ABLE ENGINEERING CO LTD v. WELMETAL RESOURCES GROUP LTD

HCA 51/2022

[2022] HKCFI 2963

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 51 OF 2022

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Reasons for Judgment

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1.  This is an application by Able Engineering Company Limited (“the plaintiff”) for summary judgment against Welmetal Resources Group Ltd (“the defendant”) pursuant to RHC Order 14 and Order 14A on 3 questions of law set out in §1 of its summons dated 22 April 2022. At the conclusion of the hearing, this court dismissed (i) §1 (a) and (b) and § 2 of the summons; and (ii) the action, with costs in favour of the defendant, such costs to be summarily assessed. Directions were then given for their assessment in Chambers.

BACKGROUND FACTS

2.  On 17 April 2020, the plaintiff as buyer and the defendant as seller entered into a contract for the sale and purchase of steel bars (“the contract”) for a 2-year period commencing 1 May 2020.

3.  Clause 12 of the Contract is in the following terms:

“Payment for each physical delivery is to be effected within 30 days from the date of delivery.

Without prejudice to the [defendant’s] other remedies, if payments are not received within the stipulated period, the [defendant] shall have the rights to suspend further delivery of Commodities under this Contract and/or terminate this Contract. [The defendant] shall not held any responsible for the suspend delivery of commodities.”

4.  Between 1 May 2020 and 27 May 2021, the plaintiff placed 24 purchase orders with the defendant.

5.  It is common ground that in respect of 14 of the purchase orders, the plaintiff failed to make payment within 30 days from the date of delivery.

6.  In May 2021, the defendant sent the following emails to the plaintiff:

(i)  on 3 May, the defendant requested payment in respect 2 of its deliveries that were overdue;

(ii)  on 7 May, the plaintiff was reminded that payments aggregating in excess of $901,000 were then overdue and that the defendant had the right to suspend delivery of the commodities immediately and/or terminate the contract;

(iii)  on 13 May, the plaintiff was asked to settle the “overdue payment” of over $555,000 “within 5 working days of this email” and if payment was not received by that date, the defendant would have to take action including the termination of the contract; and

(iv)  on 21 May, the plaintiff was asked to settle the overdue payment in excess of $1.4 million “within 3 working days of this email”, reiterating that if payment was not received, the defendant “would have to take action to retrieve the due amount, including but not limited to suspend further delivery of the commodities and/or terminate the contract”.

7.  By 27 May 2021, the overdue payments exceeded $2.9 million. The defendant exercised its right to terminate the contract, informing the plaintiff the same day by email and by letter of its decision, stating that the contract “shall, following the terms contained and agreed therein, be terminated with immediate effect”.

8.  The email was sent early that morning and the letter delivered by courier the same day.

9.  In the afternoon of 27 May, the defendant received a request from the plaintiff to collect a cheque for the overdue payments which the defendant did later that afternoon and deposited it with the bank the following day.

10.  Apart from the delivery made of a purchase order on 31 May, the defendant has refused to further supply steel bars to the plaintiff.

11.  The plaintiff commenced this action on 12 January 2022 and issued the present summons on 22 April 2022.

THIS APPLICATION

12.  By its summons, the plaintiff seeks the determination and/or construction, inter alia, of the following questions of law:

1. (a) Whether Section 12 of the Sale of Goods Ordinance, Cap 26 (“SOGO”) which stipulates that

“Unless a different intention appears from the terms of the contract, stipulations as to time of payment are not deemed to be of the essence of the contract of sale”

applies to the Sales Contract dated 17 April 2020 under Sales Contract No.: RDB-S2004025 (“the Contract”) when there is no provision therein stating that time of payment is of the essence.

(b) Whether the defendant’s emails dated 3 May 2021, 7 May 2021, 13 May 2021 and 21 May 2021 constituted reasonable notices to the plaintiff when it is not mentioned in any of the emails that time of payment is of the essence of such notices.

(c) Whether the defendant was entitled to terminate the Contract with immediate effect on 27 May 2021.

CLAUSE 12 OF THE CONTRACT

13.  Clause 12 of the contract confers on the defendant an express right to terminate the contract in the circumstances set out, namely, a failure by the plaintiff to pay for commodities supplied within 30 days of delivery (“the specified event”).

