BO HU DEVELOPMENT CO. LTD. v. SUEN KWAI KAM AND ANOTHER

HCA 16913/99

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 16913 OF 1999

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J U D G M E N T

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Facts

1. The Plaintiff was, and is, a company incorporated in the People's Republic of China. The 1st Defendant was, at all material times, a majority shareholder and director of the 2nd Defendant which is a Hong Kong company.

2. On 6th April 1999, Lubrizol Southeast Asia (PTE) Limited in Singapore contracted to sell to Maoming Lidren Chemical Industry Company Limited in Mainland China (hereinafter referred to as Maoming) lubricant additive. This contract of purchase of lubricant additive were incorporated into two purchase contracts, one dated the 6th of April and the other the 15th of April 1999 respectively. The total price of the lubricant additive so ordered were ultimately US$324,690.19.

3. Mr Chen Rong Tian, was at all material times, the General Manager of the Plaintiff company. It is not disputed that he signed 2 agency agreements with Maoming which were executed on the 9th of April and the 18th of April 1999 respectively. Under the agreements, the Plaintiff was to be responsible for the opening of a Letter of Credit in favour of the supplier in Singapore.

4. On or about the beginning of May 1999, Mr Chen telephoned the 1st Defendant and discussed the matter of opening a Letter of Credit in favour of the supplier in Singapore.

5. After negotiations, the 1st Defendant agreed finally to cause a Letter of Credit to be opened in favour of the supplier in Singapore. As a result of the agreement, the Plaintiff then faxed the two purchase contracts to the 1st Defendant. These copies of the first and second contracts can be seen in the Agreed Bundle of Documents, pages 1 and 2. Amongst the terms agreed was that the 1st Defendant would be paid commission of 3% of the amount under both contracts upon successful issue of the Letter of Credit and the Plaintiff was to pay the 1st Defendant 30% of the amount under both contracts before the 1st Defendant applied for the Letter of Credit, and the balance of the credit amount and the commission would be paid to the 1st Defendant within 60 days of delivery of the lubricant additive to Mainland China. As a result of this agreement, the Plaintiff deposited a total of HK$754,905.00 which is 30% of the total price of US$324,690.19 into the 2nd Defendant's bank account on two separate dates which was the 11th of May 1999 and 12th of May 1999 respectively.

6. On the 20th of May 1999, as requested by the 1st Defendant, the Plaintiff deposited another HK$30,000.00 into the 2nd Defendant's bank account. As admitted by the 1st Defendant this was part-payment of the commission fee of 3% that was due to her.

7. On or about the 29th of May 1999, the 1st Defendant faxed the Plaintiff an application form for issuance of a Letter of Credit from the Sin Wah Bank. After Mr Chen had confirmed by signing the application form, he faxed the application form back to the 1st Defendant. Subsequently, the 1st Defendant then faxed the issued Letter of Credit to the supplier in Singapore. On or about 9th of June 1999, the supplier pointed out that the Letter of Credit was wrong in several places and asked to have the Letter of Credit amended. Mr Chen requested the 1st Defendant to make the amendments but the 1st Defendant refused to do so.

8. The facts which I have just related above are not in issue. What is in issue is what was actually said by Mr Chen, to the 1st Defendant when negotiating for the issue of the Letter of Credit and what the 1st Defendant had told Mr Chen.

9. Mr Chen's evidence was that the 1st Defendant had agreed to have the Letter of Credit issued according to the Plaintiff's instructions and that the issue of Letter of Credit would be within a reasonable time. So, he said, in reliance upon those words, he, Mr Chen, then agreed to the commission to be paid and the deposit amount of 30%.

