FUNG WAI t/a TAK CHEUNG CO. v. YEUNG CHUI LIN t/a TWINKLE STAR PRODUCTS CO. and Another

1993, No. A9527

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D G M E N T

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1. This is a claim by the plaintiff, Fung Wai trading as Tak Cheung Company (Tak Cheung) against the first defendant Yeung Chui Lin trading as Twinkle Star Products Company (Twinkle Star) and the second defendant Lee Wai Leuk trading as Cheung Kee Plastic MFG. FTY (Cheung Kee) for the price of certain Nylon Fastening Tapes (NFT) ordered from and supplied by Tak Cheung.

2. It is the Tak Cheung's case that it was Cheung Kee who ordered the NFT as an agent of Twinkle Star and in doing so guaranteed the payment to Tak Cheung and had assumed personal liability towards Tak Cheung. Alternatively, if Cheung Kee had not been authorised as an agent by Twinkle Star, it was in breach of the warranty of authority.

3. Twinkle Star asserted that Cheung Kee was never its agent and did not order the NFT on its behalf. Twinkle Star therefore denied liability towards Tak Cheung for the price of the NFT. Cheung Kee did not dispute that the orders for the NFT in question had been made by it, however it denied liability on the basis that it was doing it on behalf of Twinkle Star whose identity had been disclosed to Tak Cheung and therefore Cheung Kee would not be liable for the price of the NFT in question.

4. Cheung Kee took out a third party proceeding against Twinkle Star seeking an order for contribution or indemnity. In the original third party statement of claim, Cheung Kee in fact also seek for further remedies, namely the return of machinery, assets and equipment as well as compensation for all expenses incurred from Twinkle Star in connection with certain alleged partnership dispute between Cheung Kee and Twinkle Star. The court at the commencement of the trial, struck off such further claims and limited Cheung Kee's third party claim against Twinkle Star to the claim for contribution or indemnity in respect of Tak Cheung's claim.

5. Twinkle Star denied liability on the basis that Cheung Kee ordered the NFT in question on it own behalf and not as its agent. It was suggested that there was a partnership agreement between Twinkle Star and Cheung Kee to set up a joint venture factory in Huizhou PRC called Twinkle Star (Huizhou) Arts Products Ltd. (Twinkle Star, Huizhou) and the NFT in question were ordered by Cheung Kee on its own to supply to Twinkle Star as part of its contribution towards the partnership assets of Twinkle Star (Huizhou).

6. The parties have no dispute on the quantum of damages, being the agreed price of the NFT ordered from and supplied by Tak Cheung, namely the sum of $317,790, the amount of the three invoices Nos. 04447, 04169 and 02260 dated the 26th of February 1993, the 8th of February 1993 and the 10th of March 1993 respectively and the issues are therefore confined to the question of liability.

7. Tak Cheung and Cheung Kee had been in business since 1989 and their relationship was described as good. Cheung Kee had been obtaining garment accessories from Tak Cheung and after the initial 2-3 transactions, was granted credit period of 60-90 days. According to Mr. Edmund Fung of Tak Cheung, in late 1992, Mr. Lee Wai Leuk of Cheung Kee went to the office of Tak Cheung with Ms. Yeung Chui Lin of Twinkle Star. Mr. Lee told Mr. Fung that he was setting up a joint venture business and in future the scale of business would be bigger and that he might be ordering some NFT. Subsequently over a period of about 4 months from October/November 1992 to February 1993, Cheung Kee placed 4 orders for the supply of NFT.

8. Delivery under the first order was made towards the end of December 1992 and an invoice dated 31st of December 1992 was issued in respect of such delivery. There were two further deliveries in the months of February 1993 and invoices in respect of the two deliveries were dated 8th and 26th of February 1993. According to Mr. Fung, when Cheung Kee placed the 4th order towards the end of February 1993, he was worry as the total amount involved in the 4 orders was getting very substantial and payment in respect of the 1st order had not been made.

