Techtrend Ltd and Another v. Majestic Design Ltd and Another

DCCJ 4522 of 2008

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 4522 OF 2008

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Coram : Deputy District Judge A. Kot in Court

Date of Hearing : 1^st September 2010 to 3^rd September 2010

Date of Judgment : 28 September 2010

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J U D G M E N T

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INTRODUCTION

1.The 1^st and 2^nd Plaintiff claims against the 1^st and 2^nd Defendant for the sum of HK$281,600 (“the Deposit”) being deposit paid for the service of the 1^st Defendant in the design and decoration of a property as well as the design and making of furniture by the 2^nd Defendant. 

2.The Defendants counter-claim against the Plaintiffs for the sum of HK$5,000 being administrative fee for the cancellation of the purchase order signed by the 2^nd Plaintiff as well as damages for the Plaintiffs’ wrongful termination of the contract.

3.The Plaintiffs are prepared to give credit to the HK$5,000 claimed by the 2^nd Defendant.  And it is also admitted by the Defendants at the end of the trial that there is no evidence of damages suffered to support the counter-claim lodged.

4.The factual issue to be determined in this case is whether there was an oral warranty made by the Defendants as to the refund of the Deposit.  Should there be such a warranty made before entering into the contract, whether such evidence is inadmissible under the parol evidence rule.  And should the evidence be admissible to form a collateral contract, whether the entire agreement clause in the purchase order denuded the legal effect of a collateral warranty.

5.Furthermore, should the court find no oral warranty existed, the Plaintiffs argued that the court still need to consider whether the Deposit were part payment which should be returned or just an earnest of performance which the Defendants are entitled to forfeit.  The certainty of the terms in Clause 1 and 3 of the Purchase Order between the 1^st Plaintiff and the 1^st Defendant is also in issue.

UNDISPUTED FACTS

6.The Plaintiffs and the Defendants are limited companies incorporated in Hong Kong. Madam Michelle Chan (“Madam Chan”) is the major shareholder holding over 90% of the shareholdings in the Plaintiffs and is also the director of the Plaintiffs. 

7.The Defendants are under the same group of companies called “Majestic Group”.  The 1^st Defendant is carrying on business of design and building project and the 2^nd Defendant is carrying on business of furniture and interior design.

8.On 30^th April 2008, Madam Chan, for and on behalf of the 1^st Plaintiff, entered into a provisional agreement for the purchase of the property known as Flats A & B on 11^th Floor and the Roof and Car Parking Spaces Nos. 17 and 21 on Ground Floor, Viva Court, No. 290 & 290A Prince Edward Road West, Kowloon (“the Property”) with completion of the purchase scheduled on 31^st July 2008.

9.The 1^st Plaintiff agreed to engage the 1^st Defendant for the design and decoration work of the Property at the total price of HK$620,000 by way of a purchase order dated 28^th June 2008 (page 155-166 of Bundle) signed by Madam Chan (“the 1^st Purchase Order”).  By another purchase order signed by Madam Chan (page 167-169 of Bundle) on the same occasion, the 2^nd Plaintiff agreed to engage the 2^nd Defendant for the design and made-to-measure furniture and fittings for the Property at the price of HK$168,000 (“the 2^nd Purchase Order”).

10.Under the 1^st Purchase Order, the 1^st Plaintiff had paid by way of credit card payment an initial deposit of HK$16,400 (page 171 of Bundle) on 28^th June 2008 and a further deposit of HK$231,600 by way of cheque (page 173 of Bundle) on 30^th June 2008.  Under the 2^nd Purchase Order, the 2^nd Plaintiff had paid a deposit of HK$33,600 by credit card payment (page 170 of Bundle) to the 2^nd Defendant upon signing of the purchase order.

