PATRICK HO & ASSOCIATES v. FOOK KONG TRADING CO.(a firm)

1987, No. A691

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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JUDGMENT

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1. Both the Plaintiff and the Defendant are import and export trading firms, and both do business with mainland China. On the 12th July 1986 the Defendant entered into an agreement ("the original contract") with the China National Metals & Minerals Import & Export Corporation ("China National") by which the Defendant agreed to sell and China National agreed to buy 5,000 tons of electrolytic tin plate at US$458 per ton. Payment was to be by letter of credit ("L/C") to be opened by the Information Electronics Development (Beijing) Company ("Information Electronics") in favour of the Defendant.

2. The origin of the goods was stipulated as Europe or Japan, and shipment or the port of loading as Europe or Japan main port. On 20th September 1986, the Defendant was informed by information Electronics that due to exchange restrictions it was unable to open the L/C. On the request of Information Electronics, Mr. KWOK Man-lap ("Mr. Kwok") of the Defendant on 22nd or 23rd September 1986 went to the office of Information Electronics in a hotel in Shum Chun in China. There he took part in a meeting with Mr. Patrick Ho and Mr. CHAN King (alias JIHNG Chern) of the Plaintiff and two representatives of Information Electronics. Mr. Patrick Ho is the Managing Director of the Plaintiff and Mr. CHAN King, the officer of  the Plaintiff who deals with its China trade.

3. At this point it is helpful to outline the essentials of the dispute between the parties. The Plaintiff claims that it entered into an agreement with the Defendant partly orally at various meetings, partly in writing in several documents and partly by conduct, under which it undertook to open a L/C to enable payment of the purchase price under the original contract to be effected in return for which Information Electronics was to nay 4.5% of the L/C value and the Defendant agreed that if it failed to cause shipment of the goods to be effected as stipulated in the letter of credit it would pay the Plaintiff a penalty or compensation of 5% of the L/C value. The Plaintiff says that it duly opened the L/C but the Defendant failed to effect shipment of the goods as stipulated and it claims 5% of the L/C value i.e. US$46,800.00.

4. In response the Defendant denies that it agreed to pay 5% in default of shipment. On the contrary it says that at the Shum Chun meeting on the 22nd or 23rd of September 1986, Mr. Ho agreed with Mr. Kwok that the Plaintiff would open an irrevocable L/C in favour of the Defendant according to the terms of the original contract in consideration of a commission of 4% of the total contract price to be paid by Information Electronics, and not the Defendant. The Defendant says that it was an express or implied term of the agreement that the Plaintiff would cause to be made to the L/C amendments reasonably requested, but it failed to effect such amendments relating to the origin and port of loading of the goods and therefore is not entitled to compensation or damages. Furthermore the Defendant says that by reason of such breach of the agreement the Defendant was unable to fulfil the original contract and it counterclaims the profit it would have made i.e. US$112,000. The Plaintiff denies it was requested to amend the origin and port of loading of the goods in the L/C.

5. Reverting then to the greeting at Shum Chun on the 22nd or 23rd September 1986 Mr. Ho says his involvement in this matter began when Information Electronics asked him to attend the meeting in Shum Chun about 23rd or 24th September. Information Electronics is the subsidiary of China Kang Hua ("Kang Hua") with which he had had previous dealings and for which he had a very high regard, the chairman of its Board of Diectors being Mr. Deng, no less than the son of Chairman Deng Xiaoping the Chinese leader. So he went.

6. It is common ground that there was a meeting attended by the parties mentioned by Mr. Kwok, although incidental details are disputed. Also what was agreed is disputed. Mr. Ho says that the meeting lasted one and a half hours. He was invited to open the L/C in place of Information Electronics and was offered a commission or payment of 4.5% of the value of the L/C for doing so. Also it was mentioned that the Defendant would pay 5% as a penalty or compensation if it failed to supply the goods. He was shown but not given a copy of the original contract. He was not willing to enter into the transaction unless the L/C was guaranteed by Kang Hun. He also wished first to have certain details sorted out between the Plaintiff and Defendant in Hong Kong.

