TELEMATE TELESYSTEMS INC. v. H.B. ELECTRONICS LTD.

Headnote

Construction of commercial document - whether "reasonable time" to be read into the meaning of "forthwith upon demand at any time" - those words cannot mean "such time as suits the defendant's convenience" - terms cannot be implied if it would contradict express term of contract.

IN THE COURT OF APPEAL

1992, No. 177
(Civil)

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J U D G M E N T

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Litton, J.A. giving the judgment of the court:

Introduction

1. This case is concerned with the right to possess 11 sets of moulds used for the manufacture of plastic components for telephones and answering machines. These are referred to as "toolings" in the papers before us. A total of 87 items are involved.

2. Both parties are manufacturers. By their writ dated 9 June 1992 the plaintiffs sought an order requiring the defendants to deliver up to them the moulds in question. On 30 October 1992 Sears J. gave summary judgment in the plaintiffs' favour. An attempt by the defendants to have execution of the order for possession of the moulds stayed pending appeal failed when Penlington, J.A., sitting as a single member of this court, dismissed the defendant's application. It has not been suggested on the defendant's behalf that we should make an order requiring the plaintiffs to return the moulds to them if we should allow the appeal and give unconditional leave to defend. The only issue still alive between the parties as far as the moulds are concerned, apart from the question of costs, is the order that the defendants should pay damages to the plaintiffs for their wrongful detention, such damages to be assessed if not agreed.

Background

3. The defendant company is the result of a merger between a Hong Kong and a U.K. company. Some of the dealings which form the background to this case were between the plaintiffs and a company called Hourbreak Electronics Company Limited, the defendant's predecessor. But, for the purposes of this case, no distinction is made between that company and the defendants. In this judgment, we shall simply refer to their dealings as those of the defendants.

4. The affidavits put in on behalf of the defendants are long and rambling. They were sworn to by Mr. Paton, the Defendant's managing director. According to these affidavits, the trading relationship between the parties went back to about 1988 when the defendants bought telephones and answering machines from the plaintiffs for distribution in the U.K. The defendants assert that the plaintiffs had difficulties meeting their delivery schedules and were unable to exercise effective control over their subcontractors in manufacturing the plastic components. The plaintiffs do not accept this. Whatever the rights and wrongs of the matter, eventually it was decided in about January 1990 that the moulds for the models then being sold would be entrusted by the plaintiffs to the defendants to enable the defendants to carry out the plastic injection processes using the plaintiffs' moulds. A royalty would be paid by the defendants for the use of the moulds. Further, the defendants would, from time to time, buy from the plaintiffs the central processing units (CPUs) to be used in the telephones and answering machines manufactured under this arrangement.

Entrusting Letters

5. There are exhibited to the defendant's affidavits a total of five "entrusting letters" spanning the period 10 February 1990 to 11 October 1991 (a period of about 20 months) pursuant to which the defendants took possession of the plaintiffs' moulds, upon the terms set out in those letters. The letters are in identical terms and bear the endorsement of the defendants acknowledging their agreement to the terms. Of relevance are the following:

"1. The said moulds shall at all times remain the property of [the plaintiffs].

2. The said moulds shall be returned to [the plaintiffs] forthwith upon demand at any time.

3. [The defendants] shall be fully responsible for the safekeeping and maintenance of the said moulds and shall upon demand return the same to [the plaintiffs] in the same condition as they were first manufactured save and except ordinary wear and tear.

4. The said moulds shall only be used by [the defendants] for the purpose of performing orders from [the plaintiffs] and other customers through [the defendants] with [the plaintiff's] permission.

5. [The defendants] shall present all supporting documents such as purchase order, Letter of Credit, Bill of Lading, Air Way Bill, invoice and packing list for [the plaintiff's] record with immediate availability.

6. [The defendants] will not develop any CPU for answering machine and also will not buy such CPU from other company except from [the Plaintiffs]."

Complaints over CPUs

6. From about December 1991 the defendants started making complaints concerning shipments of over 40,000 CPUs made by the plaintiffs. The defendants allege that they were not of the specified quality and, in particular, caused the answering machines to cut off incoming messages after a four seconds' pause: the specification required that the cut off should only occur after a eight seconds' pause. The defendants allege that they had incurred much loss and expense as a result of "reworking" these "faulty" CPUs. These are not complaints which the plaintiffs accept. In any case, the plaintiffs say that they are irrelevant to the present proceedings which are brought simply to recover the plaintiffs' own property.

