SUN WAH OIL & CEREAL LTD. v. GEE TAI TRADING CO. LTD.

IN THE COURT OF APPEAL

1992, No. 206
(Civil)

Headnote

Contract for sale and purchase of goods - Meaningless clause inserted - Whether such clause vitiated the contract or could be severed leaving the rest of the contract intact - Nicolene v. Simmonds [1953]1 QB 543 applied - Scammell v. Ouston [1941] AC 251 distinguished. Court of Appeal, upholding judgment in court below awarding damages to purchase, dismissed Vendor's appeal.

IN THE COURT OF APPEAL

1992, No. 206
(Civil)

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J U D G M E N T

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Litton, J.A.:

Introduction

1. This an appeal from the judgment of Sears J. given on the 8 December 1992 whereby he ordered damages to the plaintiff amounting to US$415,000 for failure by the defendant to deliver ten thousand metric tons of urea, an agricultural fertilizer. The contract, according to the plaintiff's case, was concluded by an exchange of telexes on 5 January 1990. The provision which has given rise to difficulty is a "force majeure/arbitration" clause. It is the defendant's case that whilst there was such an exchange of telexes, and the parties might have thought they had a concluded bargain, in fact an essential term therein was so uncertain that, in law, no enforceable contract was made.

In the court below, the judge concluded (1) that there was no uncertainty in the contract; the clause in question was, he said, understood by both parties but (2) he went on to find, even if the clause was too uncertain, it was severable and did not vitiate the whole contract. Accordingly the vendor was bound.

2. As regards finding (1), the judge reached his conclusion by accepting the testimony of the vendor's director who deposed to his own understanding of what the clause meant. This approach is plainly wrong and leading counsel for the purchaser Mr. Ribeiro, Q.C. quite rightly does not seek to sustain the judgment on this ground.

3. The appeal on this point therefore boils down to this primary issue. It is the so-called 'force majeure/arbitration' clause an essential term, the uncertainty of which vitiates the whole contract, rendering it a nullity, or is it something which can be severed and disregarded as meaningless, leaving the rest of the contract enforceable in law?

The contract

4. I now turn to the exchange of telexes on 5 January 1990 in greater detail. By a telex of that date, the defendant (vendor) offered to sell to the plaintiff (purchaser) ten thousand metric tons of urea upon detailed terms at US$103.50 per metric ton net shipped weight FOB Nakhodka, USSR. The offer was subject to the purchaser's telex confirmation reaching the vendor's office before 11.30 a.m. on 6 January 1990. The terms and conditions in the vendor's telex ended thus: "Force majeure/arbitration: standard terms to apply. Looking forward to your favourable confirmation by deadline".

5. By a telex received in the vendor's office on the same day (and therefore within the deadline) the purchaser accepted the telex offer.

The letter of credit

6. On 9 January 1990 the China and South Sea Bank opened a letter of credit on the purchaser's application in favour of the vendor in the sum of US$1035,000 covering the shipment of ten thousand metric tons of urea from Nakhodka USSR, shipment to be effected by 28 February 1990 at the latest. A copy of the Letter of Credit was faxed by the purchaser to the vendor on 11 January 1990. In the same fax the purchaser said: "Please confirm cargo readiness by return, enabling us to have sufficient time to charter vessel for lifting the subject parcel during early February 1990". It is the vendor's case on this appeal that the Letter of Credit which was opened failed to conform with the terms of the contract, thereby absolving the vendor from any obligation to ship the goods.

7. The judge found in the vendor's favour to this extent, that he held that the LC terms failed to conform with the contract, but concluded that such variance as existed was accepted by the vendor or, having regard to the conduct of the vendor after the LC was open, its right to object to the variance was waived. This point only becomes relevant if we dismiss the vendor's appeal on the first point namely whether the "force majeure/arbitration" clause was severable. It is to this point that I now revert.

Effect of uncertainty

8. There are of course many cases in the books where a seller has inserted a contractual term to the effect that his obligations are "subject to force majeure". Equally there are many contracts which are subject to arbitration. The courts have had no difficulty in construing such clauses and giving effect to them. The problem in this case is the presence of the words "standard terms to apply". It is common ground that there are no standard terms which are applicable. What then is the result in law?

