WONG SAI CHUNG t/a CONCORD INTERNATIONAL TRADING COMPANY v. KWAN MIN

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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JUDGMENT

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Background

1. This was a claim for damages for fraudulent or, in the alternative, negligent misrepresentation. It was not in dispute that the plaintiff had been carrying on the business of manufacturing and selling quartz watches. These watches were of the liquid crystal display ("LCD") type but towards the end of 1983 the market for this type of watch was falling. Although he had not dealt in the analog type watch before, the plaintiff was informed that the market for that type was still good, but that it was a considerably more difficult type of movement to produce. He was therefore anxious to secure the services of a person who was conversant with the technical side of analog watches and would be able to order parts from overseas manufacturers and to supervise their production.

2. The plaintiff was introduced to the defendant through an employee of the plaintiff, Miss Wong Siu Man and it was not in dispute that there were 3 meetings between them which finally concluded in an agreement whereby the defendant would be employed by the plaintiff on certain terms. These terms were later embodied in a written document although there was some dispute as to when, in fact, this document was executed. It was the plaintiff's claim that, as an inducement to secure employment with the plaintiff on these terms, the defendant made certain representations to him which formed the basis of the terms of employment agreed. These representations were firstly that the defendant guaranteed that he would be able to sell a minimum of 30,000 analog watch movements a month and secondly that the cost of manufacture of these movements would not be more than $27 per piece and the selling price not less than $33 per piece.

3. It was not in dispute that, following the employment of the defendant by the plaintiff, parts were ordered and delivered to the plaintiff from Switzerland and Japan sufficient to produce 80,000 movements. Sales, however, were nowhere near the 30,000 per month which the plaintiff says was guaranteed by the defendant and eventually 30,000 sets of parts were returned to the manufacturers some 15,000 remained at the assembly plant in China, apparently in unuseable condition. The balance have been sold either in Hong Kong or China. It is also not in dispute that the average sale price for these movements was less than $33.

4. Eventually on the 19th of June the defendant gave one month's notice that he would be leaving the plaintiff's employment and he duly did so on the 18th of July 1984. During the period of his employment, he had travelled twice to Switzerland and to China and incurred expenses. It is the plaintiff's case that these expenses, which were paid for by the plaintiff, would not have been incurred if it had not been for the misrepresentations made by the defendant. He seeks an order for the rescission of the contract of employment, repayment of the salary paid to the defendant during the time of his employment and damages for misrepresentation, being the loss suffered on the watch parts which were ordered less the sale price of those movements which were sold.

5. It is the defendant's case that he made no such representations as are alleged. He told the plaintiff that he was experienced in the assembly of analog movements, but that the sale of the movements was not to be his responsibility. He admitted that sales were in fact made through him to two of his own former customers but that he was never under any obligation to sell a specific number of watches per month on behalf of the plaintiff. He furthermore counterclaimed for salary, bonus and vacation benefit which had not been paid. He also claimed for a proportion of the Chinese New Year double monthly pay and for a percentage of the net profit made by the analog movement department of the plaintiff during the time he was employed.

The Evidence

6. Evidence for the plaintiff was given by Miss Wong Siu Man, his Marketing Manager. She said that in August 1983 when the plaintiff was only making LCD movements and watches, the price for those movements was going down quite rapidly. There was a very narrow profit of margin and the plaintiff decided that he should go into analog watches. However, they were not familiar with the manufacture of that type of movement nor with the source of supply of parts. The defendant was a friend of a cousin of Miss Wong and had a company which was run by himself, his wife and his brother-in-law. A meeting was arranged in the Telford Restaurant between the plaintiff, the defendant and herself at which the defendant said that he was in charge of buying material and the production of analog watches with his present company. He said that the approximate cost per movement of the parts was $27 and the sale price $33. He said the sales were in cash and there would be no problem at all with the sale of 30,000 watch movements a month as the general analog watch movement market looked good.

7. The plaintiff then asked the defendant to come to another meeting and to bring some documents to support what he had been saying. This meeting was held a few days later in the plaintiff's office in Kwun Tong and the defendant produced documents showing details of the purchase of material, some sales documents and also contract with a company in China for assembling watch movements. The defendant also produced documents showing that he had customers for watches at about $33 and again said there would be no problem with sale of about 30,000 movements a month.

8. Conditions of employment for the defendant were mentioned at this meeting and the plaintiff offered a salary of $13,000 per month plus a bonus. The defendant said he would consider it and would give the plaintiff a reply at their next meeting. The plaintiff asked to photocopy some of the documents the defendant had produced, but the defendant said that was "not convenient". The plaintiff asked him to bring more documents at their next meeting.

