JAN ALBERT (HK) LTD v. SHU KONG GARMENT FACTORY LTD

Headnote

Contract of sale - goods to be shipped from China to West Germany under quota category 4. On buyer's appeal against judge's conclusion that the contract was void for mistake and frustrated, held, allowing the appeal: -

(i) when defence of mistake was raised, the first question was whether the contract provided for the relevant risk. The material risk under this contract was accepted by the seller.

(ii) The alleged mistake was insufficient in law, as it did not affect the goods radically or at all.

(iii) There could be no finding of mistake without a finding as to the appropriate quota category upon the true construction of the treaty. No such finding was made or could have been made upon the evidence.

(iv) The terms of the contract and the parties' knowledge of and acceptance of the risk were fatal to the defence of frustration.

(v) Observations upon the need for argument and judgment to reflect the pleadings.

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J U D G M E N T

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Hunter, JA :

1. This appeal is brought by the plaintiff buyers against the judgment of Deputy Judge Cruden, given on 4 November 1988, whereby he dismissed the plaintiff's claim as buyers and the defendant's counterclaim as sellers for damages for breach of contract.

2. The parties are both Hong Kong companies. The plaintiff company was represented in this matter throughout by Mr Reichle, and it is plain that the company has close German connections and appears to specialise in buying goods in the Far East for delivery to its customers in Europe and particularly Germany. The defendant conversely was concerned in procuring the manufacture of goods in the PRC for sale to the plaintiff and for delivery to Germany. In those circumstances both parties had to face the problem of quota.

3. Quota restrictions exist as between the PRC and the EEC generally, and apparently between the PRC and one or two countries in the EEC like Germany and France in particular. The goods in this case were described in these terms in the contract itself. "Description"

"Unisex ski turtle-neck pullover, long sleeves, 1x1 rib in 32/s 100% cotton fully combed, with lycra on cuffs, and with "OPTI" zipper of about 23 cm long at front."

They were plainly designed to be worn next to the skin as a skiing undergarment. The plaintiff had a customer for these goods in Germany and it may well be that the goods were designed specifically by that German customer.

4. The full text of the treaties in existence between the PRC and the EEC, and the PRC and any other European country were never produced. All that was produced to the court was a summary of the treaty provisions apparently put out annually by an authority in the PRC which does not contain the definitions which I assume appear in the treaty itself, but simply these bare summaries. Category 4 in this document is simply described as "knitted undervests", and category 5 as "knitted outer wear". Both those categories are applicable to the EEC generally. Category 83 is "knitted outer wear", this being only applicable to Germany and France. It is apparent from those two summaries that it is impossible to draw any sensible distinction between category 5 and category 83. One is constrained to assume, as we know is the case in the Hong Kong Treaty, that the actual descriptions in the treaties are a good deal longer and somewhat more explicit.

5. The negotiations between the parties opened in September 1985. At that time both the plaintiff company and its customer appear to have been in no doubt that these pullovers were properly described as "underwear", in tire rather peculiar sense in which that word seems to be used in the treaty, and were properly classified under a quota heading of category 4. It followed that so long as the manufacturer possessed that quota and obtained the necessary export licence from the PRC, there would be no difficulty about importing the goods into Germany. It appears that prior deliveries of identical goods had been so imported successfully into Germany, having been manufactured in the Philippines.

6. During the negotiations, the defendant, through a Mr Ko, never seems to have doubted the truth of that position. When one considers the look of the garment itself, its design and apparent purpose, one can understand the parties' confidence in that respect. But unfortunately it would seem that the defendant never positively got confirmation from its manufacturer in the PRC that they shared this view that these goods were properly classified under category 4. I should add that these categories are intended to be mutually exclusive, from which it follows that if goods are properly classified under category 4, they cannot be classified under any other category.

