Isparta Ltd v. B.A.R.T.E.R. (HK) Ltd

HCA001478/1975

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

ACTION NO. 1478 OF 1975

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Coram: Li, J. in Court

Date of Judgment : 6th October 1977 at 3.35 p.m.

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JUDGMENT

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1. If toy sales may be regarded as the 'cream' of commercial or selling projects in Hong Kong these days this action is to determine who is to clean the jug after the 'cream' has turned sour. Without going into the details of material facts I may first refer to the parties in this multiparty action and their relations to one another.

2. The plaintiff is a limited company incorporated in Hong Kong and owned by one Mr. Basevi. The 1st defendant, Barter, is also a limited company incorporated in Hong Kong with its Managing Director, Mr. Peter Lewis. The 2nd defendant, the L.J.N. Toys Ltd., New York, New York is an American corporation. Its Vice President and Executive Director, is Mr. Jack Friedman. The 3rd defendant, the L.J.N. Toys (Hong Kong) Ltd., is a corporation incorporated in Hong Kong the 12th of September, 1972. It is a wholly-owned subsidiary of the 2nd defendant.

3. One of the plaintiff's lines of business is, I take it, the manufacture of toys. As to the 1st defendant, one of its lines of business is to operate as buying and selling agents for various other companies. One of the 2nd defendant's lines of business is to market toys in North American. There is very little reference as to what business is run by the 3rd defendant. It is a wholly-owned subsidiary of the 2nd defendant and it is operating in business in Hong Kong. By an agreement dated the 1st of February, 1971 the 2nd defendant appointed the 1st defendant as its buying agent in Hong Kong. The terms of the agreement read as follows:

that is, the 2nd defendant,

"hereby appoints B.A.R.T.E.R." -

the 1st defendant,

"as buying agent in Hong Kong.

Perhaps I should add that the 1st defendant had previous dealings with the plaintiff from time to time when it bought from other companies.

4. The modus operandi between the parties are as follows: The 2nd defendant is a licencee of certain designs, or trade names, or brand names of various toys. From time to time the 2nd defendant buys through the 1st defendant pursuant to this agency agreement. The 1st defendant, when such purchases are made, will open local Letters of Credit in favour of the manufacturers, and he will be reimbursed by Letters of Credit opened by the 2nd defendant in favour of buyer. When the goods are shipped to the 2nd defendant; then the 1st defendant will finance the project or will pay first for the purchase. At the same time he will be reimbursed by Letters of Credit opened in his favour by the 2nd defendant. If, however, the goods are shipped direct to a client of the 2nd defendant. If, however, the goods are shipped direct to a client of the 2nd defendant in North America, then the 1st defendant still pays for the goods first, but Letters of Credit will be opened in favour of the 3rd defendant and the 3rd defendant will then reimburse the 1st defendant. Such Letters of Credit in favour of the 3rd defendant would be opened directly by the 2nd defendant's client who purchased the goods.

5. The arrangement for sales to Europe are roughly the same, except that instead of Letters of Credit being opened in favour of the 3rd defendant, the Letter of Credit would be opened in favour of the 1st defendant. The 1st defendant will pay for the goods when they are shipped to the client direct in Europe. Letters of Credit would be opened by the client in favour of the 1st defendant, and the defendant will then reimburse itself of the capital costs, his seven percent commission, and then share the profits with the 2nd defendant on a 50-50 basis.

6. The dispute in this action is a typical example of one of such transactions. Sometime in 1973 the 2nd defendant, through Mr. Friedman, was introduced by Mr. Lewis of the 1st defendant to one Mr. Basevi of the plaintiff. Negotiations then took place resulting in a contract signed on the 21st of September, 1973 between the plaintiff and the 1st defendant whereby the 1st defendant purported to purchase 40,000 dozen of toys by the name of Woody Woodpecker Wobler Wood Toys from the plaintiff. There were further negotiations in October, and another 10,000 dozens of such toys were ordered on the 17th of October, 1973 by variation of the original contract. There were several extensions of the expiry dates of delivery and of the Letters of Credit were opened until the 31st of December 1974. Before April, 1974 some 37,062 dozen of these toys were shipped and paid for by the 2nd defendant. The remaining 12,938 dozen of these toys continued to be manufactured; however. No delivery was taken. After repeated demands and failure to take delivery, and failure to effect payment, the plaintiff brings this action against the 1st defendant in his capacity not only as an agent but as a signatory to the original contract in page 10 of the agreed bundle. That is the contract dated the 21st of September 1973 as varied on the 17th of October 1973.

