OHASHI CHEMICAL INDUSTRIES (HK) LTD. v. TO LAI SZE, LOUISE t/a SHUN CHEONG COMMERCE & CO.

1995, No. A2226

IN THE HIGH COURT OF

THE HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

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J U D G M E N T

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1. The plaintiff in this matter is a trading company incorporated in Hong Kong with limited liability, and it sues the defendant, who is the sole proprietor of the defendant company, which is also established in Hong Kong, for the price of goods sold and delivered. The goods in question are evidenced in three invoices which were sent by the plaintiff to the defendant, the first invoice dated 23rd July, 1993, being in respect of 20 litres of clear lacquer sold at a price of $88,500; the second invoice dated 12th October, 1993, being in respect of 25kg of emulsion paint sold for $16,500; and the third invoice dated 25th December 1993, also in respect of 25kg of emulsion paint, sold for $20,000.

2. There is no dispute that the goods in question were never, in fact, delivered to the defendant: they were delivered to a company in the People's Republic of China (which the defendant has referred to "as the factory in China" throughout these proceedings) called the "Nan Hai Shun Chang Basketware Company Limited",(which I shall refer to as "Nan Hai") and it is the plaintiff's case that the goods were sent to Nan Hai on the specific instructions of the defendant when the defendant ordered the goods. Nan Hai is incorporated in the People's Republic of China, and as I was informed by the defendant when she gave evidence in this matter, she is a shareholder of Nan Hai.

3. It has also not been in dispute that there was a well established previous course of dealings between the parties in this matter prior to the purchase and delivery of the goods in question. Since approximately the end of 1990, the plaintiff has been regularly delivering goods of precisely the same nature, namely clear lacquer and emulsion paint, to Nan Hai in China. The plaintiff alleges that all such goods were ordered by the defendant, and that it duly sent the invoices to the defendant seeking payment for the goods, and the defendant without exception, duly settled the invoices.

The defendant in her pleaded defence denies that she ever ordered any of these goods from the plaintiff, either in the previous course of dealings, or the goods in question. She alleged that the contracts for the purchase and sale of these goods took place directly between the plaintiff and Nan Hai. While she conceded that she did settle all of the invoices which were sent to her by the plaintiff (apart from the three in question), she alleges that to plaintiff's knowledge she did so acting as an agent for Nan Hai; and she further alleges that the invoices, which were admittedly sent to her by the plaintiff, were purely copy invoices, sent to her for reference purposes, in order to facilitate her effecting payment for the goods as the agent of and on behalf of Nan Hai.

4. She denies, not only that she ever ordered any of the goods, but also that she ever accepted or undertook any liability to the plaintiff to pay for the goods. Alternatively, (as she pleaded in her amended defence), if in fact a contract for the purchase and sale of the goods in question did exist between the plaintiff and the defendant as alleged by the plaintiff, she alleges that it was an implied term of that contract that the goods would be reasonably fit for the purposes for which the purchaser required them, and that they would be of a merchantable quality; and further, that the goods in question, in breach of both those implied conditions, were not reasonably fit for the purpose for which they were intended nor were they of a merchantable quality, (the particulars of which defects are pleaded in the amended defence); and that on that alternative ground also, the defendant is not liable to pay the plaintiff for the price of these goods.

5. Mr WONG Kwok-hung gave evidence on behalf of the plaintiff to the effect that he was the sales manager of the plaintiff at all the material times, and had been employed in that position since March of 1989, although he has subsequently ceased to be employed by the plaintiff. As sales manager, he was responsible for overseeing the sale of all the plaintiff's goods to its customers. He confirmed the course of dealings between the plaintiff and the defendant since some time in 1990, and said that it was an active trading relationship, that goods were sent once or even twice a month over this period by the plaintiff to the factory in China, and that every time, without exception, the purchase price for the goods was settled by the defendant in accordance with the invoices which the plaintiff had, in the normal way, sent to it.

6. At no stage in the course of this trading relationship, said Mr WONG, did the defendant ever indicate that it was anything other than the other contracting party, and at no time indicated that it was acting simply as an agent of the Nan Hai factory in China to effect payment of these bills on its behalf.

7. Mr WONG explained that at the outset the initial order for the goods in question was placed with the plaintiff by a Mr CHOW, who introduced himself to Mr WONG as the boss of the defendant's company. Mr WONG testified that since it was an initial order, it was important to get all the relevant details, and he obtained these from Mr CHOW, including the address of the defendant. Mr CHOW, he said, indicated that the goods should be delivered to "our China factory" and gave the address of the factory in China.