10. Mr Chen said that on the 18th of May 1999, the 1st Defendant had faxed to him an application form for the issue of a Letter of Credit issued by the Hong Kong Chinese Bank for the sum of US$94,811.90 and the 1st Defendant had asked him to verify the contents contained therein. Mr Chen said that, because of the time factor and his inability to contact the supplier in Singapore, he spoke to the 1st Defendant and the 1st Defendant told him that she could always amend the Letter of Credit later on if the Plaintiff was willing to pay the extra costs thereby caused by the amendment. Mr Chen said he agreed to that, so the 1st Defendant then told Mr Chen to sign the application form and fax the same back to her. Mr Chen said that when he had not heard from the 1st Defendant after two days, he telephoned the 1st Defendant who told him that she did not have enough money to pay the bank charges of HK$30,000.00 for the opening of the Letter of Credit, so she requested Mr Chen to deposit that amount into the 2nd Defendant's bank account and that the Plaintiff could then set off this HK$30,000.00 against the 3% commission that would eventually be due to her. Mr Chen said he did so.

11. On or about 29th of May 1999, the 1st Defendant faxed a Letter of Credit application form issued by the Sin Wah Bank to Mr Chen and asked him to verify the contents contained therein. On that form were written some Chinese characters which said in effect that after confirmation by him, Mr Chen could not ask the 1st Defendant to amend the terms of the Letter of Credit. Mr Chen said that after he faxed this document (see the Agreed Bundle of Documents page 43) to Maoming, Maoming had told him that they had difficulty in contacting the supplier in Singapore. So he agreed with Maoming that he should speak to the 1st Defendant about being able to amend the Letter of Credit subsequently if necessary. As a result, he contacted the 1st Defendant and the 1st Defendant agreed with him over the telephone that if amendments were necessary after the issue of the Letter of Credit, the amendments would be done but the Plaintiff would bear all the costs thereby incurred. Mr Chen said he agreed to that so the 1st Defendant then asked him to sign the fax and return it to her.

12. The Letter of Credit was duly issued and sent by fax to the supplier in Singapore by the 1st Defendant. But on or about 9th of June, upon receipt by Mr Chen of the supplier's complaint about certain terms and information in the Letter of Credit being incorrect, he then contacted the 1st Defendant. He asked the 1st Defendant to amend the Letter of Credit according to what was stated in the fax from the supplier in Singapore, but the 1st Defendant expressed her reluctance to do so. Mr Chen then tried to arrange a meeting with the 1st Defendant but he said that he was unsuccessful in doing so. As the Letter of Credit was not amended, the supplier therefore rejected the Letter of Credit. Feeling that the whole matter was suspicious Mr Chen said that he had reported the matter to the police on the 22nd of August 1999. The Plaintiff, Mr Chen also denied that at any time, the 1st Defendant had ever mentioned to him that the sum of HK$784,905.00 would be forfeited.

13. The 1st Defendant gave evidence and said that she was and is a director of the 2nd Defendant. She said that in about May 1999 when Mr Chen contacted her about the issue of a Letter of Credit, she had specifically stressed to him that the Letter of Credit must be subject to the following terms and conditions, namely,

(a) the sum under the Letter of Credit to be made available with stroke by "our bank by payment";

(b) partial shipment is not allowed and

(c) that the inspection certificate must be issued and signed by a representative of the LC, that is the Letter of Credit applicant, and the goods would not be shipped to the Mainland China if not inspected.

14. Furthermore, it was agreed between her and Mr Chen that 3% commission fee would be paid to her and that he would have to deposit 30% of the total sum of the Letter of Credit prior to the issue of the Letter of Credit and that the balance of the amount would be paid before shipment. She also stressed to him that if the Plaintiff should fail to comply with any of the above mentioned terms and conditions or to pay the balance of the amount of the Letter of Credit before shipment, the deposit paid by the Plaintiff would be forfeited as compensation and she said that Mr Chen agreed to those terms. As a result of this agreement, she said that on or about 18th of May, she did fax a specimen application and agreement for irrevocable documentary Letter of Credit of the Hong Kong Chinese Bank Limited to Mr Chen and on the 19th of May, Mr Chen confirmed the terms specified therein and sent the document back to her. This document can be seen at page 9 of the Agreed Bundle of Documents.

