CASTLESPRING ENTERPRISES LTD v. CORE RESOURCE (HK) LTD

1987, No. A4876

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H E A D N O T E

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    Claim by seller for the price of goods dismissed because Defendant had acted purely as agent.

    Test to be applied in determining whether agent who contracted on behalf of a foreign principal has assumed personal liability. Modern law set out in judgment of Diplock, L.J. in Teheran - Europe Co. Ltd. v. S.T. Belton (Tractors) Ltd. [1968] 2 QB 545 at p.558.

    Misrepresentation by seller, before contract made, to effect that there was large demand for the goods. Accordingly, claim, save in so far as it was for loss of profits, would in any event have been irrecoverable on application of second rule in Hadley v. Baxendale (1854)9 Ex. 341 whether as originally expressed, as restated in Victoria Laundry v. Newman [1949]2 KB 528 or as the restatement was qualified in Koufos v. Czarnikow [1969]1 AC 350.

    Operation of rule would not, however, have barred claim for loss of profits : Thompson (W.L.) Ltd. v. Robinson (Gunmakers) Ltd. [1955] Ch 177; Charter v. Sullivan [1957]2 QB 117; Lazenby Garages v. Wright [1976]l WLR 459; Re Vic Mill [1913]l Ch 465.

1987, No. A4876

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D G M E N T

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1. This case concerns a contract for the sale of 40,000 credit card alarm wallets for US$183,600 F.O.B. Hong Kong. The seller is the Plaintiff, a Hong, Kong company. Of that there is no dispute. There is, however, an issue as to who is responsible as buyer. The Plaintiff's case is that the Defendant, also a Hong Kong Company, is the person - or one of the persons - so responsible. This is disputed by the Defendant. Its case is that it acted purely as agent for an overseas buyer, and has not incurred any personal obligation to pay for the goods.

2. The Plaintiff contends that the contract here in question is contained in one document, namely, an Order Confirmation dated April 1, 1987, issued by it. In my judgment, the contract is contained in two documents. The first is a Purchase Order dated March 30, 1987, issued by the Defendant to the Plaintiff. The second is the Order Confirmation which I have just mentioned. The Order Confirmation was, on the evidence, issued in consequence of the Purchase Order. It makes, on its face, express reference to the Purchase Order, thus incorporating its terms. In itself, the Order Confirmation makes no provision in regard to the shipping mark to be used. The Plaintiff itself regarded the shipping mark as being of importance; and had insisted on a change thereto to make it read 'Made in China' (where the goods were completed) rather than 'Made in Hong Kong' (where the electronic components for the same were manufactured). Thus, unless the contract includes the Purchase Order, it would fail to embody the bargain arrived at. The importance of the Purchase Order is underlined by the fact that the Plaintiff insisted on the change to which I have referred being shown on the Purchase Order by an amendment thereto, rather than being left on the basis of an oral understanding.

3. There can be no doubt that vis-a-vis the overseas buyer, a French concern by the name of Vikidis S.A.R.L., the Defendant is only an agent. The question is whether vis-a-vis the Plaintiff, it has assumed the obligations of a principal.

4. How the courts approach questions of this sort is succinctly and, in my judgment, accurately summarised at p.426 of the 15th ed. of 'Bowstead on Agency' where it is said that :-

'The question whether an agent who has made a 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.'

5. In times past, the courts used to operate on the basis of a presumption of fact - which was treated as being so strong as to be tantamount to a rule of law - that an agent who contracted on behalf of a foreign principal assumed personal liability. That presumption no longer exists. Nevertheless, the fact that the principal is foreign remains of relevance. It is one of the circumstances to be taken into account in determining whether the agent has assumed personal liability to the other contracting party. All this is clear from the judgment of Lord Justice Diplock in Teheran - Europe Co. Ltd v. S.T. Belton (Tractors) Ltd [1968]2 QB 545 at p.558, which - if I may say so - seems to be as accurate a statement as any of the modern law on this point.

6. Coming back to the two documents in which the contract is contained, one sees that in the Purchase Order the Defendant says :"We confirm our purchase from you, for and on behalf of our buyers, the undermentioned goods, on the terms and conditions stated hereon, and overleaf." The Order Confirmation makes - as I have said - express reference to the Purchase Order.

7. The formula 'for and on behalf of' is a well-known one for indicating agency. On the documentary evidence before me, I notice that when the Plaintiff's own authorised signatory signs contracts between the Plaintiff and manufacturers he does so - on the Plaintiff's standard form -'for and on behalf of' the Plaintiff.

