CARGILL HONG KONG LTD. v. HOECHEONG PRODUCTS CO. LTD.

IN THE COURT OF APPEAL

1992, No. 135
(Civil)

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J U D G M E N T

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Penlington, J.A.:

1. By a contract dated the 27th September 1986 ("Contract 045") the plaintiff agreed to buy from the defendant 10,000 metric tons ("MT") of Chinese cotton seed expellers ("CSE") at a price of US$84.50 per MT. Shipment was specified to be between the 15th December 1986 and 31st January 1987 at the seller's option. There was also a provision for the quantity to be 10% more or less, also at the seller's option.

2. It is not in dispute that the defendant only delivered 1,000 MT of the CSE under Contract 045 and the plaintiff purchased another 9,000 MT of CSE at US$98 per MT of which 5,000 MT was purchased from the defendant under another contract (001) and 4,000 MT from a different vendor. By reason of the "10% more or less" clause, however, the plaintiff claims damages only in respect of 8,000 MT.

3. CSE is a by-product from the processing of cotton and is used as feed for animals. Although it was denied that the defendant was aware that the plaintiff bought the CSE for re-sale to purchasers in Italy, the claim is for the difference between the price agreed under Contract 045 and what was in fact paid for the balance of the CSE and for damages due to the fact that the plaintiff had to re-negotiate its contract with an intermediary who in turn had re-sold to the ultimate Italian buyers. This was due to the failure of the defendant to deliver the full quantity on time.

4. The defendant was relying for supply of the CSE to fulfil its obligations under Contract 045 on an agreement which it had entered into on the 28th August 1986 with the China National Native Produce and Animal By-products Corporation, Henan National Produce Branch ("HNP") for the sale of 10,000 MT of CSE.

5. It is also disputed as to whether the plaintiff is entitled to bring this action as agent on behalf of its principal, Cargill Singapore Ltd. That it was doing so was not disclosed at the time Contract 045 was entered into. At the hearing of this claim there was a preliminary objection by the defendant who sought that the claim be either struck out or stayed as the plaintiff had no right of action. That application was refused.

6. The defendant relies, as excluding its liability for damages for its failure to deliver the full amount of CSE under Contract 045, on clause 12 of that contract which reads as follows:

"12. Force Majeure: Should seller fail to deliver the contracted goods or effect the shipment in time by reason of war, flood, fire, storm, heavy snow or any other causes beyond their control the time of shipment might be duly extended or alternatively a part/whole of the contract might be cancelled but the seller has to furnish the buyer with a certificate issued by China Council for the Promotion of International Trade (CCPIT) or an independent and competent Chinese authority attesting such event or events."

It was the defendant's case that it could not deliver the CSE due to a drought in northern China and such drought was a cause beyond its control and came within the clause. It was so found by the judge and that finding, i.e. that if there was a drought which totally prevented the supply of CSE the defendant could avail itself of the clause, is not challenged. It is also the defendant's case that the plaintiff accepted that the defendant was entitled to default on delivery of the balance of the CSE and the defendant then assisted the plaintiff to obtain alternative supplies, albeit at a higher price.

7. The defendant claims that in addition to the written terms of Contract 045, there was also an oral term agreed between the parties that the CSE would come from the Henan Province of China and not from anywhere else. It is also pleaded that during 1986 there was a severe drought in Henan Province as a result of which supplies of CSE were not obtainable. A certificate was duly produced from the China Council for the Promotion of International Trade ("CCPIT") which reads as follows:

"Ho Cheung Enterprises Pte. Ltd.:

It's certified that Henan Province has got heavy losses and reduction of cotton grain and etc. as an exceptionally serious in history and force majeure drought in 1986 in Henan Province of PROC."

It is dated the 5th December 1986.

8. For the defendant to be able to rely on clause 12 of Contract 045 it was necessary for it to prove that there was an oral term in that contract providing that the CSE could be come from Henan and not from any other part of China. This is because the certificate refers only to Henan. It is pleaded in the amended defence that:

"It was an express collateral term of the 1st Contract that the specific source for the supply thereunder of the said 10,000 MT (10% more or less at Sellers' option) of Chinese Cotton Seed Expellers ('the Goods') should be from the Chinese Province of 'Henan' or alternatively 'Shandong or Henan'.

PARTICULARS

(1) By Transaction Confirmation in Chinese dated the 28th August 1986, the Defendant entered into a supply contract with the Henan Native Produce Branch for the supply from the Henan Province to the Defendant of 10,000 MT of cotton seed expeller subject to a 10% increase or decrease as may be decided by the supplier.

