ETACOL (HONG KONG) LTD AND OTHERS v. SINOMAST LTD AND OTHERS

HCA 3126/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 3126 OF 2003

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J U D G M E N T

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Introduction

1.  What is principally at issue in this case is the identity of the contracting parties for the sale of fabric manufactured by the 1^st Defendant, Sinomast Limited (“Sinomast”).  Although one might be forgiven for thinking that in a sale of goods contract the identity of seller and buyer would be readily apparent this is not the case on this occasion.

2.  It is helpful to begin by providing the background to the dispute which is best done by identifying the various individuals and companies that are involved.  This all began in about December 2002 when the very substantial United States retailer J.C. Penney and Company (“JCP”) decided to place an order for the making of a large quantity of boys cargo pants, a type of casual clothing, with Merchantex a Bangladesh-based company that is owned by, an Austrian, Mr Stefan Pirker and his wife.  Merchantex in turn owns 75% of a company called Uniwear, a clothing manufacturer in Uzbekistan, the remaining 25% being owned by Uzbek interests.  Uniwear owned and operated a clothing factory there which would manufacture JCP’s order.  Sinomast was nominated by JCP to produce the fabric which was to be used for the order.  Sinomast is a very well-established Hong Kong company whose principal is Mr Anthony Ko.  It has a longstanding relationship with JCP as a supplier of fabric for JCP clothing.  This is an enviable position to be in given the fact that JCP is able to provide very substantial, and therefore potentially lucrative orders, to fabric suppliers as well as clothing manufacturers.

3.  Given its purchasing power JCP is also able to impose its own procedures and terms for doing business with it.  Before a supplier or manufacturer is appointed JCP will carry out its own investigations into the quality and standing of its suppliers to ensure that they are in a position to comply with its requirements in terms of the quality of the product, an ability to produce the order on time, financial probity as well as adherence to strict international standards on labour laws.

4.  The 1^st Plaintiff (“Etacol”), which is also a long established Hong Kong company, is substantially owned and controlled by Mr Bernhard Frey (“Mr Frey”), a Swiss national, who is the 2^nd Plaintiff.  His wife Barbara (“Mrs Frey”) is the 3^rd Plaintiff and the Deputy Managing Director of Etacol.  The 4^th Plaintiff (“Andrea”) is the Frey’s, then 14-year old, daughter whose involvement in the action I will come to presently.  Etacol’s business is that of a trim supplier in the garment industry and does most of its business selling to garment companies and retailers in Europe and Asia. 

5.  The other main character in this matter is Mr Lisle Budden who is an American.  He is very experienced in the trading of fabric and garments and acts as an agent obtaining orders for garment and fabric manufacturers from substantial retailers such as JCP, for which he receives a commission from the manufacturer.  He operates through his own company, Beximco, based in the US.  He has a contract with Merchantex and Uniwear whereby those companies will pay him a commission as well as a retainer to source orders for them from substantial retailers such as JCP.  Mr Budden is well acquainted with Mr Steve Bohman of JCP, as well as others in JCP, as a result of which he was able to secure for Merchantex/Uniwear the order that is the subject matter of this action.  He was also known to Mr Ko at Sinomast through their, up till now, separate connections with JCP.  Having secured the order for Merchantex/Uniwear, Mr Budden was to become the lynch-pin or, at all events, the point of contact between Merchantex/Uniwear [that is to say Mr Pirker and his manager in Bangladesh Mr Faraz (as I shall call him)] and Sinomast [Mr Ko in Hong Kong].

6.  Before I go to the detail of JCP’s order, it will be helpful to provide some further background which, in the event, was the cause of the dispute as it now presents itself.  An important aspect which was certainly, in part, to become a cause of future difficulties was that this was a rushed order by JCP.  It appears that their original supplier had let them down and so they, at short notice, had to look elsewhere and it was in this way that Mr Budden was able to secure the order for Merchantex/Uniwear.  JCP themselves nominated Sinomast to make the fabric.

7.  The question of payment was all important.  JCP would pay Merchantex/Uniwear for the order, such payment was to include the cost of the fabric that Sinomast was to produce.  The banking system in Bangladash where Merchantex is situated and in Uzbekistan where Uniwear is located is not sufficiently advanced or flexible to deal with international letter of credit payments which were to be involved in this case.  It is for this reason that Etacol became involved.  Mr Pirker and Mr Frey have had a good working relationship for a number of years.  Because Etacol is based in Hong Kong and is in good standing with HSBC it regularly, and indeed as a matter of course, opens letters of credit and can effect payment in that way with its own customers and similarly receive payment for its own sales. 

