GOLDEN RING INDUSTRIAL LTD. v. PEER WEN PING

No. A2361 of 1995

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2361 OF 1995

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J U D G M E N T

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1. The Plaintiff's claim is for the price of 9,000 watches manufactured to the order of the Defendant. The contract price was HK$329,940.00. After taking into account disposal by the Plaintiff of the watch movements, the net claim is $228,240.00. By way of defence and counterclaim, the Defendant asserts that the Plaintiff failed to deliver the goods in accordance with the terms of the contract; and further was in breach of a subsequent oral agreement varying the quantity to 3,800 watches only. The Defendant counterclaims US$3,425.00 and HK$751.29.

2. The background to the contract for 9,000 watches is largely not in dispute. The ultimate customer for the watches was Mars GmbH, the international manufacturer of such well-known confectionery as Mars Bars and Opal Fruits. For advertising or promotional purposes, Mars wanted a consignment of watches with an Opal Fruit design. For these watches, Mars looked to one of its suppliers, another German company called Greichgauer GmbH and Co. KG (GG), which in turn made enquires of and entered into negotiation with the Plaintiff, a company which manufactures watches in Hong Kong. Ultimately, GG placed an order for 9,000 watches with the Plaintiff through the Defendant.

3. In his re-amended defence and counterclaim, the Defendant admitted the contract between him and the Plaintiff and expressly pleaded that GG was his agent. I am in little doubt, however, that GG was in fact the principal because it is manifest from the evidence I have heard and the correspondence I have read that GG was pulling the strings and dictating exactly what was required of the Plaintiff. An application on behalf of the Defendant to amend his pleading was withdrawn when the likely consequences were pointed out to him. In turn, it is fair to say Mars was dictating very exacting specifications to GG.

4. The Plaintiff's case is simple. The Defendant placed a purchase order dated 22nd August 1994 for 9,000 watches as specified at a unit price of US$4.20, totalling US$37,800.00, for delivery in Hong Kong on 31st October 1994. The order provided among other things for samples within two weeks for confirmation and for mass production upon confirmation of the samples. Payment was to be by letter of credit. By sales order dated 24th August 1994, the Plaintiff accepted the Defendant's order. Thereupon, the Defendant asked for a Swiss movement to be substituted for a Japanese Seiko movement. A Swiss movement being more expensive, the Plaintiff required a price increase to US$4.70 per unit. This increase was accepted by the Defendant and a new sales order dated 24th August was issued by the Plaintiff for a total price of US$42,300.00 or HK$329,940.00. Thereafter the Plaintiff did its best to perform the contract. It supplied at least 6 samples. However, the Defendant or GG or Mars kept changing their minds about the precise requirements for the watch. As a result, the Plaintiff was unable to begin final production.

5. Then, on 13th December 1994, to the Plaintiff's great surprise, the Defendant indicated that he required delivery of only 3,800 watches. There followed some skirmishing between the Plaintiff, the Defendant and GG about the quantity. The Defendant and GG gradually increased the quantity that they were prepared to take but not to the satisfaction of the Plaintiff. Ultimately on 25th January 1995, Mars contacted the Plaintiff direct. After an exchange of faxes that day, Mars offered to buy all 9,000 watches, paying full price for 7,000 and half price for the other 2,000 watches. The Plaintiff rejected this offer as it also rejected the assertion that there had been an earlier agreement for 3,800 watches only to be delivered. The Plaintiff then put the matter in the hands of its solicitors who, on 3rd February, wrote to the Defendant stating that the Defendant was in breach of and had repudiated the contract, but nevertheless giving the Defendant 5 days within which to comply with the contract. The Defendant then put the matter in the hands of his solicitors. No solution was reached. The Plaintiff issued a writ on 14 March 1995.

6. The Defendant's case is that, by the time the contract was made on 24th August, the Plaintiff had received all necessary specifications and artwork save in relation to the dial and the second hand. This hand was a transparent plastic disc, with a fruit printed on it indicating the seconds, which was to revolve in front of the dial. The initiative for a change of movement from Japanese to Swiss came from the Plaintiff. As far as the Defendant was concerned, this did not involve any additional cost. The increase in the unit price was brought about because the Plaintiff discovered that the printing for the watch strap required offset printing which would be more expensive. To this increase, the Defendant eventually agreed. Pending provision of artwork for the dial and disc, the Defendant expected samples of the strap at least to be provided.

