BONUS GARMENT CO. (a firm) v. KARL RIEKER GMBH & CO KG AND ANOTHER

HCA 5143/1994

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 5143 OF 1994

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J U D G M E N T

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1. In these proceedings the Plaintiff, a garment manufacturer, claims the sum of DM1,954,650.00 being the price of 235,500 sets of ladies' pyjamas sold and delivered to the 1st Defendant, a limited company carrying on business in Germany.

2. The proceedings no longer concern the 2nd Defendant as the Plaintiff has entered judgment against her in default of notice by her of intention to defend.

3. It is the Plaintiff's case that the goods were delivered pursuant to a contract of sale, made partially in the course of oral discussions but ultimately in an order confirmation dated 22 March 1993 signed by the two partners of the Plaintiff, Mr Andy Chan and Mr Simon Ho, and a Mr Dieter Renner as agent on behalf of the 1st Defendant.

4. That order confirmation related both to the ladies' pyjamas which are the subject of the Plaintiff's claim, and to 255,000 sets of children's pyjamas. The price for the ladies' pyjamas was DM8.30 per set and for the children's pyjamas DM5.80 per set.

5. There is no dispute between the parties that the 255,000 sets of children's pyjamas and 235,500 sets of ladies' pyjamas were delivered to the 1st Defendant. The Plaintiff has admitted in its Amended Reply that the children's pyjamas were paid for. That payment was effected by the 2nd Defendant in whose favour the 1st Defendant had opened letters of credit.

6. The order confirmation of 22 March 1993 provided that if the ladies' pyjamas were delivered after 15 September 1993 they had to be supplied by air at the Plaintiff's expense. There is no dispute that the ladies' pyjamas were delivered to the 1st Defendant after 15 September 1993 by air. It is also common ground that since these goods were sent on a "freight collect" basis the 1st Defendant was obliged to pay the airfreight for the goods in order to take delivery. It is the Plaintiff's case that, notwithstanding the provisions of the order confirmation, the Defendant had agreed to extend the date of delivery of the ladies' pyjamas and, in particular by a letter of 28 September 1993 from the 2nd Defendant on the 1st Defendant's behalf, to vary the original contract and to pay for the airfreight itself.

The defence

7. The principal defence of the 1st Defendant is a denial of any contractual relationship between itself and the Plaintiff. It alleges that it had no knowledge of the order confirmation of 22 March 1993 and denies that Dieter Renner was the 1st Defendant's agent.

8. It alleges that it was supplied with the children's and ladies' pyjamas, not by virtue of a contract between it and the Plaintiff, but by virtue of a contract between it and the 2nd Defendant, principally embodied in 2 order letters enclosing 14 purchase orders addressed to the 2nd Defendant dated 16 March 1993 which were sent by them on 5 April 1993 via Dieter Renner to the 2nd Defendant. The price agreed for the ladies' pyjamas was not the same as that alleged by the Plaintiff but DM8.75 per set for the ladies' pyjamas and DM6.09 per set for the children's pyjamas.

9. The 1st Defendant's alternative basis of its defence if the court was to find there was a contract between it and the Plaintiff is

(1) That it has paid the sum of DM415,436.40 to the 1st Defendant in respect of the ladies' pyjamas.

(2) That there was no variation of the terms of the order confirmation of 22 March 1993 and accordingly, the Plaintiff is obliged to reimburse the airfreight charges incurred by the 1st Defendant in the sum of DM1,038,306.41. Alternatively the Plaintiff is estopped by virtue of its electing to enter judgment in default against the 2nd Defendant from alleging that the variation was done with the authority of the 1st Defendant.

(3) That there were defects in a very substantial proportion not only of the ladies' pyjamas which are the subject of the Plaintiff's claim but of the earlier deliveries of children's pyjamas under the same contract. It claims the loss it sustained by way of set-off and counterclaim.

10. The defects alleged are wide ranging. They include allegations of defective dyeing, variations in the colours of the fabric, the use of inferior quality fabric, defective sewing, defective cutting, holes in the fabric, infestation by insects, differences in the length of arms and legs of the same garment, defective size labelling as well as dirt, to enumerate just some of the complaints.

11. These defects were in breach of the specifications and samples submitted by the 1st Defendant and rendered the goods unmerchantable and unfit for their purpose.

12. It is alleged that the proportion of defective goods delivered to the 1st Defendant in Germany was so high that it was necessary to unpack and individually inspect each of the 255,000 sets of children's pyjamas and 234,000 sets of ladies' pyjamas.

13. 3514 sets of children's pyjamas and 3,250 sets of ladies' pyjamas were so defective that they could not be rendered merchantable.