9. The third meeting was held at the end of January 1984, again in the plaintiff's office. The defendant brought more lists of customers which he showed to the plaintiff. Miss Wong said that there seemed to be a substantial number of customers. Terms of employment were again discussed and the defendant accepted the terms that were offered. He said the plaintiff should open Letters of credit for the purchase of parts and should buy some sample movements.

10. Miss Wong also identified various documents supporting the purchase by the plaintiff, on the recommendation of the defendant, of component parts to a total cost of $2,680,000.

11. She also said that the defendant went to Switzerland twice and also to china. The visits to Switzerland were to arrange for supplies of mechanical parts for the movements and to China to arrange for assembly. The first trip to China was to sign a contract and the second time to inspect actual production. The cost of the trips to Switzerland were $36,016 and to China $2,368, a total of $38,385. So far as the trips to Switzerland were concerned, this was about one tenth of what had been claimed and the Statement of Claim was amended accordingly.

12. Miss Wong said that so far as sales were concerned, the only movements which was sold by the defendant were 6,100 pieces for a total price of $207,000. On this, the plaintiff made a Profit of $26,845. She said that $30,000 sets of Parts were eventually returned to the suppliers at the purchase price but the plaintiff paid the costs of the return. She said that the plaintiff also later sold 28,700 movements at between $22 and $26 for a total return of $614,000. The loss on this was $207,685. She said that there were 15,200 movements still left but these had not been assembled but were sets of parts and had now gone rusty. They were in China and were not saleable. They cost $430,920.

13. When cross-examined, Miss Wong agreed that the rate of exchange would affect the cost of the parts imported and that these rates could fluctuate substantially. She agreed that the cost of production would therefore vary depending on the exchange rate but she said the question of exchange rates was not discussed at the meetings. In cross-examination, she also changed her evidence slightly but in a particularly important way. Whereas in chief she had simply said that the defendant said there would be "no problem" with a sale of 30,000 movements a month. When cross-examined however she went further and said that the defendant said he "guaranteed the sale of 30,000 movements per month" and it was on that basis that the plaintiff decided to employ him.

14. Miss Wong was somewhat vague as to the exact post that the defendant was being offerred. Initially she said he was to be in charge of production. Then she said he was to be in charge of the analog watch department. Finally he was to be production manager of the analog watch department. She was not aware of the terms of the written offer of employment which was accepted by the defendant which in fact offers him a position "as Production Manager in Analog Movement Department".

15. Finally Miss Wong said that in respect of the undertaking by the defendant as to monthly sales, she could not really remember the exact words used but said that, at the third meeting, the defendant said he could "guarantee the sale of 30,000 movements a month" and he was then employed by the plaintiff.

16. Mr Wong Sai Wah, the Office Manager of the plaintiff, produced some attendance records which purported to show the attendance of the defendant, and also Miss WongSiu Man, from the 6th of February, 1984 up to the 19th of July, 1984 when he left the employment of the plaintiff. According to these records, he was absent on a very large number of occasions but these records were challenged and it was put to Mr Wong they had been, is fact, only prepared for the purposes of the Labour Tribunal proceedings which were brought by the defendant.

17. The plaintiff gave evidence and said that he was manufacturing LCD watches but found the market falling off in 1983. He did not have any technical knowledge of the production of analog movements and was looking for somebody who could be in charge of all aspects including the purchase of parts, production and sales. He gave evidence relating to the meetings between himself, Miss Wong and the defendant and he also said that the defendant assured him that he could sell at least 30,000 analog movements each month. He said he was a partner at present in a company which included his wife and brother-in-law but as he was in the process of dissolving his marriage, he wanted to leave. At the second meeting, the defendant brought along some documents, including lists of customers. The defendant said that the sale price would be $33 per movement but it might go up with seasonal fluctuations, such as Christmas. The cost price for assembled movements would be $27. They discussed terms of employment and the defendant said he wanted $13,000 per month plus a bonus of 10% of the profit at the end of the year. The plaintiff told him he would consider that and asked for photo copies of the various documents but the defendant replied that, as they had not yet reached agreement, he could not have them.

18. At the third meeting, the defendant brought further documents including lists of customers and again assured him that "30,000 movements per month would be a small quantity to sell". They then agreed on terms of employment which would be a salary of $10,000 per month plus $3,000 per month to be paid at the end of the year together with a 10% bonus if there was a profit. He said he decided to employ the defendant because

Mr Wong said that if he had not been guaranteed sales of 30,000 per month, he would not have employed the defendant.

19. The plaintiff then opened Letters of Credit for supply of 80,000 sets of parts to be assembled into watch movements. He also paid the defendant expenses for his trips to Switzerland and China.

