IN THE SUPREME COURT OF TONGA
CIVIL JURISDICTION
NUKU’ALOFA REGISTRY

CV 21/2004

BETWEEN:

LIN MAOLIN
PLAINTIFF

AND:

1. WANG QIANG aka CHRIS WANG
2. RAINBOW TRADING CO LTD
DEFENDANTS

BEFORE THE HON CHIEF JUSTICE WEBSTER

Heard at Nuku’alofa on 22, 23 & 24 November 2004

Counsel: Plaintiff: Mr Kaufusi
2nd Defendant: Mr Tu’utafaiva

RESERVED DECISION GIVEN ON 1 SEPTEMBER 2006

Preliminary

The Plaintiff’s claim is for repayment of monies amounting to T$96,502, which he says were owed to him by the Defendants as a result of a series of transactions in 2003 in which he made a series of advance payments to the 1st Defendant for a series of supplies of cigarettes and other goods for his shop. The transactions came to an end when the 1st Defendant disappeared from Tonga around 9 May 2003. The Plaintiff by this action sought repayment of the outstanding amount from the 2nd Defendant, as he claimed that the 1st Defendant had ostensible and apparent authority to do what he did as a Director of the 2nd Defendant and he paid the monies to the 1st Defendant as an employee and agent of the 2nd Defendant, or that the 2nd Defendant was vicariously liable for the 1st Defendant’s actings.

The 1st Defendant filed no defence; but the 2nd Defendant denied knowledge of the 1st Defendant’s actings, denied that he was authorised to receive advance payments from customers, and denied liability for the monies claimed.

Evidence and submissions

The Plaintiff gave evidence himself (for 1½ days); and led evidence from Mr Lusio Lausi’i, Assistant Registrar of Companies, Ministry of Labour, Commerce & Industries; Mr Talailama Motu'apuaka, Sales Supervisor, Tonga Cooperative Federation [TCF]; Mrs Lee Lan, Shopkeeper, Havelu; Mr Luo Yen Xing, shopkeeper, Longolongo; Mr Wang Wen Tai, shopkeeper, Havelu, and brother-in-law of the Plaintiff; Mr Po’uliva’ati Latu’ila, Manager in overall charge of delivery trucks, TCF; and Ms Ma Feng Yun, shopkeeper, Ma’ufanga. The Plaintiff also produced documentary exhibits.

On conclusion of the evidence submissions were made for the parties in support of their cases.

Further procedure

After having had an opportunity to consider the closing submissions for both sides, on 5 April 2005, I sent a Memorandum to both Counsel advising them that, while I had not reached any final view on the evidence, it appeared to me that, in terms of the Plaintiff’s closing submissions, his Counsel was basing his case on vicarious liability under tort, although that did not appear to be specifically mentioned in his amended Statement of Claim, which refers at para 17/18 d) to the 1st Defendant having ostensible authority, which is a concept in contract. But, as was pointed out in the 2nd Defendant’s closing submissions, it did not appear to be pleaded that the 1st Defendant owed any duty in tort to the Plaintiff. I pointed out that the test to be applied in determining the liability of a master for his servant and a principal for his agent are the same, ie whether the servant or agent was acting on behalf of, and within the scope of the authority conferred by, the master or principal: Heatons Transport Ltd v TGWU [1972] 3 All ER 101 (HL); and also Halsbury’s Laws (4th Ed) Vol 16 paras 724-736. I stated that if, despite inadequate pleadings, an issue is clearly raised and is understood by the opposing party to be raised and then dealt with, it should not be excluded because of technicality of pleadings: Prasad v Morris Hedstrom (Tonga) Ltd (No 2) [1993] Tonga LR 69, 73 (CA). I therefore sought further written submissions within 21 days from Counsel on:

a.	Whether I should give any consideration at all to the contractual questions?

b.	If so, submissions on the respective positions of the parties on the contractual position.

The Plaintiff’s Counsel replied on 26 April 2005, submitting in detail that this is a case where the law of contract has full application; that the Court is free to consider the contractual questions in this case; and that the Plaintiff had made out his case against the Defendants.

Counsel for the 2nd Defendant indicated that he was going to make submissions in reply, but sought further time to do so, and eventually filed a reply on 10 June 2005, submitting, again with detailed reasons, that the Court should not give any consideration at all to the contractual questions.

Thereafter on 16 June 2005 the Court started the trial of a similar case (CV 89-92/04) by Ms Ma Feng Yun (who was a witness in this case) and others against the same Defendants and similar issues of pleadings arose. I was hopeful that clarification on the issues in this case might emerge from the second case, but in the event that trial had to be stopped due to difficulties with the Chinese interpreter (not the same interpreter as in this case). After 2 unsuccessful attempts to continue the second case a date was fixed for 6 November 2006, but at the pre-trial conference on 30 June 2006 it was decided that, as I would not have time to hear that trial before I leave Tonga, it should be completely reheard before another Judge. At that stage I then resumed consideration of the decision in this case.

Applicable law

The law applicable to the principal legal question in this case (ie whether the 1st Defendant had the actual or apparent/ostensible authority of the 2nd Defendant to do what he did) is as follows.

The relationship between employer and employee does not, of itself, confer any authority on the employee to make contracts binding on his employer; but an employee may, in appropriate circumstances, be an agent of his employer with such authority, and the ordinary principles of agency apply to this situation: Chitty on Contract (29th Ed 2004) para 39-071.

