Golden Force Ltd. v. Ki Din Kong t/a Xiang Fa Trading Co.

HCA005026/1995

1995, No.A5026

IN THE HIGH COURT OF HONG KONG

COURT OF FIRST INSTANCE

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Coram : Hon Mr Justice Cheung in Court

Date of hearing : 31 March and 1, 2, 3, April 1998

Date of delivery of judgment : 3 April 1998

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J U D G M E N T

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1. The Plaintiff was engaged in a business of garment trading by contract dated 6th May 1994 made between the Plaintiff and the Defendant. The Defendant agreed to manufacture for the Plaintiff 2,240 pieces of long cotton coat at the price of US$73,296. The chop of the Defendant was imposed on the contract. The signature of the contract was Mr Chan Wai Fu, for the Defendant. On the Plaintiff's party, contract was signed by Mr Vincent Chiu on behalf of the Plaintiff. He was the Merchandising Manager of the Plaintiff at that time. He have since left the company. The practice of the Plaintiff was that the staff of the Plaintiff could sign contracts with the manufacturer and Miss Wong, the Director of the Plaintiff would sign contract with his customer. In any event this contract was signed with the approval of Miss Wong.

2. The goods under the contract would be required by the Plaintiff for resale to a customer in Greece. The defects of the goods were discovered in the course of the production and at the time when they were delivered to the Plaintiff. The Plaintiff found the goods unacceptable but the Defendant requested the Plaintiff to ship the goods and agreed that if there should be a complaint to the goods in 1994 the Defendant would be responsible. The Plaintiff agreed and paid the Defendant the purchase price of the goods. The goods were shipped to the Plaintiff's customer and the customer rejected the goods because of their defective condition on 2nd November 1994. At a meeting held in the Defendant's premises in mid November 1994, Mr Chan Wai Fu, on behalf of the Defendant, and Mr Dennis Chan agreed to pay to the Plaintiff the full purchase price of the goods at HK$551,379.55 by way of compensation of the Plaintiff's claim. The Defendant has since failed to pay the compensation. The Plaintiff claimed the sum of HK$551,379.55. Alternatively, the damages for breach of contract which consists the purchase price of the goods and loss of profit in the sum of HK$648,598.75.

3. According to Miss Wong, Chan Wai Fu was introduced to her by Vincent Chiu in early 1994. Mr Chan told Miss Wong that he had authority to receive and issue orders on behalf of the Defendant although he did not tell Miss Wong that he had any shares in Xiang Fa. He told her that he was a partner. He said if there was any interest to share he was entitled to share it. He further told Miss Wong that he had a partner in China who had a strong financial background. Throughout the transaction Miss Wong dealt with Mr Chan, the name cards presented to her by Chan for the names of Fortune Bright Enterprises Limited and Xiang Fa Trading Company.

4. According to the Business Registration, the Defendant, Mr Ki Din Kong is the sole proprietor of a firm called Xiang Fa Trading Company. Miss Wong had never met Mr Ki, the Defendant until early 1995 when she went to the Defendant's office to demand payment of the compensation. Miss Wong, in her evidence, said that she only knew of the actual identity of the Defendant when Mr Chan told her at the end of December or the beginning of 1995 of the separation of the companies.

5. The Defendant, Mr Ki claimed that he and Mr Chan had a joint venture agreement in the garment manufacturing business between 1st January 1994 and the end of June 1994. The terms of co-operation were that business would be conducted in the name of Xiang Fa. The operation fees would be paid firstly by Xiang Fa. After the business was concluded, if there was any profit after deducting the fees, the profits would be divided between him and Mr Chan. Xiang Fa would get 60% whereas Mr Chan would get 40%. If there was any loss, the loss would be treated as Chan's debt from Xiang Fa. They would each manage their own staff. Cash borrowed by Mr Chan from Xiang Fa had to be evidenced by receipt or secured with a cheque.

