KINFORM LTD v. TSUI LOI AND OTHERS

DCCJ 3854/2009

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 3854 OF 2009

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JUDGMENT

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Introduction

1. This is an application of Kinform Limited (“Kinform”), the plaintiff, for summary judgment against Tsui Loi (“Tsui”), the 1^st defendant, Choi Yee Fan (“Choi”), the 2^nd defendant and Ho Man Trading Limited (“Ho Man”), the 3^rd defendant under Order 14, r.1 of the Rules of the District Court (“the Rules”) by summons dated 13 January 2010.

2. By the same summons, Kinform also applies for an order under O.86 r.1 of the Rules against Tsui and Choi for sale of a property registered in their joint names known as Flat 5 on 16th Floor of Block B, Yat Nga Court, No.3 Yat Nga Lane, Tai Po, New Territories, Hong Kong (“the Property”) pursuant to a written agreement made between Kinform and Tsui dated 13 October 2008 (“the Agreement”).

3. The present action against Tsui is essentially for unpaid price of goods (timbers) sold and delivered totalling HK$803,454.21. As against Choi, the pleaded case is that Choi, though not named as a party to the Agreement, signed the Agreement and agreed to guarantee the debts (and hence the unpaid price) due to Kinform and to be bound by the terms of the Agreement.

4.  Kinform’s pleaded case against Ho Man is that the goods were sold and delivered to Tsui by Kinform at the request of Ho Man represented by Tsui. This is essentially an alternative claim.

5.  The main thrust of the defence is that that the goods were defective and the defendants have duly rejected them. Kinform has accepted their rejection and hence they do not need to pay for them. Moreover, it is alleged that the contracting party in respect of the goods was Ho Man and not Tsui.

Background Facts

6.  The following matters are not in dispute.

7.  Kinform is a private company incorporated in Hong Kong carrying on business in the trade of timbers. At all the material times, Chow Wing Kun (“Chow”) worked for Kinform.

8.  Chow married Poon Tik Ka (“Poon”) in 1990. Poon was at all material times the director and shareholder of Kinform. Chow and Poon started separation in January 2009.

9.  Ho Man was incorporated in 2003 and has traded in timbers too. Tsui and Choi, husband and wife, were at all material times the only two directors and shareholders of Ho Man.

10.  Kinform had supplied timbers to Ho Man since about 2003. There is an agreement dated 13 October 2006 (“the 2006 Agreement”) signed by Tsui on behalf of Ho Man whereby Kinform agreed to supply to Ho Man timbers on such conditions stipulated therein. In particular, Ho Man was to have 30 days after delivery to pay.

11.  The Agreement was, on the face of it, signed by Kinform and Tsui in his personal capacity. There, Kinform agreed to supply to Tsui on the same credit terms contained in the 2006 Agreement. Instead of Tsui’s personal guarantee to pay any arrears in the 2006 Agreement, the Agreement contained a charge (“the Charge”) whereby Tsui agreed to charge the Property in favour of Kinform and that Kinform was entitled to sell the Property and apply all the proceeds of sale thereof to settle any unpaid price due to Kinform if Tsui was unable to pay the same.

12.  Apart from the signature of Choi, Choi’s name could not be found in the Agreement at all, let alone any guarantee or undertaking allegedly thereby given.

13.  The address of the Property was provided by both Tsui and Choi as their residential address in the company records of Ho Man filed with the Companies Registry. They acquired the Property pursuant to the Home Ownership Scheme of the Hong Kong Government in or about 1991.

14.  Tsui accepted that the 19 invoices (“the Unpaid Invoices”) exhibited under “PTK-4” to the Affirmation of Poon were unpaid.

Plaintiff’s pleadings and evidence

15.  Whilst it is pleaded in the statement of claim a simple case of goods sold and delivered, Kinform in its Reply raises 2 matters in response to the allegation of defective goods only.

16.  First, it is pleaded that from 20 October 2008 to 23 May 2009, Kinform sold to Tsui, Choi and Ho Man timbers under 32 invoices and they were all of the same standard and quality. The defendants now only complain about the goods under the Unpaid Invoices with all other 13 invoices duly settled by them.

