CHINA-ART LAPIDARY FACTORY LTD. AND ANOTHER v. HUNG YUK LIN AND ANOTHER

HCA13462/96

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 13462 OF 1996

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REASONS FOR JUDGMENT

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This is an action for the price of goods sold. The Defendant counterclaims for defective goods.

2. It would be useful to set out certain indisputable facts in chronological order:-

3. Pursuant to the terms of the Oral Agreement, the Defendants took delivery of a number of batches of lapidary goods. Some of the goods have been paid for. However, it is common ground that goods covered by the following invoices have not yet been paid for:-

4. The First Defendant denies liability. Her case is that at all material times she was the employee of the Second Defendant. She negotiated the Oral Agreement with Mr. Wong as employee of the Second Defendant, not as a party to the contract. She was not the purchaser of any of the goods.

5. The Second Defendant's case is essentially in three parts:- (1) Invoices 1427, 1427, 1429, 1431 and 1432 ("The First Five Invoices") are not the invoices of either Plaintiff and are hence irrelevant; (2) the goods under Invoices 1012, 1022, 1026, 1073 and 1025 ("The Second Five Invoices") are of inferior quality or defective. (3) Under the Oral Agreement, these goods were handed over to the Second Defendant for consignment sale and may be returned at any time. Some or all of the goods are in a warehouse in China ready to be returned. As a result of the goods under the Second Five Invoices being of inferior quality or defective, the Second Defendant has had goods returned by his customers and the Second Defendant has suffered loss of profits totalling HK$72,149.50 which is counter-claimed.

6. On the face of it, who are the parties to the Oral Agreement, the terms of the Oral Agreement and what loss and damage suffered by the Defendants are of great moment in this case. In the final analysis, it will be seen that the whole case turns primarily on credibility.

Evidence for the Plaintiffs

7. The Plaintiffs called Mr. Wong and Madam Wong.

8. According to Mr. Wong, he and the Defendants negotiated the Oral Agreement. He stated that it was made known to the First Defendant that the First Plaintiff would be registered as the vehicle to supply lapidary goods under the Oral Agreement. He was under the impression that the First Defendant and the Second Defendant were in business together. He maintained that he only agreed to give the Defendants 60 days credit term and there was no discussion about consignment sale. Almost immediately after the Oral Agreement was reached, the Defendants placed orders. Since the First Plaintiff was still in the process of incorporation and the basic business letterheads and forms were being printed, the left-over blank invoice forms of the Partnership (by then already dissolved) were used; hence the First Five Invoices. For those invoices made out to Lion Design, Mr. Wong says that they were so on the request of the Defendants and he merely obliged. It was only later, again at the request of the Defendants, that invoices were made out to China Gems.

9. By June 1996, Mr. Wong realized that the Defendants had not settled accounts and he began to chase for payment but to no avail. It was also at about this time that Madam Wong started to participate in the running of the First Plaintiff company. Further orders from the Defendants were taken and met. By the end of July 1996, the First Plaintiff ceased to supply the Defendants for accumulated outstanding accounts.

10. According to Madam Wong, she was the one always in the offices of the First Plaintiff company. When the Defendants placed orders, most of the time the goods would be collected by the Defendants or one Mr. Hung Fo Sing from the offices of the First Plaintiff. Mr. Hung Fo Sing is the younger brother of the First Defendant. The person taking delivery would count and inspect the goods. An invoice would be prepared right away and receipt of goods signed for on the invoice.

Evidence for the Defendants

11. Both Defendants gave evidence. The First Defendant stated that she alone negotiated the Oral Agreement with Mr. Wong in May 1996 because the Second Defendant was busy and could not attend the meeting. During the meeting, she told Mr. Wong that she was an employee of the Second Defendant. It was agreed that Mr. Wong would supply lapidary goods to the Second Defendant on consignment sale. By consignment sale, she meant that the goods supplied need not be paid for until after the Second Defendant has sold the goods and obtained payment from his own customers. In support of the case of consignment sale, she referred to a document apparently signed by Mr. Wong that acknowledged receipt of payment for goods supplied on consignment sale terms for January to May 1996. The First Defendant recalled that Mr. Wong had supplied goods on consignment sale terms to another trading concern called "Lucky" where the First Defendant had worked as an employee before joining the Partnership. She denied having anything to do with the use of invoice forms of the Partnership or the designation of the addressees in the invoices.

12. On the counterclaim for defective goods, the First Defendant stated that she had received lots of complaints. She went into a number of specific complaints. It is said that lots of goods had been returned and because the Plaintiff had not responded the Second Defendant arranged for the returned goods and defective goods to be stored in a warehouse in China.

13. In his evidence, the Second Defendant stated that he had discussed with Mr. Wong at the end of 1995 about the setting up of China Gems and Mr. Wong was informed in or about the end of January 1996 of the registration of China Gems. The Second Defendant confirmed that the First Defendant was his employee in dealing with Mr. Wong and the Plaintiffs.

