LOCAL INTERNATIONAL LTD. v. JOIN HO KNITTING LTD.

1997, No. A2142

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

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J U D G M E N T

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1. The plaintiff's claim is for $929,078.94 in respect of temporary quotas for knitted garments supplied to the defendant in 1996. By counterclaim, the defendant seeks an indemnity for losses which it incurred as a result of the plaintiff's breach of an agreement to supply the defendant with 3,000 dozen permanent quota for knitwear.

2. The writ having been issued on 28th February 1997, the plaintiff obtained judgment in default on 18th March. By way of execution, on 1st April the plaintiff obtained a garnishee order to show cause against the defendant's bank. On 4th April, the defendant applied to set aside the judgment. That application was heard by a Master on 23rd July who allowed the defendant to defend the claim to the extent of $250,000.00. As the plaintiff's claim is in fact admitted by the defendant, it is difficult to understand why the Master made the order he did. It was, perhaps, a misguided attempt to make some provision for the possible success of the defendant's counterclaim.

3. On 15th August, the plaintiff presented a winding-up petition against the defendant. In the companies court, the petition was later stayed and ordered to come on for hearing at the same time as this action.

Defendant's case on counter-claim

4. The plaintiff's claim being admitted, it remained only for the defendant's counterclaim to be determined. Unfortunately for the Defendant, 3 potential witnesses had died or were otherwise unavailable. They were a director, Mr. Hui, and a secretary both of whom had died, and a manager, another Mr. Hui, who is in Canada. The remaining witness to the substance of the counterclaim was another director Chan Kam Him (Mr. Chan). According to Mr. Chan, sometime before January 1996 the defendant had obtained an order from a customer in Europe for the supply of 20,000 dozen woollen garments. It was to be the defendant's responsibility to provide half the necessary quota, that is for 10,000 dozen. He said that, generally, it is cheaper to get quota before Chinese New Year. The defendant contacted quota companies for this purpose. A contract was signed with the plaintiff on 26th January 1996 for the supply of 3,000 dozen, Type B (ie permanent) quota at $250 per dozen, making a total price of $750,000. Payment was to be by way of letter of credit and there was to be transfer of the quota on or before 31st March. In the event of default, the defaulting party would "indemnify the other party of whatever losses incurred consequential and otherwise".

5. An associated company of the defendant, Join Yee Knitting Limited opened the letter of credit. It is not in dispute that the plaintiff supplied quota for 1,000 dozen and that it was paid $250,000.00 on about 5th February. As far as Mr. Chan was aware, the defendant received no further permanent quota from the plaintiff under the agreement. In April, he began asking around about quota from other sources. He discovered that the cost of temporary quota, that is for use in 1996 only, was from $180-200 per dozen. There was no price for permanent quota. The price had "shot up like a rocket" so that no one was offering to sell (presumably in the hope that even better prices could be obtained) and no one was buying (presumably in the hope that prices would come down). Therefore, the defendant was content to allow the plaintiff time to gather the necessary permanent quota in view of the price contained in the agreement. By June, however, when the time had come to begin shipping woollen garments to Europe, the defendant was in need of quota. Eventually, between June and October, it purchased 7,100 dozen temporary quota from the plaintiff to enable it to ship garments under its contract with its European customer. 2,000 dozen of that temporary quota represents the plaintiff's claim which is no longer in dispute.

6. Just before Chinese New Year 1997, Chui Wai Lun (Mr. Chui) a director of the plaintiff, accompanied by a Miss Chan, called at the defendant's office about the outstanding payment for temporary quota supplied to the defendant. Mr. Chan drew attention to the plaintiff's failure to supply 2,000 dozen permanent quota. Mr. Chui said he had promised only to try his best to obtain this quota, but had never committed himself that he would definitely supply them. He asked for payment from the defendant although he was prepared to accept settlement at a 5% discount. Mr. Chan said he told Mr. Chui that the defendant was already in financial trouble because of failure to get enough quota for its exports and that he would have to speak to the defendant's directors about payment. Later, in cross-examination, he said that he told Mr. Chui that it would be a condition of payment that the plaintiff first completed the agreement by supplying 2,000 dozen permanent quota. Permanent quota, of course, could be used in successive years and was therefore a valuable commodity.

7. The defendant's directors did not agree to make payment even at a 5% discount. They decided to pay $200,000 by cheque before Chinese New Year and to pay the balance by instalments after the holiday. A cheque was issued but was unpaid because of insufficient funds or overdraft facility. Mr. Chan explained that an expected payment of $1,000,000.00 by a customer did not materialise. In cross-examination, Mr. Chan said that he was out of Hong Kong when the cheque was returned. He contacted the defendant's accounts office and asked them to ask Mr. Chui to wait until after the holiday when he, Mr. Chan, would put the defendant's account in funds. In the meantime, his fellow director, Mr. Hui, returned to Hong Kong where unfortunately he died a few days later in a traffic accident. In the meantime, Mr. Hui had prepared a note for the plaintiff setting out the defendant's position. This note referred to the meeting with Mr. Chui and went on that the total indebtedness "was agreed to be reduced by 25%, becoming HK$713,878.29". Payment was to be by way of the cheque followed by four monthly payments of $100,000.00 each and then a final payment of the balance. The note regretted the fact that the cheque was dishonoured and said that it would be repaid with the second instalment on 16th March. Mr. Chan said that the plaintiff had not in fact accepted such a discount and that it was just a suggestion on the part of the defendant.

