CALTEX OIL HONG KONG LIMITED v. MEI KAN MOTORS LIMITED

IN THE DISTRICT COURT OF HONG KONG

HOLDEN AT KOWLOON

CIVIL JURISDICTION

ACTION NOS. 22697/84 & 24933/84

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BETWEEN

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JUDGMENT

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1. The plaintiff carries on business as a supplier of various petroleum products in Hong Kong. It markets its products to ultimate consumers through a number of service stations scattered throughout Hong Kong. Although these service stations are described as "Caltex Gasoline Stations" and the witnesses in the course of the trial of these consolidated actions have referred to them as "our" or "the plaintiff's" service stations, I am satisfied that, at all material times, they were operated by persons who are neither the servants nor the agents of the plaintiff. They are operated by independent contractors, who purchase their supplies from the plaintiff, and then re-sell them to members of the public who patronise the service stations.

2. With the possible exception of the franchised bus companies, these patrons or ultimate consumers include a wide variety of persons, who are involved in the various forms of public and private transport in Hong Kong. They include owners and drivers of private cars, taxis and public light buses, as well as persons who perform various managerial services for such users on an agency, commission or contract basis. The defendant is in the latter category. Apart from offering repair and maintenance services to its customers, it operates its own vehicles and manages others for individual owners, by hiring drivers, etc.

3. For a number of years, the plaintiff has operated a system, which enables such ultimate consumers to obtain petroleum products direct from service stations on favourable credit terms, which eliminate the need to pay cash for products supplied by such service stations. The plaintiff enters into an agreement with a selected consumer ("account-holder"), under which it issues a series of "chits" to the account-holder. Anyone in physical possession of the e chits can obtain petroleum products from any of the plaintiff's service stations without paying cash or using an established credit card, simply on production of a chit. The person acquiring the goods from a service station is, apparently, required to sign the chit, but that signature is unimportant. The chits do not even have to be signed by the account - holder, but the number of his account, opened with the plaintiff, is printed on each chit. In due course, the service stations set off the value of the goods supplied in exchange for such chits against the price they must pay to the plaintiff for goods supplied to them by the plaintiff. Information derived from these chits is fed into the plaintiff's computer. Monthly statements are produced and sent to account-holders by the plaintiff. The amount payable by the account - holder to the plaintiff is less than the retail price, since the plaintiff gives a discount to each account - holder. In essence, the consumer's obligation to pay for products sold by a service station is settled by the system of setting-off used chits against sums owed by the service station to the plaintiff, which in turn, recovers that sum (subject to the agreed discount) from the account-holder (who may not have been the person who bought the goods from the service station) under the terms of the agreement between the plaintiff and the account - holder.

4. Although this system was no doubt devised to promote sales of the plaintiff's products, it offers very real benefits to consumers and to account-holders. In addition to a small discount, the latter enjoy the benefit of a generous period of credit (on average, 45 days) at no extra charge. Those who own or operate fleets of vehicles, such as the defendant, are indirectly offered a more systematic method of administering and controlling their operations. But, like most modern substitutes for immediate cash settlement of legal obligations, this system exposes an account-holder to the risk of being held liable to the plaintiff in respect of chits which have gone astray or get into unauthorised hands. To cope with that risk, which appears to be one of frequent occurrence, the plaintiff has devised a feature, which is designed to give some protection to its account-holders against that risk.

5. In the case of what may be described as the normal or standard agreement between the plaintiff and its account-holders, one aspect of this protection is to be found in the conditions printed on the inside cover of the chit books, issued by the plaintiff to its account-holders. These conditions hereinafter referred to as the plaintiff's "standard conditions", are expressed in the following terms :-

Although these conditions are expressed in vague and precatory terms, it is common ground that they constitute part of the contractual terms of the agreement between the plaintiff and the defendant in this case.

6. The protection which is given by these standard conditions is buttressed by the plaintiff's normal practice of instructing service stations not to honour chits, which have been reported "lost or stolen".  This is done by sending out circulars to the various service stations (see, for example, page 3 of Plaintiff's Supplemental Bundle). At the same time, information is fed into the plaintiff's computer, which is programmed to reject any chits which have been honoured after the 3 - day period. If, despite these circulars, a service station deliver goods against a cancelled chit, it will not be able to use that chit as a credit or set-off against the sums it owes to the plaintiff, and that chit should not appear in the monthly statement sent to the account holder.