6. The Defendant said that Chan had entered into three contracts with the Plaintiff in the name of the Defendant. One of the contracts was the contract in this action. The deposits for the three contracts in the sum of $554,427.32 when the co-operation between the Defendant and Mr Chan was terminated, the three contracts and the deposits were turnovered to Mr Chan's company called Oriental Enterprise Company. They also signed a Memorandum on 30th July 1994 regarding the transfer of contracts and the deposits. The Defendant denied that he was liable to the Plaintiff. He said he had never agreed to pay the Plaintiff the sum of $551,379.55. The Defence filed by the Defendant in this case further pleaded that the actual terms of the agreement between the parties were as follows: Mr Chan would compensate the Plaintiff the full purchase price of $551,379.55, but the Plaintiff was to place an order for 46,000 pairs of jeans with Mr Chan so as enable Mr Chan to pay the compensation. The Plaintiff would open a Letter of Credit for the order of the jeans in favour of Chan in December 1994. Chan would effect part payment of $300,000 before Chinese New Year and the rest by installments. The Plaintiff, however, failed to open the Letter of Credit in favour of Chan in December 1994 as a result Mr Chan failed or refused to make payment to the Plaintiff. The Defendant contented that the right of the Plaintiff was extinguished or merged in the Settlement Agreement. The issues in this case are as follows:

(1) What was the actual relationship between the Defendant and Mr Chan?

(2) Did Mr Chan had authority to carry out transactions on behalf of the Defendant?

(3) Did the Plaintiff agree to have the contracts transferred from the Defendant to Chan?

(4) Was the settlement by Chan binding on the Defendant?

(5) What was the terms of the Settlement Agreement?

7. In my view, the true relationship between the Defendant and Mr Chan is that of a partnership. A partnership subsists between persons carrying on business in common with a view to profit. (See s.3(1) of the Partnership Ordinance). One looks at the substance rather than a label given by the parties to the relationship. (See s.4). Looking at the terms of the joint venture agreement referred to by Mr Ki, they bore all the hallmarks of a partnership. There was an agreement to share the profits. Although Mr Chan was to bear the loss arising from the business, this would not make the Defendant a mere money-lender because the business was actually carried out in the name of Xiang Fa of which the Defendant was the sole proprietor.

8. On the second issue, the Defendant admitted that Mr Chan had authority to enter contracts for garments or fashions in the name of Xiang Fa. In my view, Chan had the authority to bind the Defendant by virtue of their relationship. Throughout the transaction, the Defendant was quite prepared to let Mr Chan carry out the transactions on his behalf. Apart from the contract in question which was included in the three contracts that the Defendant admitted had been entered with the Plaintiff, Chan had signed on behalf of Xiang Fa a total of seven contracts with the Plaintiff. These contracts were signed between 25th March 1994 and 5th May 1994. All the contracts were performed. They were handled by Chan and Dennis Chan. Despite the Defendant's claim that before 1st July 1994, Chan had to consult him before receiving money under the contract, this restriction was not made known to others dealing with the Defendant. Mr Chan, in his evidence, said that he only need to notify the Defendant before he demand payment from the buyer. The idea of Chan consulting or notifying the Defendant in advance just does not make sense. Chan had authority to sign contracts. He was responsible for production. He had authority to ask Dennis Chan to sign contracts on behalf of Xiang Fa. Mr Chan had been in business for over 20 years. Vested with such authorities I just do not accept that Chan would be required to notify Mr Ki before purchase price was collected.