15. Subsequently Mr Chen deposited the 30% deposit into the 2nd Defendant's bank account. Miss Suen, the 1st Defendant, also said that at the request and insistence of the Letter of Credit applicant, she also faxed the application for irrevocable documentary credit of the Sin Wah Bank which can be seen at page 43 of the Bundle of Documents, to Mr Chen and the Chinese characters on that document was in fact written by somebody who was an employee of the Letter of Credit applicant. She said she asked Mr Chen to confirm the terms in that copy document by signing and affixing a chop on the document and sending it back to her. Mr Chen duly endorsed the document with his company chop and signature and returned that document to her on or about 29th of May 1999. As a result on or about 4th of June 1999, a Letter of Credit was issued and she faxed the Letter of Credit to the supplier in Singapore. Subsequently Mr Chen contacted her and requested for amendments to be made to the Letter of Credit which she refused to do so . Miss Suen stated adamantly in the witness box that she had also stressed to Mr Chen that after confirming the specimen application for a Letter of Credit, no amendments would be allowed. This she said was a crucial term under which the Letter of Credit applicant would agree to apply for the Letter of Credit using his credit line with the bank. Miss Suen denied that she avoided meeting Mr Chen subsequently and said that in fact she had pressed Mr Chen to pay her the rest of the commission that was due to her. Miss Suen denied that she had ever seen the agency agreement form which Mr Chen claimed that Miss Suen had been shown. This form can be seen at page 42 of the Agreed Bundle of Documents. I note here that that document is unsigned and undated.

Issues in the case

16. What is in contention is

(1) whether the 1st Defendant had ever agreed with Mr Chen that he could amend the Letter of Credit subsequent to its issuance.

(2) if she had, then he was entitled as a result of that agreement to withhold her commission in view of the fact that she had not complied or completed her part of the agreement.

(3) in view of the above, that Mr Chen would then be entitled to have the 30% which he had deposited with the 2nd Defendant returned to him.

17. The crux of the matter is the document at page 43 of the Agreed Bundle of Documents which is a specimen application for irrevocable and documentary credit to the Sin Wah Bank Limited. Miss Suen, the 1st Defendant, gave evidence that she was asked specially by the Letter of Credit applicant to fax this document to the Plaintiff's representative, Mr Chen, for confirmation. This document contains a written paragraph Miss Suen said was written by someone from the applicant's office and it said this:

『本人....現同意以此信用証申請書內之內容條款開出USD324,690.10並且簽確作實，不得異議。』 .

Loosely translated, it means that the Plaintiff through Mr Chen had agreed the contents of this application and that he confirms it by signing the document and that there will be no dispute. Mr Chen attached his company chop, that is the Plaintiff's chop and he signed his name and faxed this document back to Miss Suen who then had the Letter of Credit applicant apply for the Letter of Credit on the basis of that document.

18. Mr Chen's evidence is that upon receiving this document, he spoke to Miss Suen and that Miss Suen had assured him that, should he wish to amend the terms in the future, he could do so upon paying the charges incurred as a result of the amendments. Miss Suen denies that that was ever said by her. She not only denied that she said that, she also stressed that the Letter of Credit applicant was anxious that his terms be agreed and accepted otherwise he would not have applied for the Letter of Credit for the Plaintiff.

19. It is clear that the Letter of Credit applicant must have been concerned that the terms as set out in the specimen application be confirmed and accepted before he would apply for the Letter of Credit on behalf of the Plaintiff. This is evidenced by the fact that the Letter of Credit applicant included the Chinese characters in the document at page 43. It also clearly shows that the intention of the Letter of Credit applicant in writing this clause in Chinese is that there would be no misunderstanding on the part of the Plaintiff by saying that they did not understand English.

20. If Mr Chen was worried that he could not amend the Letter of Credit and in fact spoke to Miss Suen about the matter, being a prudent and reasonable businessman as he himself claimed, he would have added in Chinese characters on the document, words to the effect that the Plaintiff would be allowed to amend subject to payment of extra charges. From my observation of Mr Chen when he was giving evidence, it was clear that he was not overtly concerned about the terms of the Letter of Credit applications. He agreed he did not check the contents of the various documents faxed to him by Miss Suen on the basis that he felt that Miss Suen would not cheat him. This is hardly a way to do business and it is incredible that a man who claims himself to be a reasonable and prudent businessman would do business in such a manner. The only conclusion that I can draw from his evidence and from the documents that he had signed is that Mr Chen had, at no time, thought about the consequences of agreeing to the terms as stipulated by Miss Suen and that subsequently it was only after the supplier in Singapore had rejected the Letter of Credit that he tried to think of ways to get around the fact that he had confirmed the terms of the Letter of Credit that was issued.

