XCHRX KOREA BUILDING MATERIALS TRADING CORPORATION v. HONG KONG DONGIL TRADING CO. LTD.

1991 No.A7284

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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D E C I S I O N

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1. The Plaintiff's claim is for the return of US$3,000,000.00. Upon application by the Plaintiff for summary judgment pursuant to O.14, a master gave the Defendant conditional leave to defend. Against that decision the Defendant now appeals, seeking unconditional leave to defend. The Plaintiff in turn cross appeals seeking final judgment. (I observe that, an appeal from a master being by way of rehearing, a cross appeal appears unnecessary although plainly the respondent to such an appeal should give the appellant notice of his intention.)

2. By a contract in writing dated 1st June 1991 (the contract), the Plaintiff agreed to buy and the Defendant to sell 40,000 metric tons of urea at a price of US$6,440,000.00 fob Vladivostok. Shipment was to be the end of June 1991. Under Art. 7 of the contract, terms of payment were:

"USD3,000,000 shall be effected to deposit to the seller's account at once, and balance amount of USD3,440,000 shall be remitted to the seller on before or late 10th June, 1991. The balance remittance of USD3,440,000 shall be sent to the seller's account details as follows ......"

3. Art. 8 required the Defendant to provide a performance bond of 2% of the contract value "as penalty to the buyers if the sellers shall fail to ship .... the contracted goods within the shipping date agreed."

4. Art. 12 contained an arbitration clause but then curiously concluded as follows:

"If this contract is not performed, sellers shall refund deposited amount with its bank interest calculated from the date of receipt of amount."

5. The contract concluded with Art. 13 thus:

"Other terms and conditions.

Other terms and condition are subject to the "incoterms". This contract has been done and made in English in two originals, all originals becoming equally authentic upon seller's receipt of full contracted value sent by the buyers of full remittance do not be received by the sellers, on or before 25.8.1991.

This contract shall be cancelled automatically."

6. It will be apparent, and Mr. Chain for the Defendant emphasized this, that neither party was at home in the 'English language.

7. The Plaintiff made payment of US$3,000,000.00. It did not, however, pay the balance by 10th June as required by the contract. There was a copious exchange of telexes between the Defendant and a company called Dongil Trading Company Limited which appears to have been the Defendant's counterpart in Korea but which for the purpose of these proceedings was accepted to be the agent of the Plaintiff. These telexes show that at the end of May 1991, while the parties were still in negotiation, it was contemplated that payment would be made by way of letter of credit. By 6th June the Defendant was pressing for the balance to be paid by the Plaintiff to enable the Defendant to secure the goods from its supplier in the USA. The Defendant's bank, Bank of Credit and Commerce International, had issued an irrevocable confirmed purchase order (ICPO) against the initial payment, but was not willing to open a letter of credit for the balance until the Defendant put funds in the bank.

8. By 12th June the Plaintiff had become concerned about the ability of the Defendant to provide the goods. No performance bond had been provided. The Plaintiff was asking for details of where and when the goods would be available for shipment and stating that it would first purchase 20,000 tons on the basis of the initial payment. For its part, the Defendant continued to press for payment of the balance. As a precaution, the Defendant was already looking for a supply of urea from other sources.

9. By 20th June, the Defendant was still pressing for the balance of the payment. The Plaintiff, however, was still talking about a first purchase of 20,000 tons, but these to be out of a total of 60,000 tons.

10. By 1st July, the Plaintiff had still not paid the balance due under the contract and plainly was not going to pay. Various options were being discussed by the parties for the supply and purchase of different quantities of urea from different sources. Also under discussion was the question of the refund of Plaintiff's payment. The Defendant was to refund the payment after 20th July when the ICPO issued by its bank expired. The bank, of course, subsequently went into liquidation. No solution to their difficulties was reached by the parties. Ultimately, the Plaintiff issued its writ on 25th September 1991.

11. I can quickly dispose of two matters in issue between the parties. First, it was Mr. Chain's submission that it is at least arguable that the payment made by the Plaintiff was a deposit, and therefore not recoverable as a matter of law. On the material that was canvassed before me, it is plain that the payment was a part payment and not a deposit. It was far too substantial to be otherwise. Second, the contract was a simple contract for the sale and purchase of goods. It did not envisage, as Mr. Chain suggested was possible, the Defendant being required or expected to carry out extra work or incur expense in relation to the goods. The fact that the Defendant had to go to some lengths to secure or try to secure the goods from the seller in the USA was, in my view, no more than a natural concomitant of a contract of this nature.

12. For the Plaintiff, Mr. Faulkner argued that Art. 12 of the contract conferred on the Plaintiff a right to recover its initial payment if either the Plaintiff or Defendant did not perform the contract. I have some difficulty in accepting that. If it is the true construction of Art. 12, it confers a considerable benefit upon the Plaintiff and none on the Defendant. In any event, Art. 12 cannot, in my view, be looked at in isolation. It must be looked at in conjunction with Art. 13. If Mr. Faulkner's construction of Art. 12 is correct then Art. 13 would appear otiose. I would be reluctant to accept, however, that the parties inadvertently or otherwise drafted and agreed an empty provision. Looking at the two Articles together, it seems to me eminently arguable that Art. 12 provides for a situation where the vendor failed to perform and Art. 13 for the situation where the purchaser was in default. I agree with Mr. Chain that, not least having regard to the quaint English, the true construction of these Articles must be established in the light of evidence as to the factual background.

