YUNG ZENG INDUSTRIAL CO., (H.K.) LTD. v. ZHONG SHAN NATIVE PRODUCE AND ANIMAL BY-PRODUCTS CO. LTD and HONG KONG FORCE LTD. (Third Party)

HCA 12328/94

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 12328 OF 1994

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J U D G M E N T

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Background

1. In this particular case, the original action was brought by the Plaintiff, Yung Zeng Industrial Co. (H.K.) Ltd., against the Defendant, Zhong Shan Native Produce And Animal By-Products Co. Ltd. The matter in dispute was in relation to the sale of some quantity of peppermint oil and menthol crystal, which took place in 1994. The Plaintiff sued the Defendant for non-delivery of the goods. By an order of Master Jennings dated 6th February 1996, the Defendant filed the Statement of Claim against the Third Party, Hong Kong Force Ltd. Judge Wilson heard the action when he was sitting as a Deputy Judge of the Court of First Instance. His judgment was delivered on 7th July 1997.

2. In his judgment, Judge Wilson decided that the Plaintiff's claim against the Defendant had failed. He also announced that it would be unnecessary to consider the Third Party's claim. However, after some discussion with counsel, he made the following order :

"So then the result would seem to be that on the plaintiff's claim against the defendant, there will be costs to the defendant against the plaintiff to be taxed if not agreed. As to the Defendant's claim against the Third Party, it was adjourned to a date to be fixed."

The trial heard by this Court was in relation to the Defendant's claim against the Third Party.

3. The Third Party was the seller and the Defendant the purchaser. The goods involved were menthol products. In October 1994, the Defendant made two sale and purchase contracts with the Third Party. The first one was Contract No. NF 9401027 HK ("the first contract"). The subject matter was the sale and purchase of 18,000 kg of menthol crystals. The second one was Contract No. NF 9401028 HK ("the second contract"). It involved the sale and purchase of 28,000 kg of dementholized peppermint oil at US$5.90 per kg. All the products were manufactured in Mainland China.

4. The dispute between the Defendant and the Third Party was in relation to the 2nd contract, i.e. Contract No. NF 9401028 HK. The issue turned on the term of payment.

5. The Defendant's claim was that the Third Party never delivered the goods. In fact they sold the goods to another company. The Third Party's argument was that the non-delivery was due to the fact that the L/C was not issued by the Defendant on time. On this issue of payment, the Defendant argued that the contract expressly provided that there could be three modes of payment : by Letter of Credit (L/C), Telegraphic Transfer (T/T) and Cash against Document. They were entitled to elect any of the three payment methods and in the circumstances, payment should be effected by Cash against Document.

6. When Counsel for the Defendant opened its case, I had made enquiry regarding the propriety of the action when they had successfully defended against the Plaintiff's claim. The Defendant's case on this point was that their Statement of Claim against the Third Party was not only a claim for indemnity, but also for damages for breach of contract, which was an independent action against the Third Party. I noted that Paragraph 4 of the Defendant's Statement of Claim read :

"Further and in any event, the Defendant is entitled to damages for breach of contract on the part of the Third Party, interest and all costs incurred by the Defendant in defending this action and the costs of these Third Party proceedings against the Third Party ..."

It appeared to me that the Defendant could not be prevented from making the claim against the Third Party despite the failure of the Plaintiff's claim against them.

7. The Defendant had originally made two heads of claim : loss of profit and also damages. This could be seen at paragraph 8(a) and (b) of the Statement of Claim (dated 6th February 1996) against the Third Party. However, in the subsequent Re-amended Statement of Claim, the loss of profit claim was deleted. Hence the Defendant's action against the Third Party was to recover damages, calculated on the basis of the difference between the market price and contract price of the goods at the material time. The Defence to the Third Party claim had gone through some amendments also. At one stage, there was a counterclaim by the Defence but it was finally dropped in the Re-amended Defence.

