TOYMAX (H.K.) LTD. v. REDSMITH INTERNATIONAL LTD.

1992, No.A4178

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 an action for the price of goods manufactured and sold.

2. The Plaintiff, ("Toymax"), is a Hong Kong company in the business of manufacturing and exporting toys. One of its products comprises talking, action-dolls and their accessories which it calls its M Pact Series, the theme being some sort of international under cover police or secret agent's work.

3. Redsmith City Toys France ("Redsmith France") is a French company in the business of importing toys to France for sale there and in other countries.

4. On 3rd December 1991 in Hong Kong, Toymax and Redsmith France entered into a written contract (B.D.1) together, ("the Agreement"), under which Redsmith France was to buy at least US$1 million worth of M Pact Series toys from Toymax at specified prices in the year following the signing of the Agreement, during which time Toymax granted Redsmith France exclusive rights in respect of the product in France and other specified Francophone countries. The "talk" of the dolls, naturally, had to be French, and the writing on the packaging was in French.

5. One of the terms of the Agreement was that Redsmith France had to open a letter of credit in Toymax's favour for US$100,000 before 15th December 1991, a condition with which Redsmith France duly complied.

6. For Teymax, the Agreement was signed by its president, Mr Chu, while for Redsmith France the signatory was one of its directors, M. Dejade.

7. Redsmith France has an associated company incorporated in Hong Kong, Redsmith International Limited, ("Redsmith Hong Kong"), which is substantially owned by more or less the same people as Redsmith France.

8. Redsmith Hong Kong is in the toy exporting business.

9. On 21st February 1991, Redsmith Hong Kong, using its own printed standard contract form, (B.D.8), in each instance, placed three orders with Toymax to buy items in the M Pact Series pursuant to the Agreement. The combined value of the three orders was US$104,963.

10. In due course, reference will be made to some of the printed terms and conditions on the back of Redsmith Hong Kong's standard contract form, but, for the time being, it is sufficient to note that, on the front of each of the three contract forms with which the present case is concerned, Ms. Connie Lin, General Manager of Redsmith Hong Kong, signed along the dotted line immediately under "Redsmith International Limited" and immediately above "As Agents For Overseas Buyers".

11. Everything proceeded normally with those three orders upto and including the 6th April 1992, when representatives of Redsmith Hong Kong inspected the goods which Toymax had had made in China and approved them as being in accordance with the contract.

12. The shipment date under the letter of credit for US$100,000 had been extended by Redsmith France upto 10th April 1992, with documents having to be presented by 30th April 1992. Despite the goods conforming with the contract, neither Redsmith France nor Redsmith Hong Kong ever nominated a vessel, or otherwise made arrangements, for taking delivery of the goods. The reason for that, quite simply, was that Redsmith France found its markets flooded with this type of product, so decided not to honour the Agreement. Mr Dejade admitted that openly in court.

13. Toymax now finds itself stuck with the full US$104,493 - worth of French-speaking dolls and their paraphernalia it caused to be manufactured for Redsmith France under the three orders placed by Redsmith Hong Kong. I accept Mr Chu's evidence they are unsaleable, and that it would cost more to change the packaging and adapt them to speak the language of a country where they might be saleable, (if any exists), than to manufacture new dolls from scratch.

14. If Toymax had sued Redsmith France for the price of the dolls it would have had an open and shut case. Likewise, if it had sued both Redsmith France and Redsmith Hong Kong in the alternative. Instead, it chose to sue the least promising target, Redsmith Hong Kong on its own.

15. The Agreement was the first time Toymax and Redsmith France had done business together. Represented by Mr Chu, Toymax or one of its subsidiaries, Charterking Ltd., ("Charterking"), or Tai Ngan Ltd., ("Tai Ngan"), had, however, done business with a company called Bikin Ltd., ("Bikin"), which previously held the exclusive right in Francophone countries to sell the M Pact Series manufactured by Toymax or its subsidiaries.

16. Redsmith France had taken over Bikin together with some of its employees including M. Oliver Lepers, and Mr Van Damme.

