PERMTEK LIMITED v. CHINA RESOURCES MACHINERY & EQUIPMENT COMPANY LIMITED

1987, No. A5350

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. By a contract dated 10th September 1986, the plaintiff agreed reed to sell and the defendant agreed to buy water treatment plant it a price of US$160,000. The relevant clauses in the contract were :-

"7.    Delivery : Within 4 months after receipt the L/C, the Sellers will despatch the goods in one lot from Hong Kong to Shen Zhen, China by train or truck.

9.    Payment : The Buyers shall open an irrevocable Letter of Credit of 100% contract value in favour of PERMTER LTD before end of Oct. 1986 and to be payable negotiation (sic) as follows :

1)    90% paid against the shipping documents as stipulated on the reverse of this Contract.

2)    10% paid against the certificate signed by the representative of both side after commissioning of the complete plant or within 4 months after date of arrival of the goods at the destination whichever comes earlier.

11.    Other Terms & Conditions : ......

4)     The Contract shall come into force begining (sic) after receipt the L/C of the Buyer."

2. No Letter of Credit was opened by the defendant. On 27th December 1986, in response to several communications from the plaintiff, the defendant sent a telex to the plaintiff. The contents of this telex, which are in English are somewhat difficult to understand but the final sentence is clear enough.

"So that we are regret to advise you, we want to cancel this contract."

3. The plaintiff seeks damages for breach of contract. The defendant denies liability on the basis first, that on the true construction of the contract, clause 11(4) constitutes a condition precedent and, second, that collateral terms were orally agreed between the parties by virtue of which the defendant would not be liable for any losses of the plaintiff prior to the receipt of the Letter of Credit. It was agreed between the parties that I should deal with the quest on of liability only.

4. For the plaintiff, Mr Bell took the position that the contract is plainly not subject to a condition precedent and that the only two issues which arise are whether collateral terms were orally agreed and, if so, what effect, if any, those terms have upon the contract. Mr Fung, for the defendant, also maintained that there are two issues to be decided, but that those issues are whether the terms of the contract itself afford a defence, and if they do not, whether collateral terms were agreed which afford a defence. If the defendant is successful on either issue said Mr Fung, it must win.

5. Mr Bell argued that the contract is unworkable if clause 11(4) is read literally. That clause contradicts clause 9 and makes nonsense of it. Therefore, one of those clauses must be interpreted differently from its literal meaning. While clause 9 is specific, clear and detailed, clause 11(4) is general, lacks detail and defeats the object of the agreement. The latter clause should be interpreted differently and the proper construction to be put upon it is that it is the contractual machinery which comes into force upon the receipt by the seller of the L/C. In particular, the seller comes under an obligation to deliver, the buyer already being under an obligation to open an L/C by the end of October 1986 by virtue of clause 9. Read thus, said Mr Bell, clause 11(4) becomes consistent with common sense.

6. Mr Bell relied upon the case of Trans Trust S.P.R.L. v. Danubian Trading Company Limited, [1952]2 Q.B. 297. After referring to the modern practice whereby a buyer agrees to provide a banker's confirmed credit, and where a seller stipulates that the credit should be provided at a specified time, Denning, L.J. (as he then was) went on at p. 304 :-

"What is the legal position of such a stipulation? Sometimes it is a condition precedent to the formation of a contract, that is, it is a condition which must be fulfilled before any contract is concluded at all. In those cases the stipulation 'subject to 'the opening of a credit'' is rather like a stipulation 'subject' to contract.". If no credit is provided, there is no contract between the parties. In other cases a contract is concluded and the stipulation for a credit which is an essential terms of the contract. In those cases the provision of the credit is a condition precedent, not to the formation of a contract, but to the obligation of the seller to deliver the goods. If the buyer fails to provide the credit, the seller can treat himself as discharged from any further performance of the contract and can sue the buyer for damages for not providing the credit.

