CHAN KAY t/a HING LEE TIMBER CO. (a firm) v. SHING LEE ENGINEERING CO. LTD. and STANDARD REGENT ENGINEERING LTD. (Third Party)

HCA9785/97

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.9785 OF 1997

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J U D G M E N T

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The Plaintiff's claim

1. The Plaintiff is a supplier of timber. It claims against the Defendant the sum of HK$1,999,102.70 being the price of timber and plywood ("the timber") supplied by the Plaintiff to the Defendant at the Defendant's request.

The Defence

2. The Defendant was a contractor at a construction site in Tseung Kwan O ("the site"). It subcontracted the work to Standard Regent Engineering Limited ("Standard Regent"). Standard Regent printed order forms in the name of the Defendant and placed the orders for timber with the Plaintiff. This was done without the knowledge or authority of the Defendant. The Defendant says that the Plaintiff knew or should have known the unlawful activities or conducts of Standard Regent and any claim for the unpaid timber should be directed to Standard Regent and not the Defendant.

The issue

3. The only issue in this case is who ordered the timber from the Plaintiff.

The Plaintiff's evidence

The initial contact

4. The Plaintiff, Mr Chan, is a sole proprietor. He is assisted by Miss Ng Ha Ying ("Miss Ng"), who is responsible for matters relating to the ordering of timber by customers. She would arrange for the delivery of the timber and the issuance of invoices of the timber delivered to the customers.

5. On one social occasion, Mr Chan was introduced by a construction company called Wing Mou Construction Company Ltd. ("Wing Mou"), to representatives of the Defendant. Mr Chan was told that the Defendant was a contractor working in a construction project in Tseung Kwan O for Wing Mou and that the Defendant would require timber from the Plaintiff from time to time. Mr Chan told the representative of the Defendant to contact him.

The 25th February 1997 Purchase Order

6. After that, the Plaintiff received a request from the Defendant to prepare a quotation. He referred the matter to Miss Ng. Miss Ng from then onwards dealt with Miss Irene Chan ("Miss Chan") of the Defendant. The discussions between Miss Ng and Miss Chan took place on the telephone. On 25th February 1997, Miss Chan issued a Purchase Order in the name of the Defendant ordering timber to be delivered to the site in Tseung Kwan O. The Purchase Order stated that the contact persons were Mr Ting or Mr Wu. The timber were duly delivered to the site after Miss Ng telephoned the site to ensure that the Plaintiff could make the delivery. The invoices sent to the Defendant included copies of the delivery order. The Plaintiff granted a 45 days credit period to the Defendant for the payment of the timber. However, the actual payment for this Purchase Order was only made by the Defendant by two cheques on 22nd April 1997 and 5th June 1997 respectively.

The 7th May 1997 Purchase Order

7. On 7th May 1997, Miss Chan asked Miss Ng to prepare a quotation for the timber. After supplying the quotation to Miss Chan, Miss Ng had a telephone conversation with her in which Miss Chan said that the site would fax a delivery schedule to the Plaintiff and she asked Miss Ng to contact Mr Ting and Mr Wu for the delivery. Miss Ng then received a Purchase Order dated 7th May 1997. This Purchase Order had the name and address of the Defendant. However, the format of this Purchase Order was different from the one issued by the Defendant in February. Miss Ng, however, did not notice the change of format.

8. Miss Chan then told Miss Ng that there would be changes to the order and asked Miss Ng to contact Miss Ho at the site. Miss Ng then discussed with Miss Ho and afterwards she was told by Miss Chan to do according to the instruction of the site. Miss Ng received a Revised Purchase Order and delivered the timber to the site.

Subsequent orders

9. Between 28th May 1997 and 4th August 1997, Miss Ng received purchase orders from the Defendant for the supply of timber. Some time she also received oral orders from the Defendant. She did not know who sent the purchase orders but they all had the letterhead of the Defendant. She would contact Mr Wong, Mr Wu and Mr Tsang at the site to see if they had placed the orders and to inquire whether delivery was to be made. The names of these persons were given to her by Miss Chan. In respect of the oral orders, sometimes she would put down the name of the caller on the chitbook. Mr Wong was recorded to have placed two of the oral orders on the chitbook. These timber were duly delivered by the Plaintiff to the site and it issued invoices to the Defendant for the payment.