Conclusion

21. It is therefore obvious from the above that I find that the 1st Defendant did not make any false representations to Mr Chen for the Plaintiff. The 1st Defendant did indeed have the ability to procure the issue of the Letter of Credit in conformity with the instructions of the Plaintiff and that she did have the intention to cause the issue of the Letter of Credit in accordance with the instructions of the Plaintiff as confirmed by Mr Chen in the specimen application form. In fact the Letter of Credit was issued within a reasonable time. It was not through any fault of the Defendants that the supplier in Singapore rejected the Letter of Credit that had been issued. So I find therefore that the Plaintiff's claim against both the 1st and 2nd Defendant in the Statement of Claim fail.

22. As to the restitution of the sum of HK$784,905.00 which is 30% of the deposit paid into the account of the 2nd Defendant by Mr Chen, the Plaintiff claimed that it was a penalty if the Defendants were allowed to keep that sum. Miss Suen said in evidence that she had made it very clear to Mr Chen that if the Plaintiff should fail to comply with the terms and conditions of the issue for the Letter of Credit, the said deposit of 30% will be forfeited as compensation and that Mr Chen had agreed to that. At the same time, Mr Chen had also agreed to pay a commission of 3% of the amount of the Letter of Credit upon the issue of the Letter of Credit to the Plaintiff. Mr Chen denies this. I have already observed that Mr Chen was, as he himself admitted, negligent when pursuing this matter of the issue of the Letter of Credit on behalf of Maoming. I was not impressed with his evidence and I accept the evidence of Miss Suen that she would have been anxious to stress the forfeiture of the deposit should the Plaintiff fail to comply with the conditions for the issue of the Letter of Credit and that the 3% commission would be paid to her for her service. As she said in the witness box, she would be sharing the 3% she would receive from the Plaintiff with the Letter of Credit applicant. As the Letter of Credit applicant would be taking a risk in this matter he would be anxious first of all, that once the Letter of Credit is issued that his credit line is ensured from any loss and that can only be done if full payment was made prior to the shipment of the goods. That is why the Letter of Credit applicant in the specimen application form at page 43 of the Agreed Bundle of Documents had stressed that partial shipment was not allowed. And that the goods had to be inspected prior to shipment by a representative of the Letter of Credit applicant.

23. I have also come to conclusion that the 30% forfeiture is not a penalty but a reasonable sum in view of the fact that the Letter of Credit applicant was taking a risk by issuing the Letter of Credit on behalf of the Plaintiff, who was only acting as an agent of Maoming, which is a mainland company. So the Plaintiff's claim for restitution against both Defendants also fails.

24. The 1st Defendant had counterclaimed against the Plaintiff for the rest of the amount of 3% that was her commission fee as agreed to by the Plaintiff. As I have found the 1st Defendant had fulfilled her role under her agreement with the Plaintiff and the Letter of Credit had been issued in accordance with his instructions as confirmed by him on the specimen application form, so the 1st Defendant is entitled to her 3% as promised by the Plaintiff.

25. Miss Suen in her evidence said that she had asked Mr Chen to deposit $30,000.00 subsequently into her bank account which was the documentary fee required for the issue of the Letter of Credit and that Mr Chen had done and this $30,000.00 would eventually be deducted from the 3% commission that was due to her. So I order that the Plaintiff pay to the 1st Defendant, the sum of $45,393.06 which is the sum of $75,393.06 as claimed less $30,000.00 already paid by the Plaintiff. And that interest on that amount of $45,393.06 be to the 1st Defendant.

26. As for costs, there will be an order nisi awarding costs to both Defendants, such costs to be taxed if not agreed.