9. Looking at the two telexes objectively it is clear in my judgment that the parties had on 5 January 1990 reached a concluded bargain. Nothing more was left to be agreed at a future date. The position here seems to me quite different from that of the parties in Love and Stewart v. Instone (1917) Vol. 33 Times Law Reports 475, a case relied on heavily by Mr. Griffiths QC for the vendor, where the "strike and lock-out clauses" referred to in the correspondence between the agents of the parties were be spelt out in a contract note which was to be sent by one of the principals in London. The court found in that case that both parties contemplated the execution of a formal contract: a point which, in the present case, hovered as it were in the wings in the court below, since the buyer's telex of 5 January 1990 did make reference to a formal "purchase contract", and one was in fact prepared by the purchaser. But the point has now gone, the parties being content that we should decide the case purely upon the effect of the "force-majeure/arbitration" clause in the two telexes.

10. Mr. Griffiths, QC has also referred us to the case of Bishop & Baxter v. Anglo-Eastern Trading & Industrial Company Ltd. [1944]1 KB p.12 where the seller's acceptance of the buyer's offer to purchase 20,000 woollen cardigans was "subject to the necessary licences being in order" and also "subject to war clause". This seems to me to be a clear case where a clause referred to in correspondence had yet to be agreed. The matter was therefore still in negotiation and there was no concluded contract.

11. The question I asked myself is this: With reference to the present case, can it be said after the receipt by the vendor of the purchaser's telex of 5 January 1990 that the parties were still in negotiation?

12. The point concerning the "force majeure/arbitration" clause as put by Mr. Ribeiro QC leading counsel for the purchaser is this: The question is not whether the clause in question is uncertain and unenforceable; of course it is unenforceable, he said, since it is uncertain as to its meaning. The question is whether the contract containing a meaningless clause is unenforceable. He relies heavily on Nicolene v. Simmonds [1953]1 QB 543 where the contract contained these words "We are in agreement that the usual conditions of acceptance apply". There were no such conditions at all and the words were meaningless. At p.551 Lord Justice Denning said :

"I take it to be clear law that if one of the parties to a contract inserts into it an exempting condition in his own favour, which the other side agrees, and it afterwards turns out that that condition is meaningless, or what comes to the same thing, that it is so ambiguous that no ascertainable meaning can be given to it, that does not mean that the whole contract is a nullity. It only means that the exempting condition is a nullity and must be rejected. It would be strange indeed if a party could escape from every one of his obligations by inserting a meaningless exception from some of them."

13. The situation here in my judgment is to be contrasted with that in Scammell v. Ouston [1941] AC 251 where the purchaser's agreement to buy the motor van was "on the understanding that the balance of purchase price can be had on hire-purchase terms over a period of two years". It is difficult to see how, before those terms had been finalised, there could be said to have been a concluded bargain between the parties. The expression "hire purchase terms" is not self-explanatory, and to have imposed on the purchaser a cash sale, not one on hire purchase terms, would clearly have been to require the purchaser to accept a bargain he had himself never made.

14. In my view the judge was correct in this case when he concluded that the meaningless "force majeure/ arbitration" clause could be severed leaving the other obligations of the parties intact. This conclusion is reached objectively by a proper construction of the two telexes. I derive some comfort in this conclusion from the knowledge that this appears to conform with the parties' own understanding of their positions, for when problems arose for the vendor and difficulties were experienced with their supply of urea from the USSR they did not take the view then that no binding contract existed between the parties. Instead they took the point that they were protected by the force majeure clause, a position which is now conceded to be untenable.

Variance between the contract and the letter of credit

15. The differences between the contract and the letter of credit as regards the documents to be tendered in negotiation under the letter of credit have been helpfully tabulated by Mr. Griffiths and I gratefully adopt his tabulation on page 6 of the appellant's skeleton argument. The differences are:

16. In my view the judge was correct in finding that in relation to some of the requirements the letter of credit did not conform with the contract. It does appear curious that when the contract required, for example, three copies of the certificate of quality and quantity, the letter of credit should have specified four. Moreover, as regards the certificate of USSR Origin, the contract referred to the certificate in the singular, but the letter of credit required presentation of four copies. These are variances, however petty they might to be. There are other requirements which probably did conform. For example, as regards the last item (i), the contract contemplated that the loading of the 10,000 metric tons should be a continuous process. This meant in effect that partial shipment would not have been allowed. And as regards transhipment, the question could not have arisen since the buyer was to charter the vessel to load the 10,000 metric tons. As regards (h) in Mr. Griffiths' tabulation, it has the effect of imposing an obligation on the buyer to instruct the bank to amend the letter of credit, naming the carrying vessel, once the vessel has been nominated. I cannot see this as a variance of any significance from the requirement of the contract, even though the contract was silent as regards that matter. The other differences refer generally to matters of machinery.

