MAN SANG ENVELOPE MANUFACTURING CO LTD v. 1,2,3, PRINTING SERVICES LTD

HCA 1352/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1352 OF 2001

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(Consolidated pursuant to the Order of Master M. Yuen dated 23.2.2002)

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JUDGMENT

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1. These are claims and counterclaims before me for resolution in two actions brought under Nos. 1352/2001 and 3804/2001. They arise out of a falling out between a Hong Kong based printer and its customer. The printer is suing to recover the contract price of work undertaken for goods made and delivered and for the price of work undertaken in respect of which the customer has declined to take delivery. The customer's counter is that the printer is in breach of contract and it claims in damages an amount greater than any sums properly due.

2. First, a history.

3. Man Sang Envelope Manufacturing Co. Limited (Man Sang) is a company incorporated in Hong Kong. Its primary business is that of paper product manufacturing for and on behalf of customers whose orders are negotiated and then confirmed in a document referred to as a sales confirmation. At all material times a Miss Kitty Lau (Miss Lau) has been and is to date employed as Man Sang's sales manager and has on its behalf had conduct of its affairs leading to these proceedings.

4. 1,2,3, Publishing House Limited (Publishing House, first) was a company incorporated in the U.K. It was dissolved in July 1999. In November 1999 123 Publishing House Limited (Publishing House, second) came to be incorporated in the U.K. 1,2,3 Printing Services Limited (Printing Services) is a company incorporated in Hong Kong. The major shareholder and alter ego of, in turn, the first and then second Publishing House and Printing Services was and remains Mr. Tarek Mahmoud Hamawy (Mr. Hamawy). At all material times he had control and conduct of the affairs of these companies assisted by his wife called Ms. Marie Lou (or Malou) Apolinar. Contracts variously entered into as orchestrated by Mr. Hamawy were in the name of Publishing House in both forms because they included contracts pre-dating July 1999 and post-dating November 1999. Strangely, Mr. Hamawy was not informed of the dissolution of the first and incorporation of the second and was under the impression there was only one so-called Publishing House all along. One can only assume that the first was struck off because of carelessness by those in charge of administration in the U.K., which they sought to make good by incorporating the second without telling the boss, thereby in fact compounding the error of their ways. However this change of identity presents no difficulties in this case. There was no commercial activity during the period Publishing House in either form did not exist. Further, it is Mr. Hamawy's case that in both forms Publishing House contracted as agent for and behalf of Printing Services in whose name this litigation has been run, and Man Sang takes no issue with this. The primary activity of Printing Services in its name or using its agent Publishing House is to source and supply printing matter such as notebooks, diaries, ring binders and posters for sale to customers in the Middle East, including Bahrain and elsewhere. Since 1998 Mr. Hamawy has dealt with Man Sang and other printers in Hong Kong for such product.

5. For the purposes of this litigation I am concerned with business conducted by the parties in 1999 and thereafter.

6. In April of 1999 Miss Lau and Mr. Hamawy (for Publishing House) negotiated for the printing and supply of various items identified in Publishing House's catalogue, and comprised variously notebooks, composition books and the like. A sales confirmation for the orders dated 30th April was completed and signed. In or about early July a further 23 sales confirmation orders were completed and signed. Man Sang undertook or purported to undertake manufacture and printing in compliance with these orders. A total of 10 invoices (identified as the 1st to 10th invoices) were variously issued between 3rd June 1999 and 1st September 1999. There was no difficulty associated with the product made, delivered and charged for in respect of the 1st to 5th invoices. The total price was US$93,524.52 and this was paid.

