PHILIPP DOODT AND OTHERS v. HUANG SHIHUA AND OTHERS

HCA 2482/2017

[2021] HKCFI 305

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2482 OF 2017

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D E C I S I O N

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A.  Introduction

1.  There are two main matters currently before the court and one subsidiary matter.

2.  The matter first listed before me is the appeal brought by notice of appeal dated 27 May 2020 from Master Cruden’s decision of 14 May 2020, by which she dismissed the defendants’ application for security for costs made by their summons of 26 June 2019. Within that appeal is the subsidiary application by the plaintiffs to adduce further affidavit evidence.

3.  The second matter is the plaintiffs’ application for summary judgment made by summons dated 12 November 2020, seeking judgment for certain liquidated sums due and also on liability for damages to be assessed.

4.  They were listed to be heard together, with my permission, because it makes case management sense.  This is because the merits of the claim will necessarily be canvassed and considered in the context of the appeal.

5.  The Master’s decision to refuse security for costs was based both on her view of the merits of the claim and on the point relating to stifling of the claim.  On the merits, which she identified as focusing on the issue whether the plaintiffs would recover a monetary judgment for a sum greater than presently owed to the defendants and which she described as relatively modest, the Master was satisfied that such were the merits, that it would not be just to order the plaintiffs to pay security for the defendants’ costs.

6.  On stifling of the claim, and though agreeing that more information might have been disclosed by the plaintiffs, the Master was satisfied that the plaintiffs had demonstrated sufficient inability to pay any substantial security so that an order for security, if made, would probably stifle the claim.

7.  It is also necessary to refer to an earlier procedural application found in the decision of Deputy High Court Judge Blair dated 22 January 2020, following a hearing before him on 16 January 2020.  There, the Deputy Judge dealt with another appeal from another Master who had dismissed the plaintiffs’ application for an interim payment.  In the context of the present applications, the Deputy Judge’s reasoning and conclusions are important.  Both sides say so, though each focuses on different parts of the decision and reasoning.

8.  As the Deputy Judge noted, he was not actually dealing with an Order 14 application as there was not one before him, but the relevant test on an application for interim payment required consideration of whether the defendants had an arguable defence such as one would warrant the grant of unconditional leave in an Order 14 application.  Having carefully considered the various pleadings and the evidential material provided, the Deputy Judge reached the conclusion that the defendants had no arguable defence as might warrant the grant of unconditional leave in an Order 14 application.  But he refused to order an interim payment because he was not persuaded that there was a satisfactory basis for arriving at any particular estimate of damages which might properly be ordered.  I can return later to what is properly to be taken from that decision.

B.  Further Background

9.  By way of further background, the claim relates to a contractual dispute.  The factual background is sufficiently set out in the Deputy Judge’s decision at paragraphs 2 to 10 inclusive.  And the parties’ cases are also respectively set out in the Deputy Judge’s decision at paragraphs 11 to 21 inclusive.  I can gratefully adopt those summaries of the background and the parties’ cases by way of reference above, without repetition.

10.  Ms Euchine Ng, Counsel for the plaintiffs, has also offered what seems to me to be a brief and fair summary of the background to the contractual dispute which I can broadly adopt as follows.

11.  The 2^nd to 4^th plaintiffs (“AYNF”, “AYND” and “AYNS” respectively, together the “AYN companies”) are companies specialising in the sale and supply of garment accessories.  The AYN companies are controlled and managed by the 1^st plaintiff (“Philipp”), and his family members, including his father Paul and his brother Felix.

12.  The 2^nd defendant (“HSD”) is a zippers manufacturer controlled by the 1^st defendant (“Huang”). In 2012, Huang and Philipp entered into a joint venture cooperation whereby HSD appointed the AYN companies as the sole agent for distributors of zippers manufactured by HSD in Europe on a commission basis.

13.  The 3^rd defendant (“HSDI”) was incorporated as the joint venture vehicle to accept orders from end customers and to purchase from HSD zippers manufactured by HSD for distribution.

