KAI NGAI PRINTING & PAPER PRODUCTS CO. LTD. v. KONG KWAN CHUN t/a GRACE PRINTING EQUIPMENT CO.

CACV 931/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 931 OF 2001

(ON APPEAL FROM DCCJ NO. 8576 OF 2000)

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J U D G M E N T

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Hon Le Pichon JA:

1. This is an appeal from the judgment of His Honour Judge Z E Li dated 6 March 2001 dismissing the plaintiff's claim for the return of the sum of $100,000 paid by way of deposit under a contract made between the plaintiff and the defendant dated 7 March 2000 and giving judgment for the defendant on its counterclaim for $350,000 with interest and costs.

Background

2. Sometime prior to the date of the agreement, the plaintiff was introduced to a Mr Lee who gave the directors of the plaintiff his name card bearing the name and logo of the defendant. Mr Lee then brought Jimmy Lau ("Mr Lau") to meet the directors of the plaintiff and it appeared to them that Mr Lau was Mr Lee's boss. Negotiations ensued. Eventually, the parties entered into an agreement in Chinese. Mr Lee initialed the amendments to it on behalf of the defendant.

3. Under the terms of the agreement, the plaintiff agreed to purchase a second hand colour printing machine from the defendant for $2.68 million to be delivered to a factory in Guangdong. The machine was to be despatched from Europe before 15 April 2000. The terms included the following:

"Deposit of HK$100,000.00 upon signing of Contract. (If machine is found to be unsatisfactory after inspection, this sum is to be refunded).

Immediate payment of HK$500,000.00 after inspection. Immediate payment of HK$1,780,000.00 after the arrival of the machine in Hong Kong.

After the installation and fine turning, HK$300,000.00 has to be paid immediately."

The agreement further provided by clause 6 for inspection of the machine which was located in Portugal, such inspection to take place before 23 March. The inspection envisaged by clause 6 did not in fact take place until 30 March but nothing turns on that.

4. The inspection party consisted of Lei Kok Khing ("Mr Lei"), a director of the plaintiff and Cheung Chung Sze ("Mr Cheung") a technician of the plaintiff and Mr Lau. It was the plaintiff's case that after inspecting the machine, the plaintiff's representatives who carried out the inspection informed Mr Lau that they were dissatisfied with the machine. Further, this was followed by a written notice of rejection, namely, the plaintiff's letter dated 3 April 2000 ("the notice") countersigned by Mr Lee.

5. Mr Lau denied that that was the case. His evidence was that no one from the plaintiff ever informed him that it was dissatisfied with the machine and it was not until sometime in May 2000 that the defendant learned indirectly that the plaintiff would not be proceeding with the agreement. It was argued before the judge and this court that Mr Lei and Mr Cheung had approved and accepted the machine on the spot in Portugal i.e. on 30 March 2000. But this was not the defendant's pleaded case: it was never pleaded that the plaintiff had unequivocally accepted the machine during inspection in Portugal. On the contrary, the defendant had pleaded that it was an implied term of the agreement that the plaintiff should notify the defendant if the machine was unsatisfactory or was not acceptable before 15 April 2000.

6. At the hearing, the court was informed that this had been 'abandoned' by the defendant's counsel below but in what context is unclear since the defendant could not produce counsel's written submissions below by reference to which the 'abandonment' had apparently been made. Be that as it may, counsel for the defendant submitted that the judge had made a specific finding of acceptance and given that fact, the notice becomes irrelevant because after acceptance it was no longer open to the plaintiff to reject the machine. So it was submitted that unless the plaintiff could persuade the court to set aside the judge's finding of acceptance, the judgment below must stand. The issue of acceptance thus stood at the forefront of the defendant's submissions.

7. To complete the chronology, it is worth noting that Mr Lau of the defendant went to London via Frankfurt after leaving Portugal to purchase the machine from an English company with a view to selling it to the plaintiff. The purchase only took place on 6 April 2000. There were no documents in court that could shed any light on the question when the machine was dismantled or when it was shipped from Europe.

Acceptance

8. The judge heard evidence from the inspection party, namely, Mr Lei, Mr Cheung and Mr Lau as to what transpired during the inspection in Portugal. The judge preferred the evidence of Mr Lau whom he found had "exhibited supreme air of confidence and integrity." He found Mr Lei and Mr Cheung unreliable as witnesses. He said this (at [23]):

"I am not convinced, on the balance of probabilities, that either of them at any time told Mr. Lau that the machine was rejected or that they had bona fides reasons to reject. I believe Mr. Lau told the truth, i.e. that Mr. Cheung told Mr. Lau in Portugal that the machine was accepted and that this must be communication with the tacit approval of Mr. Lei."