17.  Secondly, it is pleaded that the only complaint that Kinform received from them was an oral one made over the phone in mid-March 2009 and it concerned 15 pieces of plywood sold under the last one of the Unpaid Invoices only. 

18.  Poon filed 2 affirmations in support of Kinform’s applications. She basically denies the allegation of defective quality of timbers sold and delivered under the Unpaid Invoices and in this regard she relies on the delivery orders in relation to the delivery of goods under the Unpaid Invoices. On each of such delivery orders signed by Tsui or his agents, the clause “Acknowledge receipt the above goods in good condition after due inspection” was printed (“Written Acknowledgements”).

19.  Poon further maintains, though not pleaded, that Chow was just a sales manager of Kinform and was not given the authority to decide or accept any rejection of goods on behalf of Kinform.

20.  Poon lastly insists that Kinform all along dealt with Tsui in his personal capacity.

Defendants’ Pleadings and Evidence

21. In their joint Defence filed on 8 October 2009, it is pleaded that the timbers sold under the Unpaid Invoices were “substandard goods or were not of merchantable quality”. It is further alleged that in response to their numerous complaints to Chow between the end of October 2008 and February 2009, Chow inspected the goods and confirmed that they were substandard. Chow further accepted the rejection of the goods by Tsui, Choi and Ho Man after inspection of the same in the construction site of Cheung Ying Construction Engineering Limited (“Cheung Ying”). Thus, they contend that they do not need to pay the Unpaid Invoices.

22. The Defence is parsimonious in detail and Kinform duly asked for further and better particulars. The defendants’ answers dated 29 October 2009 disclose the following matters:

(1)    All the goods under the Unpaid Invoices were substandard and not of merchantable quality;

(2)    Choi made the 4 verbal complaints over the phone to Chow on 23 October 2008, 26 October 2008, 4 November 2008 and 15 February 2009. There was 1 written complaint by letter dated 30 October 2008 from Ho Man to Kinform.

(3)    The goods were rejected upon inspection of Chow on behalf of Kinform about 2 or 3 days after receipt of each of the complaints by Chow.

(4)    The rejections were accepted by Chow verbally.

23. Both Chow and Tsui filed their affirmations to resist the present applications.

24. Chow claims that he has been working in the timber trade for more than 25 years. Kinform was essentially his own business and he was the de facto boss of Kinform at the material times. Poon had worked as an agent in a travel agent and subsequently joined Kinform to assist Chow in the business of Kinform.

25. Though it was Poon and not Chow who signed the Agreement on behalf of Kinform, Chow avers that Tsui signed the Agreement on behalf of Ho Man only. He explains that Kinform was at that time plagued by non-payment problems and so he required all of his customers including Ho Man to give security, though all along Ho Man had been able to settle Kinform’s invoices without delay.

26. Chow also avers that he was the person who handled the orders from Ho Man on behalf of Kinform. He confirms receipt of all the oral complaints by Choi and the written complaint. The complaint letter bearing a chop of Ho Man dated 30 October 2008 is exhibited (“the Complaint Letter”). He also confirms that he has inspected the timbers delivered to Ho Man at the construction site of Cheung Ying. He accepts that the goods were substandard and not of merchantable quality.

27. Chow produces 6 photos of those timbers which he had inspected. They, Chow claims, show that the surface of plywood delivered was uneven with broken corners. Moreover, the layers of the timbers were alleged to contain space and that the timbers were eroded. Chow claims that there were other defects found in those timbers.

28. Chow confirms that he agreed with Tsui over the phone that he accepted rejection of the goods under the Unpaid Invoices on behalf of Kinform and hence Ho Man was not required to settle the Unpaid Invoices.

29. Chow lastly points out that the business relationship between Kinform and Ho Man was not affected and Ho Man kept placing orders with Kinform after the last date of the Unpaid Invoices from March to May 2009 and has duly settled all such orders.

30. The affirmation of Tsui naturally dovetails the account of Chow in the main, save the inconsistencies to be discussed below.