14.  In 2014, the parties renewed the terms of their cooperation and entered into an agreement dated 1 August 2014 (“2014 Agreement”).  In breach of the 2014 Agreement, HSD and/or HSDI failed to pay commission to the AYN companies since March or April 2017. Non-payment of that commission is not denied by the defendants.  The plaintiffs said that it was a repudiatory breach and accepted that repudiation so as to terminate the 2014 Agreement.

15.  In July 2017, they brought the present action to recover from the defendants the various unpaid commissions, together totalling approximately HK$425,000 and damages for loss of future profits which require to be assessed, being an unliquidated sum.

16.  There is, further, no dispute that the plaintiffs owe the defendants a sum of approximately HK$1.729 million which may be set off against the plaintiffs’ claim.

C.  Summary Judgment

17.  I agree with the parties that it is logical and sensible first to consider the application for summary judgment.  If judgment is granted, the appeal would likely fail.  Ms Ng says it must fail, and I think Mr Benny Lo appearing with Mr Tang Lik-hang as Counsel for the defendants accepts that.  His opposition is mainly based on his submission that it remains wholly unclear whether the plaintiffs would be entitled to any judgment for damages assessed at an amount greater than the admitted debt owed to the defendants.

18.  There is no need for me to set out at length the principles applicable on summary judgment applications because they are trite.

19.  In the first instance, it falls to the plaintiff to state his belief in the verifying affidavit that there is no defence to the claim, and this is to ensure that the application is kept in proper perspective, so as not merely to focus on what the defendant says.  The burden is then on the defendant to show a credible triable issue or an arguable defence, and in doing so to condescend upon particulars.

20.  The court does not necessarily take the defendant’s assertions at face value, but will test them against either undisputed facts or contemporaneous documents or the inherent likelihoods and probabilities.  However, there must not be any mini-trial on affidavit.

21.  Further, in an action for unliquidated damages, if the liability of the defendant is clearly established, including where the defendant does not satisfy its burden in the face of the summary judgment application, the court should give judgment for the plaintiff on liability with damages to be assessed.

22.  Both Ms Ng and Mr Lo have addressed me at some length on the arguments on the merits, at greater length in writing than their succinct and helpful oral submissions. I mean no disrespect to either of them if I do not recite their arguments at any great length.  Clearly, much if not all of the argument was, to an extent, ventilated on the interim payment appeal heard by the Deputy Judge.  Though not strictly bound by his findings, they are of course persuasive.

23.  In any event, having considered them, I find them correct and would agree with them.  There is no dispute that the defendants failed to pay the commission due under the 2014 Agreement between March and July 2017.  None of the purported defences relating to (1) the IT system, (2) the wrong entity, or (3) the alleged implied terms give rise to any arguable defence, although to be fair to Mr Lo, he does not push the points today in the light of the Deputy Judge’s findings.

24.  The core argument today relates to whether the plaintiffs have demonstrated that they will receive more in assessed damages than the roughly HK$1.3 million, being the difference between the commission debt owed to the plaintiffs and the debt which the plaintiffs admit owing to the defendants.  Mr Lo submits that the case is pregnant with uncertainties and he says that this is what was recognised by the Deputy Judge, leading to his refusal to order an interim payment.

25.  But I do not think Mr Lo is correct to suggest that the Deputy Judge found a triable issue as to whether there would be any future commissions payable at all.  Rather, he found no defence on liability and that would necessarily lead to an assessment of damages.  What he was not prepared to do was to order any interim payment where he was not satisfied of either figure put forward as the appropriate interim payment figure to order and where no other figure was suggested or could simply be assumed.

26.  So I do not agree with Mr Lo when he suggests that the plaintiffs have lifted the Deputy Judge’s findings that the defendants have failed to show any arguable defence or triable issues on liability out of context.  Indeed, at the end of the judgment, having considered the various aspects of the application, he reiterated that the defendants had failed to show any arguable defence, and he clearly had in mind when saying so the application of the Order 14 test.

27.  I agree with Ms Ng that there is no defence on liability, even taking into account the debt owed by the plaintiffs.  Like the Deputy Judge, I am satisfied that there must be some future commission assessed as damages greater than the debt, and that the evidence demonstrates that the plaintiffs will at least recover some damages which, together with the unpaid commission, will extinguish the debt.

