GOEI TSUSHO CO LTD v. LEADER ENGINEERING & CONSTRUCTION LTD AND ANOTHER

cacv 22/2010

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 22 of 2010

(on appeal from DCCJ NO. 4581 of 2005)

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REASONS FOR JUDGMENT

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Hon Rogers VP:

1.  I agree with the reasons for judgment of Le Pichon JA.

Hon Le Pichon JA:

2.  This was an appeal by the first defendant from an order of Deputy District Judge Raymond Tsui made on 27 October 2009.  The judge ordered the first defendant to pay the plaintiff the sum of ¥10,009,598 with interest.  At the conclusion of the hearing, the appeal was dismissed.  The reasons appear below.

Overview

3.  The plaintiff is a Japanese supplier of building materials.  It is common ground that the plaintiff began to supply tiles to the first defendant from about 1998.

4.  Between 1998 and August 2002 Mr Hayakawa was the plaintiff’s managing director.  When he suffered a stroke in August 2002, Mrs Hayakawa took over the daily operations of the plaintiff until Mr Kurimoto joined the plaintiff in June 2003.

5.  The first defendant was owned and controlled by William Cheung, Julia Cheung and Cheung Kin Yu, each of whom held a third of the issued shares.  They, together with one Mr Wong, were its directors.  The first defendant was engaged in the business of building renovation and repair work and operated from an office in Nan Fung Centre, Tsuen Wan (“the Nan Fung office”).  Prior to the incorporation of the second defendant in December 2000, tiles had been supplied by the plaintiff either directly to the first defendant or through Lucky Enterprise Holdings Ltd, a related company of the first defendant, having the same shareholdings and directors as the first defendant.

6.  Julia Cheung was the ultimate beneficial majority shareholder of the second defendant through Apex Nominees which she owned and which held 99% of the shares in Dia Kowa Ltd.  Dia Kowa Ltd in turn held 90% of the issued shares of the second defendant.  One Peter Shiu (“Mr Shiu”) held the remaining 10%.

7.  Mr Shiu was responsible for the management of the second defendant.  However, he was not involved with the financial side and Julia Cheung and William Cheung handled all payment arrangements between the second defendant and its customers, the first defendant being its major customer.  Annie Leung who was employed by the first defendant was responsible for the accounts of both the first defendant and the second defendant.

8.  The action was a claim by the plaintiff against the first defendant and the second defendant for the outstanding purchase price under various purchase orders for building materials (paints and tiles) placed between April 2003 and January 2004.  The plaintiff’s case was that the first defendant placed the purchase orders in question for the supply of paints and tiles which it used in its various projects through the second defendant and, in respect of which, the first defendant and the second defendant were jointly liable.

9.  Although a default judgment was obtained against the second defendant in March 2008, the second defendant has been wound up and the judgment remains unsatisfied.

10.  The first defendant, while admitting that some of the materials supplied had been used in some of its projects, denied that the second defendant was acting as its agent when it placed the orders.  It also raised a defence that the plaintiff’s claim was barred, based on the fact that the plaintiff had entered a default judgment against the second defendant which gave rise to the doctrine of election.  Although the first defendant adduced evidence on the alleged defective quality of the goods supplied, that was not pleaded as a defence.

The judgment below

11.  The judge described the factual background in considerable detail.  He found that the second defendant was a joint venture set up pursuant to a proposal made by William Cheung and Julia Cheung to Mr Shiu in October 2000 for the distribution, marketing and sales of construction materials including paint.  As the target companies were to be construction companies in Hong Kong that would be competitors of the first defendant, the second defendant was made to appear to be a separate entity, unconnected with the first defendant.  “Leader” was thus not part of its name.

12.  Initially, Wealthy Harbour Engineering Ltd, a company wholly owned by the parents of William Cheung, held 90% of the issued shares.  But in February 2001, a major competitor of the first defendant discovered the relationship and it became necessary to design a more complex shareholding structure to conceal the interest of the first defendant in the second defendant from third parties.  That culminated in the shareholding structure described in § 6 above.  It seems that the name Dia Kowa Ltd was chosen as the name of the company to which Wealthy Harbour transferred its 90% interest because at about that time there were negotiations with the manufacturer of Dia Kowa paints (“Dia Kowa Japan”) concerning a distribution agreement.

13.  Mr Hayakawa of the plaintiff appeared to have had some involvement in those negotiations since copies of documents sent to Dia Kowa Japan, directed at convincing Dia Kowa Japan of the strength of the first defendant which was part of the Leader Group, had been faxed to him.  They included letters from the first defendant and the second defendant dated 14 November 2001 addressed to Dia Kowa Japan which gave profiles of themselves and were intended to introduce the second defendant to Dia Kowa Japan.  The letter from the first defendant was signed by Julia Cheung as administrative manager.  The letter from the second defendant, signed by William Cheung as managing director, stated that the second defendant was “one of the members of Leader Group …”.  The judge found that by claiming to be a member of the Leader Group, the second defendant could enhance its profile because of the former’s longer history.

