XCHRX JACALYN E.S. BENNETT & CO v. KASHO & SAMNONG LIMITED AND ANOTHER

A 6883 of 1993

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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JUDGMENT

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Background

1. The plaintiff designs and sells garments in the United States of America. The first defendant is a Hong Kong company engaged as trader and agent in the garment business. The second defendant is also a Hong Kong company. It is a manufacturer of garments.

2. The plaintiff makes claims against the first defendant on the basis on an agency agreement, and various claims against the second defendant. I will deal with the agency claim firstly.

Claim Against First Defendant

The Plaintiff's Allegations

3. By an agreement in writing dated 1 February 1990 (the first agreement), the plaintiff engaged the first defendant as an agent for the procurement of garments manufactured in Far East.

4. The plaintiff says that, since February 1990 and pursuant to this agreement, the plaintiff "has supplied and/or paid for many millions of yards of raw materials.". The plaintiff alleges that, pursuant to the agreement, "the plaintiff has placed orders for the production of wearing apparel with and through the first defendant. Pursuant to those orders completed garments have been delivered to the plaintiff. The quantity of materials required to fulfil such orders is less than the quantity of materials actually supplied and/or paid for by the plaintiff leaving a balance of material unused. Some of these materials have been returned to the plaintiff leaving an outstanding quantity of materials unaccounted for.".

5. The plaintiff says that, in breach of the agreement, and despite demands, the first defendant has failed to return or otherwise account for this remaining material. Particulars of the material not accounted for are given; a total of 908,928 yards of a value of US$1,144,852.

6. The plaintiff says it has suffered loss and damage by reason of the alleged breach, that the first defendant has failed to account, and that the plaintiff has suffered loss and damage by reason of that failure. The relief prayed for is against the first defendant only.

7. The plaintiff alleges that, on 31 March 1992, it and the first defendant signed a document called a "release" under which the first agreement was terminated. This release recorded that the first defendant would remain "responsible according to past practices for garment orders received by [the first defendant] from [the plaintiff] prior to 1 April 1992 and for the following specific fabric orders which were placed with [the first defendant] in expectation of subsequent garment orders for [the second defendant]". There follows a description of two lots of material.

8. The plaintiff says that, also on 31 March 1992, another agreement (the second agreement) was entered into by the plaintiff and "the second defendant as principal or alternatively, as agent for the first defendant". This second agreement provided that, from 4 April 1992, the second defendant would transfer custody of certain fabric and lace "which is in its custody or control" to Bennett Lingerie (HK) Limited, a company associated with and acting as agent for the plaintiff, and would give details of other fabric and lace in its "possession or control". The agreement also made provision for further orders given by the plaintiff to the second defendant. The second defendant was to be responsible, amongst other things, for defective merchandise.

9. There is no indication in the second agreement that the second defendant was acting as the first defendant's agent in entering into this agreement. And there is no evidence to this effect.

10. After this, the plaintiff says, the second defendant transferred some material to the plaintiff and used other material in the production of garments, but, despite demand, the second defendant has not delivered up the balance of the material. Relief is prayed for in the statement of claim against second defendant only, although there is no claim against the second defendant on this basis in the Order 14 summons.

11. I do not understand the relevance of the allegation that the second defendant may have been the agent of the first defendant. No pleaded consequences seem to flow from this.

12. There is another agreement (the sharing agreement) pleaded, but Mr Kat concedes that there is an issue fit for trial concerning its authenticity, so he is unable to place an reliance on it.

The Defence

13. The defendants say that the first defendant was the purchasing agent of the plaintiff under the first agreement. "The first defendant handled and/or financed the procurement of the said raw materials for the plaintiff and arranged for the delivery of the raw materials to one company known as Limmoda Limited. . . At all material times, all business dealings were actually carried out between the plaintiff and the said Limmoda Limited. The second defendant was never an agent of the first defendant."

14. The defendants say that the "plaintiff's orders were actually placed with the said Limmoda Limited and its subcontractors. . . the plaintiff issued purchase and production instructions to the first defendant which, as purchasing agent, placed the plaintiff's orders with the said Limmoda Limited and subcontractor factories approved by the plaintiff."

15. The defendants admit that the plaintiff supplied certain raw materials to the first defendant for onward delivery to Limmoda and other production factories approved by the plaintiff, but the production orders were placed by the plaintiff with Limmoda and other companies.

16. The second defendant, the defendants say, dedicated raw material held by it or Limmoda to use in producing the plaintiff's garments and "unused raw materials were returned or referred to the plaintiff for disposal according to routine practice". The second defendant says "that the plaintiff did not maintain creditable records of its own garment fabric utilisation, including wastage, defective fabric yardages and change of measurement specification."

