STANDARD HOLDINGS LTD v. FUJI （CHINA） DECORATION & ENGINEERING CO., LTD.

HCA 2350/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2350 OF 2007

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REASONS  FOR  DECISION

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1.  There are two summons before me:

(1)   The Plaintiff’s summons dated 3 March 2009 to amend the Statement of Claim;

(2)   The Defendant’s summons dated 29 April 2009 to strike out the Statement of Claim and the action.

2.  I allowed the amendment and dismissed the striking out at the hearing.  I now give my reasons.

Background

3.  The case was previously before me on 16 December 2008 on appeal against the Master whereby I struck out the Statement of Claim but not the action, and granted leave to file an amended Statement of Claim.

4.  Now the Plaintiff submitted the draft Amended Statement of Claim.  It is late but no point is taken on that.  

5.  Instead, the Defendant renewed the application to strike out the amendment and the action on the same grounds of vexation and abuse.

Plaintiff’s case

6.  Miss Cheung, for the Plaintiff, framed the amended cause of action on the basis of an implied contractbetween the supplier and the third party drawer of a credit opened in favour of the supplier.

7.  The draft Amended Statement of Claim pleads as follows:

(1)   The Plaintiff sold goods to a company Standard Kitchen for delivery to a company SKC Kitchen Cabinets (“SKC”) in Dongguan, the Mainland.

(2)   In about May 2007, Standard Kitchen defaulted on payment of the invoices and the Plaintiff stopped delivery in late May 2007.

(3)   The Defendant was in fact the end user of the goods and the party to put Standard Kitchen in funds.

(4)   Through negotiations between representatives of the Plaintiff and Standard Kitchen acting on behalf of the Defendant, it was agreed that the Defendant would open a Letter of Credit (“L/C”) in favour of the Plaintiff;

(5)   The amount of the L/C was to cover goods already sold and to be delivered in consideration of the Plaintiff continuing delivery.

(6)   The arrangement was an implied contract by conduct constituted by an offer by the Defendant in the application of the L/C and acceptance by the Plaintiff.

(7)   The parties agreed that delivery by the Plaintiff would remain to SKC in Dongguan notwithstanding that under the L/C the goods were for local delivery in Hong Kong.

(8)   It was an implied term of the implied contract that the Defendant would do all things necessary for carrying out its obligations under the implied contract.

(9)   In reliance upon the representations and the implied contract, the Plaintiff continued deliveries to SKC.

(10)   The Defendant was in breach of the implied contract as it failed to deliver the necessary cargo receipt to enable the Plaintiff to negotiate the L/C thereby causing loss and damage to the Plaintiff.

Defendant’s case

8.  Mr Chung, for the Defendant,  submitted as follows:

(1)   The amended plea of implied contract was inconsistent with and excluded by the previous case based on the L/C in the pleadings and affidavit evidence filed in the O. 14 application on behalf of the Plaintiff;

(2)   There could be no intention on the part of the Defendant to contract in the way pleaded in the amendment as it was inconsistent with the terms of the L/C and the Defendant could not have intended the L/C to cover anything other than goods to be delivered locally as per its terms;

(3)   The pleas of agency by Standard Kitchen on behalf of the Defendant lacked particulars and is bad for embarrassment and prejudice;

(4)   The implied contract, if any, was illegal as it would require issuance of cargo receipts covering goods already delivered outside the L/C period and outside Hong Kong;

(5)    Consideration for goods already delivered was bad as past consideration.

9.  Mr Chung pointed out that the L/C was for local delivery in Hong Kong with cargo receipt to be issued within 21 days of delivery within the validity of the credit.  The Defendant could not have lawfully issued the cargo receipts without committing forgery on the bank.  Hence, the Defendant could not have intended the L/C to cover the goods already delivered.

Relevant principles

10.  The test at striking out is whether the pleadings are clearly and obviously bad as unarguable at all and bound to fail, rather than whether it is bad as a matter of proof either now or at trial.  The same applies to legal arguments, especially where there are mixed questions of facts and law.