The first question is: What was the nature of the stipulation in this case? When the buyers sent their order they stated in writing on September 25, 1950, that a credit will be opened 'forthwith''. It was suggested that the buyers were not making any firm promise on their own account, but were only passing on information which had been given to them by their American buyers. The judge did not accept that suggestion and I agree with him. The statement was a firm promise by the buyers by which they gave their personal assurance that a credit would be opened forthwith. At that time there were some discrepancies about gauges and dates of delivery which had to be cleared up. But these were all resolved at the meetings in Brussels, and there was then, as the judge found, a concluded contract by the sellers to sell, and the buyers to buy, the steel for December - January delivery, and it was a part of that contract that the buyers would be personally responsible for seeing that a credit should be opened forthwith. On those findings it is clear that the stipulation for a credit was not a condition precedent to the formation of any contract at all. It was a condition which was an essential term of a contract actually made."

7. There is no question, I think, but that clause 9 of the contract falls into the second category of cases described by Denning L.J. The provision by the defendant of credit is a condition precedent, not to the formation of the contract, but to the obligation of the plaintiff to deliver the goods. The Trans Trust case however, did no involve a clause such as clause 11(4).

8. Mr Bell also referred me to Chitty on Contracts, 25th Edn. in relation to the constructon of terms and in particular, to paragraphs 784, 785 and 793. A clause which is inconsistent or repugnant and which does not give effect to the real intention of the parties as gathered from an instrument as a whole must be rejected. However, every effort should be made to give effect to every clause in an agreement. An example given by Chitty is of a personal covenant, and a proviso that the covenantor shall not be personally liable under the covenant. In such circumstances, the proviso is repugnant and void. Mr Bell suggested that Clause 9 is analogous to a personal covenant and the liability thereunder should not be destroyed by Clause 11(4).

9. After reminding me that I should, if possible, "save" the contract, Mr Bell said that as a last resort, he relied upon paragraph 793 and argued that I should resolve the matter, against the defendant, whose standard form of contract by applying the contra proferentem rule.

10. Mr Bell drew my attention to F.L Schuler A.G. v. Wickman Machine Tool Sales Ltd. [1974] A.C. 235 where at p. 251 Lord Reid said :-

"The fact that a particular construction leads to a very unreasonable result must be a relevant consideration. The more unreasonable the result the more unlikely it is that the parties can have intended it, and if they do intend it the more necessary it is that they shall make that intention abundantly clear."

11. Mr Bell sought to persuade me that the defendant's contention would produce an unreasonable result because the defendant, at a whim, could decide not to accept delivery of parts which the plaintiff had to order specially for this plant and for which the plaintiff had agreed a low price.

12. That case involved the construction of the word ''condition'' Strictly construed, it would have imposed a wholly unreasonable requirement on one party; but construed in the light of the whole agreement it was held to mean a contractual term breach of which, if unremedied, would entitle the other party to terminate the agreement in accordance with another clause.

13. I derive little assistance from that case. There was an agreement which each party was willing to fulfil but not, by one party, on unreasonable terms. In the instant case, there falls to be determined, on the wording of a complete clause, whether there was any contract at all. Either way, one party will suffer. But I do not see the suffering of the plaintiff as being any more unreasonable than that of the defendant.

14. Mr Bell also reminded me that, for a number of reasons, the defendant's attitude to the contract has not been consistent. The most important of these, I think, is that the defendant made an application to stay under an arbitration clause in the contract. That, said Mr Bell, showed that the defendant recognised the contract as being in force and effect. Although it is immaterial, I observe that the defendant's application was rejected.

15. Mr Fung argued that there is no ambiguity between the two clauses. He pointed out that clause 11(4) refers to "The Contract''. that is to say the entire document. He said that the clause does speak of the seller's obligations coming into force and that it cannot unilaterally relieve the seller of its obligations without, at the same time, suspending the other provisions of the contract. He said that the suspensory nature of the clause covers the whole contract and that its overall effect is clear.

16. In dealing with Mr Bell's argument based on inconsistency or repugnancy, Mr Fung said that this has no application as there is no inconsistency between clauses 9 and 11(4). He said that the latter clause does not say that the defendant is under no obligation to open an L/C. To read it thus would make nugatory all contracts subject to a condition precedent.

