Easy On Ltd. v. Janden Yarn Textile Co. Ltd. and Another

DCCJ14984/2000

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 14984 OF 2000

_______________

_______________

_________________

J U D G M E N T

_________________

1. Although this claim is for relatively modest amounts it raises interesting and not entirely straightforward points of law.

2. The action concerns the sale of polyester yarn manufactured in Taiwan which was used by the plaintiffs to make ladies knitted vests on behalf of Guess, the well known international clothing label. The yarn, as manufactured, has failed colour fastness to light laboratory tests and is, therefore, said to be sub-standard, according to the plaintiff's version of the contract for the sale of yarn.

3. The background to the action can be stated shortly. The plaintiffs are clothing manufacturers in Hong Kong, largely for overseas garment suppliers. The defendants, who are related companies with common shareholders, are also Hong Kong companies who act as agents for yarn manufactures. They represent a number of such manufacturers in places such as Korea and Taiwan. One of the companies they represent in Hong Kong is Tactel Enterprise Company Limited, a Taiwanese polyester yarn manufacturer based in Taipei.

4. I have heard from Mr Yung Ming-yu, who is a director of both of the defendants and indeed the principal of both of these companies, that the 1st defendant, Janden Yarn Textile Company Limited, only deals in cotton yarn and that the 2nd defendant, Janden Enterprise Limited, deals with other types of yarn, including polyester yarn. I accept his evidence on this matter.

5. His explanation for this is that cotton yarn is largely manufactured in Korea and that other types of yarn come from a variety of other countries, including Taiwan, and so it is thought sensible to divide up the operation of the Janden companies in this way.

6. Prior to placing these orders the plaintiff had purchased cotton yarn through the 1st defendant, being the cotton yarn company. I am satisfied that as a result of having done that, they again addressed all the purchase orders which relate to this action to the 1st defendant. These purchase orders are at page 35, for a small sample quantity, page 40, page 44 and page 47, being the bulk orders. I will need to make more detailed reference to these orders presently.

7. The documentary responses to these orders are the following: page 36 refers to the order at page 35. It is a pre-printed contract form of the 2nd defendant, the non-cotton yarn company. As to this sample order, it purports to record a contract between the plaintiff and the 2nd defendant and it comes with attached standard terms and conditions of contract, page 37. Payment was to be cash on delivery to the 2nd defendant.

8. The bulk orders are at pages 40, 44 and 47, all again addressed to the 1st defendant and responded to as appears in pages 42, 45 and 48. In these cases the response is a contract on the 2nd defendants' form of contract which states that the 2nd defendants are acting as agents for and on behalf of Tactel Enterprise Limited of Taiwan and they are signed by the 2nd defendants "as Agents only". The terms of payment is to be by irrevocable letter of credit in favour of Tactel with the advising bank being the Bank of Taiwan at one of its Taipei branches.

9. This, therefore, gives rise to the first issue which I need to decide as to who are the parties to the these contracts. The plaintiff had originally sued the 1st defendant only. Having seen the original defence from the 1st defendant, which was to the effect that the plaintiffs had not contracted with the 1st defendant, the statement of claim was amended to allege a contract by the plaintiffs with either the 1st or the 2nd defendant.

10. The 2nd defendants' defence as to parties is that whilst it accepts that it contracted with the plaintiffs on the order for a sample, pages 35 and 36, which it did as a matter of convenience because this was only for a sample quantity, the main bulk contracts were between the plaintiff and Tactel, the Taiwanese manufacturer with the defendant only acting as agent for the Taiwan company.

11. Should I resolve this issue in favour of the 1st and 2nd defendants then the plaintiffs action on the bulk of the claim must fail, leaving over the relatively small issue of the contract for the sample.

12. If I resolve this issue in favour of the plaintiffs, then I need to go on and decide what were the precise terms of the contract and whether there has been a breach of those terms by the defendants. If I find that there has been a breach then I need to deal with the issue of quantum which largely revolves around the question of whether the plaintiffs have taken sufficient steps to mitigate their loss by selling the defective vests, albeit for a lower price, which would entitle them to sue for the difference between their expected selling price to Guess and the price actually achieved.

13. The plaintiffs claim for the entire loss of their contracted selling price to Guess, on the basis that despite their best efforts they have failed to find a buyer, even a street hawker, so that the entire consignment has become commercially worthless.

14. From this recitation of the issues, I must now attempt to resolve them in turn.

Who are the parties to the contracts?

15. I have no doubt that in good faith, based on their previous transactions with the 1st defendant, the plaintiff considered that these orders would also be with the 1st defendants, hence the manner in which the purchase orders have been addressed.

16. Having listened to the evidence of Mr Yung as to how the two Janden companies divided up their business and seeing their proposed contracts I am in no doubt whatsoever that no contract has come into being involving the 1st defendants. These were orders for non-cotton yarn products which the 1st defendant did not deal with. The responses to the purchase orders, whatever their effect as to the 2nd defendant's status, did not involve the 1st defendants.