8. At the hearing, both sides had called two witnesses. The main witness for the Defendant was Mr Zhang Ruixiang ("Zhang"). He was the Director and Deputy General Manager of the Defendant. He had known the Director of the Third Party since 1979. In fact they had worked together when they were both in China.

9. The second witness called by the Defendant was Ms Cheung Sin Ping. She was a clerk of Nanyang Bank. She was asked to give evidence of what had transpired in 1994 when a customer instructed the bank to issue a Letter of Credit.

10. The Third Party had called Mr Ng Ki Sing ("Ng"). He was the Director and General Manager of Hong Kong Force Ltd., i.e. the Third Party. Ng confirmed that he knew Zhang and had worked with him before.

11. Counsel for the Third Party had at one time described Ng to be not an important witness as he had forgotten many things, but it should not be ignored that he was actually the one who had discussed the contract terms with Zhang, and he had the final say in relation to the negotiation.

12. The Third Party also called Ms Ng Siu Fung ("Ms Ng"). She was the Managing Director of Hong Kong Force Ltd. and she worked under Ng. She said she was responsible for the everyday work of the company. In 1994, there were only four persons working for the Third Party and Ng was the Chairman of the board of directors. According to Ms Ng, regarding the making of contracts, the Director, Ng, would negotiate with customers on the more important matters such as price, specifications and date of delivery of goods. After the contract was made, she would be responsible for matters relating to the performance of the contract.

13. Both counsel had very helpfully prepared written submissions at the conclusion of the trial.

14. As mentioned earlier, the main issue of the trial turned on the term of contract, especially the payment method. It would appear that the issue of liability would depend on the following matters :

- whether the parties had agreed to insert the term of Cash against Document in the contract as a payment method;

- whether time was of the essence in the payment under the contract; and

- the meaning of the term 'T/T'.

15. In considering these questions, the Court must also decide on the credibility of the witnesses. On the issue of what terms of payment had been agreed between the parties, the witnesses had given different versions. To properly analyse this question, it would be necessary to focus on the negotiation process before the conclusion of the contract.

16. Zhang said that at the end of September 1994, Ng approached him. Ng said that he had some containers of peppermint oil and menthol crystals and asked him to find a buyer. Later, Ng sent him the fax regarding the specifications of the product. However, he found that there was no reference to payment method in the fax message, so he telephoned Ng. In the telephone discussion, Ng asked for Letter of Credit as payment method but he counter-proposed Cash against Document as the bank charges would be less. At last, according to Zhang, the agreement was on Cash against Document. They also agreed on the selling price.

17. Afterwards, he was able to find a potential buyer, i.e. the Plaintiff, so he talked to Ng after receiving the quotation from the Plaintiff in this case. Subsequently, he received the draft contract from Ng. However, he noticed that on the payment method, the proposed term in the draft was L/C or T/T. He considered that some amendment, or supplement, was required as he had agreed with Ng on the phone that it should be Cash against Document. Therefore he proceeded to type the words "Cash against Document" in the draft contract. Zhang said that when he discussed with Ng about this, he had used the Chinese term "交單付款". Zhang said that it actually meant the same thing as T/T. Some people preferred to call it Cash against Document and some called it T/T. His company called it Cash against Document.

18. When Zhang was asked that if the two terms meant the same thing, why was it necessary to put in the expression of "Cash against Document"? Zhang's explanation was that the Third Party used the term T/T and his company used "Cash against Document". It was just a matter of practice but it would be more accurate to use "Cash against Document" in relation to fixing the time of payment.

19. Zhang made the amendments and he faxed the contract back to the Third Party. He also telephoned Ng and informed him about the amendment. Zhang said that having talked to him, Ng agreed to the amendment and asked him to approach Ms Ng for the other required document. On the same day, Zhang said he received another draft contract from the Third Party but again there was no inclusion of the term "Cash against Document". He therefore called Ng again and Ng agreed, among other things, to the payment method of "Cash against Document".