17. The answer, I think, is that the law in relation to personal covenants has no immediate application to a modern contract for the sale of machinery. I do not think that this line of argument is helpful to the plaintiff.

18. In relation to the application of the contra proferentem rule, Mr Fung said that it is not the defendant's standard terms which are being construed, but the special terms which were drafted jointly between the parties.

19. In spite of Mr Bell's arguments, I have little difficulty in interpreting the contract. I do not find there to be any inconsistency or repugnancy between clauses 9 and 11(4). I find that the terms agreed between the parties and embodied in the contract were conditional upon the defendant opening an L/C before the end of October 1986. If, as happened, the defendant failed to open an L/C, there was no contract, between the parties to be observed or enforced. In those circumstances, the plaintiff's claim must fail and is dismissed.

20. Although that disposes of the claim, two other matters were canvassed before me, namely, the factual matrix as an aid to construction of the contract and the alleged terms orally agreed between the parties. Both matters depended upon the evidence given during the course of the trial. I think that I must, in fairness to the parties, deal with this.

21. For the plaintiff, one witness, Mr Lam Wai-keung, gave evidence. He is employed by the plaintiff as product manager and at the material time was employed on the same kind of duty but under the process manager, responsible for promoting the sales and designing systems. He said that, amongst other products, the plaintiff sell water treatment plants. The plaintiff sub-contracts out the manufacture of some parts of these plants but purchases most parts from other sources.

22. Mr Lam said that he was aware of a proposal dated 26th November 1985 by the plaintiff for the supply of a water treatment plant for Shen Zhen Brewery. Nothing had happened in relation to this proposal but on 18th August 1986, as the result of a telephone call, he and a colleague went to Shen Zhen. Mr Lam was very certain about this date because he said he keeps a diary.

23. It is pertinent to note that later in his evidence in chief, after looking at certain documents, he agreed that this visit to Shen Zhen was on 20th August. Mr Lam explained that his memory must have been at fault. I say this is pertinent because Mr Lam was later cross-examined upon the basis that he attended another meeting in Shen Zhen on 8th September. Mr Lam denied he had been in Shen Zhen at such a meeting on that date. He produced his travel documents. For the defendant, Mr Fung accepted that there had been no such meeting. Mr Zhang Shi Yun, the defendant's only witness explained in his evidence that his memory likewise had played him false about this meeting.

24. In Shen Zhen Mr Lam met Mr Zhang and a Mr Pan Bao Zhi. Mr Lam understood that both represented the Shen Zhen Brewery, Mr Pan being a technical consultant while Mr Zhang belonged to the defendant. There were technical discussions about the plant. Nothing was said about a letter of credit or payment or price, save that the other side indicated that the price suggested namely, US$186,799, was too high.

25. After the meeting, Mr Lam and his colleague returned to Hong Kong where they made out what I shall call a revised technical schedule. They went back to Shen Zhen on 22nd August for a further meeting with Mr Zhang and Mr Pan. At that meeting, after briefly discussing the technical schedule, a price was agreed, namely US$160,000. This was a substantial reduction and Mr Lam said that at one point he and his colleague almost walked out as they were not happy with the price. However, the plaintiff had previously sold similar plant to the Guangzhou Brewery through Mr Pan who now convinced them that there would be growing business in the brewery industry and that the Shen Zhen project would be a good reference for the plaintiff.

26. They also discussed a draft contract made out by Mr Zhang. Mr Lam said it was basically a standard form of contract with blanks to be filled in. In relation to clause 7, Mr Lam thought that Mr Zhang had simply put "within four months" for delivery. After discussion, it was agreed to add the balance of that clause in order to protect the plaintiff from financial risk.

27. Mr Zhang's draft clause 9 was almost the same save that paragraph (2) did not contain the last part commencing "all within four months". Again, something was added to protect the plaintiff.

28. More importantly, however, in clause 9 the words "before end of October 1986" were not in the draft. Mr Lam said that the defendant's representatives would not say when they would issue an L/C. Mr Lam asked for a date and suggested two weeks from the signing of the contract. Ultimately, the end of October was agreed upon. Mr Lam said he was in no doubt that the L/C would be issued accordingly and that there was no question of it being conditional.