(2) In or about mid-September 1986, the Plaintiff through its representative LIM KUO CHIANG ('Lim') approached the Defendant who was represented by a Mr. WU CHING SING ('Wu'). The Defendant (through Wu) informed the Plaintiff (through Lim) that the source of the Goods were to be supplied from the Henan Province, to which Lim had accepted and agreed.

(3) In a telex dated the 26th September 1986 from the Plaintiff to the Defendant, the Plaintiff purported to confirm the purchase of the Goods and expressly specified that the Goods were to be 'of northern origins viz. Shandong or Henan.'

(4) Upon receipt of the said telex, Wu of the Defendant telephoned Lim of the Plaintiff and informed the Plaintiff that the Goods were to come from Henan only, and not from Shandong. Lim of the Plaintiff agreed to and accepted the said term."

9. The trial judge seems to have confused the question of whether there was an additional oral term in Contract 045, as pleaded in the amended defence, with whether there was another separate oral contract between the parties that the CSE would only come from Henan. He found that "there was an oral collateral agreement the terms of which were incorporated not only expressly but by the conduct of the parties".

10. By a respondent's notice the defendant submits that the judge should, on the evidence, have held that there was such an additional oral term in Contract 045 rather than that there was a separate collateral oral agreement.

11. The difference between an additional oral term in Contract 045 and a separate collateral oral agreement is of some importance as there seems to be no consideration to support the latter and it was not pleaded. However I am satisfied from reading the reasons for his finding and the use of the words "the terms of which were incorporated" that the judge was satisfied on a balance of probabilities that there was a term in Contract 045 which was agreed to orally by the parties on the 26th September that the CSE would come from Henan. That view was contrary to some of the evidence but supported by other oral testimony and documents and in my opinion cannot be challenged. In particular the judge found Mr. Wu, the main witness for the defendant, to be convincing and reliable. He did not accept all that Mr. Lim, who conducted the negotiations for the plaintiff, said and that is a finding on credibility which this court should be very reluctant not to accept. There is no reason here not to do so.

12. The vital piece of evidence given by Mr. Wu and accepted by the judge was that when he received a telex on the 26th September from the plaintiff saying that CSE was to be of "northern origins viz. Shandong or Henan", he rang Mr. Lim and told him the CSE would be only from Henan and Mr. Lim agreed to that.

13. Having so found, however, the question still remains as to whether the defendant can rely on clause 12 and the certificate to excuse the admitted non-fulfillment of all its obligations under Contract 045.

14. The manner in which the certificate came into existence and how and when it was given to the plaintiff was very uncertain. It is dated the 5th December 1986, only a month after Contract 045 was, according to Mr. Wu, executed and a little over three months from the 28th August 1986 when HNP agreed with the defendant to sell 10,000 MT of CSE. It is the defendant's case in its pleaded defence that this certificate was given to the plaintiff between the 13th and 18th December but there is no reference to it in any telex or other communication until the 10th November 1988, although as early as the 19th February 1987 the defendant had indicated it intended to rely on clause 12 of Contract 045. Again however the judge, having carefully considered all the evidence and preferring the oral testimony of Mr. Wu to that of Mr. Lim, said he was satisfied that the certificate was produced to the plaintiff in December 1986. That is a finding of fact which is supported by some of the evidence and in my view was one which the judge was entitled to come to.

15. The authenticity of the certificate was confirmed by a witness called for the defence, Mr. Guo Zi Xiu, an officer of HNP at the relevant time, who said the chop was genuine. That was not challenged.

16. There was evidence relating to a prior warning to the plaintiff that delivery of the CSE may be delayed or short of the amount contracted for. This was contained in a telex sent by the defendant to the plaintiff on the 11th November. It relayed a telex from HNP saying that Henan Province greatly suffered from drought this year: "we originally plan to fulfil all contracts but faced with such unexpected circumstances it is really difficult". HNP then suggested that the delivery date should be postponed or the quantity reduced. The evidence was that although sent on to the plaintiff on the 11th November the original telex from HNP was received by the defendant on the 29th October. As to why it was not passed on to the plaintiff until the 11th November Mr. Wu said "I was in Guangzhou and I thought my employees would inform Lim. I first heard about it in Guangzhou, during Spring Fair, from October 15th to November 15th". Mr. Wu's evidence, accepted by the judge, was that while not sure of the exact date, Contract 045 was signed between the 3rd and 11th November. He said he had signed Contract 045 before he saw the message from HNP but while Mr. Wu may have signed the contract before seeing the telex from HNP it would seem clear that it had been received in the defendant's office before Contract 045 was signed and the defendant, through the employees referred to by Mr. Wu, was aware of the drought conditions in Henan.