20. Afterwards, Zhang acknowledged that a courier company, as instructed by the Third Party, had sent the original contracts to him for signature. But he had not received them himself as he was not in the Company at the time of delivery. He became aware of that when Ms Ng telephoned him on 6th October and asked about the contracts. His secretary then handed him the envelope with the draft contracts inside. He noticed that there were only two contracts inside and not two copies for each contract as Ms Ng claimed in her testimony. He did not sign them because the payment term as Ng had agreed was still not included. So he just put them to one side.

21. When Ms Ng appeared in his company on the following day, he typed in the supplement in the presence of Ms Ng and then made a photocopy of each. He signed all the original and photocopies. Then there were some discussion as to who should keep the original and finally he let Ms Ng take the original away. That was how he got the photocopies of the two contracts with "Cash against Document" inserted as one of the payment methods.

22. Ng had given a different account. He said that before he faxed the quotation to Zhang, Zhang had told him that he actually had sufficient money to pay in advance for the goods. At that stage, he had not agreed with Zhang about the payment method. Regarding the draft contract, he said that he was not the one who had typed in the details, it was Ms Ng who did so according to his instruction.

23. Ng said his idea of payment method had always been by L/C. Then Ms Ng obtained Zhang's agreement to pay the money first, so T/T was put into the contracts. Ng said he did not understand English and Ms Ng had to interpret the terms in the contract to him. However, he denied having agreed to the insertion of the term "Cash against Document" in the contracts. He in fact wrote down in the fax sent by Zhang that he did not agree with it and instructed Ms Ng to discuss with Zhang. He recalled that Ms Ng had told him subsequently that Zhang had agreed to delete the term "Cash against Document".

24. According to Ms Ng, the involvement of Ng in the preparation of these two contracts was mainly the discussion with the other party about the goods, specifications, prices and mode of payment. After all these matter had been dealt with, Ng would leave it to her to deal with the performance of the contracts. She was the one who had typed in the terms in the draft contract as appeared at page 34 in the Agreed Bundle, which was later faxed to the Defendant. She said that she typed in the terms according to the information she had received from Ng. In relation to the payment method, she said that the agreement was that the Defendant had to pay by way of irrevocable L/C before 5th October or by way of T/T before the same date.

25. After preparing the draft contracts, she handed them over to Ng for his signature. But when copies of the contracts were sent back to her from Zhang, she saw there were amendments about the payment method and "Cash against Document" was put in. She duly informed Ng about this and Ng had expressed disagreement. At one stage, Ng was even angry and asked her to talk to Zhang again. He actually wrote in the draft agreement that it could not be agreed.

26. When she eventually talked to Zhang on the phone on 3rd October, she said Zhang had agreed to revert back to the original agreement of payment by L/C or T/T before 5th October. She said she had prepared two original copies of each contract and they were sent to Zhang by a courier company on 3rd October. The instruction given to the courier company was that the Defendant would return one copy of each contract to the Third Party after signing them. However, the courier company did not bring back any. According to Ms Ng, she telephoned Zhang herself and made enquiries about this. However, he said to her that he had already signed them and had sent them back by post. However, until now, she never received them.

27. Ms Ng agreed that she had gone up to the Defendant's premises before Zhang left Hong Kong. She said her sole purpose of the visit was to help Zhang to get a bracelet as he had no time to do so before his trip. She did not ask Zhang about the contracts while she met him because he had already said over the telephone that he would post it. When she asked the staff of the Defendant about the contracts after Zhang left Hong Kong, the staff said that she was not clear.

28. Ms Ng recalled that after Ng signed the contracts and before they were sent over to the Defendant, she was asked by Ng to request the Defendant to issue the L/C as soon as possible. She also testified that when she knew about the shipment date, she had telephoned Zhang that the shipment date in relation to the first contract would be 7th October and Zhang promised her that in view of the shortage of time, he would pay by T/T in order to save time and money. She therefore faxed him the name of the bank and the U.S. dollar account of the Third Party.

29. These were basically the different accounts of the relevant witnesses about the payment term. In a way, it is a very difficult question of credibility. The matter had taken place some time ago and both sides appeared to be respectable businessmen and businesswoman. But the Court had to make a finding in relation to their credibility.