It should be noted that in the first sentence of the passage quoted above, the judge was focusing on evidence of rejection. It did not necessarily follow from the fact that he found that the plaintiff had not rejected the machine during inspection that the machine had been accepted by the plaintiff. However, in the next sentence he appeared to be saying that the machine had been accepted. This was then followed by a paragraph i.e. [24] about the notice which, as will become apparent later at [14] of this judgment, he found was bogus and not bona fide. But the premise underlying [24] was that it was still open to the plaintiff to reject the machine by notice after the inspection. [24] would have been otiose if indeed what the judge said in the passage quoted above meant contractual acceptance. Be that as it may, he concluded (at [25]) as follows:

"For the reasons given, I believe the Plaintiff did not find the machine unsatisfactory. I find that the Plaintiff had in fact accepted the machine."

9. Counsel for the defendant submitted that those two passages from the judgment constituted a clear finding by the judge that the plaintiff had accepted the machine on 30 March. But was that really the case?

10. Unequivocal contractual acceptance is different and distinct from "acceptance" by the plaintiff's representatives of explanations given in respect of complaints and queries raised by them concerning print samples and the machine. Whilst the language used by the judge might suggest the former, when one puts those passages in their context, it is not at all clear that the judge meant contractual acceptance.

11. Counsel for the defendant was in some difficulty when asked for direct evidence on this issue. He was only able to refer the court to the following excerpts from the examination in chief of Mr Lau:

"Q. Mr Lau, I want you to bear in mind we are talking about what happened at this inspection right beside the printing machine, okay, not with letters written by solicitors or so on. My question is at the time of the inspection did Mr Cheung or Mr Lei raise with you that the various colours of the printing were out of position towards the latter part of the printing?

A. Mr Cheung did, as I've said.

Q. Then you explained to him as you have explained to us, right?

A. That's correct.

Q. Did he accept your answer or not?

A. Well, he had to accept it because it was the truth, it was a fact.

Q. Did he accept or not?

A. He did, yes."

(Transcript, p. 93 L-R)

"Q. By the time you left the factory after the inspection, did Mr Lei or, for that matter Mr Cheung, ever told you that they would not accept the machine?

A. No.

Q. Perhaps can you remember as close as possible what was said, or if possible the exact words, by the time you three were about to leave the factory, what they thought of the machine they have just inspected.

A. At that time any responsibility or duty was to have them accept the samples, because back in Hong Kong we have or they have a contract and once they accepted these samples ...

Q. So did they accepted them?

A. So I asked Mr Cheung, 'Do you accept the samples?' Very clearly he said at that time, 'I don't think there is any problem.'

Q. Was Mr Lei present or not?

A. As I have said, Mr Lei was all along holding a camera, taking pictures, he did not say anything.

Q. But when Mr Cheung said that he accepted the samples, was Mr Lei next to him able to hear this?

A. That's correct."

(Transcript, p. 95 L-S)

12. These passages illustrate the point: the evidence there related to acceptance of print samples and not to acceptance of the machine. There was no direct evidence from any witness upon which the judge could have based a finding that the plaintiff's representatives had accepted the machine when carrying out the inspection on 30 March.

13. In my judgment, the defendant's submission that the machine had been accepted on the spot in Portugal cannot be sustained. It therefore becomes relevant to consider the notice.

The notice

14. This was a computer-generated letter bearing the plaintiff's letterhead. It was addressed to the defendant and dated 3 April 2000. It read as follows:

"Re: Contract Number : J003070 DATED 07-03-2000

One Second Hand ROLAND 604-3B four-colour Printing Machine

This is to notify you that after conducting an inspection of the machine in Eupore from 29th March 2000 to 31st March with your Mr. Lau Kin Yu, we found that the Machine is not up to a satisfactory standard and not acceptable. In accordance with clause 3 of the Contract, please return the deposit of HK$100,000.00 to us as soon as possible.

(Signed)	(Chopped with the chop and signed)
LEE HOI SHING	(Signed : illegible)
_________________ ___________________
Grace Printing Equipment Company	Kai Ngai Printing & Paper Products Co. Limited "

In its defence, the defendant never denied the authenticity of the letter. Nor was any notice served under RDC Ord. 27 rule 4(2). Absent such notice, any document described in the list of documents as an original document (which included the notice,) is deemed to be "printed, written, signed or executed as it purports respectively to have been": see Ord. 27 rule 4(1)(a).