7. In respect of the remaining 13 orders there was difficulty in completion by Man Sang. The invoices that issued for those orders in respect of the products that were completed and supplied being the 6th to 10th invoices came to US$113,630.16. Why it was that there were difficulties in respect of the rest and who was responsible is a matter of conjecture. Suffice to say that Man Sang accepted at least some responsibility, for by letter of 14th September 1999 apparently faxed to Mr. Hamawy Miss Lau apologised for the difficulties and invited proposals to compensate for them. This resulted in the parties negotiating and, on 26th November 1999, entering into a written agreement (the Settlement Agreement), which took the form of a letter written by Publishing House to Man Sang and acknowledged by Man Sang. By its terms the sum outstanding was discounted to US$103,901.64 with a timetable to pay by 31st January 2000; payment was made by 1st February 2000. That left to be dealt with those orders by the date of the Settlement Agreement still not complete. Some were cancelled by consent. The remainder were identified in a schedule and described as "Outstanding Shipment". These were provided for as follows:-

	......
	2. All the goods specified in the attached schedule (the "Outstanding Shipment") will be delivered not later than 31 December 1999 to such designation as we shall specify in writing to you and in reasonably good condition and of merchantable quality.
	3. If you fail to deliver the Outstanding Shipment or any part thereof by 31 December 1999 in accordance with paragraph 2 above, we shall be entitled to cancel the order for the Outstanding Shipment and/or refuse acceptance of the Outstanding Shipment and/or withhold payment therefor and you will indemnify us in full for all or any loss, damages and charges incurred or to be incurred by us arising from such failure. For the avoidance of doubt, time shall be of the essence in respect of the delivery of the goods in respect of the Outstanding Shipment.
	4. You will return all the films in respect of all the goods in respect of all orders we have placed with you including the Outstanding Shipment within 7 days of our notice to you in writing or by fax requiring you to deliver the films to us or as we shall direct. Failure by you to return all such films to us in accordance with this clause shall entitle us not to make any payment according to the schedule provided herein until you have returned all such films to us. You will not use or copy the films for any purpose other than for production of the goods ordered by us.
	5. This letter supersedes any prior agreement or terms or arrangement or letter made between ourselves and your Company.

It was agreed that subject to punctual delivery as per clause 2 and with a discount of 10% of the price thereof provided for the cost would be met as to half by 28th February and the balance by 31st March 2000.

8. A significant consequence of this exercise was that by virtue of the Settlement Agreement, in particular paragraph 5, the 11 individual sales confirmation orders comprising the Outstanding Shipment came to be varied as to terms and consolidated into one contract; the Settlement Agreement.

9. In the event there was a delay in delivery of much of the Outstanding Shipment with both parties blaming the other for the cause. The dispute surrounds whether or not Printing Services (or Publishing House) provided films and proofs to enable the products to be made in time.

10. Meanwhile, the parties negotiated fresh orders. This time Mr. Hamawy used Printing Services. By sales confirmation dated 2nd December 1999 Printing Services ordered and Man Sang agreed to supply a quantity of posters to be printed on paper sourced from Indonesia (the 'Indonesian paper'). The unit price was fixed at US$0.845 per set of 3 posters. This order was subsequently to be replaced when the parties agreed that Printing Services would provide paper of Finnish origin (the Finnish paper). The price per set was amended to US$0.88 per set but with an allowance of US$0.40 for the cost of the paper. The amended order was made and dated 10th May 2000. I shall refer to this as the "Posters Order". By its terms, delivery was scheduled to be to Printing Services' Hong Kong warehouse 60 days following the receipt by Man Sang of all the paper, approved samples and films. Within two days Printing Services had arranged supply of the Finnish paper and invoiced Man Sang for the price thereof at 40c per sheet, a total of US$219,000. Whether this was intended to be a separate charge or a set-off against the cost of printing is another matter to resolve. Yet a further disputed issue is whether Printing Services complied with its obligation to supply and deliver the films within the stipulated time. However what is not at issue is that films for no more than 136 designs, 14 less than the contractual commitment, were in fact supplied. Mr. Hamawy professed to be content with a reduced order incorporating 130 designs; whether this represented a variation is another matter disputed.

11. Before moving on from the Posters Order there is a further matter to deal with. It is Mr. Hamawy's, and thus Printing Services' case that the parties were bound by a so-called Master Agreement. This took the shape of a series of prospective terms headed "General Terms and Conditions" professionally drawn, presumably intended first to bind the parties to the contract of 2nd December, and any contracts thereafter. There were discussions, negotiations and proposed amendments to the form but it was not signed. At issue is whether the parties verbally or by conduct agreed to be bound by the terms, a contention made by Mr. Hamawy and denied by Man Sang. What is significant is that there was provision for it to be signed and no explanation as to why it was not; further, that no subsequent sales confirmations including the Poster Order contained any reference to the Master Agreement.