29. Mr Lam denied that anything was said about the end user not being able to issue an L/C; about the contract only coming into force after an L/C was received; or about the defendant not being liable for losses suffered by the plaintiff before the receipt of an L/C.

30. Mr Lam said that he persuaded Mr Zhang to sign a short letter of agreement to confirm that the defendant would buy the water treatment plant at the agreed price. This document said that a formal contract would be signed in Hong Kong within ten days.

31. Ten days later, Mr Lam was unable to contact Mr Zhang in Hong Kong. Finally, he spoke to him on the telephone and agreed to go to Shen Zhen to sign the contract on 10th September.

32. On that day, Mr Lam and Mr Zhang signed the contract, the relevant clauses of which I have set out earlier. There was no discussion about any other terms. Mr Lam said he would not have agreed to any other terms in view of the price involved. He acknowledge that clause 11(4) was in the contract when he signed. But he did not regard it as making the contract not valid or binding. He said that to deliver on time under the contract, it would be necessary for the plaintiff to commit itself to ordering parts before receipt of the L/C.

33. Mr Lam was cross-examined with some care. He agreed that the field for the supply of water treatment plants is competitive and that he was anxious to secure this contract because it would be only the second brewery to be supplied China. However, he said that the plaintiff had already supplied a number of such plants to China to soft drink manufacturers as opposed to brewers. The water treatment plant is the same for any bottling process. He agreed that the plaintiff is anxious to secure all possible business.

34. Mr Lam accepted that a water treatment plant is only one component of the brewery process and that there were, at the time, companies competing for business in China which would supply the whole of the brewing plant.

35. Mr Lam said he appreciated that the defendant was negotiating with certain European companies about the supply of the entire brewing plant. He said that Mr Zhang had told him this at the outset of their discussions. He denied, however that Mr Zhang told him it would be premature to negotiate for the purchase of a water treatment plant at that stage. He said he understood that the Shen Zhen Brewery had already decided that it would deal with the water treatment plant separately. He explained that neither Mr Zhang nor Mr Pan told him this directly but that he gathered this was the position from the action which they took and the signing of the agreement.

36. In relation to the meeting on 22nd August, Mr Lam confirmed that the terms of the contract were discussed, but not upon the basis that it was too early to do so. He said that thee was discussion about the arbitration clause which he asked should specify a place other than China. In the end, however, he accepted Beijing as the place for arbitration.

37. It was put to Mr Lam that while he was discussing price with Mr Zhang, he asked whether Mr Zhang wanted any kick-back. Mr Lam agreed he asked such a question. He explained that before a price was finalised, he wanted to ensure that no one wanted any commission because the price allowed only a low margin. If there was to be any commission, it would be added to the price. So, whilst the payment of commission would not affect profit, it would affect the overall price.

38. On the question of delivery, Mr Lam denied that he had ever suggested a period of three months. He said that a minimum of four months was necessary because of the nature of the project and equipment involved. In particular, stainless steel was specified for all steel items whereas most water treatment plants used plain carbon steel. He also denied that Mr Zhang had said that there was no need for the plaintiff to start production of the plant until after receipt of an L/C.

39. Mr Lam also denied that on 22nd August, there was any discussion about when the contract would come into force. He said Mr Zhang was not concerned about committing the defendant to any contract. He said that would be illogical as otherwise, why sign an agreement and contract if the defendant did not want to commit itself. He did, however, agree that he possibly asked Mr Zhang to sign the letter of agreement. He said that normally he tries to push a client into signing an agreement and uses the excuse of needing something to show his boss.

40. Mr Lam was cross-examined at some length about the alleged meeting on 8th September. He denied that there was such a meeting. As I have said, his denial has now been accepted by the defendant.

41. I should mention that Mr Fung sought to re-open cross-examination on this point on the basis that there might have been, a discussion on that day by telephone. I did not grant leave. In my view, Mr Lam made it very plain that any telephone contact between Mr Zhang and himself before 10th September was confined to making an appointment to meet to sign the contract.

