MINGSON INDUSTRIES LTD. v. LIN SHUN HUNG STEPHEN

H E A D N O T E

CONTRACT OF EMPLOYMENT - employee's implied duty to exercise reasonable skill - goods sold to customer on terms that price is paid by cash cheque or cash - after goods delivered buyer tenders post-dated cheque - cheque accepted by employee after unsuccessful attempt to get employer's express authority to do so - employer gives receipt to buyer - post-dated cheque dishonoured.

Held :

Employee not in breach of implied duty.

Lister v. Romford Ice and Cold Storage Co. Ltd. [1957] A.C. 555 considered.

East of Ferrers v. Robins (1835) 2 C.M. & R 152 distinguished.

IN THE DISTRICT COURT OF HONG KONG
CIVIL JURISDICTION
ACTION NO. 6560 OF 1990

---------------------------

---------------------------

______________

JUDGMENT

______________

1. The plaintiff is a wholesaler and retailer of frozen foodstuffs. On the 8th May 1990 it sold and delivered approximately 7000lbs of frozen foods to Unitime Industrial Ltd. ("Unitime") at its premises in Yuen Long, for a total price of $50,171.51. On the 12th May 1990 the plaintiff sold and delivered approximately 6200lbs of frozen foodstuffs to Unitime for a total price of $48,789.45. The plaintiff has not received payment in respect of these two transactions which I will refer to as the first and second sales for convenience. They were the only dealings which the plaintiff had with Unitime before the latter ceased to do business on or about the 14th May 1990. Indeed, apart from sending invoices with the goods, the plaintiff has taken no steps to obtain payment for these deliveries from Unitime. Instead, it seeks to recoup its loss in the total amount of $98,960.96 by suing the defendant, one of its former employees, in negligence and for breach of his implied warranty that he would exercise reasonable skill in his capacity as the plaintiff's sales supervisor and generally in the conduct of the plaintiff's affairs.

2. The plaintiff's failure to take any steps against Unitime to secure payment of its undoubted indebtedness is very strange. No satisfactory explanation has been given for this omission. Mr. Andrew Lee, the plaintiff's managing director, sought to justify the plaintiff's inaction by suggesting that it thought nothing more was required after the matter had been reported to the police, and a prosecution had been launched against some individual in Unitime's organisation. Quite frankly, I am unable to accept this explanation, or Mr. Lee's evidence that the plaintiff did not consult its lawyers on its claims against Unitime between June and September 1990. On the 15th July 1990 the plaintiff's solicitor sent a letter before action to the defendant. I regard it as highly unlikely that it did not, at the same time, seek and obtain legal advice on its rights against Unitime. The plaintiff's rights against Unitime could not have been plainer. It had an unanswerable claim for the price of the goods delivered under the two sales; and a similarly unanswerable claim on the cheque given in payment of the price of the goods delivered under the first sale. Yet, it still has not taken any step to obtain payment or judgment against Unitime. This strange state of affairs may be relevant to the question whether the plaintiff has proved a causal link between its alleged loss and the alleged breaches of duty on the part of the defendant. I mention this aspect of this unusual case at this early stage, because it illustrates another feature which runs throughout these proceedings, namely, the inconsistencies and contradictions in the oral and documentary evidence relied on to support the plaintiff's case as a whole.

3. On the face of it the plaintiff sustained a substantial business loss because a new and supposedly creditworthy customer quickly proved to be unworthy of the trust and judgment reposed in it by several persons within the plaintiff's organisation. It is not clear from the evidence who was responsible for introducing Unitime as a potential customer. The defendant had something to do with checking the business standing of Unitime, and processing the two sales. But, other and more senior employees of the plaintiff were also involved in this exercise. Apart from Mr. Lee, these included Mr. Bonsar YIP Chow-sang, the plaintiff's former marketing manager, and Michael KOO Shiu-keung, the plaintiff's former marketing executive, both of whom gave evidence before me. They ceased to be employed by the plaintiff shortly after the dealings in question. I do not know whether they resigned, completed their terms of employment, or were dismissed. But, it does not appear to be disputed that the plaintiff has not taken any steps to hold either of them liable or accountable for the plaintiff's failure to obtain payment from Unitime for these two sales. Instead, it has singled out the defendant, and alleged that its losses are due to various breaches of duty on his part.

4. The plaintiff's case against the defendant is put and pleaded in a rather strange way. In the first place it is relevant to notice that the plaintiff does not seek to rely on a breach of any express obligation assumed by the defendant. This is perfectly understandable in view of the fact that the plaintiff contends that the defendant was employed under a written agreement, dated the 29th March 1990, which is noticeably vague and reticent about the defendant's duties. (See 93 of Agreed Bundle). Instead, the plaintiff relies on an implied warranty or term that the defendant was possessed of, and would exercise, reasonable skill as the plaintiff's sales supervisor. Alternatively, it is alleged that the defendant was negligent in failing "to exercise reasonable care in and about the service of" the plaintiff.