Apparent, or ostensible, authority is "the authority of an agent as it appears to others": under the doctrine of apparent authority the principal may be bound to third parties because the agent appeared to have authority, though as between principal and agent there was in fact no such authority granted and the normal consequences of such authority did not arise. But the basis of the doctrine of apparent authority is that a third party is entitled to assume that an agent has such authority as he appears to have or would normally have, whether or not the principal has in fact granted such authority: decisions as to what authority agents do in fact normally possess as between themselves and their principals are obviously, therefore, relevant to the doctrine. Indeed, actual and apparent authority generally co-exist and coincide, and it is only comparatively recently that a clear analytical distinction has been made. (Chitty para 31-041)

The principal cannot set up a private limitation upon the agent's actual authority so as to reduce the ostensible authority, for, so far as third persons are concerned, the ostensible authority is the sole test of his liability. The onus lies upon the person dealing with the agent to prove either real or ostensible authority, and it is a matter of fact in each case whether ostensible authority existed for the particular act for which it is sought to make the principal liable. (Halsbury’s Laws (4th Ed Reissue) Vol 1(2) para 29; Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 1 All ER 630,644-646(CA))

"An "apparent" or "ostensible" authority … is a legal relationship between the principal and the contractor created by a representation, made by the principal to the contractor, intended to be and in fact acted on by the contractor, that the agent has authority to enter on behalf of the principal into a contract of a kind within the scope of the "apparent" authority, so as to render the principal liable to perform any obligations imposed on him by such contract. … The representation, when acted on by the contractor by entering into a contract with the agent, operates as an estoppel, preventing the principal from asserting that he is not bound by the contract. It is irrelevant whether the agent had actual authority to enter into the contract.

In ordinary business dealings the contractor at the time of entering into the contract can in the nature of things hardly ever rely on the "actual" authority of the agent. His information as to the authority must be derived either from the principal or from the agent or from both, for they alone know what the agent's actual authority is. All that the contractor can know is what they tell him, which may or may not be true. In the ultimate analysis he relies either on the representation of the principal, ie, apparent authority, or on the representation of the agent, ie, warranty of authority. The representation which creates "apparent" authority may take a variety of forms of which the commonest is representation by conduct, ie, by permitting the agent to act in some way in the conduct of the principal's business with other persons. By so doing the principal represents to anyone who becomes aware that the agent is so acting that the agent has authority to enter on behalf of the principal into contracts with other persons of the kind which an agent so acting in the conduct of his principal's business has normally "actual" authority to enter into.

In applying the law, as I have endeavoured to summarise it, to the case where the principal is not a natural person, but a fictitious person, viz, a corporation, two further factors arising from the legal characteristics of a corporation have to be borne in mind. The first is that the capacity of a corporation is limited by its constitution, i.e., in the case of a company incorporated under the Companies Act, by its memorandum and articles of association; the second is that a corporation cannot do any act, and that includes making a representation, except through its agent. …..

The second characteristic of a corporation, viz, that unlike a natural person it can only make a representation through an agent, has the consequence that, in order to create an estoppel between the corporation and the contractor, the representation as to the authority of the agent which creates his "apparent" authority must be made by some person or persons who have "actual" authority from the corporation to make the representation. ... The commonest form of representation by a principal creating an "apparent" authority of an agent is by conduct, viz, by permitting the agent to act in the management or conduct of the principal's business. Thus, if in the case of a company the board of directors who have "actual" authority under the memorandum and articles of association to manage the company's business permit the agent to act in the management or conduct of the company's business, they thereby represent to all persons dealing with such agent that he has authority to enter on behalf of the corporation into contracts of a kind which an agent authorised to do acts of the kind which he is in fact permitted to do normally enters into in the ordinary course of such business. The making of such a representation is itself an act of management of the company's business. Prima facie it falls within the "actual" authority of the board of directors, and unless the memorandum or articles of the company either make such a contract ultra vires the company or prohibit the delegation of such authority to the agent, the company is estopped from denying to anyone who has entered into a contract with the agent in reliance on such "apparent" authority that the agent had authority to contract on behalf of the company."
(Freeman & Lockyer, p 644-6)

In Freeman p 646 Diplock LJ also laid down the 4 conditions which must be fulfilled to entitle a contractor to enforce against a company a contract entered into on behalf of the company by an agent who had no actual authority to do so:

"It must be shown: (a) that a representation that the agent had authority to enter on behalf of the company into a contract of the kind sought to be enforced was made to the contractor; (b) that such representation was made by a person or persons who had "actual" authority to manage the business of the company either generally or in respect of those matters to which the contract relates; (c) that he (the contractor) was induced by such representation to enter into the contract, ie, that he in fact relied on it; and (d) that under its memorandum or articles of association the company was not deprived of the capacity either to enter into a contract of the kind sought to be enforced or to delegate authority to enter into a contract of that kind to the agent."

In Freeman p 646-7 Diplock LJ further said that in the relevant cases the representation relied on as creating the "apparent" authority of the agent was by conduct in permitting the agent to act in the management and conduct of part of the business of the company. (eg British Thomson-Houston Co Ltd v Federated European Bank Ltd [1932] All ER Rep 448 (CA)) The cases where the contractor's claim failed were all cases where the contract sought to be enforced was not one which a person occupying the position in relation to the company's business, which the contractor knew that the agent occupied, would normally be authorised to enter into on behalf of the company. The conduct of the board of directors in permitting the agent to occupy that position, on which the contractor relied, thus did not of itself amount to a representation that the agent had authority to enter into the contract sought to be enforced: eg Kreditbank Cassel GmbH v Schenkers Ltd [1927] 1 KB 246 (CA) where Atkin LJ said:

"If you are dealing with a director in a matter in which a director normally would have power to act for the company you are not obliged to enquire whether or not the formalities required by the articles before he exercises that power have in fact been complied with."