42. In relation to the meeting on 10th September, Mr Lam again denied that there was any suggestion that the plaintiff should not start production before receiving an L/C, or that the defendant would not be responsible for the plaintiff's losses.

43. Mr Lam agreed that he suggested adding to the contract a provision that all Chinese taxes should be borne by the buyer. He said that in fact he probably suggested it at the meeting on 22nd August because it is standard for the plaintiff. He, himself, wrote it into the contract in manuscript.

44. Mr Lam was not sure whether before signing the contract, he discussed clause 9 with Mr Zhang. He did not think they agreed that clause 11(4) overrode clause 9 in case an L/C should not materialise. Although clause 11(4) was a new introduction by Mr Zhang he did not query it. He considered it afforded the plaintiff protection against late delivery.

45. In re-examination, Mr Lam said that the plaintiff has been in the China trade since 1978 or 1979, and has, sold between 20 and 30 water treatment plants. However, this type of water treatment plant is at the low end of the business in technology and sales volume. The plaintiff sells ultra pure water plants at US$1,000,000.

46. Mr Lam was able to say that, of his own knowledge, he had seen parts being made for this contract. He saw them at a sub-contractor's workshop. They were of stainless steel and this contract was the only one for stainless steel parts.

47. Mr Zhang gave evidence on behalf of the defendant, he said that in 1986 he was the deputy general manager of the import department and was in charge of the project for the purchase of a beer manufacturing plant for the brewery in Shen Zhen. He mainly negotiated with three overseas suppliers who would supply a complete plant including water treatment plant.

48. In August 1986, Mr Zhang said he became involved in negotiation with the plaintiff for the purchase of a water treatment plant or Shen Zhen Brewery. On 20th August, he met Mr Lam for the first time in Shen Zhen. At the meeting, he informed Mr Lam of his negotiations with the other three companies and said it was still too early to talk about a water treatment plant as the three companies could supply the entire plant. He said he had not yet decided whether the water treatment plant, which in terms of value was less than 1% of brewery plant, should be split off. However, he agreed to talk about a water treatment plant in the basis that the plaintiff could wait until a decision had been made about the complete plant before placing an order. Technical discussion took place mainly between Mr Lam and Mr Pan.

49. It was agreed on the technical side that a bill of materials would be made out, but there was no agreement to purchase plant.

50. At the meeting on 22nd August, Mr Zhang said he was asked if he was prepared to discuss commercial terms. He said it was still to early to talk. However, Mr Lam said he had come all the way from Hong Kong and persuaded Mr Zhang to have a discussion.

51. Mr Zhang said the price of US$160,000 was agreed after he assured Mr Lam that he did not want any commission. For delivery, Mr Lam said the goods could be delivered in January 1987. Mr Zhang said that was too early and proposed delivery within four months after an L /C was issued. Arbitration was discussed and agreed. No conclusion was reached, however, about when the contract should come into effect after it was signed. That, said Mr Zhang, was why it was impossible to sign contract on that day. He did, however, agreed to sign the letter of agreement for Mr Lam to show his boss.

52. He said that he had in mind that an order might be placed with one of the three overseas companies within ten days which was the reason for specifying ten days in the letter. Also, he hoped that in ten days' time, they could have some decision on how the contract should come into effect.

53. Mr Zhang said M Lam contracted him on the telephone about ten days later when they discussed the revised equipment list. Mr Lam telephoned him again on 8th September. Mr Lam said the equipment list could be typed out that day. However, Mr Lam had no proposal about when the contract should come into effect and Zhang, for his part, said he did not require the goods urgently.

54. On 10th September, Mr Lam came Shen Zhen and met Mr Mang. Asked about signing a contract, Mr Zhang said that unless the contract provided that it would only come into effect after an L/C was issued, he would not sign. He said Mr Lam agreed to this because he was well aware of competitors in Hong Kong who could supply such a plant. Mr Zhang said he explained that it would be premature for him to enter an agreement because no decision had yet been reached with any of the overseas companies. Mr Lam then agreed to his proposal.