7. It was in those circumstances that the contract, which is dated 19 December 1985, but which seems to have been signed a little time after that date, was entered into between the plaintiff and the defendant. It was on the plaintiff's printed form. It is headed "purchase note". It provides "shipment: end July 86 ex China. Destination: Hamburg category 4. Payment: by irrevocable letter of credit". The description of the goods I have already read. Opposite under price there is found the quantity, a unit price and a total price of over US$301,000. This price is "INCL. QUOTA CNF HAMBURG". Underneath the first condition is : "Merchandise to be shipped under category 4 to W. Germany ex China". Over the page the second special condition is "Export licence and certificate of origin ex China to be supplied by you", i.e. the defendant, "45 days before shipment date".

8. Contemporaneously with that contract, the plaintiff relation to the same goods with their customer in Germany. The first special condition of that contract reads "merchandise to be shipped under category 4 to W. Germany ex China". Shortly thereafter, on 18 January 1986, the defendant entered into a manufacturing contract with its manufacturer, which was the China National Textiles Import & Export Co. That contract is less specific. It simply provides for a unit price "CIF Hamburg (incl. quota)". The category of quota was unspecified.

9. The next main event in the story was that on 26 February, the plaintiff caused a letter of credit to be opened in the defendant's favour by the Belgian Bank. Amongst the accompanying documents specified, one finds "5. Copy of export licence valid for W. Germany category 4". It was at this point that the problem really arose. As soon as the defendant saw this letter of credit and having regard to what it had then been told by the manufacturers in the PRC, it said that the letter of credit was wrong, the proper category number was not 4 but 83. The plaintiff immediately started making enquiries in Germany, both directly and through its customer. The German customs reaction was first to say that the proper category was 5, and then apparently to say that they would accept import under either category 4 or 5. But they would not be prepared to accept it under 83.

10. After much argument, the parties' stances eventually took this form. The plaintiff's attitude was the contract provides for category 4. The letter of credit is a proper compliance with the contract and requires no amendment. But the plaintiff would accept shipment under category 4 or 5 but not 83, because 83 would not allow the goods to be imported into Germany. The defendant's attitude was exactly the converse. It was saying that the PRC says 83; 83 is right and the only category; you must amend the letter of credit; if you do not amend the letter of credit, there will be no shipment. That is precisely what happened. The letter of credit was not amended and the shipping period, the end of July, passed without shipment.

11. In those circumstances the plaintiffs brought their claim in damage. The original defence was that the letter of credit was defective. This defence had to be founded upon the proposition that there was a binding agreement to alter the terms of the contract from category 4 to category 83. That was rejected by the judge. So the defence failed.

12. On the second day of the initial hearing, which was in May of last year, the defendant applied and was given leave to make a re-amendment of its defence. This pleaded that the parties entered into the agreement under a common mistake of fact as to the correctness of the applicability of category 4 to these goods. It was said that it was impossible for the defendant in that event to discharge its obligations under the contract unless the contract was rectified. There was then a counterclaim added claiming 1. rectification and 2. rescission. Both these claims on their face appeared to be claims for equitable relief for rectification or rescission on the grounds of common mistake. That amendment having been allowed, there was then a lengthy adjournment. The matter was restored in October 1988. In tine course of that hearing, the defendant, in circumstances which mystify me, was permitted to argue two entirely new defences. The first was that the common mistake amounted to a mistake at common law which rendered the contract void. Secondly and alternatively, it was said that the contract had been frustrated by the conduct of the PRC authorities in saying that category 83 was the correct category. Both defences were accepted as valid by the judge in his judgment.

13. It escapes me at the moment how the defendant was allowed to argue those two defences without amendment to the pleading and how the judge could enter judgment without such amendment. Suffice to say that at a very late stage in the argument before this court, application was made to re-re-amend the defence to bring it into line with the judge's findings. On the view we take of this case, it is not necessary to make any formal ruling upon that application and I do not do so. But I would not wish parties to think that if this sort of thing occurs, this court will readily grant such an application.

