Coltronics Ltd v. Harber Industries Ltd

HCA002648/1973

IN THE SUPREME COURT OF HONG KONG

ORIGINAL JURISDICTION

ACTION NO. 2648 OF 1973

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Coram: Trainer, J.

Date of Judgment:28th January, 1974.

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JUDGMENT

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1. The plaintiff is a limited liability company which, inter alia, purchases electronic calculators for the purposes of resale throughout the world. The defendant is a limited liability company which manufactures such calculators.

2. On the 14th September, 1973 the plaintiff issued a writ of summons against the defendant claiming:

3. The plaintiff applied before me for an interlocutory injunction and the application was granted. At the time of granting it I announced that I would hand down my reasons and this I now do.

4. On the 22nd May, 1972 the parties entered into an agreement whereby the defendant undertook to manufacture "Calculators" for the plaintiff using the style and ideas provided by the plaintiff, for which Calculators the plaintiff was to have exclusive marketing rights. The price for each Calculator was based on orders of 50,000, and was set out in the agreement. The price was to remain fixed until the 1st May, 1973 or until 250,000 units were delivered whichever was the earlier. There was a provision for a variation in price if the price of the main components changed by 2% one way or the other, or if, by reason of a variation in the rate of exchange, the profit margin of the defendant increased or decreased by 2%. In the event of such a variation the plaintiff had the right to withdraw from the agreement on the acceptance of all outstanding orders. There were also other provisions for terminating the agreement by the defendant: if the plaintiff failed to place proportionately large orders within 90 days after the completion of a previous order; if the defendant gave notice that it did not wish to accept further orders after the expiration of 90 days after the completion of a previous order; if the defendant gave notice that it did not wish to accept further orders after the expiration of 90 days (during which time the defendant would not be required to accept orders for more than 100,000 Calculators and would fulfil all previous orders). It was also agreed that on giving such notice of termination the defendant would undertake not for a period of three years to sell, transfer or part with possession of any Calculators to any other person or body or assist by the provision of technical knowledge any other person or body to manufacture Calculators without the consent of the plaintiffs. The method of payment was to be by a confirmed letter of credit drawn on a Hong Kong bank within 45 days of an order being placed. Another provision in the agreement was that the industrial property rights in, or that might be acquired in the Calculators would belong to the plaintiff.

5. The agreement was duly signed by a Mr. Pitohford a director of the defendant company on its behalf, and on the same day an initial order for 50,000 units was placed. The order was to be fulfilled by deliveries in August, September, October and November, 1972.

6. It was the plaintiff's contention that between May and November, 1972 there were extensive discussions about designs of Calculators, and negotiations on the quantities that might be produced and prices. In addition to the model known as Coltronic 812, which was the original model in production, other models were discussed and, ultimately, a letter was sent by the plaintiff to the defendant on the 16th November, 1972.

7. The letter of the 16th November purported: to clarify certain ambiguities in the agreement of May with regard to the ownership of the industrial property rights in the "Calculators" and, further, to cover any such rights that might attach to any calculators manufactured by the defendant for the plaintiff; it outlined the position as being that the defendant manufactured to the plaintiff's order, and the units were then as if they were the plaintiff's own product; it said that the statement in the agreement that the defendant had exclusive world marketing rights was, in the circumstances inappropriate; and suggested that certain consequential deletions be made in the agreement.

8. The letter also purported to change the agreement to the extent that plaintiff would order and the defendant would produce 960,000 calculators before the 31st December, 1973. There was a condition that the defendant would not be obliged to produce more than 75,000 in any one month or to deliver earlier than 30 days after the placing of an order. The plaintiff for its part undertook to place orders "substantially larger" than those provided for in the agreement within 30 days of the completion by the defendant of an existing order in place of the 90 days provided for in the agreement. The calculators contemplated in the letter were to be those in a schedule annexed to the letter and made according to the specifications annexed to the agreement. There was also annexed to the letter a schedule of prices of main components which was to replace a similar schedule annexed to the agreement and was to govern the provision with regard to profit margins and the price of calculators. A list of prices for calculators was also annexed which were to be in substitution for the prices fixed in the agreement for the first 50,000 calculators. It was also stated in the letter that it was an express condition of the contract between the parties that the calculators would correspond to the description and specifications of the plaintiff and be merchantable and fit for the purpose for which they were required. To secure this the plaintiff might select a production model of any particular type of calculator and stipulate that all future models of that type conform to its standard in every respect. The letter concluded with a paragraph designed to ensure that the letter constituted a modification of the original agreement and that otherwise the agreement subsisted in every respect.