5. In my view, the plaintiff has failed to establish that such latter duty of care (para. 4) arises in the present case. Firstly, it is expressed in far too sweeping terms to be applied to the employment relationship. Secondly, it is a blatant attempt to resort to tortious principles in order to establish or enlarge an implied liability for economic loss within an existing contractual relationship. Cf Tai Hing Cotton Mill Ltd. v. Liu Chong Hing Bank Ltd. [1987] HKLRl041; Scally v. Southern Health Board [1991] 3 WLR 778, 784-5. The defendant denies that his contract of employment contained, the implied warranties alleged in paragraph 3 of the particulars of claim. Mr. Lo did not cite any authorities to support the defendant's contention. It seems to me that, in addition to the Tai Hing Cotton Mill case, the matter is governed, if at all, by Lister v. Romford Ice & Cold Storage Co. Ltd. [1957] AC 555, which Mr. Lo sought to distinguish on the basis that the employee's wrongful act in that case was that of wilfully driving the vehicle in question, which was also an offence. I have not had the benefit of full argument on this or other authorities; but, I am unable to accept the suggested basis for distinguishing a decision of the House of Lords which has withstood the tests of time and adverse comment over the intervening years.

6. Whether the conduct of the defendant in the present case falls within the scope of that implied duty is, in my view, essentially a question of fact, although I recognise that as a matter of law, it may be possible to confine that authority to cases where the employee's act causes physical injury to a third party, who can then hold the employer vicariously liable for that injury. Furthermore it may be that the implied duty does not give an employer a remedy against an employee for purely economic loss sustained by the employer as a result of a breach of contract by the employer's customer, even though the latter has been procured or introduced by the employee. But, for present purposes I consider that I should accept the proposition that the defendant was under an implied duty to exercise reasonable skill in the discharge of his duties as a sales supervisor employed by the plaintiff.

7. I turn now to the evidence adduced by the plaintiff to support the allegation of incompetence and/or negligence on the defendant's part (para.7). Apart from the usual issues raised by the defendant's denial of these and other allegations, the Court is faced with conflicts and discrepancies in the evidence of the plaintiff's witnesses on material features of the case. But, what is particularly strange about this case is the fact that the plaintiff has sought to make the defendant liable for acts or decisions, which, on the undisputed and consistent evidence of its own witnesses, were not those of the defendant, but of one or more of his superiors! Mr. Yuen eventually conceded that the plaintiff could not maintain its claim against the defendant in respect of the second sale, because it was clear from the plaintiff's own witnesses that it was Mr. Koo who authorised the delivery of the goods under that sale. It was also Mr. Koo who decided not to ask for immediate payment for these goods. Indeed, all except one of the six particulars of incompetence or negligence, alleged against the defendant in paragraph 7 of the plaintiff's pleaded case, assert acts or events which never took place; or, if they did, were carried out by Mr. Koo or persons other than the defendant. In my judgment, at the end of the case for the plaintiff, the defendant only had a case to answer in respect of the allegations in paragraph 7(3), which reads as follows:-

"Without the knowledge or permission of the plaintiff company, accepted post-dated cheque from the said Unitime Industrial Limited for the sum of HK$50,171.51 on 8th May 1990;"

8. I will now indicate my findings on this aspect of the case.

9. Unitime became a potential customer of the plaintiff at the beginning of May 1990 (see pp28-29AB). On the 7th May 1990, Mr. KOO began to process its application for the opening of a credit account by filling in some of the blank spaces on a form used by the plaintiff (pp30-3lAB). Final approval required the assent and/or signatures of the defendant and other officers or employees. Although it is uncertain whether approval in principle had been given to the opening of a credit account for Unitime by the time the goods under the first sale came to be delivered on the 8th May 1990, 1 do not think that a credit account had been formally established. But, nothing turns on this matter because it is quite clear that the first sale was known to have been made on the basis of immediate payment by a cash cheque. This condition was clearly stated on the plaintiff's invoices or delivery notes (pp32-35.1AB) sent with the goods, as well as the order forms (PP58-65AB). The defendant received this order and passed it to Mr. Koo, who approved it and arranged for the delivery to Unitime. The goods were delivered on the 8th May 1990 by one of the plaintiff's drivers, Mr. Keung Ah-loi. After Mr. Keung had delivered some 7000lbs of frozen foodstuffs into Unitime's premises, he was given a postdated cheque for the price. He tried to contact Mr. Yip and Mr. Koo to get their advice on what to do, but they were unavailable. Instead, he was put through to the defendant who, after some interval instructed him to accept the postdated cheque and report the matter to the senior employees of the plaintiff on his return. Mr. Keung accepted the postdated cheque and handed it into the accounts department of the plaintiff. On the 9th May 1990 the plaintiff issued a receipt for the price of the goods comprised in the first sale (pp35.2 & 35.3 of AB). There is really very little dispute about these facts; but there are discrepancies as to the dates or times when the defendant's superiors became aware of what had happened with regard to the first sale.