7. The new artwork for the dial and revolving disc eventually arrived and queries about it were clarified by 26th September. By then, no samples of any kind had been received and the Defendant stressed the urgency. By 24th October, samples of the strap had been received but found unsatisfactory. No further progress was made until 1st November when the Plaintiff's director and majority shareholder, Mr. Ho Kwok Cheung, went to the Defendant's office. Present at a meeting were Mr. Ho, the Defendant and Mr. Greichgauer, the proprietor of GG. It was agreed that, time for delivery of 9,000 watches having expired, the Plaintiff would only produce and deliver 3,800 watches in time for delivery to Mars by the end of December. Neither samples nor delivery were forthcoming however. Furthermore, it became apparent that the Plaintiff was preparing and expecting to deliver 9,000 watches in accordance with the original contract.

8. The Defendant was in difficulties. Orders totalling 9,000 watches had not materialised because of the delay in the provision of satisfactory samples. The Defendant and GG, however, still required 3,800 watches urgently for Mars by the end of December. It was too late by December effectively to go out and find another supplier. The Defendant and GG, therefore, were "forced" to rely on the Plaintiff and, in order to obtain delivery, eventually offered to take extra watches at their own risk. The Plaintiff, however, was unwilling to settle for anything less than performance of the original contract, although at one stage it was prepared to accept US$4.20 for the components for the balance of 5,200 watches.

9. The principal issue, therefore, is whether on 1st November 1994 the parties mutually varied the original contract by providing for a smaller quantity of watches.

10. On the evidence which came from Mr. Ho, the Defendant and Mr. Greichgauer, I am in no doubt that up to 1st November at least there was fault on both sides. As early as May 1994, GG had sent the Plaintiff detailed specifications for the construction and presentation of watches to be provided to Mars for Mars' promotional and advertising purposes. This specification provided for the watch hands to be black in colour. This was, however, subject to the qualification that "for exact location of features and colours refer to the approved artwork". The artwork, I am satisfied, was delivered to the Plaintiff by the Defendant on 22nd August. That plainly showed that the hands were to be red. Nonetheless, for reasons which remain unexplained, the Plaintiff in its two sales orders included under "remarks" that the hands were to be black.

11. The Defendant in his evidence very fairly acknowledged that he had overlooked the Plaintiff's remarks and that it was reasonable for the Plaintiff to have made preparation on the basis that the hands would be black. It was not until 1st November, however, that the error was pointed out to the Plaintiff and that he was required to change the hands to red.

12. Further, the artwork for the disc and dial was changed after the agreement had been concluded. It was not until 26th September that the new artwork had been provided and queries clarified by GG. The Plaintiff was not in a position to make samples of these items until after that date.

13. Apart from the disc and dial, the Plaintiff provided samples of the strap. These were found unsatisfactory both as to colour and printing. In the event, the Plaintiff did not provide a sample of the complete watch until 1st November when the printing of the disc and dial was still unsatisfactory.

14. There is no doubt that there was a meeting on 1st November attended by Mr. Ho, the Defendant and Mr. Greichgauer. According to Mr. Ho, the meeting was simply to discuss the sample watches which Mr. Ho had available. At the meeting, the shortcomings of these samples were pointed out and remedies discussed. There was no mention of any reduction in the quantity of watches.

15. There are three different versions of how the meeting was conducted. Mr. Ho said that he speaks Cantonese and a little Mandarin. He effectively has no English. For business purposes where English is necessary, Mr. Ho said he relied upon his wife or secretary to interpret or translate. Neither, however, were at the meeting. He relied, therefore, upon the Defendant and the Defendant's wife who spoke to him in Mandarin and some Cantonese and to Mr. Greichgauer in English or German.

16. The Defendant speaks English and Mandarin but, in 1994 at least, could speak virtually no Cantonese. He acted as interpreter for Mr. Ho and Mr. Greichgauer. He used English with Mr. Greichgauer. He spoke to Mr. Ho in Mandarin who generally understood what he was saying but, where there was difficulty, they resorted to the use of written characters.