30. In a case like the present one, it would be useful to examine the oral testimonies of the witnesses against the available documents. One would have thought that the documents, which were made and exchanged at the material time, would provide a much more reliable source of information as to what had transpired at the time.

31. Among the documents, there was a fax message which required special attention. It had also been referred to extensively during oral evidence. It was the fax message dated 26th October 1994. It was apparently signed by Ms Ng of the Third Party and was sent to the Defendant for the attention of Zhang, the manager. I believe it would be useful if the exact contents are quoted here. The original was in Chinese and the translation could be found at page 42 in the Bundle of Documents. It reads :

"We acknowledge receipt of your fax. With regard to the demontholized Peppermint oil which was found fail to reach the standard stipulated by the Commercial Goods Inspection Commission and therefore not allowed to be exported. Mr. Ng and his brother Wu Fu Sheng had contacted Mr. Zhang on several occasions to inform and discuss this matter with him when Manager Zhang returned to Jiangsu on a business trip this month. Mr. Zhang indicated repeatedly that he would firmly reject the goods if they were sub-standard (i.e. 50% menthol crystal content). Prior to signing the contract, he also demanded to have samples confirmed before performance. This is much to our regret. We hope we shall have a chance to cooperate again in the future."

The Defendant argued that this message was in fact sent in relation to the 2nd contract, i.e. the contract under consideration, and the "excuse" raised by the Third Party for non-delivery was that the goods were substandard and therefore could not be exported. The Third Party, however, argued that this fax was about another transaction and had nothing to do with the present claim.

32. Documents should be read in their context and sequence. In this regard, when one looked at the previous fax message, which was the one sent by Zhang to Ng on the same day, i.e. 26th October 1994, Zhang was clearly talking about the subject matter of the 2nd contract and not a different one. In this earlier fax message, Zhang appeared to be anxiously asking the Third Party to deliver the goods. Where he had previously made stringent demands on the standard of the goods and the need for samples, it was obvious that he was no longer insisting on them due to the pressure from his customer. He was asking the Third Party to deliver the dementholized peppermint oil to Hong Kong immediately. At the end of that message, he stated that he would like to have an urgent discussion and settlement. Then, the fax reply by Ms Ng, i.e. the one at page 42, came afterwards.

33. Both Ng and Ms Ng had insisted that the contents of their fax message were in relation to another contract and they were just trying to help Zhang to get some other supply. However, both of them were unable to give any convincing answers in cross-examination as to what was the help they were actually offering to Zhang at the time. In this connection, I have to say that both Mr Ng and Ms Ng had been rather evasive and kept giving circular replies.

34. It was also significant that the Third Party had not raised in this fax message about the failure by the Defendant to pay by either L/C or T/T on time and so there would be no delivery.

35. Apart from the question of the fax messages dated 26th October 1994, I consider that as a whole, the Defendant's case was more consistent with the actual conduct of the parties. In relation to the first contract that the parties entered into and carried out, i.e. NF 9401027 HK, there was no payment by L/C. As Counsel for the Defendant pointed out, it is hard to understand why the second contract, which was supposed to have been made at the same time as the first contract, would have a different arrangement in respect of the mode of payment.

36. In fact, in relation to the first contract, the Third Party was performing the contract in such a way that was more consistent with the payment method of Cash against Documents by tendering the relevant documents. If the L/C method of payment had been the agreed mode of payment, it would be difficult to understand also why it was only on 31st October that the Third Party raised the matter that the contract had ceased to have effect because they had not received the L/C. This appeared in the Defendant's fax message to the Third Party (page 112 of the Bundle).

37. According to my observation of the witnesses, I gained the impression that Zhang was a much more meticulous and systematic person. He obviously had a clearer recollection about the event at the time and he certainly had made an effort to recall and trace all the details. He even kept records of the fax messages at the time. He also struck me to be a rather shrew businessman. He could be aggressive and insistent. He appeared to be the type of person who would not accept defeat in business and would try to, inevitably, push his own way through.