10. A summary of the purchase orders and oral orders placed by the Defendant and the invoices issued by Miss Ng are set out as follows :-

SUMMARY OF PURCHASE ORDERS

The claim by the Plaintiff is in respect of these orders.

The Defendant's evidence

The 25th February 1997 Purchase Order

11. Miss Chan is the secretary of the Defendant. She admits that in February 1997, she had asked Miss Ng for a quotation and placed the Purchase Order with her. She said that this was done at the request of Mr Peter Yip of Standard Regent. After sending Miss Ng the Purchase Order, she told her to deliver the goods to the site and to contact either Mr Tsang or Mr Wu. She told Miss Ng that Mr Wu and Mr Tsang were the Defendant's subcontractor, but she could not recall whether she mentioned the name of Standard Regent. The name "Mr Ting" in the Purchase order was a misprint and it should read as "Mr Tsang".

12. In March Miss Chan complained about her workload to her boss, Mr James Lau ("Mr Lau") of the Defendant. Mr Lau told her that it was not the Defendant's business to purchase and finance the purchase of material for Standard Regent. Mr Lau told her to stop the purchase on behalf of Standard Regent and to inform Standard Regent of this. Miss Chan then informed Miss Ho of Standard Regent. After February 1997, Miss Chan had not issued any more purchase orders.

The 7th May 1997 Purchase Order

13. On 7th May 1997, Mr Peter Yip asked Miss Chan again to help him to obtain a new quotation from the Plaintiff. She asked Miss Ng for a new quotation and sent the quotation immediately to the attention of Miss Ho of Standard Regent.

14. In her witness statement, Miss Chan states that : "On or about the end of May, I received the invoices from the Plaintiff, I thought they send it by mistake since, we haven't been issuing any Purchase Order other than the previous one, payment of which has been settled. So I passed all the invoices to the site (Standard Regent) until one day around end of July or early August 1997 I received a lot of invoices (around 1M, and including of the May invoices, the amount was around 1.5M). At that time I suspect that something had gone wrong on the site so I reported to my boss again."

15. In her evidence, Miss Chan stated that the invoices she received in May were sent to Miss Ho. Between May and August 1997, Miss Chan had not issued any purchase orders. In July and August 1997, the invoices she received were received within a period of two weeks. Mr Lau also find the matter strange and asked her to check the Plaintiff's invoices and delivery notes and also documents given to the Defendant by Standard Regent.

16. In checking the documents, Miss Chan discovered a purchase order issued in the name of the Defendant to Ramset Fasteners (HK) Ltd. dated 4th July 1997. The order was not placed by the Defendant. Instead, Standard Regent had used the Defendant's letterhead and imposed it onto its own purchase order. Miss Chan then contacted Mr John Tsang, who is the son of one of the directors of Standard Regent and asked him why Standard Regent issued the purchase order in the name of the Defendant. She told John Tsang that it was wrong to issue the purchase order with the letterhead of the Defendant. The proper procedure was for Standard Regent to issue requisition form to the Defendant for approval and after that, the Defendant would then issue the purchase order. No approval was given to Standard Regent to issue the purchase orders in letterhead.

17. On 8th August 1997, the Defendant wrote to the Plaintiff that :-

"Various materials are being ordered by the above mentioned site under our company name. Please in future only accept orders, for the site, issued officially from this office.

Our subcontractor, Messrs Standard Regent Engineering Ltd. of Room 1909, 19/F., New Commerce Centre, 19, On Sum Street, Shatin, N.T. is of course free to place orders with you directly on their own behalf."

18. On 11th August 1997, Miss Ng faxed a statement of account of the outstanding sum of $1,929,406.70 to the Defendant.

Comparison of the Purchase Orders

19. John Tsang faxed to Miss Chan a number of purchase orders placed by Standard Regent with the Defendant. A comparison of the purchase orders issued by Standard Regent and the purchase orders issued by the Defendant since 7th May 1997 revealed that apart from the letterhead, the format is the same. Certainly, the Purchase Order of the Defendant dated 25th February 1997 and those issued afterwards are quite different.