8.  This being so Mr Pirker had established an arrangement with Mr Frey that his companies would effect and receive payment using Etacol’s letters of credit.  Etacol would therefore act as Merchantex/Uniwear’s paymaster and/or ‘banker’ for which Etacol would be paid a 3% commission to provide Mr Pirker’s companies with this service.

The Payment Arrangements on this Occasion

9.  What I am about to describe can be easily followed through the documents and e-mails that are in evidence and to which I will presently refer.  The overall scheme was to be that JCP would pay Merchantex/Uniwear for the order out of which payment the latter would pay Sinomast for the fabric.  Sinomast, perfectly sensibly it seems to me, required to be paid through a first-class bank either here in Hong Kong or in the USA.  This suited Mr Pirker as well.  An arrangement was therefore put in place, with Mr Budden’s involvement, whereby JCP would open a letter of credit in favour of Etacol with HSBC in Hong Kong to the value of its order with Merchantex/Uniwear and Etacol would in turn open a smaller letter of credit, also with HSBC in Hong Kong, in favour of Sinomast for the price of the fabric.  The expectation therefore was that once Sinomast shipped the fabric to Uniwear in Uzbekistan it would receive payment under Etacol’s letter of credit and that once Merchantex/Uniwear produced the order and shipped it, Etacol would receive payment on their behalf in Hong Kong on the letter of credit that JCP had opened with HSBC in Hong Kong.  Thereafter Etacol would credit Merchantex/Uniwear’s nominated bank account with the proceeds, less the amount paid to Sinomast for the fabric and less its 3% commission on the transactions and everybody would go away perfectly satisfied.

10.  That expectation broke down, for reasons which nobody involved had wished for, when the shipment of fabric by Sinomast to Uzbekistan was held up at the PRC/Uzbek border due to the absence of a health certificate for the fabric.  This caused a delay in getting the fabric to the factory, which in turn delayed production.  The Uniwear factory was required to deliver the order to JCP at the port of Bremerhaven in Germany.  It had anticipated doing so by road and rail.  Even though Mr Budden had been able to negotiate some delay with JCP the order now had to be air-freighted to Germany at much greater cost causing a loss of US$100,000 to Merchantex/Uniwear.

The Mechanics of the Dispute

11.  Had Sinomast received the amount that it had expected under Etacol’s letter of credit for producing the fabric, I do not believe that for one moment anyone at Sinomast would have given a second thought as to whether the contractual buyer of the fabric was Etacol or Merchantex/Uniwear.  Having regard to the delay in receiving the fabric from Sinomast which in turn caused delay in producing the order, which resulted in Uniwear having to air-freight the order at much greater expense,  Mr Pirker instructed Etacol to only release, in round figures, US$333,000 to Sinomast under the letter of credit which is US$100,000 less than the agreed selling price for the fabric.  Mr Pirker has blamed Sinomast’s freight forwarder in not asking for the proper documentation from Sinomast including the health certificate to get the containers carrying the fabric through the PRC/Uzbek border on time.  Mr Ko of Sinomast does not accept blame for this.  Mr Budden has tried to resolve the problem between the parties by trying to find a mutually acceptable compromise but he has not been able to do so.

12.  Once payment of the US$100,000 was not forthcoming from either Merchantex/Uniwear or Etacol, Sinomast put the recovery of this amount in the hands of the 2^nd Defendant, Informlink Consultancy Limited, which is a debt collection agency, the 3^rd Defendant, Mr Jacky Chan being its principal.  The 2^nd Defendant’s staff then started to demand payment from Etacol, firstly, by writing letters and sending notices, then by sending men round to its offices demanding payment followed up by unpleasant telephone calls to Mrs Frey and also by visiting the Frey’s home and frightening both Mrs Frey and Andrea.  This process of harassment by the 2^nd and 3^rd Defendants, for whom Sinomast is vicariously liable, is the subject matter of the second part of the action which I can dispose of shortly at this stage.

