HONSAICO TRADING LTD v. HONG YIAH SENG CO LTD

[The exhibition by the defendant of an unacceptably low standard of commercial morality in its dealings with the plaintiff is a relevant and important factor for the Court to take into account in deciding whether or no there is a real risk that a judgment in favour of the plaintiff might remain unsatisfied]

1989 C.L. No. 116

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D G M E N T

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1. This is an application inter partes to continue a Mareva injunction granted to the plaintiff ex parte by Nazareth J. on 19th October 1989 and varied by Bokhary J. on 26th October 1989. The plaintiff is a Hong Kong company behind which stand various state agencies of the Republic of Vietnam. The defendant is a Thai company. The dispute between the parties arises as follows.

2. On 8th July 1989, the defendant agreed to sell and the President of India, representing the Food Corporation of India, agreed to buy Vietnam rice to be shipped to India on the terms and conditions set out in a written contract of that date for the purchase and sale of the rice.

3. The quantity was 100,000 metric tonnes. The price was US$258 PMT, free on board Ho Chi Minh, Vietnam. The contract contained a delivery schedule. This provided that the delivery should be made guaranteed not later than 15th September 1989 as per the following schedule :

The contract provided that any shortfall in the monthly schedule should be carried forward to the following month up to 15th September 1989. It provided that in case of default by the seller, the contract, to the extent of the quantity not shipped by the 15th September 1989, should stand automatically cancelled; and that that would also attract a penalty for non-performance by the seller.

4. The contract contained provisions concerning shipment. The buyers were to furnish ocean going vessels for the transportation of the rice. The buyer's shipping agents were to give the sellers at least 7 days notice of the vessel's name, expected time of arrival and the approximate quantity of the cargo for which the vessel had been chartered. Loading was to be at the rate of 600 MT per weather working day, Sundays and other public holidays excepted even if used. The sellers were to load the vessels on Sundays and other public holidays if required by the buyers.

5. In order to perform its obligations under this contract, the defendant entered into a contract with the plaintiff on 11th July 1989. This latter contract was again a contract for the sale and purchase of 100,000 MT of rice. The shipment schedule contained in this contract was identical with that contained in the contract of 8th July 1989, and the loading rate was again 600 MT per weather working day, Sundays and holidays excepted even if used. The price under this contract, free on board Ho Chi Minh, was US$230 PMT. This contract provided for payment in these terms : "By confirmed irrevocable letter of credit at sight to be opened 2 weeks before shipment in favour of [the plaintiff] through [N.M.B. Hong Kong and another bank] as per our nomination later."

6. That this contract had been entered into with reference to the earlier contract of 8th July 1989 appears from the provision contained in the contract of 11th July 1989 by which it is provided, in relation to the bills of lading, that the Food Corporation of India is to be shown as the consignee. There is an addendum to the contract of 11th July 1989 buttressing that point, because it confers upon the Food Corporation of India, through the defendant, the right to associate their representatives with the weighing, sampling and analysis of the samples and loading operations of the cargo.

7. However, it is said by the defendant that, soon after it had entered into the contract of 11th July 1989, it formed the belief that the plaintiff would be unable timeously to perform its obligations under that contract.

8. In paragraph 7 of an affirmation made by one Prachai Leophairatana, the defendant's managing director, he says this :

"Shortly after the contract between the plaintiffs and the defendants was signed on 11th July 1989, I was verbally informed by Mr Sach when we spoke on the telephone that the plaintiffs were only able to supply 50,000 metric tons of the goods by 15th September 1989. He explained that this was because there were so many ships coming into Vietnam in July and August for loading cargo that shipping arrangements must be made to provide that vessels be berthed in Vietnam for loading at 2 weeks' intervals between the loading of each shipment. It is clear from such a schedule of loading, i.e. 2 vessels for every 4 weeks, that it would be impossible for the plaintiffs to arrange for the entire quanitty of 100,000 metric tons of the goods to be delivered within the contractual period, on or before 15th September 1989. I complained to Mr Sach on the telephone by saying that the plaintiffs would not then be able to perform their obligations under our contract, and that this would put the defendants in a great deal of difficulties under their own contract with the Indian Government."

(Mr. Sach represented the plaintiff on the transaction.)

9. The plaintiff does not at all accept what is said on behalf of the defendant and I am, of course, in no position to decide on this application which of the two of them is right. However, the defendant does appear to have been under a genuine belief that there was going to be a problem with the contract. (Whether those problems were the fault of the plaintiff, or the defendant, or of some third party, I neither know nor, for present purposes, care.) What the defendant did about the problem was to enter into another contract with another supplier, Pilkon Company Limited ("Pilkon") on 19th July 1989. It contracted with Pilkon under two contracts, in identical terms, for the supply by Pilkon of a total of 50,000 MT of rice, 30,000 MT under the one contract and 20,000 MT under the other. Shipment was to be in August and September 1989. Again, the loading rate was to be 600 MT per weather working day, Sundays and holidays excepted even if used. Again, it was provided that the Food Corporation of India should be shown in the bills of lading as the consignee.