11.The Defendants were informed by the Plaintiffs on or about 31^st July 2008 that the purchase of the Property had fallen through due to the defective title of the Property.  The Plaintiffs then requested for the refund of the Deposit and on the instruction of the Defendants, had provided the Defendants with a written request for refund on 23^rd August 2008 (page 180 of Bundle).  By a letter dated 3^rd September 2008 issued by the Plaintiffs’ solicitor, the Plaintiffs further requested the Defendants to refund the Deposit of HK$281,600 paid by the Plaintiffs.   By a letter from its solicitors dated 11^th September 2008, the Defendants denied the entitlement of the Plaintiffs to any refund.

12.The relevant provisions of the 1^st Purchase Order printed on the back of it are as follows :

Clause 1 – If customer cancelled this contract order, all deposits would not be refunded and the company shall forfeit all deposits.  The company reserves rights to claim against customer for all loss and damages.

Clause 2 – An order should remain valid only within six months from the date of confirmation. The customer should make a written request to the company for extension of the contract.  The company should forfeit the deposits if no written request received. In addition, the customer is liable for all loss and damages of our company.

Clause 3 – If customer suspended or terminated the contract by no reason or the customer is delaying the contract, all deposits would not be refunded.  The customer is needed to pay all started items in full and the company also reserves rights to claim against customer for all loss and damages. 

備註 4 – 訂單金額HK$620,000包括以上132項, 一切口頭承諾經已列明於合約上, 一切協議均以上列合約內容為(page 162 of Bundle)

(Remarks No. 4 – contract price HK$620,000including the above 132 items, all verbal undertakings have been set out in this contract, all agreement refer to the contents of the above contract as) (Court’s translation) 備註 4 – 一切口頭承諾經已列明於合約上, 一切協議均以上列合約內容為準, 合約以外之項目,我司 (page 165 of Bundle) (Remarks No, 4 – all verbal undertakings have been set out in this contract. All agreement referred to the contents of the above contract as correct. For items not included in this contract, our company) (Court’s translation)

13.The relevant provisions of the 2^nd Purchase Order printed on the back of it are as follows :

Clause 2 – The purchase order will be valid for 6 months from the date of issue.

Clause 3 – Unless a notice for extension of time for measurement in writing is given before expiration of six months from the date of purchase order, the purchase order will be void automatically and the deposit paid thereunder will be confiscated.  Our company is under no obligation to give notice before expiration of six months from the date of purchase order.

Clause 8 – In any event, our company shall charge administrative fee of HK$5,000 for each purchase order upon receipt of application for cancellation by the customer. After deduction of the said administrative fee, the balance of the deposit payable under the purchase order shall only be used for purchase of goods in our company.  If the deposit payable under the purchase order is insufficient to set off the administrative fee, our company reserves its rights to claim the customer for the outstanding balance.  If measurement and design work is under progress, our company shall charge the measurement and design fee HK$3,000 respectively.

WITNESSES

14.The Plaintiffs called its director Madam Chan and her brother-in-law, Mr. Chan (“Mr. Chan”) to testify whilst the Defendants called Mr. Lai, the General Manager of the Sales Department (“Mr. Lai”) as witness at this trial.

PLAINTIFFS’ CASE

15.The Plaintiffs contended that they are entitled to a refund of the Deposit since the employees of the Defendants involved in the negotiation of the 1^st and 2^nd Purchase Order had warranted to the Plaintiffs that should the 1^st Plaintiff’s purchase of the Property fall through, the Defendants would refund the Deposit to the Plaintiffs.

16.Madam Chan, upon signing the provisional agreement for the purchase of the Property, had entrusted Mr. Chan to oversee the renovation work of the Property including looking for the decoration and furniture designers.  Mr. Chan started to shop around in mid-May 2008 and had come into contact with Miss Ling Lam (“Ling”) and Mr. Gary Tam (“Gary”) of the Defendants at a shop called “Majestic” in Hung Hom.  An on-site inspection and measurement-taking had been arranged on 24^th May 2008 with Ling, Gary and the designer of the Defendants called Ah Bun (“Bun”) attending.  Measurement was took and a draft floor plan of the Property was prepared.