7. Mr. Kwok, on the other hand says that it was agreed at the meeting to reduce the quantity in the original contract to 2,000 tons, to increase the price to US$468 per ton, and to defer the shipping date, which is common ground. But he goes on to say that Mr. Ho agreed to open the L/C on Information Electronics' behalf in return for a commission of 4.5% Everything was finalized apart from some minor details of the documentary credit. In his view an agreement had been reached. Kang Hua was not mentioned by anyone nor was there any question of the Defendant paying any compensation or penalty for failure to procure shipment. Mr. Ho could not be given a copy of the original contract as there was no copying machine available. Nobody raised the question of future amendment of the L/C but he mentioned that the Defendant could give instructions.

8. It is not disputed that Mr. Ho and  Mr. Kwok returned separately to Hong Kong. Mr. Chan King, according to Mr. Ho, remained behind to pursue the matter of the guarantee with Kang Hua.

9. It is common ground that there were then 2 meetings in Hong Kong called by Mr. Ho and held in his office between him and Mr. Kwok. The first was on the 25th September 1986, at which Mr. Ho was given or made a copy of the original contract provided by Mr. Kwok. Mr. Ho says that Mr. Kwok told him the goods were to be from the UK. He accordingly prepared an application form showing the origin of the goods as UK. An agreed copy of the application was exhibited. It specifies UK as the origin of the goods and also provides in condition 7 for a penalty of 5% if the seller fails to effect shipment as stipulated in the original contract.

10. The second meeting was on the following day, the 26th September. Mr. Ho gave Mr. Kwok a copy of the application which by then he had completed. He says he explained it to Mr. Kwok clause by clause. Mr. Kwok says Mr. Ho only explained it briefly; he took away a copy with him. It is not disputed that the next step was for him to approve or confirm the terms in the application. He took the application to the nearby office of a friend who knew English and showed the friend the second page as he did not wish to disclose the price, which was on the first page. The purpose of the visit was to confirm the information on the second page. He told his friend that the L/C was to be confirmed in London as Taiwan Jetta, through whom he had arranged for the goods to be supplied, had told him the supplier was in London. At his request his friend drafted a telex, explained it briefly to him and had it sent on his friend's company's telex machine. The Plaintiff relies heavily upon that telex which approved the terms of the L/C application, repeating its terms including the condition that "should the seller fail to effect shipment on time as stipulated in our contract ... the total penalty shall be calculated 5 per cent from the total value".

11. Mr. Ho says that upon receipt of that telex and having heard from Mr. Chan King that Kang Hua had agreed to guarantee the L/C, he submitted the application to the Hong Kong and Shanghai Bank on the 29th. It was approved the same day and the L/C was collected the following day by Mr. Kwok.

12. On the 30th September Mr. Ho and Mr. Kwok had yet another meeting called by Mr. Ho, who asked him to come to sign a document and to bring along his company's chop. He went and was presented with a typed document in English. Mr. Ho says he explained the document to Mr. Kwok before he signed. Mr. Kwok says the explanation was that the document was about 5% compensation and that according to the original contract if the Defendant failed to deliver the goods it would be liable to compensate the Plaintiff in the sum of 5%. The original contract does indeed have provision for a penalty, but of 1% for every ten days of delay in delivery subject to a maximum of 5%, and that was to be paid to the purchaser i.e. China National and not the Plaintiff. Mr. Kwok says Mr. Ho told him that the document to be signed was one and the same thing as the original contract. So he signed it. I am satisfied that Mr. Kwok does not have any sufficient knowlege of English as to be able to read or even adequately understand spoken English. I shall deal in due course deal with the matter of whose evidence I accept. The document is of some importance. It is in these terms.

"According to contract No. 85EJNG49014CK signed between you (Fook Kong Trading Co.) and Information Electronics Development (Beijing) Co., China. Now Information Electronics Development (Beijing) Co., China authorized us (Patrick Ho & Associates) to open a L/C No. MGK661939EX date on 29-9-1986 to your-good-self to cover this contract.

Please note, we (Patrick Ho & Associates) is not liable on the contract No. 85EJNG49014CK signed between you (Fook Kong Trading Co.) & Information Electronics Development (Beijing) Co. China. But should the seller (Fook Kong  Trading Co.) fail to effect shipment on time as stipulated in our L/C No. MGK661939EX and should the quality and/or weight be found not according to our L/C No. MGK661939EX. The seller (Fook Kong Trading Co.) is liable to pay to Patrick Ho & Associates a liquidated damage being 5% on the total value of this L/C.

