PRINTING BEST OFFSET CO. LTD. v. SUPERLUCK PAPER PRODUCTS FACTORY and Another

1991, No.A4997

IN THE HIGH COURT OF HONG KONG

COURT OF FIRST INSTANCE

______________

______________

______________

J U D G M E N T

______________

1. This action is about the ownership of sawboards. The amount in issue is of the order of $150,000. It is most regrettable that this dispute has required eight witnesses and three days of court time to resolve and that the parties could not agree to an amicable settlement, preferring to incur substantial costs which are wholly disproportionate to the amount at stake.

2. The Plaintiff is a printing company which makes coloured paper boxes among other products for its clients. Evidence was given on its behalf by one of its directors Mr Leung Pak Kuen. The 1^st Defendant was a partnership established in 1986 between Lau Pui Ming and Lee Choi Fung, the mother of Chan Pak Lam ("Mr Chan"). The 1^st Defendant ceased business at the end of June of 1990. The 2^nd Defendant is a partnership between Mr Chan and one Wong Ming Kei who used to be the sole proprietor of Kam Fai Company which was engaged in the business of providing certain processing services in the manufacture of paper boxes. The 2^nd Defendant was apparently formed in 1989 but Mr Chan himself did not work there until 1^st July 1990.

3. In manufacturing coloured paper boxes for its clients, the Plaintiff produces the printed colour paper. It does not have the facilities for die-cutting or glueing which are processes required in the production of the colour printed boxes. So it contracts this work out to contractors who perform those processes for it.

4. At the end of February 1987, the Plaintiff commenced a business relationship with the 1^st Defendant. Mr Chan stated that he was employed as a supervisor of the 1^st Defendant. In fact the evidence is that he had only one client and the one client was the Plaintiff. The earliest invoice was dated February 1987 and it appeared that initially the business from the Plaintiff accounted for 30% of the turnover of the 1^st Defendant. But this percentage grew rapidly and certainly by late 1987 it accounted for half of the 1st Defendant's business and soon grew to about 70-80%. Mr Lau's evidence is inconsistent with Mr Chan's evidence in this regard : he does not accept that the business given by the Plaintiff amounted to as much as 70-80%, at least not until two or three months before the 1^st Defendant ceased its business.

5. Mr Leung who gave evidence on the Plaintiff's behalf stated that his family and Mr Chan know each other extremely well; their friendship dates back about 30 years and in fact the Plaintiff had given assistance to the 1^st Defendant at the time when the 1^st Defendant's business expanded. Mr Chan accepts that he knows the younger brothers of Mr Leung extremely well but said that he did not have such a close relationship with Mr Leung himself. It is not disputed that the Plaintiff made advances to the 1^st Defendant and these advances were repaid by way of deduction in respect of invoices payable by the Plaintiff for orders placed with the 1^st Defendant.

6. Mr Chan was no ordinary supervisor. He took all decisions without having to refer or report to, or seek approval from any one insofar as it concerned business conducted with the Plaintiff. His mother who was in partnership with Mr Lau did not run the business and was not actively involved in any way. There was no evidence as to the extent of each partner's interest in the partnership but Mr Chan did not report to Mr Lau. The one major client of the 1^st Defendant was serviced by Mr Chan. From the evidence, it is clear that Mr Chan was a de facto partner.

7. In the middle of 1990, Mr Chan left the 1^st Defendant and set up business in partnership with Mr Wong. Mr Chan started working for the 2^nd Defendant as one of two partners beneficially interested in July 1990. He was eager to continue the business relationship with the Plaintiff and sent the Plaintiff a notice described as "Moving Notice and Change of the Company's Name" ("the Notice"). This Notice stated that with effect from July 5^th 1990, the 1st Defendant and Kam Fai Company would form a joint venture known as Hung Cheong Industrial (Paper) Company, relocating to a new address stated to be Unit A, 11/F, Block B, Marble Industrial Building, 17-23 Kwai Fung Crescent, Kwai Chung, New Territories which was the address of Kam Fai prior to the merger.

