KARL RIEKER GMBH and CO. KG v. BONUS GARMENT CO. (a firm)

Civil Appeal No. 153 of 1995

Headnote

The plaintiff sued the 1st defendant for breach of contract as principal and, in the alternative, the 2nd defendant in damages for breach of warranty of authority as agent. Held (by a majority) following Morel Bros Co Ltd v Earl of Westmoreland [1903] AC 11 that the entry of default judgment by the plaintiff against the 2nd defendant barred the plaintiff from proceeding against the 1st defendant, the causes of action being in the alternative and inconsistent with each other.

IN THE COURT OF APPEAL

1995, No. 153
(Civil)

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J U D G M E N T

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Nazareth, V.-P.:

1. This is an appeal by the 1st defendant against two orders of Leong J. The first was made on 20th June 1995 and in effect refused the 1st defendant leave to include an application in its summons dated 12th June 1995 to strike out the Statement of Claim. The second was made on 23rd June 1995 and dismissed the 1st defendant's appeal against Master Jennings' order which itself dismissed the 1st defendant's summons to discharge the leave granted to the plaintiff to serve the 1st defendant out of the jurisdiction.

2. These matters arose in the following way. The plaintiff is a Hong Kong manufacturer of ladies' and children's pyjamas. The 1st defendant is a limited company carrying on business in Germany. The 2nd defendant is a Hong Kong import and export trader in textile garments. An agent of the 1st defendant, one Mr Dieter Renner, while in Hong Kong, was introduced to the plaintiff by the 2nd defendant. What then transpired and is of relevance is most conveniently outlined by reference to the following paragraphs of the plaintiff's Statement of Claim, to which it will in any event be necessary to refer:

"5. By a contract made between the Plaintiff and Renner of and on behalf of the 1st Defendant the Plaintiff agreed to sell and the 1st Defendant agreed to purchase 255,000 sets of children terry pyjamas and 234,000 sets of ladies terry pyjamas at DM.5.80 and DM.8.30 per set respectively, c & f Hamburg.

...

7. There were, inter alia, express terms of the said contract:

(a) that the ladies terry pyjamas were to be delivered between 1st August 1993 and 15th September 1993; and

(b) that if the ladies terry pyjamas were delayed after 15th September 1993, they had to be supplied by air fully on supplier's account.

8. The said ladies terry pyjamas were not ready for shipment until on or about late September 1993 but the 1st Defendant extended the date of shipment and varied the term as to freight charges and it was agreed in variation of the said contract that the said ladies terry pyjamas would be shipped by air at the 1st Defendant's account.

...

10. There were, inter alia, express terms of the said variation that the 2nd Defendant agreed on behalf of the 1st Defendant with the Plaintiff:

(a) to arrange for the checking and delivery of the ladies terry pyjamas;

(b) to settle payment by means of cheque/bank draft in the amount of DM.1,954,650.00 payable to the Plaintiff upon receipt of goods, that is, ex-factory Huizhou, China; and

(c) that all extra freight charges would be at the 1st Defendant's account.

11. In pursuance of the said contract as varied the Plaintiff from 8th October 1993 to 8th November 1993 delivered 235,500 sets of the said ladies terry pyjamas to the 1st Defendant and forwarded airway bills in respect thereof to the 1st Defendant through the freight forwarder, Freight Express International Limited. The 1st Defendant in breach of the contract has refused or failed and still fails and refuses to pay for the price of the said ladies terry pyjamas.

12. Alternatively, if, which is not contended by the Plaintiff, the refusal or failure of the 1st Defendant to pay for the price of the said ladies terry pyjamas was on the basis that the 2nd Defendant was not authorized by the 1st Defendant to make the said variation, the Plaintiff says that by reason of the matters set out in paragraphs 9 and 10 above the 2nd Defendant warranted that she was authorised by the 1st Defendant to make the said variation and the Plaintiff entered into the same in reliance on the said warranty. If the 2nd Defendant was not authorized by the 1st Defendant to make the said variation for and on its behalf, the 2nd Defendant is in breach of its said warranty of authority.

13. By reason of:

(1) the 1st Defendant's wrongful refusal or failure to pay for the price of ladies terry pyjamas sold.

Alternatively

(2) the 2nd Defendant's breach of warranty of authority.