17. The first defendant says that it never took possession of any unused fabrics or unshipped garments. The second defendant says that it has no unused material in its possession.

The Order 14 Summons

18. The defence was filed on 14 September 1993. Nearly two years later, on 6 September 1995, the plaintiff issued a summons seeking judgment under Order 14, and interim payments under Order 29.

19. This summons sought judgments in specific sums, or for damages to be assessed, and interim payments. There was no claim against the second defendant based on the second agreement. There was no claim for an account against the first defendant at that stage. At the hearing on 7 February 1996, the summons was amended to provide for a claim for judgment against the first defendant for US$1,144,852 "and/or an account". Mr Kat concedes he cannot have this sum and an account; only the sum or an account, and the plaintiff has elected for an account.

20. The Master gave "summary judgment . . . for the plaintiff against the first defendant for an account to be taken of what is due to the plaintiff in respect of unused material not returned to the plaintiff", and ordered the first defendant to make an interim payment of US$750,000.

21. On 28 February 1996, another Master granted a stay of execution subject to payment into court of the sum of US$750,000. The payment was made.

The Appeal

22. The defendants now appeal against these orders.

23. In its original notice of appeal, the first defendant mis-stated the effect of the Master's order and asked that the orders by the Master be set aside and that it be ordered that "an account be taken of - all raw material including griege goods, fabric and lace the property of the plaintiff which was received by the first defendant as the purchasing agent of the plaintiff and of the manner in which the first defendant has dealt with the same"; and "all unused material the property of the plaintiff which was received by the first defendant from manufacturers of garment ordered by the plaintiff and of the manner in which the first defendant has dealt with the same", with some ancillary orders. The first defendant also asked for unconditional leave to defend the action.

24. Before me, the first defendant sought leave to amend its notice of appeal to state correctly the Master's order and seeking simply unconditional leave to defend, with an order releasing the money paid into court. Mr Kat opposed the granting of leave on the basis that the notice, as originally framed, contained an admission, and the first defendant should not be allowed to withdraw it.

25. It became clear during the course of argument by Mr Kat that the plaintiff were seeking an account extending well beyond that proposed by the first defendant in the original notice of appeal. Mr Kat conceded that the order originally sought by the first defendant - an account of the property of the plaintiff received by the first defendant - claimed no more than the performance of a duty imposed by law on any agent. I could not understand why it was thought that this should be construed as an admission of fact. Nor could I understand why an appeal should be fought on the basis of whether or not an order should be made that neither party now wanted. I told Mr Kat that, if the first defendant had made an admission of fact, that admission stood, and would be there for the plaintiff to use in these proceedings or at trial. In the result, I allowed the application to amend.

The First Issue: The Ambit of the First Defendant's Duty to Account

26. This argument on leave to amend crystallised the main point at issue between the plaintiff and the first defendant. The first defendant did not, and could not, contest that it had the ordinary duty of an agent to account to its principal for property that it had received from, or on behalf of, its principal. The plaintiff contended for an obligation going far beyond this, although it was never made entirely clear to me where in the plaintiff's pleadings or evidence the precise ambit of the duty to account alleged by the plaintiff was stated in unambiguous terms.

27. The Master's order was "for an account to be taken of what is due to the plaintiff in respect of unused material not returned to the plaintiff". This wording begs the question. The plaintiff contends that one thing is due to it; the first defendant contends that quite a different thing is due. Mr Kat says, and I accept this, that the Master must have meant that what was due to the plaintiff was an account of all material ordered by the first defendant on behalf of the plaintiff and delivered to manufacturers, otherwise he would not have ordered the interim payment of US$750,000.

28. The re-amended statement of claim alleges that the first defendant was obliged to "make known to the plaintiff all material facts related to the agency of which the first defendant was aware including any information which was within or which should have been within the first defendant's knowledge relating to the value of the raw materials and garments it dealt with or was responsible for in the course of its agency" and to "keep and render to the plaintiff a proper account of money or other property which the first defendant had received, or over which it had control, on the plaintiff's behalf or credit such money to the plaintiff's account with the first defendant". These obligations, Mr Kat says, are not express terms of the contractual relationship, but arise by implication of law.