Request for the return of the moulds

7. The plaintiffs in their affidavits say that on various occasions from about late 1991 the plaintiffs' managing director Mr. David Chow alerted Mr. Paton to the possibility of the plaintiffs requiring the return of the moulds, as they were proposing to set up a factory in Shanghai, in joint venture with a Chinese party, for the manufacture of telephones and answering machines. This assertion is, however, not essential to the plaintiffs' case for it is not in dispute that there was a meeting on 18 February 1992 between Mr. Chow and Mr. Paton when Mr. Chow asked for the return of the moulds for a total of five models: No. 2100/2500, AM460, AM480, PA5550, and PF5200. By a fax dated 11 March 1992 the plaintiffs asked the defendants when those moulds might be returned and in reply, by a fax of the same date, the defendants said :

"Re: Toolings

These are going to be available at the end of March".

8. The plaintiffs then followed up with a fax of 21 March 1992 asking for the exact date when those five sets of moulds would be available. The defendant's reply is significant. It is dated 23 March 1992 and it says:

"It seems that we face a substantial difficulty in relation to the transfer of tools outside of our factory.

As our joint venture partners in China are insisting that the toolings form part of our assets, and are also their property, they are refusing to sign the licence papers. The only way that this can be resolved is by the payment to them of money for their "share" of the assets. This is an extremely complicated matter which we are trying to negotiate with them, but at the moment it is not clear."

9. The defendant's fax went on to say that because of the loss suffered as a result of the faulty CPUs supplied by the plaintiffs, the defendants found themselves short of funds and were unable to make payment to the joint venture partners in China. The defendants were looking to the plaintiffs to pay them. The fax then went on:

"We will use this money that you will pay us to defray the costs of releasing the tools from the China JV party."

10. It is clear from the tenor of this fax that the defendants were not simply referring to the five sets of moulds which they had previously told the plaintiffs would be available at the end of March. They were referring to all the moulds then in their possession.

11. The plaintiff's reply of 24 March 1992, where relevant, states :

"Toolings

It seems that even though I have extended to you all the trust and courtesy here but not being returned in the same way to us. As the entrusting agreements [defendant] signed back to us it states very clearly that these tools are [the plaintiff's] property and [the defendant] is responsible to return immediately all pieces of toolings to us upon [the plaintiff's] demand. It states that [the defendant] cannot withhold these toolings for whatever reasons. I don't know much about your deals with your partners and I don't want to be involved. We are only interested in that these toolings being returned to us in proper condition in between April 1 to April 15, 1992. Whatever accounting method you used with your Chinese partners are not an interest of mine. [The defendant] is to return these toolings as promptly as have entrusted you with.

I would appreciate a clear cut fax from you stating that these toolings would be ready by the above-mentioned date."

12. The reply is an outright refusal. By their fax of 24 March 1993 the defendants said:

"The toolings are in our safe custody. We are not releasing them until the financial matters are cleared up."

They then went on to assert a lien in relation to "the toolings".

13. In reply, the plaintiffs by their fax of 27 March 1992 complained that the defendants were holding the plaintiffs' moulds "for ransom". They complained of violation of the terms of the "toolings entrusting agreement"; the proposed use of the plaintiffs' moulds as part of the defendant's investment with their joint venture partner in China was, they said, a "serious act of piracy and invasion of property". They required a prompt return of the moulds.

14. Mr. Paton's reply, by fax dated 30 March 1992, is as follows:

"Toolings - your stupid accusations are not interesting. In the normal course of business, when a customer asks for toolings to be transferred, it is the end of that business, and accordingly all financial matters must be settled before release".

15. It was put to us in argument by Mr. Griffiths Q.C., counsel for the defendants, that the parties were then simply referring to the five sets of moulds which the defendants had previously said would be returned at the end of March, and not the full 11 sets claimed in the action. But, from the tenor of the fax messages exchanged between the parties, it is crystal clear that the plaintiffs were demanding the return of all the moulds by 15 April 1992 and the defendants knew that. It would have been absurd for the defendants to have claimed a "lien" on only part of the moulds, as security for the sums allegedly owed by the plaintiffs on the faulty CPUs, but not the rest. In any case, the fax of 23 March was not saying that the defendant's joint venture partners were asserting a claim to only part of the moulds: they were saying that all the moulds formed part of their assets and were their property.

16. The question as to when the plaintiffs first made a demand for the return of the moulds is significant for this reason : It is the defendant's case that there was a term to be implied in the entrusting letters to this effect (quoting the draft Defence and counterclaim) :

"(i) If the plaintiff shall demand the said moulds to be returned to it, the defendant shall be entitled to delay such return until after it has completed performing orders already received from the plaintiffs or from other customers with the plaintiffs' permission .....".

