XCHRX CASTWELL INDUSTRIES LTD. v. CYRK, INC.

1997, No. A10314

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

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J U D G M E N T

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1. Castwell Industries, the Plaintiff in this action, contracted to supply to the Defendants, a quantity of Marlboro black Racing Team cotton twill baseball type caps which have become, with trainers, the fashion hallmark of the young and not so young masses. The value of the contract was a little in excess of US$426,000.00. It was to be fulfilled in three shipments. This dispute is concerned with the first shipment. The subsequent two shipments were delivered in accordance with the contract and have been paid for.

2. The price of the first shipment was US$155,124.00. The Defendants rejected 22,100 items which were duly returned to the Plaintiff for replacement by an identical number. The Plaintiff does not accept that the returned goods were defective and claims the full price of the shipment under the contract. The Defendants seek to set off their costs and expenses which they claim are their losses consequential upon the rejection of the allegedly defective goods.

3. No agreement could be reached by the parties over this position and the Plaintiff duly issued a writ claiming the price of the shipment. No defence has yet been entered because the Defendants claim that the contract is subject to an arbitration clause and that therefore Plaintiff should not have commenced proceedings in the Courts. They have applied for a stay of the proceedings so that the matter can proceed to arbitration. The Plaintiff itself seeks summary judgment for the sum which it claims that the Defendants have unequivocally admitted that they are liable to pay in any event viz. the balance of the invoice price after deduction of the price of the rejected goods and the consequential costs. The Plaintiff says that there was no agreement in respect of an arbitration clause, and the Defendants claim that there is no clear admission of liability to pay the balance of the invoice price after the said deductions. Both matters are before me now.

4. The Statement of Claim pleads that the contract was contained in the purchase order of 23rd December bearing the signatures of both parties (or their authorized agents.) The complete copy of this document is at pages 23 and 24 of the bundle of exhibits; it is produced by the Defendants' Merchandising Manager and exhibited to his affirmation. The reverse of the documents contains the terms and conditions. It is clear that they have been struck through by diagonal lines forming an 'X'. This is what Mr. Tsang Kar Chuen says he did before returning the signed Purchase Order to the Defendants. It is agreed that when the document came back into the hands of the Defendants, it was so marked on its reverse. Mr. Chan for the Defendants suggests that the lines, though clearly striking through and across the page of terms and conditions, do not in fact extend through clause 24 which involves the laws of Hong Kong and the Arbitration provision. Having read the affirmations and considered the document and markings I do not consider that there is any basis for the suggestion that clause 24 is so excluded.

5. Mr. Chan's other argument is that the striking through of the terms and conditions is of no effect because the acknowledgment on the face of the document was signed but not adhered it if it were intended to exclude the terms and conditions. Certainly the wording of the first sentence is inconsistent with an exclusion of the terms and conditions on the reverse. There is no suggestion that an agreement or document deleting the terms and conditions on the reverse exists, so it could not be annexed to the purchase order or signed by the Defendants. The second sentence is therefore inapplicable in any event.

6. Mr. Tsang says that he did not sign the Purchase Order until after the 1st shipment had been made and only then because he was informed by the Defendants' employees that payments would not be made unless the Purchase Order was signed. The Plaintiff asserts that Mr. Tsang told both Mr. Luk and Mr. Lo of the Defendants that the terms were too onerous and he proposed to cross them out. Mr. Lo in his affirmation does not accept this. There is no admissible or reliable evidence from Mr. Luk. Although there is a clear conflict on this, I am sure the Plaintiff's Mr. Tsang did say something about the terms and conditions. In any event the Defendants received back an order the conditions of which were struck through. The Defendants in their affirmations do not deny the timing - so it is clear that the shipment had already taken place. What results therefore is a document signed after shipment with the terms and conditions on the reverse struck out but the face of the document bearing a signed acknowledgment which is inconsistent with the striking out. At least the document is equivocal as to those terms and conditions.

7. Article 7(2) of the Uncitral Model Law provides

"An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement."

There is no doubt that clause 24(b) is such a clause.

8. Article 16(1) provides that:

"The arbitral tribunal may rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement."

9. In the decision of the Court of Appeal in Star (Universal) Co. Ltd. and Anor v. Private Company "Triple V" Inc. 1995 - 2 H.K.L.R. 62, Litton V-P. said (p.65)

"Whilst the judge had to make a judgment as to whether there existed an underlying agreement to arbitrate, he could do no more than to form a prima facie view."

10. It is to be noted that in that case there was an arbitration clause in both contracts. The issue was whether an agreement of the same date as the first of the contracts rescinded that contract i.e. whether that second agreement was valid. The position is significantly different in the case I have had to consider.

11. There is no agreement to arbitrate in this case because the Plaintiff clearly struck through the terms and conditions before the Purchase Order was returned to the Defendants, who, at no time prior to the commencement of these proceedings, raised any query in respect of the fact that they were struck through. Mr. Chan relies on the terms on the face of the document which has not been so struck through. It is only the first sentence of it which calls for consideration. The second sentence relates to a written agreement or document of variation which has to be signed by or on behalf of the Dependents. It is not suggested by the Plaintiffs that there is any such document. They rely entirely on the striking out of the terms and conditions on the reverse.