14.  Shortly before the events mentioned in the preceding paragraph, the second defendant had written to the plaintiff on 5 November 2001 informing the plaintiff that the “Account Officer of Leader Group, Ms Annie Leung” (who was an employee of the first defendant and not of the second defendant) had been asked to follow up the account of the plaintiff and that all documents could be sent or faxed to “our Head Office”.  The telephone and fax numbers given were those of the first defendant.  That letter was signed by Julia Cheung.

15.  Then on 9 November 2001, the first defendant sent a letter to the plaintiff headed “Re: Suggestions for coming orders”.  In pertinent part it read:

“ ii. T/T or L/C Payment Method

      We would like to reach an agreement that if the invoice amount for certain transaction is below JPN$2,000,000.00, then we settle it by T/T; otherwise, by L/C.

  iii.      Time span for settlement

      It is suggested that the time span for T/T settlement or issuing a L/C is 7 days from the day we receive your invoice.

  iv.      Monthly Statement

      It is suggested a Monthly Statement is used for settlement with ease any outstanding amount due to your company.”

16.  It was signed by Annie Leung on behalf of the Leader Group.  The judge considered that an important letter as the payment terms proposed were those that governed the orders subsequently placed.  He found that while the arrangement recorded in the letter was relevant to the second defendant only, it was issued on behalf of the Leader Group using the letterhead of the first defendant and signed by Annie Leung who had never been an employee of the second defendant.

17.  In § 83 he considered another important set of documents being the covering letters issued by Annie Leung using the first defendant’s letterhead and informing the plaintiff of payments made by the second defendant by telegraphic transfers.  While those payments had nothing to do with the first defendant, it chose to take upon itself to inform the plaintiff of them.

18.  The judge concluded (at § 84) that the correspondence he reviewed and highlighted in his judgment showed the first defendant to be a contracting party and that they had induced the plaintiff to believe that it was actually dealing with the first defendant when the orders were placed by the second defendant.

19.  It should be mentioned that the letters faxed by the second defendant to the plaintiff, while written on the second defendant’s own stationery, invariably bore the fax imprint of the first defendant showing the fax number and full name of the first defendant.

20.  There were other relevant matters.  Notably, in relation to Mr Kurimoto’s first visit to Hong Kong in July 2003, Mr Kurimoto had been given the address of the Nan Fung office, which was described as the second defendant’s “Head Office”.  He was received by, inter alia, William Cheung and Julia Cheung and given their business cards bearing the name “LEADER GROUP”.  William Cheung was described as the managing director and Julia Cheung the executive director.  The address and contact details were those of the Nan Fung office.  The first defendant and no fewer than four companies bearing the name “Leader” were listed on the cards.  Then on 17 November 2003, the plaintiff was advised by fax that the second defendant had changed its correspondence address with immediate effect to the Nan Fung office which is the office of the first defendant.  The judge also took note that the first defendant never objected to the plaintiff’s Statements of Account being issued in the names of the first and second defendants.

21.  Against this factual matrix, the judge held that the second defendant had the apparent or ostensible authority of the first defendant to place the purchase orders in question and that the first defendant was a disclosed principal.  As to the defence of estoppel, the judge held that the defendants were liable jointly and that the default judgment did not amount to an election.

This appeal

22.  The judgment was challenged on two grounds, first, that contrary to the judge’s holding, the second defendant had no ostensible authority to enter into the contracts on behalf of the first defendant and, second, that the judge erred in failing to apply the principle in Morel Brothers & Co Ltd v Earl of Westmorland & Wife [1903] 1 KB 64 under which the default judgment obtained by the plaintiff against the second defendant operated as a bar to any recovery of the judgment by the plaintiff from the first defendant.  At the hearing, ostensible authority was the principal focus of the first defendant’s submissions.

Ostensible authority

23.  Mr Wong who appeared for the first defendant submitted that the holding that the second defendant had the ostensible authority of the first defendant to enter into the contracts was wrong.  There were several strands to his argument.

24.  The first point made was that it was not open to the judge to make a finding of ostensible authority because, in the case of a written contract, the principal needed to be named in the contractual document itself.  In the present case, the documents evidencing the contracts were the purchase orders and the invoices and the first defendant had not been named in any of them.  But Mr Wong cited no authority for his proposition.  While he sought to derive assistance from Shogun Finance Ltd v Hudson [2004] 1 AC 990, that was not a decision on the ostensible authority of an agent.