Special considerations arise in the case of agents of companies, because companies can only act through agents, yet are limited in their permissible activities by their memoranda of association and have public documents indicating the distribution of powers within their constitution, which can be inspected. (Chitty para 31-057)

An employee is under the control of his employer not only as to what he does but also as to the manner in which he executes his work. Though there are interconnections between tort and contract, the use of tort terminology is not usually appropriate in pure contract cases, and such attempts are probably of little practical value for the law as it stands at present. Some employees have agency powers, some not. Some owe fiduciary duties, some not. (Chitty para 31-010) 

" … the test to be applied is the same: was the servant or agent acting on behalf of, and within the scope of the authority conferred by, the master or principal? … Usually a servant, as compared with an agent, has a wider authority because his employment is more permanent and he has a larger range of duties and he may have to exercise discretion in dealing with a series of situations as they arise."
(Heatons Transport Ltd v TGWU [1972] 3 All ER 101,109(HL))

Looking at the comparable tests for vicarious liability, that is not imposed unless all the acts or omissions which were necessary to make the employee personally liable had taken place in the course of the company's business or the course of his employment. In determining whether they had so taken place, everything depended on the closeness of the connection between the duties which, in broad terms, the employee was authorised to perform and his wrongdoing. If those acts were so closely connected with the acts that he was authorised to do that, for the purposes of the liability of the company, they could fairly and properly be regarded as done by him while acting in the ordinary course of the company’s business. (Dubai Aluminium Co Ltd v Salaam [2003] 1 All ER 97 (HL))

The implied authority of an agent extends to all subordinate acts which are necessary or ordinarily incidental to the exercise of his express authority. It does not, however, extend to acts which are outside the ordinary course of his business, or which are neither necessary nor incidental to his express authority. The manager of a business has authority to do all acts necessary to the regular conduct of the business, but he has no implied authority to borrow money. A servant has not, merely from the fact of service, authority to pledge his master's credit, but an agent has been held, in particular instances, to have implied auth-ority to pledge his principal's credit. (Halsbury para 52)

There are cases in which agency may be implied, although no authority was ever specifically given in fact. "While agency must ultimately derive from consent, the consent need not necessarily be to the relationship of principal and agent itself (indeed the existence of it may be denied) but it may be to a state of fact upon which the law imposes the consequences which result from agency" (Branwhite v Worcester Works Finance Ltd [1969] 1 AC 552, 587 (HL)). The most usual way in which this occurs is by an unwritten request, or by implication from the recognition of the principal of, or from his acquiescence in, the acts of another. (Chitty para 31-025)

It would appear that a general limit on all types of implied authority is that there is no such authority to act other than for the principal's benefit: Chitty para 31-042. An agent has implied authority to do whatever is ordinarily or necessarily incidental to the due performance of his express authority: Chitty para 31-044. There is also be a residual category of authority derived from the circumstances of the case: Chitty para 31-047.

"Ostensible or apparent authority is the authority of an agent as it appears to others. It often coincides with actual authority. Thus, when the board appoint one of their number to be managing director, they invest him not only with implied authority, but also with ostensible authority to do all such things as fall within the usual scope of that office. Other people who see him acting as managing director are entitled to assume that he has the usual authority of a managing director. But sometimes ostensible authority exceeds actual authority. For instance, when the board appoint the managing director, they may expressly limit his authority by saying he is not to order goods worth more than £500 without the sanction of the board. In that case his actual authority is subject to the £500 limitation, but his ostensible authority includes all the usual authority of a managing director. The company is bound by his ostensible authority in his dealings with those who do not know of the limitation. He may himself do the "holding-out". Thus, if he orders goods worth £1,000 and signs himself "Managing Director for and on behalf of the company," the company is bound to the other party who does not know of the £500 limitation, see British Thomson-Houston Co Ltd v Federated European Bank Ltd, which was quoted for this purpose by Pearson LJ in Freeman & Lockyer. Even if the other party happens himself to be a director of the company, nevertheless the. company may be bound by the ostensible authority. Suppose the managing director orders £1,000 worth of goods from a new director who has just joined the company and does not know of the £500 limitation, not having studied the minute book, the company may yet be bound."
(Hely-Hutchison v Brayhead Ltd [1967] 3 All ER 98,102 (CA))

To establish that an agent has an apparent or ostensible authority to act on behalf of his principal it must be shown that the principal represented or permitted it to be represented that the agent had authority so to act. It is the principal's representation that creates the authority; not the agent's assertion that he has that authority:

"It is of the essence ... that [the principal] be shown to have represented or permitted it to be represented that [the agent] had authority to act on its behalf or that [it] had that authority. A line of authorities at the highest level makes that clear. The locus classicus on the subject is the judgment of Diplock LJ in Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd: [citing the passage referred to above about ‘apparent’ or ‘ostensible’ authority]. A further useful statement of principle is to be found in the speech of Lord Keith of Kinkel in Armagas Ltd v Mundogas SA [1986] 2 All ER 385,389-390 (HL):

"Ostensible general authority may also arise where the agent has had a course of dealing with a particular contractor and the principal has acquiesced in this course of dealing and honoured transactions arising out of it. Ostensible general authority can, however, never arise where the contractor knows that the agent's authority is limited so as to exclude entering into transactions of the type in question, and so cannot have relied on any contrary representation by the principal: Russo-Chinese Bank v Li Yau Sam [1910] AC 174 (PC)."

