SHENZHEN BAOMING CERAMICS CO LTD v. COMPANION-CHINA LTD

CACV 93/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 93 OF 2000

(ON APPEAL FROM HCA NO. 9059 OF 1999)

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J U D G M E N T

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Keith JA (giving the judgment of the Court):

Introduction

1. In May 1997, the Plaintiff, Shenzhen Baoming Ceramics Co. Ltd, concluded an agreement ("the original agreement") with the Defendant, Companion-China Ltd, for the manufacture by the Plaintiff and the sale to the Defendant of quantities of ceramic tiles. By a subsequent agreement concluded in September 1997 ("the settlement agreement"), the parties agreed that they should be discharged from performing their obligations under the original agreement. One of the terms of the settlement agreement was that certain payments would be made by the Defendant to the Plaintiff, and the settlement agreement included a timetable setting out the deadlines for those payments.

2. In due course, the Plaintiff commenced proceedings against the Defendant. One of its claims was that sums of $2,349,394.86 and RMB7,447.86 (which were part of the sums owed by the Defendant under the settlement agreement) had not been paid. The Plaintiff applied for summary judgment for these amounts plus interest under Ord. 14. The Defendant admitted that sums totalling $1,859,755.88 due under the settlement agreement had not been paid. Master Lau gave the Plaintiff summary judgment for that amount plus interest, and gave the Defendant unconditional leave to defend the balance of the Plaintiff's claim.

3. The Defendant appealed against the award of summary judgment. The appeal was heard by Cheung J. He allowed the appeal, and gave the Defendant unconditional leave to defend the whole of the Plaintiff's claim. The Plaintiff now appeals. It seeks to have Master Lau's orders restored.

The defence of agency

4. The defence which caused the judge to grant the Defendant unconditional leave to defend the whole of the Plaintiff's claim related to the status of the Defendant. The Defendant's case was that when it entered the original and subsequent agreements it was not acting as principal. It was acting as an agent, and entered the agreements as agent for and on behalf of Saint Galarie Tiles Ltd ("SGT"). Both the fact of this agency, and the identity of the principal, were said to have been disclosed to the Plaintiff. Accordingly, it was said that the Plaintiff's claim for the amounts unpaid under the settlement agreement could not succeed against the Defendant, and that the Plaintiff's cause of action was against SGT. The judge allowed the appeal because he thought that this defence raised a triable issue.

5. The basis on which the Defendant claims that it was acting as the agent of SGT appears from the affirmation of Leung Kwok Wa, one of its directors. In essence, Mr Leung's evidence was that the Defendant is a member of the Companion Group of Companies. It is principally engaged in investment holding. It is not one of the operating companies in the Group, and owns no factory or machinery. SGT is its wholly-owned subsidiary. It is SGT which carries on the business of supplying ceramic tiles to local and overseas customers. That was known to the Plaintiff's representative with whom Mr Leung negotiated the original agreement. Since

(a) the Plaintiff was owned by a County Government on the mainland,

(b) the Companion Group of Companies was well known on the mainland for its trade in ceramic tiles, and

(c) this was the first time that the Group had dealt with the County Government,

Mr Leung thought that "it would be better to use the Defendant's name to enter" the original agreement with the Plaintiff. Accordingly, he told the Plaintiff's representative that the agreement "would be signed in the name of the Defendant but the buyer was SGT". He mentioned that both during the visit of the Plaintiff's representative to SGT's retail outlets in Hong Kong and when the terms of the original agreement were finalised on the mainland. He claims that on neither occasion did the Plaintiff's representative raise any objection.

6. Mr Leung's evidence on the topic concluded with the following statement:

"Other than lending its name to the [original] agreement, the Defendant took no part in the deal. There was no contract of sale and purchase between the Defendant and SGT. Raw tiles would bear SGT's logo and be sent to SGT direct. [The] [c]oating process would be carried out by SGT. SGT paid the Plaintiff for raw tiles supplied to SGT. SGT was solely responsible for the sale of the ceramic tiles. The profit and loss from the [original] agreement would be attributed to SGT."

It was on the basis of this extrinsic evidence from Mr Leung that the judge held that there was a triable issue as to whether the Defendant was liable to the Plaintiff for the sums due under the settlement agreement.