14. The defects in the other sets had to be remedied at substantial cost before being delivered to the 1st Defendant's customers. The 1st Defendant counterclaims the costs of individual inspection of the pyjamas, the cost of remedying the defects and repackaging the pyjamas as well as replacement for the pyjamas the defects in which could not be remedied.

The Contracting Party

15. The first issue in this case, and one which is decisive if it is decided in favour of the 1st Defendant, is whether the Plaintiff has established that it is entitled to sue the 1st Defendant based upon its agreement with Dieter Renner, in particular on the order confirmation of 22 March 1993. The Plaintiff's case rests upon the authority of Mr Renner to sign that order confirmation as the agent of the 1st Defendant.

16. The 1st Defendant contends that the evidence shows that Renner signed the order confirmation on behalf of the 2nd Defendant, and that subsequently it (the 1st Defendant) contracted with the 2nd Defendant for the supply of the pyjamas.

17. However even if the 1st Defendant fails to prove that Renner signed that agreement as an agent of the 2nd Defendant and the evidence points to Renner being an agent of the 1st Defendant at that stage, the Plaintiff would fail in its claim if it could not prove that Renner was acting within his actual authority.

18. The reason for this is that during the course of his evidence Mr Simon Ho, the witness for the Plaintiff, revealed, apparently for the first time, that when he signed the order confirmation with Renner on 20 March 1993 he believed that Renner was contracting on his own behalf and that it was not until 6 months later in September that year when he visited Germany that he became aware that the 1st Defendant was the purchaser. He later qualified that by saying that although Renner had not told him expressly, he came to believe that the 1st Defendant was the "real purchaser" and that Renner and the 2nd Defendant were just agents sometime earlier than September during the course of a visit by Mr Herbert Rieker, a representative of the 1st Defendant, to his factory in about June 1993. In any event on Mr Ho's evidence he believed that he was contracting with Renner as principal at the time of and for a period of at least 2 to 3 months after signing of the order confirmation.

19. In order fully to understand how the issues arise in this case it is necessary to summarise the rather complicated history of the matter.

The history

20. The 1st Defendant, a German company based in Bodelshausen in Baden Wurttemburg, is a supplier of garments to retail organisations.

21. At the end of 1992 it was approached by Dieter Renner ("Renner"), the proprietor of a firm engaged in the business of import/export. Renner offered to supply and/or source garments for the 1st Defendant from overseas suppliers. There was some correspondence between Renner and the 1st Defendant as to the services he could offer.

22. It is apparent from the Statement of Monika Rieker, the witness for the 1st Defendant (see para. 13 of her statement of 1 February 1999) that shortly after the approach by Renner the 1st Defendant "got in touch with Renner about the possibility of obtaining through him terry pyjamas for children (delivery deadline 15 July 1993) and ladies' (delivery deadline 15 September 1993)". She said that after Renner had been shown a sample of the pyjamas "Mr Renner was asked to obtain an offer from a Far East Supplier based on this sample as regards quality, finish, weight etc".

23. She went on to state that Renner had made enquiries in several countries in the Far East and that while he was staying in the Hyatt Hotel in Hong Kong he had submitted an offer to the 1st Defendant from Hong Kong without mentioning the supplier's name (para. 14). It is apparent that the offer she was referring to was that contained in a fax from Renner dated 19 March 1993. In this fax which is on Hyatt Hotel note paper but headed "from Mandarin: HK" (i.e. the 2nd Defendant) Renner stated that he had discussed everything with "the supplier". He stated that the supplier's best price was DM6.09 per set for children's pyjamas and DM8.75 per set for ladies' pyjamas on the basis of shipping terms "C & F Hamburg". He went on to say that, as the delivery period for the children's pyjamas was soon, "please answer today if possible whether we should finalise both orders".

24. On receipt of this fax there was a telephone conversation and the same day the 1st Defendant sent a fax back to Renner "We agree the prices but the prices are understood to be CIF Bodelshausen".

25. I am satisfied that by his fax of 19 March Renner was seeking authority to contract with "the supplier" on the 1st Defendant's behalf on the basis of the terms set out in this fax. I am also satisfied that the 1st Defendant gave Renner such authority providing the shipping terms were "CIF Bodelshausen" rather than "C & F Hamburg".

26. Although Mrs Rieker said in evidence that when she received Renner's fax of 19 March she realised for the first time that "the supplier" was Mandarin (the 2nd Defendant), the fax does not suggest that the supplier was Mandarin. In her own witness statement to which I have referred she had stated that the name of the supplier was not disclosed.