To the same effect is the judgment of this Court in New Zealand Tenancy Bonds Ltd v Mooney [1986] 1 NZLR 280,283 (CA) where the essence of the doctrine of ostensible authority was stressed - it is the principal's representation that creates the authority; not the agent's assertion that he has that authority.

......

It is not enough for a third party to show that he relied on the agent's representation that he had the authority of his principal. He must show that he relied on the representation of the principal that the agent had the necessary authority. See the judgment of Robert Goff LJ in Armagas Ltd v Mundogas SA at p 805-6."
(Savill v Chase Holdings (Wellington) Ltd [1989] 1 NZLR 257,304-5 (CA))

"A similar situation arose in Armagas Ltd v Mundogas SA [1985] 3 All ER 795 (CA). It had been suggested that an agent, having no ostensible authority to make a contract, had such authority to notify approval by his company's Board. At pp 805-6 Robert Goff LJ said:

"[The] submission suffers, in my judgment, from the same defect as the reasoning of the judge, in that it confuses reliance by a third party on a representation by the principal that the agent had authority with an assumption by the third party that it would in the circumstances be safe to rely on the agent's representation that he had authority.""
(Savill p 314)

The rules for finding ostensible authority as traditionally stated may be divided as follows:

(i) A representation must be made by words or conduct. But though such representation may be express, it may also be implied from acts of a quite general nature, eg putting the agent in a position carrying with it a usual authority: Freeman & Lockyer.

(ii) The representation must be made by the principal, or someone authorised in accordance with the law of agency to act for him: Freeman & Lockyer. A representation by the agent as to his authority cannot of itself create apparent authority: Freeman & Lockyer. But the conduct of the principal may make it more reasonable for the agent's representation as to his authority, or as to facts upon which his authority depends, to be relied on; and in a recent decision the principal was held bound on the basis that the agent, known to have limited authority to contract, nevertheless had authority to communicate the principal's approval to the transaction in question (First Energy (UK) Ltd v Hungarian Intl Bank Ltd [1993] 2 Lloyd’s Rep 194), though cf Armagas, in which there was little beyond an avowal by the agent that he had authority.

(iii) On general principles the representation must be of fact and not of law.

(iv) The third party must act on the representation: Freeman & Lockyer. If he does not know of any representation, express or, implied, but deals with the agent as a principal, it is obvious that he cannot rely on the doctrine. But the requirement that there must be a representation which is relied on is not interpreted strictly. It does not seem that the third party's reliance need have been to his detriment: it is probably sufficient reliance merely to enter into a transaction on the faith of the representation.

(v) The doctrine applies though the agent effects a forgery, if the act in the course of which the forgery occurred was within his apparent authority. The same is true where the agent acts illegally in some other way.

(vi) ......

(vii) The authority will be that which the agent reasonably appeared to have to the third party, taking into account the manifestations of the principal, the implied authority normally applicable in the circumstances or to a person in the agent's position, or both.
(Chitty para 31-056)

It is also an established rule that an act done for another by a person not assuming to act for himself, but for such other person, though without any precedent authority, may rank as the act of the principal if subsequently ratified by him. Ratification will be implied from any act showing an intention to adopt the transaction. It may be inferred in appropriate cases even from silence or mere acquiescence; and it seems clear that, like the grant of authority, it need not be communicated to the third party. (Chitty paras 31-026-7)

Grounds of decision

The Plaintiff is a shopkeeper who owns and operates a retail store at Wellington Road, Kolofo’ou, Nuku’alofa.

The 1st Defendant at the relevant time was a shareholder, Director, Secretary and employee of the 2nd Defendant, which admitted that he was a shareholder and employee. He held these positions in the 2nd Defendant company and also made deliveries of the 2nd Defendant's merchandise goods by van to the Plaintiff and other Chinese shop owners in Tongatapu. The 1st Defendant did not file any statement of defence or appear in Court.

The 2nd Defendant did not deny that at all material times it was, and still is, a company duly incorporated under the Laws of Tonga, carrying on business as wholesalers and retailers and having its registered office at Ma’ufanga.

I accepted the Plaintiff as a credible and reliable witness. He answered questions well in cross-examination and his answers stood up; and he gave logical and credible explanations of the figures in his notebook and the reasons for his actions.

The Plaintiff gave evidence that he was told by the 1st Defendant that he was a shareholder, Director and Secretary of the 2nd Defendant – which was borne out by the evidence from the Assistant Registrar of Companies.

It has to be remembered that the alleged dealings between the Plaintiff and the 1st Defendant were between 2 Chinese businessmen, so even if they were not necessarily done the way a Tongan or a European might do them, that did not mean that they were made up or did not occur in that way.

The only evidence for the 2nd Defendant, that of the witness Mrs Wang Lan, was extremely unsatisfactory, even taking into account the difficulty of working through a Chinese interpreter. She answered almost every question in examination-in-chief without hesitation, but under cross-examination her evidence was peppered with "I don’t know" and "I don’t really remember", so that overall I was unable to consider her a generally credible and reliable witness. Although she said she was the one responsible for the 2nd Defendant’s company finance (which I accepted), she had absolutely no records to back up what she said, or the case of the 2nd Defendant. She accepted that the 1st Defendant, who was her nephew, was a shareholder, Director and Secretary of the 2nd Defendant; and that he was the only person delivering goods for the 2nd Defendant. She contradicted herself when she said both that the 1st Defendant kept no records, and that sometimes he did and sometimes he did not; but she said that all she got when he returned at the end of the day was cash which he gave to her husband. There was nothing in writing to back up her assertions that the 1st Defendant was limited to buying goods up to $500 (although she admitted ‘maybe’ being aware of such transactions and that, if she agreed, most of the time his transactions were over $500), nor that the 2nd Defendant did not take money in advance for orders, and I was unable to accept her evidence about that.