9. When the matter of payment was raised with Mr. Lee, Mr. Lee told Mr. Fung that he dealt with the NFT with a joint venture company and he had some argument with them in China. He also said the matter was not difficult to resolve and that Mr. Fung should not worry. He also said he had a share in the new company and if the new company did not pay for the NFT, he would pay himself.

10. Eventually when Tak Cheung pressed for payment and indicated that unless payment was made, there would be no further delivery, Cheung Kee referred it to Twinkle Star to get payment. As a result a cheque dated 10th of March 1993 for $115,830. was paid by Twinkle Star to Tak Cheung as payment for the first delivery of the NFT. When Mr. Fung noticed such payment, he questioned Mr. Lee and was told that it was his new company. Mr. Fung insisted that Cheung Kee had never mentioned the name of the joint venture company before.

11. Mr. Fung said Tak Cheung would not allow any new customer any credit period and that he would not supply the NFT if Cheung Kee ordered them for someone else and had not undertaken to be responsible.

12. While Mr. Lee of Cheung Kee insisted that the NFT were ordered for Twinkle Star, he did not suggested that the identity of the joint venture company had been made clear to Tak Cheung when the orders for the NFT were placed. He also conceded that Cheung Kee's name was used to order the good as Tak Cheung had more faith in it because of the long business association between Tak Cheung and Cheung Kee and that Tak Cheung would not grant any credit period to a new customer. There is no dispute that all the goods were delivered to the warehouse of Cheung Kee and all invoices were also addressed to Cheung Kee.

13. It is against the aforesaid background that I have to consider whether Cheung Kee had assumed personal liability towards Tak Cheung for the NFT supplied even if Cheung Kee was placing the orders for someone else.

14. It is well established that an agent is not necessary exempted from personal liability just because he is acting as an agent and known to be doing so.

15. Lord Justice Scrutton in H. O. Brandt & Co. v. H. N. Morris & Co., Ltd., [1917] 2 K. B. 784 said the following:

" The fact that a person is agent and is known so to be does not of itself prevent his incurring personal liability. Whether he does so is to be determined by the nature and terms of the contract and the surrounding circumstances. Where he contracts on behalf of a foreign principal there is a presumption that he is incurring a personal liability unless a contrary intention appears; and similarly where he signs in his own name without qualification."

16. Mr. Lee admitted that Cheung Kee's name was used to order the goods because Tak Cheung had trust and faith in Cheung Kee due to their previous business dealing and that Tak Cheung would not grant credit period if the good had been ordered by a new company.

17. There is no dispute that the orders for the NFT were placed by staffs of Cheung Kee and that the goods were all delivered to the warehouse of Cheung Kee. There is also no dispute that the invoices in respect of the goods were all issued to Cheung Kee and Cheung Kee had not raised any objection. Even when Mr. Lee mentioned the joint venture company, he was referring to a joint venture company in Huizhou, China where the goods were sent for processing work to be done.

18. On the undisputed evidence and the evidence from Mr. Lee, I do not have any difficulty in concluding that when Cheung Kee placed orders for the NFT from Tak Cheung, it was incurring personal liability.

19. In any event, the evidence clearly indicated that Mr. Lee in his dealing with Tak Cheung had not made it clear that he was ordering the NFT for another company until perhaps when Tak Cheung was pressing for payment. Further when Mr. Lee mentioned the joint venture company, he was vague and had not clearly mentioned to Tak Cheung what and where was this joint venture company he was talking about. When agreeing to supply the NFT on credit, Tak Cheung was obviously looking to Cheung Kee for payment, a fact known to Cheung Kee. I also accept Mr. Fung's evidence that Mr Lee had indicated when pressed for payment that if the new company did not pay, he would pay.

20. On the evidence, I have not the slightest hesitation in coming to the conclusion that Cheung Kee is personally liability for the price of the NFT even if it was acting as an agent for Twinkle Star at the material time.