28.  I do not think it necessary to look in any detail at the various offered calculations.  The plaintiffs have the benefit of an expert report suggesting damages should be assessed at a figure of around HK$40 million for the remainder of the 10-year contractual term which would, but for the breach, have expired only in 2024.  Ms Ng recognises that figure is on the high side, as did her predecessor who appeared before the Deputy Judge.  But she points out the various calculations offered as to the amount of commission only for the period until July or August 2018, a period of roughly one year after the repudiatory breach was accepted so as to terminate the 2014 Agreement in July 2017, would be readily sufficient fully to extinguish the debt.

29.  On the other hand, Mr Lo submits that such were the problems in the relationship between the joint venture parties that it is impossible to say, on a summary basis, that the relationship would have continued on the terms of the 2014 Agreement even until mid-2018.  He points to the evidence of negotiations at least at times initiated from the plaintiffs’ side and the suggestion that the main joint venture vehicle, HSDI, would be discarded.  However, it is clear that the plaintiffs were making suggestions on the basis that the commission would continue to be payable to them basically on the same basis as under the 2014 Agreement.  That is not surprising, as that is how the plaintiffs earned their elements from the joint venture arrangement, whereas the defendants’ side earned theirs from the manufacturing process.

30.  Mr Lo also points out the difficulties in relation to HSDI were not caused by the breach in the failure to pay commissions but as a result of long-term operational losses, cumulatively reaching a figure which both sides regarded as broadly unacceptable.  So he submits that it is not clear that the 2014 Agreement would have continued or that the commission-paying entity would have continued to be the same, or that any commissions would have continued at the same rates, or on the same conditions.

31.  However, I do not think those points change the analysis.  The parties had been negotiating the possibility of restructuring since at least late 2015 but had so far failed to reach agreement before the termination of the 2014 Agreement following the plaintiffs’ acceptance of the defendants’ repudiatory breach in July 2017.  Absent the breach and its acceptance, there is no evidence properly to suggest that the 2014 Agreement would not have carried on.  In any event, it seems to me that any new agreement as might have been put into place would still have been on the basis that the plaintiffs would be seeking and obtaining commission as their method of profiting from the joint venture.

32.  So I agree with Ms Ng that even a new venture would likely be causatively linked, and that absent the breach there would continue to have been the generation of commissions for a significant period.  There is also force in Ms Ng’s point that what caused the result leading to the damages claim is simply the repudiatory breach and the non-payment of commission, even if there were also potential restructuring plans which might have come into fruition.

33.  I also therefore do not accept Mr Lo’s submission that the issues of liability and quantum are inseparable in the sense he suggests, namely, that it is impossible to say that there is no triable issue as to whether the plaintiffs would recover more than HK$1.3 million in assessed damages.  This is a contractual claim and the finding on liability does not require proof of any particular damage even if the full extent of the liability has not yet been assessed.

34.  Whilst it is correct that there is a counterclaim and that to achieve a net monetary award in their favour, the plaintiffs must obtain damages for future lost commissions greater than approximately HK$1.3 million, that does not seem to me to mean that, until that amount is assessed, the defendants are not liable to the plaintiffs at all.  I think that is what the Deputy Judge meant in his approach to the interim payment application, and I agree that the quantum may be fact-sensitive or may require complex considerations, including of the expert evidence.  That it is not possible now to be reasonably sure of any particular amount in excess of $1.3 million as might have been ordered by way of interim payment does not seem to me to make this case one not suitable for summary judgment on liability.  I would therefore grant summary judgment.

D.  Security for Costs

35.  As to the question of security for costs, I would deal with the matter in any event.  The plaintiffs do not dispute the court has jurisdiction to grant security against them either because they are outside the jurisdiction or because there is reason to believe that they will not be able to satisfy a costs order made against them if the defendant succeeds in its defence.

36.  Similarly, on consideration of the merits, Mr Lo accepts that the plaintiffs’ claim is arguable but he says that considering the admitted cross-debt in the sum of roughly HK$1.729 million and the complexity of the case requiring the assistance of a business forecast expert where there is a high degree of uncertainty at present, the plaintiffs’ claim cannot be said to have a high probability of success.  Put shortly, Mr Lo says that to succeed to a monetary judgment, the plaintiffs must prove that the asserted lost opportunity to earn future commissions exceeded that debt.