31. Tsui produces a letter dated 2 January 2009 of Cheung Ying complaining to Ho Man about the defective quality of timbers supplied by Kinform.

32. Tsui further avers that Chow all along represented to him that he was the boss and not just the sales manager of Kinform and that he never dealt with Kinform in his personal capacity. All the correspondence relating to the relevant transactions were made between Kinform and Ho Man. 

The Applications

33. At the outset of the hearing, I expressed my concerns about Kinform’s applications. First, in relation to the O.86 application for a compulsory sale of the Property, since the Property was purchased under the Home Ownership Scheme and apparently the Charge was made without the requisite written permission of the Housing Authority, the Charge is prima facie a void alienation within the meaning of section 17B of the Housing Ordinance, Cap. 283 and hence shall be void.

34. After a brief adjournment, Mr. Lam, Counsel for Kinform, sensibly and rightly in my view, applies to withdraw the O.86 application against Tsui and Choi. Mr. Lam further agrees that the O.14 application against Choi should be dismissed too. I note in passing that the land search records relating to the Property show that Kinform caused to be registered the Writ herein as a lis pendens against the Property on 21 September 2009. Given the accepted unenforceability of the Charge, Kinform should vacate the registration of the lis pendens.

35. In respect of the O.14 application, in Mr. Lam’s skeleton submission, it is stated that should this court find that there is a triable issue as to whether Tsui was the contracting party, this court should have no difficulties in taking Ho Man as the contracting party. Mr. Lam clarifies that in such an event, Kinform should abandon its claim against Tsui.

36. What remains to be resolved is whether summary judgment should be entered against Tsui or in the alternative, Ho Man. I shall of course bear in mind the well-established principles relating to summary judgment applications. The onus is on the defendants to show a triable issue(s) and a credible or bona fide defence by affidavit evidence condescending upon particulars.  

Discussion

Defective Goods?

37. Mr. Lam’s primary argument is that the defence’s evidence in support of their allegation of defective quality of the timbers supplied by Kinform lacks any evidential basis and is unparticularised. Mr. Lam points out that the defendants do not mount a counterclaim.

38. It is submitted that the allegation of defective quality was only raised for the first time in the Defence without particulars of the defects of the timbers supplied. As regards Chow’s assertion of 4 specific defects, it is submitted that Chow fails to relate them to any particular timbers.

39. As set out above, the defence case is that complaints about defective quality were made orally by Choi to Chow on 4 occasions long before the issue of the Writ. There are two written complaints including the Complaint Letter too. Though Kinform denies having received these complaints and Mr. Lam finds the timing of such complaints suspect, whether such complaints were made is really a factual dispute to be resolved at trial. At this stage I cannot accept that the defence only raised the allegation of defective quality in the Defence for the first time so as to avert judgment.

40.  I also take note of the unchallenged evidence that Tsui/Ho Man continued to place orders with Kinform after the date of the last unpaid invoice (4 February 2009) and such orders were duly settled. Kinform did not make any complaint about non-payment of the Unpaid Invoices until 6 July 2009 despite the fact that they had been long overdue. This calls for an explanation.

41.  It’s true that Chow did not relate the 4 specific defects to any particular timbers (of which there were thousands). I, nevertheless, do not find this necessarily fatal to the defence. Chow on behalf of Kinform inspected the timbers delivered to Cheung Ying under the Unpaid Invoices and if his general observation about such timbers is accepted by the trial judge, the defendants will have a defence. His account is not inherently incredible and not contradicted by any contemporaneous documents. There is no reason why Chow’s evidence should be dismissed as incredible at this stage.   

42.  Criticisms are also made of the photos of the timbers alleged to be defective. They are black and white, undated and unclear. Their originals in digital forms are not made available to Kinform due to their alleged deletion after the printing of the photos. The complaints may indeed go on but this is really a matter of credibility and can only be resolved at trial.

43.  Mr. Lam places heavy reliance on the Written Acknowledgements in the delivery orders, which he submits wholly contradict the defence’s allegation of defective quality.  I do not agree that the Written Acknowledgements are necessarily in contradiction of the defence’s allegation.