13.  Letters were written to the 2^nd Defendant by Etacol explaining that it owed nothing to Sinomast because it has no contract with Sinomast and that Sinomast would have to look to Merchantex/Uniwear for repayment.  These events occurred during the summer of 2003.  Fortunately, the 2^nd Defendant was persuaded to desist.  In September 2003, at a time when Sinomast was threatening to bring proceedings in court to recover the US$100,000 from Etacol, Mr Frey instructed his solicitors to bring this action.  Etacol therefore got in first.  The first part of it is for a declaration by Etacol to the effect that it has no contract with Sinomast for the purchase of the fabric and is therefore not indebted to it for the US$100,000.  This declaration is opposed by Sinomast which counterclaims against Etacol for this amount — hence the issue that I am required to resolve.  Separately, the Frey’s are also suing the 2^nd and 3^rd Defendants for damages for harassment.  In this respect they have also sued Sinomast for the 2^nd and 3^rd Defendants unlawful activities on the basis of it being vicariously liable for what the 2^nd and 3^rd Defendants have done.

14.  The three relevant plaintiffs have settled their harassment claim against the 2^nd and 3^rd Defendants and so I am not concerned with the case against these two Defendants.  As against Sinomast, the 2^nd, 3^rd and 4^th Plaintiffs took out an Order 14 summons claiming summary judgment on their claim for harassment.  On this summons, they obtained judgment, with damages to be assessed, from me on 15^th September 2006.  In the course of the trial, I have also heard evidence from Mr and Mrs Frey in respect of quantum on this part of the case which I propose to consider after I have dealt with the main issue on whether Etacol can be held to be liable to Sinomast on the sale of the fabric.  This therefore is how the matter now lies before me.

The Law on the Contractual Issues

15.  Mr Lee Tung Ming, on behalf of Sinomast, in a series of very persuasive submissions has suggested that there are two bases upon which Etacol can be held liable to pay Sinomast for the outstanding balance of US$100,000.  Firstly, as the other contracting party on the contract of sale for the fabric.  If that fails, then Etacol is still to be held liable for the outstanding balance as Merchantex/Uniwear’s agent by incurring a concurrent personal liability under the contract for the sale of fabric.  I will need to consider each basis separately, although the second would only require an answer if Sinomast fails to make out its case under the first.

Etacol as the Buyer

16.  The outcome of the question of whether two parties have arrived at a binding contract is to be decided by looking at the matter objectively.  The starting point is to ask whether an offer had been made by one party and accepted by the other.  The current edition of Chitty at 2-001 in addressing the objective test says that:

“… once the parties have to all the outward appearances agreed in the same terms on the subject matter, then neither can, generally rely on some unexpressed qualification or reservation to show that he had not in fact agreed to the terms to which he had appeared to agreed.  Such subjective reservations of one party therefore do not prevent the formation of a contract.”

at 2-002 (ibid.) the offer is:

“… an expression of willingness to contract made with the intention (actual or apparent) that it is to become binding on the person making it as soon as it is accepted by the person to whom it is addressed.  Under the objective test of agreement, an apparent intention to be bound may suffice, i.e. the alleged offeror (A) may be bound if his words or conduct are such as to induce a reasonable person to believe that he intends to be bound, even though in fact he has no such intention.”

17.  Fundamentally, this is a question of fact to be decided on all of the relevant evidence.  A very important part of the evidence is the letter of credit and some of the other documentation which names Etacol as the buyer.  Whilst, on the face of it, this must provide strong ammunition for saying that Etacol is the buyer of the fabric, it is by no means conclusive.  In this regard Mr Hung, who appears for all the Plaintiffs, relies on the decision of the Court of Final Appeal in Shanghai Tongji Science & Technology Industrial Co. Ltd v Casil Clearing Ltd [2004] 2 HKLRD 548, which involved the use of a letter of credit.  Whilst the facts substantially differ from what I am required to consider the judgment of Ribeiro PJ re-states the principles that I have to apply in coming to a conclusion as to whether Etacol is the buyer of the fabric.  In that case, where there had been a lot of dishonourable conduct which is not the case here, it might be said that the significance of the letter of credit was to be more easily discounted.  It had been contended that the fact that the terms of the letter of credit called for an invoice to be issued in the name of the Defendant (Casil Clearing Ltd), in the present case Etacol, showed that Casil was a party to the contract.  Notwithstanding this Ribeiro PJ held that to be:

“… unobjectionable and reasonably explicable as an aspect of financing arrangements.” (at p.567A (ibid.)