17. I am satisfied, therefore, that the action against the 1st defendant must fail and that there must be judgment to the 1st defendant against the plaintiffs.

18. As to the contract for the sample it is accepted and indeed averred by the 2nd defendants that it was they who contracted with the plaintiffs for the reasons that I have already given. I find as a fact that this contract, page 35, 36 and 37, was entered into between the plaintiff and the 2nd defendant. I will return presently to what the terms of that contract were.

19. As to the bulk orders, Mr James Cheung, who appears for both defendants, submit that it is abundantly clear on the face of the contracts which are at pages 42, 45 and 48, that the 2nd defendants were putting themselves forward as agents for their principals in Taiwan who were to manufacture this yarn. They are described as agents, Tactel are described as the sellers and the plaintiffs are described as the buyers. The 2nd defendants have purported to sign as agents only.

20. Clause 18 of the conditions of contract provides that:

"It is clearly understood that agents are only conducting business as intermediaries between buyers and sellers and are in no way responsible for non-compliance of contracts, claims, etc., arising, provided they will give reasonable assistance to arrange negotiations for amicable settlement whenever possible."

21. Finally, Mr Cheung draws attention to the fact that the method of payment is by letter of credit in favour of Tactel, payable in Taipei.

22. Miss Chau, for the plaintiffs does not accept that the 2nd defendant is to be treated as an agent. She says that the 2nd defendants cannot blow hot and cold, accepting contractual liability on the order for the sample, but denying a contract as principal on the main orders.

23. The plaintiffs were only interested in contracting with a Hong Kong company. I have no doubt that is what the plaintiffs would have wished for, but looked at objectively, I am satisfied on all the evidence that the 2nd defendant is properly to be viewed as agent for a disclosed principal, in this case Tactel.

24. The 2nd defendants put forward these contracts on a very clear basis. Everything points to a sale by Tactel to the plaintiff with the 2nd defendants as the middlemen. But, in the event that this is the court's finding, Miss Chau goes on to submit that a finding of agency does not absolve the 2nd defendant of liability.

25. She submits that with a disclosed foreign principal the position needs to be examined with care. She says that it would not be right to force a contract onto the defendants with a party outside Hong Kong, particularly with a Taiwanese company where Hong Kong has no agreement for the enforcement of its court's judgements in Taiwan. She relies in particular to article 105 in the current edition of Bowstead, page 427. The article is to this effect:

"An agent who makes a contract on his principal's behalf is liable to or entitled to sue the third party in accordance with the terms of any contractual engagement whether upon the same contract or upon some independent contract into which he has entered."

26. The comment indicates that; "The question, whether an agent who has made contract on behalf of his principal is to be deemed to have contracted personally and, if so, the extent of his liability depends on the intention of the parties to be deduced from the nature and terms of the particular contract and the surrounding circumstances, including any binding custom. As in all matters of formation of contract the test is objective."

27. What was the intention of these parties to be deduced from the nature and terms of the particular contract and the surrounding circumstances, including any binding custom? I have not heard any evidence as to binding custom in these sort of circumstances and so I can get no assistance from evidence of custom, there is none.

28. The terms of the contracts heavily favour an interpretation that the 2nd defendant would not have an independent liability on the contract. Clause 18 serves to underline that by specifically excluding such liability. From the plaintiffs' point of view I am satisfied that they intended to contract with either or both of the defendants and that is what they would have wished for.

29. The 2nd defendants - and I am now only concerned with their position - clearly intended to act as agents, with no liability for the contracts. I can find no collateral contract in the evidence between the plaintiff and the 2nd defendant which might fix the 2nd defendant with liability, nor with any rights, such as the right to sue for the price, which, in any event, would not be necessary as payment was by letter of credit.

30. Nevertheless, the fact that Tactel is a foreign principal is a factor to be taken into account, but as Lord Denning, M.R. said in Teheran Europe Limited v Belton [1968] 2 AER 886 at 889 G:

"The fact that the principal is a foreigner is an element to be thrown into the scale on construction, but that is all."

31. Whilst Hong Kong judgments may not be enforceable in Taiwan, the fact is that the volume of Taiwan/Hong Kong trade is enormous. Taiwan has a well established legal system. These sort of transactions are being concluded on a daily basis many times over and so I am satisfied that the usual rule must apply in this case which is that the agent for a disclosed principal is not liable to the third party, see article 104 of Bowstead, page 424.

32. This being the case, I find that on the bulk orders, the plaintiff should have sued Tactel as principal and not the 2nd defendant, with the result that for this reason the action must fail and there must be judgment to the 2nd defendant on the bulk contracts, which now leaves over consideration of the 2nd defendants' liability on the contract for the samples.