Mr Leung's submission

20. Mr Leung, Counsel for the Plaintiff, submits that Miss Chan was authorised by the Defendant to issue purchase orders and to arrange for the purchase of timbers from the Defendant. Miss Chan lined up an arrangement in which Miss Ng was requested to accept orders from the site. The mutual understanding between Miss Ng and Miss Chan was that the Defendant was the contracting party and that was why all the invoices and delivery orders were issued to the Defendant and sent to the Defendant's office in Mongkok. The Defendant did not know about Standard Regent. The Defendant was in receipt of the invoices from time to time and the Defendant never complained of any wrong order or delivery. The defence of wrong party was an afterthought on the part of the Defendant's management driven by the Defendant's dire financial position.

21. Mr Leung referred to the contract the Defendant had entered into with Standard Regent on 9th January 1997 in which the Defendant subcontracted the construction work at Tseung Kwan O to Standard Regent. The notes to this agreement state that :-

"a) Shing Lee agree to open a Bank A/C for this project whereas Mr Peter Yip will be one of person who signs the cheque.

b) This contract is on a back to back basis. However, in the event that Standard Regent Engineering Ltd. is in need of advance payment prior to the normal payment date. Shing Lee agree to provide financing facility where as Standard Regent Engineering Ltd. agree to pay interest at a rate of prime plus 2% for all advance payment made."

22. Mr Leung submits that the Defendant is liable to the Plaintiff because the orders placed were pursuant to this arrangement between the Defendant and Standard Regent.

Actual and apparent authority

23. In Freeman & Lockyer (a firm) v. Buckhurst Park Properties (Mangal) Ltd. and Another [1964] 2 QB 480, the Court of Appeal dealt with the concept of actual and apparent authority of an agent. Actual authority may either be express, for example, when an agent is specifically authorised to do an act, or it may be implied, for example, when an agent is appointed to some office which carried with it authority to make a contract on behalf of the principal (see judgment of Willmer L.J. at pages 488-489).

24. In respect of apparent authority, four conditions must be satisfied in establishing that the agent has apparent authority where in fact it does not have any actual authority :-

(1) a representation that the agent had authority to enter on behalf of the company into a contract of the kind sought to be enforced was made to the contractor;

(2) such representation was made by a person or persons who had "actual" authority to manage the business of the company either generally or in respect of those matters to which the contract relates;

(3) he (the contractor) was induced by such representation to enter into the contract, that is, that he in fact relied upon it; and

(4) under its memorandum or articles of association the company was not deprived of the capacity either to enter into a contract of the kind sought to be enforced or to delegate authority to enter into a contract of that kind to the agent.

See the judgment of Diplock L.J. at page 506.

Authority of Miss Chan

25. The Plaintiff submits that Miss Chan had actual authority on the following grounds. She was the only staff of the Defendant and she was essentially managing the Defendant. She issued the February Purchase Order and the Defendant paid for it without any complaint. Various directors of the Defendant signed the cheques for the delivery under the February Purchase Order and they knew of the transaction. Miss Chan issued purchase orders to order goods for the use of other subcontractors in other projects. This suggests that she was invested with the power. She also has the apparent authority. Reliance is placed on the judgment of Pearson L.J. in Freeman & Lockyer at page 499 which states that :-

"... An interesting passage, showing that the agent himself may make the representation which binds the company, is to be found in the judgment of Greer L.J. in the British Thomson-Houston case where he said : 'In the case before us the 'guarantee was signed by a person who was the chairman of the board of directors. Someone must represent the company for the purpose of conducting correspondence, it may be a secretary, or the managing director, or some other officer; and he must have authority to bind the company by letters written on its behalf. The person chosen by the defendants for this purpose was the chairman of the board, and the defendants have represented by their chairman that the plaintiffs could rely on the guarantee of the defendants as the act of the defendants and are responsible for those acts which they have held him out as having authority to perform.'"

26. The Plaintiff submits that Miss Chan also had apparent authority. According to Miss Ng, Miss Chan was the contact person for the Defendant. Miss Chan placed order for the supply of timber as evidenced in the February Purchase Order. As the secretary of the Defendant, Miss Chan must have the authority to use the Defendant's letterhead. The Defendant had knowledge of Miss Chan's issuing the February Purchase Order and must knew that the Plaintiff would rely on it. Miss Chan asked for a further quotation on 7th May 1997 and confirmed to Miss Ng that she could issue the quotation to Mr Wu in July 1997. The Defendant never complained about any of the invoices and delivery orders and had therefore acquiesced or affirmed the orders. The Defendant was trying to put forth proposals for repayment in September 1997.