17. The question of whether a seller can rely on a force majeure clause if, before entering into the contract, he was aware of facts which would reasonably be expected to bring that clause into operation are set out in Benjamin's Sale of Goods, 4th ed. at para. 8-085 and the cases of Trade and Transport Inc. v. Iino Kaiun Kaisha Ltd [1983] 1 WLR 210 and the later decision of Channel Island Ferries Ltd v. Sealink United Kingdom Ltd [1988] 1 Lloyd's Reports 323 are discussed. The learned author is of the view that a person cannot rely on a force majeure clause which, as a result of facts known to him at the time of contracting, inevitably bring it into operation. Here, while it was denied that the defendant knew the CSE was being purchased by the defendant for re-sale, the evidence was such that Mr. Wu must have known that and it would in my view be totally wrong for a seller to enter into a contract in such circumstances knowing that there was a grave risk to the purchaser that he would not receive the goods due to force majeure and, as here, not insert a similar clause in his contract of re-sale.

18. I am moreover of the opinion that the certificate, taken with the terms of clause 12 of the contract, is not sufficient to enable the defendant to rely on that clause. The clause provides for delay in shipment or for whole or partial non-delivery in the event of "war, flood, fire, storm, heavy snow or any other causes beyond their control" and no doubt drought would, in that context, come within "any other causes" but the certificate simply says there has been a drought in Henan in 1986. It does not say that because of that delivery of the CSE contracted for could not be made, even at a high price. It is to be noted that in fact 1,000 MT was shipped from Henan under Contract 045 and another 3,000 MT was later made available from Henan. The judge did consider this question and referred to the decision of Donaldson J. in Wildhandel N.V. v. Tucker & Cross [1975] 2 Lloyds Reports 240, at 242, in considering a virtually identical clause in a contract for the sale of Chinese frozen rabbits. The seller's solicitors forwarded a certificate simply saying that the seller had not been supplied with the goods and therefore, for reasons beyond their control, could not supply the buyer. That was held to be insufficient. Donaldson J. said:

" The contract called for Chinese rabbits, c.i.f. Their obligation was, therefore, to tender documents, not to ship the rabbits themselves. If there were any Chinese rabbits afloat, they could have bought them, and it is for the sellers to show that no such rabbits were available. Mr. Paton accepts this position, but he invites me to infer from the very limited facts that the arbitrator has found, namely that there was a limited supply of rabbits actually reaching the Netherlands and the fact that the buyers do not appear to have bought in against this contract, that Chinese rabbits were simply not available. But it seems to me to be an impossible inference to draw, even if it is for me to draw the inference rather than the arbitrator, which may be doubted. Let us suppose, just for purposes of testing Mr. Paton's hypothesis, that suddenly the Americans develop an overwhelming desire to eat Chinese frozen rabbits in consequence of which the price of Chinese frozen rabbits c.i.f. America rose steeply. It would not be surprising if, in those circumstances, shippers of this commodity diverted all the rabbits to the United States, but it would be the duty of the sellers in those circumstances to buy in from the United States market and to procure the reshipment of the frozen rabbits c.i.f. Rotterdam. I do not for one moment suggest that that is what happened, but it seems to me that there has been a total failure in this case on the part of the sellers to prove that it was impossible for them to fulfil their contracts, and accordingly, they are unable to take advantage of the protection afforded by the Chinese force mature clause.

For the sake of completeness, I ought to mention that the claimants would, if necessary, have relied upon the failure of the sellers to supply a certificate in accordance with the clause. What the sellers in fact did was to get their solicitors to write a letter on July 10, 1973, saying:

For the avoidance of any doubt we think we should invite you to accept this letter as a certificate on behalf of our clients in terms of the contract that they have not been supplied with the goods and cannot supply you and that such failure of supply is for reasons beyond their control.

I entertain some doubts whether that is a sufficient certificate. But it may well be that the true view is that, assuming that that is such a certificate, all that it attests is the fact that the sellers have not themselves received the goods or documents in sufficient quantities to enable them to fulfil these particular contracts. It does not even purport to say what steps the sellers have taken to obtain an alternative source of supply. However that may be, whether or not that is a sufficient certificate for purposes of the clause, the certificate itself is not conclusive. It is an additional hurdle in the way of the sellers, and I am not satisfied on the arbitrator's findings of fact that it was impossible for the sellers to procure goods to fulfil this contract."

19. The judge here, having considered that decision, said "The certificate here does not appear to have identified the event which made it impossible to supply the buyer. To that extent it may well have been insufficient. In any event that was not decided. But that is not the situation in the present case, where the event was attested. It is implicit in the attestation that drought has caused CSE to become unavailable in Henan and I do not discern a requirement on the part of the seller to set out the steps it has taken to obtain an alternative source of supply" (emphasis added).