7. The plaintiff also brings an alternative action against the 2nd and 3rd defendants. The 2nd defendant is sued in its capacity as principal. I am not too sure in what capacity the 3rd defendant is sued, but presumably as an agent of the 2nd defendant.

8. At the commencement of the proceedings, all the parties agreed that despite the somewhat involved and detailed dealings the damages, if any of the defendant is found liable, would be $118,000. At the same time the 2nd defendant abandoned its counterclaim against the plaintiff, and, by the same token, presumably against the 1st defendant for damages on the grounds that the goods supplied to the 2nd defendant in America were defective. The only issue, therefore, is since the 1st defendant maintained that throughout he acted as agent for the 2nd defendant, whether any liability can be imposed upon the 2nd defendant. On the other hand the 2nd defendant maintained that the 1st defendant was solely liable and responsible for the order of the 10,000 dozen of toys and certainly for the payment of them.

9. The 1st defendant's case is that the extension by adding to the order of another 10,000 dozen was made by Mr. Friedman of the 2nd defendant. So far as the 1st defendant was concerned Mr. Lewis only agreed at the negotiations that he would market the goods in Europe and try to sell them for an extra remuneration, apart from the commission, in the form of profit-sharing of 50 percent of the profits. As early as February or March in 1974 it was found that the toys were not in such demand in Europe or in America and he had great difficulty in selling them in Europe. For this reason he repeatedly pressed, through Mr. Friedman, the 2nd defendant for instructions as to what he should do with the 10,000 dozen, or indeed, the 12,938 dozen of the toys. The 1st defendant maintains that at all times he was acting as the agent of the 2nd defendant for the whole transaction of 50,000 dozen of these toys.

10. The 2nd defendant's case is that the additional order was made after a series of discussions sometime in October 1973. Such discussions were in the presence of not only Mr. Lewis and Mr. Friedman, but also in the presence of Mr. Basevi and the Canadian agent of the 2nd defendant. In several of these meetings, the 1st defendant agreed to assume responsibility for the payment and the disposal of 10,000 dozen of the toys. There was subsequently a discussion in a New York office, the date of which nobody can remember, about the gravity of the situation when they discovered that the goods could not be sold. There was also mention that at that time the 2nd defendant had a counterclaim either against the plaintiff or against the 1st defendant. There was mention by Mr. Lewis for the 1st defendant that he was prepared, as to the 10,000 dozen of toys to assume 20 percent loss. But there was no agreement was reached at this discussion. There was no agreement except that a remark was made by an office manager of the 2nd defendant's that the 10,000 dozen was exactly 20 percent of the 50,000 of the total order, and therefore nobody would be taking advantage of the other if Mr. Lewis on behalf of the 1st defendant would assume the total loss for the payment of the 10,000 dozen of the toys. Be that as it may I must observe that there was no agreement reached in that discussion at all. These were just passing remarks. For these reasons, however, the 2nd defendant maintained that the 1st defendant must be responsible for the payment of the 10,000 dozen of the toys. In this connection I must observe that, first of all, there is no dispute that for the order of the 40,000 dozen toys the 1st defendant was acting as agent for the 2nd defendant. This is so despite the fact that the 1st defendant was a signatory to the contract in page 10 of the agreed bundle. As such there is no necessity for me to decide whether extrinsic evidence would be necessary or is admissible to construe the contract. All the parties agree that, vis-a-vis 40,000 toys the 1st defendant acted in no other capacity than that of an agent. I say this subject to the remark by learned counsel for the plaintiff who maintained that as far as the document is concerned the 1st defendant acted as signatory. But I find as a fact on the evidence that the 1st defendant was only an agent.

11. What is very much in issue between the 1st defendant and the 2nd defendant is whether the purchase of the 10,000 dozen was an additional order or a separate transaction for which the 1st defendant is solely responsible, or whether the 1st defendant is at least a partner or a party to a joint venture for the sales of these 10,000 dozen in Europe. Perhaps I should then refer to some of the documentary evidence. In page eight of the agreed bundle is a letter written by Clayton Wong of the 1st defendant to the plaintiff, in which it reads:

"As arranged, please find enclosed herewith our contract No. 1974 stock order dated September 21st 1973 calling for 40,000 dozen of Item No.5500 Woody Woodpecker Wobler Wood Toys. As discussed with Mr. Jack Friedman of L.J.N. Toys Ltd., New York, it is to our understanding that the above quantity will be their initial commitment for the year, 1974. And they feel confidence that they could sell at least 100,000 dozen of this item for the next year."