10. Mr. Lee testified that he first learned of the settlement by means of the postdated cheque on the 11th May 1990, as a result of an enquiry of the accounts department and prior to instructing Mr. Koo or Mr. Yip to authorise delivery under the second sale, if they considered it prudent to do so notwithstanding Unitime's failure to pay cash for the first sale. Mr. Yip testified that he first, learned of the postdated cheque on the 16th May 1990, when he was so informed by Mr. Lee. Mr. Koo testified that he first learned of the postdated cheque on the 8th May when Mr. Yip told him that it had been given. Mr. Keung testified that, on his return to the plaintiff's premises on the 8th May 1990, he told Mr. Yip that he had brought back a postdated cheque. He further testified that Mr. Yip made no response; and he was not criticised by anyone for accepting the cheque in question. The defendant testified that he instructed Mr. Keung to accept the cheque and report the matter upon his return to the plaintiff's offices only after he had tried to consult Mr. Lee, Mr. Yip and Mr. Koo, none of whom was available when he received Mr. Keung's telephone call. He did so because he feared that the goods delivered to Unitime might be damaged if they were reloaded onto the plaintiff's vehicle and returned to the cold storage, some considerable distance from Unitime's premises.

11. On this aspect of the case I have no hesitation in preferring the testimony of Mr. Keung and the defendant to that of Mr. Lee, Mr. Yip and Mr. Koo. The latter were, in my view, very evasive and offered no explanations to contradict the clear evidence of Mr. Keung; or that of the defendant. Indeed, I found Mr. Yip to be a wholly unreliable witness. That alone does not necessarily diminish the testimony of Mr. Lee and Mr. Koo, because their evidence is consistent with the possibility that Mr. Yip failed to tell them what Mr. Keung had done on the instructions of the defendant on the day in question. I was not particularly impressed by Mr. Lee's evidence or his demeanour. I do not think that he was "in the dark" regarding the first sale until the 11th May 1990. It is very difficult to decide whether he had a stormy meeting with the defendant, Mr. Yip and Mr. Koo on or about the 11th May 1990, as he claims. If he did make strong objections to the fact that the first sale had been settled by an unauthorised method, i.e. a postdated cheque, it is very surprising that he urged Mr. Koo to deal gently with Unitime in respect of the second sale. It is an undoubted fact that Mr. Koo did not seek payment for the second sale or even remind Unitime that payment for the first sale was overdue. In my view, far from expressing strong disapproval of the defendant's conduct, Mr. Lee and the other superiors were anxious not to upset a new and substantial customer. Only when that customer proved to be worthless, did the plaintiff look for scapegoats.

12. In all the circumstances, the defendant's instruction to Mr. Keung to accept the postdated cheque was not, in my judgment, a breach of his implied duty to exercise reasonable skill and competence. It was a sensible and pragmatic decision in the situation facing him. Even if his fears of damage being done to the foodstuffs if they were returned to the plaintiff's headquarters were unfounded, it is probable that he could not have insisted upon the foodstuffs being reloaded by Mr. Keung. Property in the goods would probably have passed to Unitime once they were taken into its premises, and any lien of the plaintiff would have been lost. In any event, Mr. Keung returned with a cheque which I find was accepted by Mr. Yip and the accounts department on the 8th May 1990, without any criticism of the defendant. In a strict literal sense, the defendant accepted the postdated cheque without the knowledge or permission of the plaintiff. But, he did so because it was not possible to obtain the approval of his superiors, as they were not immediately available. Even if collection of payments from customers was part of the defendant's duties as a sales supervisor (which has not been clearly proved) I do not think that the defendant's decision on the 8th May was a breach of his implied duty. By bringing these proceedings the plaintiff has sought to make the defendant liable as a guarantor of the customer's creditworthiness. An employee may be held liable for not exercising reasonable care in entering into a contract on behalf of his employer. But, I do not think that the implied duty of care extends to guaranteeing performance of every contract by the employer's customers.

13. In my judgment, these proceedings are wholly misconceived and have been brought without proper consideration of the extent of the defendant's contractual obligations. Indeed, to the extent that they have been based almost entirely on the acts or omissions of the defendant's superiors, none of whom has been sued by the plaintiff, I consider that these proceedings are an abuse of the process of the court. The only authority cited by Mr. Yuen in support of the claim is the old case of Earl of Ferrers v Robins (1835) 2 C.M. & R. 152. But, with all respect to counsel, I do not consider that the case supports what has been done in this case. In that case the auctioneer sold furniture on terms which involved the giving of a bill of exchange by the buyer, instead of ready money. The plaintiff never accepted the bill in satisfaction for the furniture. In the present case, the plaintiff did accept the postdated cheque, albeit conditionally, in satisfaction for the goods comprised in the first sale. Furthermore, the defendant did not accept the order for the first sale on terms that Unitime could pay by postdated cheque. On the contrary, to the extent that he was solely responsible for effecting this sale, he did so on terms that payment should be by cash cheque. He did not conclude a credit sale. After the sale had been concluded on terms which accorded with accepted practice for new customers; and after the goods had been delivered to the buyer, and had probably become the property of the buyer, he decided to authorise Mr. Keung to bring back a postdated cheque, after trying to get express consent of his superiors. In my view, far from being guilty of a breach of his implied duties, he did the best possible for the plaintiff in the short time and the circumstances available to him. This claim is dismissed.