27. Following the exchange of faxes between Renner and the 1st Defendant, Renner signed the order confirmation dated 22 March 1993 as the buyer with the Plaintiff without disclosing that he was not the principal. The terms as to the price were more advantageous than those he had quoted to the 1st Defendant (DM5.80 per set for children's pyjamas and DM8.30 per set for ladies' pyjamas) but the shipping terms were less favourable than those upon which the 1st Defendant had authorised Renner to contract (i.e. "C & F Hamburg").

28. The order confirmation was countersigned by a representative of the 2nd Defendant as a witness. It is apparent from the evidence that Renner had been introduced to the Plaintiff through the 2nd Defendant, a Hong Kong trader in textiles with whom Renner had had previous dealings.

29. I am satisfied that the 1st Defendant was never shown a copy of the order confirmation of 22 March 1993 upon which the Plaintiff relies. Indeed I find that Renner concealed that document from the 1st Defendant.

30. Following the signing of the order confirmation Renner, by 2 faxes of 25 March 1993, falsely represented to the 1st Defendant that he had contracted with the supplier on the basis of the terms he had set out in his fax of 19 March rather than on the terms contained in the order confirmation of 20 March 1993. He stated that the supplier was the Plaintiff and that the 1st Defendant should open letters of credit to "our agent in Hong Kong". The 1st Defendant was asked to open letter of credit in favour of Mandarin (Far East) Company. In one of the faxes, he purported to enclose "a copy of the confirmation of order, translated". Although Mrs Rieker said in evidence that no order confirmation was sent to the 1st Defendant, or at least that she had not seen one, I consider it probable that the 1st Defendant was sent the document purporting to be the order confirmation entered into with the 1st Defendant, and an approximate translation thereof both of which were disclosed by the 1st Defendant in the course of Discovery. Those documents purport to show an agreement by the Plaintiffs to supply the pyjamas at the prices set out in Renner's fax to the 1st Defendant of 19 March 1993. It has a space for the 1st Defendant to attach its signature.

31. I am satisfied that that document was a false document to induce the 1st Defendant to believe that Renner had contracted with the Plaintiff at the higher prices. I accept the evidence of Simon Ho that although it purported to have been signed by him for the Plaintiff he did not sign it. Although 3 reminders were sent to the 1st Defendant to countersign this false order confirmation, one dated 30 March 1993 from Renner and the second and third dated 1 April and 2 April 1993 from the 2nd Defendant there is no evidence that the 1st Defendant ever did so. It appears that the 1st Defendant just ignored these requests.

32. Instead the 1st Defendant sent off purchase letters enclosing purchase orders for the pyjamas addressed to the 2nd Defendant on 5 April 1993 (although they were dated 16 March 1993) ("the purchase orders of 16 March 1993").

33. The terms of these purchase letters indicate that the 1st Defendant was placing the purchase orders with the 2nd Defendant acting in the capacity of a principal, as one of its terms specified that if production commenced without the 1st Defendant's authorization such production would be at the risk of Renner and the 2nd Defendant. The "supplier" was stated in the purchase order to be "Mandarin" (i.e. the 2nd Defendant). Although the purchase letters requested the 2nd Defendant to sign and return the original purchase orders, there is no evidence that she did so but thereafter invoices were issued by the 2nd Defendant to the 1st Defendant for the supply of the pyjamas and such invoices made specific reference to the order of 16 March 1993.

34. The 1st Defendant made application to its bankers for Letters of Credit specifically referring to them being pursuant to the orders of 16 March 1993. Payments were made thereunder by the 1st Defendant to the 2nd Defendant.

35. I do not propose to summarise in detail what subsequently transpired save that the children's pyjamas were delivered between approximately 27 August 1993 and 7 September 1993. After commencement of delivery of the children's pyjamas complaints were made by the 1st Defendant to the 2nd Defendant as to a variety of alleged defects in the pyjamas. A visit to the 1st Defendant's factory in Germany was made by the 2nd Defendant and Mr Andy Chan and Mr Simon Ho of the Plaintiff on 21 September 1993. Although Mr Ho claimed in evidence that this visit was unconnected with any alleged defects in the children's pyjamas which had been delivered, I am satisfied that the visit was a direct result of these complaints. During the course of the visit two documents dated 21 September 1993 was signed by the Plaintiff, the 2nd Defendant and Renner. One inter alia acknowledged the defects in the children's pyjamas. The other was an agreement for a Mrs Hardt of the 1st Defendant's company to visit China at the Plaintiff's expense to check the ladies' pyjamas. The ladies' pyjamas were dispatched by air between 9 October 1993 and 8 November 1993. Despite Mrs Hardt's visit to China, the 1st Defendant made similar complaints about the quality of the ladies' pyjamas to those it had made in respect of the children's pyjamas.

