PIONEER DELUXE LTD v. CIPHER INTERNATIONAL LTD AND ANOTHER

HCA1434/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1434 OF 2009

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J U D G M E N T

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1. This is a claim by the plaintiff as the manufacturer of men’s and women’s shoes against the 1st defendant for the price of 8,500 pairs of shoes manufactured to the 1st defendant’s design and specification and supplied in November 2008. Although all the shoes were delivered, none has been paid for.

2. One of the 1st defendant’s contentions has been that some of the shoes were defective in quality and did not conform to sample, but none of these has been returned and no evidence has been produced to support this aspect of the case which is the subject of part of the counterclaim.  The central part of the defence has been an allegation of late delivery of goods and thus breach of contract.

3. The 2nd defendant was merely a third party whose financial standing was used by the 1st defendant to furnish a Letter of Credit intended to be the means of payment for the shoes.  It appears that a Mr Chan Chi-chung wanted to become a shareholder in the 1st defendant company and bought 10 shares for HK$2 million and then persuaded his father’s company, the 2nd defendant, to use that company’s bank to provide the Letter of Credit. The plaintiff, in due course, discontinued its action against the 2nd defendant.

4. Although the 1st defendant has had two firms of solicitors acting for it in the past, it has been represented throughout this trial by one of its directors, Mr Collin Thompson.  That has obviously created some difficulties for Mr Thompson because he seems not to have appreciated the significance of the principal documents and the email contact passing essentially between himself and Mr Lam, the plaintiff’s sales manager.  These documents are crucial to this case and I will therefore detail them chronologically as I proceed with this judgment.

5. Contact between the parties seems to have been initiated in the first half of 2008.  This was followed up by an initial inquiry as to the pricing for an order of 8,500 pairs of shoes, the subject of an email from Mr Collin Thompson in late June 2008.  Attached to that email was what should properly be described as a provisional order. Some terms and conditions of business were set out, including penalties stipulated for late delivery. 

6. There was no immediate reply to that inquiry and two reminders were sent, one on 10 July and the other on 24 July. Four days later, Mr Lam replied, sending the plaintiff’s quotation for the cost of the 8,500 pairs of shoes in the sum of HK$1,380,985, including the following terms of business:

(1)  Free on board Hong Kong by sea with full container load.

(2)  Payment terms:  Letter of Credit at sight.

(3)  Late shipment penalty is not applied on this order.

(4) The price does not include the cost of inner box, special bags for packaging, last and outsole moulds for mass production.

7. On 25 July, also by email, the plaintiff sent a debit note for the cost of the lasts and outsole moulds in the sum of HK$203,200.  A further debit note for the balance of the charges for these was sent on 6 August in the sum of HK$8,000.  It is clear on the quotation that the plaintiff rejected the penalties for late delivery set out on the proposed order.

8. The plaintiff also indicated that delivery would be at the end of October in a later email, 27 August 2008, when asking for a copy of the application for the Letter of Credit and stipulating what should be in the Letter of Credit in respect of the acceptable documents. On that same date, the defendant’s cheque for HK$211,200 was credited to the plaintiff’s bank account for payment for the debit notes issued for the lasts and moulds.

9. The defendant’s email of 27 August stated that the delivery should be on 28 October 2008.  At that time, it appears that the Letter of Credit was not yet in existence because Mr Thompson’s email confirmed to the plaintiff that they were working on the documentation, including the Letter of Credit, to meet the plaintiff’s terms. In fact, the Letter of Credit was issued on the same day but clearly contained an error.  It set out delivery by 25 October 2008, despite what Mr Thompson had confirmed in his email.  The cargo receipt, or other appropriate equivalent document, was required, amongst others, to secure payment to the plaintiff for the goods, but the Letter of Credit was to expire on 10 November 2008.  It was never extended or renewed by the defendant.

10. On 24 September 2008, the plaintiff issued a debit note in respect of the cost of manufacture and provision of the boxes for the shoes.  The original pro forma invoice had clearly stated that the cost of the boxes was not included in the price specified as it had in relation to the lasts and moulds.  The amount required for the former was HK$237,600, of which 30 per cent was required in advance as a deposit.

11. Mr Lam gave evidence that before this debit note was issued, the defendant, through Mr Thompson, had stipulated the requirements in this regard and had approved the sample.  They were not ordinary boxes, he said, and had to conform to the customer’s design.  Payment for the shoe boxes had to be made before production started and he said he told Mr Thompson that it would take about 30 days for the boxes to be produced.  At that stage, Mr Lam said that he was of the view that he could still meet the delivery date of 28 October 2008. 