17.On 18^th June, Madam Chan was informed by her solicitor that there might be a problem with the title to the Property.  Another on-site inspection was arranged on 28^th June with Ling and Gary attending.  Madam Chan received another call from her solicitors about the defective title whilst waiting for the estate agent with Ling and Gary at the ground floor of the Property.  Madam Chan then told Gary and Ling that the purchase may not be able to complete due to the defective title.  Both Gary and Ling acknowledged this fact.

18.After the inspection, Madam Chan together with Mr. Chan were invited to attend the Defendants’ office in Kowloon Bay to discuss further about the draft plan.  At the office, Madam Chan was asked to choose the materials from the samples.  Bun also told Madam Chan that the three dimensional draft design plan would only be prepared after they have received some deposit.  At this juncture, Madam Chan left the room to bring her son to the toilet.  Mr. Chan then asked Gary and Ling what if the purchase of the Property fell through due to defective title.  Both Gary and Ling assured Mr. Chan that should this be the case, the Deposit would be fully refunded.  Mr. Chan then related the same to Madam Chan on her return.  With such assurance, Madam Chan signed the 2 purchase orders prepared by Gary after negotiation for a discount.

19.According to Madam Chan, only the work items and the price on the 2 purchase orders were explained to her and at no time did Ling or Gary explain the terms and conditions on the 2 purchases orders, nor had Madam Chan ever read them.  Madam Chan just signed and paid the Deposit on the understanding and representations by Gary and Ling that the Deposit would be refunded should the 1^st Plaintiff fail to complete the purchase of the Property.

20.Only a draft outline plan but no detail design plan or three dimensional plan was ever prepared by the Defendants.  On 31 July 2008, Mr. Chan attended the Defendants’ shop in Hung Hom and told Ling that the purchase of the Property fell through and asked for the refund of the Deposit.  Ling indicated there was no problem and asked Mr. Chan to fill in a claim form and it would take about one week to prepare a report to their boss before the claim form could be submitted.

21.On 13^th August 2008, Mr. Chan got into contact with Gary and was told that the claim form was with Ling who was on leave and will be back in one week’s time.  On 19^th August 2008, Mr. Chan attended the shop again and was told that both Ling and Gary had resigned and his case was being followed up by Bun.  Mr. Chan then called Bun and on 20^th August, Bun faxed him a claim form and asked Mr. Chan to fill in the reason for the refund.  The claim form signed by Madam Chan was faxed to Bun on 25^th August and Mr. Chan was told to contact Miss Lam (“Miss Lam”) of the customer department of the Defendants.  Mr. Chan did as told and upon request, had faxed to Miss Lam a letter (page 194-195 of Bundle) from the Plaintiff’s solicitor confirming the falling through of the purchase of the Property.  Miss Lam had indicated to Mr. Chan that the deposit would be refunded after deducting HK$5,000 administrative fee and the cheque would be ready in one week’s time.

22.However, by a letter dated 11 September 2008, the Defendants denied the Plaintiffs’ right to a refund of the deposit.  Hence, this claim filed on 24^th November 2008.

THE DEFENDANTS’ CASE

23.The Defendants denied that there was any oral warranty to refund the Deposit and relied on the written terms on the 2 purchase orders in particular those stated in paragraph 10-11 above to defend the claim and as basis for its counter-claim. 

24.Mr. Lai said that had there been an oral warranty, such should be included in the written purchase orders and signed by both parties to acknowledge the same.  This is the usual practice of the staff according to the instructions of the Defendants and it was also stated in Remarks No. 4 of the 1^st Purchase Order that all verbal undertakings had been set out in the purchase order (page 162 and 165 of Bundle).  It is also the requirement by the Defendants that the printed provisions on the purchase order should be read to the customers.  So Madam Chan who signed on the 2 purchase orders should be fully aware of the terms and conditions.  The falling through of the purchase of the Property had nothing to do with the 2 purchase orders. 