In this regard the learned Permanent Judge referred to the judgment of Potter LJ (as he then was) in Montrod Ltd v Grundkotter Fleischvertriebs-Gmbh [2002] 1 WLR 1975 at 1992, who in relation to documentary credit transactions commented that there are:

“… a ‘wide variety of circumstances in which documents come into existence in a commercial context which do not necessarily reflect the factual situation but which parties may none the less employ as a convenient means of progressing a particular transaction.’”

18.  Shanghai Tongji (supra.) also provides a re-statement of the principle that a decision as to whether a binding contract has been concluded requires the application of an objective test.  At page 561C-D Ribeiro PJ made clear that the burden of establishing the existence of a contract by virtue of the parties conduct is on the person asserting its existence — in this case Sinomast.  Reference was made to Brogden v Metropolitan Railway (1877) 2 App 666 at 693.  The court will not imply such a contract lightly: 

“The conduct relied on must be unequivocally referable to the contract sought to be inferred.”  (at p.561D (ibid.)). 

In The Aramis (1989) 1 Lloyds, Rep 213 at 224, Bingham LJ (as he then was) in a passage referred to in Tongji at 561E said this:

“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 conduct 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.”

19.  Ribeiro PJ at 561J went on to observe that:

“Where the conduct in question satisfied the objective test the law generally excludes as irrelevant evidence of a party’s actual intention.”

The analysis of Robert Goff LJ (as he then was) in The Leonidas D [1985] 1 WLR 925 at 936 was as follows:

“… if one party, O, so acts that his conduct, objectively considered, constitutes an offer, and the other party, A, believing that the conduct of O represents his actual intention, accepts O’s offer, then a contract will come into existence, and on those facts it will make no difference if O did not in fact intend to make an offer, or if he misunderstood A’s acceptance, so that O’s state of mind is, in such circumstances, irrelevant.”

20.  More recently the House of Lords in Shogun Finance Ltd v Hudson [2003] 1 WLR 1371 was required to decide, in very different circumstances, when a contract would come into existence.  Lord Phillips of Worth Matravers’ speech at page 1466 explained the position in relation to the objective test to be applied and the impact of any subjective qualification to it.  He said this:

“A contract will not be concluded unless the parties are agreed as to its material terms.  There must be ‘consensus ad idem’.  Whether the parties have reached agreement on the terms is not determined by evidence of the subjective intention of each party.  It is, in large measure, determined by making an objective appraisal of the exchanges between the parties.  If an offeree understands an offer in accordance with its natural meaning and accepts it, the offeror cannot be heard to say that he intended the words of his offer to have a different meaning.  The contract stands according to the natural meaning of the words used.  There is one important exception to this principle.  If the offeree knows that the offeror does not intend the terms of the offer to be those that the natural meaning of the words would suggest, he cannot, by purporting to accept the offer, bind the offeror to a contract: Hartog v Colin & Shields [1939] 3 All ER 566; Smith v Hughes (1871) LR 6 QB 597.  Thus the task of ascertaining whether the parties have reached agreement as to the terms of a contract can involve quite a complex amalgam of the objective and the subjective and involve the application of a principle that bears close comparison with the doctrine of estoppel.  Normally, however, the task involves no more than an objective analysis of the words used by the parties.  The object of the exercise is to determine what each party intended, or must be deemed to have intended.”

21.  Finally, in relation to the applicable test as to when a contract will be deemed to have been concluded, Ribeiro PJ at 564H-J (ibid.) drew attention to the current edition of Chitty at 2-148 which really encapsulates the position, if I may say so, very succinctly:

“… the objective test is … subject to the limitation that it does not apply in favour of a party who knows the truth.  Thus … the party who did not intend to be bound would not be bound if his state of mind was actually known to the other party.  Nor could a party who did not in fact intend to be bound invoke the objective test so as to hold the other party to the contract: to apply that test in such a case would pervert its purpose, which is to protect a party who has relied on the objective appearance of consent from the prejudice which he would suffer if the other party could escape liability on the ground that he had no real intention to be bound.” (at p.156 § 2-148)

22.  I will need to apply these principles in deciding whether a binding contract has come into existence between Sinomast and Etacol.  If Mr Lee succeeds in persuading me that it has then it will not be necessary to go on and decide his fall-back position which seeks to argue liability on the basis that Etacol was Merchantex/Uniwear’s agent but also one which has incurred personal liability under the contract.  The law in relation to when an agent will incur such liability can be briefly explained and I propose to do that after I have set out and analysed the relevant evidence.  Hopefully, that analysis will provide the context and background against which Mr Lee seeks to make out Etacol’s alternative liability and therefore will make his points more readily understandable.