12. Then matters started to go wrong as far as the defendant was concerned.  The cheque for the deposit payment for the boxes in the sum of HK$70,000, rounded down from 30 per cent, was dishonoured on presentation by the plaintiff’s bank.  Mr Thompson, who was relying on his co-shareholder, Mr Chan Chi-chung, said it was inexplicable as Mr Chan told him that there were adequate funds in his account.  There is not a statement of Mr Chan’s account so it is not possible to see the picture.  However, it does not matter.  The cheque dated 26 September 2008 was dishonoured.  The plaintiff was alerted to the position by the bank’s letter of 10 October and re-presented the cheque.  It was cleared a day or so after 14 October when it appears as a credit in the plaintiff’s account.  A fortnight had been lost, in effect.

13. Mr Lam immediately telephoned the factory producing the shoeboxes to inform them but he was now much concerned as to whether the delivery date of 28 October could be met.  He reminded Mr Thompson that the boxes still needed 30 days for production which would take delivery of the shoes up to 12-13 November.  Time would still be required for packaging, about five or six days.  I accept Mr Lam’s evidence.  It is consistent with the content of the emails and a commonsense understanding of the situation.  He told Mr Thompson that the delivery date of 28 October could not be met.  It was, after all, only two weeks ahead of the date the cheque was met.

14. Thereafter, Mr Lam pressed consistently for payment of the balance of the cost of the boxes.  He was worried about the defendant’s ability to meet payment obligations and he was right to be so concerned.  Despite requests in the emails from Mr Lam for payment of the balance dated 20 October, 21 October, 24 October, 3 November, 12 November, 18 November and 19 November, Mr Thompson either ignored these requests or tried to “fob” Mr Lam off with empty promises until, at last, on 24 November and 1 December, the defendant paid the outstanding balance of HK$167,600 in two more or less equal tranches. 

15. That was a bad enough impression of the defendant’s business technique and reliability but worse was indicated in an email from Mr Thompson dated 18 November 2008:

“We will decide how and when to process payments. Do not ask again. I will tell you SHORTLY when we will settle our outstanding accounts.”

There is more than a touch of arrogance in this patronising message from a company whose financial standing was justifiably worrying Mr Lam.  By this time, the defendant had received two deliveries, the bulk of the order, and the Letter of Credit had expired.

16. But I need to go back a little earlier in time to see how other aspects were unfolding.

17. On 23 October, Mr Lam informed Mr Thompson that the delivery date for the shoes needed to be postponed until 18 November because the boxes would not arrive until 13 November. 

18. Mr Thompson’s reply virtually ignored the problem that had been created by the defendant in relation to the boxes and payment for them, and he ignored the request for payment of the balance due for the boxes.  Mr Lam had in fact been able to bring delivery of the boxes forward from 13 November to 5 November. 

19. Mr Thompson sent a list of the partial orders for immediate despatch by the plaintiff but he still ignored the request for payment.  In fact, Mr Lam explained in evidence that he had been able to get the supplier of the boxes to proceed on the strength of the goodwill between the plaintiff and the box suppliers, despite the failure of the defendant to make payment.

20. On 3 November, Mr Thompson emailed to Mr Lam:

“Cipher will make payment to you for any outstanding INVOICES ONCE GOODS ARE DELIVERED TO THE CIPHER WAREHOUSE IN HONG KONG.”

By this time, the original delivery date had passed - 28 October - and the defendant was not exercising any right of cancellation, no doubt because it realised, as was the case, that it had itself occasioned the delay by, firstly, the dishonoured cheque and, secondly, the failure to make the payment of the balance due.  Furthermore, the expiry date of the Letter of Credit was rapidly approaching.

21. The first delivery arrived on 12 November.  Mr Thompson was now linking the deliveries of the shoes to payment of the balance of the money due for the boxes.  He emailed on 13 November:

“Seems like all the shoes are not deliver(ed) to our warehouse yet. Also I am out of town for this week. I will contact you when I am back for the payment.”

By now the Letter of Credit had expired. 

22. The delivery of the shoes finished on 20 November.  The defendant eventually paid the balance due for the boxes by 1 December.  The problem for the plaintiff was now the cargo receipt.  Its urgent release was requested by the plaintiff by emails of 18 and 20 November.  Once again, Mr Thompson tried to stall matters.  He must have known that the Letter of Credit had no validity even if the cargo receipt was supplied.  He told Mr Lam to “Talk to Donna about this”.  Mr Lam very pertinently replied, “Why (do) I need to talk with Donna?”.

23. The matter is played out through January 2009 with Mr Thompson emailing:  “I will email (Jack) and call him to release the cargo receipt,” and “I have spoken to Jack about this matter and he has said that he agrees and will release the cargo receipt to you...I will set up a date for him to issue you the cargo receipt...” and then later, he attaches a condition:

“We will require that you send all our production moulds and production lasts to our Guangzhou warehouse upon receipt. We will set up a time for when our production team will visit you at the factory in China to inspect our property, and upon approval, exchange the cargo receipt for our production moulds and lasts.”