17. Because Mr Chu had not been happy with the way Bikin and its employees did business with him and his companies when it came to payment, he was not, at first, prepared to grant exclusive rights in Francophone countries for the M Pact Series to Redsmith France, (whose negotiating team for the Agreement included M. Lepers and Mr Van Damme), unless Redsmith France came up with letters of credit covering the full US$1 million proposed minimum purchases.

18. Another customer with which Charterking and Tai Ngan had done business was Redsmith Hong Kong. The nature of that business appears, more likely than not, to have been Redsmith Hong Kong's acting as agent for disclosed, but unnamed, foreign principals, placing orders to buy and export toys for which Redsmith Hong Kong, by its own cheque, paid. Those sorts of transactions were entered into by Charterking or Tai Ngan with Redsmith Hong Kong both before and after the Agreement.

19. Redsmith Hong Kong does not dispute it was personally liable for the price of the goods bought for unnamed foreign principals from Charterking and Tai Ngan, but contends the situation between the parties to the present action is different because,

(i) the identity of its foreign principal, Redsmith France, was known to Toymax before Redsmith Hong Kong placed the three orders,

(ii) payment was to be by letter of credit opened by Redsmith France for Toymax, and

(iii) Ms. Connie Lin, the General Manager of Redsmith Hong Kong, had explicitly told Mr Chu immediately after the Agreement had been negotiated between Toymax and Redsmith France, but just before it was signed, that Redsmith Hong Kong would not be liable under the Agreement since it would be acting merely as Redsmith France's local agent here to administer the Agreement over such matters as collecting samples from Toymax for despatch to Redsmith France, issuing buy orders, and inspecting the goods prior to delivery.

20. There is a dispute of fact between the parties over the stage at which Ms. Connie Lin joined the negotiations between Mr Chu of Toymax and M. Dejade and his team from Redsmith France on 3rd December 1991 before the Agreement was signed, and what she is supposed to have said.

21. According to Mr. Connie Lin and M. Dejade, she was only called into the room where negotiations took place after the Agreement was concluded. She was aghast, so the defence version goes, to find that the parties had concluded a deal directly between themselves, since such an arrangement precluded Redsmith Hong Kong factoring a mark-up for itself into the sales price. Ms. Connie Lin is supposed to have announced that Redsmith Hong Kong was only prepared to assist in the implementation of the Agreement on a basis of Redsmith Hong Kong not incurring any personal liability. An unlikely tale which did not ring true, in my view.

22. What 1 found more likely was Mr Chu's version which was to the effect that it was the participation of Ms. Connie Lin in the negotiations which influenced him in deciding to enter into the Agreement without the whole US$1 million minimum purchase during the Agreement's one year life being backed up by letters of credit.

23. I am not satisfied, however, that Redsmith Hong Kong, either expressly or impliedly, by words or conduct, engaged itself for any personal liability to Toymax. The impression I got was that Mr Chu felt more confident about Redsmith France when he knew it was allied with Redsmith Hong Kong, a company with which his subsidiaries had had satisfactory business dealings in the past, but the evidence as a whole did not satisfy me that Ms. Connie Lin held out Redsmith Hong Kong as accepting joint or several liability with Redsmith France under the Agreement.

24. The oral evidence of what transpired at the meeting of 3rd December 1991 and the history of prior dealings is, in my view, too vague to pin any personal liability on Redsmith Hong Kong for any defaults of Redsmith France under the Agreement. Moreover, the content of the Agreement and the three purchase contracts of 21st February points away from Redsmith Hong Kong's liability, too.

25. To the Agreement itself, Toymax and Redsmith France are the only parties, without any reference to Redsmith Hong Kong. What is more, the letter of credit requirement points strongly towards Toymax looking solely to Redsmith France for payment.

26. Neither do any of the three purchase orders of 21st February 1992 on Redsmith Hong Kong's standard printed contract form point towards personal liability on Redsmith Hong Kong's part, since Redsmith Hong Kong, in terms, signed "As agents for overseas buyers" in circumstances where Toymax was in no doubt over the identity of Redsmith Hong Kong's overseas' principal.