37.  The phrase “high probability of success” is relevant on the applicable legal principles which include:

(1)  The court may order a plaintiff to give such security for a defendant’s costs of the action as it thinks just.

(2)  The discretion is wide and unfettered.

(3)  Normally, a court will order security for costs against a plaintiff resident abroad as ordinarily it is just to do so.

(4)  The same point might be made in relation to an application under section 905 of the Companies Ordinance, Chapter 622, where there is reason to believe the plaintiff has an inability to pay costs.

(5)  The application for security is not an occasion for the court to go into the merits of the case in any detail, save in relatively simple cases where on affidavit evidence the court can already see that there is a high degree of probability of success for the plaintiff.

(6)  Any argument that an order for security for costs would stifle a claim makes it incumbent on the plaintiff to adduce evidence in support, showing not only itself but also its shareholders or other funding parties are unable, rather than merely unwilling, to provide the security if ordered.

(7)  Any such evidence produced by the court should be full and frank, and the court should scrutinise what it is told with a critical eye and may draw adverse inferences from any unexplained gaps in the evidence.

(8)  But whilst there should be scrutiny, that does not necessarily mean that there must be scepticism.

38.  I do not need to repeat the matters relating to the merits.  But in the context of the security for costs appeal, Mr Lo again relies on the Decision of the Deputy Judge, and in particular, at paragraphs 64 to 67.  As pointed out, there the Deputy Judge identified that it was not easy to adopt even a broad-brush approach to estimate likely damages and rejected both the full figure of HK$40 million claimed or the supposedly customary two-thirds of that sum, noting also no other possible figure was put forward.

39.  But as already stated, I do not think that means he found there to be a triable issue on liability.  Instead, he said the opposite, though he envisaged it would be necessary for there to be a proper assessment of damages.  Even had I found the case not suitable for the grant of summary judgment on liability, I would nevertheless have found a high degree of probability of success, which seems to me to point strongly against the making of any order for security for costs.

40.  As to the point of stifling the claim, the plaintiffs have applied to put in three further affidavits by which they seek to bolster their evidence.  That application is opposed by the defendants.  The relevant legal principles for adducing new evidence on appeal from a master to a judge require the applicant to identify special grounds akin to satisfying the conditions laid down in Ladd v Marshall, albeit with an overarching discretion to act in the interest of justice even if not all such conditions are met.

41.  Ms Ng says the new affidavits are to update the court as to the financial position of the Doodt family and the AYN companies, in particular, following the impact of COVID-19.  Acknowledging that some of the matters referred to could not satisfy the Ladd v Marshall conditions, Ms Ng seeks indulgence to provide a current and complete picture.

42.  Mr Lo says the application should fail where the plaintiffs have patently and admittedly failed to meet the necessary test for filing further evidence under Rules of High Court, Order 58 rule 1(5).  He emphasises that the court should do nothing that might encourage parties seeking to adduce further evidence on appeal either after an unfavourable decision from a master or criticism of evidence at the hearing before the master.  Indeed, this is not a case where the plaintiff alleges a change of its financial position after the hearing before the Master.  Rather, the new affidavits are an attempt to patch up its case on its financial position.  This is precisely what the rules are intended to prevent.

43.  I agree with Mr Lo that much of the evidence could and should have been before the Master.  Further, the updated material, mainly in bank statements, probably adds little of significance to the outcome of the case where those statements post-date the master’s decision and do not show what happened in the period before it.  Therefore, I would disallow the new affidavits and dismiss the summons with costs to be summarily assessed.

44.  On the original evidence, I agree with the Master that there are areas where the evidence might have provided further information.  But I think I would have been satisfied that the apparently strong claim would probably be stifled by any order for security for costs in any substantial sum.  In any event, balancing the merits of the claim against the risks, if not probability, of stifling, I would have tended to a decision overall not to order security.