29. There are no allegations the re-amended statement of claim as to precisely what material the first defendant "dealt with or was responsible for" or which it "received, or over which it had control". The only relevant allegation is that "the plaintiff has placed orders for the production of wearing apparel with and through the first defendant. Pursuant to those orders completed garments have been delivered to the plaintiff . The quantity of materials required to fulfil such orders is less than the quantity of materials actually supplied and/or paid for by the plaintiff leaving a balance of material unused. Some of these materials have been returned to the plaintiff leaving an outstanding quantity of materials unaccounted for.". The statement of claim goes on to say that the first defendant has failed to return or otherwise account for this "outstanding" material.

30. It became clear, however, during the course of argument that the plaintiff was maintaining that, if the plaintiff asked the first defendant to order raw material and have it delivered to a manufacturer for use by that manufacturer in making up garments for the plaintiff, the first defendant was responsible for that material, even if it never saw that material, even if it never touched that material, even if it had no physical control over that material in the hands of the manufacturer of the garments. This means, the plaintiff contends, that if the amount of material delivered to the manufacturer is more than is required by that manufacturer to make the garments delivered to the plaintiff, the first defendant must account to the plaintiff for the difference.

31. In my view, this proposition cannot be right. It is not, in my judgment, the nature of the duty imposed on an agent by law. The duty to account relates only to that property of the principal that comes within the agent's control. It is not for the first defendant to account for the manufacturer's use of the material. The manufacturer is not the first defendant's agent for whose actions the first defendant is responsible. At least, this is not the basis on which the plaintiff pleads its case, and it does not plead any other basis for the first defendant being liable to account for material in the control of someone else. It is not, and it is not alleged to be, a duty expressly imposed by the contractual relationship between the plaintiff and the first defendant. Nor can it be said that it is an obligation that should be implied. One can imagine the reaction of a reasonable man in the position of the first defendant if it had been said to it at the time the contract was entered into that it would be responsible to the plaintiff if a manufacturer making garments for the plaintiff did not make proper use of the material delivered to it. I think a reasonable man would have said - "What? You must be mad! I'm not undertaking responsibility for something over which I have no control! That's a matter between the manufacturer and the buyer; it has nothing to do with me."

32. In my view, far from the difference between the contentions of the plaintiff and the second defendant as to the scope of the first defendant's duty to account not raising an issue fit for trial, the pleaded allegations of the plaintiff do not raise the case it now seeks to make out at all. Nowhere is it said in clear terms that the plaintiff alleges that the first defendant is under a duty to account to the plaintiff for all material ordered by it on behalf of the plaintiff and delivered to manufacturers on behalf of the plaintiff. And nowhere is there any basis pleaded for such an allegation; for example, that the first defendant is responsible for any material in the hands of manufacturers because the manufacturers were the first defendant's agents. And if it did try to allege that the second defendant is liable to account for all material ordered by the second defendant and delivered to manufacturers on the plaintiff's behalf, whatever the circumstances, and without stating clearly why it says that this is so, it would have grave difficulty in doing so without facing the risk of being struck out.

The Second Issue: For What Must the First Defendant Account?

33. Apart from the issue as to the scope of the duty to account, it appears that there is another issue between the parties. Assuming that there is a duty to account as contended for by the plaintiff, has the first defendant failed to so account?

34. Mr Hier, who is the chief executive officer of the plaintiff, in an affidavit in support of the application for summary judgment says that the first defendant is "justly and truly indebted" to the plaintiff in the sum of US$1,144,852 in respect of material for which it was responsible. He says that the defendants "had an obligation to account to the plaintiff for materials supplied to the first and second defendants" and he points to the alleged obligations implied by law. He goes on to say that the second defendant had a contractual obligation to account to the plaintiff for fabric and lace in its custody or control. Mr Hier says that the plaintiff "has kept complete records of the amounts of fabric ("yardage") and value (at cost) at the various stages of dealing with material". He produces a document( APH4), which he says he has checked, and which he confirms is accurate. This document is the basis for the claim of US$1,144,852. It replaces the schedule to the statement of claim, and covers a different time period. Although APH4 covers a different time period, remarkably, the same figure of US$1,144,852 is reached. I do not understand how this can be so, and it was not explained to me.

35. APH4 is a strange document. It purports to show the deficiency of yardage between material delivered, on the one hand, and that used and returned, on the other, but, oddly, in many cases, more material was returned than should have been available after use. As will appear presently, this document is hardly worth the paper on which it is written. It is hopelessly flawed.