17. Mr. Greichgauer, however, said that he was largely able to communicate direct with Mr. Ho in English, with resort to the Defendant for help when necessary.

18. Both the Defendant and Mr. Greichgauer agree that when a reduction in quantity was mentioned, Mr. Ho said in English "OK, no problem". But if the Defendant's evidence is correct, that was an isolated use of English by Mr. Ho in the middle of a discussion which was otherwise interpreted by the Defendant. If Mr. Greichgauer is correct, however, there had been substantial conversation in English between him and Mr. Ho.

19. It seems to me that, at the very least, there was fertile ground for misunderstanding during this meeting. If the Defendant's account is to be believed, there was an oral agreement to vary the original contract. No attempt, however, was made to record this agreement in writing. On the contrary, the exchange of correspondence thereafter continued to refer to 9,000 watches. It is difficult to understand why, when the Plaintiff in its correspondence made reference to the figure 9,000, the replies from both the Defendant and GG made no attempt to remind the Plaintiff that agreement had been reached for the supply of 3,800 watches only.

20. I find it difficult to accept the explanations which were given by the Defendant and Mr. Greichgauer for this omission. In effect, they were two. First, that an agreement having been concluded orally there was no need to keep repeating it in correspondence. Second, that where the Defendant referred to the figure 9,000 in his correspondence, this was simply a mechanical reproduction by his staff of the order number and the quantity referred to therein.

21. On 13th December, in a fax from the Defendant to the Plaintiff, for the first time the order number appeared without the figure 9,000. That fax read:

"Sorry! As not much time left for this year, some units have cancelled the order, now only 3,800 left to be delivered, please let us know whether the same can be packed to enable us to inspect the same within this week?"

22. Try as I might, and putting the most favourable interpretation upon it, I cannot find in that communication any hint or suggestion that, one and a half months earlier, the parties had agreed to the supply of 3,800 watches only. The Defendant and Mr. Greichgauer cannot, however, be accused of recent invention. Two days later on 15th December, the Defendant wrote to the Plaintiff to remind Mr. Ho that there had been a meeting followed by dinner at which it had been mentioned that the quantity would be reduced and at which Mr. Ho had said there would be no problem because nothing had been prepared.

23. It has to be accepted that Mr. Ho's evidence was not without its blemishes. In chief, Mr. Ho insisted that the increase in price from US$4.20 to US$4.70 was because the Defendant wanted to change to a Swiss movement which was more expensive than the Seiko movement which the Plaintiff wished to use. He also acknowledged that the design for the dial became more complex. The documentary evidence coming from the Plaintiff, however, is wholly against Mr. Ho because it makes plain that the increase was because the printing of the watch strap was more complicated than had been anticipated. In cross-examination, Mr. Ho accepted that he had recommended the use of a Swiss movement, and was prepared to accept that the increase in price was at least due partly to the more complicated printing. It is true that the correspondence is all in English and that it was prepared for Mr. Ho. Mr. Ho, however, said that he approved all outgoing correspondence. It is no answer to this criticism of his evidence that his command of English was poor.

24. As to the 1st November meeting, Mr. Ho's evidence was twofold. First, there was no reference to a reduction in quantity nor any reference to 3,800 watches only. Secondly, he had not met Mr. Greichgauer before. In cross-examination, however, after an overnight adjournment, Mr. Ho recalled that he had met Mr. Greichgauer on 21st or 22nd October at the Plaintiff's factory when partial shipments of 3,800, 4,500 and 5,000 watches were mentioned by Mr. Greichgauer. He was adamant that this meeting had occurred.

25. Unfortunately, Mr. Greichgauer's passport shows that Mr. Greichgauer himself did not arrive in Hong Kong until 26th October. There could have been no such earlier meeting. Further, on 22nd December, the Plaintiff faxed direct to GG complaining that the Defendant had changed the order to 3,800 watches only and required that the balance be accepted. Mr. Greichgauer replied the same day and referred to "your letter of 22nd of December". He continued "I sit together with you on 22nd of October and we have discussed everything". Mr. Greichgauer in evidence explained, and I accept, that the reference to 22nd October for a meeting was a mistake, the earlier reference to 22nd in relation to the Plaintiff's letter being repeated. He said that the proper reference should be 1st November.