8. There was no dispute that the invoices for the first orders were duly sent to the defendant company in Hong Kong and settled by the defendant. Mr WONG explained that, thereafter, he did not play any personal part in securing or receiving any further orders from the defendant. He said that this was handled by a salesman called Mr TAM, who is no longer employed by the plaintiff, and was not available to give evidence in these proceedings.

9. The system, he explained, was that once Mr TAM had secured or received orders, the next step was that a sales order was prepared by the plaintiff. This was a document purely for the internal purposes of the plaintiff, the purpose of which was to reflect the order that had been made, and no copy of this document was ever sent to the other contracting party.

10. He produced the relevant 3 documents in relation to each of the three orders of goods in question. In relation to each order, a document, headed "Sales Order", all bearing the dates corresponding to the dates of the invoices which I have already described, all bearing the name of the defendant at its address in Fanling as being the ordering party, and describing the nature and quantity of the goods and the price charged for them.

11. In addition, there is a Delivery Order in respect of each such order for goods. Mr WONG explained that the clear lacquer was not manufactured by the plaintiff, but imported by the plaintiff from Taiwan, and it was delivered from Hong Kong to Nan Hai in China as part of its service, and it is for that reason in respect of 20 litres of clear lacquer (described as "rattan paint"), that the delivery order dated 23rd July, 1993, contains the name of the Nan Hai factory in China as the receiving party, since this had to be made clear for the purposes of clearing the border when the goods were delivered. The other two delivery orders, both in respect of the two quantities of emulsion paint, were both documents of the plaintiff's factory in China which manufactured this paint, and from where the orders were despatched directly to the Nan Hai factory in China. Both these delivery orders bear an endorsement that the "goods receiving unit" was the "Shun Chang Company", being a reference to the defendant company.

12. The delivery orders all bear signatures to show that the goods were duly received, and the signatures were of personnel, so far as Mr WONG knew, of the employees of the Nan Hai factory in China, who actually received the goods.

13. Finally, the third document in each of these three sets was the Invoice, and all these invoices which I have already described, were addressed under the reference "Customer" to the defendant at it's place of business in Fanling. These invoices, Mr WONG explained, were sent to the defendant in order to seek payment for the goods in the normal way, at the end of the month in which the order was made, or at the beginning of the following month, and each of these invoices were checked and signed by him personally. (There was no dispute that each of them does bear his signature.)

There was no dispute that, in fact, no payment has ever been made in respect of the three orders in question. The defendant testified that the reason for this was that the Nan Hai instructed her not to make payment for these three orders because the goods which had been delivered were of inferior quality.

14. Mr WONG testified that the plaintiff never at any time received any complaint or any hint of dissatisfaction from either the defendant or Nan Hai in relation to these goods, and the first time any complaint was made in relation to the quality of the goods was on 12th April, 1995, when it was raised by the defendant's solicitors in reply to the plaintiff's formal demand for payment.

15. Mr WONG explained that if any such complaint had been made, he would have immediately taken action on it by going to China to inspect the goods in order to determine whether they were defective, and if he found that they were defective, he would have arranged for them to be returned to the plaintiff's premises and for replacement goods to be supplied. However, he said that that was never done for the simple reason that no complaint was ever received in respect of these goods.

16. It was put to him in cross-examination by Miss TO, that complaints may well have been made by the Nan Hai factory in China to the salesman, Mr TAM, to which suggestion Mr WONG replied that it was inconceivable that such complaints had been made to Mr TAM because he was certain that if they had been, Mr TAM would have referred the matter to him immediately. He explained that it would have been in Mr TAM's own interest to do this because he was remunerated on a commission basis, and he only received his commission upon completion of the contract of sale, namely after payment had been made for the goods; until that time he did not receive any commission.

17. Therefore, if the factory in China had been dissatisfied with the goods, Mr TAM would have necessarily wanted to see the matter settled one way or the other, either to see the goods replaced with goods which did satisfy the factory, and which would have led to due payment for the goods, or, even if it was not accepted by the plaintiff that they were defective, he would nevertheless have communicated the matter to the plaintiff to enable it to take appropriate action to obtain payment for the goods, so that Mr TAM could get his commission, one way or the other.

18. Mr WONG further testified - and this was not disputed by Ms TO - that when the plaintiff pressed the defendant for payment for the goods, the defendant never intimated at any time that it was refusing to pay because the goods which had been delivered were of an inferior quality.

