WANG KU trading as SUN HING LUNG (INTERNATIONAL) TRADING COMPANY v. MAK CHI KONG trading as ART TRADING COMPANY

1993, No.A7033

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

___________

________________

J U D G M E N T

________________

1. By this action the Plaintiff, who is a garment manufacturer and supplier, claims payment for 19,000 jogging suits which he supplied to the Defendant, who is a garment trader, in early 1992.

2. No complaints are made about the quality or quantity of the goods supplied. The reason for this litigation stems from problems in making payment. The Defendant did not want the goods for himself - he was selling on to a customer in the U.S.A. The method of payment was through letters of credit. There was one letter of credit (USA L/C) between the Defendant and his US customer and another one (HK L/C) between the Defendant and the Plaintiff. It is part of the Defendant's case that the Plaintiff would only be paid on the HK L/C after he had been paid on the USA L/C.

3. In skeleton form what went wrong was as follows. Firstly the goods were shipped to Mexico about a week late. The last date for shipment was April 30th. They left Hong Kong in early May. Secondly, the HK L/C opened by the Defendant was dated a day after the last shipment date, May 1st. Thirdly, the Banks refused to pay on the L/Cs because of a number of discrepancies on the documents which had to be supplied. Fourthly, negotiations to settle the matter during 1992 and early 1993 broke down. The Plaintiff at one stage agreed to accept a reduced price and later agreed to accept the goods back at the Defendant's expense. Regrettably however further difficulties were encountered with Mexican customs and the 19000 jogging suits remain in a warehouse in Mexico (so far as the parties are aware). The Plaintiff has not been paid by the Defendant and the Defendant has not been paid by the USA buyer.

4. The fundamental issue between the parties is - what is the nature of the contract. The Plaintiff says it is a local-ex-warehouse purchase and sale. If so, he must succeed in this action. The Defendant says it was an FOB contract. If so, the matter becomes more complex both in law and fact.

5. Counsel for both parties, Mr H.Y. Wong for the Plaintiff and Mr T.C Chong for the Defendant have researched, prepared and presented their respective cases with commendable thoroughness.

The Plaintiff's case

6. The Plaintiff's case put at its simplest is that this was not an FOB contract. His position is that the sale was to a local buyer, the Defendant. He was not concerned with who the Defendant's customer was. Initially he asked for payment by cash or cheque and only later agreed to payment by L/C because he thought this was the only way he would get paid. The Defendant arranged collection of the goods from his warehouse and took them to the shipper. The Defendant prepared the documents for shipment and the L/Cs. The Plaintiff's only contribution was to supply such documentation, such as the invoice and packing lists, to the Defendant on request.

The Defendant's case

7. The Defendant's case, according to Mr Chong's final submission is that the nature of the 1st agreement in May 1992 is no longer relevant because it was superseded by a 2nd agreement in or about August 1992 when the Plaintiff agreed to a reduction in price from HK$950,000 to $855,000. Mr Chong submits that in order to resolve the dispute between the parties one must decide who breached that agreement. As to the 1st agreement he submits that the Plaintiff knew the goods were for onward sale to an overseas buyer, that it was an FOB contract in which the Plaintiff accepted that he would only be paid on the HK L/C after the Defendant had been paid on his USA L/C and that the failure of the 1st agreement was due to the Plaintiff not complying with his obligations under the FOB contract.

8. As will be seen from my decision in this case, many of the issues and much of the evidence which has been canvassed before me need not be dealth with in this judgment. I have concluded that this was in the first instance a local ex-warehouse contract which the Defendant has breached by his failure to pay for the goods supplied. All subsequent problems, that is for example, the discrepancies in the L/Cs, the late shipment, the 2nd agreement, the attempt to settle, all stem from the Plaintiff's desire to get paid.

9. I shall concentrate therefore on those issues which require resolution in order to determine the preliminary issue of :-

1. Ex-warehouse or FOB?

10. My findings which have resulted in the decision that this was not an FOB contract are these.

(a) The first step was taken by the Defendant when in or about April 1992 he placed an order with the Plaintiff for 19000 suits at HK$50 per piece. The Plaintiff originally requested cash or cheque. His later acceptance of the L/C arrangement was merely in order to get paid.

(b) The Defendant arranged collection of the goods from the Plaintiff's warehouse in Tsuen Wan and undertook to handle and prepare the documentation. Accordingly, after collection the Plaintiff sent an invoice and packing list to the Defendant.

(c) The invoice states simply that the price of the goods was $50 per set and not $50 FOB(H.K.)

(d) Miss Choi of the Defendant Company completed the documents (which were later found to be inaccurate). I reject the suggestion made on behalf of the Defendant that although Miss Choi did complete many of the documents she was only doing so on the Plaintiff's instructions.

(e) Had it been an FOB contract the Defendant should have made the L/C available to the Plaintiff a reasonable time before the latest shipment date. In our case the L/C in fact post dates the last shipment date. In evidence the Defendant contended that the late shipment and the date on the L/C were discussed between himself and the Plaintiff and that the Plaintiff accepted that they could be rectified later and was prepared to take the risk. This was one part of the Defendant's evidence which I found unconvincing.