I emphasize the choice of the word 'initial commitment' therefore indicating that the 40,000 dozen need not be the only commitment, but it is only the initial commitment. I bear in mind that this letter was written on behalf of the 1st defendant and signed by Clayton Wong, one of the directors of the 1st defendant.

12. Then I go over to the document in page 15 which is a letter written by Mr. Basevi to Mr. Lewis of the 1st defendant in which the first paragraph reads:

"I hereby confirm my discussion of this morning over the telephone with Mr. Jack Friedman. I confirmed to Jack that our deliveries are planned as follows:-

And this is a letter written on the 17th of October 1973. That is the very date of this contract. The next paragraph read:

"These are the new numbers for the modified items as per samples in your hand. We shall supply these items at the price of HK$1.66 per item for this range of equally assorted six items."

And then in the last paragraph it reads:

"As regards the L/C our understanding is that you will establish an irrevocable Letter of Credit for expiring in May, 1974 for 20,000 dozen pieces for HK$398,400 and that we will not cash this L/C until the last 20,000 dozen are delivered as per your initial requirement of 50,000 dozen."

This is a letter which referred to the initial requirement of 50,000 dozen instead of 40,000 dozen. I also bear in mind that this is a letter written by the plaintiff to the 1st defendant. However, it does mention Mr. Jack Friedman on the telephone agreeing with Mr. Basevi and the 50,000 was lumped together in separate instalments for the purpose of delivery; and the revision of price must also affect all the commodity and all the 50,000 dozen and not the 40,000 and another 10,000 separately.

13. I finally refer to the document in page 16 of the agreed bundle which is a letter from Mr. Friedman to Mr. Basevi dated the 30th of October a date after the revission or variation of the contract. It reads:

"We have last week made application for a Letter of Credit for 20,000 dozen wood toys, and have asked our bank to cable this to Hong Kong. This is for an initial 90 day period. As per our understanding when we ship customers on direct L/C for the first 20,000 dozen, we will then extend our L/C for another 90 days, thus guaranteeing you a total of 40,000 dozen plus 10,000 dozen to Eurpoe, making a total guaranteed quantity of 50,000 dozen. We trust by this time Peter has received cable advice of our L/C and has no notified you."

14. Reading these documents it appears that the 10,000 additional dozen should be regarded as part and parcel of the original order. In other words, it was an extension from the 40,000 dozen to 50,000 dozen. Prima facie the 1st defendant was purchasing these 50,000 dozen in its capacity as agent. This is subject, of course, to evidence in rebuttal the burden of which is on the 2nd defendant, to show that the original agreement of agency had been replaced or varied by a subsequent agreement between the 1st defendant and the 2nd defendant. In this connection the 2nd defendant relied on oral agreements. It is said that in October 1973 the 1st defendant had already agreed to assume responsibility for 10,000 dozen of these toys, for their payment as well as for their disposal. Alternatively it was at least a joint venture for selling or disposing of these 10,000 dozens in Europe. In this regard I have to observe that while there was an allegation of joint venture referring to the 10,000 dozens there was no allegation whatever that the 40,000 dozen of the same toys - or similar toys - were subject matter of a joint venture. As such I fail to appreciate - and indeed, even Mr. Friedman, in his evidence could not offer a satisfactory explanation - why the 2nd defendant's office manager in New York should ever equate the loss on the 10,000 dozens to the 20 percent of the total loss of the 50,000 of the toys in the course of the discovery. To my mind there is no reason to suggest that the 10,000 dozen of these toys should be equated as a 20 percent loss of the total order. The 2nd defendant, if it succeeds at all, must prove that the 10,000 dozen was a separate deal. If, as Mr. Friedman said, that Mr. Lewis had already assumed responsibility for the 10,000 dozen of the toys there would be no question for the 1st defendant to bear any loss regarding the other 40,000 dozen. If it is said that the 1st defendant had agreed in the multiparty meetings and discussions to assume responsibility for the 10,000 dozen toys, then when Mr. Basevi was in the witness box, no question was put to him that such proposition was put to Mr. Lewis during such discussions in the presence of Mr. Basevi. There is no documentary evidence as such to show that the 1st defendant agreed to assume the responsibility for the 10,000 dozen of these toys. Indeed, no such allegation had been made until the pleadings were amended after the first day of the trial.

