Easy On Ltd. v. Heltex Ltd.

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMININSTRATIVE REGION

Civil Action No. 14555 of 2000

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Judgment

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Background

1. The plaintiff is a garment manufacturer and has previously ordered yarn from the defendant. On 11th December 99, the plaintiff placed a purchase order with the defendant for 1500 kg. of yarn dyed to various colours. The exact delivery date and the quantity in respect of each colour were to be finalised at a later stage. A 30% deposit was paid and, if dispute did not arise, $50,000, the agreed compensation in respect of a previous transaction , would be set off from the purchase price. On 30th December 99 the plaintiff then revised its purchase order reducing the quantity by half to 750 kg. Subsequent to this second purchase order, the parties continued to liase with one another with a view to finalise the colour assortment of the yarn. From time to time the plaintiff revised its purchase order setting out the requirements of the colour assortment. In the meantime a dispute broke out on the setting off of the said sum of $50,000 from the purchase price. The defendant could only agree to set off part of the $50,000 as the plaintiff had reduced the very original order by half. The parties did not contact one other during the intervening Chinese New Year holidays. When parties resumed liaison after the holidays, the plaintiff proposed to cancel the purchase order and the defendant agreed and promised to return the deposit. The defendant thereupon wrote to the plaintiff asking for a written confirmation of the cancellation of the contract and reiterated its promise to return the deposit. The plaintiff replied in a letter confirming the cancellation and unfortunately and quite unwisely put in matters on record blaming the defendant and reserved its right to sue. This letter must have provoked the defendant who then refused to honour its promise to return the deposit. The plaintiff then took out the proceedings suing for the return of deposit and the said sum of $50,000. The defendant is counterclaiming for forfeiture of the deposit on ground of repudiation of contract by the plaintiff, and for a declaration that the promise to pay compensation of $50,000 is not supported by consideration and not enforceable at law.

Plaintiff's Case

2. The plaintiff contends that no contract of sale has been concluded and therefore the defendant is liable to return the deposit. Alternatively, the plaintiff contends that the contract as evidenced by the original purchase order has been varied by subsequent purchase orders, that such contract has been cancelled by mutual agreement and the defendant is liable to return the deposit.

3. As to the said sum of $50,000, the plaintiff is simply suing on the agreement to settle a potential claim for damages in respect of the previous transaction.

Defendant's case

4. The very original purchase order dated 11th December constituted an offer and was accepted by the defendant by15th December by facsimile of the same date. A contract was there and then concluded between the parties. Subsequent negotiation or liaison is for the purpose of varying the original contract. No agreement has been reached with regard to variation of the contract and therefore the original contract stands in its full terms and effect. The deposit being a security for performance is liable to be forfeited when the plaintiff repudiated as it did the contract. The promise to return the deposit is unsupported by consideration. As to the sum of $50,000, the defendant only agreed to pay by setting off from the price of future orders and by instalments and therefore is not enforceable or supported by consideration.

Credibility of witnesses

5. The attack on the credibility of Ms Ng, the only witness called by the plaintiff, cannot be justified. She answered questions readily and spontaneously. If her evidence is looked at in its entirety, there is no inconsistency. She was criticised for saying the order from her customer DKNY was for 1500 kg. yarn. On the face of it is not accurate to a layman to the garment trade and to those who are not familiar with the trade. On being further cross-examined she made it clear why she said that. It is because DKNY intended to order garments which required 1500 kg. yarn for its production. It has always been the case of the plaintiff that it manufactures finished products for its customers and it has never suggested that it buys and re-sells yarn for profit. I find she never intended to mislead anyone. She gave the answer in the way she did because she was using the common terms in the trade. The other criticism by Mr. Kwan related to the provision of colour standard by DKNY. This again is unfounded. Mr. Kwan searched for details of the order from DKNY. The more he asked the more details he obtained. This is only natural. The negotiating process between the DKNY and the plaintiff is not a simple exercise before everything can be finalised. She cannot be expected to give details not apparently asked for. Looking at the questions put to her and the answers she gave, I cannot detect any attempt on her part to be untruthful or tendency to withhold information. Furthermore at times she frankly admitted she had no first hand knowledge of matters which are of assistance to the plaintiff's case. I find her an honest and reliable witness. Quite a substantial part of the negotiation was however conducted by one Ms Ip. It was also her who obtained over a telephone conversation the promise from the Mr. Tse, the only defence witness, to refund the deposit. Without her evidence the plaintiff is clearly handicapped. Mr. Tse's evidence is consistent with documents and most of his version of event remain uncontoverted in the absence of evidence from Ms Ip.