Please sign below with your company chop confirming you acceptance to the above mentioned points."

13. During the next week the Defendant asked the Plaintiff for several amendments in consequence of which the Plaintiff made 2 applications for amendment of the L/C. These were effected by the Bank by Amendment No. 1 on 7th October. None of the amendments related to the origin of the goods or the port of loading.

14. On the 15th October 1986 China National asked the Defendant to get the Plaintiff to have certain amendments made to the L/C to show China National Dalian as the notifying party. The Plaintiff was agreeable but only if Kang Hua as guarantor approved. However Kang Hua did not do so (at any rate not upon conditions that could be met); on the contrary on the 5th November, the stipulated date of shipment, it withdrew its guarantee saying there was "something wrong with the original contract, which was not an external contract".

15. Mr. Kwok also says that he made repeated requests from early October for the origin of the goods and the port of loading specified in the L/C to be amended. Mr. Ho denies that. No further amendments were made to the L/C. In consequence, the Defendant says, it was unable to fulfil the original contract and sustained the loss of profit claimed.

16. Despite the existence of a considerable body of  agreed documentary evidence, the issues between the parties manifestly turn upon the oral evidence of the 2 protagonists,   Mr. Ho and Mr.  Kwok.

17. Mr. Kwok is a relatively young man, about 34 years old on his own evidence. He came to Hong Kong about September 1980 from Fujian Province in China. He was educated there to junior middle school one. He knows virtually no English. Also he knows little Cantonese and used to converse with Mr. Ho in Mandarin. Before he came to Hong Kong he was a driver in China. After he arrived he was a factory worker for about 2 years. Then he fell ill and returned to China. Later he came back to Hong Kong and then travelled to and fro. He worked as a casual worker and only had a steady job for about one year. Before he joined the Defendant firm he worked for a very short unstated period in the China trade assisting his cousin. The Defendant firm is apparently comprised of fellow Fujian clansmen; and according to Mr. Kwok it closed down at the end of 1986. Mr. Kwok joined the Defendant firm as officer in charge of PRC trade. He did not in fact receive any remuneration from the Defendant firm because it was to take the form of commission upon profits which did not materialise. There seems to have been some makeshift aspects about the firm. Not only was Mr. Kwok in charge of the China trade with authority to act on his own, at least in regard to the original contract, but he admitted he knew little about letters of credit, and for English translation in regard to correspondence and documents had to rely upon ex-employees of the firm who might happen to be available.

18. Mr. Kwok was not without ability and considerable intelligence as his knowledge of the disputed matters and his answers during Mr. Tsang's prolonged cross-examination demonstrated. Nonetheless serious discrepancies and questions as to his veracity, which he was not able to satisfactorily explain, emerged in his evidence. First he said he did not become aware of the 5% penalty or compensation until 30th September. Later he was constrained to admit that it was after the meeting of the 26th September. Second, Mr. Kwok said he did not know that the goods were of UK origin until a very late stage. The documentary evidence, however, dating back to 27th September shows that he must have known much earlier than he claimed. Third, one of the amendments Mr. Kwok sought was the transfer of the L/C to one Indesen Company so that the latter could transfer it to the UK. On or before the 6th October 1986 both Indesen and the Defendant approved a L/C amendment application which provided in effect for inspection in the UK and expressly for the origin of the goods to be UK. That contradicts the making of complaints by Mr. Kwok about UK being specified as the origin of the goods in the L/C. Fourth, it is apparent from the Defendant's further and better particulars and from questions put by Mr. Chung, that Mr. Kwok must have told his legal advisers that he could not adequately recall the telephone conversation he claims to have had with Mr. Ho on the 1st October. But he nevertheless in the event proceeded to give a detailed account of it in evidence. Fifth, having testified in his evidence in chief that there was no mention of Kang Hua at the meetings of 22nd, 25th and 26th September (that being a corner stone of the Plaintiff's case) he inadvertently let slip the admission that there had been references to "Kang Hua, Kang Hua". Pressed upon the contradiction, he sought to explain it  away by saying that was how he referred to Information Electronics. Sixth, there is a surprising, and in the circumstances, damaging absence of the sort of documentary evidence one would expect of Mr. Kwok's alleged requests for amendment of the origin and port of loading of the goods. The only document that might have availed him in some measure, on the probabilities, originated about the 10th of November, clearly after the shipment date and the withdrawal of the guarantee.