17. But, as the judge found upon the facts, the vendors acted in the exchange of telexes throughout as if they accepted the letter of credit terms. The vendors' evidence to the effect that they objected orally to the terms, or some of them, was disbelieved by the judge. But, of course, the mere fact that they purportedly objected to some of the terms meant that they knew all about them. Mr. Hermann Leung, the vendor's director, in his written statement expressly stated that he had studied the terms of the letter of credit; and yet in the exchange of the telexes he never complained.

18. The judge was impressed by the vendor's telex of the 5 February 1990 (which came after a series of telexes from the buyer, who was pressing the vendor to have the cargo ready for shipment) in which the vendor said: "Laycan and cargo readiness will be all fixed tonight after my meeting with the supplier in Guangchou. Will contact you on phone and officially advise tomorrow morning by telex. Please wait. Sorry for such delays caused by our supplier. Please understand and cooperate. Once known, will ask you to amend LC accordingly."

19. In the context of what went before between the parties the judge concluded that the reference to amending the LC could only have meant that the vendors accepted condition (h) in Mr. Griffiths' tabulation. In my judgment the judge was correct in his conclusion, and was on the evidence entitled to conclude that such variations as existed between the contract and the Letter of Credit terms were accepted by the vendor; alternatively they have waived the right to object.

20. This conclusion again seems to me to accord with the common-sense of the matter. It cannot have been the contractual intent of the parties in early January 1990 that, months after the event, lawyers should come along and scour the fine print of the contractual documents to see whether there were discrepancies between the contractual terms and the LC terms and, finding discrepancies, conclude that the vendor never had the obligation after all to ship the goods, when all along they themselves were plainly of the view that there was such an obligation.

Damages

21. Section 53(3) of the Sale of Goods Ordinance Chapter 26 provides that "where there is an available market for the goods in question, the measure of damages is prima facie to be ascertained by the difference between the contract price and the market or current price of the goods at the time or times when they ought to have been delivered, or, if no time was fixed for delivery, then at the time of the neglect or refusal to deliver".

22. The judge ordered damages on the basis of this provision, finding on the evidence that there was an available market for the goods in question. Mr. Griffiths QC for the vendor attacks this finding.

23. The evidence on the point came from an expert witness Mr. Clive Yearsley whose testimony was generally to the effect that in about February 1990 there was an available market in urea, albeit that the market was tight. To reach the market price of US$145 per metric ton Mr. Yearsley extrapolated figures from the price of urea available to be shipped in bulk from Odessa in the Black Sea, not from Nakhodka. This led counsel for the vendor to argue before us that on the evidence there was no available market at Nakhodka. This in my judgment misses the point. The "available market" referred to in section 53(3) is that available to the parties generally in Hong Kong; and if urea was available to be shipped in bulk from Odessa to Tianjin, which was what the parties contemplated as the destination, that was plainly an available market. In my view the judge did not err in his award of damages. I would accordingly dismiss the appeal with costs against the appellant.

Mortimer, J.:

24. By exchange of telexes the parties purported to make a bargain for the sale and purchase of 10,000 metric tons of urea. It was FOB and contained necessary terms for quality, quantity, delivery and payment by documentary credit. In addition, the contract contained the disputed term which reads: "Force majeure/arbitration: standard terms to apply". It is common ground in this appeal that there are no such standard terms. There was no evidence of such before the learned judge and no meaning can be ascribed to the words "standard terms to apply". The defendant failed to deliver on a rising market. The plaintiff sued and succeeded. The appellant here and below contends that this disputed clause is without effect and that therefore the contract is unenforceable; no meaning can be ascribed to the term.