10. The price under these contracts was the same, US$230 PMT. It is plain, from the evidence originally filed on behalf of the plaintiff, that the plaintiff's reaction, when it realised that something was afoot between the defendant and Pilkon, was that the defendant was able to buy the rice from Pilkon at a better price than it had obtained from the plaintiff, and was therefore proposing to increase its profit by applying this cheaper rice from Pilkon to the fulfillment of its contract with the Food Corporation of India.

11. Once it appeared, however, as it did, that the price in both contracts was the same, this could not be sustained. One is left wondering why it was that the defendant entered into the contracts, into which it did enter, with Pilkon, if it was not that it had formed the genuine belief that the plaintiff would be unable to perform its contract. I do not know whether there was any substance in that belief. I am not in a position to decide whether it was well founded or not, but for present purposes, there being no other reasonable explanation, I am satisfied I should treat the belief which the defendant says it formed as a genuine belief. On their respective analyses of the state of affairs at the port of Ho Chi Minh, in particular on the possibilities of loading the cargo so as to procure a shipment in due time, the parties differ. I see no justification whatever for this court at this stage getting into any consideration of that matter. The defendant protests that it is obvious that the plaintiff could not have performed its contract. The plaintiff protests that it is equally obvious that it could have performed its contract and would have done so had the defendant done what it was required to do, which was to nominate the ships in time and to put in place the necessary letters of credit. No doubt, the parties will be able to treat the trial judge to a more comprehensive rehearsal of their respective arguments. The point, as I see it, is not one for me.

12. I start then from the proposition that shortly after 11th July 1989, the defendant formed the genuine belief that the plaintiff would be unable to honour its contract and that, accordingly, it was sensible for the defendant to cover itself by entering into the contracts with Pilkon to provide it with 50,000 MT of rice to meet its obligations under its contract of 8th July 1989 with the President of India.

13. However, at no time in the 8 days between 11th July 1989, the date of the contract between the plaintiff and the defendant, and 19th July 1989, the date of the contract between the defendant and Pilkon, did the defendant express to the plaintiff in writing, whether by letter, or telex, or facsimile or anything else, a hint of its concern about the matter. I do not ignore the telephone conversation mentioned in the defendant's evidence. But not a word, as I say, do I find in written form.

14. The plaintiff was, apparently, wholly unaware of this real or supposed difficulty when it began, as soon as it had need to do so, to press the defendant to get on with its obligations of nominating the vessels and, of putting in place the necessary letters of credit. The plaintiff could not have done more. It laid it on the line for the defendant in telex after telex. For days there was no response whatever from the defendant. But on 27th July 1989, there was a response, or at any rate, a response of sorts.

15. On 27th July 1989, the defendant sent a telex to Mr. Sach saying this :-

"Thank you for your telex dated 27th July 1989. Sending you letters of credit details. We are pushing Indians to nominate more vessels."

That response does not in any way deal with the detailed and increasingly anguished attempts of the plaintiff to try and find out from the defendant what it was playing at. Nor does it protest that the problem had been caused in any way by the plaintiff.

16. The plaintiff believed that the delay had been caused by the Indian buyer's side, as it said in its own telex to the defendant of 27th July 1989. The reply to which I have referred, the so-called response, continued to give the plaintiff the impression that upon that point they were right. Not from the defendant a word to suggest that the plaintiff had itself entered into a contract which was doomed from the start because it was impossible for the plaintiff to perform it.

17. From then on, the plaintiff continued to press the defendant to perform its obligations under the contract. But the defendant never gave the plaintiff any sort of written explanation of what its real or supposed concerns were. There was evidence that some of these matters had been dealt with on the telephone, but for present purposes I have to look at the evidence as it stands. I cannot get into the question - who said what to whom - in conversations over the telephone. I can only read the material which has been placed before me and I observe that there is no such material at a time when one would be entitled to expect it.

18. On and on the plaintiff went, trying to sort the matter out. It went so far as to get in touch itself with the Food Corporation of India by telex, sending copies of that telex to the defendant, but even this evoked no response from the defendant. The nearest thing, apart from the respondent's telex of 27th July 1989 to which I have referred, which could be dignified with the name of a response was that the defendant actually accepted an extension of time for one or more of the letters of credit. It did nothing consistent with a belief that the plaintiff was acting in breach of its contract or was inevitably bound so to do.