The Material Evidence

23.  The outcome must turn on the contemporaneous e-mails and the terms of the proforma invoices and the letters of credit and other ‘raw’ documentary evidence that was generated at the time, as well as the evidence of the various witnesses who have spoken to these events and their understanding of what was going on at the time.

24.  By way of preliminary comment I wish to say, having read the documentary evidence and heard these witnesses, that what I have to do is to embark on an ex-post facto reconstruction to decide who the contracting parties were when I am absolutely convinced that at the time that this was going on no one gave a second thought about the contractual status, as between themselves, of the three involved entities, they being Sinomast, Etacol and Merchantex/Uniwear (who for the moment I will continue to refer compendiously) and this comment also extends to Mr Budden’s thoughts on the matter.

25.  I am satisfied that JCP considered that it had a contract with Merchantex/Uniwear to produce the order for which it would make payment at the appropriate time and for his part I also have no doubt that this was Mr Pirker’s understanding so far as Merchantex/Uniwear were concerned.

26.  Under that contract JCP had nominated Sinomast to make and supply the fabric.  As nominated supplier Sinomast had no contractual relationship with JCP and quite rightly nobody has suggested otherwise.  This requirement by JCP was one that the manufacturer of the order, Merchantex/Uniwear, would have to comply with.  But for the difficulties with the banking systems in Bangladesh and Uzbekistan, I have absolutely no doubt at all that one would have seen documentation in the form of an order for the fabric going from Merchantex/Uniwear (it would have been from one or the other as they are quite distinct companies with different shareholders as Mr Lee correctly points out) to Sinomast and thereafter an invoice going the other way.  If payment was to be, as is usual, by letter of credit that would have been opened by one or other of Mr Pirker’s companies and payment would have been released to Sinomast after delivery of the fabric against the usual documentation.

27.  Pausing here for a moment; because Mr Pirker could not pay Sinomast in that way he was obliged to interpose Etacol to effect payment on his behalf.  Indeed he accepts, and I was pleased to have his assurance about this in the course of his evidence, that if Etacol is obliged by me to pay Sinomast the US$100,000, he considers himself duty and legally bound to indemnify Etacol for this amount.  Given the history of dealing between Mr Frey and Mr Pirker, whereby Etacol made such payments for the Pirker companies using its own letter of credit facilities, I have no doubt whatsoever that Mr Frey had never considered himself as entering into direct contractual relations with Mr Pirker’s customers in relation to the letters of credit that were used to finance those transactions.  On this occasion as well, I am satisfied beyond any doubt whatsoever that he did not consider that Etacol was contracting with Sinomast as buyer of this fabric.  This of course was his subjective understanding but I am required to stand back from all of the evidence and consider this matter objectively as the authorities require me to.

28.  Equally, for his part Mr Ko says that he would never have allowed his company to enter into a direct contractual relationship with unknown, to him, companies in Bangladesh and Uzbekistan, a country whose international borders he could not identify on a blank map of the world.

29.  With all of such situations the principal, if not the only, concern for a supplier such as Sinomast is that it should have in place a financing arrangement which will ensure that it will receive payment against the presentation of the usual shipping documents.  Hence Mr Ko’s insistence, quite rightly, that he would be paid through a first class bank in either the USA or Hong Kong, which is what he ultimately obtained through the interposition of Etacol.  It is this sort of analysis which needs to be accommodated in any objective appraisal of the evidence.

30.  In his very detailed analysis of the documents, Mr Lee has stressed that much of the correspondence between Mr Budden, JCP, Merchantex/Uniwear and Etacol was not copied to Sinomast.  Had it been it would have demonstrated to Mr Ko what the real underlying position was in relation to Etacol and its role as paymaster/banker, with the result that Sinomast would not, in my judgment, have had any sort of case against Etacol.  But in view of the fact that Mr Ko and his staff were not privy to that earlier correspondence the issue must, and does remain very much afloat.  Those early e-mails only serve to demonstrate that so far as Messrs Pirker, Frey and Budden, Etacol’s role was strictly limited to opening the letter of credit.  This is the basis of my finding that Mr Frey was convinced of his very limited role in this matter and that his company was in no sense the buyer of the fabric.