7. It is clear that, so long as these protective measures are properly invoked, the plaintiff bears absolutely no risk from the unauthorised use of its chits. If a chit is honoured after the 3-day period, the plaintiff is not concerned with recovering payment for the goods supplied. It has no cause of action against the account-holder. It does not have to give credit to the service station, which alone must "chase after" the person who acquired the goods.

8. In or about March or April 1983, the plaintiff opened a chit-account with Mei Kan Motors, after a meeting between one of its partners, Mr. Chang Fung Chiu, and Mr. Lam Kwok Leung, the plaintiff's senior sales representative. This chit-account was transferred to the defendant, upon the latter's incorporation in September 1983. On the 9th July 1984, the defendant gave written notioe (pages 17 and 18 of Plaintiff's Bundle to the plaintiff asking it to cancel a large number of chits. On the 13th July 1984 the plaintiff issued a circular (page 4 of Plaintiff's Supplemental Bundle) to its service stations asking them to stop delivery to these chits. Nevertheless, on and after the 20th July 1984, several of these chits were honoured by service stations, and the cost of the goods was later included in the monthly statements sent by the plaintiff to the defendant in August, September, and October 1984. The defendant disputed the amounts alleged to be due for these months but paid for the chits which had not been cancelled. By these consolidated actions, the plaintiff seeks to recover the balance, totalling $42,502.40. At the trial, it was eventually conceded by the defendant that it was liable to the plaintiff to the extent of $4381.06, as it was discovered that the appropriate chits had never been cancelled. After a small deduction for a sum already paid, it is common ground that the amount now in dispute is $38,086.34, and that this sum relates to "cancelled" chits, which were honoured on and after the 20th July 1984.

9. I now come to the crucial question in this case, namely, in what circumstances was the defendant entitled to require the plaintiff to take the protective measures described earlier? The pleadings in this case are multi-coloured and the amended defence is, in my respectful view, unduly prolix. Although they tend to obscure the issues, the case has been fought according to fairly clear "battle-lines".  The plaintiff contends that it was only obliged to take these measures if the defendant gave notice that a chit had been lost or stolen, and that its agreement with the defendant was governed solely by the standard conditions, set out above. It further contends that none of the cancelled chits was lost or stolen. The defendant, however, contends that it was entitled to give notice of cancellation of chits in other circumstances, whereupon the plaintiff was under a legal duty to take the protective measures, and only entitled to debit the account of the defendant in respect of chits honoured within 3 days of such notice. These "other circumstances" are not really particularised in the amended defence, but the defendant confined this aspect of its case to those chits which it had, in turn, issued to its customers under credit facilities similar to those extended by the plaintiff to the defendant.

10. What had happened was this. I find as a fact that in July and November 1983, Mei Kan Motors and the defendant entered into agreements with Mr. WONG Wai-woon and Mr. LO Wing-chung, under which Mr. Wong and Mr. Lo were issued with some of the chits which the defendant had obtained from the plaintiff. These gentlemen defaulted in payment of sums due to the defendant for goods supplied against these chits, and on the 9th July 1984, the defendant gave notice suspending these accounts and demanding the return of all unused chits. The unused chits were never returned to the defendant, but some of them were used to obtain goods from service stations, and were later debited to the defendant by the plaintiff.

11. Although the defendant alternatively contends that these chits, which had not been returned by its own customers, were "lost or stolen" within the meaning of these terms in the plaintiff's standard conditions, the main thrust of its case has been to justify a wider right to cancel chits which had been issued to its own customers, after they had defaulted in their obligations to the defendant. It seeks to justify this wider right on three grounds. Firstly, it contends that the plaintiff expressly agreed to accept notice of cancellation in such circumstances. Secondly, it contends that a term to that effect should be implied in fact, having regard to the nature of their agreement and their relationship. Thirdly, it contends that the plaintiff was under a duty, implied or imposed by law, to take the protective measures I have mentioned, and to take reasonable steps to ensure their effectiveness.