12. On 16th May 2000 there were two further confirmation orders entered into, made by Printing Services, for a product described as a quantity of tracing books (Arabic version). The terms provided for the tracing paper to be supplied by Printing Services; this time the cost of printing was fixed net of the supply of the paper at US$0.365 per unit and US$0.375 per unit respectively. I shall refer to this as the Tracing Order. Printing Services provided the tracing paper, invoicing the same at US$75,000.

13. On the same date, 16th May, the parties entered into two more sales confirmations, for products referred to as Grade Book (Arabic version) and Large Stationery Box Set (Arabic version). These I shall refer to as the 16th May Orders.

14. On 18th May there were 7 more sales confirmations. These were for quantities of Hardcover Notebooks (2 types), Hardcover Science Notebooks, Hardcover Graph Notebooks, Coloured Sheet Sticker Pad (2 types), Wire-O Books, Homework Wire-O Record Books, Diary (Arabic), Book Portfolio (Arabic) and Portfolio with tab (Arabic). These became the 18th May Orders.

15. The last transaction in time between the parties was entered into when Man Sang on request quoted in 3 quotations on 28th July and 5th August 2000 for the production of a product called a timetable, which quotes were accepted. These are the Timetable Orders.

16. Some, not all, of the Outstanding Shipment, Posters Order, Tracing Order, 16th May, 18th May and Timetable Orders were produced and delivered. Man Sang issued three invoices on 31st August 2000 for these, subsequently amended on 15th November 2000. These are respectively the 11th to 13th invoices. Meanwhile, Printing Services had, in May 2000, paid a deposit of US$50,000 towards the cost of products to be supplied. Of this, an amount equal to one half of the amount due under the 12th invoice, the one half being US$16,265.17, was utilized so that the 12th invoice when it issued was for the remaining one half of US$16,265.17. The total of the 11th to 13th invoices, as adjusted, comes to US$206,586.37.

17. But none of this amount was paid. Man Sang made repeated demands. Mr. Hamawy declined to pay, complaining that Man Sang was not complying with delivery deadlines. Man Sang's response to that was that it was unable to complete full production because Printing Services had failed to supply all the films and proofs. It produced and delivered what it could, which partial deliveries were accepted.

18. The impasse seemed to be resolved when Miss Lau and Mr. Hamawy met on 3rd January 2001. They reached an agreement that Man Sang would deliver finished products between 15th January and 28th February against the invoices for the cost thereof. But this broke down when Printing Services failed to settle the outstanding invoices despite being pressed for payment, and Man Sang declined to make further deliveries without payment.

19. The upshot was that by 2nd March, with the 11th to 13th invoices not settled, Man Sang's solicitors wrote on that date in a letter before action demanding payment. In the absence of payment, on 24th March they issued a writ for this amount, under no. 1352/2001. The statement of claim recorded the 11th to 13th invoices being for the price of goods and services supplied, seeking judgment for the sum of US$206,586.37, interest and costs.

20. Chronologically, what came next were key letters in the context of this litigation, written by solicitors representing then, as now, Printing Services. The first is dated 12th April 2001 to Man Sang. It referred to the Settlement Agreement and stated that because Man Sang had failed to comply with the terms relating to delivery of the Outstanding Shipment it was in breach. It thereby gave notice that Printing Services cancelled the Settlement Agreement, refused to accept delivery of the Outstanding Shipment and withheld payment therefor, with a right to claim damages as a consequence of the breach.

21. The second letter is dated 7th May 2001, this time to Man Sang's solicitors, in response to their letter of 2nd March 2001. By that it referred to first the Posters Order (and Master Agreement) and alleged failure by Man Sang to comply with the terms of delivery, which conduct put it in repudiatory breach. On behalf of their client they gave notice that the Posters Order was cancelled. As a part consequence of that termination, it was said to be entitled to demand payment of the cost of the Finnish paper of US$219,000 and they made such demand. Next they referred to the orders variously described as the Tracing Order, the Orders of 16th May, 18th May and the Timetable Orders, alleging that in failing to deliver the balance outstanding of the goods the subject of these orders Man Sang was in repudiatory breach, giving notice that Printing Services thereby cancelled the contracts concerning these outstanding orders. Consequently they claimed for it the cost of the tracing paper of US$75,000.