45.  In the circumstances, I do not propose to address the quantum of any security for costs as might have been ordered, save to say that I acknowledge the point made by Mr Lo that I might have ordered a sum lower than the sum of the roughly HK$1.5 million claimed if I had been satisfied that that might be the way to provide some substantial security, albeit not in an amount that would otherwise have stifled the claim.

E.  Result

46.  Of course, in light of the grant of summary judgment, the decision on the appeal is strictly unnecessary.  But, formally, I would dismiss the appeal with the costs of the appeal to be paid by the defendants to be summarily assessed.

47.  I would order instead summary judgment that:

(1)  HSD do pay to AYNF the liquidated sum of HK$130,934.70.

(2)  HSD do pay to AYND the liquidated sum of HK$215,458.65.

(3)  HSDI do pay to AYNS the liquidated sum of HK$78,348.60.

(4)  Interest on those sums be payable at 1 per cent over Hong Kong prime from the date of the writ until judgment, and thereafter at judgment rate until payment.

(5)  Judgment on liability be entered against Huang, HSD and HSDI for damages and interest thereon to be assessed.

(6)  Costs of the application for summary judgment to be paid by the defendants to be summarily assessed.

(Discussion re costs of the action)

48.  So what I can make clear, I suppose, is that the remainder of the costs of the action be reserved.

Ms Euchine Ng, instructed by Tsang, Chan & Woo Solicitors & Notaries, for all plaintiffs

Mr Benny Lo and Mr Tang Lik-hang, instructed by Liu, Chan & Lam, for all defendants

HCA 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

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J U D G M E N T

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1.  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.

2.  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.

3.  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 1^st P, and Mr Huang Shihua, a Hong Kong resident, who is the 1^st D.  The Ps’ companies have the prefix AYN and the Ds’ companies have the prefix HSD.

4.  According to Ds, the two sides’ cooperation dates back to 2007.  Ds say that around 2012, AYNF (the 2^nd P which is a Hong Kong company) appeared to be in financial hardship.

5.  Subsequently, a Shareholders’ Agreement was entered into between Mr Huang and Mr Doodt dated 16 January 2012.  HDSI (the 3^rd P) is a Hong Kong company which is the joint venture entity, and which functioned as the trading vehicle.  It was the entity that took customer orders and received payments for them. HSD, on the other hand, was the manufacturer of the products ordered by the customers; it also arranged for shipment of goods on behalf of HSDI.

6.  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.

7.  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 is this 2014 Agreement with which this case is primarily concerned, and in particular whether (as they claim) Ps brought it to an end by accepting Ds’ repudiatory breach in July 2017.

8.  Under the terms of the 2014 Agreement, AYNS (the 4^th P) a company incorporated 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)).

9.  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 can only pay HSD if both sides consent. The Ps’ side has withheld such consent since December 2016.

10.  Finally, in terms of factual background, By July 2017, the state of account between the parties was as follows:

(1)  unpaid commissions HK$424,741.95; this constitutes commission which was earned but not paid between April 2017 and July 2017.

(2)  Ps’ indebtedness to Ds’ side, HK$993,850.86 plus €84,203.59 (approximately HK$1,728,948 in total at a conversion rate of €1=HK$8.73).  This constitutes indebtedness going back to 2012 which was being repaid over time under Appendix 3 of the 2014 Agreement.

The parties’ cases

11.  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:

(a)  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.

(b)  Second, by a letter dated 12 July 2017, Ps accepted Ds’ repudiatory breach and terminated the 2014 Agreement.

(c)  Third, as a result, Ps have a good claim for unpaid commission already accrued, together with substantial damages for loss of future profits from the 2014 Agreement which, on its terms, does not expire until 30 June 2024 at the earliest.

12.  Ps submit that a number of the defences are only recently put forward on the change of Ds’ legal team, and have no merit.

13.  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.

14.  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 Ps).

15.  In summary, Ds’ case is that it cannot be said that there are no triable issues as to whether Ds repudiated the 2014 Agreement entitling Ps to terminate it.

16.  Ds’ side was a substantial net creditor vis-à-vis Ps’ side at the time of the purported termination of the 2014 Agreement.  Thus, for Ps to maintain this interim payment application, they have to rely on the alleged lost opportunity to earn “forecast commissions” post-termination.