12. In my view, the second and third grounds for enlarging the scope of the plaintiff's duties to the defendant can only arise, if at all, on the basis that the plaintiff was aware, at all material times, that the defendant intended to re-issue chits, supplied to it by the plaintiff, to its own customers, i.e., to persons who were neither the servants nor agents of the defendant, or otherwise subject to its direct control. Without such special knowledge on the part of the plaintiff, there is, in my view, no obvious necessity for adding a term or terms, along the lines suggested by the defendant in this case, to these contained in the plaintiff's standard conditions. In the case of an agreement with an "ordinary" account holder, i.e. one who intends to confine use of the chits to himself, members of his family, or his servants, it seems to me that the standard conditions clearly and reasonably allocate the risks inherent in the "chit-system", and make adequate provision for dealing with chits which fall into unauthorised hands. In order to give such agreements business efficacy, it might be necessary to imply a term requiring the plaintiff forthwith to notify its service stations upon receipt of a report of a "lost or stolen" chit, in order to prevent, or minimise, the risk of such chit being honoured within the 3-days' period. I am not convinced that that limited implied obligation needs to be imported into ordinary agreements. But, as all the disputed chits in the present case were honoured many days after the 3-days' period, it is unnecessary to give further consideration to this question.

13. In my respectful view, the precise scope of the additional term (or duty) to be implied, in the circumstances of the present case, has not been clearly disclosed by the defendant's pleading, and only partially explored in the course of the trial. Much of the evidence and argument before me has been directed at supporting the defendant's first and primary contention, namely, that the plaintiff expressly agreed to accept notice of cancellation of chits which were not ''lost or stolen", and to take certain steps to prevent such chits from being honoured by service stations, and eventually being debited to the defendant. I consider this aspect of the case later in my judgment. But, insofar as it is also relevant to the suggested implied term or legal duty, attention has mainly focussed on the question whether the plaintiff exercised reasonable diligence to prevent such chits from being honoured. The question whether the defendant had an implied contractual right to cancel chits which were neither "lost" nor "stolen" (according to the proper construction of these terms in the plaintiff's standard conditions) has been largely assumed or overlooked, except by Miss Kwan, who has throughout maintained that the defendant had no such right, whether as a result of express agreement, implied terms, or the operation of modern principles governing the tortious liability of parties to "special" relationships.

14. For reasons I give later in this judgment, I find as a fact that the plaintiff was aware, at all material times, that the defendant would re-issue the chits to persons not under its immediate control. But, unless I am obliged by authority clearly binding upon me, I would not be disposed to hold that this particular knowledge is sufficient to support the implication, in fact, of a term entitling the defendant to unilaterally cancel any chit which was not "lost or stolen".  I do not consider that such a term is obvious or necessary in order to give business efficacy to the agreement between the parties. Nor do I think that the parties would have readily assented to the game as a reasonable suggestion from an "officious bystander".  No doubt, the parties had mutual reasons or interests for entering into the present agreement. But, I cannot accept that they were sufficiently common or coincidental to justify the implication of a right of unilateral cancellation by the defendant of any chit issued to him by the plaintiff.

15. However, if I have correctly understood Mr. Lau's sub-missions on this aspect of the present case, I do not have to be persuaded that these customary or orthodox tests for the implication of a term are satisfied. Instead, he referred me to Liverpool City Council v. Irwin [1977] A. C. 239, and invited me to follow the recent decision of the Court of Appeal in Tai Hing Cotton Mill Ltd. v. Liu Chong Hing Bank Ltd. and Others [1984] H. K. L. R. 95, and to extend it to the contractual relationship between the parties to the present case, on the basis that the position of the defendant is directly analogous to that of a banker, and that of the plaintiff is correspondingly similar to a banker's current account customer i.e. it is under a duty to take reasonable care in the operation of its account with the defendant. Mr. Lau contends that the supposedly absolute or unlimited responsibility of the defendant for the use of chits issued to it is no different from a banker's obligation to honour cheques drawn by its customer.

16. In the context of the present case, I consider that these superficial similarities are more contrived than real. I am prepared to accept that, if the defendant is legallyl entitled to notify the plaintiff that it wishes to cancel chits which are neither lost nor stolen, it may be necessary to imply a term that the plaintiff should exercise reasonable diligence to ensure that these chits are not honoured. But that is a different matter from the question whether it is necessary to give, by implication of fact or law, a right on the part of the defendant to give notice to cancel chits which are neither lost nor stolen, according to the proper construction of the standard conditions.