(f) Had it been an FOB contract the Defendant would have had to name the ship so that the Plaintiff could deliver the goods to it. This did not happen. The Defendant's evidence was again unconvincing when he suggested the actions he took in this regard were on the Plaintiff's instructions.

(g) It is fundamental to the Defence case that the Plaintiff agreed to "back to back" L/Cs resulting payment to him only after the Defendant had been paid on his USA L/C. I simply do not accept that the Plaintiff did or would have agreed to such a term. The Defendant's stance on this particular issue illustrates the not uncommon attitude in Hong Kong that party B need only fulfill his obligations to party A, after he has made his profit from party C.

2. Subsequent conduct

11. For the sake of completeness, although not strictly necessary, I shall deal with additional issues between the parties concerning later events. They are worthy of mention because in each case they tend to support the Plaintiff's claim and in each case where matters turn on issues of credibility it is the Plaintiff's evidence which has been the more probable.

(a) Discrepancies in the L/C

On May 14th, 1992 the issuing Bank for the HK L/C gave written notice to the Defendant of eight discrepancies which prevented the Bank from paying out on the L/C. For example the number of cartons on the packing list differed from the number on the Bill of Lading; the description of the goods on the L/C differed from the description on the Invoice and the Defendant's address on the L/C was different from his address on other documents.

Any bank is entitled to refuse payment under an L/C because of any discrepancy however minor. In these circumstances the seller, the Plaintiff, could never be paid. He could only be paid either once the discrepancies have been rectified or the buyer, the Defendant, accepts the discrepancies.

Given my earlier finding that it was the Defendant who arranged the collection of the goods from the warehouse and to the ship and given that it was the Defendant's employee who prepared the documentation it could not be said that the discrepancies were attributable to the Plaintiff nor could it be said that he was capable of rectifying them nor could it be said that he was permitted, as seller, to accept them. In the circumstances it is unnecessary to examine each discrepancy.

(b) Subsequent payment of $50,000 to Plaintiff. Part payment or personal loan?

In August 1992 the Defendant paid to the Plaintiff $20,000 cash and in October 1992, $30,000 by cheque. The Defendant says these were personal loans unrelated to this contract. I find that this contention seriously weakens his credibility. The first time any claim is made for the repayment of these alleged loans is in the Amended Defence and Counterclaim. On the other hand the Plaintiff first pleaded it as part payment of the purchase price in the original Reply and Defence to Counterclaim over two years earlier.

I am satisfied that this money was paid at a time when the Plaintiff was becoming more frustrated by the fact that he had still not received any money for his goods. Negotiations were taking place to try and settle the matter. The Plaintiff was being accommodating. On October 21st, by a written document, the Plaintiff even agreed to take the goods back subject to the Defendant arranging for and paying for their shipment back to Hong Kong and him forfeiting the $50,000 part payment already made.

(c) Alleged settlement agreement

On both the 1st and 2nd day of this trial Mr Chong for the Defence applied to further amend the Defence, notably paragraph 18, so as to allege that there had been a settlement agreement between the parties in or about October 1992 and that the Plaintiff was in breach of this agreement. I disallowed the applications to amend for three reasons. Firstly, its lateness. Different amendments had been proposed a week before the trial - the contents of which the Plaintiff did not oppose - which did not include this amendment. Secondly, its nature. The effect of the proposed amendment was to significantly change the issues at trial. Thirdly, its consequences. The Plaintiff would, very properly, have asked for further and better particulars and would have had to make further consequential amendments, of a not insignificant nature, to his pleadings. I was further assisted by the case of Wellfit Investments Ltd. v. Poly Commerce [1995]3 HKC 56. The observations made at p.59 in the judgment of Nazareth V-P, which it is not necessary to recite herein, have direct application to the exercise of my discretion in this instance.

12. It was nonetheless necessary for evidence concerning the parties' discussions and negotiations at the time of the alleged settlement to be heard. I shall therefore deal with it briefly.

13. The Defendant's claim that there was a settlement agreement which supersedes and cancels the 1st contract and which the Plaintiff has breached cannot be entertained. The alleged settlement was, in short, that the Plaintiff would accept the goods back. The alleged breach by the Plaintiff, in short, is that he failed to take the necessary steps to ensure they were shipped back from Mexico. The problems encountered in getting the goods back were not dissimilar from the problems relating to the original L/C in May 1992. Again, the Defendant's contention that these problems should be laid at the door of the Plaintiff is without merit. The reasons it is without merit are substantially the same as those already referred to earlier in the judgment. The reality of the situation was that from the Plaintiff's position it was a final attempt to extract something of value from this troubled contract. The Plaintiff cannot be criticized for not writing to the Mexican customs in an attempt to resolve the problems because by the time he was asked to do so, it was late March 1993. A further 5 or 6 months had passed and by that time litigation seemed the more appropriate method of seeking satisfaction.

14. Accordingly, I now give judgment for the Plaintiff in the sum of HK$855,000 plus interest at 10% from September 1st, 1992.

15. There will be an order for costs in the Plaintiff's favour on the claim. The counterclaim is accordingly dismissed with costs.