8. To revert to the production process, the Plaintiff would place orders with a processing company such as the 1^st Defendant who would be responsible for preparing a drawing after receiving the printed colour paper from the Plaintiff. The dimensions of the box appeared on the printed paper and the drawing would be prepared on this basis. After the drawing was ready, a piece of plywood would be purchased. The plywood supplier would then be asked to cut grooves in the board based on the drawing. Thereafter the 1^st Defendant would insert blades into the grooves. Rubber pads would be glued on to the board and this would become the sawboard used for die-cutting the printed paper. The evidence is that the cost of the materials (excluding labour) for the creation of a sawboard is very low. The Plaintiff produced three sawboard samples (exhibits P1 to P3) and the Defendant one (exhibit D1). Although they differ somewhat in size, the evidence of Mr Chan is that for exhibit D1 the materials would not cost more than about $40 whilst the Plaintiff's exhibits would cost a little more. Further, generally speaking it would only take an hour on average to produce a sawboard. The printing company would be charged between $250-$450 for a sawboard depending on size and complexity.

9. It is common ground from the evidence given that a sawboard is normally capable of being used more than once. It would depend on the size of the orders. On the Defendant's evidence it would normally be capable of cutting 20,000 to 30,000 pieces of paper. On the Plaintiff's evidence, it should be capable of cutting up to 100,000 pieces of paper. There is certainly evidence of repeat orders for at least 59 of the sawboards that are in issue. It is also common ground that a sawboard could become damaged after being used and that the blades might turn rusty. This would depend on the conditions in which the boards are kept. The printing company would have to pay for the sawboard when it places the first order but not when orders are repeated.

10. The evidence of Mr Chan and Mr Chiu is that the sawboards would often be damaged and they would be discarded. When a repeat order was received, they would absorb the cost of producing a new sawboard if the original one had been discarded on the basis that the profit to be made from the die-cutting order would more than justify the absorption of this cost. After the die-cutting process, there was also a glueing process but it is unnecessary for present purposes to go into that.

11. By September of 1990, the relationship between the Plaintiff and Mr Chan turned sour. The Plaintiff felt that its orders were not given priority, that promises for deliveries were not kept and generally they were dissatisfied with the level of service provided by the 2^nd Defendant. Mr Chan for his part complained about the number of urgent orders received from the Plaintiff, that he was not given enough time to perform them; that he had to burn the mid-night oil far too often and that generally the Plaintiff was unreasonable in not allowing sufficient time for the orders to be performed. Whatever the reason, in September/October 1990, the Plaintiff asked for the return of all sawboards made by the 1^st and 2^nd Defendants which it had paid for. The Plaintiff stated that despite having been promised that they would be returned, apart from a handful, they were not.

12. Mr Leung's evidence is to the effect only those listed in Schedule I and III to his statements were returned. Schedule I contains particulars of one sawboard that had been returned by the 1^st Defendant pursuant to the Plaintiff's request in May of 1990. This was prior to the commencement of the business relationship with the 2^nd Defendant. Schedule III lists six sawboards that had been made by the 1^st Defendant but returned by the 2^nd Defendant to the Plaintiff in August and September of 1990. So apart from these seven instances, the other sawboards paid for by the Plaintiff, totalling 496, have not been returned. The Plaintiff therefore commenced this action.

The Issues

13. The central issue is the ownership of the sawboards. A subsidiary issue is whether the 1^st Defendant merged with Kam Fai to become the 2^nd Defendant as the Notice appeared to suggest.

14. On the evidence it is clear that it was charged something in the region of several hundred dollars for each sawboard. Having regard to Mr Chan's evidence as to the cost of the materials, labour accounted for the bulk of the charge. The Plaintiff's case is that because it paid for the sawboards, it owns them. Further, it is trade practice that the customer who pays for the sawboard would own it. As pleaded, the defence is that there was no agreement between the parties that the Defendant would return the sawboards to the Plaintiff. The Defence filed did not contain any plea of a positive agreement as to ownership which Mr Chan sought to assert when he gave evidence. The correspondence from the 2^nd Defendant's solicitors on 25 October 1990 and 6 February 1991 as well as letters dated 12 October 1992 and 15 October 1994 from the 2^nd Defendant to the Plaintiff make no reference to the alleged oral agreement at all. In fact the letters from the 2nd Defendant expressly acknowledged that the boards were produced for the Plaintiff. The first mention of any oral agreement was made five years later when Mr Chan filed his witness statement in November 1995. This has the trappings of an afterthought.