On the evidence of the Plaintiff, supported by what had occurred with his other witnesses in similar circumstances, I accepted that in 2003 he had a course of dealings with the 1st Defendant, which he believed on good grounds were being done by the 1st Defendant in his position as a Director and employee of the 2nd Defendant and with its authority. I accepted the Plaintiff's evidence that he gave advance payments to the 1st Defendant in exchange for receiving cheaper goods for him in due course; and that he relied on the 1st Defendant to produce the kind of goods he was looking for. While the price may have been set by Wang Lan and her husband, as she alleged, that is not really relevant. Even though the exact goods were not specified at the time the Plaintiff made the advance payment, ultimately the Plaintiff had the choice of whether to accept any particular goods offered to him by the 1st Defendant or not.

I further accepted that the notes in the Plaintiff's notebook (Plaintiff’s Productions p 1-5) were not a full commercial record of the transactions between him and the 1st Defendant, and were not intended to be so, as they were simply a brief records between the two of them. I viewed them as a type of Chinese IOU, and an IOU is after all a legally binding document. Thus the informality of the notes in the notebook did not mean that the Court could not take them into account in order to establish whether there was a debt due to the Plaintiff. I considered that the notebook had a ring of truth, especially after Mrs Lee was able to produce a similar record when asked about it in cross-examination. The figures in the notebook were a logical progression, being scratched out when that that particular transaction was cleared; and the system of the debtor writing the record in the notebook was logical.

The Plaintiff's oral evidence was consistent and also tallied with the figures in the notebook, which is what I found when I looked at the figures in the notebook alone before re-capping the Plaintiff's evidence.

Particular points on the evidence were as follows: One of the early entries on page 1 of the notebook relating to $36,840 was said by the Plaintiff to be signed by the 1st Defendant for the 2nd Defendant Rainbow Co, and I accepted that evidence. It was clear from all the evidence taken together that the monies paid by the Plaintiff to the 1st Defendant were not just loans, or even personal loans, but were advance payments for the delivery of goods, and the delivery of the goods amounted, as it were, to repayment: eg on 19 March 2003 goods worth $123,046 were delivered, wiping out all the debt due to the Plaintiff except for the relatively small amount of $6,462. Then there was the occasion around the end of March/beginning of April when the 1st Defendant gave the Plaintiff a cheque for $47,000 from the 2nd Defendant Rainbow (referred to in Para 10 of the Statement of Claim), which was not met when presented, but which was recorded in the Plaintiff's ANZ Bank statement (Plaintiff’s Productions p 7). The same ANZ Bank statement also showed the movement of cash in the Plaintiff's bank account of thousands of pa'anga, up to $36,000, giving credence to the Plaintiff's evidence that he did have that sort of money available in cash. Then there was the cheque from the 2nd Defendant Rainbow on 3 May for $36,000 - although that was not met when it was presented in the bank, the important point about that was the Plaintiff's evidence that it was a cheque from the 2nd Defendant Rainbow.

On points of detail, I found that the sum owing of $56,893.00 referred to in Para 9 of the Statement of Claim was established by the Plaintiff in his evidence, supported by the record in his notebook. Although the dates when the Plaintiff was given cheques for $36,000 are rather confused in the Statement of Claim, those cheques were referred to in the Claim and the Plaintiff gave evidence about them. Finally, the outstanding amount of $96,502.00 now claimed was referred to in Para 19 of the Amended Statement of Claim, and the derivation of that amount was clearly shown on page 5 of the notebook record and supported by the Plaintiff’s oral evidence: I accepted all that evidence as establishing on the balance of probabilities that total amount due on 8 May 2003 of $96,502.00.

Finally there were the Plaintiff's dealings with Wang Lan after the first cheque for $36,000 was not honoured and he called her, after which the 1st Defendant came back with the second cheque for $36,000 drawn by Mei Fa Guo (Plaintiff’s Productions p 6), but there was no money in the bank to meet that either, after which Wang Lan said she would return the money to the Plaintiff, although that never happened. I accepted the Plaintiff's evidence about that and did not accept the denials by Wang Lan.

The Plaintiff was well aware that the 2nd Defendant was not an importer of cigarettes, but he bought them from the 1st Defendant because he could get them at a cheaper price than buying direct from the importers TCF or MC International. The evidence from the 2 TCF employees Mr Po’uliva’ati Latu’ila and Mr Talailama Motu’apuaka corroborated this evidence as it showed that the 1st and 2nd Defendants did buy cigarettes in bulk from TCF. Wang Lan also accepted that the 2nd Defendant bought cigarettes from other companies.

That state of affairs was particularly supported and borne out by the evidence of Mr Talailama Motu’apuaka, now Sales Supervisor at TCF, whom I considered to be an independent, credible and reliable witness. His evidence was that he knew the 1st Defendant under the name of Chris Wang when he worked on the TCF delivery truck in the Ma’ufanga area for 2 months; and the 1st Defendant had an Auntie Lily who lived at a house beside Faua Wharf, whom he pointed out in Court as Wang Lan. 

Talailama said that the 1st Defendant used to request cigarettes and other merchandise including corned beef for his delivery truck. When the 1st Defendant needed goods from him he would call him and Talailama would list them in his diary and deliver them to a building opposite the OSB building, and would invoice and receipt them (sometimes in the 1st Defendant’s name and sometimes in Lily’s name) once the 1st Defendant paid for them. TCF’s policy was that drivers were not allowed to sell goods on credit, but the 1st Defendant knew their stocktaking time every 2 weeks and purchased goods on credit and paid for them before the stocktake. The largest sum for which he had bought on credit had been $60,000. Once or twice Talailama had delivered cigarettes to the 1st Defendant at a house at the back of Lily’s Night Club. Wang Lan accepted that the 2nd Defendant had a warehouse at Lily’s.