25.By the letter dated 11^th September 2008, the Defendants had given the Plaintiffs 6 months to enable the Defendants to carry out the purchase orders and in failing to do so, the Plaintiffs had been in breach of the contract.  The Defendants were entitled to forfeit the deposits for the 1^st Purchase Order and charged an administrative fee of HK$5,000 for the 2^nd Purchase Order with the balance of the deposit to be used by the Plaintiffs for purchase of goods from the 2^nd Defendant.

FINDING OF FACTS

26.The first question to resolve is whether there was an oral warranty uttered by Ling and Gary before Madam Chan signed on the 2 purchase orders and whether the terms on the purchase orders had in fact been explained to Madam Chan.  This solely turns on the credibility of the witnesses.  Having heard the evidence and on a balance of probability, I accept the evidence of the Plaintiffs. 

27.I found both Madam Chan and Mr. Chan truthful witnesses.  They are not shaken under cross-examination and most importantly there is no evidence to the contrary to rebut their evidence.  Mr. Lai had not been involved in the dealings with Madam Chan and could tell nothing about what had actually happened on 28^th June 2008 except for the usual practice of the Defendants.  Mr. Lai had fairly admitted in the witness box that he could not be sure if Gary and Ling had in fact followed the company practice.  The manner of the Defendants in dealing with the request for refund after 31 July 2008 is also inconsistent with its denial of the existence of the oral warranty.

28.Given the fact that Madam Chan and Mr. Chan were already made aware of the likelihood of the purchase of the Property falling through, it would not be surprising for Mr. Chan to be concerned and raised this issue with Gary and Ling.  Should the terms at the back of the 2 purchase orders have been explained to Madam Chan or Mr. Chan, it would be beyond belief that Madam Chan would still proceed to commit and sign on the 2 purchase orders.

29.And, had the terms of the 2 purchase orders been read to Madam Chan, the mistake on Remarks No. 4 (page 162 & 165 of Bundle) due to a misprint of the computer as well as the inconsistency between the costs for the moving of electrical socket (page 165 of Bundle) should have been discovered and rectified.  One can come to the conclusion that these terms are not read and explained at the time of signing, hence no rectification had been made.  The fact that those terms appeared on the front of the purchase orders had not been read to Madam Chan, it is highly unlikely that the terms at the back of the purchase orders had been instead.

30.As for the attack that had there been an oral warranty, Madam Chan should have asked for such to be included in the written purchase orders, I found this to be consistent with the fact that the terms at the back of the purchase orders were not brought to the attention of Madam Chan.  Had it not been so, she would definitely asked for the oral warranty to be added since it was apparently inconsistent with the terms on the back of the purchase orders.

31.Furthermore, from the evidence of Mr. Lai, he also agreed that a number of other agreed terms had in fact not been included in the written purchase orders.   This includes there was a charge for the design but not for the measurement taking, three dimensional plan will only be available upon payment of the deposit and the payment method other than by cash and by cheque.  All these tends to show that the contention by the Defendants that everything agreed should be recorded in the purchase orders is not actually the case.

32.I found as a fact that Gary and Ling did indicate to Mr. Chan that should the purchase of the Property fall through, the Deposit would be refunded and based on this oral warranty, Madam Chan signed on the 2 purchase orders without anyone explaining to her the detail provisions on the document.

DISCUSSION

33.There is no argument that if there is a written contract, verbal evidence is not allowed to contradict, vary or qualify the written contract.  However the parol evidence rule is and has long been subject to a number of exceptions.

34.The Plaintiffs submitted that one of the exceptions that is applicable in this case is that “if it is shown that the document was not intended to express the entire agreement between the parties” (paragraph 12-097 of Chitty on Contracts, 30^th Ed, Vol 1).  And it is stated in Chitty on Contracts at paragraph 12-100 that “where it appears that the parties did not intend to record all the terms of their agreement in a particular document, then on the same analysis extrinsic evidence would be admissible to prove other terms even if they varied or contradicted those in the document.”