8. A shipping clerk, Pang Wai King (Miss Pang) also gave evidence on behalf of the defendant. She explained that it was her duty and responsibility to complete transfer of quota forms on behalf of the defendant as transferee. She said that invariably Mr. Chui brought the completed form on which she had only to place the defendant's chop and sign on behalf of the defendant. After she had made a photocopy of the completed form, Mr. Chui would take it away with him. Such transfer forms were only completed when the defendant needed quota in order to make shipments of goods. She knew when the defendant required quota because of her position as shipping clerk and because of a list kept in the defendant's office.

9. Among the documents in this case is a letter dated 18th March 1996 from the plaintiff to the defendant. In it, the plaintiff referred to the agreement and said

"We are pleased to deliver 24,000 pieces of EU Cat. 5 quota to your company. Kindly issued 2 sets of TIC 397 transfer form(s) to accepted the said quota".

10. Mr. Chan denied that the defendant had received such a letter or quota. Miss Pang said she had never seen this letter although she agreed that it may have gone direct to the director Mr. Hui to whom it was addressed without her seeing it.

Plaintiff's case

11. Mr. Chui gave evidence on behalf of the plaintiff. He is now a director but, at the time when the events with which I am concerned took place, he was only an employee. He is also the sole proprietor of a company called Wiggham Trading Company. Between 1974 and 1991, he was in partnership with Lee Hong Kei in a company called Wiggham (Import and Export) Company. When the partnership dissolved in 1991, Mr. Lee continued to trade under the existing name while Mr. Chui adopted the new name. It appears that there was some sort of tacit agreement that each of the erstwhile partners could keep the name "Wiggham".

12. Mr. Chui confirmed that he made the agreement dated 26th January 1996 with the defendant. He arranged the transfer of 1,000 dozen permanent quota to the defendant on about 5th February. On 8th March, he signed an agreement on behalf of the plaintiff for the purchase from Wiggham (Import and Export) Company of 2,000 dozen permanent quota at a price of $272.00 Mr. Lee signed the agreement on behalf of Wiggham. The total price was $408,000.00 of which the plaintiff paid 25% amounting to $136,000 on 18th March. Wiggham issued a receipt.

13. Between 8th and 18th March, Mr. Chui informed Mr. Eric Hui, the defendant's manager, many times on the telephone that the quota was ready. On 18th March, he prepared the letter to which I have already referred advising the defendant that the quota was ready and asking the defendant to provide 2 transfer forms. Mr. Chui had the letter sent both by fax and by post.

14. There having been no response to his letter, Mr. Chui realised that the defendant was not going to accept the delivery of the quota. On 30th March, the day before the last day for delivery provided for in the agreement, he sold the quota back to Wiggham at the same price. Mr. Chui said he did not make any complaint to the defendant because the plaintiff was not going to make a loss and he did not want to spoil the business relationship with the defendant. He said the defendant did not chase the plaintiff for the permanent quota. Rather, between June and October, the defendant bought about 7,100 dozen temporary quota from the plaintiff at an average value of $455.00 a dozen.

15. As far as the forms of transfer of quota were concerned, Mr. Chui said that because Mr. Eric Hui had not had experience of handling this kind of transfer, Mr. Chui, as part of the plaintiff's service package, provided the blank forms and helped to prepare and fill them in. Hence, he thought that the defendant should provide and fill in the forms for subsequent transfers. He said he could not fill in part II of that form because he did not necessarily know who the transferee was going to be nor who would sign the form. When it came to the temporary quota later in the year, there were occasions when the defendant failed to sign the form after Mr. Chui had asked them to do so. He decided therefore to go to the defendant's office himself with the forms on each occasion. There, he saw Mr. Eric Hui who arranged for staff of the defendant to complete part II of the form.

16. Mr. Chui agreed that, with a fellow director, Mrs. Chan, he went to the defendant's office in January 1997 to ask the defendant to pay for outstanding temporary quota of 2,000 dozen. He saw Eric Hui and met Mr. Chan for the first time. Mr. Chui said that Mr. Chan did ask about the 2,000 dozen permanent quota which he said the plaintiff had failed to deliver. Mr. Chui said that the plaintiff no longer owed anything. There was then discussion about the outstanding payment for the temporary quota. Mr. Chui asked the defendant to pay before Chinese New Year. Mr. Chui suggested a 5% discount on the amount owing, but the balance to be paid at once. Mr. Chan said he would have to think about the matter and would reply later. Later, Mr. Chui was contacted by a Miss Yuen of the defendant who asked him to go and collect $200,000.00. Mr. Chui collected a cheque for that sum on 5th February. The cheque was subsequently dishonoured twice so that this action was commenced.