17. Although I may be bound by this recent decision of the Court of Appeal, I am not persuaded that I am obliged to extend it to the situation now before me. Insofar as the Court of Appeal was breaking new ground, I consider that it was doing so only in the context of the special relationship between a banker and its customer. I do not think that it was intended or contemplated that the duty found in that case should, or could, be extended to other relationships which involve the provision of credit facilities. It may be the case that, in the special sphere of banking law, the result of the cited case was just and reasonable. Whether it can properly be achieved by the courts, or only by legislation is, perhaps debatable. But, until the opinion of the Privy Council on the issues involved in that particular case is made known, I do not think that I should extend it to the present case, especially as I do not think that it has any direct bearing upon the question whether the defendant was entitled to cancel the disputed chits. In my respectful view, the defendant's reliance upon this decision, though ingenious, is mainly misconceived.

18. The defendant's third ground for disputing liability in this case appears to be based on the proposition that the relationship between the plaintiff and the defendant was sufficiently proximate that, in the reasonable contemplation of the plaintiff, carelessness on its part would be likely to result in damage to the defendant, and, accordingly, the plaintiff was under a legal duty to take the preventive measures I have mentioned upon receipt of notice of cancellation from the defendant. It is contended that this duty arises out of modern cases on the scope of the tort of negligence.  cf. Home Office v. Dorset Yacht Co. Ltd. [1970] AC1004; Anns v Merton London Borough Council [1978] AC 728, of which the recent decision of our Court of Appeal is merely an example of its application to parties to a special contractual relationship. It is further contended that there are no reasons for restricting or cutting down this duty of care, since the class of persons to whom the plaintiff issues its chitbooks is relatively small, and the plaintiff can perform its duty with relative ease.

19. Accepting these arguments for the moment, I must confess that I have difficulty in appreciating how they afford the defendant any defence to the plaintiff's present claim. It seems to me, that the defendant's remedy, if any, would take the form of a counterclaim for damages for breach of this duty of care. No counterclaim has been pleaded; nor is it alleged that the plaintiff is estopped from holding the defendant responsible for goods supplied against the disputed chits because it was in breach of this duty of care. But, assuming that, upon a generous interpretation of the defendant's pleadings and the arguments advanced before me, the defendant is really contending that the plaintiff was not entitled to debit the disputed chits to the defendant, because it was in breach of its duty of care, I consider that it is relevant to take into account the defendant's conduct in relation to its use of the chits supplied by the plaintiff.

20. In my respectful view, there is considerable merit in Miss Kwan's submissions that, before resorting to an implied term or duty of the kind suggested by the defendant, the court should consider whether the defendant was under some corresponding duty and had discharged that duty. She forcefully points out, and I find as a fact, that the defendant re-issued some of the disputed chits to one of its customers (Mr. WONG Wai - woon) on the 4th May 1984, despite the fact that Mr. Wong was already in substantial default in discharging his indebtedness to the defendant. It seems to me that, whilst the plaintiff must have contemplated, at the time when it entered into the contract with the defendant, or issued chits to the defendant, that the defendant might suffer some loss as a result of re-issuing these chits to its customers, and their subsequent unauthorised use, the plaintiff can, nevertheless, reasonably contend that the loss suffered by the defendant is directly attributable to its own conduct, and not directly referable to any breach of an existing duty on the plaintiff's part. Alternatively, the plaintiff can reasonably contend that the fact that the defendant intended to re-issue chits to other persons is a consideration which "ought to negative, or to reduce or limit the scope of the duty or the class of person to whom it is owed or the damages to which a breach of it may give rise" (per Lord Wilberforce in Anns v Merton London BC supra at 752. It may be more appropriate to regard these counter-submissions as being relevant to the existence of the alleged duty to use reasonable diligence to prevent certain chits from being honoured, or to the question whether, in the particular circumstances, that duty was broken. But, I also consider that they have some bearing upon the question whether such duty of care can be "triggered" by the defendant's unilateral act of givingnotice of cancellation.

