CHAN SUI TIM t/a LUNG TAI TRADING CO v. TSE KWOK HING t/a ETERNITY INDSTRIAL CO

IN THE HIGH COURT OF JUSTICE

HONG KONG

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BETWEEN

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JUDGMENT

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1. The plaintiff's claim is for breach of contract by the defendant for the purchase of 500,000 tonnes of rice at a total price of US$68,250,000. The plaintiff seeks payment by the defendant of the sum of US$2,047,500, being 3% of the contract price, under a liquidated damage clause.

2. Until the case came on for hearing, the defence pleaded non est factum or misrepresentation and that the liquidated damage clause was a penalty. At the hearing, the pleas of non est factum and misrepresentation were abandoned. There was substituted a vague plea that the plaintiff was in some way herself in breach of contract because she had not shown that she was in a position to perform the contract. There was no specific plea such as impossibility or renunciation or of a repudiatory act. Accordingly, upon application by the plaintiff, I gave judgment for the plaintiff for damages to be assessed. The sole issue remaining was whether or not the liquidated damage clause is a penalty.

3. The facts are that the plaintiff and a company called Maccaddy Limited entered a joint venture for the purchase from China of 3.5 million tonnes of rice for subsequent sale to countries to be approved by the Chinese Authorities. According to the business card of Mr. Chong Man, the only witness who gave evidence on behalf of the plaintiff, both these companies are part of the Lung Tai Group. The agreement for the joint venture was reduced into writing on 20th March 1986 in a document entitled "Certificate" (Exh. P3). In the meantime, on 10th March 1986 Maccaddy Limited had signed a contract with China Xinxing Corporation ("Xinxing") for the sale and purchase of that rice (Exh. P2) ("the China contract"). Mr Chong said the total cost would be some US$400 million.

4. Clause 15 of the China contract reads as follows:-

5. By contract dated 27th August 1986, a company called Phoenflite Limited, acting on behalf of the plaintiff, sold the whole quantity of rice to the defendant. That contract contained a provision for single contracts to be signed for 500,000 tonnes each of the rice. There was also a provision that within 7 days of signing of that contract the parties should attend the offices of a Hong Kong solicitor for "additional execution". In accordance with the latter provision, a contract for the sale of 500,000 tonnes of the rice was signed between the plaintiff and defendant in Hong Kong on 28th August. The contract is dated 2nd September. The explanation for this appears to be that the defendant did not have his company chop when he signed on 28th August.

6. On the occasion of the signing of that contract, Mr. Chong, who signed on behalf of the plaintiff, explained to the defendant the details of the China Contract.

7. The parties apparently thought it prudent to go to a solicitor. This they did on 1st September when a further contract in identical terms was signed by Mr. Chong and the defendant, save that it contains a modification clause which supersedes all prior written agreements and provides that there should be no variations other than in writing. This contract ("the Hong Kong contract") is also dated 2nd September, again for the reason that the defendant did not have his chop on let September when he signed it.

8. The Hong Kong contract contains the following clauses :-

"7.     Liquidated damages for non-performance

10.      Destination

12.      Documentations

9. In accordance with Clause 10(C), the defendant was to provide an import permit from Iraq, that being the country to which he intended to sell the rice and which the Chinese Authorities had already approved. On 12th September, the defendant in writing asked for seven days "to finalise matters". The plaintiff apparently granted this extension. The import permit was not, however, forthcoming. The plaintiff viewed this as a repudiatory breach of contract which was accepted by the plaintiff on 20th September.

10. The plaintiff and her companies are manifestly middlemen, the Chinese Authorities through Xinxing which is a unit of the Ministry of Defence retaining considerable control over the disposal of the rice. The China contract stipulates that the seller, Xinxing, must he notified of the importing country and reserves the right to vary the price depending on the dateof delivery and the relationship with the importing country. Xinxing is aware that the plaintiff is responsible for selling the rice. Because the contract with the defendant has fallen through, Xinxing has already demanded US$530,000 from the plaintiff who expects to be asked to pay more in future because of Clause 15 in the China contract. In the meantime, the Chinese Authorities will not permit the plaintiff to sell any rice until the compensation has been paid.

11. I have said that these are the facts. These findings are based upon the evidence of Mr. Chong, the documents which have been produced and the pleadings. For the defendant, Mr. Siu sought to argue (I think) that Mr. Chong was either not telling the truth or did not really have personal knowledge of these transactions, that the China contract was ultra vires Maccaddy Limited and that the authenticity of the China contract was in doubt. He was indignant that I did not allow an adjournment for the defence to make background enquiries in China about the China contract which, it is fair to say, was only discovered by the plaintiff immediately before Mr. Chong started his evidence. I could not see, however, that anything was likely to be gained from an adjournment other than a lengthy delay in a case which I had already adjourned once of my own motion because I was concerned whether, in such a substantial case, the defendant's interests were adequately represented and protected.

12. I was satisfied that, where he so indicated, Mr. Chong was speaking with personal knowledge. I had no reason to doubt his credibility or the authenticity of the documents. No evidence was called on behalf of the defendant.

13. For the plaintiff, Mr. Wong referred me to the wellknown principles set out in Dunlop Pneumatic Tyre Company, Limited v. New Garage and Motor Company, Limited⁽¹⁾. He said that although the Court must look at the substance rather than the form of words used, it is proper to construe Clauses 7 and 10 of the Hong Kong contract together and the title to Clause 7 gives some indication of the attitude of the parties.