15. Mr Chan's evidence as regards this oral agreement is unsatisfactory : it was lacking in particulars. He said that he reached an oral agreement with Mr Leung at the commencement of the business relationship with the Plaintiff in February of 1987 that the 1^st Defendant would be entitled to the ownership of the sawboards. But it is not apparent what prompted Mr Chan to stipulate for such a term.

16. The evidence given by him and by his experts may be summarised as follows. The boards cost very little to produce. After being used once, they were virtually valueless : they would often be damaged. Further, there was no place to store them and they would normally be discarded. All this, of course, has no bearing on the reason why there was a need to stipulate for ownership of the boards. Then Mr Chan spoke about the skill involved in the insertion and bending of blades into the grooves and that this professional know-how must be kept secret and if the boards were not owned by the Defendants, the know-how would be revealed to his detriment. Suffice to say that I have grave difficulty in seeing how any one looking at these boards could really acquire any professional know-how.

17. Then it was said the die-cutting company could not be under any obligation to store the boards for the customer. But it is not the Plaintiff's case that the Defendants were under any obligation to store the boards. There was nothing to prevent the Defendants from returning the sawboards to the customer or to seek the customer's permission to discard sawboards whether or not they were still usable. From the business standpoint, the Defendants were more likely to retain business for repeat orders if they retained possession of the boards. If the boards were returned to the customer, the customer could easily send them out to other processors for die-cutting. So viewed pragmatically, one can easily understand why the boards were not normally returned to the printing company but retained by the die-cutter. But again that fact has no bearing on the question of ownership.

18. There is evidence that on at least one occasion when the 1st Defendant could not meet the deadline the sawboard was retrieved and given to another company for die-cutting. One of the Plaintiff's experts, Mr Herbert Chan, stated that he had performed die-cutting orders for clients who came to him with sawboards. This tends to corroborate the Plaintiff's evidence that a printing company would retrieve a sawboard from one processor and place it with another in circumstances where the first processor was unable to carry out the particular order on time. Mr Liu Jum Lun who gave evidence for the Defendants also referred to instances, albeit infrequent, that requests were made for the return of boards usually when a dispute arose between the parties. The fact that such requests were made would support the view that the ownership of the boards were with the customer that paid for them.

19. Counsel for the Defendants submitted that the proper way of analyzing the situation is that the boards were a necessary tool in the die-cutting process for which a fee was charged for both labour and material cost and that on that basis the boards should belong to the Defendants. The logic of this submission escapes me. It does not appear to be any reason at all that because it is a necessary tool in the die-cutting process, the sawboard should belong to the Defendants where it had been charged to and paid for as a separate item by the Plaintiff.

20. For the reasons set out above, I do not accept Mr Chan's evidence that there was an express oral agreement between him and Mr Leung regarding ownership of the sawboards.

21. The Plaintiff also called expert evidence to deal with trade practice with regard to the ownership of the sawboards. Mr Ma Wai Mo, a director of the Luk Ka Industrial Company, a substantial company engaged in the business gave evidence. He has 30 years' experience in the trade and is the Chairman of the Hong Kong Corrugated Paper Manufacturers' Association.

22. I was asked by counsel for the Defendants to view Mr Ma's evidence with circumspection because of a business relationship that his company has with the Plaintiff. The same criticism was made of Mr Herbert Chan, the other expert called by the Plaintiff who has been in the business for 25 years. Mr Herbert Chan's company has, on a few occasions, done work for the Plaintiff.