19. Mr WONG testified that he himself spoke on one occasion to the accounts staff of the defendant company and pressed them to pay the invoices in question, and all that he was told was that the company was not in a position to pay immediately, and would pay later. There was never any hint of dissatisfaction with the quality of the goods which had been delivered.

20. Mr WONG explained that when the second order of goods was sent to Nan Hai, although the defendant had not yet paid for the first order, since the defendant had already indicated at that stage that it would pay for the first order at a later stage, plaintiff decided to send the second order of goods to Nan Hai. The same question arose, explained Mr WONG, in relation to the third order, since payment had not been effected for either of the earlier two orders and, since the matter was more serious at that stage, he said that he had a meeting with his boss, Mr LEE, to determine whether that third order should be fulfilled and, again, on the undertaking of the defendant that it would pay for the earlier two orders as well as for the third order if the plaintiff fulfilled it, they decided that the third order should be fulfilled. The products in question were therefore duly delivered to Nan Hai.

21. He explained that the invoices were sent only to the defendant because, as far as the plaintiff was concerned, the defendant was the purchaser of these goods at all times, and it was the defendant who settled payment for the goods at all times. Invoices were never sent, and payment was never sought from Nan Hai. Mr WONG said that it was a strict policy of the plaintiff not to accept orders from any purchasers in China, but only from Hong Kong.

22. Ms TO produced a number of copies of invoices of the plaintiff which were addressed to Nan Hai in China, which she put to Mr WONG in cross-examination, in order to contradict his allegation that invoices were never sent to Nan Hai; and she alleged that she had been given these invoices by Nan Hai, specifically in response to her request for evidence to contradict the plaintiff's allegations as contained in its pleadings.

23. Mr WONG demonstrated that all of these "invoices" which were produced by Ms TO are headed "EX", being short for "export", and they are all accompanied by a document headed "Packing List", and he explained that these were simply copy invoices provided to the drivers for the sole purpose of enabling the goods to transit through Chinese Customs at the border post, since the Chinese Customs were, at the time in question, very strict, and it was necessary for anybody sending goods through the border to produce documentation which specified precisely the nature and quantity of the goods, the price being charged, and the person by whom and to whom they were being sent.

24. He pointed to the fact that by contrast, none of the three invoices in question, nor the earlier ones which were part of the previous course of dealings (and two of which are also contained in the plaintiff's bundle of documents as pages 1 and 2), bear this endorsement "EX" for "export", since these were all normal invoices sent to the defendant in order to seek payment for the goods in question.

25. Mr WONG also alleged, and this was not in dispute, that it was necessary to obtain import licence granted by the relevant authorities of the People's Republic of China before any goods can be exported from Hong Kong to China (this only applied, of course, to the clear lacquer, which was the only product sent by the plaintiff from Hong Kong). He said that the licence in question was in each instance granted by the Chinese authorities to the defendant, and that the plaintiff would have to obtain a copy of the licence from the defendant in each instance.

26. The defendant, Ms TO, was the sole witness to give evidence on the defendant's behalf. She confirmed that she is the sole proprietor of the defendant, the main purpose of its business being to import arts and crafts products from the People's Republic of China for resale to overseas customers. She explained that the Nan Hai Shun Chang Basketware Company Limited, is a company incorporated in the People's Republic of China with its place of business in Nan Hai Province, and that it is one of the suppliers of arts and crafts products from China to her company in Hong Kong. She has been doing business with it since 1991, and she is a shareholder of that company.

27. She explained that as an overseas Chinese, she was extended privileges which are not available to local people in China. She further said that she deliberately adopted the same name, or a very similar name, namely "Shun Cheong", for her company in Hong Kong, as the name of the company in China, because this would be to the advantage of her business in Hong Kong, to demonstrate that she had a close connection with a major supplier in the People's Republic of China, which would give her customers, in Hong Kong and overseas, confidence that supplies of the products would be assured and would be of good quality.

28. She explained that to settle payment for the goods which her company ordered from Nan Hai, she had an agreement with Nan Hai that she would either pay the money into bank accounts in Hong Kong as nominated by Nan Hai; or as an alternative method of settling her company's indebtedness to Nan Hai, she would effect payment for goods which had been ordered by Nan Hai from companies in Hong Kong, by issuing cheques directly to Nan Hai's creditors in Hong Kong, and would set these payments off against her company's indebtedness to Nan Hai.