9. The letter was endorsed: "We hereby confirm that we agree to the foregoing" and the endorsement was signed "J. White General Manager for and on behalf of Coltronics Limited" and each page of the letter was also initialled by Mr. White. As to the method of payment for the calculators no change was indicated.

10. On the same date as the letter an order was placed by the plaintiff with the defendant for 419,000 calculators of different types to be delivered in various monthly quantities between December 1972 and May 1973. The order was endorsed "We hereby confirm that we agree to and accept the Purchase Order consisting of 4 pages and the first schedule attached thereto consisting of two pages" and was signed "J. White General Manager for and on behalf of Coltronies Limited" Mr. White remained the General Manager of the defendant until March 1973.

11. It is alleged by the plaintiff that difficulty in delivery was experienced by the defendant about September 1972 with regard to the initial order; so much so that the plaintiff threatened to institute proceedings. The defendant on the other hand charges the plaintiff with a series of manoeuvres in October 1972 to frustrate the collection of money against the letters of credit by withholding information necessary to be inserted in waybills which had to be presented to obtain payment. It alleges the plaintiff later sought to institute a cash against delivery payment in lieu of letters of credit, and, in fact, a number of deliveries were made on these terms. This, the defendant says, was most unsatisfactory as a Mr. Wittenberg was the only person authorised to sign cheques on behalf of the plaintiff and he was frequently absent. In fact it alleges in October the plaintiff owed $2,000,000.

12. It is against this not very harmonious background that the letter of the 16th November came into existence.

13. The defendant says that in October it instructed Mr. White:

14. A Mr. Rippingall, a director of the defendant company, who deposed to those instructions in an affidavit filed on the defendant's behalf then proceeds in it to accuse Mr. White of lying to him about the letter and order. He said Mr. White originally said he had received them but later said the plaintiff had failed to forward them. Mr. Rippingall deposed that at the time, as he was about to leave Hong Kong, he contacted Mr. Wittenberg of the plaintiff firm and told him that he, personally, wished to see and consider the letter and the orders which the plaintiff proposed to place. He said he never saw the letter of the 16th November until about the end of November when he returned to the Colony. He said he saw Mr. Wittenberg on the 8th December, 1972 and told him that the defendant could not possibly tolerate the terms of the letter, and that Mr. White had no authority to sign such a document on behalf of the defendant. He went on to depose that, in fact, Mr. White had no such authority, and exhibited the defendant articles of association and Mr. White's service agreement with the company.

15. Mr. Wittenberg in an affidavit filed on behalf of the plaintiff denied that Mr. Rippingall or any other director of the defendant company ever repudiated Mr. White's authority. He said that rather than repudiate the authority the defendant proceeded to fulfil the order that accompanied the letter. He said that between May 1972 and the date of his affidavit, the 24th September, 1973 the defendant supplied 175,000 calculators. Of these he said 50,000 were in respect of the order placed on the 22nd May, 1972 and the rest were as a result of the order of the 16th November. In fact, he deposed, most of all the invoices concerning deliveries after November 1972 made specific reference to the order of the 16th November, 1972.

16. The relationship between the parties could scarcely be termed the happiest. There were wars and rumours of wars but the big explosion came in a letter to the plaintiff from the defendant's solicitors dated the 11th September, 1973. The letter referred to the letter of the 16th November, 1972 written by Mr. Wittenberg on behalf of the plaintiff, and the purported agreement to the contents by Mr. White "Erstwhile General Manager" of the defendant. It stated: that immediately on becoming aware of the contents of the letter of the 16th November, 1972 the defendant repudiated the contents; that the defendant had "continued to protest at the manner in which the purported agreement was made ..... The Board of Directors has never ratified the purported agreement."; that Mr. White had no authority to bind the defendant; and it went on to inform the plaintiff that the defendant held the plaintiff to be in such breach of the agreement of the 22nd May, 1972, by failing to receive and pay for calculators offered for delivery in August, 1973, that the defendant considered the plaintiff to have repudiated it. The letter informed the plaintiff that the defendant accepted the repudiation and intended to proceed against the plaintiff for damages.