38. Ng, on the other hand, appeared to be a more congenial person. He would be more willing to make compromises and would avoid confrontation and arguments. However, as a witness, he did strike me as somewhat reluctant to recall and disclose the details of the events, even granting that the event had taken place quite a long time ago. I received the impression that he simply wanted Ms Ng to answer the questions for him.

39. As to Ms Ng, she appeared to me to be an able person with rather strong character. Between Ng and herself, obviously she would be the one who would take a tougher line on business deals. She would be more unyielding in business negotiations than Ng. She did her best in answering the questions in cross-examination. But at times she was evasive and some of her answers do not tally with the contents of the documents, especially the fax message dated 26th October.

40. Having heard the witnesses and considered the documents, I came to the view that what had taken place was as follows : when Zhang and Ng were first negotiating for the two contracts, Zhang had insisted on the term of Cash against Document while Ng would prefer L/C or T/T. T/T being a more ambiguous term, Zhang succeeded in persuading Ng that T/T actually meant Cash against Document and Ng finally agreed to insert that into the contracts. Although Ms Ng might have found it not acceptable and tried to propose otherwise, she had to abide by Ng's decision. Ng was willing to accept Zhang's term partly because he had taken into account of his relationship with Zhang and did not want to stand too firm against him.

41. However, problems arose regarding payment in relation to the first contract and Ng was upset and frustrated. He and Ms Ng became worried as they believed Zhang had taken advantage of them. They would not want to carry out the 2nd contract with the Defendant and to experience the same difficulties again. So they relied on the matters such as the sample and poor quality as excuses to avoid further dealing with Zhang. The excuses were used not simply because they had found a better deal in selling the product, but they did not want to affect the relationship. Raising the issue of his failure to pay on time in the first contract would constitute an open criticism of Zhang and would cause embarrassment. However, Zhang failed to appreciate the position and was insistent. Finally the Third Party had no choice but to state clearly what the problem really was, and to rely on the lack of L/C to resist Zhang's claim.

42. I believe the last paragraph of the message sent to the Defendant was rather telling when Ms Ng said : "Learning from the way that you performed contract NF 9401027 HK, the approach you employed, we have lost confidence in your company .... this contract has now automatically ceased to take effect because it is 31 October today and we have not received an L/C for contract NF 9401028 HK".

43. Hence, even when Zhang immediately tried to arrange for the issue of an L/C, the Third Party was obviously trying to avoid acceptance of it, because they were no longer interested in dealing with Zhang.

44. In a way, I could understand the frustration both Ng and Ms Ng had in dealing with Zhang, as he was a rather difficult person, but once a contract is made, it was binding on parties as a matter of law. It had to be performed no matter how much one dislikes having further dealings with the other side. Ng took into account personal relationship in his business dealings; Zhang only considered his business advantage. But the Court is not concerned with who was a better person. It was the contractual obligations that are in issue here.

45. In the end, I would accept Zhang's evidence on what had taken place in this incident. As I said, I found that Zhang had managed to persuade Ng to agree to the insertion of "Cash against Document" as a payment term on the basis that it was a more accurate description of T/T. I would reject evidence to the contrary. I would also reject that suggestion by the Third Party that the Third Party had communicated the termination to the Defendant on 14th October 1994. I find that Ng and Ms Ng had not told the Court the truth about the events, although their motive was really to get out of a contract with someone they could no longer trust. In this regard, I would reject the submission by Counsel for the Third Party, although ably put. In the circumstances, I agree with the Defendant's submissions and find that liability is established by the Defendant against the Third Party. The Third Party was only entitled to receive payment when all the relevant documents were sent to the Defendant, and that the Third Party could not call off the contract at will.

Assessment of Damages

46. Having established the liability of the Third Party, it would be necessary to turn to the question of damages. On this matter, the Third Party invited the Court to take into account three matters :

1. The Defendant did not actually buy any substituted goods in the market.

2. There was no question of the Defendant's liability on the resale/on-sale contract; as Deputy Judge Wilson already found that there was no contract between the Plaintiff and the Defendant.