25. The basis of the submissions are these. (1) That the parties had yet to agree this term and therefore had not concluded their bargain or (2) that as the term itself was meaningless no bargain had been made, because the offer which contained the term was incapable of acceptance. So in either situation there was no concluded bargain.

26. For these submissions Mr. Griffiths for the appellant relies upon a number of well known cases Scammell v. Ouston [1941] AC 251, Love and Stewart v. Instone (1917)33 Times Law Report 475, British Electrical v. Patley Pressings [1953]1 WLR 280 and Bishop & Baxter v. Anglo-Eastern Trading [1944]1 KB 12. In each of those cases the plaintiff failed to prove a concluded contract which was enforceable. But an issue of this kind can arise in a number of different circumstances; it is not possible to be exhaustive.

27. The first is where the parties have not achieved a concluded bargain because they have not completed their negotiations. For example, where they have agreed terms but those terms are found to be subject to some further agreement or clarification without which the bargain cannot be said to be concluded. Often there will be the words "subject to" in the offer or acceptance.

28. The second is where the whole basis of the agreement is so uncertain that no meaning can be ascribed to it. In Scammell v. Ouston (supra) Lord Russell refers to those two situations at p.261, towards the end of his speech, where he says the respondents are faced with what appears to be a fatal alternative namely either (1) this term of the alleged contract is quite uncertain as to its meaning, and prevents the existence of an enforceable contract, or (2) the term leaves essential contractual provisions for further negotiation between the parties, with the same result.

29. There is a third circumstance where the parties have purported to conclude an agreement unconditionally but in that agreement there is a term to which the court cannot ascribe a meaning. Where "the contract" is not made subject to further agreement, and where the whole basis of the agreement is not such as prevents the existence of an enforceable contract. Such was the situation in Nicolene v. Simmonds [1953]1 QB 543. That was the case in which it was found that a bargain had been made and that meaningless words used in the course of making that bargain could be ignored. As Lord Denning said at p.551 "In my opinion a distinction must be drawn between a clause which is meaningless and a clause which is yet to be agreed."

30. Mr. Ribeiro submits that here the clause was meaningless in the sense that no enforceable meaning can be ascribed to it but that it can be rejected without rejecting the contract as a whole. For my part I find it is useful to adopt the question he posed when he said it is useful to ask not whether the clause is meaningless but whether the contract is meaningless. If the clause is an essential one it is likely that no meaning can be ascribed to the contract without it. But there can be no easy answer. The court will always seek to give commercial effect to bargains made by businessmen if it is proper to do so. Were it otherwise the law would fail in its certainty and its usefulness; commercial chaos would result.

31. In the instant case it is accepted the judge was wrong when he found that the clause had a meaning which could be ascribed to it by the court and neither party sought to support him on this. However he was right when he found there was a concluded bargain which could be enforced without the clause and without giving any meaning to that clause. For my part I agree with the judge when he found that the clause was severable and the contract was otherwise enforceable, relying as he did upon the judgment of the Court of Appeal in Nicolene v. Simmonds and in particular the judgment of Lord Denning.

32. Before leaving this matter, I think it is appropriate to say that in the course of Lord Denning's judgment, he mentioned the possible effects were the situation otherwise so that one could not sever a meaningless clause from a concluded contract. He said it would be most unfortunate if the law should say otherwise as defaulters would scan their contracts to find some meaningless clause on which to ride free. A glance at the Defence in this case and perhaps the Notice of Appeal (astonishing at least for its length which equals the length of the judgment) makes it clear that there could at least be a fear that this has happened in this case. So, so far as the first matter is concerned I would dismiss the appeal.

33. In relation to the points raised about the Letter of Credit and the measure of damages I agree entirely with the conclusions expressed by Litton J.A. and I also agree with the judge. I also would dismiss this appeal.