17.  On the “1st alleged breach”, there are triable issues as to whether 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.

18.  On the “2nd alleged breach”, it is far from clear that Ds’ representation demonstrates an unequivocal intention to refuse to perform the 2014 Agreement.

19.  On the “3rd alleged breach”, there are triable issues as to the significance of the fact that AYNS shut down HSDI’s IT system, and whether HSD’s direct dealing with Hugo Boss was just an emergency response to the shut-down.

20.  If Ps’ claim for lost future profits are excluded, Ds’ counterclaims far exceed Ps’ claim against Ds by at least 4 times over.  Since Ps’ loss of future profits claim is based on speculative and weak expert evidence, Ps have failed to prove that they would obtain judgment for substantial damages against Ds over and above Ds’ set-off and counterclaim.

21.  In any event, Ps’ admitted “dire financial situation” (this term is used by Ps themselves 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

22.  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 interim payment summons is before the court.

23.  There is no dispute as to the applicable legal principles.  As summarised by Au J in Guo Jing Jing v Art Master Investment Ltd (unrep., HCA 1008/2009, 11 December 2009) at §88) the Court may order an interim payment under O29, r11 on two conditions:

(a)  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.

(b)  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.

24.  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 v Top One Property Group Ltd (unrep., CACV 269/2011, 20 July 2012) at §18.

25.  As held in Tse Tsz Chong v Law Sze Man [2015] 1 HKLRD 1120 at §35, after an estimate is made, the court should take account of the financial ability of the plaintiff to repay any 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 same applies where recovery would be more difficult from a plaintiff outside Hong Kong.

Discussion as to arguable defence

26.  It is convenient to begin with the second limb of the Guo Jing Jing test, namely that 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 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.

27.  The parties dealt with this part of the case by reference to three alleged breaches of the 2014 Agreement.

1st alleged breach

28.  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.

29.  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 other two matters relied on, one relating to the proposal of a new agreement by Ds, and the other to Ds dealing direct with Hugo Boss.

30.  As a matter of factual history, Ps’ solicitors wrote to Ds on 26 June 2017 at some length demanding compliance with the 2014 Agreement, including payment of commissions.  There was no reply to that letter at the time.  On 12 July 2017, Ps’ solicitors wrote to Ds to the effect that their clients accepted the breaches as repudiating the 2014 Agreement, alternatively electing to terminate pursuant to clause 7.2.

31.  Ds take a number of points in this regard.

32.  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 particular, clause 7.4 and Appendix 3).  Ps counter with some force that, short of rectification, which is not claimed, Ds cannot seek to go behind clause 5 because it is the operative clause.  Ps may be right about this, but it clearly raises an issue which cannot be determined summarily.

33.  Cogently, however, Ps contend that, even taking Ds’ argument at its highest, it does not absolve Ds from liability to pay the commission, but merely shifts the liability to pay commission from one party to another (i.e. 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.

34.  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).

35.  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 is no substance in this point.

36.  Second, Ds rely on proposed implied terms pleaded by way of re-amendment in paragraph 11.8 of the Defence.  In short, this is to the effect that commission is not payable until HSD receives full payment for the cost of manufacturing 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 commission” arises.  It is unthinkable, Ds submit, that HSD must pay commission out of its own pocket.  This cannot be what was intended by the parties.

37.  The test for the implication of contractual terms has recently been considered by the Court of Appeal in Lo Yuk Sui v Fubon Bank (Hong Kong)[2019] HKCA 261. After considering recent authority, at §32 the Court refers with approval to the summary of the law in Nazir Ali v Petroleum Company of Trinidad and Tobago [2017] UKPC 2 at [7]:

“It is enough to reiterate 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.”

38.  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.

39.  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 10^th 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.…”.

40.  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 manufacture, they did not so agree.  (2) Further, the contract provides in clause 5.2 for the timing of payment of commission, and terms cannot be implied to contradict what the parties have expressly agreed.

41.  In that regard, Ds’ third point is that given that 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 my view, it is sufficiently clear so as not to raise a triable issue.