21. It seems to me that the Tai Hing Cotton Mill case and the recent decisions of the House of Lords, already cited, indicate that the same conclusionor destination may be reached by two different routes - the shorter contractual route or the more tortuous tortious route. But, if I have correctly understood Mr. Lau's submissions, he contends that if he fails to get to his destination via the contractual route of an implied contractual term, he can still get there via a duty imposed by the law governing tortious liability. That may be the case. But in the context of the present case, acceptance of that argument would involve recognition of the proposition that, although the relationship of the parties, at the time when they entered into their agreement (or at the time when the plaintiff issued chit-books to the defendant) was not sufficiently proximate to give rise to a duty of care, such proximity can be brought about simply as a result of the subsequent conduct of the defendant with regard to the chits placed at its complete disposal and under its control. In my view, that would involve the introduction of a novel concept to the law governing tortious liability. It seems to me that, in the absence of some express promise or undertaking on the plaintiff's part, the defendant must bear the risks inherent in placing these chits in the hands of persons who are not subject to its immediate control. Accordingly, I turn to the question whether the plaintiff expressly agreed to take the protective measures in the circumstances which have occurred in this case.

22. On this aspect of the case, I am mainly concerned with the evidence of Mr. LAM Kwok-leung, of the plaintiff, and Mr. Chang Fung Chiu, of the defendant. Furthermore, I am only concerned to ascertain what was agreed at a meeting in the plaintiff's office in or about February or March of 1983, because it is common ground that whatever was then agreed reed between Mr. Lam and Mr. Chang, who was they a partner in a firm know as Mei Kan Motors, governed the contract later made between the plaintiff and the defendant, after the latter's incorporation. Nevertheless, Miss Kwan has quite properly and forcefully relied on certain aspects of the defendant's conduct in or about July 1984, for the purpose of demonstrating that Mr. Chang should not be -regarded as a credible witness as to what was agreed in 1983, or subsequently. Although there are undoubtedly apparent contradictions or inconsistencies in this aspect of Mr. Chang's conduct and his evidence, it is fair to say that similar defects are to be found in the evidence of the plaintiff's witnesses.

23. Some of these features of the evidence before me are no doubt attributable to defects in recollecting details of conversations after the passage of time. Some of the differences may be due to a subconscious desire to justify postures assumed, or judgments reached, hurriedly and stubbornly when the events leading to the present dispute actually occurred. There is, in my view, considerable confusion, or, both sides, as to the precise sequence and content of the various exchanges between Mr. Chang and various employees of the plaintiff in July 1984, consequent upon the defendant's attempt to cancel a surprisingly large number of chits, possibly because these events and exchanges took place at a speed and in circumstances in which snap decisions were called for, and were made. During the trial, there were moments when I gained the impression that some of the plaintiff's witnesses were being less than frank or truthful in their answers to certain questions, and were endeavouring to cover up for mistakes, errors of judgment, or other weaknesses or defects in the plaintiff's internal management or organisation, or, perhaps, seeking to protect the interests of those service stations which had honoured chits, in disregard of the plaintiff's circulars. At the same time, I have not overlooked the possibility that Mr. Chang's evidence may have been specially tailored to overcome his difficulties with his own customers, and to avoid being saddled with a liability to the plaintiff.

24. It is, however, tolerably clear that, whereas the defendant, in my view, genuinely believed that it was acting in accordance with a special agreement, made with Mr. Lam on behalf of the plaintiff in 1983, the plaintiff's witnesses, in July 1984, regarded the contract between the plaintiff and the defendant as governed solely by the standard conditions printed on the cover of the chit books. It is, in my view, significant that Mr. Lam belonged to the section of the plaintiff's organisation concerned with promoting sales. In 1983 he was a senior sales representative, and is now senior merchandiser in the retail department. With the exception of Mr. Chang Chi Yan, who is the retail sales manager, the other witnesses worked in the credit department handling the day-to-day operation of chit - book accounts. It is not clear whether, in July 1984, there were any enquiries within the plaintiff's organisation to ascertain from Mr. Lam what precisely had been agreed in 1983, before the other employees of the plaintiff decided to handle the defendant's purported cancellation of a large number of chits in the way that they did. If there were, and Mr. Lam's recollection of his meeting with Mr. Chang was similar to the evidence he gave before me, it is not surprising that the other witnesses regarded the contract with the defendant as governed by the plaintiff's standard conditions, and viewed with suspicion the circumstances in which the defendant sought to cancel the chits in question.