The Authority of Renner

36. As I have said I find that on 19 March 1993 Renner did seek authority to contract with "the supplier" on the 1st Defendant's behalf without disclosing who that supplier was.

37. The question for the Court is whether Renner had the 1st Defendant's actual authority to enter into the contract on the 1st Defendant's behalf in the terms of the order confirmation of 22 March 1993.

38. If he did not, then the Plaintiff cannot sue the 1st Defendant as an undisclosed principal on that contract.

39. The leading case of Keighly Maxsted & Co v. Durant [1901] AC 240 upholds the principle that if the agent does not disclose that he was acting as an agent but acts as though he was a principal (as happened insofar as Renner is concerned in this case) the principal cannot subsequently ratify any contract made by the agent which exceeded the agent's actual authority.

40. I would observe that on the facts of this case, even if the law did permit ratification in such circumstances, such ratification could not take place without full knowledge on the part of the principal of the circumstances in which the act was done. In this case, Renner carefully concealed what had actually occurred.

41. Mr Kenneth Chan, for the 1st Defendant, has argued that an agent who is given authority to contract at a certain price is not acting within his actual authority even if he, for instance, contracts at a price less than that price. This argument however ignores the fact that an agent's authority may be expressed or implied. All other things being equal I consider that an agent given authority to contract for certain goods at a certain price would have implied authority to contract for the same goods at a lower price.

42. This however is not a case where the agent has simply contracted for the same goods at a lower price, all other things being equal. He has contracted on less advantageous terms both as to insurance and as to the place of delivery. In so far as the latter is concerned Bodelshausen is not in close proximity to Hamburg but several hundred miles to the south in Baden Wurttemburg. There is no evidence as to the reasons the 1st Defendant was insisting on "CIF Bodelshausen" rather than "C & F Hamburg" or that the 1st Defendant had disclosed its reasons to Renner. Accordingly this court cannot infer that Renner had authority to make a judgment as to the monetary value of the difference in terms.

43. I have borne in mind that in October that year there was an adjustment of the price of the ladies' pyjamas from DM8.75 per set to DM8.41 per set apparently to reflect the need of the 1st Defendant to pay for certain insurance. The evidence was not clear as to the circumstances of this revision in price. But even if had had reflected the difference between "C & F Hamburg" and "CIF Bodelshausen" it does not follow that simply because in October, when under pressure to deliver goods to its own customers and facing the possibility of having to pay penalties if it did not do so, the 1st Defendant was prepared to agree a price greater than the price at which Renner contracted that Renner had authority to contract at the reduced price with more onerous shipping terms in March.

44. In reaching the conclusion that Renner had no actual authority expressed or implied to sign the order confirmation of 22 March 1993, I have also taken into account the other conduct of the parties. Mrs Rieker testified that when the 1st Defendant sent the fax of 19 March 1993 in reply to Renner's fax of the same day, she regarded the contract as finalised. I am satisfied that by that she was simply saying that provided Renner contracted with the supplier on the terms she had specified the matter would be finalised. She was not authorising Renner to disregard the terms of her fax of 19 March.

45. I have borne in mind also that in what I have described as the false order confirmation which I find was probably sent by Renner to the 1st Defendant on or after 25 March 1993 and in the faxes of 25 March and 29 March the shipping terms are still stated to be "C&F Hamburg". In other words although an attempt had been made to deceive the 1st Defendant as to the price that had been agreed there was no attempt to deceive the 1st Defendant that the shipping terms agreed were "CIF Bodelshausen". I do not consider that it can be inferred therefrom that therefore Renner must have had actual authority to agree upon such terms bearing in mind the terms of the 1st Defendant's fax of 19 March 1993 and its subsequent conduct. It is true that following the receipt of these documents, Mr Sieber of the 1st Defendant wrote to the 2nd Defendant on 2 April 1993 saying "the order is fixed now" but that too does not signify that the 1st Defendant was agreeable to the shipping/insurance terms agreed to by Renner because in the same letter Sieber referred to the opening of the Letters of Credit. In the 1st Defendant's application for Letters of Credit on 5 April it was specified that the order was to be on terms of "CIF Bodelshausen" indicating that the 1st Defendant had not given any implicit approval to the terms which they had been informed had been negotiated by Renner.