Talailama said that anyone who ordered a large quantity of cigarettes got a special price (given by the person in charge of the drivers) if he ordered over 10 cartons, ie 300 sleeves. If the normal price was $50 per sleeve, the special price would be $48 down to $45.

When the 1st Defendant left the country Talailama had gone to Lily to pick up a cheque or cash, and he had also gone with the 1st Defendant to pick up money from the Plaintiff. He had heard rumours on a Saturday that the 1st Defendant had disappeared on the Friday, but his stocktaking for TCF was on the following Tuesday, he had gone to Lily’s home at Faua Wharf at 9.00 am and tried to convince her, showing all the invoices purchased on credit. She had told him that he could not get money at that time, but would get it in the afternoon, which he did and got the money, which was around $2,700. Lily had told him she would not pay the money, but her husband had told her to pay because the cigarettes had gone into the shop.

I also heard evidence from Mr Pouliva’ati Latuila, who was Manager in charge of the TCF’s delivery trucks, that he discovered that drivers had been allowing purchases of goods on credit, and that the name of the 1st Defendant, Chris Wang, appeared many times, with the amount of the invoice to him matching the driver’s shortage for that day. He said the name given to him was Chris Wang, but the invoice was in name of Collin Wang. Most of the purchases were of tobacco, purchases of other goods just being minimal. He was the person who authorised reductions for large special purchases of cigarettes of more than 10 cartons; he gave the 1st Defendant $1 off the wholesale price, though he was not the only person making special purchases. He had recorded the shortages in a Short Pay-in List of 20 items from 16 December to 8 May (Plaintiff’s Exhibit 1); the largest shortage being $58,884.70 on 8 May, and the smallest being $436.60 on 5 May. He had directed the drivers concerned that payment had to be made that day. That was done by the drivers making contact directly with Chris Wang, or going to collect money from other stores, or getting money from the 2nd Defendant’s shop in Railway Road.

Mr Latuila said that in relation to the final shortage, the drivers had phoned to tell them that Chris Wang had given them 2 cheques to pay for the shortage, and he had directed them to pay in the 2 cheques, one was a Bank of Tonga cheque dated 8 May 2003, drawn on the account of Mei Fa Guo for $36,000 (the same cheque as given to the Plaintiff – Plaintiff’s Productions p 2); and the other an MBf Bank cheque also dated 8 May 2003, drawn on the account of Nissi Trading Co for $24,000. The MBf Bank had told him that there were insufficient funds to meet it, but there might be sufficient funds the following day, Friday, as the 2nd Defendant paid in funds every day. There had been sufficient funds in the Bank of Tonga account, but when it was presented he was informed that there was a stop payment on it. The debt of $58,884 still stands.

On all that evidence I found that the final balance of $96,502.50 claimed by the Plaintiff was the resultant balance after a series of transactions and beginning around 21 March after a large delivery by the 1st Defendant which wiped out the debt to the Plaintiff apart from a small balance of $6,462. This was not all a one-way process, as around 12 April the 1st Defendant gave the Plaintiff goods worth $30,544, and again around 16 April he delivered cigarettes worth $43,160, leaving a balance of $37,893. Then the 1st Defendant asked for more money from the Plaintiff on several occasions until the debt rose to $97,869, and even then the 1st Defendant delivered goods to the Plaintiff worth $1366.50, leaving a final balance of $96,502.50. The picture gained from that evidence is of the 1st Defendant wheeling and dealing to get as much money as possible to buy as many cigarettes as possible at a time to get a good discount, and then having to deliver the cigarettes without delay, juggling his various liabilities. Clearly something intervened to prevent the 1st Defendant continuing with that process, but the Court does not have to speculate on why that was, and there was insufficient evidence to establish that the 1st Defendant was acting fraudulently: the result was that when that the music stopped when the 1st Defendant disappeared in this particular game of pass the parcel, it was the Plaintiff who was left holding one of the parcels.

The Plaintiff's evidence was supported, as stated above, by the evidence of Talailama from TCF that he sold cigarettes in bulk on credit to the 1st Defendant; and that when the 1st Defendant disappeared he also was left being owed money by the 1st Defendant, payment of which he obtained when he went to see Wang Lan (or Lily as he knew her), one of the major shareholders of the 2nd Defendant. He also gave evidence of delivering the cigarettes to the 1st Defendant at the 2nd Defendant's premises at Fanga. I found all that evidence credible and reliable.

There was also the supporting evidence, again referred to above, from Mr Latuila from TCF about the many shortages relating to transactions by the TCF drivers with the 1st Defendant and the outstanding amount of $58,000 when the 1st Defendant disappeared. Once again the 2nd Defendant had apparently taken responsibility and had attempted to pay that outstanding amount by giving Mr Latuila 2 cheques (including the cheque from Mei Fa Guo which the Plaintiff had earlier tried to cash unsuccessfully), but in the outcome neither had been honoured. Again I found that evidence credible and reliable.

There was also the evidence of the other 3 Chinese witnesses, who had had similar experiences to the Plaintiff with the 1st Defendant. I also accepted their evidence as credible and reliable. 