9. The third issue is: did the Plaintiff agree to the transfer of the contract. I accept Miss Wong's evidence that when she was introduced to Chan, Chan told her that he was a partner of Xiang Fa and gave her his name card. There is no reason why she should be concern with the actual business relationship of Chan and the Defendant. The Defendant's case is that the Defendant and Chan agreed later that Oriental should takeover the contracts. In my view, whatever agreement that had been reached between Chan and Mr Ki regarding Mr Chan or Oriental taking over the contracts would not bind on third parties until the third parties agreed to the transfer. The contemporary documents issued by the Plaintiff after June 1994, i.e. after the relationship between Mr Ki and Chan had been terminated, were all addressed to the name of the Defendant. Likewise, documents of the Defendant were issued to the Plaintiff. Of the documents disclosed in this case, only four documents from the Plaintiff bore the name of Oriental. These documents were faxed from the Plaintiff to the Defendant dated 7th September, 21st September, 22nd September and 26th September. In three of these documents the name Xiang Fa was named in brackets side by side with that of Oriental. One document was addressed to Xiang Fa with Oriental in brackets. These documents were prepared by Vincent Chiu. In her Witness Statement, Miss Wong said that when she saw the fax dated 26th September 1994, she did not know why this had happened. On enquiry, Chiu said Mr Chan had requested that the contract be transferred to Oriental as Chan was leaving Xiang Fa. Wong told Chiu that she would not agree because the Plaintiff had paid Xiang Fa a deposit of $380,205.87. This included the deposit of the contract in question. Xiang Fa had opened the Letter of Credit for the purchase of the fabric under the contract. Chan did not have financial resources to support the production of the goods. There was no notification from the Defendant that Chan was leaving and there was no request from the Defendant for transfer of the contract to Oriental. Her evidence in chief, however, was that she only became aware of the name of Oriental on these documents when the litigation began. She had not seen the name of the Oriental on the documents. She has not asked Chiu why he wrote the two names of Oriental and Xiang Fa. Upon being questioned by the Court, Miss Wong maintained that she only became aware of the names on the documents when the litigation began. She, however, confirmed that Chiu had told her that Chan had requested transfer of the contracts to Oriental. She refused and gave the reasons. This took place before the settlement conference in November 1994. She attributed the mistake in her Witness Statement as confusion that occurred in the taking of statements with her lawyers. I accept what Miss Wong said.

10. Mr Chiu was merely a Merchandising Manager and he certainly had no authority to agree to a transfer of the contract. In his evidence, Mr Vincent Chiu said he told Mr Chan that he had to inform Miss Wong of Mr Chan's request for transfer. The fact that the name Oriental appeared in the document is not an indication that the Plaintiff had agreed to the transfer of contracts by Oriental. If there was an agreement by the Plaintiff to have the contracts transferred to Oriental, then one would expect the only name that would appear in future documents would be Oriental. In respect of the contract in question, the Defendant had issued two invoices dated 24th September 1994. These invoices were stamped with the chop of Fortune Bright Enterprise. Miss Wong did not notice the chop was Fortune Bright when she received the invoices. I accept her evidence. Mr Dennis Chan said that Mr Chan asked him to sign these invoices after he, i.e. Mr Chan, had put the chops of Fortune Bright on them. Miss Wong was at one time presented by her colleague an invoice dated 14th August 1994 from Oriental Enterprise Company. As the Plaintiff did not have any contract with Oriental, he asked her colleagues to telephone Mr Chan to issue an invoice from Xiang Fa. Xiang Fa later issued an identical invoice dated 11th August 1994. This is totally inconsistent if Wong had agreed to the transfer.

11. In this case there were five invoices with the chop of Xiang Fa but without the signature inside the chop. There was one invoice without chop or signature. I accept Miss Wong's evidence that these matters were not noticed when the documents were received. There was the question of a cheque issued by the Plaintiff to the Defendant for the payment of the purchase price of the contract in question. The payee of the cheque was still Xiang Fa Trading Company. One would have thought that was the clearness indication that the Plaintiff was still contracting with the Defendant. However, it was argued by the Defendant that the Plaintiff did not cross out the word "bearer" on that cheque. The events leading to the issue of the cheque are these after the defects were discovered and after Chan to be responsible the Plaintiff prepared a Letter of Guarantee which recorded the defects and the agreement of Xiang Fa to be responsible for the defects. The Letter of Guarantee was, however, not signed by Chan. Chan later asked for the payment of the goods. The Plaintiff wanted to have the signed Letter of Guarantee first. Chan told Miss Wong that since he had acknowledged the defects in the Inspection Certificates which were the same as those recorded in the Guarantee. Chan wanted the cheque to be issued to himself. This was refused by Wong. Chan said that the Defendant was the only authorised signatory in the bank and he was not in Hong Kong, and Chan needed the cash to deal with the productions of the goods.