20. 20,000 sets of parts arrived and were sent to the assembly plant in China and this was followed by another 30,000 sets. They were returned as assembled movements to Hong Kong starting in May and that month 5,000 movements were sold and in June and July another 1,100. All were sold by the defendant but there were no further sales in Hong Kong. The defendant assured him that sales would gradually increase and that the plaintiff had nothing to worry about. He said the stock could be sold almost immediately and there were customers who would take all of the movements available but they needed time to make the watch cases before they purchased the movements.  However, sales did not, in fact, pick up as promised and eventually in June, he sent 30,000 sets of parts back to the suppliers in Japan and Switzerland.

21. On the 19th of June the defendant came into his office and handed him the letter of resignation and said he was no longer working for him. He asked the defendant why he was leaving and what the defendant should do with the stock on hand. The defendant simply said it was his bad luck. From that time on, the defendant only came to the office occasionally but a few more hundred movements were sold by him.

22. So far as the letter of appointment was concerned, which is at page 1 of the defendant's bundle of documents, he said that although this letter was dated the 1st of February, 1984, it was in fact only produced to him by the defendant in April when he came back from his first visit to Switzerland. He said that he employed the defendant as manager of his analog department, not as only the Production Manager. He also denied that he ordered name cards for the defendant but that the defendant did that himself without approval although he did agree to his having a card. The defendant's business card, which is at p. 94 of the defendant's bundle, has the name of the plaintiff's group of companies at the top and the individual companies are then listed, some of which are incorporated and some, as with Concord International Trading Company, unincorporated. It then describes the defendant as Production Department Manager. The plaintiff said he asked the defendant about that and was told that it was "useful to have that title in purchasing material and on the technical side".

23. Mr Wong said that the watches were to be assembled in China at a factory for which the defendant had already set up the production line. There was also a Quantity Controller in that factory employed by the defendant himself.

24. Mr Wong said that in May and June, he asked the defendant on several occasions about sales and the defendant told him there was nothing to worry about. He, however, did not ask for particulars until well into June and then the defendant showed him a note book containing lists of customers and repeated there was nothing to worry about. He said, however, that while he was worried about movements having been sold and possibly not paid for and he pressed the defendant, he did not ask for any name of any particular customer.

25. The plaintiff agreed that at the time of the initial discussions, nothing was said about fluctuating exchange rates and he did not give him the name of any particular customer.

26. In re-examination, Mr Wong said that he hoped the defendant would be able to sell 30,000 movements per month, which he had promised he could do. He said this would cover losses on LCD watches.

27. The defendant gave evidence and said that he had been operating a company called Garnets Co. Ltd. together with his brother-in-law. He said he purchased the materials and was responsible for production while his brother-in-law, one Lai Hing-lun, attended to sales. He came to know Miss Wong Siu-man late in 1983 when she asked him about the difference between LCD and analog watches. He told her what his view was of the potential market for analog watches and subsequently met the plaintiff in the Telford Restaurant. He said that the cost price of a movement would be about $27 and they could be sold for about $33. They met again in the plaintiff's office when he was told that the plaintiff wanted somebody who could supply component parts for assembly of analog watches at a factory known as the Sar Hoe Factory in Zhujiang as the defendant knew about supplies and production and the plaintiff had a factory, they could co-operate to do business. They had another meeting in the plaintiff's office and the defendant brought along some costing material including L/Cs for parts from Japan and Switzerland which he showed to the plaintiff. However, he denied showing him any other documents and specifically denied producing any note book with lists of customers. He said he did not keep such lists himself. He said that exchange rates were discussed and the plaintiff phoned his bank and got the current exchange rates for Switzerland and Japan.

28. The plaintiff then offered to employ the defendant. He said that he only knew the technical side and would only do production. He wanted a salary of $15,000 per month plus a 10% bonus at the end of the year on the net profit of the Analog Movement Department. The plaintiff replied that the defendant was not to worry about the marketing side and the plaintiff would look after sales in Hong Kong and in China.

29. At the third meeting he said there was also a Miss Fong present as well as Miss Wong and himself and the plaintiff. The terms of employment were discussed and the plaintiff said he had a cash flow problem and offered him $13,000 per month of which he was to be paid $10,000 at the end of each month and $3,000 at the end of the year, or on termination of his service. It was also agreed he would receive a 10% bonus on the profits made by the analog watch department and he would receive the usual double pay at Chinese New Year. He was also to have 2 weeks annual vacation leave.

30. The defendant said that the plaintiff had told him that a letter of employment would be given to him on the day that he started work. In fact that did not happen and he was not given the letter until May. He confirmed the terms of the employment as contained in that letter i.e. that he was to be employed as Production Manager in Analogue Movements and had no responsibility for sales. He specifically denied that he had ever told the plaintiff that he had potential customers for 30,000 analog movements per month and said he had never shown the plaintiff lists of customers. He had no book containing such lists.