23. Mr Ma's evidence is to the effect that the practice in the trade is that the sawboards would belong to the printing company if it paid for them. The boards would normally be left in the custody of the die-cutter so that when there were repeat orders, they could be carried out more easily and expeditiously. Mr Ma said that more than 3,000 sawboards are kept by his company on behalf of various customers and there is a retrieval system which enables the relevant sawboards to be retrieved with comparative ease. Sawboards would be returned when there were no more dealings with a particular customer or at the request of a customer.

24. Mr Chan's evidence is consistent with that given by Mr Ma.

25. The Defendants' expert Mr Chiu, a former employee of the Defendants, said that there was no such trade practice regarding the ownership of the sawboards or their return to customers. Comparatively speaking, Mr Chiu's experience is somewhat limited. He has been in the trade for 10 years but for five of those, he was under the tutelage of the 1^st Defendant and the 2^nd Defendant. It is unclear whether he worked under Mr Chan or Mr Lau. For some 3½ years, Mr Chan had only one customer i.e. the Plaintiff. This would have seriously limited Mr Chiu's exposure. Mr Chiu did not strike me as having the depth of experience that one would expect from an expert. Although he said in evidence that sawboards are never returned to the customer, when questioned further, it emerged that that was merely his own experience. He acknowledged that of the seven companies engaged in the same trade in the same industrial building, he only knew three of them well and that in fact he had never discussed that question with them.

26. Having heard the evidence of the experts, whilst noting the business relationship of Mr Ma and Mr Herbert Chan with the Plaintiff, I find their evidence to be the more convincing and persuasive. They struck me as honest and reliable witnesses and I accept their evidence on trade practice.

27. In all the circumstances of this case and on the evidence, I find that the Plaintiff owns the sawboards in issue.

28. I now turn to the question of damages.

29. The general rule in the case of conversion is that the measure of damages should reflect the market price or market value of the goods converted. If there is no evidence of the market price then either the original cost or the replacement cost would be indicative of the measure of damages. See Clerk and Lindsell on Torts, 17^th Edition at paras.13-114 and 13-124. To similar effect is the passage in Srivastava and Tennekone, The Law of Torts in Hong Kong, 1995 Edition at pages 102-3. In the present case, there is no evidence of market price or market value. There is evidence of the original cost, both of the 474 sawboards made by the 1^st Defendant and also the original cost of 22 sawboards made by the 2^nd Defendant, none of which had been returned to the Plaintiff.

30. So far as the cost of the sawboards are concerned, the Plaintiff is content, given the small difference between replacement cost and the original cost of the sawboards, to adopt the original cost as the measure of its damages. There is also a claim for consequential damages flowing from the alleged termination of a business relationship by Minwa Electronics Co. Ltd. Although Mr Leung gave some evidence about this, there was really nothing to substantiate his evidence and I do not regard the evidence adduced as sufficient in establishing the Plaintiff's claim to consequential damages.

31. The only question that remains is the subsidiary issue which would affect the question whether judgment should be against the 1^st Defendant and the 2^nd Defendant or only against the 2^nd Defendant.

32. It is not without significance that the 2^nd Defendant was able to return to the Plaintiff six sawboards that had been made by the 1^st Defendant and use sawboards made by the 1^st Defendant for orders placed by the Plaintiff with the 2^nd Defendant : see Schedules III and II to Mr Leung's statement. This would only have been possible if there had been a merger as the Notice suggested or if the 2^nd Defendant had the custody of the Plaintiff's sawboards from the 1^st Defendant. Given Mr Chan's role in the 1^st Defendant, his eagerness to channel the Plaintiff's business to the 2^nd Defendant and the fact that he was able to procure the return of some of those sawboards to the Plaintiff, whether there was in fact a merger of the 1^st Defendant with Kam Fai to form the 2^nd Defendant, I find that the 2^nd Defendant had access to and custody of the sawboards that had been made by the 1st Defendant for the Plaintiff.

33. On the facts that I have found, I come to the conclusion that judgment should be entered against the 2^nd Defendant only. I will therefore make an order against the 2^nd Defendant in respect of the original cost of all 496 sawboards which amount to $152,710. Interest from the date of the writ is payable on this sum at the rate of 10% per annum until payment. Costs will follow the event and I award them to the Plaintiff.