29. The plaintiff was one of those creditors of Nan Hai and it was under the aforesaid arrangement that she had with Nan Hai that she came to effect payment for the goods which were delivered during those years by the plaintiff to Nan Hai. She did not dispute that apart from the 3 invoices in question, she settled all the invoices which were submitted to her by the plaintiff for the goods which had been supplied to Nan Hai, though she alleged that in addition to those transactions there were other instances where the plaintiff directly invoiced Nan Hai and received payment direct from Nan Hai.

30. This was not in fact put to Mr WONG, who made it clear that all invoices were sent by the plaintiff to the defendant and were all settled by the defendant. He denied that there had ever been any contractual dealings directly with the Nan Hai company in China.

31. Ms TO alleged that the plaintiff knew about this arrangement that she had, whereby she acted as the agent of Nan Hai in effecting payment on their behalf for their purchases from the plaintiff, and that the plaintiff would send only the copy invoices to her to facilitate her making payment under this arrangement. She denied that she, or her company, had ever placed any orders for goods from the plaintiff, either for the defendant or on behalf of Nan Hai company.

32. She explained that when she received the three invoices in question from the plaintiff, she telephoned the assistant foreman of the Nan Hai company in China, who told her that the goods were of a poor quality and not acceptable to Nan Hai, and that no payment should be made to the plaintiff, and she accordingly ignored the three invoices.

33. Although it was hearsay evidence, I recite for completeness that she alleged that Mr TAM telephoned one of her staff members in 1993, asking when payment would be settled for the invoices in question, and she alleged that Mr TAM was told that no settlement would be forthcoming because of the poor quality of the goods.

34. On 20th December 1994, the plaintiff's solicitors sent a formal letter of demand to the defendant company. On 28th December 1994, the defendant replied that:

"Our records do not show any outstanding payments owed. Can you be kind enough to forward us information related to your claims and we will be happy to investigate this further for you."

35. Thereafter, on 9th January, the plaintiff replied, and sent the defendant copies of all the documents in question, namely the invoices, the sales orders, and the delivery orders. The defendant confirmed in her testimony that her company had never, in fact, responded to that letter.

36. Mr WONG was an excellent witness for the plaintiff, in my view, and I have no doubt at all that he was telling the truth about all the matters which he testified to.

37. The evidence shows, and indeed it was not disputed, that there was a very well-settled course of conduct or pattern of business between the plaintiff and the defendant prior to the orders in question being made, whereunder the plaintiff delivered goods of exactly the same nature as the goods in question to the Nan Hai factory in China and on every occasion the payment for the goods was settled by the defendant.

38. It was the defendant whom plaintiff invoiced for the goods and the defendant who paid for them on every occasion, and at no time did the defendant ever intimate to the plaintiff that it was acting in any special or particular capacity in so doing. In particular, it was never intimated to the plaintiff that the defendant, in paying for the goods, was acting simply as the agent of Nan Hai to effect payment on Nan Hai's behalf.

39. Mr WONG made it clear and I accept his evidence that this trading relationship between the parties was initiated by this man Mr CHOW, with whom Mr WONG dealt directly, and who made it clear that he was acting on behalf of the defendant in ordering these goods. Mr WONG's evidence in this regard is supported by the fact that the invoices for that initial order were indeed sent to the defendant in order to obtain payment for the goods in question, and thereafter once this relationship had been established in this way, the same pattern prevailed whereby the plaintiff delivered the goods to Nan Hai, it was the defendant who was invoiced on each occasion and it was the defendant who settled payment for the goods on each occasion, without ever indicating that she/her company was acting simply as an agent to effect payment on behalf of Nan Hai.

40. There was no dispute that there was nothing different about the three orders in question, from all the other orders which had been made in the course of this ongoing relationship between the parties since about some time in 1990. They were apparently the last three orders that were made for delivery of these goods to Nan Hai; and there was no dispute that the goods in question were duly delivered to Nan Hai, as they had been on all previous occasions.

41. I have no reason to believe that Ms TO was not telling the truth in respect of her evidence, which I accept, that she never placed any order and to her knowledge, no member of her staff placed any order for any of the goods in question with the plaintiff company.

42. She testified that Mr CHOW was not a member of her staff at the time in late 1990 when Mr WONG says that Mr CHOW placed the initial order with plaintiff on behalf of her company. She went on to explain that she does now employ a person called Mr CHOW and has done for the last two years, but she does not know, and is not able to say whether he is the same Mr CHOW with whom Mr WONG had dealings at the very outset of the parties' business relationship.