22. I return to Man Sang's writ no. 1352/2001. Printing Services' defence to Man Sang's claim in its final form does not purport to deny that it received the goods the subject of the claim and thus that the amount as claimed was and remains due. However it claims as per the letters of 12th April and 7th May that Man Sang had wrongfully repudiated the various contracts to supply not complied with, which gave it the right to cancel them and the right to damages to be assessed. By reason of that cancellation it is also entitled to reclaim the deposit paid of US$50,000, the cost of the Finnish paper of US$219,000 and the cost of the tracing paper of US$75,000.

23. Meanwhile, by letter of 23rd July 2001, Man Sang over the signature of its accountant followed up previous correspondence that it had completed those of the various orders outstanding since August 2000, requiring payment therefor and instruction on delivery. The amount (as subsequently revised) was for US$330,662.92. Allowing for the balance of the deposit of US$50,000 not already utilized to reduce the 12th invoice (that balance being US$33,734.83) that total due was now US$296,928.09.

24. This led to Printing Services issuing its own writ on 24th August 2001 under no. 3804/2001, by which it seeks a pre-emptive declaration that it is not liable for the amount claimed by Man Sang (as reduced to US$296,928.09) upon the grounds that the contracts in question were already cancelled. Man Sang counterclaims for the sum of US$296,928.09; alternatively, damages.

25. By pre-trial order it was ordered that the two actions be consolidated, Man Sang's of 1352/2001 to be the lead action.

26. And so the matter came on for trial before me, spanning 14 days. Two witnesses only were called, being Miss Lau for Man Sang and Mr. Hamawy for Printing Services. Their evidence and in the main extensive cross-examination occupied most of the 14 days. Apart from the issues in dispute I have already referred to, much of that time was spent in recounting the entire history from mid 1999, and the other party being blamed; Man Sang because it persistently failed to complete the goods and make delivery timeously, Printing Services because it did not provide the films and proofs to enable full production and delivery and, ultimately, to pay for and take delivery of the completed goods.

27. There is no argument that Printing Services had taken delivery of the goods the subject of the lead claim. The matters I have to resolve are as to whether Printing Services was entitled to cancel the Settlement Agreement, the Posters Order, the Tracing Order, the 16th May and 18th May Orders and the Timetable Orders by virtue of Man Sang's repudiation and thereby escape liability for failing to take delivery of those goods held by Man Sang in its warehouse and meet its claim in damages.

28. Before dealing with the findings of fact it is appropriate to recite the law, and, in particular, relevant provisions of the Sale of Goods Ordinance Cap. 26 (SGO) by whose terms, it is not in issue, the parties are bound.

29. Section 32 (1), headed Delivery of Wrong Quantity, states:-

"where the seller delivers to the buyer a quantity of goods less than he contracted to sell the buyer may reject them, but if the buyer accepts the goods so delivered, he must pay for them at the contract rate."

30. So, it is the duty of the seller to deliver to the buyer the exact quantity of goods stipulated in the contract of sale and, if he does not, then the buyer may reject them. What follows from this is that if a buyer accepts goods by instalments and delivery of further instalments is postponed by the seller, the buyer having granted the concession may not treat the contract as repudiated on the ground that the goods have not been delivered or accepted within the time stipulated by the contract.

31. Section 40 SGO states that where the whole of the purchase price of goods has not been paid or tendered, the seller is deemed to be an unpaid seller.

32. Sections 41 and 42 SGO give the unpaid seller of goods a lien on them or right to retain them for the price while he is in possession of them and, if property has not already passed, a right to withhold delivery.

33. The consequence of this is that where the buyer has refused to pay for goods already delivered he can never compel the seller to deliver the remainder of the goods which would force him to relinquish his lien or right of retention. So, a notice requiring delivery by a stipulated time is ineffective unless the buyer pays for the goods already delivered to him. It follows that failure by an unpaid seller to deliver the remainder of the goods without payment cannot amount to a repudiation of the contract.