26. Mr. Ho replied personally on 23rd December. In his fax he said:

"we still remember that while we have the meeting on 22nd October, we personally confirm that we accept the order is 3,800 or 4,500 pcs, provided that the residual 5,200 set accessory must be at your own account. It's a hard time for us to take all the responsibility."

27. In reliance upon Mr. Greichgauer's error, it seems to me that Mr. Ho was endeavouring to conjure up another meeting whose existence was wholly impossible. In any event, it gives the lie to there having been no mention of 3,800 watches, albeit that the delivery of such a quantity was qualified.

28. On the other hand, the Defendant's problem is that, apart from a casual mention by GG on 11th November that "the quantity was shortened" (and I note that there was no response to this), there was until 13th December no written reminder or clarification of the variation allegedly agreed on 1st November. I have to bear in mind, however, that the Defendant and GG were working to their own deadline of 31st December for delivery to Mars. From the outset, the Defendant had emphasised the urgency for the supply of samples. By 1st November, no satisfactory samples had been provided and, because of the delay in the provision of satisfactory samples, orders totalling 9,000 watches had not materialised. Provided the problem of the samples could be quickly overcome, there was still time to fill the order for 3,800 watches. It would not be unreasonable, therefore, for the Defendant and Mr. Greichgauer to try and solve the problem of the samples and the new quantity. There was every likelihood, it was argued, that a reduction would have been mentioned on 1st November. There was also no reason for the Plaintiff not to have agreed because, at that stage, the Plaintiff had not produced any watches. I note that, apart from an invoice for a sample of the engraving, invoices for the supply of the various parts did not appear until 15th November. Indeed, the invoices for the movements are dated 20th December. Plainly the invoices would have some temporal connection with the actual delivery of the goods involved. It is difficult to see, therefore, how the Plaintiff would have been prejudiced by a reduction in quantity.

29. The matter is finely balanced. On the balance of probabilities, however, I find there was no true meeting of the minds on 1st November. After making every allowance for the defects in Mr. Ho's evidence, what weighs more strongly with me is that, with the one exception, the correspondence and activities of the parties after 1st November and until 13th December is more consistent with the original contract remaining unchanged, other than that the delivery date had been put back.

30. It may have been open to the Defendant to have taken the position on or soon after 1st November that the Plaintiff was unable to perform the original agreement and to have accepted repudiation thereof. He did not do so. His view was that, provided the Plaintiff delivered by the end of November, there was still time to make delivery to Mars in Europe by the end of December using sea freight. The time for delivery was, therefore, extended. In December, the Mars' delivery time could still be met by the use of air freight. At all events, from the fax of 13th December, it is clear that the Defendant was still prepared to accept a delivery. But the Defendant was not prepared to accept delivery of more than 3,800 watches. Although this number was later increased, the Defendant was never prepared to accept the full quantity for which he contracted. The Defendant was in breach of contract.

31. In mitigation of its loss, the Plaintiff dismantled the watches which had been assembled and disposed of the movements for HK$119,700.00. There was no alternative open to the Plaintiff because Mars had property rights in the rest of the watch apart from the hands. According to the Plaintiff, there was a labour cost of $18,000.00 for the dismantling of the watches. The net claim is, therefore, $228,240.00.

32. In my judgment, however, the Plaintiff should have mitigated its loss further by accepting the offer made by Mars on 25th January. By then, it must have been obvious to the Plaintiff that the original contract was not going to be performed by the Defendant. While it is true that the Defendant and GG had gradually increased the number of watches they were prepared to accept, even making an improved offer within hours, I think there can be no doubt that there would be no improvement upon or extension of the offer made by GG on 20 January. If the Mars' offer had been accepted, the loss to the Plaintiff would have been 2,000 x US$2.35, totalling US$4,700.00 or approximately HK$36,660.00.

33. I give judgment for the Plaintiff in the sum of HK$36,660.00. The counterclaim is dismissed. I will hear the parties on costs.