20. With respect, I do not see how it should be implicit from the wording of the certificate that CSE was unavailable in Henan. The certificate refers to a severe drought - a "force majeure drought". No doubt force majeure is a concept with which the HNP officials are familiar and the price of CSE may well have gone up as a result but it does not say it is not available. Indeed the evidence was to the contrary. Mr. Guo's evidence was that rainfall was 40% less than usual in 1986. The cotton harvest was 150,000 MT short and CSE was "very serious". It seems strange therefore that on the 28th August HNP should enter into a contract for the sake of 10,000 MT to the defendant. I do not consider that the defendant can rely on the certificate to invoke the protection afforded by clause 12 of the contract. It is clear from Wildhandel N.V. v. Tucker & Cross that a seller must, if necessary, go into the market and buy the goods he has contracted to supply even if he thereby makes a loss.

21. In its respondent's notice the defendant claims that even if the judge was wrong in finding that it could rely on the force majeure clause it had in fact not only supplied 5,000 MT of CSE from Hebei under Contract 001 but also it had made available 3,000 MT at Lianyungang and a further 3,500 tons at "a Chinese port". The short answer to that is that Contract 045 called for the 10,000 MT of CSE to be delivered "trimmed, one safe P.R.C. port". While the relevant letter of credit was amended with the consent of the plaintiff to allow partial shipment of the 1,000 MT which was supplied under Contract 045 I do not consider that condition was ever waived by the defendant who was not obliged to incur the additional cost of the balance of the CSE not being shipped together. There is, moreover, very strong evidence in the exchange of telexes between the plaintiff and the defendant that the plaintiff did not accept the 4,000 MT of CSE under Contract 001 or the 5,000 MT supplied from Hebei as being an alternative to the defendant's obligations under Contract 045. I am satisfied it did not do so but in fact at all relevant times continued to demand compensation from the defendant for non-delivery under that contract.

22. On the question of the plaintiff's right to bring this action the judge found that there was an agreement between the plaintiff and Cargill Singapore that the plaintiff would enter into this contract as the undisclosed agent of Cargill Singapore. He accepted the evidence of Mr. Lim and a Mr. Beneke, head of Cargill Singapore and there was a great deal of documentary evidence to support that relationship, and in particular that the plaintiff was to be paid a fee of 50 cents per MT. That being so the plaintiff was entitled to sue in its own name, though any damages received are the property of its principal.

23. The defendant also claims that once the relationship of the plaintiff to its undisclosed principal in Singapore was disclosed the plaintiff should have joined Cargill Singapore as a joint plaintiff. Once the relationship was so disclosed the plaintiff could not continue the action without authorisation to do so from Cargill Singapore. That authorisation was not produced at the trial. Reliance is placed on Pople v. Evans [1969] 2 Ch 255 and Allen v. F. O'Hearn and Co. [1937] AC 213.

24. At the hearing of this appeal an application was made to introduce a letter from Cargill Southeast Asia Ltd. stating that at all relevant times the plaintiff was acting as agent for Cargill Singapore but, coming as late as it did, we declined to allow its production. Nevertheless I am satisfied that the evidence of Mr. Beneke was such that the judge was entitled to come to the conclusion that the plaintiff was acting as the agent of Cargill Singapore both to enter into Contact 045 and to sue upon it. That authorisation remained in force at least until the trial. Reliance was placed by the defendant on a contract between the plaintiff and Cargill Singapore as showing that the plaintiff was dealing on its own behalf, not as an agent. The judge, however, accepted the evidence of Messrs. Lim and Beneke that such was not the relationship and I am satisfied that he was entitled to come to that conclusion

25. On the question of damages the judge went into that de bene esse and found that the level of damage, if the plaintiff had succeeded before him, would have been the difference between the contract price under Contract 045 of US$84.50 per MT and what the plaintiff paid for the 8,000 MT it purchased to make up for the short delivery, US$98 per MT, i.e. 8,000 x US$13.50 = US$108,000. The judge went on to consider the further claim arising from discounts which the plaintiff said it had to give to its sub-purchaser. He found that while there were documents produced which did show that discounts were given there was not enough evidence to link those discounts with the failure of the defendant to deliver on time under Contract 045. He said the oral evidence about this, given by Messrs. Lim and Beneke, was "very vague indeed". He was not satisfied that the plaintiff had proved any damage suffered beyond the difference in price between that in Contract 045 and what the plaintiff had to pay for the 8,000 MT of CSE purchased to replace what was not supplied under that contract. That was a finding of fact which, on the evidence, he was entitled to reach and should not be disturbed.

26. I would allow this appeal and enter judgment for the plaintiff for the sum of US$108,000. I would also make an order nisi that the plaintiff have its costs below and of this appeal.

Nazareth, J.A.:

27. I agree.

Sears, J.:

28. I also agree and have nothing to add.