14. Before this court, both counsel accept that the first and fundamental problem is to construe the contract which the parties have entered into. It makes a material difference to defences of mistake and frustration, if the parties have entered into a contract, in clear, absolute or unqualified terms which covers the contingency or failure or mistake or whatever it is which has aiisen and which is said to give rise to particular relief. The matter was very conveniently and simply expressed recently by Steyn J in his judgment in Associated Japanese Bank International Ltd v. Credit du Nord SA 1989 [1WLR] 255 at p. 268. He says

"Logically, before one can turn to the rules as to mistake, whether at common law or in equity, one must first determine whether the contract itself, by express or implied condition precedent or otherwise, provides who bears the risk of the relevant mistake. It is at this hurdle that many pleas of mistakes will either fail or prove to have been unnecessary. Only if the contract is silent on the point, is there scope for invoking mistake."

I have already read the material provisions of this contract. It is plainly not silent. It is precise in its terms. The contracting parties were well aware of these quota requirements. They were a necessary evil with which they had to lives. They carefully apportioned responsibility and risk between themselves: it might be said with the result that the import into Germany risk was to be carried. By the plaintiff, the export from the PRC risk was to be carried by the defendant.

15. The defendant expressly undertook to procure sufficient quota in category 4 to enable the goods to be exported from the PRC, together with the necessary export licence which itself was no doubt conditional upon the same contingency. It necessarily follows that the defendant accepted responsibility for and bore the risk of any failure to procure, first, quota in sufficient quantity, and secondly sufficient quota in category 4. Conversely the contract assumed that category 4 quota would be acceptable to the German customs. Therefore as between the plaintiff and the defendant, the risk of the German customs rejecting category 4 as appropriate and refusing to allow the goods to be imported into Germany, would fall upon the plaintiff. If, for example, in this case the facts had been slightly altered, and if the PRC had accepted category 4 as appropriate, and the German customs had stuck to their original idea, which was that the appropriate category was 5, that would have put this plaintiff in difficulty, albeit that it might have been able to pass on its responsibility to its customer. There would have been precise performance of its obligations by the defendant.

16. Mr Fung, faced with the express terms of that contract, has attempted to argue that the category 4 provision was only provisional, and if the attribution to category 4 proved incorrect, and the matter could not be resolved, then the contract was in someway open to cancellation. He purported to rely on what he called the matrix of fact. In reality he was relying upon the parties willingness to discuss alterations and to try to resolve the problem when it arose. This is for many reasons an impossible argument, the principal one being the words used. If the parties had wanted this description to be provisional, it would have been very simple to have made a contract subject to clarification, or quota or some such thing. But this is not what they said. If the parties had taken that course, then this contract and its satellite contracts would have been in quite different terms. This contract in my judgment was anything but silent, and in Steyn J's language this defence fails at this the first fence or hurdle.

17. There are two other fatal flaws in the defence, the first legal and the second factual. First, I am quite unable to accept the judge's conclusion that any mistake as to the correct quota classification would have rendered this contract void on the authority of Bell v. Lever Brothers [1932] AC 161, on what he called "both the narrower and wider interpretations" of the speeches in that case. The true view I accept was that stated by Steyn J, again in the same case, when he says this :

"Fourthly, and this is the point established by Bell v. Lever Brothers, the mistake must render the subject matter of the contract essentially and radically different from the subject matter which the parties believed to exist."

The subject matter of this contract was "unisex, ski, turtle-neck pullovers". Assume that those garments should have been attributed to category 83 and not category 4, the garments as such are in no way altered. Not one stitch is changed or misplaced. The garments remain identical. There is no radical change at all. A mistake of this nature is plainly in my judgment insufficient to bring about the conclusion which the judge reached.

