CRYSTAL KNITTERS LTD v. FAN BIK LING t/a IKFAT CO

Temporary transfer of quota agreement - transferee to utilize 95% of the quotas transferred and in default transferee to compensate transferor by obtaining for transferor loss in allocation of quota in next year by transfer of quotas on a permanent basis 'in the next year' - whether expression 'in the next year' must mean at any time during the next year.

IN THE DISTRICT COURT OF HONG KONG

HOLDEN AT KOWLOON

CIVIL JURISDICTION

ACTION NO. 13549 & 13550 OF 1983

(Consolidated)

___________________

BETWEEN

_______________________

___________

JUDGMENT

___________

1. These are two consolidated actions by the same plaintiff against the defendants for damages arising from the alleged failure of the defendants to perform the terms of a guarantee given in consideration of a transfer, on a temporary basis, by the plaintiff to the defendant of quotas in category No. 338/339(1) for the export of textiles to the U.S.A. during the textile year 1982 (1st January to 31st December 1982).

2. In October, 1982, the plaintiff had no orders at hand for the shipment of textiles. It had quotas to spare. If 95% of those quotas were not utilized during that year the plaintiff's quota allocation for the next year would be reduced by the number of quotas that were unused. So the plaintiff agreed to a Type A transfer - which is a temporary transfer - of 760 quotas to the defendant in the first action and 403 quotas to the defendant in the second action for no monetary consideration on the defendant's undertaking to utilize at least 95% of the quotas that were transferred and in that way ensure that it would still retain a quota allocation for the next year in the amount transferred temporarily to the defendants.

3. Both defendants, in accepting the temporary transfer of the quotas, agreed to utilize at least 95% of the quantity of quotas so transferred by the 31st December 1982. The guarantee they gave upon default of their so utilizing the quotas as undertaken by them was as follows:

"In the event of our failure due to whatsoever reasons in shipping or utilizing full or any part of the said quota on the above date which results in your loss on the entire or partial quota rights in the next textile year, we are fully responsible to compensate all your loss by obtaining from elsewhere the same quota quantity under the same category in the next textile year by transfer on permanent basis. "

4. It is not disputed that the defendants failed to abide by their undertaking in utilizing the quotas as agreed. The defendant in the first action (K.C.J.13549/83) failed to ship any of the 760 dozens garments covered by the quotas transferred to him, while the defendant in the second action (K.C.J.13550/83) shipped only 43 dozens out of the 403 dozens textile quotas that were transferred. As a result, the plaintiff's quota allocation for the textile year 1983 became reduced under the 'past performance rule' operated by the Trade Department whereby if a company uses less than 95% of its quota holding in a particular category it will be offered for the following year an allocation equal to the amount of quotas it actually utilized. For this purpose, performance by a transferee of quotas transferred on a temporary basis is treated as performance attributable to the transferor. Hence, it is understandable that the plaintiff required a guarantee from the defendants that they would utilize 95% of the transferred quotas to avoid a loss of its quota entitlement.

5. As quota entitlements in a subsequent year are based on rates of utilization in the preceding year, the allocation of quotas can only be made after individual quota allocations in the preceding year has been fully verified by shipping documents. The verification process takes a few months to complete. To avoid unneccessary disrup-tion to companies which have contractual commitments to fulfill during the first few months of the new textile year while the Trade Department calculates quota entitlements, preliminary quota allocations are offered. After the department has completed verification of licensed shipments, a final quota allocation is then made.

6. In the case at hand, it is not disputed that the plaintiff would not know what allocation would be offered to it until sometime in March 1983. It was then that the plaintiff found that it suffered a reduction of its quota entitlement for 1983 represented by 756 dozens in the case of the defendant in the first action and 360 dozens in the case of the defendant in the second action (hereafter referred to as "the lost quotas for 1983") due to their failure to utilize 95% of the quotas transferred to them on a temporary basis. In early April 1983 the plaintiff applied to the defendants for the transfer on a permanent basis of lost quotas for 1983. The demand was repeated in May. On the 21st November, 1983, the defendants offered to effect the transfer in the 3rd week of December 1983, and requested the plaintiff to forward the relevant transfer forms which the plaintiff did on the 23rd November, 1983. On the 28th December, 1983 the forms were returned to the plaintiff completed by the defendants.

7. Among the uncontested documents agreed is 'The Textile Export Control System' issued by the Irade Department. The practice and rules administered by the Director of Trade Inudstry and Customs relating to export licences and quotas (for reasons mentioned in the document) were given in evidence by an officer of that department. The unchallenged evidence is that:

8. The plaintiff's case is that as the lost quotas for 1983 was due to the fault of the defendants, it was an implied term of the guarantee that the defendants would effect a permanent transfer of the quantity of quotas lost to the plaintiff either forthwith or within a reasonable time after the allocation of quotas for 1983.