14.  It is common ground that as at 27 May 2021, the plaintiff was in breach of its payment obligations under the contract. Clause 12 of the contract is an express provision that on its face conferred an express right of termination on the defendant on the occurrence of the specified event.

15.  Ms Christine Yu, counsel for the plaintiff, submitted that the plaintiff is entitled to terminate only if the breaches amounted to a repudiation of its contractual obligations. The thrust of her submissions is that unless punctual payment is a “condition” of the contract, the defendant cannot exercise the right to terminate.

16.  She submitted that clause 12, properly construed, was an innominate or intermediate term. Whether or not the defendant was entitled to terminate the contract would depend on the severity of the breach(es), the length of delay, the amount outstanding, the conduct of the plaintiff et cetera. In other words, the right to terminate only arises if the breach or breaches were repudiatory, amounting to a fundamental breach.

17.  It was drawn to the court’s attention that the contract was for the supply of 15,000 MTS over a two-year period, the commodities to be supplied by partial deliveries within that period. The total value of the commodities was of the order of $49 million and the plaintiff was obligated to make full payment of undrawn quantities on or before 30 April 2022.

18.  Against that background, it was suggested that the breaches that had occurred were relatively minor and were not repudiatory.

19.  Reference was made to the schedule to the statement of claim. The court’s attention was directed to the fact that the invoice date as well as the invoice receipt date would invariably lag behind the delivery date by several days. The point sought to be made appears to be that, as a result, the plaintiff had less than 30 days from the date of delivery to make payment because of the time lag of several days between the date of delivery and the date of receipt of the invoice.

20.  I fail to see the relevance of that submission. The contract is clear: payment is due within 30 days from the date of delivery. It could have provided for payment to be made within 30 days of the date of the invoice or the date of receipt of the invoice but that was not what the parties had agreed.

21.  It was further submitted that on the occurrence of the specified event, the defendant had an option to withhold delivery instead of terminating the contract. The former was less draconian or drastic in its effect and it could not have been the intention of the parties that the defendant could resort to exercising the ‘nuclear option’ of termination when it had the option of withholding deliveries which was also “without prejudice” to the defendant’s “other remedies”. However, there was no elaboration of what those “other remedies” would be had the defendant gone down that route.

22.  The plaintiff placed considerable reliance on Spar Shipping AS v Grand China Logistics (Group) Co Ltd [2017] Bus LR 663 where the English Court of Appeal considered the effect of an identical clause 11 of 3 charter parties. In pertinent part, it reads as follows:

“11. Hire Payment

… Failing the punctual and regular payment of the hire… the owners shall be at liberty to withdraw the vessel from the service of the charterers without prejudice to any claims they the owners may otherwise have…”

23.  The issue before the Court of Appeal is succinctly stated in the judgment of Gross LJ:

“ISSUE I: THE CONDITION ISSUE

[16] (A) Introduction: This Issue is concerned with the controversy as to whether the obligation to make punctual payment of hire is or is not a condition in standard form time charterparties (subject of course to any specific express wording not found in the charterparties). A “condition” (see further below) is a term any breach of which is sufficient to entitle the innocent party to terminate the contract—and claim damages for loss of bargain (or, where appropriate, reliance loss, to which further reference need not be made).

[17] If, as Popplewell J held, the obligation in question was not a condition, then GCS's failure to make punctual payments of hire entitled Spar to terminate the charterparties pursuant to the express provisions of the withdrawal clause in clause 11 thereof—so putting to an end to future performance obligations and also to claim the balances due under the charterparties at the date of termination. However, mere breach of this obligation did not entitle Spar to claim damages for loss of bargain. On the judge's reasoning, that entitlement flowed instead from GCS having renounced the charterparties. Conversely, if the obligation in question was a condition, then Spar was not only entitled to terminate the charterparties but also, on this ground alone, to claim damages for loss of bargain.”

24.  The plaintiff focused on the finding, upheld on appeal, that punctual payment of hire was not a condition entitling the innocent party to terminate the contract[1]. Its approach was directed at the question whether a punctual payment provision amounts to a ‘condition’ and entirely overlooks what the Court of Appeal went on to hold, namely, that if the obligation to make punctual payment was not a condition, then failure to make punctual payments entitled the innocent party to terminate the charter parties pursuant to the express provisions of the withdrawal clause in clause 11.