19. And as to his demeanour, Mr. Kwok appeared uneasy and distinctly hesitant in his evidence upon some of the matters disputed. I formed the impression both upon his demeanour and the substance of his testimony, that his evidence was unreliable, that he was clearly being untruthful in some instances and that he was modifying his evidence in some respects to meet the  emerging requirements of the Defendant's case.

20. In contrast I was impressed with Mr. Ho, who did not seek to embellish his evidence, and was unshaken in his protracted cross-examination. On the contrary he frankly admitted that he could not remember matters that quite obviously would have been in his favour. I formed the impression that he was generally reliable and truthful. The documentary evidence was far more consistent with his rather than Mr. Kwok's evidence.

21. I can see no reason whatever why he should deny that Mr. Kwok repeatedly requested him to amend the origin and port of loading provisions of the L/C. It is common ground that Hr. Ho and the Plaintiff had no interest in those matters. I reject the possibility of a conspiracy on the part of Mr. Ho, Kang Hua and even China National against the Defendant. That was suggested by Mr. Chung purely upon the somewhat obscure references in a telex from Kang Hua to Mr. Ho, to inter alia, receipt by Kang Hua of HK$78,000 for the charges of the L/C, to a plan of payment and to some documents. That sort of speculation could not counter the overwhelming evidence that supports the Plaintiff's case. Moreover it should have been properly put to Mr. Ho if not also pleaded. And finally if such speculation were to be of any value, a far more credible explanation would be some sort of plan or arrangement incorporating payment to Information Electronics and Kang Hua by China National for the former's services in arranging for and guaranteeing the L/C.

22. Likewise I reject the possibility, which was also suggested and which I have carefully considered, that Mr. Ho, having at the meeting of the 22nd September agreed to open the L/C in return for a 4.5% commission from information Electronics, became wise after the event and decided to trick Mr. Kwok into signing the typed English agreement to pay 5% in the event of non-delivery as stipulated. The evidence to the contrary is overwhelming.

23. I have no hesitation in accepting the evidence of Mr. Ho and rejecting that of Mr. Kwok to the extent that their evidence conflicts. I do not believe that an agreement was concluded on the 22nd September. Mr. Ho had not known Mr. Kwok or the Defendant before. He would not have been likely to agree after a mere one and a half hour meeting to open a L/C for almost a million US dollars, the largest L/C his company had ever opened, without looking further into details at least. It seems to me much more probable even upon the intrinsic probabilities and disregarding the evidence I have accepted, that Mr. Ho would have sought a guarantee and kept matters open while doing so and clarifying details.

24. In my finding therefore, no firm agreement was entered into on the 22nd September as claimed by the Defendant. On the contrary I am satisfied on the probabilities that to the knowledge of Mr. Kwok, Mr. Ho was only prepared to open the L/C if Kang Hua guaranteed it, that the agreement between the Plaintiff and the Defendant was made after the 22nd of September partly orally, partly in writing and partly by conduct as claimed by the Plaintiff; that one of its terms was that if the Defendant failed to effect shipment of the goods on time as stipulated in the L/C, the Defendant would pay to the Plaintiff 5% of the value of the L/C i.e. US$46,800, and that the origin and port of loading specified in the L/C were so specified upon information provided by Mr. Kwok and with his approval. It is common ground that no shipment was made.

25. I proceed then to consider the two other defences pleaded by the Defendant. The first is an express or implied term in the agreement requiring the Plaintiff to make reasonable amendments to the L/C at the request of the defendant. There is no evidence of such an express term and it is upon a term to the like effect but implied by law that Mr. Chung has had to rely upon in the event. He relies upon the well-known principles and their application described in the 24th Edition of Chitty on Contract in paragraphs 843 to 846 and 849. Applying those to this case, Mr. Chung submits that the provision "European or Japan - main port" in the original contract is too uncertain; if that were provided in those terms in the L/C, it would comply with the contract but the Plaintiff would have had to amend as payment might not have been effected if, for instance, shipment was from Antwerp. Applying the Moorcock test referred to in those paragraphs, the question is if an officious bystander were to suggest express provision for such amendment, the parties would testily suppress him with a common "oh of course".