14. On sub-standard or defective goods, the Second Defendant asserted what has been pleaded in the counterclaim which is:-

"11. Part of the articles delivered were defective and/or of inferior quality.

PARTICULARS

Invoice	Remarks	Amount
1012	inferior quality/defective	$21,000.00
1022	inferior quality/defective	$46,600.00
1026	inferior quality/defective	$10,000.00
1073	returned to 1st Plaintiff	$6,000.00
1025	inferior quality/defective	$4,500.00

15. By reason of the matters pleaded above, in particular paragraph 11, the 2nd Defendant has suffered loss and damage.

PARTICULARS

Loss of profits and claims from customers totalling HK$72,149.50.

16. The 2nd Defendant seeks to set off such amount as may be found to be due by the 2nd Defendant to the 1st Plaintiff against the 1st Plaintiff's claim so as to extinguish or diminish such claims."

Evaluation of the Evidence

15. By the very nature of the Oral Agreement, there is little objective evidence on which the court may rely to determine who were the contracting parties and the terms of the Oral Agreements. One is driven to resolve conflict in evidence on the bases of credibility and common sense.

16. There is nothing remarkable or inherently incredible in the evidence of Mr. Wong. The same can be said of the evidence of Madam Wong. Both were subjected to thorough cross-examination. Indeed I also questioned Madam Wong on some details to test her credibility. Taking all factors and circumstances into consideration, I found that both Mr. Wong and Madam Wong are honest and reliable witnesses.

17. The evidence of the First Defendant strikes one as rather artificial. The First Defendant said that she was the employee of the Second Defendant. Whenever she referred to the Second Defendant, she called him Mr. Lam. In other words, in her evidence, the First Defendant tried to create an impression of objective distance from the Second Defendant. Now, she is the wife of the Second Defendant. In the lapidary business, she has been in the trade for years. She was one of the three founders of the Partnership. She dealt with Mr. Wong all along. There is no doubt that she handled all the sales which apparently were to overseas customers. It is also abundantly clear that the First Defendant ordered the goods and she dealt with the book-keeping of the business. Moreover, the evidence shows that the Second Defendant signed blank cheques for the First Defendant to complete for payment for goods. Obviously, the First Defendant's involvement in the business goes far beyond that of an employee or that of a marketing person as her business card says. On the other hand, the Second Defendant had no more than a nominal role in the lapidary business. Of course, theoretically, the First Defendant can be an employee of her husband but the reality in this case does not bear this out.

18. There are several problems with the document allegedly signed by Mr. Wong that acknowledges receipt of payment for goods supplied on consignment sale. First the First Defendant cannot produce the original of this document. Only a photocopy is produced. Her explanation is that Mr. Wong asked to take the original away. But it is also her evidence that she took the initiative of drawing up that document for Mr. Wong to sign. It is difficult to accept that, seeing the need to obtain a signed receipt from Mr. Wong, the First Defendant would let Mr. Wong take away the piece of paper with the signature. The second problem with this piece of evidence is that it refers to supply of goods for the period from January to May 1996. It is common ground that the Defendants started to order goods under the Oral Agreement from May 1996. The third problem is that the signature on this photocopy is quite different in several aspects from Mr. Wong's signature on another document. One is therefore, left in considerable doubt as to the authenticity of the document relied upon or, to put it more bluntly, the veracity of the First Defendant.

19. On the question of inferior or defective goods, the First Defendant quite clearly exaggerated the problem. Although the First Defendant stated in effect that all the goods covered by the Second Five Invoices were inferior or defective, she could only show a very small number of specific complaints from her customers. Because the counterclaim for inferior or defective goods was rather general and vague, I asked the First Defendant about the particular complaints from her customers. She came across as a witness constantly shifting grounds about the true nature and extent of the complaints. The documentary evidence relied upon by the First Defendant reveal complaints from about 7 customers involving a total of about 20 pieces of goods. The Second Defendant in his evidence confirmed that those are all the complaints they had received. Evidently, the Defendants took delivery of more goods and had paid for some already. Even assuming that these 20 pieces complained of are among the goods supplied under the First Five Invoices or the Second Five Invoices, they constitute about 2% of the aggregate under all 10 invoices. When one looks further into the complaints, it is hardly possible to pin fault on the Plaintiffs. There are complaints about broken pieces which could be due to faulty packing by the Defendants for shipment. There is a complaint about the base not fitting the globe which can be due to mis-match by the Defendants because they had at one stage taken globes without base. There is one complaint in which the customer asked for replacement screws. There is one instance in which the customer asked for a couple of pieces to be sent at cheapest cost which one may say perhaps is not a complaint at all because a customer with legitimate complaint about inferior or defective goods would normally ask for replacement at cost to the seller. So, essentially, the case of inferior or defective goods was grossly inflated. One cannot help feeling that the Defendants created excuses to avoid payment.