27. The Plaintiff submits that Wu, Wong and Tsang had actual authority from the Defendant to place orders under the Defendant's letterhead, alternatively, they were held out by Miss Chan to have authority to place orders under the Defendant's name and they had ostensible authority. In the February Purchase Order the Defendant represented that Mr Wu and Mr Tsang also had authority. Miss Chan also mentioned about the authority of Mr Wong. Reliance is placed on Bowstead and Reynolds on Agency, 16th Ed., para 8-021, where it is stated that :-

" Permits it to be represented: authority to make representations as to authority of others. The representation as to authority need not be made by the principal himself: it may obviously be made by an intermediate agent with actual authority to do so. More difficulties arise as to apparent authority. It seems correct in principle to say that an agent can have apparent authority to make representations as to the authority of other agents, provided that his own authority can finally be traced back to a representation by the principal or to a person with actual authority from the principal to make it. However, such apparent authority would in general only be attributed to a person who would normally have actual authority to act within that particular sphere of activity. An agent would, therefore, not usually be regarded as having apparent authority, simply because he is or appears to be permitted to answer inquiries, to attribute authority to another agent, unless he was or appeared to be authorised to conduct that business or that part of the business to which the transaction related."

Alternative case

28. The Plaintiff's alternative case is that the Defendant knew that the Plaintiff was mistaken as to the identity of the contracting party. At no time did the Defendant inform the Plaintiff about the lack of authority of the site staff to place order under the Defendant's name. The Plaintiff acted or continued to act to his detriment by fulfilling orders placed by the site staff. Therefore, the Defendant is estopped from denying that it was the contracting party. Reliance is placed on The Henrik Sif [1982] 1 LLR 456.

Mr Cheung's submission

29. Mr Cheung, Counsel for the Defendant, accepts the principles referred to by Mr Leung. However, he says that these principles have no application where fraud or forgery is involved. He submits that the purchase orders issued in the name of the Defendant from May onwards were forgeries and the Defendant is not liable for those orders. He referred to the judgment of Wright J. in Slingsby v. District Bank, Ltd. [1931] 2 KB 588 where at page 604, he held that :-

" I think there is a further ground why in such a case as this the drawers cannot be held directly liable as principals for the fraud of their agent-namely, that the fraud was an act of forgery. This question was discussed in Ruben v. Great Fingall Consolidated [1906] AC 439, 443, and more recently, and since Lloyd v. Grace, Smith & Co. [1912] AC 716, in Kreditbank Cassel v. Schenkers [1927] 11 KB 826, 835. In both those cases the forgery was in the signatures to the documents and the question was whether the documents were binding on the respective companies, on the principle that outsiders were entitled to assume that matters of indoor management were in order. In principle this question is not dissimilar from what is involved in the question whether an act is within an agent's ostensible authority. It was held that the question could not be raised in the case of a forgery. Though a man may be estopped by conduct from denying that a forgery is his signature, yet as forgery is a crime he cannot authorize it in advance (if indeed it is not a contradiction in terms to authorize a forgery) without being an accessory before the fact. Nor can he agree to be bound by it subsequently, so as to shield a criminal or compound a felony. Hence an act of forgery is a nullity and outside any actual or ostensible authority, and outside the principle of Lloyd v. Grace, Smith & Co."

30. On the question of estoppel he refers to Farquharson Brothers & Co. v. C. King & Co. [1902] AC 325, where the facts as appearing on the headnote are these :-

" The appellants, who were timber merchants, warehoused with a dock company the timber they imported, and instructed the dock company to accept all transfer or delivery orders signed by their clerk. The clerk had their authority to make limited sales to their known customers. The clerk under an assumed name fraudulently sold timber of the appellants to the respondents, who knew nothing of the appellants or of the clerk under his real name, and who bought and paid the clerk for the timber in good faith. The clerk carried out the sales by giving the dock company orders for the transfer of timber into his assumed name, and then in that name giving delivery orders to the respondents :- ..."