19. Then, at last, the defendant came clean. On 6th October 1989, it telexed the plaintiff and said this : "Your past performance of loading rice in previous vessels showed the average rate of 600 metric tons per day as very difficult to achieve and no way could you load such quantity of 100,000 metric tons of rice within September 15th 1989, but for sake of our past long term relationship, we try to persuade our buyer to extend the shipment period to load the maximum quantity with your mutual consent. It takes time and efforts but you have never appreciated our efforts on the remaining quantity of 50,000 metric tons so we agreed to cancel the remaining 50,000 metric tons so that we do not have to waste our time to persuade to extend shipments for the remaining 50,000 metric tons."

20. Finally, on 18th October 1989, the defendant telexed the plaintiff and said this : "Due to your inability to load fast for the Indian buyer within 15th September, they decided against the additional quantity of 50,000 metric tons, so please note accordingly". This is another disingenuous attempt to obscure what, on the face of the documents, appears to be the true position. The 50,000 MT that the defendant was not taking from the plaintiff was, in fact, being supplied through Pilkon.

21. On the facts to which I have referred, the plaintiff has asked for a continuation of the Mareva injunction granted ex parte on 19th October 1989. A number of matters have to be satisfied before this drastic and extraordinary remedy is granted. For example, there must be proof of assets within the jurisdiction before a Mareva injunction is granted; see Third Chandris Shipping Corporaton v. Unimarine S.A. [1979]1 Q.B. 645, per Lawton L.J. at p.673. And there are other matters into which, however, I need not go; because, in the present case, the parties are content to argue the matter on one ground alone; i.e., whether or not there is a "real risk" of the defendant dissipating its assets to avoid a judgment. On other matters, I have heard no argument and I say nothing about them in relation to the present case.

22. The question of "real risk" was vigorously debated before me. However, here too, thanks to the good sense of counsel, I have the advantage of an agreement between them as to what the question is that I have to decide. The question is : On the whole of the evidence, would the refusal of a Mareva injunction involve a real risk that the judgment in favour of the plaintiff would remain unsatisfied? (The framing of the question in that way is supported by a judgment of the Court of Appeal in England in Ninemia Maritime Corporation v. Trave Schiffahrtsgesellschaft m.b.h. und Co. K.G. [1983]1 W.L.R. 1412.)

23. The defendant is a foreign company which is, on the evidence, in a big way of business, though not in Hong Kong. There is no evidence before me of its having a bad reputation in the market. There is, I think, no doubt that the grant of a Mareva injunction would tend to damage its interests and its reputation in Hong Kong and possibly elsewhere. That is often the effect of a Mareva injunction granted on the ground that the judge is satisfied that there is a real risk that the defendant might allow a judgment against it to remain unsatisfied. In the present case, the defendant claims (without giving anything that could remotely be considered as particulars) that it has a substantial banking relationship in Hong Kong with its bankers. For these reasons, which I quite understand, I am most hesitant to grant this relief against this defendant. But I do have to weigh against these considerations the fact that, as the evidence establishes, there is no reciprolity of enforcement of judgments between Hong Kong and Thailand, and also the most important consideration which, as it seems to me this case discloses, that is, the devious conduct of the defendant in its dealings with the plaintiff.

24. I am not here to punish the defendant because I disapprove of its conduct; that is not the purpose of a Mareva injunction. But, if I come to the view that its conduct, in relation to this transaction, leaves me so uneasy that I am driven to the conclusion that there is a real risk that a judgment in favour of the plaintiff might remain unsatisfied, then I conceive it to be my duty to grant the injunction. It may be that some cash will come to the hands of the defendant which would be easily removable out of the jurisdiction, but I attach no very considerable weight to that. It is the case as I have already pointed out that the defendant is a foreign corporation, but it is a substantial one, and I place no great weight on that either.

25. I have, however, come to the conclusion that the defendant has exhibited an unacceptably low standard commercial morality in its dealings with the plaintiff; and this drives me to conclude that there is a danger that if the defendant thought it was in its best interests to do it, it would not shrink from attempting to defeat the interests of the plaintiff under any judgment the plaintiff might obtain here.

26. I can understand that the defendant would wish to protest at such a conclusion; but as it seems to me, it has, by its own conduct, brought this upon itself. That there is such a danger is a view which I have formed with reluctance; and I would be anxious to do what I can to avoid damaging the interests of the defendant more than is necessary in line with that conclusion. If, for example, the court were to be offered, even at this late stage, an undertaking from the defendant not to dispose of its assets within the jurisdiction of this court, above the amount of the plaintiff's claim for damages (which amounts to some US$1.4 million) without first giving notice of its intention so to do to the plaintiff, or if some other machinery can be worked out which would preclude the Mareva injunction from going, I should be prepared to consider it. But, absent any such thing, I think that on balance the plaintiff has made out its case for the protection of a Mareva injunction; and I propose, for those reasons, to grant one.