8. The material surrounding circumstances in the present case include these matters : Prior to the formation of the contract, there had been contact between the Plaintiff and Vikidis. At the time when the contract was made the Plaintiff knew that the Defendant's 'customer' - to employ the expression used in a letter dated March 28, 1987, from the Plaintiff to the Defendant - was the French concern. Pausing here, I should mention that the  letter of the 28th contains a request by the Plaintiff to the Defendant for a purchase order. As we know, one was sent on the 30th.

9. It is true that in the course of his evidence, Mr Joel Martin (a director of the Plaintiff and the person on its side dealing with this matter throughout) said, at one stage, that he was very reluctant to deal with Vikidis direct. But he subsequently made it clear that it was after the contract had been entered into and difficulties had arisen over getting a letter of credit that he arrived at that state of mind.

10. Mr Richard Rund (then a director of the Defendant and the person on its side dealing with this matter at its most important stages) gave evidence to this effect : He had, prior to the making of the contract, told Mr Martin that one of the ways in which the Defendant did business was as a buying agent, and that it was so acting in the present instance.

11. I found Mr Rund to be a reliable witness. I accept his evidence.

12. Even leaving aside his evidence as to what he had told Mr Martin about the Defendant acting as a buying agent, I conclude that the Defendant did not incur any personal obligation to pay for the goods, whether alone or along with its foreign principal. Indeed, I so conclude even upon looking at the Purchase Order and the Order Confirmation isolated from all the circumstances surrounding them. The formula 'for and on behalf of' is very telling (even bearing in mind that, as Mr. Rund frankly told the court, the Defendant has used purchase order forms containing those words even on the rare occasions when it was buying on its own account). Looking at the surrounding circumstances fortifies my conclusion. These circumstances include this statement in a fax dated March 26, 1987, from the Plaintiff to the Defendant : "Please advise your buyer that we require a letter of credit should he decide to proceed." (Emphasis supplied). Finally Mr Rund's evidence as to what he told Mr Martin about the Defendant acting, as a buying agent further fortifies my conclusion that the Defendant has not incurred any personal liability to the Plaintiff.

13. For that reason, the Plaintiff's claim against the Defendant must fail.

14. I should mention that the Defendant had also pleaded that the contract had been varied as far as its payment terms were concerned. But the plea of variation was not pursued. With it went the plea that it was in fact the Plaintiff who was in repudiatory breach.

15. Actually, that plea would have failed even if the one of variation had succeeded. The reason is simple : The buyer, Vikidis, failed to proffer any letter of credit. So even if all that was required was a letter of credit in accordance with a contract varied as it had been pleaded that this one was, that was not forthcoming either. The Defendant's counterclaim for loss of commission - which would have faced other difficulties anyway - must therefore fail.

16. It remains necessary for me to indicate what I would have done in regard to damages if the Plaintiff had succeeded on liability.

17. The plaintiff's evidence as to damages is - even assuming its acceptance at face value - far from satisfactory. On such assumption, the position would be one along these lines : One starts off with 40,000 wallets at US$4.59 each. Then one deducts 5,120 wallets sold, also at US$4.59 each, to Vikidis under another contract following the discharge by breach of the one sued upon. This leaves 34,880, which is presumably the quantity which Mr Paul Lai (of the factory which had contracted with the plaintiff to supply it with the wallets) had in mind when he spoke of 35,000 odd wallets left. Of this 35,000 odd wallets, 10,000 odd had been made up. This 10,000 odd wallets ?taking it at 10,000 exactly - would support a claim by the Plaintiff for the contract price for the same, ie. US$45,900.00, assuming that the factory could and would sue the Plaintiff for manufacturing these 10,000 odd wallets. Of the remaining 25,000 odd wallets referred to by Mr Lai, it is necessary to deduct 2,500 delivered and paid for by cheque under the contract sued upon. This leaves 22,500 semi-finished wallets. There is no evidence as to what claim the factory could or would bring against the Plaintiff in respect of these semi-finished wallets. To what extent such a claim would exceed the HK$53,000 for which the semi-finished items were sold by way of mitigation is impossible to say. The difference between the cost to the Plaintiff of the wallets, US$3.76 each, and his selling price, US$4.59, is US92 cents. So his profit on 22,500 wallets would be US$20,700.00; and that would be all that it would be safe to award in respect of the 22,500 wallets even on the assumption on which I am proceeding for the moment. On such as assumption, the appropriate award would seem to be US$45,900.00 plus US$20,700.00 giving US$66,600.00.