13. Mr. Chain also argued that Art. 12 will have to be looked at against the rule of construction that there is a presumption that, in the absence of express provision, it cannot have been the intention of the parties to a contract that either should be entitled to rely on his own breach to secure an advantage. He referred to Alghussein Establishment v. Eton College (1988) 1 W.L.R. 587. There the House of Lords confirmed that the rule applied not only to a party who relied on his own breach to avoid the contract but also to a party who sought to obtain a benefit under a continuing contract because of his breach. Mr. Chain said that the Plaintiff is not entitled to invoke its own breach and, in so doing, effectively compel the Defendant to accept the Plaintiff's repudiation of the contract.

14. In my view, there is force in Mr. Chain's submission. I find it difficult to accept that Art. 12 constitutes an express provision in favour of the Plaintiff. It seems to me that Art. 12 will have to be construed in the light of that authority.

15. Mr. Chain had to grapple, however, with Dies and Another v. British and International Mining and Finance Corporation, Limited (1939) 1 K.B. 724. That case had considerable similarity to the instant case. It involved the sale of a quantity of rifles and ammunition for f270,000.00. The purchaser paid ?100,000.00 but neither completed payment of the purchase price nor took delivery of the goods. Unlike the instant case, the vendors elected to treat the contract as at an end. Stable J. reviewed the authorities distinguishing between a deposit which is forfeitable on the purchaser's default and a part payment which is returnable. He decided that the distinction was one of general application and held that an innocent vendor must return a part payment to a purchaser who has defaulted subject to a claim and possible set off of damages for breach of contract. The ratio of the decision appears to have been the Judge's concern that if a vendor is allowed to keep a part payment, he may become the recipient of a windfall or unjust enrichment because the payment may be considerably in excess of any damages that may be awarded.

16. That decision has been treated with some reservation, to put the matter neutrally, by the Court of Appeal in Hyundai Shipbuilding and Heavy Industries Company Limited v. Pournaras (1978) 2 Lloyd's Law Reports 502 and by the House of Lords in Hyundai Heavy Industries Company Limited v. Papadopoulos and Others (1980) 1 W.L.R. 1129. In the 8th edition of his work, The Sale of Goods, Atiyah at p.547-551 expresses considerable doubt as to the correctness of the decision in Dies. In contrast, however, in Rover International Ltd, & Others v. Cannon Film Sales Limited (No. 3) (1989) 3 All E.R. 423 the Court of Appeal expressly followed Dies. As Mr. Faulkner submitted, Dies is therefore good law.

17. Mr. Chain, however, pointed out that Dies has not been considered in the light of the Eton College decision and the principles therein. Therefore, he said, it is still open to argument as to whether a purchaser, who is in breach of contract, can recover a part or complete payment from the vendor.

18. For my part, I am doubtful whether the decision in Dies is now capable of being attacked. I am attracted to the reasoning of Stable J. who, quite rightly in my view, was anxious that a vendor, albeit innocent, should not acquire a substantial and unearned windfall. Nonetheless, it seems to me that it bears examination and, taken together, all these matters have bearing upon the construction of Art. 12. I am satisfied that Art. 12 is not capable only of the somewhat simplistic construction put on it by Mr. Faulkner. In my judgment, the Defendant has an arguable and bona fide defence.

19. I do not, in the circumstances, need to deal with any other of the points raised by Mr. Chain. I observe, however, that it was part of Mr. Chain's argument in relation to the construction of Art. 12 that if the Plaintiff is correct, it would have the effect of compelling the Defendant to accept the Plaintiff's repudiation, a proposition which is unsound. He submitted that in fact the Defendant did not accept the Plaintiff's repudiation, at least not by the time the writ was issued in September 1991. He pressed his argument notwithstanding the many references in the correspondence to the return by the Defendant of the Plaintiff's payment. I accept the submission. It is clear that the Defendant was prepared to reimburse the Plaintiff if the business failed. Reimbursement was therefore contingent. The Defendant, in my view, was trying to salvage some deal with the Plaintiff from the wreckage of the contract. Until all prospect of a deal had fallen through, it is certainly arguable that the Defendant would not have made reimbursement.

20. That being so, said Mr. Chain, the contract was arguably not at an end when the writ was issued and the Plaintiff, therefore, had no claim to pursue as it had no entitlement to return of the payment. I found that argument difficult to follow. If the Plaintiff's construction of Art. 12 is correct which, as I have found, is open to debate, the Plaintiff is plainly entitled to return of the payment. If the Plaintiff's construction is not accepted, there is anyway a matter for trial at which acceptance may be an issue. Whether or not the Defendant had accepted the Plaintiff's repudiation by the issue of the writ seems to me to be immaterial at this stage.

21. In the circumstances, I allow the Defendant's appeal. The Defendant is to have unconditional leave to defend. The Plaintiff's cross appeal is dismissed. I make an order nisi that the Defendant should have the costs here and below in any event.