17. There is no doubt that when this case comes on for final hearing one of the first issues for resolution will be the position of Mr. White. Had he real or ostensible authority to act as he did. Mr. Litton for the plaintiff would contend that he had such authority and it is to be found in the articles of association of the defendant company and the service agreement which Mr. White had with it. Further, or alternatively, he would argue, if there is any doubt about his express authority Mr. White was cloaked with such ostensible authority as would justify the plaintiff concluding he had such authority; an authority, which the plaintiff maintained, was never questioned until the letter of September 1973. Indeed, Mr. Litton contended, the defendant actually delivered calculators on the strength of the order placed and to be read with the letter of the 16th November, and the defendant cannot now be heard to say that while they accept the order they repudiate what is in the letter, both being part of the same transaction.

18. Mr. Webster for the defendant argued that Mr. White had no express authority to commit the defendant as he purported to do in the letter of the 16th November nor to accept the order that went with it; nor did he have ostensible authority. He contended that even if Mr. White did have a general ostensible authority the plaintiff knew, or should have known that such ostensible authority did not extend to committing the company to the extent of the letter of the 16th November or such an order such as went with it. He referred to the terms of the service agreement of Mr. White where he was invested with "the control and management" of the defendant company. That, he maintained, could not be interpreted as meaning that Mr. White had authority to bind the company as the letter purported to do but confined his authority to internal or domestic control. He said that the articles of association conferred no greater authority.

19. As I said earlier Mr. White's authority must be a primary issue for resolution when this case is being finally decided. It would, I consider, be improper for me to express an opinion as to the extent of the authority of the defendant's General Manager. However, there has been produced by the plaintiff sufficient evidence to show that Mr. White might well have had such authority and that the letter of the 16th November constituted an effective and valid variation of the agreement of the 22nd May, 1972.

20. The plaintiff denies that it ever repudiated the agreement of the 22nd May, 1972. On the contrary, it says, it is, and always was, ready and willing to comply with it as varied by the letter of the 16th November. It says that immediately on receipt of the letter of the 11th September it replied denying what was alleged in it and stating that it still considered the contract subsisting. It maintains that at no time has it ever failed to accept calculators proferred for delivery nor has it failed to pay for calculators at the agreed price. The plaintiff says that for the three weeks prior to the letter of the 11th September it had persistently endeavoured to persuade the defendant to release calculators which the defendant had in stock so that it, the plaintiff, might fulfil a commitment with a very valuable customer called Quelle. In fact, the plaintiff says, as proof that it intended to continue trading with the defendant it established a letter of credit in favour of the defendant, valid until October, 1973.

21. Mr. Webster in opposing the granting of the interlocutery injunction made as his first point that at the trial of the action an injunction would not be granted on the terms sought as they went beyond what is contained in clause 5(a) of the agreement of the 22nd May. That is a clause whereby the defendant undertakes not to dispose of "Calculators" to anyone other than the plaintiff during the currency if the agreement, and will "use its best endeavours" to see that its parent company or its subsidiaries will not do so. In addition it provides that the defendant will not, and will, similarly, endeavour to ensure that its parent company and its subsidiaries will not, manufacture "Calculator" for others or produce or provide technical assistance to assist others to produce "Calculator" during that period. Mr. Webster would maintain that there was a limitation on the restriction as to what the defendant might provide for others by the use of the word "Calculators". The word "Calculators". with a small "c", in the summons demanded something beyond what a proper interpretation of "Calculator" covers. Mr. Webster also referred to clause 6(11) of the agreement. That clause enables the defendant to terminate the agreement on certain conditions and provides that in such event the restrictions imposed in clause 5(a) should continue for three years after the termination. This he contended is void as being an illegal restraint of trade.

22. Another point Mr. Webster made was that the plaintiff had refused to accept all, or was prepared to accept only a very small quantity of calculators in the month of August, 1973 in breach of the agreement and that this constituted a repudiation of the agreement of the 22nd of May even if it had been validly varied, though he would maintain it had not. He instanced further incidents which he contended constituted a repudiation.