Contract and Forfeiture of Deposit

6. The issue is not simply whether a contract was concluded by the parties. The ultimate issue is whether under the terms of the contract the defendant is entitled to forfeit the deposit in the circumstances of the case. There is no express provision in the contract for the circumstances giving rise to forfeiture of the deposit. The defendant has to rely on an implied term. Factors urged upon me for such term, include trade and practice, necessity for the defendant to incur expenses to procure supply of yarn and plaintiff's knowledge of it, and business efficacy. What exactly the implied term should be was not spelt out by Mr. Kwan. I understand his submission to mean that if and only if the plaintiff was in breach of the contract, the deposit would be forfeited. I do not think he argued that the deposit would be forfeited even if the plaintiff is not at fault. Even if the latter had been his contention, it would have failed. The simple reason is that there is no business efficacy for such term to be implied into the contract and there is not the slightest evidence of trade custom or practice to show that the deposit would be forfeited when the buyer through no fault of his own chose not to go ahead with the contract. In order to succeed, the defendant has to establish three things. Firstly there was a contract. Secondly there was an implied term to forfeit the deposit when the plaintiff was at fault in cancelling the contract. Thirdly, the plaintiff was at fault.

7. Mr. Kwan submitted that though the delivery date and assortment of colour had not been finalised in the first purchase order, the defendant had accepted the purchase order by facsimile and a binding contract was thereby concluded. I accept this is correct. Furthermore payment and acceptance of a deposit lends support to the inference that a contract had been concluded. The fact that Ms Ng said she has not seen the confirmation by facsimile is irrelevant. Previous dealings indicated the mode of acceptance would be by facsimile. In fact negotiation to finalise the outstanding terms went ahead as usual. It is futile for the plaintiff to argue that there was never a contract because of uncertainty in respect of colour assortment and delivery date. Not all terms of the contract need to be clearly spelt out before it becomes valid and binding. Looking at the previous dealing of the parties, I accept Mr. Kwan's submission that when agreement could not be reached to finalise the delivery date and colour assortment, the court would ascertain those terms resorting to the test of reasonableness.

8. The evidence of trade practice with respect to deposit is meagre. Mr. Tse gave evidence that in his trade a deposit was always required. However no evidence was adduced to show that the deposit would be liable to be forfeited if the buyer was at fault in not going ahead. That the defendant had to incur expenses to procure the supply of yarn is a relevant factor but by no means the sufficient factor to imply such forfeiture clause into the contract. The ultimate question is one of business efficacy. The cost of procuring supply for an intended purchaser is nothing more than usual cost of running a business. Business risks have to be taken from time to time. The mere requirement for a deposit reduces such risk. The payment of deposit would show sincerity and good faith. While business efficacy might require a deposit, I do not find business efficacy required the deposit to be forfeited when the buyer is at breach. If the deposit should be looked at as liquidated damages, the parties can do so by express terms. For these reasons I do not find there has been such an implied term as to forfeiture of deposit.

Variation and Cancellation of Contract

9. Assuming there had been an implied term to forfeit the deposit when the plaintiff was at fault, the defendant had to show the fault of the plaintiff. The defendant argued that the original purchase order stands. This cannot be right. The quantity of the order has been varied and reduced to by half. The defendant clearly agreed to it and continued to work out the other terms, like delivery date, colour assortment. The number of colours in the colour assortment has also been varied and this again was clearly agreed to by the defendant. This is evident by the conduct of the defendant and by its correspondence with the plaintiff. There is no merit in Mr. Kwan's argument that as the parties failed to reach agreement on other terms there was no valid agreement to vary the original purchase order. Mr. Tse gave evidence that it was not necessary to decide on quantities in respect of each colour at the time of contract. Mr. Kwan relied on this in urging the court to find there was a binding contract when the defendant confirmed the purchase order. I agree with him on this point. To adopt and to extend his argument to the variation of contract, the fact that the parties failed to reach agreement on terms which in any event would have to be finalised under the original purchase order could not be relied on alone to show there was no agreement to vary the contract, namely in respect of total quantity and number of colours in the assortment. Therefore I do not find the plaintiff at fault by merely reducing the total quantity of the order and increasing the number of colours in the assortment. Mr. Kwan suggested that the plaintiff was at fault in varying the delivery date many times. I do not find this is the case. The delivery date had yet to be finalised at the time of confirmation of the original order. Parties still went ahead with the finalisation of colour assortment well past the deadline of delivery that appeared on the confirmation. Further there is no evidence and it is not the defendant's case that they have given reasonable notice or any notice that the process of finalisation had to stop and delivery be made on certain date. In these circumstances, I do not find the plaintiff at fault in not deciding on a reasonable date of delivery. In fact from the point of view of the defendant, as Mr. Kwan submitted, the only deadlock was over setting off the sum $50,000. Looking at the conduct of the parties and the correspondents, I do not find the agreement to the variations of contract was conditional upon the plaintiff agreeing to offset only part of $50,000 from the purchase price as proposed by the defendant. If the defendant chose not to go ahead with the contract as varied for this reason, it would be at fault rather than the plaintiff.