17. Miss Kitty Lee also gave evidence on behalf of the plaintiff. She is a director of Kongtex Enterprises Limited, a quota broker. She had known Mr. Chui for over 15 years. They are business friends.

18. Miss Lee produced 5 copy transfer notes for Category 5 permanent quota between 22nd and 29th April 1996. Debit notes to the customers showed a price of between $276.00 and $281.00 a dozen. Other than that, without access to her computer record, she could not really remember the price of either permanent or temporary quota in 1996 or any particular trend.

Assessment

19. Apart from the evidence of Miss Lee, however, there was the evidence of the defendant's purchases of temporary quota between June and October which showed an average price of $455.00. It is common ground that permanent quota is more expensive than temporary quota. It was submitted on behalf of the defendant that the plaintiff failed to deliver the balance of the permanent quota to the defendant because it did not want to make a substantial loss. Rather, it hoped to be able to acquire quota at a lower price towards the end of the year and satisfy the defendant's requirements that way. It was pointed out that if the defendant really failed to accept delivery in March 1996, there was no reason for Mr. Chan to have raised the matter at the meeting in January 1997. The defendant had the necessary credit for the purchase of the permanent quota from the plaintiff in place by way of a letter of credit. The defendant had already accepted 1,000 dozen permanent quota without difficulty.

20. Accordingly, it was the defendant's case that the plaintiff's letter of 18th March and the Wiggham documents were documents brought into being for the purpose of defending the counterclaim.

21. I find myself unable to accept that contention. First, although Miss Lee was pressed in cross-examination to the effect that she had come to give such evidence as Mr. Chui might have required of her, I saw no reason to doubt the documents which she produced. It is worth mentioning that Miss Lee was only required to give evidence at all because the defendant would not accept the authenticity of her documents and issued a counter notice. Miss Lee said, and I accept, that she had no difficulty in finding either buyers or sellers for Category 5 permanent quota in April 1996. I have therefore no reason to believe that the plaintiff would have had any difficulty in acquiring quota in March at the price agreed with Wiggham. Whilst it is true that that would have resulted in a loss to the plaintiff of $44,000.00, I accept Mr. Chui's evidence that that was a loss which would have been of no consequence to the plaintiff.

22. Second, if the plaintiff was indeed in breach of its agreement, it seems surprising that the defendant kept on ordering quota from the plaintiff later in the year. If the defendant, as Mr. Chan now said, feels and felt so strongly that it was entitled to an indemnity, it seems strange that the defendant settled payment for over 5,000 dozen temporary quota. In any event, apart from the mention of the outstanding quota by Mr. Chan in January 1997, there was never any demand, and certainly no demand in writing, by the defendant for the outstanding quota and no request to be indemnified until after these proceedings had commenced.

23. Third, while Mr. Chui no doubt still has a friend in Mr. Lee, the proprietor of Wiggham (Import and Export) Company, I find it difficult to believe that Mr. Chui, aided and abetted by Mr. Lee, could have gone to the lengths which they did in order to defeat the defendant's counterclaim. The certified copy of the plaintiff's cheque, which was produced and agreed as being authentic, shows that the cheque for $136,000.00 was paid by the plaintiff's bank. Whilst of course, it might have been paid straight back by Mr. Lee, in my view this financial aspect of the transaction puts the matter beyond doubt. The cheque is dated contemporaneously with the other documents. That militates against the transaction having been created to defeat the counter-claim. That the transaction was actually dreamed up in March 1996 as a precaution seems unlikely. I do not accept that there has been a wholesale fabrication of documents.

24. I accept that there may be some inconsistency between the evidence of Miss Pang and that of Mr. Chui about completion of the transfer forms. I have no particular reason to doubt the evidence of Miss Pang. It seems perfectly possible to me, however, that Mr. Chui had obtained the necessary details from Mr. Eric Hui when Mr. Hui placed an order for temporary quota. Mr. Chui then brought the completed form to the defendant's office where eventually they were presented to Miss Pang to chop and sign.

25. In the circumstances, I am satisfied and so find that the plaintiff had, and advised the defendant that it had, 2,000 Category 5 permanent quota for delivery in March 1996. The defendant failed to accept delivery of that quota and was consequently in breach of the agreement between the parties. The defendant's counterclaim must therefore fail.

26. Accordingly, there will be judgment for the plaintiff for the balance of its claim of $250,000.00 with costs.

27. The defendant's counterclaim is dismissed with costs.

28. The winding-up proceedings against the defendant may now be restored.

(N. J. Barnett)

Judge of the Court of First Instance