35.It is clear from the evidence of Mr. Lai that not all the terms of the contract had been put into writing.  This is clearly inconsistent with the contention of the Defendants.  Judging from the fact that not all the terms of the contract were included in the written purchase orders, I found extrinsic evidence should be allowed to prove that the oral warranty did exist even though it was inconsistent with the terms on the back of the purchase orders. 

36.And even though the parties intended to express the whole of their agreement in a particular document, extrinsic evidence will nevertheless be admitted to prove a contract or warranty collateral to that agreement.  And “more recently, the courts have admitted evidence to prove an overriding oral warranty or to prove an oral promise that the written contract will not be enforced in accordance with its terms.” (paragraph 12-103 of Chitty on Contracts).  It is also stated in paragraph 12-004 of Chitty on Contracts that “The courts are prepared in some circumstances to treat a statement intended to have contractual effect as a separate contract or warranty, collateral to the main transaction.  In particular, they will do so where one party refuses to enter into the contract unless the other gives him an assurance on a certain point or unless the other promises not to enforce a term of the written agreement”.

37.Since Madam Chan was well aware of the likelihood of the purchase of the Property being fallen through, it would be inevitable for Mr. Chan to raise the issue as to what if it really fell through.  And if not for the fact that Gary and Ling had assured that the Deposit would be refunded should the purchase fall through, Madam Chan would not have signed the purchase orders.  Such assurance by Gary and Ling did amount to a collateral agreement between the parties and extrinsic evidence should be admissible to prove its existence.  The collateral contract is an exception to the parol evidence rule and such a promise inducing the contract prevents the Defendants from invoking the printed terms in the purchase orders to the contrary effect.

38.To conclude, I found the oral warranty made by Gary and Ling amounted to a promise by the Defendants to refund the deposit should the purchase of the Property fall through and this is very important to the Plaintiffs.  Without such warranty, Madam Chan would not have signed the 2 purchase orders.  To allow the Defendants to rely on the forfeiture of deposit clause at the back of the purchase orders would render the promise to be illusory.

39.I also found the entire agreement clause argument advanced by the Defendants must fail.  Entire agreement clause operates to denude what would otherwise constitute a collateral warranty of legal effect and it renders inadmissible extrinsic evidence to prove terms other than those in the written contract. The purpose of such a clause is to achieve the exclusion of liability for statements other than those set out in the written contract.  The effect of the clause will necessarily depend upon its precise wordings. 

40.The entire agreement clause in this case only appeared on the 1^st Purchase Order (Remarks No. 4 on page 162 and 165 of Bundle).  Both of these terms appeared to be incomplete with the precise wordings unknown.  Given the incompleteness of these terms, I cannot accept that these are in fact entire agreement clause.

41.Given my ruling on facts above, the other arguments raised by the Plaintiffs need not be dealt with.

42.I found the Plaintiffs are entitled to a refund of the Deposit based on the oral warranty made by the Defendants.  Since the Plaintiffs agreed to give credit to the HK$5,000 being administrative fee claimed by the 2^nd Defendant, such amount should be set off from the award.

The Order

43.It is ordered that :-

a.  Judgment be given for the Plaintiffs and the 1^st Defendant do pay to the 1^st Plaintiff the sum of HK$248,000 whilst the 2^nd Defendant do pay to the 2^nd Plaintiff the sum of HK$28,600;

b. Interest on the said sum at half of the judgment rate from the date of writ to the date of judgment, thereafter at full judgment rate until full payment ;

c. The Counter-Claim of the Defendants for damages be dismissed;

d. Costs order nisi that the Defendants do pay the costs of the action to the Plaintiffs with certificate for counsel to be taxed if not agreed.  Unless any of the parties applies by summons to vary it, the costs order nisi shall be made absolute upon expiry of 14 days.

Mr. Matthew T. S. Tse instructed by Messrs Bobby Tse & Co for the 1^st and 2^nd Plaintiff

Ms. Lau Wan Ching instructed by Messrs K. Y. Lo & Co for the 1^st and 2^nd Defendant