25. According to Mr. Lam, when Mr. Chang visited him at the beginning of 1983 to enquire about the plaintiff's chit account, he merely explained how to use and re-order chits, and the general mechanics of the operation. He did not explain the relevant terms of the intended agreement, apart from advising Mr. Chang to take great care of the chit books, and to report any loss or theft as soon as possible, and in writing, and that, in the event of theft, he should make a report to the police. Mr. Chang asked no questions, but his attention was drawn to the conditions of use on the cover of the chit book, and he was invited to look at them when he left the plaintiff's office. That, in essence, was all that Mr. Lam said in examination in chief then cross-examined, he denied that Mr. Chang told him that the chit books would be issued to Mr. Chang's customers, and that Mr. Chang was worried in case his customers did not pay. He further denied that he was asked if the plaintiff would "chase after" such customers or cancel chits issued to them; and, denied that he gave any assurance that the plaintiff would merely notify the service station, if Mr. Chang notified his desire to cancel any chits. He also denied telling Mr. Chang that he would be liable for chits honoured during the period of three days after notice to the plaintiff.

26. In my view, these denials are not surprising. What are, in my view, significant, are the matters which Mr. Lam agreed were mentioned at this meeting. He agreed that t Mr. Chang told him that he (Mr. Chang) was in the business of buying, selling and repairing taxis; that he operated 20-30 taxis, driven by his own drivers or rented out to others, and wanted his management of taxis to be more systematic (which, incidentally, was one of the advantages alluded to in the plaintiff's circular (p. 1 of the Defendant's Bundle), sent to Mr. Chang's firm in 1982!), Mr. Lam also agreed that he told Mr. Chang that he would receive a discount on petrol supplied, and that Mr. Chang had a similar chit-account with another supplier, viz, Mobil. But, the denied that Mr. Chang mentioned the details of his agreement with Mobil.

27. Mr. Chang testified that he told Mr. Lam that he would use the chit-account for himself and his customers, to whom he would re-issue chits supplied by the plaintiff. He mentioned that he already had a similar account with Mobil, which gave him a discount of 25 cents on every gallon supplied, and "chased after" his defaulting customers. He asked if the plaintiff would offer the same advantages. He was told that he would receive the same discount, but that the plaintiff would not "chase after" Mr. Chang's customers. That would be Mr. Chang's responsibility. The plaintiff would merely stop the chits on receipt of a telephone call, but Mr. Chang would be liable for chits honoured in the next three days. He asked Mr. Lam to put these assurances into writing, but did not press this request, when Mr. Lam told him that the plaintiff was a big company and did not normally put such things in writing, and asked him to trust Mr. Lam. Mr. Chang accepted the terms and conditions offered by Mr. Lam, because, although not as favourable as those offered by Mobil, they gave him and his customers access to more service stations than those operated by Mobil.

28. I have given very careful consideration to counsel's submissions on various aspects of the evidence which tend to diminish the credibility or reliability of Mr. Lam and Mr. Chang. But, at the end of the day, I prefer Mr. Chang's account of what was discussed and 3 agreed at this meeting with Mr. Lam. It is clear from some of Mr. Lam's answers under cross-examination that their discussion went far beyond a simple explanation of the mere mechanics of the operation of the plaintiff's chit-account. Given his supposedly limited knowledge of the nature and extent of Mr. Chang's business, it is, in my view, wholly unrealistic to accept his denials that Mr. Chang mentioned the difficulties he might encounter from extending similar facilities to his customers. I am satisfied that Mr. Chang did mention these with a view to obtaining assurances of facilities similar to those he enjoyed from Mobil. I do not accept Mr. Lam's evidence that he was never made aware of the details of Mr. Chang's arrangements with Mobil. I am satisfied that Mr. Chang did so for two reasons, viz, to ascertain what discount the plaintiff would give him - which he described as "the kickback" - and what protection, if any, the plaintiff would give him against defaulting customers. Faced with Mr. Lam's blanket denials, Mr. Chang could have strengthened his case by falsely asserting that he was given assurances that he would receive the same advantages he enjoyed from Mobil. He did not do so. He accepted the limited protection which the plaintiff was prepared to offer. Although he has sought (no doubt on the advice of his lawyers!) to extend the scope of the plaintiff's legal obligations, in the course of these proceedings, it is noticeable that he has never asserted that the plaintiff ever agreed to "chase after" his defaulting customers.