25.  Ostensible authority arises where, by words or conduct, a person represents or permits it to be represented that another has authority to act on his behalf.  This necessarily requires the court to ascertain from all the circumstances whether there was any conduct on the part of the principal amounting to a representation of authority.  The inquiry is necessarily factual.  As a matter of principle, it is difficult to see why the fact that the agent’s name alone appears on the document evidencing the contract should preclude such an inquiry or the application of the doctrine.

26.  Mr Wong referred toFreeman & Lockyer v Buckhurst Park Properties (Magnal) Ltd [1964] 2 QB 480 where Diplock LJ, in explaining ostensible authority, stated (at 503) that the agent must not purport to make the agreement as principal himself.  It was submitted that the naming of the second defendant as the contracting party in the purchase orders precluded the application of the doctrine of ostensible authority.  But whether or not the agent was making the agreement as principal must depend on the particular circumstances of the case. In my view, there is nothing in the observations of Diplock LJ that precludes the application of the doctrine of ostensible authority simply because the agent’s name appears on the document evidencing the contract.

27.  The next point made was that it was wrong for the judge to have equated the Leader Group with the first defendant when his finding was that the plaintiff’s belief was that it had entered into contracts with “the Leader Group”.  The objection was that the Leader Group is not a legal entity.  Further, to have identified the first defendant with the Leader Group was entirely arbitrary.  It was said that the judge’s approach would lead to uncertainty in mercantile law.

28.  There is no merit in the criticism.  The plaintiff’s subjective belief is immaterial.  The test is objective.  The real question is whether, looked at objectively, a reasonable businessman would have concluded that the second defendant was purchasing on behalf of the first defendant.  Given the factual matrix meticulously set out by the judge and outlined above, he was amply justified in taking the view that he did.

29.  Mr Wong then repeated the criticisms he had made below concerning the plaintiff’s pleadings relating to the first defendant’s representations and the plaintiff’s reliance on them.  The representations are those set out in § 18 of the statement of claim which, as amended, reads:

“18.      Albeit the fact that the subject purchase orders were issued by the 2^nd Defendant, the Plaintiff was induced to believe that it was dealing with the 1^st Defendant, who acted as the principal of the 2^nd Defendant by the following behaviours of the 1^st Defendant:

      (a)     before the Plaintiff commenced the supply of Goods to the 2^nd Defendant, Ms. Julia Cheung, the main contact person with the Plaintiff, and also Mr. William Cheung presented to the Plaintiff their name cards which showed that they were key officers of Leader Group, of which the 1^st Defendant was the major group company;

      (b)     certain negotiations and correspondences in respect of the supply of the said paints and tiles were sent by the Plaintiff to the 1^st Defendant and the 1^st Defendant had never denied that it was not the relevant party of the subject transactions and/or it was not the correct recipient of the same;

      (c)     the Plaintiff carried on all dealings, such as negotiations of terms, correspondence concerning delivery, after sales service etc. in respect of the purchase orders, with the representatives of the 1^st Defendant; all relevant negotiations and meetings were held either at the 1^st Defendant’s registered office or at its project sites; and

      (d)     In or about the end of November 2003, Ms. Julia Cheung, for and on behalf of 1^st Defendant, represented to the Plaintiff that the 1^st Defendant would settle the then outstanding amount by end of 2003.”

Essentially, the complaint was that the pleadings were inadequate, deficient and lacking in specificity.

30.  The judge addressed sub-paragraph (a) in § 113 of his judgment and I did not understand Mr Wong to be challenging any aspect of the judge’s reasoning in that paragraph.

31.  As to sub-paragraphs (b) and (c), it would appear that the complaint was the lack of specificity.  It was said that, as a result, the first defendant was unable to prepare his defence properly.  Mr Wong referred to the letter dated 9 November 2001 from the first defendant (set out in § 15 above) and complained that it was never alleged to be part of the relevant conduct.  As the judge rightly observed, the plaintiff’s case rested, amongst other things, on documents and letters exchanged between the plaintiff, first defendant and the second defendant.  The first defendant never saw fit to ask for further particulars of the “correspondence”.  In those circumstances, I do not consider that it is in any position to complain about the letter of 9 November 2001.  By the same taken, that must apply to all the other letters considered by the judge.  I have no hesitation in rejecting Mr Wong’s submission.

32.  It was also pointed out that the judge had found against the plaintiff on sub-paragraph (d).  That may be the case and one might say: so what?