11.  Implied contract as inferred from conduct of the parties was considered by the Court of Final Appeal in Shanghai Tongji Science & Technology Industrial Company Limited v Casil Clearing Limited (2004) 7 HKCFAR 79.  In essence, the considerations are:

(1)   A contract could be inferred from the conduct of the parties but the court would not imply such a contract lightly;

(2)    The burden of establishing such a contract was on the person asserting its existence;

(3)    The starting point is an “objective test” and it would only be met if the conclusion was reached in each case that the parties’ conduct was consistent only with there being a contract implied, and inconsistent with there being no such contract;

(4)    The conduct relied on had to be unequivocally referable to the contract sought to be inferred and it is not sufficient that it “might” be referable;

(5)    Where the conduct in question satisfied the “objective test”, the law would generally exclude as irrelevant evidence a party’s actual intentions apart from one subjective qualification: the “objective test” did not apply in favour of a party who actually knew the other party in fact had no intention to contract with him.

12.  Ribeiro PJ cited (in para. 38 of the judgment) The Aramis [1989] 1 Lloyd’s Rep 213, 224 where Bingham LJ (as he then was) said:

“I do not think it is enough for the party seeking the implication of a contract to obtain “it might” as an answer to [the above-mentioned] questions, for it would, in my view, be contrary to principle to countenance the implication of a contract from conduct if the contract relied upon is no more consistent with an intention to contract than with an intention not to contract. It must, surely, be necessary to identify conduct referable to the contract contended for or, at the very least, conduct inconsistent with there being no contract made between the parties to the effect contended for. Put another way, I think it must be fatal to the implication of a contract if the parties would or might have acted exactly as they did in the absence of a contract.”

Discussion

13.  It is important to note that the Plaintiff is not suing on the L/C, but rather an implied obligation to pay to be inferred against the Defendant as evidence by the conduct of the opening of the L/C.

14.  Mr Chung pointed out that the original Statement of Claim and the affidavit verifying the O. 14 application framed the claim on the L/C, and never mentioned any contract, let alone implied contract.  Be that as it may, I failed to see what else could the case against the Defendant be otherwise than in contract.

15.  Miss Cheung said that she is not relying on agency as such, but merely referring to the fact that the negotiations for the L/C took place only between the Plaintiff and Standard Kitchen, resulting in the L/C being opened by the Defendant in favour of the Plaintiff.  Hence, the inference is that Standard Kitchen must have been acting on behalf of the Defendant.  I see that this point is sufficiently dealt with in the amendment.

16.  Miss Cheung asked the rhetoric question that if the Defendant was not intending to pay the Plaintiff the outstanding invoices for resumption of the deliveries, whether the Defendant was intending to trick or defraud the Plaintiff into continuing delivery.

17.  I find the plea of implied contract is reasonably open on the facts. Granted there is a question of fact as to whether the amount of the L/C covered the unpaid invoices as well as the remaining goods.  The point is neither necessary nor suited to be dealt with at the pleading stage.

18.  As mentioned, the Plaintiff is not suing on the L/C, nor did it present any false cargo receipt.  The Plaintiff’s case is that it acted on the representations of Standard Kitchen in accepting the L/C.  Given the modern view on pari delicto and locus poenitentiae,it is not clear and obvious that the contract is unenforceable by reason of illegality.

19.  As to consideration, the L/C was supposed to cover resumed delivery.  The common law looks at value as opposed to adequacy of the consideration, and the consideration was not necessarily bad.

Conclusion

20.  In the event, I allowed the amendment and dismissed the striking out.

21.  The Defence has not been filed because of the earlier O. 14 application.  I gave directions for filing of pleadings, and re-engagement of the case management in O. 25, RHC upon close of pleadings.

Costs

22.  I ordered costs of the present amendment and striking out be paid by the Defendant to the Plaintiff, summarily assessed at $30,000.

23.  Costs of the previous striking out hearing on 16 December 2008 were reserved.  I ordered those costs be paid by the Plaintiff to the Defendant, summarily assessed at $15,000. 

24.  I confirm no order as to costs as ordered by the Master for the proceedings before her.