29. Accordingly, I find as a fact that, in or about February or March 1983, Mr. Lam, acting on behalf of the plaintiff, expressly agreed that Mr. Chang could give notice of his desire to cancel chits issued to his customers, in the event of their default, and that the plaintiff would take reasonable steps to prevent those chits being honoured by its service stations, or to ensure that he was not held accountable to the plaintiff in respect of any chits honoured by service stations after three days from the date of his notification to the plaintiff. I further find that these assurances were not confined to chits which were "lost or stolen", in the strict or narrow sense. Nor were these assurances conditional upon the return of all ''unused chits" to the plaintiff, or a report being made to the police. In my view, the return of unused chits was only required in the event of the defendant's intended departure from Hong Kong, or it's decision to terminate entirely its credit facilities with the plaintiff. Furthermore, at the most, a report to the police was only required if any chit was "stolen".

30. At this juncture, I would merely observe that I have not been able to derive any assistance from the correspondence exchanged between the parties' solicitors, beginning with the letter of the 13th July 1984 from the plaintiff's solicitors. It seems to me, with the utmost respect, that this correspondence indicates that the parties' solicitors had not fully appreciated the extent or nature of the differences between the parties to the present dispute, or taken full instructions from their respective clients.  It is arguable that, even at that stage, the plaintiff was prepared to concede that the defendant was not liable to the plaintiff in respect of the disputed chits if it was prepared to support its stance by making a formal report to the police. I find as a fact that the defendant did make a report to the police, regarding the disputed chits and its inability to obtain payment from its customers, viz Wong Wai woon and Lo Wing Cheung, on or about the 12th July 1984, in response to a suggestion made by Mr. Lam shortly before that date. At the same time, I can easily appreciate why the police did not accept this report as one involving the commission of a criminal offence, as distinct from a civil matter, over which they had no interest or jurisdiction.

31. In my view, these findings are sufficient to dispose of the issues in this case. It is strictly unnecessary to make findings of fact as to what transpired between the plaintiff and the defendant in July 1984, after the defendant had notified the plaintiff that the disputed chits should be cancelled. The difficulty of making findings of fact as to the precise sequence of events at that time, is, in my view, largely due to the fact that the plaintiff's witnesses were not then aware of what had been agreed in 1983 or, if they were so aware, chose to ignore it, in order to protect Mr. Lam from the consequence of having committed the plaintiff to an agreement which went beyond its standard conditions. Instead, they assumed, or adopted the stance, that the plaintiff's agreement with the defendant was solely governed by the standard conditions, and that none of the chits included in the defendant's notice of the 9th July 1984 was "lost or stolen." As to the latter feature, their suspicious were, perhaps, understandable.

32. I am unable to accept that the plaintiff's employees responded to the defendant's notice of the 9th July 1984 solely as a matter of "grace and favour", designed to minimise the loss which the defendant might suffer from having issued the relevant chits to its customers. Although they took steps to instruct service stations not to honour the chits in question,they clearly knew that these instructions might be disregarded. Furthermore, they deliberately refrained from informing the computer department that such instructions had been given to the service stations, with the consequence that the computer did not automatically reject chits which were honoured after the 3-day period.

33. It is, in my view, clear that the events of July 1984 began with a telephone call by Mr. Chang to Mr. Lam Kwok Leung, on or about the 7th or 8th July, in the course of which Mr. Chang indicated that he wished to cancel a large number of chits, which he had issued to customers who had failed to pay the sums they owed to the defendant. It is significant that, at that point, Mr. Lam did not tell Mr. Chang that he could not cancel chits issued to his customers. He merely asked him to put the numbers of the chits in writing because they were so numerous. Nor did he, at that time, ask if Mr. Chang had made a report to the police. In my view, the defendant's written notice dated the 9th July 1984 was sent in response to Mr. Lam's request. At about that time or shortly afterwards, I think that Mr. Cheung Yin Hung, the manager of the credit department, and Mr. Cheng Chi Yan, the retail sales manager, came to the conclusion that the chits were neither stolen nor lost. Acting on their instructions, Mr. Lam then asked Mr. Chang to make a report to the police and to give the plaintiff some form of undertaking in respect of the cancelled chits. The defendant's second written notice dated the 13th July 1984 (pages 21 & 22 of Plaintiff's Bundle) was sent in response to this request. On the 13th July 1984, after this notice had been sent to the plaintiff, Mr. Chang spoke to Mr. Cheng. I find as a fact that this was the first time that the plaintiff indicated to Mr. Chang that the chits could not be cancelled because they were not lost. Mr. Chang was clearly annoyed at what he regarded as an attempt to renege on the promises given earlier by Mr. Lam.