27. Those appearing for Toymax sought to make much of some of the printed terms and conditions on the back of Redsmith Hong Kong's printed standard contract form as indicative of Redsmith Hong Kong's personal liability. Term No.1 was singled out, since it purports to entitle Redsmith Hong Kong to sue on the contract in its own name. Likewise, Clauses 5 and 6 which refer to court proceedings between agent and seller, with the seller being liable for "loss damages and expenses incurred by the agent". In respect of Condition No.7, it was pointed out on Toymax's behalf that the agent is given the right to terminate the contract if monies are due to the agent under other similar contracts. Clause 11, by excluding liability on the agent's part for various frustrating events such as act of God, force majeur and the like, is said by Toymax to pre-suppose personal liability on Redsmith Hong Kong's part, for, otherwise, why bother to make an exclusion provision?

28. Basically, the argument advanced on Toymax's behalf in relation to those terms and conditions in the standard form contract is that if Redsmith Hong Kong on the up-side seeks all those personal advantages, on the down-side it must accept corresponding liabilities on a reciprocal basis.

29. In my view, most of the so-called advantages Redsmith Hong Kong claims under its standard terms and conditions are illusory, since it would have difficulty enforcing them in court for want of consideration. On this, see Chitty on Contract (26th ed.) para. 2570, f.n.89. Moreover, even applying the contra proferentem rule in construing the terms and conditions, I fail to see how they impliedly bring about personal liability for Redsmith Hong Kong in the present case where on the front of the contract form it is explicitly stated that Redsmith Hong Kong was signing "As agents for overseas buyers" in circumstances where the seller, Toymax, all along knew about the overseas buyers, Redsmith France.

30. I have not overlooked Term and Condition No.14 that the contract is to be governed by the laws of Hong Kong, but do not regard that as of any particular significance.

31. The strongest point in Toymax's favour is that Redsmith Hong Kong paid Toymax directly for samples. On that, though, I see no reason to doubt Redsmith Hong Kong's explanations that it settled the invoices for these, since the amounts involved were relatively trivial, and I do not regard that circumstance as amounting to a holding out to Toymax by Redsmith Hong Kong that the latter was accepting liability to pay for the bulk of the goods.

32. None of the witnesses rated highly for credibility. It looks as if Mr Chu was probably less than frank with his own solicitors in leading them to believe Toymax did not know who the ultimate overseas buyer of the goods was.

33. Both M. Dejade and Ms. Connie Lin left me with the impression they were not telling me the truth in their account of how Ms. Connie Lin was alleged to have appeared on the scene after negotiations for the Agreement had just been concluded, whereupon she was supposed to have uttered a disclaimer of liability too good to be true, on Redsmith Hong Kong's behalf. Another source of denting for her credibility was her contention she did not know Redsmith France and Redsmith Hong Kong were companies associated through common shareholdings.

34. Because of problems over credibility of all the witnesses, the court was left in the position of having to make up its mind over matters of fact on the basis of inherent probability.

35. Under the law, there can be no doubt that, if the circumstances so warrant, an agent can be liable at the same time as the principal. The authority for that is the Privy Council case of Kai Yung v. Hong Kong & Shanghai Banking Corporation [1981] AC 787, 795, where Lord Scarman, delivering opinion of the Board stated,

"It is not the law that, if a principal is liable his agent cannot be. The true principle of the law is that a person is liable for his engagements (as for his torts) even though he is acting for another, unless he can show that by the law of agency he is to be held to have expressly or impliedly negatived his personal liability."

36. On the slightly unusual facts of that case, involving the entitlement of a person invested with a statutory or common law duty of a ministerial character - in that case, the keeping by a company of its share register - to an indemnity from a party who acts in the capacity of an agent - there a stock- broker acting for a customer who requested him to act by getting shares registered - the stock-broker was liable to the company in respect of loss arising from the dishonesty of the stock-broker's customer who had stolen the shares in question. There, both the stock-broker as agent and his customer as principal were liable to the company.