31.  Quite rightly, Mr Lee has stressed the importance of the documentation which, if unexplained or put into context as Mr Hung has sought to do, would tell the uninformed neutral observer that this was a contract between Sinomast and Etacol for the supply of this fabric.  Mr Hung has helpfully extracted from the document files, the main correspondence and documents which he has put into a folder of  “core documents” which contains the essential but not all the material upon which the outcome of this case depends.

32.  What is perfectly plain is that all the documentation between a buyer and a seller on an international sale financed by a letter of credit is present identifying Etacol as buyer and Sinomast as seller.  How this came about can be told shortly.  Originally, the JCP documentation had identified Uniwear as the other contracting party but once it became clear that payment could not be directly effected by it to Sinomast’s satisfaction JCP had to assign the name of Etacol in its place otherwise JCP’s own system of accounting could not accommodate a situation which had Etacol receiving payment from JCP on the letter of credit.  For this reason, Etacol was assigned its own computer identification number as JCP’s contracting party.  Everything had to revolve around JCP’s way of doing business.  Everybody concerned was prepared to fall in with its requirements in order to, in Merchantex/Uniwear’s case, become an approved and listed supplier, now and in future, and in the case of Sinomast to continue with what was already a good working relationship.  In Sinomast’s case this went even further because there had been a misunderstanding with JCP who opened a letter of credit with HSBC in a form that was not acceptable to HSBC so another had to be put in place.  This caused a delay before JCP opened another letter of credit in acceptable form.  During this time the fabric needed to be shipped by Sinomast as a matter of great urgency.  Mr Ko was prevailed upon by Mr Budden to ship the fabric before payment was received.  Mr Ko anxious not to upset his relationship with JCP was prepared to do this.  He considered that as this was a JCP related matter he ought, as a matter of good business sense and accommodation, to do so.  This perhaps is the most significant instance of these smaller commercial organizations, anxious to please a larger and more powerful customer, being prepared to take a chance, which Mr Ko did in letting the fabric go before the letter of credit had even been opened.

33.  Having regard to the bare evidence which has the effect, if not otherwise explained, that there was indeed a contract between Etacol and Sinomast, Mr Hung submits that none of this is at all surprising.  This is precisely the documentation and state of affairs that one would expect and indeed require to see under such a letter of credit.  In describing the status of a letter of credit he has drawn my attention to Professor Goode’s text on Commercial Law 2^nd edition, page 987 which states the position of a letter of credit in this way:

“One of the primary functions of the letter of credit is to create an abstract payment obligation independent of and detached from the underlying contract of sale between Seller and Buyer and from the contract between the Buyer and Issuing Bank.  It is thus a cardinal rule of documentary credits that the conditions of the bank’s duty to pay are to be found exclusively.”

34.  In assessing this matter one must also be aware of the exchange of the later e-mails in which Sinomast were in communication with Merchantex/Uniwear from which it was absolutely clear that Uniwear was going to manufacture the JCP order.  It was abundantly clear therefore that this was not just a simple sale of fabric — it was a contract for the production of the fabric which Sinomast was required to ship to the manufacturer.

35.  Whilst Mr Lee has embarked on a very detailed analysis of every small step on the way between Sinomast having obtained the order to produce the fabric until its receipt of an amount that was US$100,000 less than the agreed value of the fabric, such an exercise whilst valuable in the sense of being comprehensive must not be allowed to get in the way of a view of the overall objective picture.  It seems to me that anybody viewing this objectively cannot avoid the conclusion that, quite frankly, Mr Ko’s only pre-occupation was to have in place a financing arrangement which was going to ensure that he was paid promptly in an effective manner, hence his requirement that it be in Hong Kong or the US.  What mattered to him was that he had received yet another order from JCP whose custom he greatly valued, to the extent that in order to please it he was prepared to let the fabric go even before the letter of credit had been opened.

36.  I do not wish to be understood as being unkind to Mr Lee’s very hard worked and elaborate analysis of the documents but it seems to me that no amount of argument slanted to support a view that a contract of buyer and seller existed between Etacol and Sinomast for this fabric can survive the reality of the situation which is that Sinomast was selling this fabric to Merchantex/Uniwear and that Etacol was merely there as agent for Mr Pirker’s companies to effect payment for the fabric to Sinomast.