It was held that :-

"...the appellants, not having held out the clerk to the respondents as their agent to sell to the respondents, were not estopped from denying the clerk's authority to sell; that the clerk, having no title or apparent authority himself, could not give the respondents any title; and that the appellants were entitled to recover from the respondents the value of the timber."

Earl of Halsbury L.C. stated that :-

"... Estoppel arises where you are precluded from denying the truth of anything which you have represented as a fact although it is not a fact; but no such question arises here...."

Assessment of the witnesses

31. I accept Miss Ng to be an honest witness and she gave a true account of the transactions she had with the Defendant. Miss Chan, on the other hand, repeatedly said that she was unable to recall whether she had discussions with Miss Ng on specific transactions. I do not accept that this is due to mere forgetfulness. In my view, she deliberately avoids giving a truthful answer on some of the issues in this case. In my view, Miss Chan clearly had the authority, both actual and apparent, to place the Purchase Order in February 1997 to goods which were delivered and paid for by the Defendant. I find in the discussions between Miss Chan and Miss Ng, she had not informed Miss Ng that Mr Wu and Mr Tsang were the Defendant's subcontractor. However, even given this assessment, in respect of the Defendant's liability for subsequent purchase orders or oral orders, a distinction must be made between the order placed on 7th May 1997 and the subsequent ones.

Purchase Order - 7th May 1997

32. In respect of this order, I accept Miss Ng's evidence that Miss Chan had asked her to provide a quotation and after Miss Ng received the Purchase Order, she had a telephone conversation with Miss Chan in which Miss Chan told her that the Purchase Order would be revised and asked her to follow the instruction from the site. I accept Miss Ng's evidence that in the unrevised Purchase Order she received on 7th May 1997, the names she wrote down, namely, Mr Wong and Mr Lau, were names provided to her by Miss Chan. In my view, the Defendant was fully aware of this Purchase Order. The Defendant, through Miss Chan, represented to Miss Ng that the staff at site had the authority to place the order. This is an order placed by Standard Regent with the authority of the Defendant.

33. I further accept Miss Ng's evidence that the invoices for this Purchase Order were dispatched on 21st and 28th May 1997 and 12th June 1997 respectively. The Defendant could not possibly have mistaken that these invoices were for the earlier February 1997 Purchase Order because by April 1997, the Defendant had already made one payment of the February Purchase Order. The invoices were addressed to the Defendant. The Defendant had made no protest whatsoever when it received the invoices. Miss Chan said that she sent the invoices to Miss Ho of Standard Regent, this may or may not be true but it has no effect on the outcome of this part of the case. Even if she had sent the invoices to Standard Regent, I do not consider this to be an indication that the Defendant is not responsible for the Purchase Order. It may well be the arrangement between Standard Regent and the Defendant required this to be done.

34. The next question is of course on the "forged" Purchase Order of 7th May 1997 sent to Miss Ng by Standard Regent. I accept that the Defendant had not authorised Standard Regent to issue purchase orders in its name and on balance, I accept Standard Regent had forged the purchase orders. There was no reason why the Defendant would allow Standard Regent to use a forged purchase order in placing orders. But I do not think the case of Slingsby would assist the Defendant. It is not a matter of condoning the criminal act of Standard Regent. While the Purchase Order was a forged one, the actual order placed by Standard Regent was one actually authorised by the Defendant. The total amount covered by the invoices for the 7th May 1997 Purchase Order is $487,195.80. The Plaintiff is entitled to this sum.

Subsequent Purchase Orders

35. In my view, the Defendant is not liable for the subsequent orders. Unlike the February Purchase Order or the 7th May 1997 Purchase Order, Miss Chan had not discussed with Miss Ng about these orders at all. They were all placed by Standard Regent and I find, without the knowledge of the Defendant. Miss Ng was asked if there was any discussion on 7th May 1997 with Miss Chan about future order. The answer given by her is that she was told by Miss Chan that it was "to be done in accordance with the site instruction". In my view, this is not a general representation that all future orders could be placed by Standard Regent. The conversation was clearly referring to the transaction on 7th May 1997. Miss Ng had said that in July 1997, she was asked by the site to submit a quotation. She asked Miss Chan if the Defendant had any objection to this. This episode does not, in my view, support the Plaintiff's claim against the Defendant. Furthermore the written purchase orders were forged ones and the Defendant could not in anyway condone the criminal acts.