42.  Fourth and finally under this head, Ds submit that it cannot be said that HSD/HSDI’s withholding of commission to Ps for around 3 months was a repudiatory breach such that it evinced Ds’ 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 was “withheld for the time being” was “due to Ps’ ungrateful and wrongful deeds”.

43.  The test for repudiatory breach is not in dispute.  As summarised by Mimmie Chan J in Ipson Renovation Ltd v IO of Connie Towers (unrep., HCCT 26/2014, 16 December 2016) at §45, for there to be a repudiation or renunciation of a contract, there must be a clear and absolute refusal to perform it in some essential respect.  Further, any purported acceptance of repudiation must be unequivocal.  The test of whether there is a 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 (33^rd ed) §24-018.

44.  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 had been withheld for some 3 to 4 months (it varied slightly as between plaintiff).  On 26 June 2017 (as noted above) Ps’ solicitors wrote to Ds asserting that the withholding of commissions was “in blatant breach” of the 2014 Agreement and demanding performance.  There was no response to that letter.  On 12 July 2017, Ps’ solicitors wrote a further letter accepting the continuing breach as a repudiation of the 2014 Agreement. (Ds plead a letter a letter dated 7 August 2017 issued by their PRC lawyers, but this was not produced, and in any case came after the repudiatory breach had been accepted as putting an end to the contract.)

45.  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 renunciation of the 2014 Agreement, which Ps were entitled to and did accept as putting an end to it.  Contrary to Ds’ submission, clause 2.2 of the Shareholders’ Agreement which requires both sides to “use their best endeavours to promote and develop the business of [HSDI] to the best advantage” does not affect this conclusion.

2nd alleged breach

46.  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

47.  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

48.  Ds have the following set-offs/counterclaims against Ps that they submit ought to be taken into account:

(1)  HK$1,728,948, being Ps’ admitted debt to Ds.  This is admitted.

(2)  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 term, which I have rejected.

(3)  HK$5,920,545, being the estimated amount of HSDI’s counterclaim against AYNS for the latter’s wrongful breach of the 2014 Agreement by shutting down the IT System when the agreement was still on foot.  However, AYNS shut down 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

49.  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

50.  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.

51.  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 Schewe, to forecast the loss of future profits applying various models by extrapolating from previous business performance and commission payments.  Ps say that:

(a)  Professor Schewe uses the “S-curve concept” to check Ps’ sales forecast, which he says is widely regarded as a reliable predictor for the development of sales, turnover or company success over time.

(b)  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.

52.  In summary, and on a preliminary basis, Ps’ claims for outstanding sums due and damages against Ds are as follows:

	HSD	HSDI	Huang (Clause 2.1)
AYNF	HK$4,235,353.00	X	HK$4,235,353.00
AYND	HK$34,583,660.00	X	HK$34,583,660.00
AYNS	X	HK$1,572,386.00	HK$1,572,386.00

53.  Ps says that this calculation – which totals HK$40,391,399 – takes into account the amount admittedly owing by AYNF to HSD, and the sales cost.

54.  Ps invite the Court to order an interim payment adopting as a rough proportion two-thirds, as is the general rule in cases of interim payment of costs (see Re Lehman Brothers Asia Ltd [2010] 1 HKLRD 43 at §§26-27), which results in a figure of HK$26,800.000.

55.  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.

56.  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.

57.  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.

58.  Finally, Ds object that no mention is made of mitigation.  It is assumed that the calculation should be made on the basis that Ps cannot obtain alternative work in the business using their experience and connections.

59.  I begin by reiterating that in determining 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).

60.  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.

61.  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 was manufacturing the zippers).  I have already held that a term as to payment by HSDI cannot be implied into the agreement in that respect, but the non-payment could be potentially relevant to the projection of future commission flows.  I cannot rule out Ds’ 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.

62.  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.

63.  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 was no doubt what fees had been charged, the question being what they should be paid pending taxation.  It was in those circumstances that the court awarded two thirds of the claim.

64.  In the present case, by comparison, the claim is for projected commissions 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.

65.  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.

66.  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. 

67.  The appeal must fail therefore.

68.  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.

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