43. What is clear in my view is that, albeit that Ms TO never herself placed any direct order with the plaintiff, her company, by its consistent course of conduct over the years since 1990, ratified the contract which had been entered into on behalf of her company by Mr CHOW initially, and thereafter continued to ratify the orders that were regularly placed with the plaintiff company for delivery of these goods to Nan Hai.

44. She knew that the plaintiff looked to her company for settlement of all of the relevant invoices which were sent to it on each occasion in respect of these goods, and she duly settled payment for the goods on each occasion without ever intimating to the plaintiff that she did not accept or undertake liability to do so, and without ever informing the plaintiff that she was only making payment in a particular capacity as agent of Nan Hai to effect payment on its behalf.

45. So knowing that these orders had been placed with the plaintiff purportedly on behalf of her company, knowing that the plaintiff was looking only to her company for payment, she proceeded to ratify the orders that had been made and to effect payment for them.

46. Certainly it is clear to me that in any event, by the consistent course of conduct which I have described over the course of many years, the defendant represented to the plaintiff that she/her company was accepting liability to pay for all the goods which were ordered from the plaintiff to be delivered to Nan Hai. It is also clear that the plaintiff acted upon that representation to its detriment, or certainly its potential detriment. In these circumstances, the defendant is estopped from denying its liability to pay for the three orders in question; which orders, as I have explained, were in no way different from any of the orders which had been previously delivered to Nan Hai and paid for by the defendant.

47. I do note that the plaintiff has not specifically pleaded estoppel as such. However, all the allegations necessary to found the aforesaid estoppel and all the facts relevant to such are clearly set out in the plaintiff's pleadings. (I refer in particular to paragraph 2 of the plaintiff's Reply). The matter was, as I say, clearly pleaded in all but name, the defendant has not, in my view, been in any way prejudiced by the fact that it was not specifically pleaded by name and I did not accede to Mr CHONG's application for leave to amend the plaintiff's pleadings. This was made at a late stage, during the plaintiff's closing submissions. It was not, in my view, necessary or appropriate to delay the matter any further and incur further costs, for the reasons that I have already indicated.

48. The only reason, as was clear from Ms TO's evidence, that she did not settle payment for the three orders in question, as she had done on all previous occasions, was because she was informed that the goods which had been delivered on these three occasions were of an inferior quality.

49. Apart from the hearsay allegations of Ms TO, there has been no direct evidence at all to establish that the goods which were delivered were in any way of an inferior or unacceptable quality, or not of a merchantable quality, or not fit for the purpose for which they were intended.

50. I note that in addition, the goods are still in the possession of Nan Hai in China and that at no stage had there been any effort apparently to return them to the plaintiff, or to request the plaintiff to accept the return of the goods and send substitute goods of an acceptable quality. Mr WONG made it perfectly clear in his evidence that no such request had ever been received from either the defendant or Nan Hai, and that no complaint was ever received by the plaintiff in relation to these goods.

51. He also made the point that the plaintiff was selling the identical type of goods to other customers at the same time as they were sold to Nan Hai on these three occasions, and no complaints had ever been received from any of these other customers.

52. For the reasons I have given, I am satisfied that the plaintiff has discharged the onus of establishing on a balance of probabilities that the defendant is liable to pay for the goods in question which were ordered on its behalf and which orders it ratified, and which liability the defendant is in any event estopped from denying, in the circumstances of this case.

53. The invoices which the plaintiff sent to the defendant, at least as from invoice No. 1 in the plaintiff's document bundle dated 22 May 1993, were all endorsed to the effect that interest of 1.5 per cent per month would be charged on overdue accounts, and Mr WONG testified that he had been at pains to highlight this term by highlighting it with highlight pens in the initial invoices that he sent to the defendant. He said, and I accept that there was never any negative response from the defendant indicating that it would not accept such a term.

54. In these circumstances, in my view, bearing in mind that this same term was inserted in all subsequent invoices including the three invoices in question, without any dissent from the defendant, it was incorporated into the parties' contract, and the plaintiff assumed liability for it.

55. In the circumstances, I grant judgment to the plaintiff in terms of the prayer in its amended statement of claim, namely for the sum of $125,000 and interest on the various sums, as set out in paragraph (b)-(d) of the prayer, and also for costs. (It is unfortunate that such substantial costs on a High Court scale have been run up on a relatively small claim of this nature, but the action has been properly brought in the High Court since it is beyond the jurisdiction of the District Court, and there is no reason to order that costs should do anything other than follow the event.)