3. There is no evidence that the Defendant could gain by resale. The other buyers as located in the evidence offered prices even lower than the price that the Defendant had to pay to the Third Party under the 2nd contract.

47. The Third Party argued that the burden is always on the Defendant to show that it actually suffered loss and in the present case, if the Court ignored the resale, the Defendant might be over-compensated.

48. As to the Defence, they mainly relied on section 53 of the Sale of Goods Ordinance, Cap.26. The section provides that :

(1) Where the seller wrongfully neglects to deliver the goods to the buyer, the buyer may maintain an action against the seller for damages for non-delivery.

(2) The measure of damages is the estimated loss directly and naturally resulting in the ordinary course of events, from the seller's breach of contract.

(3) 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.

The Defendant argued that in the present case, there were no exceptional circumstances rendering the prima facie rule inapplicable. Regarding the point that the Defendant had not suffered loss as the Court had earlier dismissed the Plaintiff's claim, Counsel cited the cases of William Brothers v. Ed. T. Agis, Limited (1914) A.C. 510 and Rodocanachi, sons & Co. v. Milburn Brothers (1886) 17 Q.B. 67.

49. Based on the authorities cited, the Defendant argued that it would be immaterial what the buyer intended to do with the goods, since any resale would be a separate contract. The loss suffered by the Defendant would be the difference between the contract price and the market price as of the date of delivery.

50. On this issue, there are some relevant passages in Benjamin on Sale of Goods, 5th Ed., paragraph 17-003 dealing with the measurement of damages where there is an available market. It reads :

" Section 51(3) spells out the normal application of the rule in section 51(2) to the situation where there is 'an available market' for the goods. The normal measure of damages when the seller fails to deliver the goods is the difference between (a) the market price of the relevant goods at the time fixed for delivery and at the place for delivery, and (b) the contract price .... One of the grounds for this measure of damages is the doctrine of mitigation since section 51(3) assumes that the reasonable buyer should have gone into the market, immediately following the seller's breach of contract, and bought substitute goods. With the amount of money designated by section 51(3), the buyer should therefore be in the same financial position as he would have been in if the seller had performed his contractual obligation to deliver.

Despite the absence of proof of loss caused by a breach of contract, nominal damages are always recoverable by the innocent party to signify the fact of the other's breach: thus, when section 51(3) applies, and the market price at the time of the breach is the same as, or less than, the contract price, the buyer is still entitled to nominal damages."

51. Section 51 is the English equivalent of section 53 of the Sales of Goods Ordinance. In this regard, two matters were, in my view, important. The first is that when I raised the issue of the mitigation of loss in the final submission, the Third Party pointed out that it was not relevant. In fact, it was not raised in the pleadings. The second important issue was that the parties had agreed that the relevant market price, if liability was established, should be at US$8.9, which was higher than the contractual sum.

52. If mitigation of loss were not relevant, then I agree with the Defendant's submission and that the simple calculation of damages would be the difference between the contract price and the market price as stated in section 53(3) of the Ordinance. And as the market price was agreed to be a sum higher than the contract price, then the difference would be the loss suffered by the Defendant.

Conclusion

53. In the circumstances, I shall give judgment to the Defendant. The damages will be calculated on the basis of the agreed market price, i.e. US$8.9. The formula is therefore :

(US$8.9/kg - US$5.9/kg) x 28,000kg

The final sum is US$112,000.

54. I consider that the Defendant should be entitled to the costs of the action against the Third Party. I therefore make an order nisi that the Third Party pays the Defendant the costs, to be taxed if not agreed.

55. The Defendant also claimed interest under s.48 of the High Court Ordinance, Cap.4. In this regard, I shall also make an order nisi that the Third Party pays the Defendant interest on the award at judgment rate from 6th February 1996 to date of payment.

56. Both nisi orders to be made absolute upon the expiration of 14 days from today, i.e. 7th December 1999.