44.  Chow claims that it was not possible to inspect the quality of the timbers at the time when they were delivered to Tsui/ Ho Man as they were all packed for loading. Thus when the truck driver hired by Tsui/Ho Man and/or Tsui signed on the delivery notes, they did not actually have the chance to inspect the conditions of the timbers delivered.

45.  There is no contrary evidence save Poon’s assertion that Tsui or his staff inspected the timbers before signing the delivery orders. There is no evidence that Poon personally handled any of the relevant orders placed by Tsui/Ho Man. The basis of Poon’s assertion is unknown.   

46.  In the premises, I cannot accept that Tsui/Ho Man must be bound by the Written Acknowledgements and now be estopped from making any allegation of defective quality.

47.  Mr. Lee, Counsel for the Defendants, refers me to section 37(2) of the Sale of Goods Ordinance, Cap. 26 (“the SOGO”) and submits that even if Ho Man acknowledged the timbers in good condition at the time of delivery it should not be deprived of its right to reject them if they were subsequently found to be of poor quality.

48.  Mr. Lam’s answer is that the sub-section only applies to buyers dealing as consumers and thus does not assist Tsui/Ho Man, who undoubtedly dealt with Kinform in the course of a business and not as consumers: sections 2 & 37(3) of the SOGO. 

49.  It is trite that the right to reject goods will be lost once the buyer has accepted the goods: Benjamin’s Sale of Goods, 17^th Edn.,§14-021. The point made by Mr. Lam in respect of the Written Acknowledgements is on the issue of defective quality. Mr. Lam does not say that by the Written Acknowledgements, Tsui/Ho Man should be deemed to have already accepted the goods and lost any right to reject them pursuant to section 37(1) of the SOGO.  This is not the pleaded case of Kinform in any event.

50.  In my view, the deeming provision of acceptance of section 37(1), and hence section 37(2) of the SOGO, is not engaged at all.

51.  On the evidence, I accept that there is a triable issue as to whether the timbers were of defective quality despite the Written Acknowledgements.

Kinform’s Agreements to Accept Rejection of Goods?

52.  Mr. Lee relies on the century old “indoor management rule” enunciated in Royal British Bank v. Turquand (1856) 6 El & Bl 327. He argues that Kinform cannot now say that Chow did not have the actual authority to agree with Tsui/ Ho Man to accept any rejection of the goods on behalf of Kinform.

53.  Mr. Lam fairly accepts that Kinform cannot raise the issue of lack of authority in view of the indoor management rule. Mr. Lam’s challenge to the alleged agreements is that they were made on the basis of the timbers under the Unpaid Invoices were substandard and not of merchantable quality (this is indeed the pleaded case of the defence). Mr. Lam submitted that if the allegation of defective quality is not proved by the defence, the allegation of such agreements must go too as they are, in Mr. Lam’s words, in the same package.

54.  I am unable to agree to this submission. Whilst I accept that the ground of rejection on which subsequent reliance is placed must actually exist at the time of rejection, we have an unusual allegation here – the seller actually accepted the rejection of goods of the buyer. We are not really concerned with the validity of the rejection, which was allegedly accepted by Kinform.

55.  Even if the quality of the timbers in question cannot be proved to be defective by objective standard, it does not follow that Kinform (through Chow) could not have agreed with Tsui/Ho Man to accept their rejection of such timbers. These were after all commercial decisions made against the undisputed background that the parties had been in a long-term and good commercial relationship.

56.  If the goods were of good and merchantable quality, of course, it would be more unlikely that Chow had made the alleged agreements with Tsui/Ho Man but still this is not an inescapable conclusion. In my judgment, Chow’s admission of having made such agreements with Tsui/Ho Man, which is yet to be rebutted by any contrary evidence, should entitle the defendants to a trial to test the validity of Kinform’s claim.

57.  I do note that Chow is now alleged to be working for a trade competitor of Kinform, namely, HK Timber Limited with Tsui and his relationship with Poon has obviously deteriorated. However, these are merely matters relating to general credibility of Chow, which is best to be decided at trial. These matters cannot conclusively show that Chow’s account is incredible.        