17. The plaintiffs' case is that even if such a term was to be implied, demand for the return of the moulds having been made as early as 24 March 1992, any excuse for retention which the defendants might have had under that implied term would have been long spent by the time the solicitors wrote their letter dated 15 May 1992 demanding the delivery up of the moulds and certainly by the time the writ was issued on 9 June 1992. The judge in his ex tempore judgment upheld the plaintiffs on this point. His reasoning was put very shortly but, having reviewed the evidence closely, as we have done above, we cannot see how the judge can be faulted in his conclusion in any way.

18. What is note-worthy is this : In the exchanges of fax within the last week of March 1992, as set out above, there was no suggestion by the defendants that the moulds could not be returned because they were still being used in the course of producing plastic components. What was asserted was a right of lien - to hold the moulds until "all financial matters" between the parties were settled. This became the second string to the defendant's "implied term" defence as appears in the draft pleading : an assertion which plainly has no merit. Mr. Griffiths, Q.C. did not seek to persuade us on appeal that his clients had such a right of lien.

Proper Construction of the "Entrusting Letters"

19. There is no dispute that the plaintiffs are the owners of the moulds. The moulds were delivered to the defendants to facilitate the business then being conducted, to the mutual benefit of the parties. Each party may have had its own hopes and expectations, but unless these are incorporated as terms of the contract, they formed no part of the bargain. As regards the plaintiff's right of property in the moulds, it is difficult to imagine clearer words than those in the "entrusting letters".

20. On behalf of the defendants Mr. Griffiths, Q.C. argues that the obligation to return the moulds "upon demand" means within a reasonable time. He cites the instance where such expression is used in a banking context and argues that a bank is only entitled to sue a customer for monies over-drawn on a current account after having made a demand and given the customer a reasonable time to pay : LLoyds Bank v. Margolis (1954)1 A.E.R. 734. From this he argues that, in the context of this case, reasonable time means such time as would be sufficient to permit (i) the completion of pending orders by the use of the moulds and (ii) the manufacture of sufficient numbers of telephones and answering machines to exhaust the supply of CPUs previously ordered from the plaintiffs. The second proposition is so manifestly extravagant that, in the course of argument, it was abandoned by Mr. Griffiths who then confined his case to the first proposition.

21. In our judgment, the "entrusting letters" cannot bear counsel's construction. The matter can be tested by reference to Mr. Paton's first affidavit, para. 19, where he says :

Paras 2 and 3 of the entrusting letters state to the effect that the moulds should be returned to the plaintiffs upon demand in the same condition as they were first manufactured, save and except ordinary wear and tear. It was the defendant's understanding that these provisions relating to the return of the relevant moulds upon demand by the plaintiff were not absolute obligations but were qualified to the extent that the plaintiff was not entitled summarily to demand the return of the moulds until all pending orders which had been approved by the plaintiff had been completed. In this regard I crave leave to refer to paragraph 4 of the entrusting letter which provides that the moulds shall only be used by the defendant for the purpose of performing orders from the plaintiff and other customers obtained by the defendant with the plaintiff's permission. The defendant believes that as a matter of commercial logic and business efficacy taking into account the underlying contractual arrangements between the parties, the plaintiff should not be entitled to the return of the moulds until all orders which had been approved by the plaintiff and, as contemplated by paragraph 4 of the entrusting letters, had been completed." (Underlining added).

22. There are similar statements of the defendant's belief in other passages of Mr. Paton's lengthy affidavit. In our judgment, these unilateral statements of belief add nothing to the defendant's case.

23. It is probably correct to assume that, whilst the relationship between the parties was harmonious, and business was good, the moulds would have been left with the defendants to fulfil repeated orders. But this in no way affects the right of the plaintiffs to require their own moulds back on demand. If "reasonable time" was to be read into the meaning of the words "forthwith upon demand at any time", it must simply mean such time as would have enabled the defendants to comply with the demand. Nothing in the entrusting letters say that, in making the demand, the plaintiffs must have regard to the defendants' reasonable expectations of profit or their manufacturing processes or anything of that kind. The terms of the entrusting letters place no duty on the plaintiffs to have regard to the defendant's interests at all. In so construing the terms of the entrusting letters, we are not ignoring the "commercial purpose" of the transaction nor "the surrounding circumstances" in which the transaction came about: see Lord Wilberforce in Reardon Smith v. Hansen-Tangen [1976]1 WLR 989 at 995H. But, whatever the nature of the surrounding circumstances, the court cannot give to the words in the contract an effect contrary to their ordinary meaning. "Forthwith upon demand at any time" cannot mean "such time as suits the defendant's convenience"; far less can it mean "such time as best suits the defendant's commercial advantage".