34. I come now to apply these principles to the facts and, where necessary, deal with issues in dispute.

35. The Settlement Agreement dealing as it did with all the 1999 contracts not concluded had the effect of consolidating them as identified. This is material because when Printing Services failed to meet payment of the 12th invoice for some of the outstanding shipment Man Sang became an unpaid seller with a right to retain the balance of these goods. It follows that whoever of the parties was responsible for the delays in completion of the remainder of the orders, an issue of course in substantial dispute, is not material. Even if Man Sang was at fault and in breach, Printing Services did not react by treating the Settlement Agreement as repudiated, which it would have been entitled to do applying section 32 (1) SGO. It continued to press for delivery, whilst withholding payment. Man Sang was thus entitled to retain the balance of the goods as unpaid seller pending payment. Printing Services was thus wrong to cancel the Settlement Agreement as it did by its solicitors' letter of 12th April 2001.

36. I come next to the Posters Order. On the issue of whether the terms of the Master Agreement were incorporated, I am satisfied that they were not. The parties negotiated those terms but did not sign, an obvious and intended exercise were they to have wanted to bind themselves. There was no later reference to the Master Agreement in forthcoming sales confirmations. There was no contractual commitment to its terms.

37. As to the order itself, the parties are materially and substantially at odds as to the cause of delays. Whatever the cause, what is not disputed is that Printing Services did not supply all the films. Man Sang was prepared to accommodate by making fewer posters, but this was not, in the absence of any consideration, a variation of the contractual terms. Printing Services was not entitled to deliver fewer films, insist upon production of a reduced number of posters and then hold Man Sang in breach for failing to do so. Its solicitors by the letter of 7th May had no right to cancel the Posters Order, because by not supplying all of the necessary films and proofs it had not satisfied a condition precedent, so it could not hold Man Sang in default of the delivery provision of the Posters Order.

38. On the issue of whether Printing Services is entitled to regard the supply of Finnish paper as a separate contract, I am satisfied it was not. It is quite apparent to me that with the paper supplied specifically to enable Man Sang to complete the order it was intended that when it came to charge Man Sang would set off against the price the difference, as per the order, calculated at 40c per set. And this is what it did in the invoice (as amended) for US$296,928.09.

39. I come now to the Tracing Order, the 16th May and 18th May Orders and the Timetable Orders. These can be categorized together because of the proximity of dates and because in each case Man Sang made partial deliveries which were accepted. It issued invoices being the 11th and 13th invoices. No payment having been made, by the expiry of the credit period Man Sang became an unpaid seller with a right of retention of the balance of the goods pending payment. This remained the position as at May 2001 on which date Printing Services purported to cancel all outstanding orders. But, as before, Man Sang's failing to deliver was not a breach, entitling Printing Services to cancel.

40. As to the Tracing Order, Printing Services has claimed to recover the cost to it of the tracing paper of US$75,000. The terms of this order differ from that for the posters, in that there is no allowance for the cost of paper. Read strictly the charge is for the cost of printing with no contract for the paper. And this is the only sensible reading. One only needs to compare the contracted cost with earlier orders in which Man Sang provided the paper and charged for it. Were it to be otherwise compliance by Man Sang could only have resulted in a loss, making no commercial sense. Thus Printing Services has no right to this claim.

41. Summarized, these findings are that Printing Services was wrong in law in holding that Man Sang had committed repudiatory breach of, in turn, the Settlement Agreement, the Posters Order, the Tracing Order, the 16th May and 18th May Orders and the Timetable Orders, and wrong thus to claim the right to terminate these contracts. The terminations being wrongful themselves amounted to repudiation, giving Man Sang the right to accept and to the damages it now claims.

42. Accordingly, in action HCA 1352/2001 I order judgment on the claim in favour of Man Sang in the sum of US$206,586.37 and interest thereon at prime from 15th November 2000 to the date hereof. The counterclaim is dismissed. Costs are to Man Sang, taxed if not agreed.

43. In action HCA 3804/2001 I order judgment on the counterclaim in favour of Man Sang in damages assessed at US$296,928.09 and interest thereon at prime from 8th May 2001 to the date hereof. The claim is dismissed. Costs are to Man Sang, taxed if not agreed.

44. The orders for costs are nisi at first instance.