21. I shall now deal with the issue of whether Cheung Kee was ordering the NFT on its own account or on behalf of Twinkle Star. This affects not just Twinkle Star's position towards Tak Cheung but Twinkle Star's liability to indemnify Cheung Kee against Tak Cheung's claim.

22. According to Ms. Yeung Chui Lin, the sole proprietress of Twinkle Star, she was introduced to Mr. Lee of Cheung Kee in 1991 by her elder brother. Subsequently they agreed to set up a joint venture factory in Huizhou, China in order to carry out processing work on future order received by Twinkle Star. The agreement was that each side would be equal partner and be responsible for 50% of the duty and liability of the joint venture factory.

23. Ms. Yeung said there was in fact a written partnership agreement but the only copy was kept by Mr. Lee and she did not have any copy. Ms. Yeung suggested that as Mr. Lee was experienced in business in China and she had no such dealing previously, the procedure of setting up the factory in China was handled by a Mr. Lam Siu Bun on the suggestion of Mr. Lee and she just followed the suggestion and instruction of Mr. Lee. It was decided that Ms. Yeung would be the Chairwoman and Mr. Lee and Ms. Yeung's elder brother would be the vice president and director respectively.

24. The joint venture company was set up in February 1992 after the preparation of the memorandum and article of association was completed and the business registration certificate obtained. Ms. Yeung in her own name signed a tenancy agreement for the joint venture factory premises in Huizhou on 13th of January 1992 at the monthly rent of RMB 17,724. a month.

25. In connection with the setting up of the joint venture factory, Ms. Yeung said she had spent about RMB one million, RMB 200,000. on rent and deposit, RMB 280,000. on decorations of the factory premises, and RMB 300,000 on machinery, equipment and travelling. In addition, Ms. Yeung was also responsible for paying wages to workers and her contribution towards the joint venture factory up to the time when it closed in early 1993 exceeded RMB 2 millions.

26. On the other hand, the only contribution by Mr. Lee of Cheung Kee towards the joint venture factory was limited to a power press and a heater, valued at about HK$10,000.

According to Ms Yeung, when she asked Mr. Lee for his contribution towards the capital outlay of the joint venture factory, Mr. Lee kept saying he was in financial difficulty. Eventually Mr. Lee suggested that he would acquire the NFT himself and that the cost for the NFT would be treated as his contribution towards the capital outlay of the joint venture factory.

27. According to Ms. Yeung, not only did Mr. Lee fail to contribute towards the joint venture factory, he sent his own goods to the joint venture factory to be processed and he was indebted to the factory for the cost of such processing work.

28. Ms. Yeung did not dispute that her company, Twinkle Star in fact paid for the first delivery of the NFT in early March 1993. She said the payment was just a loan to Cheung Kee as Mr. Lee said he was in financial difficulty and was unable to pay. As further delivery of NFT was required to fulfil contracts and Mr. Lee said unless payment of the first delivery was made, further delivery might be affected, Ms. Yeung had no choice but to pay on behalf of Cheung Kee. She said however that Mr. Lee agreed to repay her as soon as possible.

29. There is no dispute that the NFT was to be used in connection with the making of certain beach bags which were the subject matter of contracts placed by Trade Source Co., Ltd. with Twinkle Star. However Ms. Yeung said Twinkle Star's name was used at the suggestion of Mr. Lee and that the actual recipient of those orders was to be the joint venture factory.

30. Ms. Yeung agreed that when Trade Source Co., Ltd made payment in respect of the orders for the beach bags, the sum of about $900,000. was paid into the account of Twinkle Star. She used part of the money to meet expenses of the joint venture factory and she also retained part of the money as reimbursement to her of the expenses that she had incurred in connection with the joint venture factory.

31. Since March 1993, the rent in respect of the premises of the joint venture factory in Huizhou had not been paid and there was a subsequent proceeding between the landlord and Twinkle Star in the Huizhou Huicheng District People's Court. Mr Lee of Cheung Kee was brought in as the Third party as he claimed to be entitled to some of the machinery in the factory. It was decided that as Twinkle Star had failed to pay rent in accordance with the agreement, the landlord was entitled to terminate the tenancy agreement. It was further decided that Mr. Lee had successfully proved himself to be the rightful owner of the machinery, they should be returned to him.