The Plaintiff has been unable to enforce the said contract as varied and has thereby suffered loss and damage.

Particulars

235,500 sets of ladies terry pyjamas at the price of DM.8.3 per set, i.e., total price is DM.1,954,650.00.

...

And the Plaintiff claims:

(1) As against the 1st defendant:

(a) DM1,954,650.00 (i.e. price of ladies terry pyjamas sold and delivered) or its equivalent in Hong Kong Dollars.

(b) Alternatively, damages for breach of contract.

(2) Alternatively, as against the 2nd defendant, damages for breach of warranty of authority;"

3. The plaintiff took out its writ on 27th May 1994 and on 10th June 1994 obtained ex parte from Master Jennings, leave to serve it out of the jurisdiction on the 1st defendant in Germany. The 1st defendant then applied to have the order granting leave set aside. Master Jennings dismissed that application and the 1st defendant appealed from that order of dismissal. The 1st defendant also on 22nd December 1994 took out a summons under O12 r8 to set aside the order granting leave to serve the writ out of the jurisdiction. On 20th June 1995 the 1st defendant sought leave to amend its summons to seek also an order that the plaintiff's writ and Statement of Claim be struck out and being frivolous, vexatious or otherwise an abuse of process.

4. As indicated, these applications came before Leong J who refused both. The 1st defendant now appeals to this Court against those orders. The appeals are pursued by Mr Joseph Fok on behalf of the 1st defendant upon only one ground, i.e. that by obtaining default judgment against the 2nd defendant for breach of warranty of authority, the plaintiff elected to abandon its claim against the 1st defendant as principal.

5. He relies upon the following passages in the Supreme Court Practice 1995 Vol.1, pp.196 and 176:

"15/4/8	Effect of joinder of defendants in the alternative - In actions where alternative defendants are joined, the plaintiff must be careful not to sign judgment by default ... unless he is prepared, by so doing, to abandon his claim against the other. See Morel v Westmoreland [1903] 1 KB 75, affirmed [1904] AC 11
14/8/2	... On the other hand where two defendants are sued on a claim on which the plaintiff has a right of action alternatively, but not jointly, a judgment against one of them is equivalent to an election to sue that one, and a bar to further proceedings against the other (Morel Bros v Westmoreland (Earl of ) [1903] 1 KB 64 CA)."

6. It is convenient at this point to note the manner in which Leong J dealt with the matter at p.6J of his judgment:

"The 1st Defendant submits that the Plaintiff having entered judgment against the 2nd defendant, is barred from proceeding against the 1st Defendant even if the 2nd Defendant were the agent of the 1st Defendant as asserted by the Plaintiff. The 1st Defendant relies on the principle that where a third party obtains judgment against the agent whether in ignorance of the principal's existence or not, the principal is discharged from liability to third party. Reliance is placed on Morel Bros Co Ltd v Earl of Westmoreland [1903] AC 11 where Earl of Halsbury LC said,

"... The result was that the Plaintiffs got judgment against the agent. They cannot get judgment against the principal also. It is an alternative remedy. It cannot be made available against the two.

The 1st Defendant's contention is that if the Plaintiff is barred, then the Plaintiff's case would have no merit and leave for service out should not be granted.

This principle of agency is clear. However, as pointed out by counsel for the Plaintiff, there are exceptions such as where the part of the claim for which the judgment has been obtained constitutes a separate cause of action. Chitty in paragraph 31-065 has this to say after reciting the principle on the effect of judgment against the agent:

'But it cannot of course apply where there are completely separate causes of action. And even if it is in general correct, it is difficult to justify in the case of summary or default judgment, where the interpretation of the facts may in effect be settled by accident and an undefended judgment against the party who is in fact not liable at all (and perhaps cannot not pay) may bar an action against the party who is liable. A recent New Zealand case refuses to accept the doctrine in such a situation.'

Thus Morel Brothers may be applicable in a principal and agent situation where the cause of action against both is the same and where judgment has been obtained on the merits and not through default but not otherwise."

7. The judge then went on to demonstrate that the two causes of action, i.e. against the 1st defendant (as principal in the contract) and against the 2nd defendant (for breach of warranty of authority) were not the same. He concluded that in those circumstances, having regard to the judgment against the 2nd defendant being entered in default of his notice to defend, Morel would have no application and the plaintiff was not barred from proceeding against the 1st defendant. There was a serious question to be tried.