36. On 27 March 1996, that is, after the Master's granting of summary judgment, an affirmation was filed by Mr Koh, a director of both defendants. He challenged many of the figures in APH4. As a result of this, Mr Hier filed a further affidavit on 3 June 1996. He says that he agrees that reductions should be made to APH4 totalling US$618,894, leaving a balance claimed of US$525,958. He apologises for the errors in the original claim. He says these were inadvertent and resulted from record keeping deficiencies. He now swears that it is the balance of US$525,958 that is due. This is an extraordinary climb-down. The plaintiff now says that a lot less than half of what it originally claimed, and that it swore was due and owing, is actually due. It concedes that the very large sum of US$618,894 was wrongly claimed. In these circumstances, I have to wonder what further damage would be done to the plaintiff's case during a proper examination of its claim at trial.

37. This leaves me having very little confidence in the reliability of Mr Hier or the plaintiff.

38. The result is that there is certainly an issue fit for trial on whether or not the plaintiff is due anything at all, even on its own contention as to the duty of the first defendant.

The Plaintiff's Bottom Line: The Pentana Fabric

39. Mr Kat says that, at the very minimum, the plaintiff is entitled to judgment in relation to certain fabric said to be held by a company called Pentana, one of the plaintiff's manufacturers in Thailand.

40. Mr Koh says that, when the plaintiff started to dispute raw material quantities and liability, the manufacturers were requested to check if they had raw materials left over from production on behalf of the plaintiff, and, if they did, to freeze the materials until clarification was achieved with the plaintiff. It appears that, on 15 October 1993, the second defendant wrote to Pentana saying "No disposal or movement involving this fabric may take place without express instruction from us. Our purpose is to shield you from legal involvement in a dispute between ourselves and the Bennett company." On 3 January 1996, the second defendant wrote again to Pentana saying "We have no objections to authorised Bennett representatives taking over the materials from you provided they sign receipts showing a true count by you of the materials released and that we be given a full set of such receipts". Mr Kat says that the plaintiff no longer wants this material, but wants payment of money.

41. Mr Kat says that this action by the second defendant amounts to conversion. I am not sure that it does. When the second defendant wrote its letter on 15 October 1993, the parties were immersed in litigation. Holding the status quo while that litigation was pending is not unambiguous evidence of conversion. It may be that conversion could be established, but that would be a matter for trial.

42. With an affidavit dated 12 December 1996, Mr Hier produced an inventory, which he says was clearly produced after 25 April 1992, but before 26 August 1992, that records that this fabric may have been damaged and returned to the manufacturer. So it may emerge at trial that this fabric was disposed of in this way.

43. In any event, the Order 14 summons does not seek any judgment against the second defendant on the basis of conversion, and the statement of claim does not seem to make any claim against the second defendant on the basis of conversion of this fabric. The cause of action arose after the writ and original statement of claim were filed. If the plaintiff wishes to raise this allegation of conversion at trial, perhaps it should amend its claim.

The Conduct of the Parties

44. I asked Mr Kat to show me, in the contemporaneous documents, examples of the first defendant giving an account of materials that were in the hands of manufacturers, or of the plaintiff complaining that the first defendant had not done so. Mr Kat struggled manfully through many of the many documents before me, but, in the end, I was not able to see any clear evidence of the plaintiff seeking to exercise the right it now contends that it had, or making unambiguous complaints that the first defendant was not fulfilling its duties in this regard.

45. Mr Kat sought to show that the practice of the parties demonstrated clearly that the obligation contended for by the plaintiff was recognised by the first defendant. I do not think he succeeded in this exercise. In any event, if a party seeks to rely on a practice creating an obligation arising from a course of dealing, this must be pleaded, and that has not been done here.

The Result: First Defendant's Appeal

46. As I think I have indicated, I believe that the first defendant has established that there are clear issues fit for trial. It may be that it has even gone beyond this and established that the plaintiff has no case on its pleaded allegations. I am satisfied that the first defendant is entitled to unconditional leave to defend, and this is granted. The Master's orders are set aside.

47. The sum of US$750,000 paid into court by the first defendant is to be paid out to it.

Claims Against Second Defendant

The Two Production Orders

48. As I have recited above, and repeat here for convenience, the plaintiff says that, on 31 March 1992, another agreement (the second agreement) was entered into by the plaintiff and "the second defendant as principal or alternatively, as agent for the first defendant". This second agreement provided that, from 4 April 1992, the second defendant would transfer custody of certain fabric and lace "which is in its custody or control" to Bennett Lingerie (HK) Limited, a company associated with and acting as agent for the plaintiff, and would give details of other fabric and lace in its "possession or control". The agreement also made provision for further orders given by the plaintiff to the second defendant. The second defendant was to be responsible, amongst other things, for defective merchandise.

49. There is no claim in the Order 14 summons against the second defendant on any basis other than in respect of these allegedly defective goods.