33.  Finally, the judge was also criticised for relying on matters not pleaded and/or irrelevant matters.  Mr Wong referred to the fax imprint as an example.  With respect, that is but one minute aspect of the entire background of the dealings between the parties through correspondence and conduct prior to and throughout the relevant period.  It could not have been the determinative factor.  In my view, the outcome would not have been any different had that factor not been taken into account.

34.  For all those reasons, the first defendant’s challenge on ostensible authority must fail.

Recovery against the first defendant

35.  The issue is whether the default judgment entered against the second defendant constituted an election such as would prevent the plaintiff from any recovery of the unsatisfied judgment from the first defendant.

36.  Mr Wong relies on the Morel principle which he submitted remains binding in Hong Kong, citing the decision of this court in Bonus Garment Co (a firm) v Karl Rieker GMBH & Co. KG [1995] 3 HKC 721 at 728C- 729B.  The decision in Bonus Garment was predicated on the causes of action against two defendants (principal and agent) being inconsistent or alternative causes of action.  That decision was reversed by the Privy Council (reported in [1997] 2 HKC 460) on the basis that the basic requirement to bring the Morel principle into play (two claims against two defendants based on mutually inconsistent assumptions of fact) had not been shown because the factual assumption underlying the judgment taken against the agent (that she had no authority to vary the delivery date) was not necessarily inconsistent with the facts necessary to entitle the plaintiff to judgment against the principal on the ground that the principal had accepted the goods.

37.  Unlike Bonus Garment, the present case is one of joint liability.  The judge held (at § 127) that the first and second defendants were jointly liable, a conclusion which plainly was open to him since, in the case of an agent and a disclosed principal, whether or not the agent is personally liable depends on an objective assessment of the intention of the parties to be deduced from the nature in terms of the particular contract and the surrounding circumstances.  As Brandon J (as he then was) observed in Bridges & Salmon Ltd v The “Swan” (Owner) [1968] 1 Ll. Rep 5 at 12:

“Where A contracts with B on behalf of a disclosed principal C, the question whether both A and C are liable on the contract or only C depends on the intention of the parties.  That intention is to be gathered from (1) the nature of the contract, (2) its terms and (3) the surrounding circumstances; see Bowstead on Agency, (12th ed)(1959), at pp. 257 and 258, par 113, and the authorities there cited.  The intention for which the Court looks is not the subjective intention of A or B.  Their subjective intentions may differ.  The intention for which the Court looks is an objective intention of both parties based on what two reasonable businessmen making the contract of that nature, in those terms and in those surrounding circumstances must be taken to have intended.”

38.  Joint liability involves only one obligation such that the performance by one joint obligor discharges the other.  At common law, it was subject to technical rules and the general rule was that a judgment against one joint debtor operated to bar an action against the other.   See for example Kendall v Hamilton (1879) 4 App Cas 504.

39.  However, the common law rule has been superseded where section 5 of the Civil Liability Ordinance, Cap. 377 applies.  That section provides:

“5.     Proceedings against persons jointly liable for the same debt or damage

   Judgment obtained against any person liable in respect of any debt or damage shall not be a bar to an action, or to the continuance of an action, against any other person who is (apart from any such bar) jointly liable with him in respect of the same debt or damage.”

40.  There is nothing in that provision that limits or restricts its application and, prima facie, it would extend to all cases of joint liability.  In David Moore Builders Ltd v Preddy, (unreported, Lexus transcript) 24 October 1995, the English Court of Appeal had to consider the true construction of the English counterpart of section 5 (on which, incidentally, the Hong Kong provision was modeled) and held that the provision covers any joint liability no matter whether incurred by parties directly engaged in negotiation or indirectly through an agent.  I would respectfully agree.

41.  In my view, in cases of joint liability, section 5 must prevail and would necessarily displace the Morel principle.  Even if I am wrong on this point, in the present case, the claims against the first and second defendants, when analysed, cannot be said to be based on mutually inconsistent assumptions of fact.  They are based on the same set of facts and, therefore, would fall squarely within the principle stated by the Privy Council in Bonus Garment.

42.  I would make this final observation.  There is no underlying merit whatsoever in the first defendant’s case.  The first defendant has taken delivery of and used goods supplied by the plaintiff without payment and seeks to invoke the Morel principle simply to avoid its obligation to make payment.

Hon Yuen JA:

43.  I agree with the judgment of Le Pichon JA save that I do not find it necessary on the facts of this case to consider the arguments on the Morel principle.  I would also add in relation to Mr Wong’s arguments discussed at paragraphs 24-26 that the plaintiff’s claim in the present case is not based on a written contract made between parties who were strangers to each other.  Here the plaintiff had a history of doing business with the first defendant and its associated company, and the introduction of the second defendant was for the reason set out in paragraph 11.  Against the matrix of these facts, Mr Wong’s contentions do not stand scrutiny.