8. It is important to note that Mr Fok's submission is not founded upon the defendant's position as principal or agent, nor upon the causes of action in relation to both being the same (plainly they are not), but upon the two causes of action being inconsistent or alternative causes of action. Although Morel was concerned with a principal and agent relationship, as indeed are most of the other authorities cited to us, that is incidental to the dicta relied upon by Mr Fok. Thus, at the Court of Appeal hearing of Morel counsel for the defendant submitted at p.68 that OXIV, r5, cannot mean that, when the right of action against two defendants is alternative, and the liability of one is inconsistent with that of the other, the recovery of judgment against one shall not prejudice the right to proceed against the other". Sir Richard Collins MR said this at p.76:

"The plaintiffs, having obtained judgment against the [wife] on the footing that she was separately liable as the principal, cannot now turn round and say that she was an agent for the purpose of imposing liability upon her husband as the principal. In this point of view the liability of the husband and wife is not joint, but the liability of one is inconsistent with the liability of the other. In such a case, if it is sought to render the agent liable, it must be by treating the agent as a principal, to the exclusion of the liability of the real principal."

And at p.77:

"The case in the present point of view does not seem to me to come within the special provision made by rule 5 of Order XIV, which enables a plaintiff who obtains judgment under that order against one of two defendants in an action to go on with the action against the other. That provision does not, I think, apply to the case of alternative liability. Therefore, we must look at the case in the light of general principle; and it seems clear, so regarding it, that, if there has been a conclusive election by the plaintiffs to adopt the liability of one of two persons alternatively liable, they cannot afterwards made the other liable: see Scarf v Jardine. (1) Here, on the hypothesis that the writ covers an alternative claim against the husband or wife, the issuing of the writ will not involve any election; but, if on the road to trial of the action the plaintiffs accept judgment against one of the two defendants, that may be called an interlocutory step, but it is a complete judgment upon which execution may be issued against that defendant and which alters her relation to the other defendant; and I think it is impossible to say that it is not a conclusive election to make the wife liable to the exclusion of the liability of the husband."

9. In his speech in the judgment of House of Lords [1904] AC 11 at 14 the Earl of Halsbury LC in approving the judgment of the Court of Appeal said this:

"With reference to the rule upon which reliance has been placed (O14, r5) I think it is accurately stated in the Yearly Practice of the Supreme Court ... that 'the rule does not apply to the case of alternative liability. Therefore, if the claim is against two defendants as alternatively liable, and judgment is signed against one, this rule does not enable the plaintiff to proceed against the other; ...' "

10. Lord Davey (at p.14) added:

"But if the proof which [the plaintiffs] tendered at the trial shews, not a joint debt by the two, but an alternative claim against one or the other, then I think that by signing judgment against one they have, on the principle of Scarf v Jardine, elected to take their remedy against that one, and cannot afterwards sue the other who is not jointly but alternatively liable."

11. Lord Robertson (at p.15) said this:

"The true theory of the case, namely, that the Earl was principal during the earlier period, is not available to the appellants now that they have taken judgment in this suit against the lady who ex hypothesi was agent."

12. Lord Shand (at p.14) concurred.

13. It would of course be unfortunate for a plaintiff if judgment against one alternative defendant was entered precipitately, or indeed if the consequence was not appreciated. Likewise "summary or default judgments, where the interpretation of the facts may in effect be settled by accident, and an undefended judgment against a party who is not liable at (and perhaps cannot pay either) may bar an action against a party who is liable" may be matters of concern (see Chitty on Contracts 27th Ed. Vol II para. 31-065 and L.C. Fowler & Sons Ltd v St Stephens College Board of Governors [1991] 3 NZLR 304). But the law in point seems to me to be clear, and as propounded in Morel, to be binding upon this Court.

14. It remains to be added that the causes of action against the 1st defendant, and against the 2nd defendant, are clearly alternative to and inconsistent with each other. If the 2nd defendant was in breach of authority, the variation negotiated by her was ineffective; if it was effective, that could only be in circumstances because she had authority. Moreover, the plaintiff must clearly have seen the two causes of action as being in the alternative since it expressly pleaded them in the alternative.