Finally there was the evidence of Mr Lausi’i, Assistant Registrar of Companies, that the 2nd Defendant was registered as a company on 2 November 2001, having its office at Ma’ufanga and having 5 Directors and shareholders: Wang Lan (35 shares), Collin Wang (35), Peter Wang (10), Wang Jun (10), and Wang Qiang (10) [the 1st Defendant]. The Company Secretary was Wang Qiang.

On 17 September 2002 the shares of Peter Wang and Wang Jun were transferred to Wang Qiang, so that he then had 30 shares. Then on 6 May 2003 the 1st Defendant Wang Qiang ceased to act both as a Director and as Company Secretary and Jeremy Wang became the Company Secretary.

At the date on which Mr Lausi’i gave evidence (23 November 2004), Wang Lan held 65 shares and Collin Wang held 35 shares.

Mr Lausi’i also said that there was a letter dated 10 November 2003 from Wang Lan, apparently to the 1st Defendant Wang Qiang and copied to the Registrar resigning as Director and shareholder effective as from 2 June 2002. Then there was a reply to her from Mr Lausi’i dated 11 November 2003, stating that her request to cease to be a Director and transfer of her shares had been recorded accordingly, so that the new shareholding structure was Mr Collin Wang 35 shares and Mr Qiang Wang (the 1st Defendant) 65 shares. But those letters were both cancelled by a letter dated 9 March 2004 from Mr Tevita Vaa’ivaka, Senior Assistant Secretary at the Ministry: Mr Lausi’i did not know why they were cancelled, except that there was a requirement for a form to be completed before that. His evidence was therefore that Mrs Wang Lan is still the majority shareholder and a Director of Rainbow Trading Co Ltd.

So the salient features of Mr Lausi’i’s evidence were the removal of the 1st Defendant as a Director, Secretary and shareholder of the 2nd Defendant on 6 May, only 2 or 3 days before his disappearance from Tonga. Whatever other inferences might be drawn from that, it leads to the very clear inference that, unless the removal was a sheer coincidence, which on the balance of probabilities seems most unlikely, the 1st Defendant's disappearance was not unplanned and may have occurred with the knowledge of some of the other people involved in the management of the 2nd Defendant. There was no evidence from Wang Lan to explain why those actions to remove all connections of the 1st Defendant with the 2nd Defendant were taken at that time, so beyond that the Court cannot speculate. But that evidence is important because by the lack of explanation from Wang Lan of the circumstances surrounding it, she cast doubt on the remainder of her evidence.

There was also the strange evidence of Mr Lausi’i about the attempt by Wang Lan by the letter dated 10 November 2003 from her, apparently to the 1st Defendant Wang Qiang and copied to the Registrar resigning as Director and shareholder effective as from 2 June 2002, which attempted to stop her involvement with the 2nd Defendant company retrospectively, but which had ultimately been cancelled on 9 March 2004. Once again, on the balance of probabilities that pointed to Wang Lan being fearful of her responsibility as a Director and shareholder and attempting to avoid it retrospectively. Once again, there was no evidence from Wang Lan to explain why she had written the letter.

So on all the evidence it is clear that all these financial transactions between the Plaintiff and the 1st Defendant were part of one course of dealing in the purchase of goods by the Plaintiff from the 1st Defendant as an employee or agent of the 2nd Defendant. Even if some of the transactions had the appearance of borrowing by the 1st Defendant himself, the reality was that these were all part of the one course of business. The dealings amounted to advances of money by the Plaintiff before the purpose of unspecified purchases of goods were from the 1st Defendant.

Because of this, the transactions were not personal to the 1st Defendant, who was acting as an employee of the 2nd Defendant in the course of his employment (with the ostensible authority of the 2nd Defendant). The 1st Defendant was driving the delivery van belonging to the 2nd Defendant, and he occasionally gave the Plaintiff a cheque from the 2nd Defendant in repayment if he could not obtain goods in time. The Plaintiff had on occasion been to the 2nd Defendant's warehouse to collect the goods. He had later dealings with one of the 2nd Defendant's major shareholders, Wang Lan, about the money outstanding to the Plaintiff from the these transactions as a result of the disappearance of the 1st Defendant. On the balance of probabilities there was no reason why the Plaintiff should have thought that he was making the some kind of private arrangement with the 1st Defendant, rather than with his employer the 2nd Defendant.

The 2 TCF witnesses were in a similar position and Wang Lan repaid Talailama in full and appeared to take responsibility for the 2nd Defendant to TCF for the larger shortage of $58,800 by passing on to it 2 cheques, albeit these cheques were not in the event honoured.

When considering the facts in relation to the relevant law, the Court must take account of the evidence before it. If, despite inadequate pleadings, an issue is clearly raised and is understood by the opposing party to be raised and then dealt with, it should not be excluded because of technicality of pleadings: Prasad v Morris Hedstrom (Tonga) Ltd (No 2) [1993] Tonga LR 69,73 (CA). So that even if the Plaintiff's case was pleaded in tort, it can only be fair if the Court reaches its decision in terms of contract, especially after Counsel have been given an opportunity to make submissions on the basis of a claim on contract. This Court is not working in a sophisticated legal system and it must give Counsel on behalf of their clients some leeway in order to produce a fair result. In doing so in this case I cannot see any real disadvantage to the 2nd Defendant, or that a different approach would have resulted in different evidence. There was a very thorough cross-examination of the Plaintiff, attacking his evidence on the basis of the veracity of his alleged course of dealing with the 1st Defendant and the records in his notebook, which was applicable to a case in contract or tort.

The crucial question in this case was whether the 1st Defendant had the actual or apparent/ostensible authority of the 2nd Defendant to do what he did.