15. If I may refer to further telexes sent to the 2nd defendant by the 1st defendant, I would observe that the document, page 18 of the B bundle reads:

"Basevi already has made 8,000 dozen wood toys and is producing at 500 dozen per day. Please do your utmost to dispose of these quantities or I can foresee extreme difficulty in the immediate future."

Then at page 20 of the B bundle another telex to the 2nd defendant which reads:

"Basevi insisting on fulfillment wood toy commitment. Have you made any headway offering at cheaper price? Can foresee difficulties with Basevi as anticipated."

Page 21:

"You are ignoring our repeated requests per telex and telephone Re problems on wood toys. Goods are piling up. Still no answer from you. At the moment there is no way we can stop the production of additional 17,000 dozen. 7,000 dozen already in godown and paid for. Outstanding orders on hand approximately 5,000 dozen. Balance as you can see, 12,000 dozen. Immediate advice is required from you as to disposition."

Then page 22:

"Extreme problem still exist with wood toys and Basevi. I have tried my best to dispose of wood toys even incurring losses for B.A.R.T.E.R. and L.J.N., but to no avail. Present situation Re wood toys as follows: 7,000 dozen paid for and in warehouse. Further 10,000 ready in Basevi's factory and he is demanding payment. Basevi insists that L/C be extended to the 30th of July so he can use it for financial purposes. Suggest you call me and we put our heads together for solution."

These telexes were sent between February and April of 1974. To these telexes there was no reply whatsoever. At least there is no evidence of any reply from the 2nd defendant. Reading the text of these telexes it appears to be consistent with such message being sent by an agent to a principal involved for further instruction rather than a partner or a party to the joint venture or a sole principal to another party in consultation. Furthermore, there is no reply from the 2nd defendant at all. There is certainly no suggestion at the time that the 10,000 dozens of toys was the 1st defendant's problem and not the 2nd defendant's. Nor was there any reply that the 1st defendant could do whatever it liked with the 10,000 dozen of toys with the 2nd defendant's licence to sell them as toys.

16. For these reasons I find that there is not sufficient evidence to suggest that the 1st defendant assumed complete liability in respect of the 10,000 dozen of the toys. Nor is there sufficient evidence to suggest that there was a joint venture. In this regard I am not unmindful of the fact that for European sales - or sales in Europe - the 1st defendant would be entitled to share the profit on a 50-50 basis. However, it is in evidence that there had been previous dealings between the 1st defendant and the 2nd defendant in respect of sales in Europe and that the 1st defendants as agent was entitled in such dealings to deduct the cost for deductable expenses, the seven percent commission and then share the profits on a 50-50 basis.

17. For these reasons my findings are as follows: In view of the authority that is cited in Bowstead on Agency I find that the plaintiff is justified for the protection of himself to sue the 1st defendant as well as the 2nd defendant. I find also that through out the dealings in respect of all of the 50,000 dozen of the toys, the 1st defendant was acting through out as agent for the 2nd defendant. The 1st defendant as such is entitled to be indemnified by the 2nd defendant in respect of damages and costs found against it in favour of the plaintiff. The plaintiff is not justified in suing the 3rd defendant. Similarly the 1st defendant has no justification to link the 3rd defendant in this action. There is practically no evidence, or very little evidence, to link the 3rd defendant in this action whether in its capacity as principal or as agent. The claim by the 2nd defendant for an indemnity by the 1st defendant is not justified. The total result in summary is that there should be judgment to the plaintiff in the sum of $118,000 plus interest at eight percent per annum as from the 1st of January 1975 against the 1st defendant and the 2nd defendant.

18. I also give judgment for an indemnity in favour of the 1st defendant against the 2nd defendant, both in damages and in costs. The action by the plaintiff and by the 1st defendant against the 3rd defendant is dismissed. The claim by the 2nd defendant against the 1st defendant for an indemnity against the 1st defendant is dismissed.

Representation:

M.Asome (J.S.M.) for plaintiff.

D.Chang (Deacons) for 1st Defendant.

K.Bokhary (Wilkinson & Grist) for 2nd & 3rd Defendants.