14. Mr. Wong argued that Clause 10(C), upon which he relies because of the failure to provide an import permit, is not in terrorem. He pointed out that Mr. Chong gave evidence that Clauses 7 and 10 in the contract were back to back with the China contract. He said that the plaintiff was only trying to pass on to the defendant by way of protection, the risk which the plaintiff was running of having to pay compensation to Xinxing. The plaintiff, said Mr. Wong, was not seeking to terrorise the defendant into performing the contract but rather reasonably estimating the damage that would flow to the plaintiff in the event of breach on the part of the defendant.

15. Mr. Wong said that the plaintiff was being realistic rather than extravagant. Further, having regard to the difficulties in finding buyers for the rice, and having regard to the differing prices depending upon the country of destination, it would be extremely difficult to assess damages in advance.

16. Finally, in relation to Dunlop, Mr. Wong said that the case emphasises the need to look at the whole essence of the contract. In Dunlop, the damage flowed from breach of a retail price maintenance agreement and not simply from the sale of one item under such an agreement at a price less than that prescribed.

17. Mr. Wong also relied upon Robert Stewart & Sons, Ltd. v. Carapanayoti & Co., Ltd.⁽²⁾. He relied on it for two reasons. First, a clause which contained a provision for "a penalty of not less than 2%, not more than 10% over the estimated market value" was upheld. There is authority, therefore, that liquidated damages may consist of a variable factor rather than a fixed sum. Secondly, at page 422 McNair, J. said :-

"......this provision does not impose a fine or punishment on the defaulting party, nor is it imposed in terrorem, but is a perfectly reasonable, businesslike way of providing machinery for dealing with a practical concrete problem, namely, how is the innocent party to be compensated for certain items of loss which are not covered by an award based merely on the difference between contract price and market price. In giving such a construction to the condition, there is nothing in it at all which, within the meaning of the law, is extravagant or which provides for an extravagant or unconscionable payment."

and later he added:-

"...It seems to me - not here attempting, I hope, any new definition in a rather complicated field - that a payment would only be considered unconscionable and extravagant if it produced a grossly unreasonable result, either in amount or in the conditions under which payment was made, so that the court would feel it unjust to allow such a sum to be recovered. Those considerations do not, in my judgment, apply in the present case, and I, accordingly, uphold the award."

18. Mr. Wong urged that Clause 7(C) of the contract does not produce a grossly unreasonable result and does not provide for an extravagant or unconscionable payment.

19. I pointed out to Mr. Wong that Clause 7(C), unlike the other clauses, provides for payment of damages of 3% to 5%, not only in the case of breach causing failure of the contract but also delay. As the damage flowing from delay would, in all probability, be rather less than that flowing from entire failure of the contract, Clause 7(C) might therefore fall foul of principle 4(c) laid down by Lord Dunedin in the Dunlop case. Mr. Wong said that "delay" was put in ex abundante and, in the circumstances of the contract, really had no meaning. He pointed out that the Hong Kong contract contains a strict time table for the parties to observe, particular dates being given for the provision of certain documents. He said that time was the essence of the contract, that there was no obligation on either party to extend time limits and that any delay by a party would be a repudiatory breach of the contract.

20. Notwithstanding the strict time table, I find it difficult to accept that upon the failure of one party to provide documents within the time stipulated, the other party would immediately regard the contract as having been repudiated. If there is such great difficulty in finding buyers for the rice, as Mr. Wong earlier relied upon, it would be unrealistic for the plaintiff so quickly to regard the contract as repudiated in view of the consequences that would follow with the Chinese Authorities. Further, the plaintiff in fact granted an extension of time to the defendant for the supply of the import permit. It seems to me, therefore, that the parties did in fact contemplate the possibility of delay. I could not follow Mr. Wong's brief reference to novation in this context.

21. Mr. Siu advanced a number of interesting arguments. Insofar as I could understand them, the relevant ones appeared to be :

22. I find it difficult to accept that, however carefully the matter is discussed and agreed between the parties, a seller can pass on to a buyer by way of a liquidated damage clause, compensation (to use a neutral term) which may be payable by the seller to his own supplier. A liquidated damage clause must,  it seems to me, have some relationship to the amount of damages which might he recoverable in accordance with common law principles. Alternatively, such a clause should reflect a genuine agreement between the parties that having regard to the difficulties of assessment of damages, the amount agreed upon is fair and reasonable. Neither of these attributes appear to he present in this case.

23. The plaintiff might have required an indemnity from the defendant. It was, however, a point which was not pleaded or argued and, on the wording of the Hong Kong contract, would have stood little chance of success.

24. Clauses 7(A) and (B) provide for partial or total failure. Clause 10(C) provides for delay or total failure. Substantially different amounts of damage must flow from these differing consequences. In my view, the range of compensation, 3-5%, although allowing some latitude, does not provide sufficient recognition of the differing consequences.

25. In the circumstances, I find clause 7(C) of the contract to be a penalty under which the plaintiff may not recover.

26. No other evidence of damage was led on behalf of the plaintiff. Indeed, Mr. Wong conceded that he relied entirely upon Clause 7(C). There are, therefore, no damages which I can assess. The plaintiff's judgment is an empty one.

(1)    [1914] A.C. 79

(2)    [1962] 1 All E.R.418