GUANG DONG WALLONG IMPORT & EXPORT CORPORATION v. WILLI CO. LTD.

DCCJ 7256/2001

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 7256 OF 2001

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JUDGMENT

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1. In this action the Plaintiff claims against the Defendant for the sum of USD 40,147.42 being the unpaid purchase price of goods sold and delivered to the Defendant.

2. The claim was originally instituted in the Court of First Instance by a Writ of Summons dated 30th May 2000. On 2nd April 2001 the proceedings were transferred to the District Court.

3. The Plaintiff has paid into court a total sum of $250,000 as security for the Defendant's costs.

The parties

4. The Plaintiff is a PRC state owned company with an annual turnover of USD 30 million. The import and export of lights is one of the diverse businesses carried on by the Plaintiff.

5. The Defendant is a Hong Kong company engaged in the lighting business. Most of the Defendant's lights are sold to the United States.

6. A factory in China called the Jin Li Lighting Factory " 金利燈飾廠 " ("the Factory") used to manufacture lights which were required by the Defendant's customers. Sometime in the latter half of 1998, the Factory went into receivership. Therein lies the root of the present disputes between the Plaintiff and the Defendant.

The claim

7. The present claim stems from a Purchase Order, No. 50125733, dated 18th July 1998 ("the Purchase Order") for 3100 lights to be shipped on or before 15th October 1998. The contract price for these lights was USD 42,457.09 although it was subsequently reduced to USD 40,147.42 as a result of a delay in the shipment. I shall return to this reduction for delayed shipment later in this judgment.

8. The Purchase Order was placed by the Defendant and was addressed to the Factory. Apart from the particulars relating to the quantity, packing and reference numbers of the lights, the Defendant also stipulated certain terms and conditions in the Purchase Order with regard to quality control and penalty in the event of late delivery. Some of the terms were accepted whilst others were either modified or rejected by the Factory. The Purchase Order was signed by the Defendant as buyer and the Factory as supplier.

9. There is no question that the Defendant was the buyer under the Purchase Order. What is disputed is whether the Plaintiff or the Factory was the other contracting party under the Purchase Order. The Plaintiff says it was the seller whilst the Defendant says the Factory was the seller under the Purchase Order.

10. The role of the Plaintiff is relevant because of the Defendant's claim of its entitlement to set off the price of the Purchase Order against monies said to be due from the Factory to the Defendant.

11. Apparently the Factory owed the Defendant the sums of RMB 110,420.90 and USD 54,000 when it went into receivership. As a result the Defendant has refused to pay for the 3100 lights manufactured by the Factory under the Purchase Order seeking instead to set it off against the sums due from the Factory. The Defendant says it is entitled to such set off because the Purchase Order was placed with the Factory as seller and manufacturer of the subject lights. According to the Defendant, the Plaintiff was merely an agent appointed by the Factory for tax purposes to export the subject lights and to receive payment for the Purchase Order.

The Plaintiff's case

12. The Plaintiff denies it was a mere agent or exporter of the Factory but claims to be the seller under the Purchase Order. The Plaintiff says it purchased the 3100 subject lights from its supplier, the Factory, and had in turn sold these lights to the Defendant. According to the Plaintiff there were two contracts in respect of these 3100 lights, one between the Plaintiff and the Defendant and another between the Plaintiff and the Factory. Hence, the Plaintiff claims, it is entitled to the price of the Purchase Order and denies the Defendant's right to set off the price against any outstanding sums from the Factory since such sums were unrelated to the Plaintiff or the Purchase Order. It was against this background that the present claim was instituted against the Defendant.

13. The Plaintiff called one witness Ms. Lam Chau Yin ("Ms. Lam"). Ms Lam has been an employee of the Plaintiff since 1993 and was responsible for, amongst other things, the import and export of lights. Ms. Lam adopted her witness statement as her evidence-in-chief and supplemented her evidence by giving oral evidence.