Considering the tests in Chitty para 31–056, firstly I considered that the representation by the 2nd Defendant was implied from its act and conduct of a very general nature in putting the 1st Defendant in a position going round selling merchandise for which he was expected to collect payment in cash: Freeman. The contractor can hardly ever rely on the actual of authority of an agent, and in that situation the 1st Defendant had ostensible authority to seek advance payments – which after all, many wholesalers would see as a prudent measure – and even if the 2nd Defendant did not permit him to do that, the Plaintiff was not to know: Hely-Hutchison. Nor was the Plaintiff to know that the 1st Defendant was limited to buying goods up to $500, even if I had accepted Wang Lan’s evidence about that, which I did not. The 2nd Defendant permitted the 1st Defendant to act in the conduct of its business selling goods wholesale to retail shops (Freeman) and the 1st Defendant’s conduct was not unusual for a person in his position. As the Plaintiff was dealing with a Director of the 2nd Defendant, he did not required to go into the formalities of his appointment: per Lord Atkin in Kreditbank Cassel. The Plaintiff did not and cannot have known that the 1st Defendant’s authority may have been limited so as to exclude him entering into transactions of this type: Armagas.

The 1st Defendant may even have had implied authority to take advance payments as part of his incidental authority as a delivery salesman for the 2nd Defendant. His course of dealings with the Plaintiff was within the ordinary course of business. In boosting sales by taking advance payments for larger orders, he was increasing business and so acting for the benefit of the 2nd Defendant company. Wang Lan and her husband clearly knew of the amount of the 1st Defendant’s sales when they received his cash takings each day, and were not troubled by the absence of records from him. In that sense the 1st Defendant’s authority may even have been implied from the general circumstances and nature of the transactions he carried out in taking advance payments for goods to be delivered: Branwhite.

Secondly, that was representation by the 2nd Defendant, ie the principal, not by the agent, ie the 1st Defendant: Armagas, Savill. What occurred in this case appear to go beyond the mere avowal by the agent that he had authority, as in Armagas.

Thirdly, in advancing large amounts of money to the 1st Defendant for the purpose of getting lower prices due to bulk buying, the Plaintiff clearly acted on the representation by the 2nd Defendant.

Fourthly, the 1st Defendant as agent reasonably appeared to the Plaintiff as contractor to have that authority. The 1st Defendant appeared to be acting within the scope of his authority, even if he was doing so in a wrongful and unauthorised manner, right up until his disappearance: Heaton, Armagas. Even if the 1st Defendant did go outwith the scope of his authority, there was a very close connection between his authorised duties and what he actually did: Dubai Aluminium.

As a crosscheck on the position, it clearly meets the Diplock tests from Freeman. The representation was made to the Plaintiff as contractor; it was made by a person having the authority to do so, ie the 2nd Defendant company by its conduct; the Plaintiff as contractor was induced to enter into the series of contracts with the 2nd Defendant company through its agent the 1st Defendant in reliance on the representation; and there was no evidence as to the 2nd Defendant company being deprived of authority to do that by its Memo and Articles.

Furthermore, the Plaintiff was entitled to imply that the 2nd Defendant had ratified or acquiesced in at least some of the series of transactions when it showed an intention to adopt them when it allowed the 1st Defendant to give the Plaintiff the cheque for $47,000 at the end of March/beginning of April 2003, and the cheque for $36,000 on 3 May. That coincides with the evidence that the 2nd Defendant, via its 2 major shareholders, had knowledge of the 1st Defendant’s day-to-day takings.

This was a clear case of the authority of the 1st Defendant agent, as it appeared to the Plaintiff (and others as well), being that he had ostensible authority to take advance payments for goods, including amounts over $500. That was the sole test of the 2nd Defendant’s liability.

Even if the 1st Defendant conducted fraudulent transactions, the 2nd Defendant would be liable: Lloyd v Grace Smith [1912] AC 716, [1911-13] All ER Rep 51 (HL). In this connection I also gave consideration to whether on the facts the 1st Defendant was liable in tort to the Plaintiff, and so the 2nd Defendant might be vicariously liable, but I considered that, in light of the course of dealings which I found established, there was insufficient evidence of fraudulent actings by the 1st Defendant, as opposed to a breach of contract. Bearing on that is the original difficulty I identified with the Plaintiff’s pleadings, ie that it did not appear to be pleaded that the 1st Defendant owed any duty in tort to the Plaintiff.

So the 2nd Defendant was bound by the actions of the 1st Defendant, but failed to produce the goods to meet its indebtedness to the Plaintiff or to repay the money outstanding, so it is in breach of contract and is liable for the sum sued for, with interest as claimed at 10% from 30 April 2003.

I shall order that, in part satisfaction of the Plaintiff’s claim, the sum of $63,000 transferred to a term deposit account with the ANZ Bank on 6 February 2004 and held there under this Court’s order of 5 March 2004, together with the interest thereon, shall be paid by the ANZ Bank to the Plaintiff.

On this basis I make no finding against the 1st Defendant, as I find he was acting as agent for the 2nd Defendant, and not on his own behalf.

Costs

I see no reason why the normal basis should not apply, so I award costs as agreed or taxed to the Plaintiff against the 2nd Defendant.

Delay in decision

In conclusion, I have to apologise for the length of time it has taken to produce this decision, which has partly been due to the pressure of other Court matters of a more urgent nature. But the time taken has also been the result of Counsel not analysing their cases properly in terms of the facts and their relation to the law before they raise them and presenting them to the Court in a muddle, so that the Court has had to spend a great deal of time doing their work for them. The lateness of the decision is the penalty which Counsel and their clients have to pay for them falling short in their preparation of the case.

1 September 2006

R M Webster
Chief Justice