34. I have considered very carefully whether Mr. Chang's conduct at this time indicated that he accepted the plaintiff's version of their agreement. I do not think it does. I am satisfied that he issued the second notice containing the undertaking, because he realised that the plaintiff would not give instructions to the service stations unless and until it received such notice. If, as I find, the plaintiff had expressly agreed to take the protective measures in respect of chits issued to the defendant's customers, the plaintiff gave no consideration for the defendant's undertaking. It undertook to do no more than it was contractually bound to do. The undertaking would only be binding on the defendant, if the plaintiff was only obliged to cancel lost or stolen chits.

35. For the aforesaid reasons, I consider that the plaintiff was not entitled to debit the defendant's account with the cost of goods supplied in exchange for the disputed chits. Accordingly, I find that the defendant is only liable for the amount conceded at the trial.

36. It is also not really necessary to decide whether the chits in question were "lost" or "stolen" within the meaning of those words in the standard conditions. But, in case this goes further, I will state my conclusions on this aspect of the case. Mr. Lau contended that the chits were stolen, because the defendant's customers had failed to return them after the bailment thereof had been terminated, upon cancellation of the credit facility, and despite demands for their return. He argues that this amounted to an appropriation of property belonging to the defendant. I am not convinced that mere retention, as distinct from an express refusal, by a bailee, after the bailment has been determined, is an appropriation within the meaning of section 4(1) of the Theft Ordinance (Cap. 210), since it does not obviously connote keeping the property "as owner". Even if it does amount to appropriation, the other ingredients of theft, e. g. dishonesty, intention of permanently depriving the other person, were not obviously present at the time when the defendant made its report to the plaintiff or to the police. The subsequent use of the chits might complete these ingredients, but on the evidence before me this did not take place until the 20th July 1984, at the earliest. On the proper construction of the plaintiff's standard conditions, I consider that a chit must have acquired the quality of being "stolen" before a report is made to the plaintiff.

37. In support of his argument that the chits were "lost", Mr. Lau referred me to the definitions of "loss" at p.180 of Vo1.3 of the 2nd edition of Words and Phrases Legally Defined and Sivewright v. Allen [1906] 2KB81. With respect, I do not think that these sources offer any guidance on the meaning of "lost" in the standard conditions. In my view, Mr. Lau was on stronger ground by contending that the chits were "lost" if the defendant had been deprived of them and could not recover them. However, I do not consider that the evidence before me establishes these features of his suggested definition. I conceive that I must consider the meaning of "lost" on the basis that the defendant did not obtain any contractual undertaking from the plaintiff to assist it in the event that its customers defaulted in settling their accounts with the defendant. It seems to me that a person can hardly be said to be deprived of something when he has voluntarily parted with possession of it to another, under a contract which does not expressly stipulate that it must be returned to him in certain circumstances. No such provision is to be found in the agreement between the defendant and its customers (see e. g. pages 49 and 50 of Defendant's Bundle). In this respect, I think that there is some substance in Miss Kwan's submission that the defendant had no right to demand the return of the chits from its customers. For my own part, I would not go along with her suggestions that the chits were delivery orders, or that the defendant transferred its property therein to its customers forever. Nor do I think that the authority she cited (Eisinger v. General Accident Fire and Life Assurance Corpn. Ltd. [1955] IWLR 869) supports her argument. The distinction drawn in that case by Lord Goddard C. J., between loss of the car and loss of the proceeds of its sale, could, in my view, only be applied to chits used by the defendant's customers before the defendant cancelled its credit facilities to such customers. Nevertheless, I consider that her submission that a chit is not "lost" if it can be found or located, after taking reasonable steps to trace it, more accurately reflects what was meant or contemplated by its use in the plaintiff's standard conditions. On the basis of the scanty evidence before me, I do not think that the defendant has established that the chits which it issued to its customers were beyond being found or recovered at the time when it gave either of its notices of cancellation. Accordingly, this alternative basis for denying liability to the plaintiff in this case must, in my view, fail.

Certified true copies,

(L. Leung)

Stenographer

21.6.85