14. According to Ms. Lam the Plaintiff began ordering and purchasing lights from the Factory since about 1993. Such lights were then sold to the Plaintiff's customers like the Defendant. The Plaintiff would either place orders with the Factory after having reached an agreement with its customers or, for the sake of convenience, instruct its customers to order directly from the Factory. In the event that the Plaintiff's customer dealt directly with the Factory, the purchase order would be sent to the Factory by the customer and not to the Plaintiff. Either way the Plaintiff would pay the Factory for the lights so ordered upon their delivery.

15. Ms. Lam says the Plaintiff and the Defendant began their business relationship in 1995 and that she had dealt with Mr. Ching Siu Mei ("Mr. Ching senior"), Mr. Ching Or ("Mr. Ching") and Ms. Ching Ni ("Ms. Ching") since then. Mr. Ching senior is the father of Mr. Ching and Ms. Ching.

16. In or about July 1998 Ms. Lam says she received a telephone call from Mr. Ching placing an order for 3100 lights. They discussed and agreed over the telephone the quantity of lights, the price and delivery time. Since the Plaintiff knew the Defendant well and had a good business relationship, for the sake of convenience the Purchase Order was sent to the Factory directly by the Defendant. The Purchase Order made no reference to the Plaintiff or the oral agreement reached between Ms. Lam and Mr. Ching over the telephone. The oral agreement was also not reduced into writing. Ms. Lam explains this was because of the established relationship between the Plaintiff and the Defendant and that in any event, the Plaintiff's position was protected since the Plaintiff would only order the 3100 lights from the Factory after having received documentary credit from the Defendant.

17. Ms. Lam points to the existence of a contract (page 85 of the Agreed Bundle of Documents) between the Plaintiff and the Factory to rebut the Defendant's claim that the Plaintiff was merely an agent and exporter for the Factory. Ms. Lam says the contract would be superfluous if the Plaintiff were merely acting as an exporter and agent of the Factory. The contract is undated but Ms. Lam says it was made on the 25th July 1998 being its effective date. The contract price was RMB 488,813.50. Under clause 3 of the contract a deposit in the sum of RMB 300,000 was payable before delivery with the balance of the contract price to be settled upon delivery. The contract was valid for a year from 25th July 1998 to 25th July 1999. The Plaintiff duly paid the deposit sum of RBM 300,000 as evidenced by a receipt dated 6th October 1998 (page 86 of the Agreed Bundle of Documents).

18. After the lights had been delivered to the Defendant, the Plaintiff received invoices from the Factory and in turn invoiced the Defendant. The relevant invoice issued by the Plaintiff to the Defendant, number 98GDWL0864/5, 98GDWL0862/3, dated 5th November 1998 for 3100 lights was for USD 40,147.42 after taking into account a deduction of USD 2,309.67 (page 41 of the Agreed Bundle of Documents).

19. In further support of its claim, the Plaintiff relies on three letters said to be admissions by the Defendant of the Plaintiff's rights under the Purchase Order (pages 44, 45 and 46 of the Agreed Bundle of Documents). The letters were dated 7th June 1999, 18th November 1999 and 29th November 1999 respectively and were all signed by Mr. Ching. I shall return to these letters when I deal with Mr. Ching's evidence.

20. In reply to the question of Mr. Chan, solicitor for the Defendant, as to why the Defendant would be so foolish as to lower its profit margin by ordering through the Plaintiff when it was already dealing directly with the Factory, Ms. Lam responded by saying the Plaintiff did not mind its customers having direct contact with the Factory because of their good relationship. In any event, Ms Lam says, the Factory chose not to sell to the Defendant directly because it did not want to bear the risks of non-payment.

The Defendant's case

21. Mr. Ching senior, Mr. Ching and Ms. Ching gave evidence for the Defendant. They adopted their witness statements and also gave oral evidence.

22. According to Mr. Ching senior, the Defendant has never ordered any lights from the Plaintiff because the Defendant has always dealt directly with its suppliers including the Factory. He explained the low profit margins of lighting goods meant the Defendant would, without exception, order directly from its suppliers instead of through a third party.

23. Mr. Ching senior says the Defendant and the Factory went back more than ten years and enjoyed a very good and trusting relationship before the latter went into receivership. For tax purposes, the Factory used to appoint third parties such as the Plaintiff to export its lights and to receive payments on its behalf. Mr. Ching senior does not deny the existence of previous dealings between the Plaintiff and the Defendant for lights made by the Factory but says the Plaintiff acted as an exporter of the Factory on all these occasions as it did for the Purchase Order and like the arrangement under the Purchase Order payments for the previous orders were made to the Plaintiff upon direction of the Factory.