33. This issue requires me to decide what the terms of this contract were. Had I found the 2nd defendants to have a liability on the bulk contracts, either as principal or as agent, I would also have needed to consider this issue in respect of the bulk orders. The point is identical on those contracts as well. In the event of an appeal I should make clear, therefore, that what follows would have been my findings on those bulk contracts as well.

34. The plaintiffs contend that the terms of the contracts are contained in the purchase orders and in the defendants' related contract documents. The main terms which the plaintiff seek to have incorporated in the contract relate to the remarks in the purchase orders, inter alia, as to colour fastness to light which calls for fastness to hold over four hours exposure to light; secondly, that the vendor acknowledges that the yarn is for the purpose of resale, for the marketing of garments for sale in the United States of America and they warrant that the yarn is of merchantable quality and fit for its purpose.

35. The 2nd defendants' say that these orders, being for pastel shades, which are well known to present difficulties in achieving a high degree of colour fastness, would never have been guaranteed as to colour fastness. Mr Cheung submits that the contract is to be found in the 2nd defendants' contract documents, page 36 in this specific case, which makes no reference to colour fastness. The references there relate only to the colours, the type of yarn, the quantity, the make up of the yarn, the price, delivery dates and the terms of payment.

36. The 2nd defendants' case is that this was a sale of a sample and thereafter, in respect of the bulk orders, a sale by sample. Once the sample was produced, colour matching tests were performed, as they were for the bulk orders and the plaintiffs should have carried out their own laboratory tests on colour fastness, firstly on the sample itself and thereafter on the bulk orders before the garments were made up. What actually occurred was that the colour fastness tests were performed after the vests were made up. The only pre-production tests that were performed related to colour matching.

37. It is important in my judgment to consider the status of the purchase orders. These, in my view, constituted an offer to purchase on the terms set out in the document. Did delivery of the purchase orders, without more have the effect of incorporating the terms of the orders into the contracts?

38. The purchase orders served the purpose of informing the vendor of the purchasers requirements, including the terms that I have specifically referred to. Miss Yip, the plaintiffs' director who placed these orders, says that because the defendants have made no disclaimer she assumed that her terms were accepted. Mr Yung, the defendants' director, did not deal with these orders directly. He deputed an employee of his, Jeffery, to tell the plaintiffs that colour fastness to light could not be guaranteed because of the pastel shades that were required. He assumes Jeffery did what he was told. Jeffery has not been called, he was not available, but Miss Yip has, and she says that there was no such disclaimer. In any event, according to her, class 4 fastness to light is a well known requirement for the United States market.

39. The 2nd defendants are clearly at an evidential disadvantage because they do not have a witness to speak directly to the material conversations regarding the plaintiffs' requirements on colour fastness, although, on the other hand, it is right to say that Miss Yip has every incentive to, perhaps, mis-recollect the content of these conversations which are of great importance to her employer's case. She is hardly a disinterested or neutral witness in this matter. I must, therefore, proceed carefully on what may or may not have been said about colour fastness.

40. There is no doubt that this colour fastness standard was the one that the plaintiffs required. In saying that this could not be guaranteed I am impressed by Mr Yung's explanation that pastel colours presented these technical problems which more standard colours, such as navy blue or red, did not. From that I feel able to say that it is inherently likely that the 2nd defendants would not have been prepared to give that guarantee and in this view I get support from the contracts themselves, page 36, which are silent as to colour fastness. The contracts only refer to the colour which was, in fact, checked to ensure that it matched the specification.

41. The other matter is that samples were called for first and that would have afforded the plaintiffs with the opportunity to do these tests for colour fastness before the bulk orders were placed. This, of course, and perhaps not surprisingly, is what Tactel and the 2nd defendants were to say in correspondence, once the colour fastness was shown not to pass the requirements of class 4.

42. When viewed objectively, I am satisfied on a balance of probabilities that this condition or term as to colour fastness was never part of these contracts. The terms of the contracts are those contained in the 2nd defendants Forms of Contract. They, thereby, accepted the purchase orders, but only on the terms appearing in those documents, pages 36, 42, 45 and 48. The 2nd defendants are to be taken as saying in those documents 'We accept your orders but only on these terms.'

43. In order to introduce the more onerous requirements as to colour fastness the plaintiffs would have been required to persuade the 2nd defendants to positively acknowledge the requirements as to colour fastness, which I am satisfied they were unwilling to do because they knew that these tricky pastel shades would have been very difficult to achieve. The plaintiffs are to be taken to have accepted that situation and should have protected themselves by testing the sample order for colour fastness which they elected not to do.

44. In these circumstances I am satisfied that the 2nd defendants have fulfilled all their obligations under this contract for the sample order and by virtue of this reason, had I found that the 2nd defendants assumed a liability for the bulk orders as well, they would have also fulfilled their obligations in respect of those contracts.

45. Accordingly, for all these reasons, the claim must stand dismissed.

46. In the light of these findings, it is unnecessary for me to consider the question of whether the plaintiffs have mitigated their loss by selling the defective vests elsewhere, albeit at a much reduced price.