25.  The plaintiff’s submissions disregarded the fact that clause 12 conferred an express right to terminate the contract on the occurrence of the specified event. In my view, there is no discernible difference between the express provisions of the withdrawal clause in Spar Shipping and the express right conferred by clause 12.

26.  It is also clear from Spar Shipping the effect of exercising the express power to terminate puts to an end future performance obligations and also to claim the outstanding balances at the date of termination. It does not entitle the innocent party to claim damages for loss of bargain. Had the obligation been a ‘condition’, apart from its right of termination, the innocent party would be entitled to claim damages for loss of bargain.

27.  In the present case, the defendant does not claim damages and the question whether the obligation to make payment within the stipulated time amounts to a condition is irrelevant and beside the point for present purposes.

28.  Mr Jiang, counsel for the defendant, submitted that, given the Court of Appeal’s holdings at §§17 and 64, Spar Shipping is actually an authority that supports the defendant’s case.

29.  As regards the express provision to terminate contained in clause 12, there are authorities on the subject. Under the rubric “Express provision for determination” in Treitel on The Law of Contract (15^th Ed., 2020) at §18-067, it is clear that a contract may provide for one party to terminate in circumstances that do not amount to a breach or failure to perform and that such provisions can also confer a right to terminate for some specified failure to perform. Its purpose is explained at §18-075:

“[t]he purpose of an express provision for determination is to prevent disputes from arising as to the often difficult question whether the failure in performance is sufficiently serious to justify termination; and they take effect even though there is no substantial failure.”

30.  The English Court of Appeal’s decision in Kason Kek-Gardner Limited v Process Components Ltd [2017] EWCA Civ 2132 is an illustration of its application. The relevant provision before the court was clause 11.2[2] of the contract which was in the following terms:

“11.2 Either party shall be entitled to terminate this Agreement immediately by written notice to the other in the event of:

(a) any material breach by the other party of any of its obligations under this Agreement which, being a breach capable of remedy, is not remedied within 30 days of notice to the party in breach specifying the breach and requiring its remedy. (For this purpose, non-payment of any royalty under clause 5 constitutes a remediable material breach and breach of the confidentiality obligations under clause 10 constitutes a non-remediable material breach);”

31.  The issue was whether any breach of clause 10 which was a non-remediable material breach, triggered the right of termination. Lewison LJ held (at §57) that where the parties have themselves agreed to the circumstances in which the contract may be terminated, the distinction between conditions and innominate terms does not matter. What matters is what the parties have agreed about the circumstances in which the contract may be terminated.

32.  He noted (at §58) that clause 11.2 is not a blanket provision entitling the injured party to terminate on “any” breach of contract. Rather, clauses 10 and 5 are singled out for special treatment and on breach of clause 10, the innocent party was entitled to terminate the license.

33.  On the issue of stipulations as to time, Treitel (at §18-117) states as follows:

“Time 'of the essence' by express agreement. Time will obviously be of the essence if the contract expressly so provides. The contract may provide that the stipulation as to time is a condition and where time is expressed to be 'of the essence' that is itself a form of words which the courts have accepted as sufficient to create a condition. Alternatively, the contract may simply provide that in the event of one party's failure to perform within the stipulated time, the other is to be entitled to terminate, without making the time stipulation into a condition. In such cases, the contract may be terminated on the basis of the express provision, but the innocent party will not have the benefit of the consequences which may flow from terminating for breach of condition.” (Italics supplied)

34.  A similar view is expressed in Chitty on Contracts, 34^th Ed., 2021 (p. 1994):

“§27-029 Time made expressly or implicitly ‘of the essence’ Time is of the essence:

(1) Where the parties have expressly stipulated in their contract that the time fixed for performance must be exactly complied with⁷⁹, or that time is to be ‘of the essence’.”

35.  Footnote 79 to the above extract states:

“… The same result follows if the contract provides … that any breach of the clause shall entitle the innocent party to “rescind” or terminate.”

36.  In my view, there is no doubt but that the defendant was entitled to terminate the contract on 27 May 2021.

The questions raised in §1 of the plaintiff’s summons

Questions §1 (a) and (b)

37.  Given that the defendant had the right to terminate the contract when it did, questions §1 (a) and (b) are irrelevant. Accordingly, they fall to be dismissed.

Question §1 (c)

38.  The answer must be in the affirmative.

CONCLUSION

39.  As the contract has been duly terminated by the defendant, this action must be dismissed and I so order.