaded issues.  They should be struck out.

12.  Paragraphs 56-59 of Mr. Fu’s witness statement are on the arrangements leading to “the Agreement to Split”, which was formed after the 2010 arrangement pleaded in paragraph 3(i) of the Defence.  Mr. Lee submits that the defendant mainly relies upon the 2010 arrangement to defend its case and the Agreement to Split was another separate agreement between Chau and Mr. Fu subsequently reached.  This Agreement to Split does not form part of the defence and it was not pleaded.  In the witness statements, the defendant had already given the facts in support of the 2010 arrangement.  The purpose of putting the facts leading to the Agreement to Split is because the plaintiff has, in the Reply, at paragraph 13 set out the events that cover the Agreement to Split, which the defendant does not agree.  The defendant considers that it should respond to those facts as stated in Mr. Fu’s witness statement.

13.  The defendant is not allowed to respond to the Reply by way of witness statement without a proper foundation of the pleadings.  The defendant may consider amending the Defence or applying for leave to serve a Rejoinder.  Alternatively, the defendant may, if it considers that the issue of Agreement to Split is not relevant to its defence, ignore it or deal with it by way of cross-examination of the plaintiff’s witnesses on this issue.  What the defendant is not permitted to do is to adduce evidence outside the pleaded issues as decided in Hua Tyan Development Ltd. and John Simpson Warham.

14.  Mr. Lee asks me not to strike out these paragraphs pending the defendant’s application for leave to amend the Defence or for leave to file and serve the Rejoinder.  Mr. Lo opposes this suggestion, saying that there is no such application before the court and there is no material as what the defendant will say in the Amended Defence or the Rejoinder.  I agree with Mr. Lo.  The legal principles stated above are trite and the defendant should know in advance that it should not have included these paragraphs in the witness statement without a proper pleading to support them.  I decide to strike them out.

15.  The preamble of paragraph 60 refers to breach of the Agreement to Split.  For the same reasons above, I strike out this preamble too.

16.  The second sentence of paragraph 66 of Mr. Fu’s witness statement refers to the Agreement to Split issue, which I have struck out.  As such, this sentence is also irrelevant and should be struck out.

17.  Paragraphs 33-35 of Miss Tam’s witness statement are in support of the issue of the Agreement to Split, which I have struck out.  As such, they should be struck out too.

The costs

18.  As to the costs of this application and this hearing, they should follow the event (with counsel’s certificate for today) and be assessed summarily under Order 62 rule 9A RHC.  Mr. Lo has prepared the schedule of costs, which have been considered by Mr. Lee.  On a broad-brush approach, the costs are assessed at $55,000.00 to be paid by the defendant within 14 days from the date hereof.

The order

19.  I shall now make an order in terms as follows:

a.  The impugned paragraphs in paragraph 1 of this Decision be struck out;

b.  The costs of this application, including all costs reserved and for this hearing be assessed at $55,000.00 to be paid by the defendant within 14 days from the date hereof.