15. It is recorded in the judgment that counsel for the defendant below urged the court to infer from the fact that the date "3rd April 2000" on the notice is of a different font from that of the other computer printed parts that "the date on this written notice was inserted later i.e. the written notice of disapproval was an ex post facto reversal and not genuine." That submission found favour with the judge. He found that the notice was "contrived evidence to support the plaintiff's decision to look for another machines (sic)." The logic behind this finding is difficult to discern. The suggestion appears to be that the notice when signed by Mr Lee was undated, that the date "3rd April 2000" (being of a different font) was printed after Mr Lee had signed the notice but that the date inserted did not reflect the true date of Mr Lee's signature to the notice. In other words, the notice was backdated. But none of these matters was ever put to Madam Wan who gave evidence for the plaintiff and who had personal knowledge of the notice, having prepared it or caused it to be prepared. She was the person who had called Mr Lee to attend the plaintiff's office and the countersigning had taken place in her presence. Nor was there any evidence to show that the document was not signed on 3 April. It would have been different had the defendant called Mr Lee and he had given evidence to the effect that the document was in fact signed on a date later than 3 April. But that was not the case.

16. I agree with the submission of counsel for the plaintiff that it was not open to the judge to find that the notice was not genuine because (i) its genuineness was never raised as an issue in the defence; (ii) no notice was served under Ord. 24, 27 rule 4; (iii) it was never put to Madam Wan in cross-examination and (iv) there was no evidence to show that the notice was not signed by Mr Lee on 3 April 2000. In the circumstances, effect has to be given to the deeming provision.

17. The defendant's denial of receipt of the notice, that the first it knew of the plaintiff's refusal to purchase the machine was upon receipt of the letter dated 30 May 2000 from the plaintiff's solicitor, has no bearing on the authenticity of the notice. The fact that during the course of his evidence, Mr Lau had suggested that the document was forged was not sufficient. If such a point were to be taken, it had to have been raised much earlier so that the plaintiff would be in a position, if it saw fit, to rebut any such suggestion. For example, it might have subpoenaed Mr Lee, or there could have been much more detailed evidence relating to the preparation, printing, dating and signing of the notice. In the event, counsel for the defendant acknowledged that no allegation of forgery was being made by the defendant.

18. In passing, it is worth noting that under the terms of the agreement, a further instalment of $500,000 was payable "immediately after inspection" and the machine had to be despatched from Portugal on 15 April. It is also to be noted that no written request or demand was ever made by the defendant to the plaintiff in respect of this instalment during the critical period between inspection and shipment. All Mr Lau did was to chase Mr Lee about it. These matters are not referred to at all in the judgment.

Ostensible authority

19. The next question which arises is whether Mr Lee had ostensible authority so that any notice to him was sufficient notice to the defendant. Mr Lee's name card bore the name, address and telephone number of the defendant. He introduced Mr Lau who was the director of the defendant to the directors of the plaintiff. Madam Wan's evidence was that Mr Lee introduced Mr Lau as his boss. It was accepted that Mr Lee had the requisite authority to initial amendments to the written contract on behalf of the defendant. Sometime after the inspection but before 3 April, when Madam Wan tried to contact Mr Lee at the office of the defendant, she was told that Mr Lee was out and was asked to leave a message. Thereupon Madam Wan repeated her demand for the return of the deposit. There was never any suggestion that Mr Lee did not work at the defendant's and was not known there. Taking all those matters into consideration, there was clearly a holding out by the defendant that Mr Lee was its agent. In my judgment, the notice given to Mr Lee was effective notice to the defendant.

20. Counsel for the defendant submitted that as Mr Lee's name card was not given to the plaintiff by the defendant but by Mr Lee himself, there was no holding out on the part of the defendant that Mr Lee was its agent and/or employee. That submission might have had some merit had it been the only relevant fact. But given the other facts referred to above, it cannot seriously be suggested that Mr Lee was not the defendant's agent. The issue here is not whether Mr Lee had authority to bind the company. All that was necessary for the plaintiff to show was that notice of rejection had been given to the defendant within a reasonable time after inspection and certainly before 15 April. The giving of the notice to Mr Lee sufficed for that purpose.

Conclusion

21. In my judgment, the plaintiff was entitled to and did reject the machine after inspection. The notice was a valid and sufficient notice of rejection. I would therefore allow the appeal.

22. Accordingly, the judgment below is to be set aside and judgment granted to the plaintiff in respect of its claim for $100,000 with interest from 6 March 2001 until payment at the judgment rate. I would also make an order nisi for costs here and below in favour of the plaintiff.

Hon Stone J:

23. I agree.

Hon Rogers VP:

24. I also agree.