18. Secondly on the facts, the judge was perfectly entitled to find that both parties at the time of the contract assumed category 4 to be correct. But he could not conclude that this was a mistake without a further finding that the parties' belief was wrong on the true construction of the treaty. He purported to found his finding of mistake on the basis that a Chinese view, which he was minded to regard as authoritative in China, was that this was category 83 and that therefore category 4 was wrong. But this was quite insufficient to show that mistake had in fact been made. This part of the judgment has indeed not been supported in argument before us.

19. I accept that on the material before the judge he was in great difficulty in making any finding at all. The full text of the treaty was not before him. He had evidence, oral and documentary, from various people who claimed to have read the treaty, and claimed by applying the definitions in that treaty to arrive at the conclusion that the true category in this case was 4 or 83 as the case may be. But in the absence of the precise terms of the treaty there was no way in which the judge could properly resolve that conflict. I could therefore quite understand it if he declined to make a finding. I cannot accept that no finding was necessary.

20. It seems to me plain that for this defence to be made out, the judge had to conclude that category 83 was correct and category 4 was wrong on the true construction of the treaty. This finding he did not reach, and this was a finding he could not have reached on the evidence. For those reasons I am of the opinion that this defence of mistake fails.

21. I turn to the defence of frustration. There the same considerations lead to the same conclusion. First, the true test of frustration is now what had been described as the "construction" test formulated by Lords Radcliffe and Reid in Davis Contractors Ltd v. Fareham Urban District Council [1956] AC 696. It is sufficient to read only Lord Reid's formulation at page 721 :

"The question is whether the contract which they made is, on its true construction wide enough to apply to the new situation: if it is not, then it is at an end."

On his test the question is: is this contract wide enough to apply to this situation? The answer is plainly that it is because it is specifically directed at it. The same result is reached from the application of Lord Simon's formulation in National Carriers & Panalpina Ltd [1981] AC 675, 700, which the judge cited. It starts :

"Frustration of a contract takes place when there supervenes, an event (without default of either party and for which the contract makes no sufficient provision) which so significantly changes the nature (my emphasis) ......"

So if one applies Lord Simon's test, the question is : did this contract make sufficient provision? That to my mind admits of one answer : "yes, precise. provision". On this basis, the frustration defence does not start to run.

22. Secondly and similarly, this in my judgment is a case of an existing risk and not of a supervening event at all. The contract was made with full knowledge of and in the face of the existing licensing requirements. There is no possible reason for thinking that the answer of the Chinese authorities given in about June 1986, and upon which the judge relied, would have been any different if they had been asked the same question in November or December 1985. The matter is precisely covered by a dictum Lord Wright in Martime National Fish Ltd v ocean Trawlers Ltd [1935] AC 524, 529. In that case the refusal of a licensing authority to issue a licence was the frustrating event relied upon. In relation to that part of the case Lord Wright says:

"The authority", (he was there referring to the decision in Krell v. Henry [1902], 2 KB 742), "is certainly not one to be extended: it is particularly difficult to apply where, as in the present case, the possibility of the event relied on as constituting a frustration of the adventure (here the failure to obtain a licence) was known to both parties when the contract was made, but the contract entered into was absolute in terms so far as concerned that known possibility."

That was a case where the parties entered into the contract in the knowledge that the licensing provisions existed. The contract did not refer to them. That was the conclusion Lord Wright reached on that contract. I am minded to think that he would, have had no difficulty whatever in reaching the same conclusion if the contract had expressly referred to the licensing provisions and made provision as to how they were to be met. For those two reasons, in my judgment, there is no substance in the defence of frustration.

23. I accordingly conclude that the judge went wrong, and ought to have determined the issue of liability in the plaintiff's favour. It follows in my judgment that the appeal should be allowed, and judgment should be entered for the plaintiff for damages to be assessed. Subject to further argument I am minded to suggest that the order should be for damages to be assessed in the High Court.

Fuad, V-P

24. I agree that for the reasons stated by my Lord Hunter, JA, the appeal should be allowed. I would also agree with the order that he proposes.

Power, JA.

25. I agree with all that has fallen from my brother Hunter and the proposed order.