18. In fact, however, I do not find any of the Plaintiff's evidence as to damages reliable beyond the fact that 40,000 wallets at US$4.59 were ordered, and only 7,620 wallets were paid for at that price. This leaves 32,380 wallets on each of which the Plaintiff lost US92 cents profit. Its loss of profit comes, therefore, to US92 cents times 32,380, which comes to US$29,789,60. I would not make any deduction for the HK$53,000.00 said to have been received because I do not find any of the evidence as to what was left over, or what it fetched, reliable.

19. There is another route by which I arrive at the same result.

20. Shortly before the contract was entered into, and with a view to inducing it, the Plaintiff, through Mr Martin, had represented that it had several other orders - including, two larges ones - for the wallets. Its fax of March 25, 1987, to the Defendant reads :-

'We have just received two large orders and three small ones on the wallets. I have not yet confirmed shipment date pending advise from you on your proposed order. If your customer is going to proceed, I will hold the capacity as for the schedule previously submitted, if not, please let me know at once so we can service our other customers. I will hold off the others until 6 p.m. Thursday night Hong Kong time.'

21. Mr Barretto, who appears for the Plaintiff, submits that in light of that representation no reasonable buyer would think that his refusal to pay for and take the goods would result in them being left in the seller's hands. Accordingly, Mr Barretto submits, the operation of the second rule in Hadley v. Baxenda1e (1854)9 Ex. 341 would prevent the Plaintiff from recovering anything more than nominal damages. That would, I think, be going too far. Nevertheless I do think that the rule would operate so as to curtail the award of damages to the Plaintiff even if it had surmounted all the other barriers in its way.

22. In Hadley v. Baxendale (supra) itself, the rule was said by Baron Alderson (at p. 354) to be that damages for breach of contract were limited to "...such as may reasonably have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it."

23. The rule was restated in Victoria Laundry v. Newman [1949]2 KB 528 by Lord Justice Asquith (at pp 539 - 540). In the course of his restatement, the learned Lord Justice suggested the formula 'a serious possibility', 'a real danger' and - colloquially-'on the cards' as replacements for the formula 'the probable result of the breach' used by Baron Alderson.

24. That restatement was qualified in Koufos v.Czarnikow [1969]1 AC 350 in which Lord Reid said (at P. 382) that the test is whether the loss in question is '... of a kind which the defendant, when he made the contract, ought to have realised was not unlikely to result from the breach.....'

25. In my judgment, however the rule is expressed, the Plaintiff's claim would, save in so far as it is for loss of profits, fail the test laid down by the rule. During the period leading up to the making of the contract, the Plaintiff had been busily and deliberately creating in the buyer's mind the false impression that there was a very considerable demand for the items in question and, indeed, something of a rush on the part of buyers to acquire the same. In such circumstances, I find myself quite unable to hold that the buyer ought, at the time when the contract was made, to have realised that the Plaintiff's being unable to dispose of the items for more or less the same price elsewhere was not unlikely to result in the event of its failure to pay for and take up such items. In the scenario painted by Mr Martin, such a result was unlikely. Mr Franklin, who appears for the Plaintiff, sought to avoid this conclusion by urging that the Plaintiff's misrepresentation was no more than 'mere puffing', as the expression goes. In my judgment, it went well beyond that. The misrepresentation was specific, as one can see from the fax which I have quoted.

26. I do not, however, think that the rule would operate to defeat even the claim for loss of profit. In arguing that it would, Mr Barretto cited the motor car cases. The old cases of the unpopular Vauxhall Vanguard (Thompson (W.L.) Ltd v. Robinson (Gunmakers) Ltd. [1955] Ch 177) and of the popular Hillman Minx, (Charter v. Sullivan [1957]2 QB 117) have now been joined by the case of the second-hand BMW2002, (Lazenby Garages v. Wright [1976]1 WLR 459). I do not, however, propose to analyse these case. In all the circumstances, I am of the view that the fallacy of the Defendant's argument here is quite simply the fallacy identified by Lord Justice Hamilton in Re Vic-Mill [1913]1 Ch 465 at p. 473, namely, the fallacy '... in supposing that the second customer [would be] a substituted customer, that, had all gone well, the [seller] would not have had both customers, both orders, and both profits.'

27. In the result, both the claim and the counterclaim are dismissed. It only remains for me to thank both counsel for their assistance, and to invite them to address me on costs.

[Argument as to costs]

Court : Costs of the claim to be paid by the Plaintiff to the Defendant; and costs of the counterclaim to be paid by the Defendant to the Plaintiff. Exhibits P1 - P5 inclusive be returned to the Plaintiff's Solicitors upon the expiration of the period for bringing an appeal-if no appeal is brought within that period.