24. Mr. Ching denies telephoning Ms. Lam in July 1998 regarding the Purchase Order. Like his father, Mr. Ching is adamant that the Defendant only deals directly with its suppliers including the Factory.

25. Mr. Ching admits he wrote the two letters dated 7th June 1999 and 18th November 1999 but denies writing the letter dated 29th November 1999. He says the last letter was written by the Plaintiff but signed by him.

26. The letter dated 7th June 1999 was addressed to the liquidator of the Factory putting forward proposals to resolve several issues namely, monies outstanding from the Factory to the Defendant's subsidiary, the payment for the Purchase Order and the return of the Defendant's goods stored at the Factory. Mr. Ching did not receive any response to this letter so he wrote another letter on 18th November 1999 this time not only to the Factory's liquidator but also to the Plaintiff and the former management of the Factory. The proposals made in the June letter were repeated in this letter. Around this time Mr. Ching says someone whom he believes to be Ms. Lam's superior telephoned to discuss the payment issues. As a result a meeting attended by himself, the Plaintiff's general manager, the liquidator and representatives of the Factory was arranged. During the meeting Mr. Ching says he repeated the proposals set out in his June letter.

27. Subsequent to the meeting Mr. Ching says he received a draft letter from the Plaintiff which he signed. This was the letter dated 29th November 1999. The letter, which was addressed to the Plaintiff, explained the reason why payment had not been made to the Plaintiff was because the Factory owed the Defendant certain sums of money. Mr. Ching explains the three letters have to be read together and in context. He insists that the Defendant was not admitting the Plaintiff's entitlement to payment under the Purchase Order in any of these letters but was merely acknowledging the Plaintiff's right to receive payment upon instructions of the Factory.

28. In her evidence Ms. Ching refers to a fax dated 11th November 1998 addressed to her (page 21 of the Agreed Bundle of Documents). The fax was from a Ms. Au of the Factory informing Ms. Ching that the Plaintiff had been instructed of the deduction to be made to the price under the Purchase Order. In the same fax Ms. Au also directed the Plaintiff to settle payment for the lights by telegraphic transfer.

Findings

29. On the evidence I find that the Purchase Order was made between the Defendant and the Factory as buyer and seller respectively for 3100 lights. I am not satisfied that there was an agreement between the Plaintiff and the Defendant for the sale and purchase of the subject lights under the Purchase Order. I also find that the Defendant has had a long and established relationship with the Factory at the time of the Purchase Order and that it was the Defendant's practice to order its lights directly from its suppliers including the Factory.

30. According to Ms. Lam the 3100 lights under the Purchase Order was not shipped until early November 1998 when the letter of credit open by the Defendant had already expired. As a result, she agreed with Mr. Ching that telegraphic transfer should be made instead. Ms. Lam says she had also agreed to deduct USD 2,309.67 from the Purchase Order as compensation for the delay. Ms. Lam's evidence in this respect is clearly contradicted by the fax dated 11th November 1998 sent by the Factory to Ms. Ching. It is evident from this fax that it was the Factory, not Ms. Lam, who worked out the deductions to be made on the Purchase Order and informed the Plaintiff accordingly. It is also clear from this fax that it was the Factory, not Ms. Lam, who decided that payment should be made by telegraphic transfer. The fact that it was the Factory who made these decisions, particularly the alternative mode of payment, is consistent with its capacity as seller and contracting party of the Purchase Order. I agree with Mr. Chan for the Defendant this fax demonstrates that the Plaintiff was merely acting under the instructions of the Factory and had no say as to the matters under the Purchase Order.

31. It inconceivable that a company such as the Plaintiff would instruct its customers to contact and order directly from its suppliers simply for the sake of convenience. One of the most fundamental responsibilities of a seller is to take orders from its customers. It is difficult to imagine the Plaintiff, with its resources and manpower, would shift such a basic and simple duty to its supplier.