12. As Miss Wong was informed by the Plaintiff's bank that bearer cheques could be cashed, she issued the cheque in favour of Xiang Fa without crossing the word "bearer". The way the cheque was handled does not in any way support the Defendant's case that the Plaintiff had agreed to the transfer the contracts. This was not the first time that cheques issued to Xiang Fa was not crossed. There were six other cheques paid to Xiang Fa between 29th July 1994 to 7th October 1994 which were not crossed. Prior to July 1994, three cheques were issued to the Defendant, they were crossed. Two of them bore the stamp "Not Negotiable. Account Payee Only". In July 1994, Chan asked for the cheques to be issued in his name. This was refused by Miss Wong. Chan told Wong that he needed the cash, and if the cheque was crossed then it would take a long time to take the money out from the bank. Furthermore, Chan had brought along the chop of Xiang Fa and Wong agreed not to cross the cheque.

13. Wong had known Chan for a long time. Chan was also a friend of Vincent Chiu. Wong was assured by Chiu that there was no problem with this arrangement. She was not suspicious that anything was a miss. In my view the decision not to cross the cheques from July 1994 onwards is not an indication that the Plaintiff had agreed to have the contracts transferred to Oriental. It is also not an indication that the Plaintiff was aware that from that time onwards, Chan no longer had authority to act for the Defendant. She did not cross the cheques in order to enable Xiang Fa to obtain payment quickly. Although Miss Wong said she only knew of Oriental at the end of 1994, it is apparent from the evidence that she must have come across the name Oriental at the earliest in August 1994 when an invoice from Oriental was received. However, this does not mean that she accept Oriental as the contracting party, otherwise she would not have asked Chan to issue an invoice from Xiang Fa. There is no doubt that in reviewing Miss Wong's evidence, there are discrepancies the which in her evidence which I had already referred. She readily admitted that she had made mistakes. She attributed this to the passage of time that she was pregnant in 1994 and she took sometime off after giving birth, and she might have misunderstood her lawyers. All in all, I am satisfied that Miss Wong is an honest witness. In June or July 1994, Chan told him that he would not worked for Xiang Fa but for his own company. The two companies have been divided up and their contracts would be followed up by Oriental. Chiu told Chan that basically there was no problem but he had to inform Miss Wong. When Miss Wong was informed she said no problem. In his Witness Statement which he adopted as his evidence in Court, Mr Vincent Chiu said

" 而這是我當時確實已知會公司負責人，即前僱主Connie Wong 小姐，而因當時大家抱著只要把訂單完成和陳偉夫先生仍然是執行生產商責任便可，誰管他換上什麼公司名稱，故當時在雙方明白的情形下，沒有把原來的合同修改."

He did not mention in his Witness Statement that Miss Wong had told him that there would be no problem. I do not accept Vincent Chiu's evidence. If Miss Wong had agreed to the transfer of the contract, there was no reason why in the weeks that followed he should continue to send fax to Xiang Fa regarding the contracts. I accept Miss Wong's evidence as I have said that she had refused to accept the transfer and gave reasons for the refusal. Mr Chan said he had told Miss Wong of the change of Xiang Fu and Oriental and asked for the change for the transfer of the contracts. Wong said that there would not be any problem. Wong told her that since the company name was stored up in the computer, altering it was relatively troublesome and it would be alright if the money was to be paid to Oriental. I do not accept the evidence of Mr Chan.