37.  Mr Lee has rightly asked the rhetorical question: if it was not Etacol who was the buyer, which of Merchastex or Uniwear was the buyer of the fabric?  That is a perfectly proper observation because of course it could not be both.  In my judgment, the answer must be Uniwear, the manufacturer — it being Uniwear that was originally on the JCP documentation.  It was only when it was realised that Etacol would be the paymaster for Uniwear that Uniwear’s name was replaced with Etacol’s on the JCP computerised system.  The substance of it, on any reasonable objective view, was that JCP had placed its order with Uniwear to manufacture the order and it required Uniwear to buy the fabric from Sinomast and to pay Sinomast for that fabric which it did through Etacol’s agency by making use of Etacol’s letter of credit facility in Hong Kong.  Any other way of viewing these facts is to distort the contractual reality.

38.  This explains the status of the letter of credit.  The fact that the documentation attaching to the letter of credit names Etacol as buyer merely reflects the demands of the system of finance by letter of credit.  It goes no further than that on these facts for which ample support is to be had from the case of Tongji (ibid.) and the English cases to which I have already referred, as well as Professor Goode’s textbook, the passage which I have recited at paragraph 33 above demonstrating the separate obligations created by the letter of credit itself and the underlying contract of sale between buyer and seller.

39.  This being my view, Sinomast has failed to show that it had a contract for the sale of the fabric with Etacol and so as a matter of primary obligation it is not able to make Etacol liable on the price of fabric and a fortiorari for the disputed shortfall of US$100,000.

Agency

40.  This then leaves over Mr Lee’s fall-back position which requires me to consider whether Etacol should be held liable on a concurrent basis as agent.

41.  Mr Lee submits that just because Etacol may have acted as agent for Uniwear will not necessarily negate its liability for the purchase price.  Etacol can only do so if it can show that on agency principles it has expressly or impliedly negatived its personal liability.  This is to be decided by looking at the intention of the parties to be deduced from the nature and terms of the contract and all the relevant circumstances when viewed objectively.  The starting point and general postition is stated at
9-001 in Reynolds:

“In the absence of other indications, when an agent makes a contract, purporting to act solely on behalf of a disclosed principal, whether named or unnamed, he is not liable to the third party on it.  Nor can he sue the third party on it.”

Nevertheless, that is not the end of the matter.  The principle, as correctly submitted by Mr Lee, appears in 9-002 of Reynolds citing Lord Scarman in Yeung Kai Yung v Hong Kong & Shanghai Banking Corporation [1981] AC 787 at 795:

“However, the mere fact that a person acts as agent and is known to do so does not necessarily negate his involvement in the transaction.  It has more recently been said that ‘it is not the case that, if a principal is liable, his agent cannot be.  The true principle of law is that a person is liable for his engagements (as for his torts) even though he acts for another, unless he can show that by the law of agency he is to be held to have expressly or impliedly negatived his personal liability.”

42.  Mr Lee’s point is that the evidence does not sufficiently disclose that Etacol was merely acting as agent for Uniwear or indeed anybody else.  He goes further than that by saying that even if he cannot support that submission, the fact that Etacol had a foreign principal in Uzbekistan would be a very powerful consideration in deciding whether Etacol can be said to have negatived its personal liability.  Sinomast would not have countenanced a situation whereby it would contract through an agent with a far-off party whose agent would be absolved of any personal liability on the contract.  The position is discussed at 9-20 in Reynolds and reference is made there to Teheran-Europe Co. Ltd v Belton (Tractors) Ltd (1968) 2 QB 545 which sets out the modern law on the subject.  This passage bears repetition here:

“Foreign principal.  There long existed a strong presumption of fact (so 9-020 strong that a court was ‘justified in treating it as a matter of law’) that in the context of sale where an agent in England contracted on behalf of a foreign principal, disclosed or undisclosed, the agent assumed personal liability to his English suppliers and had no authority to pledge the principal’s credit by establishing privity of contract between the principal and the third party; and conversely, where a merchant in England contracted with an agent abroad, that merchant was not to be regarded as having authority to bring his suppliers into privity of contract with the England merchant. …

… The presumption could be displaced by clear evidence of authority.  Further the effect of the presumption was to render the agent along liable and entitled on the contract; so that when it was clear that the agent contracted only as agent, and that it was not intended that he should be personally liable, there was no room for the presumption, which could not operate inconsistently with the clear purport of the contract.  The presumption was not affected by the fact that the contract was in writing: most, if not all, of the cases concern such contracts.