32. According to the evidence of Ms. Lam, the Plaintiff enjoyed a good relationship with both the Factory and the Defendant since 1993 and 1995 respectively. It is also the evidence of Ms. Lam that the contract between the Plaintiff and the Factory was to safeguard the Plaintiff's position. I therefore find it illogical as to why the Plaintiff did not consider it necessary to also safeguard its position with the Defendant by having a written agreement. Put it another way why did the Plaintiff feel it had to protect its position by having a written contract with the Factory and not the Defendant particularly when the Plaintiff's relationship with the Factory was longer than that with the Defendant? Ms. Lam's explanation that the Plaintiff's position vis-à-vis the Defendant was protected by the letter of credit is unconvincing because such letter of credit was not open until 11th September 1998, more than one month after the Plaintiff had already entered into a contract with the Factory on 25th July 1998.

33. I accept the evidence of the Defendant's witnesses that the Defendant had been ordering from the Factory for over ten years before the latter went into receivership. Such finding necessarily mean I reject any suggestion by Ms. Lam that the Factory chose to conduct business with the Defendant through the Plaintiff because it (the Factory) did not want to bear the risks of non-payment by the Defendant.

34. If the contract between the Plaintiff and the Factory was a normal sale and purchase contract for 3100 lights, there was no reason why the contract should be valid one year. It is also significant that the contract made no reference to the Defendant. Since details of the Purchase Order were discussed between the Defendant and the Factory directly and given the fact that there was no written contract between the Plaintiff and the Defendant, one would expect a parallel contract, which the contract between the Plaintiff and the Factory was, should at least make reference either to the Defendant or to the Purchase Order so as to identify the lights under the Purchase Order.

35. Given Ms. Lam's concession that amendments were frequently made after initial orders had been placed, it is all the more important that there be a written agreement between the Plaintiff and the Defendant specifying what had been agreed or at least identifying the Purchase Order so as to avoid the possibility that the lights under the contract made between the Plaintiff and the Factory being different from those ordered by the Defendant from the Factory directly. I therefore find it incredible that the Plaintiff did not feel the need to have anything in writing with the Defendant.

36. For these reason I am not satisfied on a balance of probability there was a bilateral contract in respect of the 3100 lights.

37. I accept Mr. Ching's evidence that the letter dated 29th November 1999 was drafted by the Plaintiff and signed by him. It is to be noted that the date in respect of this letter, unlike the other two letters, was written and not typed. It is not difficult to imagine that when the Plaintiff drafted the letter it did not know when Mr. Ching would sign it hence the date was not typed and was only written subsequently either when the letter was signed or after it was signed.

38. Mr. Ching says the Plaintiff draftd this letter in order to provide its management with an explanation for the non-payment of this sum of money. That this was the purpose is clear from the content of the letter and also consistent with the Plaintiff's letter to the Defendant dated 1st November 1999 requesting for such an explanation in writing. If, as the Plaintiff claims, the Defendant was admitting the Plaintiff's entitlement to payment, it made little sense why the subject of the outstanding sums from the Factory would need to be mentioned in this letter since, on the Plaintiff's evidence, the contract between it and the Defendant had nothing to do with the Factory.

39. I do not read the two letters dated 7th June 1998 and 18th November 1998 respectively as amounting to admissions by the Defendant of the Plaintiff's entitlement under the Purchase Order. The second paragraph of the June letter refers to outstanding sums for the four containers of lights which would be paid to the Plaintiff upon settlement of the other matters raised in that letter. Against the background of this case, an acknowledgement that payment would be made to the Plaintiff is not tantamount to an admission that the Plaintiff was the contracting party under the Purchase Order. Rather, the second paragraph of the June letter is consistent with the Defendant's position that payment for the lights under the Purchase Order was to be made to the Plaintiff upon the instructions of the Factory.

Conclusion

40. For reasons given above the Plaintiff's claim is dismissed. There will be an order nisi that the costs of the action (including costs previously reserved) be to the Defendant to be taxed on party-to-party basis, if not agreed.

41. The costs prior to 2nd April 2001 should be taxed on the Court of First Instance scale.

42. The order nisi to be made absolute within 14 days of this judgment.