14. What transpired afterwards was totally inconsistent with Miss Wong agreeing to the transfer in terms of payment of the goods and the documentation. Mr Chan further said that it was Miss Wong who suggested that cheques would be issued to Xiang Fa according to the contract, but if it was not crossed one would withdraw cash. I accept Miss Wong's evidence that the reason why she did not cross out the cheque was really to accommodate the Defendant. In my view, Chan is not a trustworthy witness. I accept Miss Wong's evidence that when she pressed him for payment, he told her that she was not responsible because the contract was with Xiang Fa. On the other hand when Mr Ki asked him about the matter, he told Mr Ki that the Plaintiff should be dealing with Oriental. He was simply paying off one person against the other. If Wong had actually agreed to the transfer of contracts, there was no reason why Chan still issued invoices in the name of Xiang Fa and agreed to replace an invoice by Xiang Fa with one issued in the name of Oriental. After all, Chan and the Defendant had already terminated their business relationships. Certainly from Mr Ki's standpoint, after 1st July 1994, all things relating to the Plaintiff had nothing to do with him. I deal with the authority to settle.

15. Regarding the settlement in November 1994, the Defendant said that his relationship with Mr Chan had terminated. However, this was an arrangement between these two partners only. A person who deals with a partnership after a change in his constitution is entitled to treat all apparent members of the old partnership as being its members until he has noticed of the change (s.38(1) of the Partnership Ordinance). Miss Wong denied that she knew about the termination of the relationship of the Defendant and Chan. I accept her evidence.

16. Michael Chiu told her that Chan wanted to transfer the contract to Oriental. In my view, this is not necessarily something that alerted her that Chan no longer has authority to represent the Defendant. On the contrary, invoices were continued to be issued in the name of Xiang Fa seeking payment of goods, and a settlement was conducted in the office of the Defendant. A third party just cannot be laboured with the burden of finding out the private arrangements between the Defendant and Mr Chan about their respective contribution to the office cost. Even after the relationship had been terminated, Chan was still signing receipts in the name of Xiang Fa to the cheque dated 29th July 1994. The chop of Xiang Fa was used for the receipt. How could a third party be expected to know that Chan's authority to represent the Defendant was no longer in existence with this sort of background.

17. I am satisfied that at the time of the settlement, the Defendant still had the apparent and ostensible authority to act for the Defendant.

Terms of the Settlement

18. I accept the Plaintiff's Greek customer had rejected the goods and demanded the Plaintiff to pay the purchase price because of defects. I accept that the Plaintiff had repaid the money by way of credit accounts against future orders of the customer and also by way of cash payment as described by Miss Wong. I do not accept that the Defendant's agreement to pay the compensation was conditional upon the Plaintiff placing the order for the gems. I accept Miss Wong's evidence that Chan readily agreed to pay the compensation. It was then followed by his suggestion that the Plaintiff place a future order with him. Chan might have wished to pay the compensation for the income he might receive from the new order, but the settlement was not conditional upon the Plaintiff eventually placing the order with him.

19. Miss Wong's evidence of the settlement was confirmed by her colleague Miss Hung whose evidence was not challenged. Mr Dennis Chan who formerly worked for Mr Chan confirmed the evidence of Miss Wong as well. Mr Chan denied that there had been any large defects in the garments. He denied that he had seen the letter of guarantee dated 14th October 1994. He said at the end of 1994 Mr Chiu telephoned him saying that the Plaintiff's client had returned one coat produced by Mr Chan because the coat's colour came off. Mr Chiu, however, could not tell him why this had happened because there was no problem at the time of the delivery of the goods. Later on, Miss Wong asked Mr Chan to return all the payment of the purchase price and proposed that the Plaintiff would place another order on Oriental and the profits from that order would be used to pay the compensation.

20. I do not accept Mr Chan's evidence. His evidence is not convincing at all. I accept Miss Wong's evidence in relation to the defects and how the settlement was reached. The question of defects were raised by Vincent Chiu in his earlier letters to the Defendant. There was no written response from Xiang Fa or Oriental on the defects. Mr Chan said that he had in fact communicated with the Plaintiff after July in the name of Oriental. The records were thrown away when his office was repossessed in May 1995. He further alleged that the problems regarding the garments were remedied.