26. Having found, as I have, that Mr. Ho was not prepared to enter into the transaction without a guarantee from Kang Hua, I think Mr. Ho far from saying "oh of course" would most probably have said, "only if Kang Hua agrees or I may lose my guarantee". Furthermore, contrary to the usual situation, Mr. Ho was not the buyer, nor even the agent of the buyer. He was acting on his own company's behalf to make a profit, having been invited to participate by Information Electronics which itself seems not to have had any direct relationship with the buyer, China National. It cannot in the circumstances be assumed that it obviously would have been the intention of the parties that the Plaintiff would amend upon any reasonable request of the Defendant, or indeed that amendment of the origin of the goods and port of loading would necessarily be reasonable.

27. Mr. Chung also submitted that the provision for amendment that he contended for was "necessary in the business sense, to give efficacy to the contract" (para 844), But as the same paragraph shows, Bowen L.J., in whose judgment in the Moorcock that test was formulated, also said that is an implication raised by the law from the presumed intention of the parties. Given the background and my finding that Mr. Ho insisted upon a guarantee from Kang Hua to the knowledge of Mr. Kwok, there can be little room for such a presumed intention. Furthermore (and this is no doubt the same principle from a different view) "a term ought not to be implied unless it is in all the circumstances reasonable" (paragraph 847). Again given the background and my finding in relation to a guarantee from Kang Hua, I do not think the term contended for would be reasonable.

28. Paragraph 847 of Chitty goes on to say that the "touchstone is always necessity and not merely reasonableness. The term to be implied must also be capable of being formulated with reasonable precision", although failure is not necessarily fatal. It is by no means clear, and no evidence was adduced upon the point, that provision for "European or Japan main port" in the L/C would have prevented the transaction going through. And although that might not necessarily have been fatal, I consider that the formulation suggested by Mr. Chung, of any reasonable amendment or any amendment reasonably required by the Defendant, does lack necessary precision. For the foregoing reasons I reject Mr. Chung's submissions of any implied term of the sort he urges.

29. I turn then to the second ground of defence i.e. that the provision for payment by the Defendant of 5% of the value of the L/C if the Defendant defaults in shipment is a penalty and therefore unenforceable. This ground was advanced upon the narrow basis that the Plaintiff's only loss was the 4.5% commission it would have received under the agreement.   I have no hesitation in rejecting the submission. Upon the clear authority of Dunlop Pneumatic Tyre Co. v. New Garage and Motor Co. (1915) A.C. 79 the guidelines as adumbrated in paragraphs 341 to 349 of the 14th Edition of McGregor on Damages upon which Mr. Tsang relied, and which Mr. Chung did not dispute, are as follows:

"A stipulated sum will ... be classed as a penalty where it is in the nature of a threat fixed in terrorem of the other party. ... The intention behind such a provision is generally to prevent a breach of the contract by establishing a greater incentive for its performance. (para 341) ....In one sense it may be said to be a rule for distinguishing liquidated damages from penalties that the one is a genuine pre-estimate of damage and the other a sum fixed in terrorem (para 346). ...The wording ... is of marginal importance (para 347). ... A stipulated sum is a penalty if it is extravagant and unconscionable in comparison with the greatest loss that could consceivably be proved to have followed from the breach: otherwise it is liquidated damages (para 349)."

30. Turning to the facts of this case, the value of the L/C and contract was US$936,000 i.e. HK$7,300,800; 0.5% of that, i.e. the additional amount of the penalty or compensation over and above the commission of 4.5%, is about HK$36,504. On the face of it that can hardly be a sum in terrorem. It is true that Mr. Ho had difficulty in explaining how he arrived at it, but it nonetheless seems to me a prudent and very modest provision for the additional expense and damage that could he sustained. In the particular circumstances I do not consider that its intention was to prevent a breach of the contract by providing a greater incentive for its performance. And in my view it is clearly neither extravagant nor unconscionable. I have no hesitation in holding that it is not a penalty.

31. For the foregoing reasons there will be judgment for the Plaintiff in the sum of US$46,800. It follows from my acceptance of the Plaintiff's claim that the Defendant's counterclaim must fail, as Mr. Chung rightly conceded. The counterclaim is accordingly dismissed. I will now hear counsel upon interest and costs.