55. The draft contract, some of which was written by Mr Lam and some by Mr Zhang, was then given to a typist. While the contract was being typed out, Mr Zhang discussed clause 11(4) with Mr Lam. Mr Lam said it was perfectly clear that if an L/C was not received that all terms invalid. Mr Lam also jokingly said "my company can still continue with production as we do not produce goods solely for your company". Mr Zhang said he repeatedly told Mr Lam that the plaintiff should not start manufacturing before receipt of an L/C.

56. The typed contract was brought back for signature. At this stage, at Mr Lam's suggestion, the provision in relation to taxation was added in manuscript. Two amendments were also made. The date, i.e. ''tenth'' was added while a spelling mistake ''sixy''was corrected by writing ''sixty''.

57. At Mr Zhang's suggestion, the contract was taken away to be retyped. While this was being done, Mr Zhang again reminded Mr Lam not to start manufacturing before receiving an L/C. He said that the defendant would not be responsible for any loss in those circumstances. Mr Lam told him not to worry because it was clear that without receiving an L/C, the contract would be an invalid one.

58. In cross-examination, Mr Zhang said that an agreement was signed on 8th May 1987 with an overseas company for the supply of a complete brewing plant. He would not commit himself as to whether this was a more profitable way of dealing with the matter.

59. Mr Zhang agreed that in 1986, he had been a vice-manager for three or jour years and responsible for negotiating contracts. He accepted that it is important record every term of what is agreed between parties.

60. In relation to the letter of agreement signed on 22nd August, Mr Zhang confirmed that he wrote it at the request of Mr Lam. Although it does not specifically recite any qualification, the provision for a formal contract to be signed within ten days referred, to the fact, as Mr Lam knew, that Mr Zhang thought that he might be able to decide from which company to purchase plant within ten days and whether agreement could be reached upon when the contract would become effective. He denied that this document is very misleading in the light of his evidence about it being premature to sign a contract. He said the letter of agreement should be read in conjunction with the blank standard contract form. He was unable to explain how Mr Lam's boss would be able to discern that there was any qualification to the terms by reading these two documents.

61. In relation to the meeting on 22nd August, Mr Zhang said he was not mistaken about there being a discussion concerning when the contract should become effective. He said there was simply no definite proposal. He also said that there was no discussion about losses by the plaintiff.

62. Mr Zhang agreed that on 22nd August, all the terms contained in the contract with the exception of clause 11(4) and the clause relating to taxation had been agreed.

63. Mr Zhang said that Mr Lam asked whether he wanted a kick back, in which case it would have to be added to the price. He said that Mr Lam used the phase "wui kau". (This was interpreted by the court interpreter as "kick back".) Mr Zhang said he understood that Mr Lam was not enquiring about a ligitimate commission or handling fee but rather about an unlawful payment.

64. Mr Zhang said that he is a mechanical engineer and took the view that it is a must to must to use stainless steel for any equipment to be used in connection with edible products. He disagreed with Mr Lam about stainless steel being unusual.

65. Coming to the 10th September, Mr Zhang said that he did not really want to discuss the matter with Mr Lam but at Mr Lam's insistence, was prepared to sign a conditional contract. He signed also to protect himself so that if the supplier of the brewery plant agreed that the water treatment plant could be bought from the plaintiff, he could proceed with the purchase. However, he made it clear to Mr Lam that he was still in the course of negotiation and might not place a purchase order with him.

66. In relation to clause 9, Mr Zhang said that initially he did not wish to put in any date for the opening of the L/C. However, Mr Lam pointed to clause 11(4) and said that if there was no L/C, all terms in the contract would become invalid. He thought, therefore that it did not matter if a date was added to clause 9.

67. Mr Zhang asserted, therefore, that the contract concluded on 10th September was not immediately valid but conditional.

68. Mr Zhang denied that the contract was typed before the meeting on 10th September. He said that clause 11(4) was not discussed before that meeting and was brought up by him at the meeting. Mr Zhang accepted that the typist omitted to type the date of the month. He said that this was possibly because it had not been written in the draft or that the typist left it blank because the date of a contract is more likely to change than the month.