15. Mr Lawrence Ng, for the plaintiff, referred us to a number of authorities, which I do not find it necessary to adumbrate. They were concerned with separate causes of action and with relationships in agency, and not with election by accepting judgment upon one of two alternative or inconsistent causes of action.

16. It is of course fundamental to effective election that it be informed and unequivocal. There is no suggestion that it was not. On the contrary, the plaintiff was legally represented throughout. And curiously, as pointed out by Mr Fok, the plaintiff has indicated that it intends to call the 2nd defendant as one of its witnesses. But none of that is to the point, since the plaintiff has actually entered judgment against the 2nd defendant. The obtaining of judgment is a step of such consequence that it must upon the authorities be taken as conclusive election by the plaintiff (see e.g. per Sir Richard Collins MR in Morel supra). The judgment here is no less a judgment, for being entered in default.

17. Mr Ng touched upon merger as the basis of election as relied upon by the 1st defendant and also mentioned rescission in the context of variation of the contraction. I cannot see that these are in any way material,a fortiori upon the foregoing view that I have taken.

18. It was implicit in the submissions before us, that if the 1st defendant's ground of appeal succeeded, as it has in my view, there would be no serious question to be tried, and that the appeals would succeed in both respects.

19. I would accordingly allow the appeal and hear the parties as to the orders to be made and as to costs.

Bokhary, J.A.:

20. I agree.

21. On the basis of the plaintiff's pleadings, the second defendant cannot be liable unless the first defendant is not. Analyzing the position by reference to what Lord Halsbury LC said in Morel Bros v. Westmoreland [1904] AC 11 at p. 14, this is how things stand. The claim is against two defendants as alternatively liable. Judgment has been signed against one. So the plaintiff is unable to proceed against the other.

22. There is no evidence that the default judgment against the second defendant had been entered by accident. Nor, assuming it to be material to consider whether the second defendant can pay, has it been shown that she cannot pay.

Liu, J.A.:

23. The facts have been fully digested in the judgment just delivered by the Vice-President. For the purpose of expressing my view, it is only necessary to outline the events. It is the plaintiff's case that it entered into a written contract with the 1st defendant for the supply of garments. In effect, one Dieter Renner acted as the agent of the 1st defendant for that contract. Before delivery, the said contract was varied in the manner as specified in paragraphs 8 and 10 of the Statement of Claim. The 2nd defendant agreed to the terms in the variation as agent for the 1st defendant.

24. Turning to the 1st defendant, it claims to have ordered these goods from the 2nd defendant but refuses to pay the 2nd defendant the contract price by reason of alleged discrepancies and unmerchantability.

25. The plaintiff has caused the writ to be served on the 1st defendant in Germany. After service out of jurisdiction, the plaintiff signed judgment in default against the 2nd defendant. The plaintiff's case against the 2nd defendant as pleaded in paragraph 12 of the Statement of Claim is as follows:-

"Alternatively, if, which is not contended by the Plaintiff; the refusal or failure of the 1st Defendant to pay for the price of the said ladies terry pyjamas was on the basis that the 2nd Defendant was not authorized by the 1st Defendant to make the said variation, the Plaintiff says that by reason of the matters set out in paragraphs 9 and 10 above the 2nd Defendant warranted that she was authorised by the 1st Defendant to make the said variation and the Plaintiff entered into the same in reliance on the said warranty. If the 2nd Defendant was not authorized by the 1st Defendant to make the said variation for and on its behalf, the 2nd Defendant is in breach of its said warranty of authority."

26. The plaintiff's cause of action against the 2nd defendant is pleaded in the alternative and conditional upon "the 1st defendant [refusing or failing] to pay for the price of the said ladies terry pyjamas ....... on the basis that the 2nd defendant was not authorised by the 1st defendant to make the said variation".

27. In this appeal, of the Grounds of Appeal not abandoned the 1st defendant focuses on two issues: (1) the default judgment against the 2nd defendant for breach of warranty of authority precludes the plaintiff from claiming against the 1st defendant as an alleged principal; in other words the 1st defendant was released by the default judgment against its alleged agent, the 2nd defendant and (2) for the same parity of reasoning, the plaintiff's duplicate claim against the 1st defendant should be struck out. The 1st defendant seeks to set aside the order of Leong, J. for service out of jurisdiction and appeals against the judge's decision for disallowing the proposed amendments to the 1st defendant's summons so as to enable the 1st defendant to apply to strike out the plaintiff's claim. The striking out is sought ex abundante cautela as the default judgment was signed after the order for service out of jurisdiction.