Implied Terms

24. In our judgment, there is no room in this case for terms to be implied, as the defendants contend. A term will not be implied if it would contradict an express term of the contract : see Chitty on Contracts [26th edition] vol. 1 para. 909. The test is one of necessity. A term would only be implied if, without it, the whole transaction would be inefficacious, futile and absurd, Tai Hing Cotton Mill v. Liu Chong Hing Bank [1986] A.C. 80 at 104-5.

"Countermanding" the Request

25. Although the draft Defence and Counterclaim does not raise this as a defence, Mr. Griffiths Q.C. argues that, on the facts disclosed in the affidavits before the judge, it would have been open to him to have concluded that, arguably, the plaintiffs have countermanded the request for the return of the moulds, by placing new orders for telephones and answering machines which required the use of the moulds. Although there is an assertion to this effect in Mr. Paton's affidavit, the primary evidence to support such assertion is non-existent. The point is introduced in this way:

(a) In Mr. Paton's first affidavit, he exhibited a bundle marked "MSP - 4" which he described as "true copies of proforma invoices issued by the defendant to its customers which relate to pending orders which cannot be executed without the use of plaintiff's moulds ..... in all there are four orders with an aggregate value of US$215,207". (Emphasis added). It is to be noted that, here, Mr. Paton referred to the invoices as having been issued by the defendant to its own customers.

(b) Later on in the same affidavit, after having referred to the plaintiff's solicitor's letter dated 15 May 1992, requiring the moulds to be returned by 22 May 1992, Mr. Paton said : "the demand was made without regard to the completion by the defendant of the pending orders to its own customers as referred to above and notwithstanding the fact that the defendant was still in the process of completing an order for one of the plaintiff's customers in Holland which required the use of the tools to models No. AM460 and AM480". It transpired that "one of the plaintiff's customers in Holland" was a company called Sabre Nederland BV and the proforma invoice referred to by Mr. Paton was in fact the same as one of the "four orders" referred to in para. (a) above - one of the invoices "issued by the defendant to its customers". Page 2 of the proforma invoice shows unquestionably that Sabre Nederland BV was one of the defendant's own customers since the letter of credit was opened in favour of the defendants.

(c) Later on in the same affidavit, Mr. Paton said: "The defendant is still in the course of manufacturing the goods under this order and upon completion the defendant will invoice the plaintiff's customer directly. There is now produced and is shown to me in a bundle marked "MSP-8" copies of the proforma invoices relating to the order placed by the plaintiff's customer in Holland.....". When one looks at "MSP-8" one finds, without too much surprise, that it is the same proforma invoice as exhibited previously: "MSP-4" : an invoice "issued by the defendant to its customer".

26. In the light of such material, it is perhaps not surprising that counsel for the plaintiffs should have described it as a smoke screen.

27. Mr. Griffiths, Q.C. argues that the failure to plead the defence of "countermand" in the draft pleading is not fatal if the actual material before the court can lead to that conclusion. He further argues that, at this stage, all that the defendants need to show is an arguable case. We accept Mr. Griffiths' broad submissions on this point. Where we differ is that, like the judge, we can find no material before the court capable of supporting the assertion. An assertion on oath remains an assertion, see Murjani v. Bank of India [1990]1 HKLR 586 at 589G per Hunter J.A. ".... the mere assertion of fact in an affidavit does not necessarily give leave to defend".

Conclusion

28. The judge found that the plaintiffs made demand for the return of the moulds in March 1992 and were told by the defendants that the moulds would be available by the end of March 1992. He then went on to find that a reasonable time for compliance with the demand had been given. In so far as he found that the first demand for the return of all the moulds was made on 11 March 1992, he was in error, because, at that time, the parties were only referring to five sets of moulds. However, after the defendant had asserted a right of lien, the plaintiffs responded on 24 March by demanding the return of all the moulds between 1 and 15 April. This was refused, and a further assertion of a right of lien was made. The facts seem to us overwhelming. The judge was plainly correct in concluding that ample time had been given by the plaintiffs to the defendants to comply with the demand.

29. As to the defence of "countermand", the judge found that there was no evidence at all that further orders had been placed by the plaintiffs or with the plaintiffs' consent after they had demanded the return of the moulds. In this regard, he was also right. The judge also found that a number of the defendants' assertions were "very colourable". Having ourselves gone through the same material - amounting to almost 250 pages - we have come to the same view.

30. The defendants have shown no arguable defence. The appeal must be dismissed. In handing down this judgment we make an order nisi for costs to the plaintiff (respondent).