69. Mr Zhang said that after terms had been agreed, two copies of the contract were typed out and signed by the parties with manuscript amendments or additions. Exhibit D5 is the plaintiff's copy. Two further clean copies were then typed and signed. Exhibit D4 is the defendant's copy. Mr Zhang said that in the presence of Mr Lam, he tore up and threw away his copy with manuscript addition. He denied that Exhibit D4 is one of the original copies with manuscript writing.

70. In relation to Exhibit D4, Mr Zhang conceded that sixty thousand only is possibly where the typist made a mistake, corrected it and retyped over correcting fluid. His eye-sight did not, however, permit of any other observation, nor did it permit of observing any erasure where ''tenth"' is typed in the top line.

71. Suffice it to say, if Exhibit D4 is held up to a strong light, it is quite easy to see that underneath the correcting fluid there appears the original mis-spelling "sixy". To the naked eye, it is apparent that something has been erased where "tenth" appears in the top line of the contract. To the naked eye, it is also apparent that something has been erased where clause 12, the clause which relates to taxation, appears on page 2 of the contract. It will be recalled that the latter clause was written in manuscript.

72. Mr Zhang was asked why, if the plaintiff was to be responsible for any losses before the issue of an L/C, this term was not written into the contract. Mr Zhang said it was a question of the effectiveness of the contract. He thought it only necessary too put in important things, not all the details. Asked whether he did not think this important, he said he did not say it was unimportant, simply that it was not necessary for him to put in things which counsel might consider important. He was certain, however, that there was such a discussion about losses.

73. Counsel advanced a number of reasons why Mr Lam's or Mr Zhang's evidence should be preferred. For the defendant, Mr Fung said that Mr Zhang's evidence is consistent with the written terms of the contract. He said that on the plaintiff's case, it beggars belief that there was no discussion about clause 11(4) and that Mr Lam simply accepted it although it was a complete departure from earlier agreed terms. On the other hand, Mr Zhang said that there was extensive discussion on 10th September as to the meaning of clause 11(4), whether it would override clause 9 and who, if the plaintiff started production before the opening of an L/C, should bear any losses arising therefrom. That, said Mr Fung, is fully consistent with the parties having reached agreement in principle on all commercial terms, save for when the contract should come into effect on 22nd August, and with execution of the contract being delayed beyond the ten day period pending a decision upon this provision.

74. Mr Fung said that Mr Lam's evidence was generally unsatisfactory. He said that Mr Lam could not  remember certain words and was unsure about other matters, in particular, whether Mr Zhang raised the question about the plaintiff going into production. He pointed to the illogicality of Mr Lam saying he understood clause 11(4) to be protection for the plaintiff against late delivery, yet on the other hand, allowing the plaintiff to proceed with production before an L/C was received.

75. On the other hand, Mr Fung said that Mr Zhang had candidly admitted that his memory is not wholly accurate and conceded that he may have made other minor mistakes apart from the meeting on 8th September. He said that Mr Zhang's evidence stands up against the facts and documents and is convincing upon small points, such as Mr Lam joking about the plaintiff proceeding to production but not necessarily for Shen Zhen Brewery.

76. Mr Bell said that Mr Zhang, apart from having a serious flaw in his memory, has been inconsistent throughout the case. In an affidavit which he made in support of the application to stay, Mr Zhang affirmed that there was a valid contract. However, he did not assert such validity in a series of telexes which he sent to the plaintiff in response to its enquiries as to when the letter of credit would be opened. Further, those telexes do not refer to any oral terms which had been allegedly agreed and which would surely have been mentioned had they existed. The first reference to oral terms is contained in Mr Zhang's same affirmation.

77. I have firmly in mind the points made by counsel. As I have already noted, both Mr Lam and Mr Zhang made mistakes about dates. However, Mr Zhang's error is of much greater substance. He sought to create a meeting which, it is now admitted, never took place.