28. What is central to this appeal is whether by entering judgment against the 2nd defendant in default, the plaintiff has released her alleged principal, the 1st defendant. It is common ground that the plaintiff need merely show a serious question to be tried. See Seaconsar Limited v. Bank Markazi, [1993]3 WLR 756, p. 763F, per Lord Goff.

29. The plaintiff's pleaded case is that the said contract as varied was still subsisting. It is submitted for the 1st defendant by Mr Fok that the said contract had been rescinded and replaced by the "variation" for which the 2nd defendant was the alleged agent. If the said contract, though varied, was still subsisting, then Renner not the 2nd defendant should be the alleged agent of the 1st defendant. In which case, it would not be unarguable, so Mr Fok seems to have conceded, that the default judgment against the 2nd defendant in her capacity as agent only for the variation would have no appreciable effect on the plaintiff's claim against the 1st defendant. In fact, Mr Fok readily admits that the 1st defendant's arguments before the court are predicated on the said contract having been rescinded by the variation. The question as to "whether there has been a mere variation of terms or a rescission ........ may not be an easy one to answer". See para. 22 - 030 at p. 1084 Chitty on Contracts (General Principles) 27th edn. Moreover, "the Court cannot resolve disputed questions of fact on affidavit evidence". Seaconsar, supra p. 763 E. per Lord Goff. Can it really be doubted that the issue as to whether or not the said contract was still subsisting or rescinded is a serious question to be tried?

30. Further, the plaintiff's claim against the 2nd defendant is conditional upon the 1st defendant raising the allegations that "the 2nd defendant was not authorised by the 1st defendant to make the variation". The 1st defendant has made no such assertion and clearly the plaintiff's alleged cause of action against the 2nd defendant had not arisen on its own pleading for making an alternative claim under paragraph 12 of the Statement of Claim. The plaintiff had acquired no right against the 2nd defendant and its purported application to sign judgment against her in default was ill grounded. The default judgment entered against the 2nd defendant was unsupported by a valid cause of action, in which no damages had been sustained and the plaintiff could not prove any damages in the assessment before a master. The default judgment was a futile exercise. The plaintiff cannot be precluded by the meaningless default judgment from continuing to claim against the 1st defendant as alleged principal when no damages can be recovered under it against its alleged agent, the 2nd defendant . Whatever procedural step taken in vain by the plaintiff in its purported enforcement of a non-existent right against the 2nd defendant cannot release the 1st defendant. Moreover, unless the 1st defendant disputes the authority of the 2nd defendant as its agent in the variation, there is no issue, letting alone a common issue from which two mutually inconsistent claims could arise. This must also be at least another serious question to be tried.

31. If the 1st defendant had averred that "the 1st defendant [was not liable] to pay for the price of the said ladies terry pyjamas ..... on the basis that the 2nd defendant was not authorised by the 1st defendant to make the variation", a live issue might then have been said to have been raised as to whether on the controversy of agency authority or the lack of it, the plaintiff would be releasing the 1st defendant upon signing a default judgment against the 2nd defendant for, inter alia, the reason that it would be unjust or unconscionable for the plaintiff to enjoy the fruit twice in two judgments against these defendants on a common issue of agency authority. The causes of action based on the common issue against these defendants might then have been said to be mutually inconsistent. On the other hand, the issue joined on want of authority could not have been taken advantage of by the 1st defendant except on the "variation" as a new contract of which the 2nd defendant was the alleged agent, but the plaintiff's pleaded case is linked exclusively to "the said [subsisting] contract as varied". Could it be argued, if it had been so averred, that the proper challenge to the plaintiff's claims should have been mounted on the premise that it sued on a contract which had been rescinded? If so, would it not have been open to the plaintiff to assail Mr Fok's submissions as being wholly hypothetical for this court to entertain? However, this is not the case before us, and I need not dwell upon the question whether the diametrically opposite stance adopted by each defendant in that scenario could also be one serious enough to be tried.

32. For all these reasons, in my view there are, as canvassed in the course of the hearing, these serious questions to be tried and the order for service out of jurisdiction was well supported. I would dismiss the appeals.