The admissibility of the extrinsic evidence

7. The admissibility of extrinsic evidence is the subject of Art. 102 in Bowstead and Reynolds on Agency, 16th ed. At para. 9-037, the authors write:

"Where it is clear from the terms of a written contract made by an agent that he contracted personally, extrinsic evidence is not admissible to show that, notwithstanding the terms of the contract, it was the intention of the parties that he should not be personally liable on it, because such evidence would be contradictory to the written contract."

A similar statement of principle appears in Halsbury's Laws of England, 4th ed., vol. 1(2), para. 137:

"If .... the agent contracts in such terms as to imply that he is the real and only principal, evidence to contradict the terms of the contract will not be admitted."

That is to be contrasted with the case of an agent who "contracts in his own name but not in terms which are consistent only with his having done so as principal". In such a case, "oral evidence may be admitted to prove the identity of the principal". These are also quotations from Halsbury, op. cit., para. 137, as is the statement that "[w]hether he has contracted in such terms or not depends upon the construction of the particular contract".

8. Against this background, we turn to the agreements themselves. Both of them were in Chinese, but they have been translated into perfect English. Although the translation has not been certified, there is no dispute that the translation is correct. The Defendant is named in each of the agreements as the contracting party, each of the agreements was signed by a person who purported to be a representative of the Defendant, and who purported to be signing the agreements on behalf of the Defendant, and each of them bore the Defendant's chop. So far as the original agreement is concerned, although it provided for the tiles to be delivered to SGT,

(a) the agreement recorded that the specifications for the tiles had to be provided by the Defendant,

(b) it required the tiles to be manufactured by a process agreed by the production engineers of the Defendant,

(c) it required the Defendant to assign technicians to conduct tests of the tiles, and

(d) it required the Defendant to pay the purchase price, as well as the customs declaration, fees and taxes.

Indeed, the settlement agreement referred to the fact that it was the Defendant which owed the sums unpaid under the original agreement. So far as the settlement agreement itself is concerned, it required the Defendant to pay the sums due under the settlement agreement.

9. Having looked at the two agreements as a whole, it is plain that the Defendant contracted with the Plaintiff in such terms as to imply that it was the real and only principal and in terms which are consistent only with it having done so as principal. It follows that the conditions necessary for Mr Leung's extrinsic evidence to be admissible have not been satisfied, and that the Defendant has to be treated as the party with whom the Plaintiff contracted. For these reasons, the defence of agency does not, in our view, raise a triable issue.

The defence of set-off

10. Since the judge was giving the Defendant unconditional leave to defend the whole of the Plaintiff's claim on the basis of the defence of agency, he understandably did not address the question whether any of the Defendant's other pleaded defences raised triable issues. Mr Francis Yip for the Defendant relied only on one other pleaded defence as raising a triable issue, and that is the defence of set-off.

11. The Defendant's pleaded case is that in September 1998 another agreement was entered into with the Plaintiff ("the third agreement"), this time for the purchase of 60,000 tiles in order to fulfil a contract which SGT had concluded with one of its customers. However, a substantial number of the tiles delivered to SGT pursuant to the third agreement were defective. In the light of SGT's inability to honour its agreement with its customer, SGT's customer terminated that agreement, and SGT suffered losses under various heads amounting to $5.2m. The Defendant, alternatively SGT, claim that sum from the Plaintiff, and they claim that one or other of them is entitled to set off that amount by way of defence to the Plaintiff's claim.

12. The question which arises is which of the Defendant or SGT was the contracting party with the Plaintiff in the third agreement. The third agreement was in the form of a memo sent to the Defendant containing the terms of the agreement. It was countersigned by an unidentified person who agreed to the terms proposed in the memo. That person did not identify for which company he was agreeing the terms, but since

(a) the memo was expressly addressed to the Defendant,

(b) it referred at various places to "your company",

(c) the person who countersigned it referred to "our company" appointing someone to be the factory representative, and

(d) the only company referred to in the memo was the Defendant and SGT was not mentioned in it at all,

it is plain that it was the Defendant who was contracting with the Plaintiff, and doing so in such terms as to imply that it was the real and only principal. Thus, the cause of action for breach of the third agreement vests in the Defendant, not SGT.