78. There was some difficulty over the interpretation of the Cantonese for "valid" and "effective". Whichever adjective is used, however, I find it difficult to understand why Mr Zhang has been unable to make up his mind whether there was a valid or effective contract which entitled the defendant to pray in aid the arbitration clause, or whether there was an agreement which required the opening of an L/C to make it valid or effective. I also find it strange that there was no reference to the oral terms until Mr Zhang's affirmation some twelve months after the contract had been signed.

79. I am satisfied that Mr Zhang has not been truthful about the number of contracts typed and signed. It is plain to me, as I have already indicated, that Exhibit D4 contains erasures of manuscript writing and a covering up of the originally mistyped "sixy". It is quite clear that the original copies of the contract which contained the manuscript additions or amendments were not retyped as Mr Zhang would have it.

80. I also note the haste with which Mr Lam and his colleague returned to Hong Kong after the meeting on 20th August in order to prepare a revised technical schedule. There would surely have been no need for such haste if, as Mr Zhang said in his evidence, it had been made plain to Mr Lam that discussion was, at that stage, premature.

81. On the balance of probabilities, therefore, I am satisfied that Mr Lam has in general been truthful and accurate in his account of the negotiations that took place between him and Mr Zhang. I am satisfied that there were no collateral terms agreed orally between the parties which would have the effect of undermining the written contract.

82. In case it should have been necessary for me to refer to the factual matrix as an aid to construction of the contract, I was referred to the case of Reardon Smith Line Ltd. v. Hansen-Tangen [1976]1 W.L.R. 989 where after reviewing the authorities, Lord Wilberforce said at p. 997 :-

''I think that all of their Lordships are saying, in different words, the same thing -  what the court must do must be to place itself in thought in the same factual matrix as that in which the parties were. All of these opinions seem to me implicitly to recognise that, in the search for the relevant background, there may be facts which form part of the circumstances in which the parties contract in which one, or both, may take no particular interest, their minds being addressed to or concentrated on other facts so that if asked they would assert that they did not have these facts in the forefront of their mind, but that will not prevent those facts from forming part of an objective setting in which the contract is to be construed. I shall show that this is so in the present case.''

83. Mr Fung put forward twelve matters which, he said, provided the background. Mr Bell analysed these, saying that 6 showed Mr Lam's anxiety to obtain a contract, which does no more than state the obvious and not assist in construction; 3 related to negotiations with overseas companies, but have no relevance to construction of a contract once it is signed; one related to the defendant protecting itself in case its supplier should insist upon supplying the entire plant; and 2 simply related to the friendly terms upon which the parties conducted their negotiations. None of these, said Mr Bell, may legitimately be included in the matrix. He maintained that the matrix concerns matters such as the identity of the parties, subject matter, place of performance, circumstances of performance and the aim and objectives.

84. It seems to me that Reardon Smith goes rather farther than Mr Bell would suggest and, as Mr Fung would have it, the Court should adopt a liberal approach.

85. The only qualification seems to me to by that a particular fact or facts was or were known to both parties to contract.

86. In spite of Mr Bell's comments, the only matter which to me appears to be part of the factual background and relevant is that the defendant was still in negotiation with three overseas companies for the supply of brewing plant. This was admittedly made known to Mr Lam. I accept that, although the defendant may have wished to keep its options open, the contract should not necessarily be construed so that the defendant is successful in achieving this. I also accept that, if the defendant required protection in case the overseas company with whom it finally contracted for the provision of brewing plant was not prepared to split off the water treatment plant, it is necessary to look at the contract to see whether this protection has as been afforded, not construe the contract to afford the protection unless the contract so warrants. Nonetheless, this situation must have been a very powerful factor in the background as far as Mr Zhang was concerned. At the same time, it was quite clearly a factor in which Mr Lam, being anxious to secure a contract for his company, took no particular interest. Certainly, Mr Lam made no specific enquiry about it but simply assumed that it was not a problem.

87. If I had found it less easy to construe the contract, I would have taken this factor into account. In taking it into account, I think that it would have ...(illegible) in favour of the construction sought by Mr Fung. Thus, it would not have been necessary for him to rely upon alleged collateral terms which I have found, as a matter of fact, not to have been agreed.

88. As I have already said, however, the plaintiff's claim is dismissed.