58.  Mr. Lam seeks to argue against the existence of the alleged agreements by referring me to the evidence of Chow as to what allegedly happened to the rejected timbers. Chow says they were simply left at the construction site of Cheung Ying for Tsui/ Ho Man to discard them. Mr. Lam submits that it did not make any sense.

59.  I am unable to agree to Mr. Lam’s submission, particularly given the explanation that Chow gave in this regard – the rejected timbers were of little value and their transportation costs could be high. Again it was a commercial decision made by the parties as to how to deal with the rejected timbers. 

60.  Mr. Lam further rightly points out that there are inconsistencies in the defence case as to what happened to the rejected timbers.  In the answers given as further and better particulars, the defendants say that a small part of the rejected timbers were collected and the rest were disposed of at the construction site of Cheung Ying.

61.  Chow says that Kinform allowed the workers at the site to dispose of the rejected timbers without mentioning any collection of any part of them.

62.  Tsui gives an apparently different version. He says that Ho Man returned the rejected timbers to Kinform after Chow’s inspection and it was up to Kinform to dispose of them.

63.  These inconsistencies may or may not be explained away at trial.  I do not find these inconsistencies, without more, sufficient to negate the necessity of a trial to resolve the major issue as to whether Kinform has agreed to accept rejection of the goods.

Tsui or Ho Man?

64.  I shall briefly deal with the third triable issue raised by the defence, viz, whether it was Tsui or Ho Man who contracted with Kinform in relation to the Unpaid Invoices.

65.  All the Unpaid Invoices and the delivery orders were issued by Kinform to Ho Man. For other subsequent transactions, the invoices of Kinform and written receipts of payment were issued to Ho Man too.

66.  Of course the Agreement was entered into by Tsui in his personal capacity without any reference to Ho Man.

67.  Mr. Lam draws to my attention that by their defence, the defendants admit Kinform’s allegation that Tsui has been purchasing timbers from Kinform and Kinform has been supplying timbers to Tsui at his request. Mr. Lam submits that the defendants cannot now resile from this admission without leave.

68.  I can see the force in his submission. However, the admitted allegation is not time-specific. I also note that the defence actually denies Kinform’s specific allegation that timbers under the Unpaid Invoices were sold and delivered to Tsui at his request.  It is thus arguable that the admission is not unequivocal and that it should still be open to the defence to raise this issue at trial.

Conclusion

69.  This is not really a run-of-the-mill case of goods sold and delivered as characterized by Mr. Lam but is one with a twist. The allegations of Chow may provide an arguable defence to Kinform’s claim and such allegations, among other issues, cry out for a trial.

70.  I also reject Mr. Lam’s suggestion as his fall-back to grant conditional leave to defend to Tsui or Ho Man. Suffice it to say I have borne in mind the guiding principles set out by Watkins LJ in Extraktionstechnik Gesellschaft Für Analagenbau MbH v. Oskar (1984) 128 SJ 417. I do not agree that the defence shown is merely shadowy and the evidence in support is thin.

71.  Despite the sterling effort of Mr. Lam, I am not convinced that summary judgment is appropriate. Most of the contentions of the defendants are evident in the defendants’ pleadings (including their Answers to Request for Further and Better Particulars of the Defence) and should be known to Kinform before Kinform took out this summons.

72.  This is a case falling squarely within O.14 r. 7 and I order that the summons be dismissed in its entirety.  I also make an order nisi that Kinform should pay costs of this application to the defendants including any costs reserved, such costs to be taxed if not agreed with certificate for counsel.

Further Conduct

73.  O.14 r.6 has no application here and strictly speaking I am not obliged to give directions as to the further conduct of these proceedings. To facilitate expeditious resolution of the parties’ disputes, I nevertheless give such directions. I direct that the parties are to submit agreed directions for my approval by way of a consent summons within 14 days hereof. Absent agreement on directions, this matter should be restored before a master within 28 days from the date hereof with their respective timetabling questionnaires filed and served 5 days before such a hearing.