37. Apart from stating the general principle, the Kai Yung case is not really a lot of help when it comes to making a determination on the rather different fact situations which obtain in sale of goods cases. Despite argument to the contrary advanced on Toymax's behalf, I do not think that N. & J. Vlassopulos Ltd. v. Ney Shipping Ltd. (The "Santa Carina") [1977]1 LI.L.478 would need to be decided any differently after Kai Yung. That was a straightforward case of a shipping broker over the phone ordering bunkers on behalf of the time-charteres of a vessel. The seller knew the broker was not ordering the bunkers for himself. In Lord Denning's words (at page 482):

"It is just the same, it seems to me, as if the brokers had given a written order for the bunkers and added to their signatures 'as agents only'. In that case they would not have been personally liable."

38. It so happens that in the case before me, with its standard-form written contracts, that Redsmith Hong Kong did add after its signature, "as agents for overseas buyers". Redsmith Hong Kong's signing it that way is a strong indicator against its assuming personal liability. As put by Bokhary J. (as he then was) in Castlespring Enterprises Limited v. Core Resource (H.K.) Limited (1987 No.A4876, unreported), a sale of goods and agency case, "The formula 'for and on behalf of' is very telling". Likewise, "As agents for overseas buyers", is very telling, too.

39. A useful way of approaching the present case is to adopt the technique of Lord Denning, M.R., in The Santa Carina, page 482, where, in relation to whether the broker was liable as agent for the bunkers bought, Lord Denning pointed out "It can be tested by taking the converse case", which, in the present case means considering on what the position would have been if Toymax had breached the Agreement by selling the M Pact Series to a competitor of Redsmith France in the Francophone area where Redsmith France was supposed to enjoy exclusive rights. Could Redsmith Hong Kong sue Toymax over that? I think the answer is clearly, No. It would be Redsmith France which would have to sue over that, and the obverse side of that coin is that when it comes to suing for the price, Toymax has to go against Redsmith France.

40. There are even explicit acknowledgments in the Witness Statements filed on Toymax's behalf that Redsmith Hong Kong was merely an agent. In particular I have in mind, the second sentence of paragraph 8 of Mr Chu's statement :

"Moreover, pursuant to the Agreement, 3 Contracts for the sale and purchase of various toys products ('the said toy products') were entered into by the Plaintiff and the Defendant on behalf of City Toys at a total price of US$104,963.88."

and paragraph 4 of the statement of Mr Cheung Sui Wah, Edward, Toymax's shipping manager :

"4. Later in February and March 1992, the Plaintiff entered into 3 Contracts ('the Contracts') with City Toys through its local buying agent, the Defendant herein for the sale and purchase of various toy products ('the said toy products') at a total price of US$104,963.88 pursuant to the Agreement."

41. In the witness-box, too, Mr Chu impliedly acknowledged that Redsmith France had dropped out of the picture, and Redsmith Hong Kong taken over when he said that he looked to Redsmith France to accept the goods.

42. Assistance was sought on Toymax's behalf from the principle established by Amalgamated Property Co. v. Texas Bank (C.A.) [1982]1 Q.B.84 that, where parties conduct their business on a common assumption, the courts will not allow a party to resile from that assumption.

43. According to those representing Toymax, the common assumption in the present case was that Redsmith Hong Kong would stand behind Redsmith France to ensure that Toymax got paid.

44. In my view the facts, such as they are, do not give rise to a situation where Redsmith Hong Kong is estopped from denying liability to Toymax for the price.

45. As I see the position, Toymax allowed itself to be lulled into a situation where it thought Redsmith France was a company of integrity because of its links with Redsmith Hong Kong. Because Redsmith France appeared to come from the same stable as Redsmith Hong Kong, Mr Chu decided it was alright to do business with Redsmith France. Those facts, to my mind, fall short of any common assumption by Toymax and Redsmith Hong Kong that Redsmith Hong Kong was undertaking to pay for goods ordered under the Agreement.

46. The reality was, I am satisfied, that at the time the Agreement was made Toymax was looking to Redsmith France alone to pay, the agreed source of such payment being the letter of credit Redsmith France was obliged to and did open.

47. In view of what is said above, I hold that Toymax has failed to prove that Redsmith Hong Kong is liable.

48. Were I wrong on that, the damages I would award Toymax would be US$104,963, the full sale price of the goods Toymax manufactured, since there was no realistic possibility of Toymax mitigating its loss.

49. This is a judgment delivered pursuant to O.42, r.5B. I make an order nisi that costs are to follow the event.