12. What then is the effect of the first sentence in the light of the striking out of the terms and conditions? The position remaining is that the terms and conditions on the face of the document "constitute the entire contract" between the parties. The reference to "terms and conditions ...... overleaf" must be construed in the light of the clear fact that they have been struck through. They do not exist therefore they do not operate on the contract and the arbitration clause is not an agreed term. There is nothing to form even a prima facie view that there was an agreement to arbitrate.

13. At one stage I was troubled by the Plaintiff's own "Sales Confirmation" dated 24th December 1996, (p. 5/6 Exhibits bundle.) on the reverse of which is also a set of conditions of sale, (14 of which is an arbitration clause which varies a little from that on the Defendants' Purchase Order. However, as both Counsel asserted in their respective arguments, this document did not form part of the contract and was never signed by the Defendants, therefore it cannot constitute part of the contract. It was not raised as such in any pleading. The only point which could be deduced from it is that arbitration, as a means of resolution of disputes, featured in the Plaintiffs' commercial scheme of things. To impute a general invariable intention and practice to the Plaintiff so as to displace the proper and only inference to be drawn from the striking through of the Defendants' conditions would be to set at naught that evidence, and in effect reconstruct a contract on a different set of conditions which the Defendants never accepted. Accordingly in my view the Plaintiff unequivocally rejected the arbitration clause as governing the contract and the Defendants' application for a stay of the proceedings in this Court fails.

14. I now turn to the Plaintiff's argument that all the documents, including the affirmations and pleadings contain an admission by the Defendants that at least US$98,056.68 is due to the Plaintiff for the goods delivered in accordance with the contract. The other two shipments have been paid for in full.

15. The invoice in respect of this first shipment is dated 17th January 1997. The Defendants' faxed letter of 20th May 1997 refers to a fax dated 16th May 1997 from the Plaintiffs which I have not seen. The Defendants clearly set out their dispute in respect of the rejected 22,100 caps. The letter on the first page under "Payment for the first shipment" says :

"Until we clear all problems, we will pay you the balance shortly after reduction of all expenses involved."

This slightly uncertainly constructed sentence is clarified by the penultimate paragraph on the second page -

"We will let you know the balance after the calculation of deduction for all involved expenses."

The letter concludes with a reference to the necessary and agreed removal of the logo of the returned goods.

16. The Defendants sent a follow-up fax on 23rd May 1997. (p.18 of Exhibits bundle.) I do not need to reproduce all the relevant contents. It is headed "Payment of your invoice." It goes on to "confirm you that the balance payment ...... is US$98,056.68" and sets out the price of the rejected goods and the expenses in relation to them, concluding with the net sum due.

17. It then purports to stipulate terms for the payment of the sum in two instalments. One term includes the existing agreement in relation to the goods from which the logo is to be removed. The other requires the letter to be signed as an acknowledgment.

18. Lawyers came to be involved thereafter and the Defendants' in-house Counsel wrote on the 4th August 1997. The statement that the Defendants regard the net sum due by reason of the calculations in respect of the rejected goods and the associated expenses is repeated. It specifically asks for the invoice to be amended so as to reflect the figure specified. I have no doubt that the Defendants were saying "amend the invoice to the figure we have calculated and we will pay it". There is a reference to the agreement to remove the logo on the rejected goods but no attempt to suggest that this in any way affects the figure which they have calculated to be due.

19. The affirmation of Mr. Chung Yak Kam sworn on the 19th December 1997 deals with this matter at paragraph 16(c). The figure for the Defendants' total loss is set out as the same figure in the earlier correspondences. Not until his second affirmation on the 11th February 1998 does he seek to revive the notion that the hitherto calculated net sum due to the Plaintiffs was payable only on the condition that the logo was removed from the rejected goods.

20. There is some force in the Plaintiff's contention that nothing should be done to the caps, by way of removing the logo, or anything else until the matter of dispute, whether the Defendants were entitled to reject the goods, has been resolved. This can have no bearing on what is currently due and payable to them. The only claim the Defendants might have is one for loss of business if defective goods were sold on the market thereby competing with the real quality goods which they have bought. This is speculative and in any event the Defendants have available the remedy of an injunction to restrain any such disposal. Furthermore the written agreement of the Plaintiff contained in the "Suppliers Acknowledgment and Consent" is a separate agreement enforceable if necessary at the suit of the Defendants.

21. I have no doubt that the Defendants have admitted, and acknowledged on several occasions that, quite apart from the dispute over the rejected goods, there is due to the Plaintiffs US$98,056.68. The Plaintiffs are entitled to judgment under Order 27 rule 3 for this sum.

22. The Plaintiff is entitled to the costs of both summonses and of this hearing.

23. The order in respect of the hearing of these two summonses was that they should come before the Judge in charge of the Commercial and Arbitration List. He was engaged in a trial which has overrun its estimated length. Before I started to hear these summonses I asked both counsel if the parties were willing for them to be heard by me. Both consented.