9. The defendants' answer is that the plaintiff has no cause of action because the guarantee document goes no further than to require the defendants to effect a transfer on a permanent basis 'in the next textile year' which means at any time between 1st January 1983 to 31st December 1983. As they have effected such a transfer on the 28th December 1983 they have fulfilled their obligation under the agreement, and, accordingly the plaintiff is not entitled to make any demand upon the defendants.

10. I grant that the words 'in the next textile year', standing alone, can carry the construction advanced by counsel for the defendants. But the meaning of those words when read in conjunction with the other parts of the document can imply a meaning referable to some point of time 'in the next textile year'. However, in order to justify a departure from the ordinary and natural meaning of any word or phrase there must be found in the instrument containing it a context which necessitates or justifies such departure. Reasonableness is not the test.

11. The document spells out what is to be done in the event of the defendants' failure resulting in the plaintiff's 'loss... of quota rights' in 1983. It is then followed by words indicating how the defendants are to compensate the plaintiff for loss of quota rights in that year. It says that the defendants are responsible to compen-sate 'all' the plaintiff's loss (of quotas) by obtaining from elsewhere the same quantity in the same category in 1983 by transfer on a per-manent basis. I think the word 'all' must be given its full weight and effect. The plaintiff came to know what quantity it had lost in March 1983. The defendants were told of this in April 1983. Let us suppose that in July 1983 the defendants effected the transfer of quotas to the plaintiff on a permanent basis. In this event, the plaintiff would not have been compensated for all its quota loss for 1983. It would only have been compensated partially. It would not have been compensated for the quota loss between April to June 1983. On the facts, by making the transfer to the plaintiff on the 28th December 1983, the defendants have not compensated the plaintiff even partially. The transfer may have been effectual to give the plaintiff the quotas for 1984 but the plaintiff has not been compensated for its loss of those quotas for 1983. Taking into account the surrounding circumstances and the necessity of having the words referred to read in harmony with the other parts of the document the expression 'in the next textile year' can imply and be referable to a time in that year (1983) when the transfer on a permanent basis is to be effected.

12. What then is that time?

"No contracts are made in a vacuum: there is always a setting in which they have to be placed. The nature of what is legitimate to have regard to is usually described as the 'the surrounding circumstances' but this phrase is imprecise: it can be illustrated but hardly defined. In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating. " per Lord Wilberforce in Readon Smith Line Ltd v. Yngvar Hansen-Targen (1976) 1 WLR 989 at 995.

13. The guarantee signed by the defendants is a printed one. It appears to be a standard form widely used. I am told nothing of the circumstances in which it was signed. The defendants elected not to give evidence. But from the agreed bundle of documents produced I have every reason to believe that the defendants were aware of the control and mechanics in which the Director of Trade administers the system for export licences and quotas. The cut-off date for an export licence is 1st December. So in December 1982 the defendants knew that they have not fulfilled their undertaking to utilize the quotas as promised which would probably result in the plaintiff's loss of its quota allocation for the forthcoming year. It may well be, therefore, that it was intended that the plaintiff should not have a right to a transfer on a permanent basis until it knew definitely what final allocation has been made by the Trade Department. As that date would not be known until the next year, the words 'in the next textile year' could, when viewed on the background of the surrounding circumstances, mean the date when the final allocation is made by the Director of Trade confirming the amount reduced as a result of the defendants' default so that the defendants would know the quantity of permanent quotas that has to be obtained. And that can only be known 'in the next textile year' (1983).

14. It is important that a document should be consistent with itself and that each part should be consistent with the whole and with the other parts. The words of each clause should be so interpreted as to bring them into harmony with the general intention shown by the document read as a whole and with the other clauses. It is from the whole of the document coupled with the surrounding circumstances that the general intention of the parties is to be ascertained. Although the court ascertains the intention from the words used, the imperfection of the language, and the fact that the meaning of the words varies according to the circumstances in respect of which they are used, often render it impossible to know what that intention is without inquiring further and seeing what those circumstances were and what was the object, appearing from those circumstances, which the person using the words had in view. : see per Lord Blackburn in River Wear Commissioners v. Adamson (1877) 2 A.C. 743 at 763.

15. Applying these principles and in making one part of the document read consistently with the other, I hold that the defendants were under a duty to obtain the permanent transfers of the quotas for the plaintiff on being informed of the quota reduction attributable to the defendants' default. As the defendants have failed to discharge their obligation they are liable to the plaintiff in damages which have not been waived. In the circumstances of this case I do not see how the plaintiff can be called upon or expected to mitigate damage. I assess damages at the rate of $7.- per dozen being the rate which the plaintiff could reasonably have expected to obtain for temporary transfers of quotas in category 338/339(1) for the year 1983.

16. There will be judgment for the plaintiff against the defendant in the first action in the sum of $5,292 and against the defendant in the second action in the sum of $2,520 and costs (in both actions) with certificate for counsel.