10. The main fault of the plaintiff as complained and relied on by the defendant is the cancellation of the contract. The cancellation of contract originated from a conversation of Mr. Tse and Ms Ip. As I have stated earlier, the evidence of this conversation came only from Mr. Tse. He said Ms Ip enquired if the purchase order was going ahead and he replied that he had not made any arrangement as he received no reply from the plaintiff before Chinese New Year. Whereupon, he said, Ms. Ip said she would cancel the contract. He in return said it would be fine and also mentioned that the deposit would be liable to be forfeited. According to him, Ms Ip pleaded with him to return the deposit and indicated she would otherwise be in trouble. It is not in dispute that he then agreed to return the deposit. Soon after that the defendant wrote to the plaintiff setting out the results of the conversation asking for written confirmation of its cancellation of the contract. The plaintiff wrote a letter confirming the cancellation.

11. The question of whether the plaintiff was at fault when Ms. Ip said she would cancel the contract could not be looked at separately from the promise by Mr. Tse to return the deposit. The argument of the defence runs like this. Once the Ms. Ip said she would cancel the contract, it amounts to repudiation and the promise that followed almost immediately in the same conversation to return the deposit is without consideration and is therefore not binding. Emphasis was laid by Mr. Kwan and the Mr. Tse that Ms. Ip mentioned cancellation of contract before asking for the return of deposit. This is an ingenious argument. However if this argument is valid, then Ms. Ip could not have retracted her cancellation in the same conversation. What if, when she heard about the forfeiture of deposit, she immediately said, " In that case I do not want to cancel the contract." or " In that case, I have to think about it." Certainly she could have second thought if she wanted to. The question is whether an inference of repudiation can be drawn from the her remarks in the context of the conversation. It cannot be said or so inferred that the plaintiff evinced an intention not to be bound by the contract by merely uttering those words and I find there was no repudiation. Looking at the conversation as related by Mr. Tse, and the letters that passed between the parties afterwards, I draw the inference that an agreement was reached between the parties at the end of conversation that each would be discharged from obligations under the contract and that the deposit would be returned. The plaintiff's reservation of its rights to further action in her reply was of no effect but on the other hand the promise by the defendant to return the deposit was supported by consideration. Under these circumstances, I do not think the plaintiff has discharged the burden of proving the fault of the plaintiff in cancelling the contract and therefore is not entitled to forfeit the deposit.

The Compensation of $50,000

12. The defendant merely asserted that there was no consideration to support promise to pay the sum $50,000. There was a on going dispute about a claim involving a much greater sum. It is true that the plaintiff had not yet taken out any legal proceedings to recover it at the time of promise. It is trite law that parties can compromise a claim before initiation of legal proceedings. The agreement to pay $50,000 is clearly supported by consideration. There is no realistic prospect for parties to do business again. The opportunity to set it off in future orders is practically non-existent. The amount of payment and the number of instalments to be set off are not specified in the agreement. The court would not render the agreement invalid because of this uncertainty. The court would ascertain its term. It is question of reasonableness. To take an extreme example, the defendant cannot insist on setting off only a small amount by a large number of instalments say of $1 each over a period of 20 years. Given the relation of the parties now, little future prospect of doing business together, and the length of time that has expired since, I find that time is due for the defendant to pay the agreed compensation

Orders

For the reasons given above, I give judgment for the plaintiff on the main claim in the sum of $429,087.53 with interest at judgment rate from date of writ and dismiss the counter-claim. I hereby also make an order nisi for costs in favour of the plaintiff both in the main claim and counter-claim and such costs be taxed if not agreed.