Godfrey, J.:

34. I agree that this appeal must be dismissed. On the main issue the first question as it seems to me is a question of construction. The telex from the seller of 5 January 1990 starts off with the words "We are pleased to offer you firm subject to your telex confirmation reaching here before 11:30 a.m. 6 Jan 1990 with terms and conditions as follows". The terms and conditions are then set out. Those terms and conditions include the following: "Force majeure/arbitration : standard terms to apply". If, as a matter of construction, that offer (which was duly accepted by telex) is to be construed as an offer made subject to contract, then I have no doubt that no concluded contract was made by reason of the exchange of these telexes. But the words of introduction "subject to your telex confirmation reaching here before 11.30 a.m. 6 Jan 1990 with terms and conditions as follows" are not in my judgment words which introduce a contract which is to be made only subject to further agreement between the parties. The only matter to which the contract was to be subject was the receipt of the telex confirmation by the seller from the buyer. The terms and conditions set out were the final terms and conditions. Accordingly I reject the contention that the exchange of telexes constituted here a contract made subject to contract and therefore not a concluded contract at all. That being so, it is not necessary for me to examine the decisions in Love & Stewart Ltd. v. S. Instone & Company Ltd. (1917)33 Times Law Reports 475, Bishop & Baxter Ltd. v. Anglo-Eastern Trading & Industrial Co. Ltd. [1944]1 KB 12 or British Electrical and Associated Industries (Cardiff) Ltd. v. Patley Pressings Ltd. & Others [1953]1 WLR 280, all of which were cited to us. All of these were cases in which the words "subject to" were incorporated in the term which gave rise to the difficulty. In the first case the contract was made "subject to strike and lock-out clause". In the second case the contract was made "subject to war clause". In the third case the contract was made "subject to force majeure conditions". All of these are therefore cases where the matter never got past the stage of negotiation and into the stage of concluded contract, notwithstanding that the parties may have thought that they did. These cases therefore may be put on one side.

35. The second question is whether the provision "Force majeure/arbitration : standard terms to apply" is a provision to which the court can ascribe any meaning. I have no doubt that it cannot. There are a number of varieties of force majeure/arbitration clauses, and this provision gives no indication as to which, if any, of them is to be the one which is to apply. In this sense therefore the provision is meaningless; not meaningless in the sense that you cannot begin to understand what the parties were getting at (as in the case of G. Scammell and Nephew Ltd. v. HC and JG Ouston [1941] AC 251) but in the sense that the words are too uncertain for the court to ascribe any meaning to them. It does not matter in what sense the provision is meaningless, for meaningless it is.

36. Now, where a term is essential in order to make the contract workable, then if it is meaningless the contract cannot be made to work. That will mean that the contract has failed. So much is clearly established by G. Scammell and Nephew v. HC and JG Ouston to which I have just referred. Where however the term is inessential to the operation of the contract, then it seems to me proper for the court to treat it as something which ought to be ignored. That was the course taken in Nicolene Ltd v. Simmonds [1953]1 QB 543 (a case followed by Mr. Justice Goff in Michael Richards Properties Ltd v. Corporation of Wardens of St Saviour's Parish. Southwark [1975] 3 All ER 416). Despite some criticisms, eloquently advanced, of the judgment of Lord Justice Denning (as he then was) in Nicolene Ltd v. Simmonds by Mr. John Griffiths QC for the appellants, I am of the opinion that the Lord Justice accurately summarised the effect of the cases and helpfully set out the law.

37. I adopt what was said in Nicolene v. Simmonds, as the judge it seems has done in the present case: neither a force majeure clause nor an arbitration clause was necessary in order to make this contract workable. They are not essential features of this type of contract in general and they are not essential features of this contract in particular. The seller, having put forward an offer containing a meaningless term as to force majeure cannot claim force majeure as an excuse for failure to perform his obligations; similarly, having put forward an offer containing a meaningless term as to arbitration, he would have to accept that any dispute or difference between the parties would have to be settled or resolved by litigation. The buyer, having accepted such an offer, would be in exactly the same position.

38. In the result, the right course in my judgment is simply to ignore this meaningless provision and treat the contract as one concluded without it.

39. As to the subsidiary issues in this appeal, on the point regarding the variances in the Letter of Credit I would myself prefer to express no opinion as to whether the learned judge was right or wrong. It is sufficient to say that I am for my part quite satisfied that, in coming to the conclusion as he did that any such variances would have been waived by the seller, he came to a conclusion justified on the facts before him and the conclusion of fact which he reached is not one with which the appellant has shown we ought to interfere. I take the same view of the point about an available market. The judge has come to a conclusion of fact upon that matter and I have not been satisfied that we ought to interfere with his decision. For those reasons I agree as I have said that this appeal must be dismissed.