31. The defendant said that in June he decided to resign and gave the plaintiff a letter of resignation on the 19th of July (this is at p. 3 of the defendant's bundle). He said the plaintiff did not ask him why he resigned but there were, in fact, 3 reasons. These were :

32. The defendant was emphatic that the letter of employment was prepared by the plaintiff and he simply found it on his desk in an envelope. He agreed with the terms, signed a copy and returned it. After the closure of the defence case Mr Chong sought leave to call further evidence for the plaintiff. He said that a search had now been made in the plaintiff's office and a note-book containing lists of customers had been found amongst other documents left behind by the defendant. This would contradict the defendant's evidence that he had no such note-book and lists. That application was strongly resisted by Mr Wong for the defendant who pointed out that the plaintiff had had over 2 years to locate such evidence and it was too late to call it at that stage. I agreed with that submission and refused the application. I was satisfied that if the plaintiff had showed due diligence the evidence would have been available well before the trial commenced.

The Law

33. It was argued by Mr Wong on behalf of the defendant that even if the defendant had said he could sell 30,000 movements per month, that was only his opinion and not a statement as to an existing fact. Furthermore, if any representation was made, it was clearly one which was not intended by the defendant to have contractual force. It was simply an indication as to the possible cost of the items, their selling price and what were, in the defendant's opinion, potential sales. However, he emphasised that the terms of the contract of employment made no mention whatever of any of these representations and clearly, both by that contract and by the defendant's name cards and by the tasks with which he was entrusted, the defendant was in charge of production only and not sales.

34. Mr Chong for the plaintiff relied on Dick Bentley Productions Ltd. and another v. Harold Smith Motors Ltd. (1965)2 A. E. R. 65. That was a case involving misrepresentation of the mileage of a second hand car. It was held that if a representation is made in a course of dealings for a contract for the very purpose of inducing the other party to act on it and if it actually induces him to act on it, it is prima facie ground for inferring that the representation was intended as a warranty. The plaintiff also relies on Esso Petroleum Co. Ltd. v. Mardon (1976)2 A. E. R. 2 where a large oil company made predictions as to potential sales from a petrol retail station and the plaintiff entered into a lease based on them. Those predictions were held to be a warranty.  In that case the defendants were specialists, the plaintiff was relying on their special knowledge and expertise. Here while the defendant did hold himself out as an expert in the production of analog watch movements, the plaintiff himself was heavily involved in the production and sale of watch movements, albeit not analog movements. In Bisset v. Wilkinson (1927) A. C. 177 a farmer told a potential purchaser of his farm that the carrying capacity of the farm was 20,000 head of sheep. That proved to be wrong but the Privy Council held it was a statement of opinion only and not a warranty. I realise that the trend seems to be towards holding persons who make representations liable if proved wrong but I think the facts here are much closer to Bisset v. Wilkinson than to either Dick Bentley Productions v. Harold Smith Motors or Esso Petroleum v. Mardon.

Decision

35. I am satisfied on the evidence that no representation as to sales was made by the defendant to the plaintiff such as was intended to form any contractual liability between them. I accepted the evidence given by Miss Wong that what the defendant said was that there should be no problem with the sale of 30,000 movements a month. It is quite true that when pressed in cross-examination, she went further than that and said the defendant guaranteed sale of that number. I do not accept it was a guarantee and am satisfied that it was an estimate and no more. It was not intended to form any part of the contract and this is confirmed by the fact that there is no mention whatever in it in the subsequent written contract of employment which I find was prepared by the plaintiff. I am satisfied that the defendant was asked about potential sales and give his opinion that the plaintiff would be able to sell 30,000 movements a month. I am also satisfied that he showed the plaintiff lists of potential customers. I am, however, also satisfied that while his opinion on that aspect was important he was being employed because of his knowledge of production and the statement of likely sales was not intended to be a warranty made for the purpose of enducing the plaintiff to employ him.

36. I am satisfied that there is no representation made by the defendant upon which the plaintiff can rely as a collateral warranty and the claim is dismissed.

37. The defendant also counterclaims and I am satisfied that he must succeed to some extent in his counterclaim. He is entitled to his salary to 18/7/84. I do not accept the records showing his absence from work as being genuine. He is also entitled to the $3,000 per month withheld. It is payable "on your termination". He is however not entitled under the written terms of employment to pay in lieu of vacation nor to a proportion of Chinese New Year double pay. As the analog watch movement department did not make a profit he is not entitled to any commission. These amounts are :

The defendant is entitled to his costs on the claim and counterclaim. It was however submitted that the length of the trial had been prolonged by the refusal of the defendant to admit several facts as set out in a notice to admit facts issued by the plaintiff. Even if he was not prepared to make a full admission of some of the points he could have filed qualified admissions. I find that submission has merit and the defendant is not to be paid his costs for two days of the trial