21. The explanation is simply not credible in the light of subsequent documents issued by Chan in the name of Xiang Fa. I find that Xiang Fa and Oriental had not responded to the allegations of defects. I further find that the letter of guarantee was shown to Mr Chan by Dennis Chan, but he chose not to sign on the letter of guarantee. If there was only minor defects, there was no reason why Chan should agree to pay full compensation even if the compensation would come from another order. I further do not accept that Chan had informally sworn that he would only be responsible if it was found that Oriental was liable for the defects. Obviously he had known at that stage the garments were defective and he had previously agreed to be responsible for the claims by the Greek customer.

Subsequent events after the settlement conference

22. Mr Ki said that at the first meeting with Miss Wong, she did not ask him for compensation but rather admitted that he was innocent and that the purpose of seeing Mr Ki was to beg him to find Mr Chan for her. Mr Dennis Chan agreed that Miss Wong had at the meeting said that she knew Ki was innocent although he was not sure whether this was said by her or her husband. He further agreed that Miss Wong had asked Mr Ki's assistants to locate Chan. However Mr Dennis Chan also stated in his evidence that Miss Wong had discussed with Mr Ki about the question of compensation. Miss Wong told Mr Ki the order was placed with Xiang Fa, the deposit was paid to Xiang Fa and there was no official notification of transfer of order and so Xiang Fa should be held responsible for the order.

23. Dennis Chan also said Mr Ki told Miss Wong that he was not clear with the situation, he had discussion with Chan and that the order had been transferred to Chan, and that he would try his best to locate Chan.

24. Miss Wong in her evidence said that she had told Mr Ki what had happened. She and her husband showed Mr Ki all the documents of the customer's request for compensation and asked Mr Ki for a solution to the compensation problem. Miss Wong said that it was her husband who said that they knew Mr Ki was innocent. She explained that the expression was used because they understand Mr Ki was not involved in the daily transaction regarding the order. They also knew Mr Ki had Mr Chan as his partner and Mr Ki had told them that Mr Chan owed him $6-9 million and they understood Mr Ki had not touched that order.

25. I accept Miss Wong's explanation. I accept that she had asked Mr Ki for compensation. What she or her husband had said regarding the innocence of Mr Ki is not an implication that they had agreed to look to Mr Chan for compensation.

26. Mr Chan accepted that he had signed a guarantee dated 15 March 1995 to the Defendant in which it was stated that Oriental would be wholly responsible for the Plaintiff's claim, and that the matter regarding the contract had nothing to do with the Defendant. This is a matter between Mr Chan and Mr Ki. While the Defendant may have a cause of action against Mr Chan, it was not a matter that would affect the Plaintiff.

27. As far as Mr Ki is concerned, he did not notify the Plaintiff the termination of the relationship between him and Mr Chan.

28. At a further meeting between Miss Wong and the Defendant, a suggestion was made that the Greek customer should be persuaded to sell as many garment as possible. Miss Wong did ask the customer to sell the goods and a total of 1,035 pieces were sold. The price that was fetched was US$11,350. The rest of the goods were shipped back to Hong Kong and stored in the Plaintiff's warehouse. Miss Wong said that the goods were preserved for this litigation.

29. The agreement by the Defendant to pay the compensation is a concluded agreement. It is not dependant upon the Plaintiff returning further money or goods to the Defendant. As I am satisfied that there was a settlement for the payment of the compensation, it was not necessary for me to reduce further sums from the claim. Reduction will only become necessary when the Plaintiff claims damages for breach of contract. In view of my finding on the compensation, it is not necessary to deal with the damages for breach of contract.

30. There shall be judgment accordingly to the Plaintiff in the sum of $551,379.55 with interest at 7% per annum from 24th May 1995 to today and thereafter at judgment rate until payment. Costs of the action shall also be to the Plaintiff.

Representation:

Mr Rimsky K. K. Yuen, inst'd by M/s Vincent Chu & Co., for Plaintiff

Mr Ki Din Kong trading as Xiang Fa Trading Co., in person