13. In these circumstances, the potential difficulty for the Defendant is that the Defendant is counterclaiming damages for losses which were sustained by SGT. Are damages for such losses claimable by the Defendant? The answer to that question does not depend, as has been contended, on the following principle in the law of agency:

"Where the agent is sued on the main contract, he can presumably plead defences arising out of the contract, and defences personal to himself, but not defences personal to the principal": Bowstead and Reynolds, op. cit., para. 9-027.

That is because the Defendant had not been acting as SGT's agent when it concluded the third agreement. The answer to the question depends on the law of privity of contract. Where X breaks its contract with Y which was made for the benefit of Z and which causes loss to Z, can Y claim from X damages for Z's loss? The common law on this topic is in a state of flux: see the discussion on the topic in Chitty on Contracts, 28th ed., vol. 1, paras. 19-046 and following. Indeed, in the United Kingdom, Parliament has intervened to legislate in the field: see Contracts (Rights of Third Parties) Act 1999. In our view, although this is a crisp question of law, it is one which requires mature and detailed consideration, and is not one which is susceptible to resolution in a summary procedure of the kind provided for by Ord. 14. In any event, we have not had the benefit of any submissions of counsel on this topic. Accordingly, there is a triable issue as to whether the loss alleged to amount to $5.2m. sustained by SGT can be counterclaimed by the Defendant.

14. What order, then, should be made in these circumstances? The law in this area has been usefully summarised in the Supreme Court Practice 1999, vol. 1, at p. 179 as follows:

"An analysis of the authorities as to what order should be made where the defendant raises a set-off or counterclaim shows that there are four different classes or groups of such orders, namely:

(a) where the defendant can show an arguable set-off, whether equitable or otherwise, he is entitled to defend to the extent of the set-off and the court has no discretion;

(b) where the defendant sets up a bona fide counterclaim arising out of the same subject matter as the action and connected with the grounds of defence, the order should not be for judgment on the claim, subject to a stay pending trial of the counterclaim, but should be for unconditional leave to defend, even if the defendant admits the whole or part of the claim;

(c) where there is no defence to the claim but a plausible counterclaim of not less than the claim is set up, judgment should be for the plaintiff on the claim with costs, stayed until trial of the counterclaim;

(d) where the counterclaim arises out of a separate and distinct transaction or is wholly foreign to the claim, judgment should be for the plaintiff with costs without a stay;

the lack of clarity between classes (b), (c) and (d) gives the court freedom to respond to the perceived justice of the individual case (United Overseas Ltd v. Peter Robinson Ltd, March 26, 1991, CA Transcript 91/0297, per Bingham LJ)."

The Defendant's counterclaim does not come within category (a) or category (b). Accordingly, there is no defence to the Plaintiff's claim for $1,859,755.88 plus interest, and there must be judgment for the Plaintiff for that sum. The issue is whether the Defendant's counterclaim comes within category (c) or category (d). In our view, it comes within category (c). Both the settlement agreement and the third agreement arose out of orders given to the Plaintiff for ceramic tiles pursuant to an ongoing trading relationship. In our judgment, it would be unjust to require the Defendant in such a relationship to pay a sum which represents a compromise as to the balance of the purchase price of goods to which the original agreement related before the determination of the seller's liability to compensate the buyer for losses alleged to have been incurred as a result of sub-standard goods being delivered under the third agreement.

Conclusion

15. In these circumstances, we allow the appeal, we set aside the order made by the judge, and we substitute for it the following orders:

(i) judgment be entered for the Plaintiff against the Defendant for the sum of $1,859,755.88, with interest thereon at 1.5% per month from 25 February 1999,

(ii) execution of that judgment be stayed pending the trial of the Defendant's counterclaim, and

(iii) the Defendant be granted unconditional leave to defend the balance of the Plaintiff's claim.

As for costs, the orders nisi which we make are that the Defendant must pay to the Plaintiff the Plaintiff's costs of the summons under Ord. 14 up to and including the hearing before the master in any event, to be taxed if not agreed, but that the costs of the summons thereafter, including the costs of the appeals to Cheung J and the Court of Appeal, should be in the counterclaim.