The First Order

50. Pursuant to the second agreement, the plaintiff says that, on 4 May 1992, it ordered 27,732 brassieres from the second defendant (the first production order). The order included instructions for the construction of the garments and a sample garment. The plaintiff says that these garments were faulty, and gives details. The plaintiff says, in this respect, it has suffered loss and damage in the sum of US$128,236.68 in respect of which it issued a debit note to the first defendant "an associated company of and acting as agent for the second defendant". The plaintiff says it made demand upon the "first and/or second defendants" but the "first defendant" has refused to pay. The relief is prayed for against the second defendant.

51. The plaintiff goes on to allege that "in any event" the second defendant accepted responsibility by signing a "letter of guarantee".

The Defence

52. Regarding the first production order, the defendants say the goods were not defective and were manufactured according to the design and specifications of the plaintiff. In relation to the "guarantee", the second defendant admits it signed it, but says that it was signed by an unauthorised person. It is also alleged that it was signed under economic duress.

The Second Order

53. The plaintiff alleges that, on about 4 May 1992, it ordered from the second defendant 5054 sets of brassieres and pants (the second production order), but when these were delivered they were also faulty in that the material was badly streaked. The plaintiff says it has suffered loss and damage here amounting to US$24,204.60. Again the relief prayed for is against the second defendant.

The Defence

54. The garments delivered under the second production order were not, the defendants say, defective, and were made according to the design and specifications of the plaintiff.

55. In both cases, the defendants say that, if the goods were defective, the defects could be remedied, or sold to other customers.

Summary Judgment

56. Summary judgment was entered against the second defendant in respect of these claims for damages to be assessed, and the second defendant was ordered to make an interim payment to the plaintiff of US$75,000.

57. The second defendant appeals against this.

The Evidence

58. Mr Hier says he saw the goods and confirms they were defective. He does not say specifically that he inspected personally 27,732 brassieres. I doubt it. Apparently, 12,085 brassieres were inspected by unnamed employees of the plaintiff, and defects were found. It is not said on how many garments these defects were discovered; only that the audit was "based on" inspection of 12,085 brassieres.

59. The "guarantee" relied upon by the plaintiff is a document that records that "On inspection of goods against the above-mentioned shipment, we particularly noted the following discrepancies - Incorrect tunnel construction and under wire twisted when worn." The shipped quantity is said to be "9656/18076 pcs". The document goes on to say that "We have allowed these goods to ship forward but will hold you responsible should there be any complaint from our customer. . . . Please confirm your acceptance of responsibility by signing over your company chop and returning to us the enclosed copy of this letter." Endorsed on this document is "Above saids are confirmed and agreed by" and this is signed by someone for the second defendant.

60. In respect of this matter, Mr Koh wrote to the plaintiff on 1 March 1993 saying "we have found that the product throughout its manufacture conformed to you approval specifications of production. As issues of design are involved in the questions you raise".

61. Regarding the second order, Mr Hier again confirms that the defects alleged, being that the silk fabric was badly streaked, are accurate. Again, I doubt if Mr Hier inspected 5054 sets of brassieres and pants.

Assessment

62. The case of the plaintiff on these matters is not satisfactory. Apparently, there has been no survey of the alleged defects by an independent third party. It is not clear to me on acceptable evidence how many of the garments are alleged to be defective. The plaintiff, through Mr Hier, has proved itself not to be reliable when assessing its own case.

63. The "guarantee" is not, of course, a guarantee. It is an admission, or, possibly, a collateral contract. It will be useful for the plaintiff at trial, but it cannot found a basis for summary judgment in view of the defences raised by the second defendant. It is not clear what this document is to be taken to say. It does not say how many garments had "Incorrect tunnel construction and under wire twisted when worn", or how serious the alleged defect was. On the probabilities, it cannot be that the defect applied to so many garments, or that the defect was so serious, that it was obvious that the shipment was unmerchantable. If this were the case, there would be no point in incurring the expense of sending the garments to the customer. The document seems to say - "There is something wrong here, but let us see what the customer says.".

64. The second defendant raises defences, which, if accepted at trial, are good defences. I am certainly not in a position, at this stage, to say that the issues raised by the second defendant are not fit for trial. It cannot be said that the defences are shadowy. They are either good, or they are not, and it is not possible to say which at this stage. On this basis, the second defendant is entitled to unconditional leave to defend. I grant this. The Master's orders are set aside. The second defendant is to be repaid the US$75,000 paid into court.

Costs

65. The parties are agreed that I should reserve the costs at this stage. I do so.