24. Whether or not the defendant made such a visit to the factory at Guangzhou - and it seems that it did not - the matter of the cargo receipt remained unresolved.  On 10 February, Mr Lam emailed to Mr Thompson:  “Today is February 10.  Do  you have prepared the cargo receipt to us?”  Mr Thompson replied on 16 February:  “The payment will be processed to you within the week, we are just working with the bank.  You will be notified when it is ready.  I have sent off all the information”.  Whether that was a truthful statement, and I have my doubts, or an empty reassurance, which may be more likely, perhaps does not matter. 

25. Mr Lam emailed on two more occasions, this time without response from the defendant.  The cargo receipt was never sent, as Mr Thompson agrees.  The Letter of Credit was never extended or renewed, as Mr Thompson also agrees.  The only explanation that Mr Thompson has been able to put forward was that he hoped somehow to renegotiate the price for the shoes delivered, but there is not a hint of this in any of his emails following delivery of the shoes.  Everything indicates a cynical series of empty promises geared to avoiding payment under the contract.  Mr Lam accepts that at some stage before delivery of the shoes, Mr Thompson tried to persuade the plaintiff to discount the contract price.  The plaintiff, it appears, would have none of it and Mr Thompson does not suggest he was ever offered a reduction in the price.

Conclusion

26. The original contract date for delivery of the goods was 28 October 2008.  However, this could never be achieved because of the defendant’s delay in making payment for the boxes.  The delivery date was accordingly pushed back until early November.  The defendant was well aware of this and accepted it.

27. In spite of the defendant’s failure - and I dealt with this earlier in detail - the plaintiff did its best to hasten the delivery of the boxes and, consequently, the delivery of the shoes, by using its own goodwill with the manufacturer of the boxes to hasten production of them.  The defendant was kept fully in the picture and accepted delivery of the goods on 12, 15 and 20 November. 

28. At some stage before delivery of the boxes, Mr Thompson had visited the plaintiff’s factory and said in evidence that the production of the shoes was so behind that the plaintiff could not have effected delivery by 28 October in any event.  I find his evidence wholly unreliable.  He was attempting to suggest that the plaintiff made no effort to meet the original delivery date when the true picture was one of late delivery of the boxes for which the defendant was entirely responsible.  The plaintiff also had reasonable doubts about the financial probity of the defendant which the latter did nothing to dispel.

29. After delivery and acceptance of the shoes, the defendant indulged in delaying tactics to try and put off payment. No goods were returned and nearly two months after the delivery of the last load, the defendant was still promising to release the cargo receipt, finally attaching a condition to its release.  It knew the Letter of Credit was out of time and that, even with production of the cargo receipt, the plaintiff would not be paid.

30. Throughout the emails, there was no mention of any defect in the goods or any suggestion that the goods be returned; simply, for the most part, empty promises.  Eventually, the balance due for the boxes was paid, but in two instalments, leading one reasonably to the conclusion that the defendant was experiencing at least cash flow problems. 

31. Although no evidence or documents have been produced by the defendant to support any aspect of its counterclaim, except in relation to the lasts and moulds, I shall deal with it to the extent that it is necessary.  The pleaded counterclaim sets out seven quantified headings identified by a short sentence and two unquantified claims.  The quantified ones total HK$2,431,531.53.  The plaintiff asked for further and better particulars.  This was a proper request.  It was met with a stonewalling refusal in the form that the barest detail pleaded was alleged to be “Sufficiently pleaded” or, in one respect, the plaintiff was “not entitled” to particulars. 

32. It was open to the plaintiff to apply to strike out the counterclaim.  It did not do so and may have taken the view that since the defendant had now dispensed with the services of solicitors, it would be better to proceed with the action as quickly as possible. 

33. The plaintiff has succeeded in its claim.  There will be judgment for the plaintiff for HK$1,380,985 with costs. The counterclaim will be dismissed with costs, save in respect of the lasts and moulds which effectively constitute a setoff. 

34. In view of the last-minute preparation of the essential parts of this plaintiff’s case, namely the emails and documents relating to the cheques sent by the defendant which were only made available during the course of this trial at my instigation, the plaintiff should have only two-thirds of its costs to be taxed.  The costs associated with the counterclaim will be of a very low order since the plaintiff did not really have a case to meet in view of what I have already said.

35. There remains only the matter of the lasts and moulds for which the defendant paid.  It is entitled to the return of these over which the plaintiff has exercised its lien in view of the non-payment for the shoes.  I am informed that the plaintiff still has these lasts and moulds.  I therefore order that after the defendant has made payment under this judgment, the lasts and moulds must be handed over.