The status of this presumption was discussed in many cases, and though it could be questioned, it was said to reflect both a preference by foreign merchants to use an intermediary who did not bring them into privity of contract with a merchant in another country, especially where the contract involved bulk supplies from several foreign sources; and also the reluctance of English merchants to enter into transactions which might involve them in problems of the conflict of laws or the possibility of having to sue in a foreign jurisdiction, or both, especially where the contract concerned bulk supplies from overseas sources.  The latter reasoning seems more significant to modern eyes, since the foreign merchant’s contract with his English intermediary may not be governed by English law.  The banker’s commercial credit system performs a similar function in to some extent localising the transaction.  Later cases tended to treat the fact that the principal was foreign as one to be taken into account but no more.  In Teheran-Europe Co. Ltd v S.T. Belton (Tractors) Ltd, where air compressors were ordered for use in Iran, the Court of Appeal held that the presumption itself no longer exists, for ‘the usages of the law merchant are not immutable.’ But the fact that the principal is foreign is not irrelevant.  Diplock LJ said:

‘The fact that the principal is a foreigner is one of the circumstances to be taken into account in determining whether or not the other party to the contract was willing, or led ‘the agent to believe’ that he was willing, to treat as a party to the contract the agent’s principal, and, if he was so willing, whether the mutual intention  of the other party and the agent was that the agent should be personally entitled to sue and liable to be sued on the contract as well as his principal.  But it is only one of many circumstances, and as respects the creation of privity of contract between the other party and the principal its weight may be minimal, particularly in a case such as the present where the terms of payment are cash before delivery and no credit is extended by the other party to the principal.  It may have considerably more weight in determining whether the mutual intention of the other party and the agent was that the agent should be personally liable to be sued as well as the principal, particularly if credit has been extended by the other party.’”

43.  It seems to me that the facts in this case and my ruling on the main issue go a long way in determining this question as well.  The evidence has demonstrated that Etacol had a very limited role indeed.  Although it was an agent, it was only an agent in arranging payment to suit Sinomast’s wish to be paid in either Hong Kong or the US through a reliable bank by letter of credit.  Etacol did not play the part of an agent as Mr Budden had of putting buyer and seller together, which is the usual situation that one is required to deal with in deciding whether an agent has also assumed personal liability.  Once one understands Etacol’s very limited role, as I have already found it to be, that must dispose of this issue as well.  There is simply no basis for saying that Etacol had, by accepting this very limited role, also assumed a concurrent liability under this contract for the sale of fabric by Sinomast to Uniwear.

44.  This being my view, Sinomast must therefore be taken to have failed on this basis as well.  Accordingly, Etacol must have the declaration that it seeks and Sinomast’s counterclaim will therefore stand dismissed.

Quantum for Harassment

45.  This of course is a quite separate aspect of the case.  Mr Hung accepts that the amount of damages awarded will be modest.  I have been shown cases where the behaviour complained of was very much worse than this — a bad example of which is the decision of Chu J in Sheck v Wong & Ors, HCA 4455/2002 where she felt able to award $300,000 under this head.

46.  Although there is no doubt that in the present case this was very disturbing behaviour which upset Barbara Frey in particular which would have included her worries as a mother for her children especially when the behaviour complained of started when Mr Frey was not in Hong Kong and she could not look to him for support.  It ought to be remembered that there was no violence, although from the Plaintiff’s point of view this must have been something that was seen as a real risk.  What is clear is that matters did not get seriously out of hand and the debt-collection agency was called off and desisted in reasonably short order.  Mr Hung accepts that the most that he can reasonably ask for is $80,000.  The behaviour complained of amounted to ‘heavy tactics’ by the debt-collectors — abusive language, a visit to the vicinity of the Frey’s house which was all calculated to frighten the Freys’ into paying up.  In my judgment the proper award is one of $45,000.

Costs

47.  Where the Plaintiffs have succeeded they must have their costs of the action.  On the award of damages there will be interest at half the judgment rate from the date of the writ until judgment and thereafter at the judgment rate until payment.  The order as to costs and interest will be an order nisi in the usual way.  Should either party seek a variation let it do so by letter within 21 days of today supported by a written submission which will also be responded to in writing no later than 14 days after that.