23. All the incidents alleged by the defendant to constitute repudiation of the agreement were contested by the plaintiff. The plaintiff would concede that there were differences between it and the defendant but were such as could be remedied, principally by the defendant producing a calculator which would be to the standard required by the plaintiff's customers, and which would operate efficiently.

24. A final point made by Mr. Webster was that, whatever the position with regard to the agreement, the trading relationship between the parties had irretrievably broken down before the letter of the 11th September was written. If that were so, he maintained, it would be inequitable to restrain the defendant from selling its products elsewhere. He stressed that the production of calculators was the almost exclusive operation of the defendant and an injunction would compel them to cease operating. This would result not only in the dismissal of the defendant's employees (and the great difficulty in recovering this trained personnel should an injunction be refused at the hearing) but would have far ranging effects in the electronic component industry in the Colony. To refuse the injunction would impose no hardship on the plaintiff. Counsel would maintain that on the balance of convenience the scale weighed heavily against granting it. His final point was that this is a case where even if the plaintiff were to succeed damages are the appropriate remedy. He said that as a guarantee for any damages that might be awarded the defendant was prepared to bring into court $750,000.

25. Mr. Webster developed at length the various points he raised but with the exception of one, with which I shall deal later, they were all issues which went to the root of the case and will have to be decided at the trial.

26. I do not propose to traverse those points or the arguments in support of them as I consider it would serve no useful purpose so to do. Indeed, I think it would be improper for me at this stage to de so and express an opinion on them. Suffice it, for the purpose of this application, for me to say that having heard what Mr. Litton had to offer on behalf of the plaintiff and the argument of Mr. Webster I was satisfied that the plaintiff has a solid basis for its application for an injunction and the trial judge might very well grant what is sought. That applies equally to Mr. Webster's argument that the appropriate remedy for the plaintiff, if it is entitled to anything, lies in damages.

27. The only thing that presented any difficulty was as to whether on the balance of convenience the defendant would suffer more by the granting of the application than the plaintiff would if it were denied an injunction. It did occur to me that if by the granting of an injunction the defendant were compelled to dismiss its workmen which, if my memory serves me correctly, number about 400, and close down, with the attendant result of dismissals in the components manufacturing ...(illegible), the inconvenience to the defendant would be very considerable. Should the defendant have to dismiss their employees and be successful at the trial then the problem of recruiting new employees would be immense. On the other hand the plaintiff, too, was in a precarious position. It had certain existing commitments which it could not fulfil if the defendant, its sole supplier, were free to refuse to sell to it and sell wherever it pleased. The plaintiff has built up a good will throughout the world; it has customers in Germany, England and Australia. These customers are very large distributors and if supplies were to be out off from the plaintiff and the defendant were at liberty with the world market open to it, to sell to, among others, those distributors the plaintiff by the less of its business with them, and its inability to expand must suffer damage the extent of which must be well nigh impossible of calculation if it were successful at the trial of the action. It did occur to me, and I suggested it to the parties, that the defendant's inconvenience could be solved by it selling to the plaintiff at the price which the plaintiff allege was fixed by the letter of the 16th November, 1972 without prejudice to any claim for a refund if the court found for it. In this way they would have avoided the necessity of dismissing their employees. In his argument Mr. Webster had submitted that if an injunction were granted the plaintiff should be asked to deposit, or give an adequate guarantee for, the sum of $750,000 against the event of it being unsuccessful at the trial. He might well have asked for a sum as would take into consideration the suggestion I made.

28. As I saw the case it was one where the plaintiff might very well indeed succeed at the ...(illegible) , and on the balance of convenience and to maintain the status quo so far as is possible I considered it was necessary to grant the plaintiff's application. This I did in the form of the order made and later amended and I directed the plaintiff to provide security to the extent of $750,000 to abide the result of the trial.

29. Costs will be costs in the cause.

Representation:

Henry Litton Q.C. & Wesley Wong instructed by Johnson Stokce & Master for Plaintiff.

Peter Webster, Q.C. & John J. Swaine instructed by Brutton & Stewart for Defendant.