20. The whereabouts of the bulk of alleged inferior or defective goods is also a mystery. Both Defendants said that because they could not contact Mr. Wong and because the Plaintiffs did not respond they had the goods, said to be of large quantity, sent to China for storage. But they are ready and willing to return them to the Plaintiffs. When questioned about how the goods could have been sent to China, neither Defendant can produce documents showing shipment or clearance through Chinese Customs. Whilst both Defendants in oral testimony said that it was the Second Defendant who arranged for a friend of his to transport the inferior or defective goods to China. In fact the First Defendant tried to impress upon the court that it was the Second Defendant's doing so she did not know much about the arrangement. But both Defendants forgot that the First Defendant in her written witness statement says that it was "I" who sent the goods to China.

21. The allegation of contingency sale is unconvincing. The document said to prove this, even if genuine, probably relate to some other deal. But, as I have analysed, the document is suspect. The Plaintiffs pointed out that the Defendant sold mostly if not exclusively to overseas customers. This is borne out by various pieces of evidence from the Defendants. The purchase orders issued by the Defendants also amply demonstrate that the Defendants had obtained orders from customers before they placed orders with the Plaintiffs. It also appears that the Plaintiffs were from time to time unable to meet orders placed by the Defendant. There is simply no reason for the Plaintiffs to agree to supply goods to the Defendants on consignment sale basis.

22. I have already mentioned some of the weaknesses in the Second Defendant's evidence. There is one further instance which reflects adversely on him. When giving evidence, the Second Defendant said that Mr. Wong went to the Defendants' offices every month to check the stock of goods supplied on consignment sale terms. But at the next breath he stated that Mr. Wong had not been to their offices during the months of May to August 1996. The point is that the Plaintiffs supplied goods to the Defendants under the Oral Agreement during the months of May to July 1996 only.

23. In conclusion, I found both Defendants unreliable and unbelievable witness. The defence and counterclaim did not come up to proof.

Parties to the Oral Agreement

24. Bearing in mind the previous history between the First Defendant and Mr. Wong, the evidence for the Plaintiffs that I have accepted, the real role of the First Defendant in the conduct of trade between the Defendants and the Plaintiffs, I had no doubt that the First Defendant contracted personally as one of the parties to the Oral Agreement. The fact that she was not registered as a partner in Lion Design or China Gems is, of course, a factor to be considered. But in view of the fact that neither Defendant stuck to formality about the vehicle of trading, I thought the First Defendant can be safely regarded as having a proprietary interest in dealings with the Plaintiffs. It follows that she must be held jointly and severally liable for the price of goods supplied under the Oral Agreement.

25. Although the First Five Invoices were issued on left-over forms of the Partnership, as I have accepted evidence in this regard, those forms were used with the agreement of the Defendants as substitutes for those to be printed for the First Plaintiff which were in the process of registration. Since the First Five Invoices were issued at the time when the Partnership had been dissolved, it cannot be seriously argued that on account of the letterhead of those invoices the Defendants were dealing with the Partnership. Indeed, such argument in fact advanced by the Defendant shows the length to which the Defendants would go to evade liability. It is reasonable to hold that the use of those forms do not derogate from the fact that the Defendants actually intended to deal with the First Plaintiff. In any event, even if as the Defendants said in the alternative that they contracted with Mr. Wong personally, there is nothing to prevent Mr. Wong from assigning his book debts to the First Plaintiff to give the First Plaintiff the right to sue for the price of goods supplied by Mr. Wong personally.

26. It is, I believed, common ground that the Second Plaintiff was not a party to the Oral Agreement. The only reason why the Second Plaintiff joined in this action was, I believed, that the Defendant had issued purchase orders to the Second Plaintiff purportedly pursuant to the Oral Agreement.

27. In short, I hold that the contracting parties to the Oral Agreement are the First Plaintiff with the Defendants jointly and severally.

The Terms of the Oral Agreement

28. For reasons I have already given, I hold that the parties did not agree that goods would be supplied on consignment sale basis. The Oral Agreement was for out right sale.

Inferior or Defective Goods

29. Having come to the conclusion that the Defendants are not credible witness, and for the reasons I have given relating to alleged specific complaints from the customers of the Defendants, I found the goods covered by all the invoices under consideration are neither inferior nor defective. Even if there are a few problematic pieces, they are de minimis and there is nothing to suggest that the Plaintiff would have difficulty in providing good replacement pieces on demand; but such demand was not made.

Conclusion

30. In the premises, I found that the First Plaintiff's claim proved in its entirely and the Second Defendant's counterclaim utterly failed. Accordingly, judgment was given for the First Plaintiff against the First Defendant and the Second Defendant jointly and severally for the sum of HK$387,349.50 together with interest thereon at judgment rate from the date of the issue of the writ and costs to be taxed if not agreed. The counterclaim was dismissed with costs as well.