46. There is nothing in the conduct to the 1st Defendant following the receipt of the faxes from Renner of 25 March 1993 to indicate that they were endorsing the terms which Renner was claiming he had agreed with the Plaintiff. The terms of the order letters and purchaser orders dated 16 March 1993 to the 2nd Defendant sent on 5 April 1993 stipulated that the goods were to be shipped "CIF Bodelshausen".

47. I find that Renner had no actual authority express or implied to enter into the order confirmation on the 1st Defendant's behalf on 22 March 1993.

Usual Authority

48. It has been argued by Mr Lawrence Ng on behalf of the Plaintiff that even if not acting within his actual authority an undisclosed principal is bound if his agent is acting within the authority usually confined to an agent in his situation.

49. The authority for this proposition is Watteau v. Fenwick (1893) 1 QB 346. This was described by Bingham J, as he then was, in the "Rhodian River" 1984 1 Lloyds Report 373 as "a somewhat puzzling case". Referring to the alleged principle relied upon by Mr Lawrence Ng, he went on "I would myself be extremely wary of applying this doctrine if it exists". The same proposition has been described by the editor of Bowstead and Reynolds on Agency as "extremely dubious" and "inconsistent with the basic principles of agency law as subsequently established which make it clear that liability can only be based upon actual or apparent authority". The Supreme Court of Ontario and the Court of Appeal of British Columbia have refused to follow it. Even if it is good law, I do not find that an agent in the position of Renner can usually be said to have the authority to decide shipping and insurance terms on his principal's behalf without actual authority from his principal. I therefore find that the principle has no application in this case.

50. If Renner had acted within his authority from the 1st Defendant when he signed the order confirmation with the Plaintiff on 22 March 1993 then the 1st Defendant would have been bound by that agreement notwithstanding the fact that Renner failed to disclose to the Plaintiff that he was acting as an agent. The sending of the purchase orders of 16 March 1993 to the 2nd Defendant would not have affected that liability.

51. In view of my finding that Renner did not act within the authority conferred upon him by the 1st Defendant when he signed the order confirmation with the Plaintiff on 22 March 1993, the terms of the purchase orders of 16 March 1993 are significant in that they govern the supply of the pyjamas to the 1st Defendant. These purchase orders are between the 1st and the 2nd Defendants.

Estoppel

52. Mr Lawrence Ng has argued that even if Renner did not have authority to sign the order of confirmation of 22 March 1993, the 1st Defendants are nonetheless estopped from denying that there was a contract between the 1st Defendant and the Plaintiff by virtue of the agreement dated 21 September 1993 relating to the visit of Mrs Hardt to China. That document was signed by the Plaintiff, Renner and the 2nd Defendant. It is argued that that document was signed by Renner and the 2nd Defendant as agents for the 1st Defendant and therefore the 1st Defendant cannot now argue that there was no contract between itself and the Plaintiff.

53. I do not find any force in this submission. The document does not state that it was signed by Renner and the 2nd Defendant as agents for the 1st Defendant. It does refer to "agency Mandarin" (Agentur Mandarin) and "Agency Renner" (Agentur Renner). Bearing in mind that the Plaintiff is referred to as "Manufacturer Bonus Garments" the use of the word Agency (rather than the word agent) may simply be a reference to the nature of the business of the 2nd Defendant and Renner rather than their capacity in a particular transaction.

54. In any event even if the reference to the 2nd Defendant and Renner is as agents the document is equivocal as to whose agents they were. In the context of the circumstances of this particular meeting it does not follow that the 2nd Defendant and Renner were necessarily signing as agents of the 1st Defendant. It could equally be the case that the 1st Defendant was seeking a signed acknowledgement from the parties with whom it was dealing and whom it alleged to be at fault as to the terms of Mrs Hardt's visit to China. It should be borne in mind that the purchase order of 16 March 1993 stipulated responsibility on the part of both Renner as well as the 2nd Defendant. The reference to the 2nd Defendant and Renner being agents could be a reference to them being the agents of the Plaintiff as manufacturer.

55. Even if Renner was signing this agreement as an agent of the 1st Defendant it must be borne in mind that this was a new agreement which had arisen out of the circumstances which had arisen on 21 September 1993. It does not follow that the 1st Defendant was representing that Renner had authority to enter into any earlier agreement.

56. This document is too equivocal to give rise to any estoppel.

57. I accordingly find that the Plaintiff's claim against the 1st Defendant fails. Since the 1st Defendant's counterclaim is conditional upon a finding that the 1st Defendant was liable on the order confirmation it does not arise.

58. I dismiss the Plaintiff's claim.

59. I order that unless either party applies to be heard on the question of costs within 14 days the 1st Defendant's costs of these proceedings be taxed and paid by the Plaintiff.