32. Twinkle Star appealed against the decision, but the appeal was dismissed by the Guangdong Huizhou Intermediate People's Court.

33. Ms. Yeung of Twinkle Star said she had no confidence of the system in China and she dared not return to China since the closure of the joint venture factory until recently. She claimed that all the property and documents in the factory had since been stolen and lost. She claimed to have lost some $1.5 million in connection with the joint venture factory in Huizhou.

34. Mr. Lee of Cheung Kee on the other hand suggested that he had in fact contributed significantly into the capital outlay of the joint venture factory by providing many of the machinery and equipment of the factory. He said despite the agreement he had with Ms. Yeung, he was never officially made a partner to the business. His suggestion was that Ms. Yeung in fact was committing a fraud against him. He said despite the decision of the Courts in China, he had been unable to get back the machinery and equipment he brought to the factory in Huizhou.

35. I have spent considerable time listening to the evidence pertaining to the dispute between Ms. Yeung of Twinkle Star and Mr. Lee of Cheung Kee in connection with the joint venture factory in Huizhou. But I must emphasis that I am not dealing with their alleged partnership dispute at all. The alleged partnership dispute was not the subject matter of the litigation before me. Such dispute if needed to be resolved, can only be properly resolved in separate proceeding. The evidence pertaining to the alleged partnership dispute was allowed to be presented to enable me to properly dispose of the question of whether when Cheung Kee placed the orders for NFT from Tak Cheung, it was doing it on behalf of Twinkle Star.

36. I have considered the evidence as well as Counsel's submission carefully. I must say I am not impressed by the evidence of Ms. Yeung of Twinkle Star at all. She claimed that all the relevant documents were either lost or unavailable. Her evidence pertaining to how the payment of $900,000. for the beach bags from Trade Source Co., Ltd. was subsequently spent was vague, unsupported by evidence, confusing and full of contradiction and inconsistencies. I find it most unconvincing that she was prepared to incur so much expenses for the joint venture factory and allowed Mr. Lee to carry out processing work for his own goods in the factory without paying for them when he did not make any contribution towards the outlay of the joint venture factory despite the agreement they had reached. Indeed I find it impossible to accept any of her evidence at all.

37. What is not in dispute was that Twinkle Star was named as the supplier of certain beach bags under the contracts with Trade Source Co., Ltd. What is not in dispute was that the NFT ordered from Tak Cheung were all used to make the beach bags to be supplied to Trade Source Co., Ltd. What is not in dispute was that the payment by Trade Source Co., Ltd for the beach bags was paid into the account of Twinkle Star. I reject the suggestion that when Twinkle Star paid for the first delivery of the NFT in early March 1993, it was paying on behalf of Cheung Kee because it was in financial difficulty. Such payment, in my view clearly supports the suggestion that the order for the NFT in question were placed by Cheung Kee on behalf of Twinkle Star. That being the case, Twinkle Star must be liable for the price of the NFT.

38. I would only add that should Twinkle Star consider that it has any valid claim against Cheung Kee in connection with the alleged partnerhip dispute, such matter had to be separately dealt with in another proceeding.

39. In the circumstance, I must give judgement for the plaintiff Tak Cheung, against both Twinkle Star and Cheung Kee in the sum as claimed, namely HK$ 317,790. and interest thereon at the rate of 10% per annum from the 21st of October 1993 and costs to be taxed if not agreed.

40. On the Third Party Proceeding by Cheung Kee against Twinkle Star, I order that Twinkle Star is to indemnify Cheung Kee in respect of the judgement against it by Tak Cheung. Twinkle Star is to bear the costs of the Third Party Proceeding to be taxed if not agreed. The orders for costs are orders nisi to be made absolute 7 days after the handing down of the judgement.