36. The bulk of the invoices for the subsequent purchase orders were dispatched by the Plaintiff to the Defendant on 21st and 30th July 1997 and 5th August 1997. The period between 21st July and 8th August 1997 clearly cannot be held against the Defendant. I accept Miss Chan's evidence that as soon as she discovered this large batch of invoices, she reported the matter to the Defendant and the forgery was then discovered. The letter of 8th August 1997 written by the Defendant to the Plaintiff is clearly consistent with what Miss Chan has said. On 12th August 1997, the Defendant also wrote to Standard Regent, stating that :-

"It has come to our attention today that you have printed company order forms in our name, without our permission and are using them to place orders with outside companies. A copy of the order is attached.

We subsequently discussed this matter on the telephone with you this morning.

The action you have taken is not legal and we cannot accept any invoices or charges which may result from your actions.

We require you to notify us and give us a copy of all orders which you have placed under our name and also return to us today all unused printed material in our companies name.

We reserve the right to take further action should the need arise."

Proposal for repayment

37. The Plaintiff submits that the stance taken by the Defendant that it did not place the subsequent orders is totally inconsistent with its proposal for repayment to the Plaintiff when the Plaintiff's solicitors demanded payment for the unpaid sums. The response of the Defendant to the solicitors' demand is contained in the letter of 6th September 1997 which states that :-

"As you may well aware there are at least three parties involved in the placing and receipt of the goods at issue, namely, Enfield/Wing Mou (the Main Contractor), Shing Lee - we as the sub-contractor and Standard Regent - our sub-contractor. From the records, most of orders were placed and received by our sub-contractor. We are at present checking the issue as well as to identify the recipient of the goods. This operation will take some time to complete. We hope you will be kind enough to allow us for more time to resolve this matter. Your previous support and patient extended to our company is appreciated. However, we shall be most obliged if you could allow us to put forward a repayment proposal to you on or before 20th of September for approval and consideration."

The author of the letter, Mr Lau, did not give evidence and, of course, one does not know why he wrote in such a manner. However, the proposal for payment is not totally inconsistent with the stance now taken by the Defendant. Clearly, it recognised that it was indebted to the Plaintiff for certain purchase orders and in this case the Purchase Order of 7th May 1997.

38. I accept Miss Ng's evidence that Miss Chan did explain to her the reason for not settling the invoices was because of the delay of payment by the main contractor. However, this is not an indication that Miss Chan was aware that Standard Regent had continued to place orders with the Plaintiff after the 7th May 1997 Purchase Order. Afterall, the February 1997 Purchase Order was only finally settled in June 1997.

39. Miss Ng said that after she received the fax from the Defendant dated 8th August 1997, she telephoned Miss Chan to ask her if it was necessary to take back the timber as they did not belong to the Defendant. Miss Chan later told her not to panic, the timber were at the site and covered by canvas and she did not ask Miss Ng to take them back. I do not consider this is to be an indication that the Defendant had authorised Standard Regent to order the goods. The fact that the Defendant did not ask Miss Ng to take back the goods is not an unequivocal admission of liability.

Conclusion

40. Regrettably I have come to the conclusion that the Plaintiff is only entitled to recover part of the claim from the Defendant. Regrettable because the Plaintiff is clearly an innocent party. I will give judgment to the Plaintiff in the sum of $487,195.80 with costs at judgment rate from 11th August 1997 to payment. The Plaintiff is to have costs nisi of the action.

Application for adjournment

41. I would add that an application was made by the Defendant on the first day of the trial for an adjournment on the ground that Mr Lau was not in Hong Kong. The ground put forward for adjournment was extremely sketchy. It was said that Mr Lau was attacked by a group of people in Hong Kong in December 1998 and he had then left for treatment in Canada. No details were given as to why he had to go to Canada nor was it explained what type of medical treatment he was required to undergo in Canada. Bearing in mind the case was already adjourned once last year when the Defendant only supplied the witness statements on the day of the hearing, I refused a general adjournment of this case but instead allowed a short adjournment to allow Mr Lau to give evidence on Friday (the trial started on Monday). However, Mr Cheung informed the Court that Mr Lau would not come back to give evidence.