SIMARKA TRADING CO LTD v. JOSA TEXTILES MANUFACTURING CO LTD

Contract - sale of goods- whether deposit paid under prior contract refundable - whether subsequent contract was additional to or in substitution for prior contract - factual dispute over oral negotiations which culminated in rearrangement - Held: 1. New contract under which price fully paid replaced prior contract; 2. Deposit paid under prior contract refundable to plaintiff; 3. Judgment for plaintiff for $150,000 deposit sum.

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

H.C. Action No. 404 of 1984

____________

BETWEEN

_________________

__________

JUDGMENT

__________

1. Judgment was delivered in this action at the end of the trial. The narrow issue which arose was whether a deposit paid by the plaintiff to the defendant of $150,000, in relation to a contract for the sale of dyed cloth, was refundable. In giving judgment I ordered that the deposit be refunded by the defendant to the plaintiff and indicated that reasons for judgment would be handed down subsequently. I now proceed to do so.

2. The background to the dispute between the parties involves a series of three contracts under which the plaintiff purchased remiecotton cloth. The plaintiff is part of an American group of companies which purchases cloth in Hong Kong, has it manufactured into garments and then exports them to the United States. The defendant is a Hong Kong textile wholesaler which buys and sells cloth and also arranges for natural coloured cloth to be dyed.

3. The first contract of the series was entered on 18th August 1983 between the plaintiff and another Company called Wing Hing (Tangs) Fabrics Manufacturing Co. Ltd. The major shareholder of the latter Company was the father of a Mr. Thomas Tang, who with his wife, were the major shareholders of the defendant. Mr. Thomas Tang during the relevant period was involved in entering into contracts for the sale of cloth on behalf of both the plaintiff and Wing Hing (Tangs) Fabrics Manufacturing Co. Ltd. Under the first contract the latter company supplied the cloth and it was paid for in full by the plaintiff. No contractual disputes arose in relation to that contract and it was discharged by performance. However, subsequently both the plaintiff and Mr. Tang complained about the other's performance under that contract. The plaintiff asserted that when the cloth was opened out on the cutting table for manufacture into garments, dying defects became apparent, which rendered large parts of the cloth unuseable. Mr. Tang complained that the plaintiff delayed in selecting colours, taking delivery and making payment. Because of the fluctuating remie-cotton market, Mr. Tang alleged that it had lost more than $200,000, on this contract.

4. Mr. Tang further asserted that because of that loss, his father refused to permit Wing Hing (Tangs) Fabrics Manufacturing Co Ltd., to have any further dealings with the plaintiff. According to Mr. Thomas Tang it was for this reason that when the plaintiff sought to place a further order, he arranged for the cloth to be supplied by the defendant in which Mr. Thomas Tang and his wife, held the majority of shares. The plaintiff's witnesses stated that throughout they dealt with Mr. Thomas Tang and until the present dispute had assumed that both the defendant and Wing Hing (Tangs) Fabrics Manufacturing Co.Ltd., were related companies and members of the same group.

5. The principal persons involved in the dealings between the parties in relation to all three contracts were Mrs. Eileen Chan of the plaintiff and Mr. Thomas Tang of the defendant. Both gave evidence. The plaintiff also called Mr. Sydney Kantor, who is the Chief Executive of the plaintiff. It was undisputed that a second contract was entered into on 20th October 1983 between the plaintiff and the defendant. This contract was for the sale of 40,000 yards of dyed ramie-cotton by the defendant to the plaintiff at a price of $500,000. Payment under the first contract had been made in full under a letter of credit. Under the second contract the provisions for payment were different. A marginal deposit of $150,000 was payable upon the signing of the contract together with a letter of credit at sight which was to be established before 25th October 1983.

6. Miss Chan and Mr. Kantor stated that the variation of the original letter of credit terms from at sight to 45 days sight was sought by the plaintiff, because after the second contract was signed, inspection of the cloth under the first contract, revealed dyeing defects. The period of 45 days was inserted to enable the plaintiff to have time to inspect the cloth before payment became due. The plaintiff's witnesses agreed that it was Mr. Tang who required payment of the deposit. According to Mr. Tang, he required the deposit to safeguard the defendant from any loss in purchasing the remie-cotton on the fluctuating market which might be occasioned if there was any delay on the part of the plaintiff, similar to the alleged delays or the first contract. Originally he had sought a 40% deposit which, it seemed, would have substantially covered the cost price the defendant had to pay the Chinese export corporation, for the remie-cotton. Mrs. Chan had no recollection of any reason being advanced for the deposit but stated that she referred that condition to Mr. Kantor. Mr. Kantor stated that payment of a deposit was unusual but that at the time he was anxious to obtain the cloth and agreed to that condition in order to expedite delivery.

7. The plaintiff paid the deposit of $150,000 in terms of the second contract on 20th October 1983. Under the contract the letter of credit had to be opened and colour assortments supplied by 31st October 1983. Shortly before that date, Mr. Kantor stated that he became concerned with the dyeing defects which had become apparent in the cloth under the first contract. According to Mr. Kantor, when dyeing problems arise, the buyer is invariably faced with disputes between the seller and the dyer as to who was responsible for the defects. To avoid this problem arising, Mr. Kantor asked Mrs. Chan to attempt either to vary the contract to one for the sale of undyed natural cloth, or to have it cancelled. If natural cloth could be supplied Mr. Kantor stated his company would then arrange for it to be dyed, that he could control the dyeing process. Because of this change in attitude by the plaintiff, it did not supply the colour assortments or open the letter of credit by 31st October 1983.

8. The response to this delay by the defendant, is recorded in a telex received by the plaintiff from the defendant on 1st November 1983. The defendant in that telex gave the plaintiff until 11 a.m. on 2nd November 1983 to advise it of the number of the letter of credit, otherwise it reserved the right to sell the. cloth and claim damages. I record that it is common ground that during October and November 1983 the market price of remie-cotton was rising. Mrs. Chan referred that telex to Mr. Kantor and on 2nd November 1983 she sent a telex in reply, asking the defendant to call at her office that same day to discuss the contract.

9. As a result of the latter telex, two discussions were held on 2nd November 1983 between Mrs. Chan and Mr. Tang. Mrs. Chan stated that the position on 2nd November 1983 in respect of the cloth to be supplied under the second contract, was that the defendant was holding the 40,000 yards in its natural condition pending dyeing instructions and the opening of the letter of credit. Mrs. Chan stated that during the second discussion, Mr. Tang and she agreed that the contract for the dyed cloth was to be cancelled and that the plaintiff would purchase the same cloth, but in its natural undyed condition. The dyed price of $12.50 per yard was reduced to an undyed price of $10.50 per yard which produced a new lower contract price of $420,000. The plaintiff agreed to open a letter of credit for $420,000 without delay and the undyed cloth was to be delivered no later than 20th November 1983. Mrs. Char stated that it was further agreed that the defendant would refund the $150,000 paid under the cancelled second contract as follows:

10. I would record that the letter of credit for $420,000 was promptly opened by the plaintiff in favour of the defendant on 3rd November 1983. The contract permitted the defendant to supply the 40,000 yards subject to a 10% tolerance. In fact the defendant supplied within the upper limit of that tolerance, 44,000 yards of natural undyed cloth on 5th November 1983. Payment under the letter of credit for $420,000 was made to the defendant on 5th November 1983. The defendant on 5th November 1983 also issued an invoice for $462,000 which included the additional 4,000 yards which balance was paid in full. So by 5th November 1983 all the points of the alleged agreement set out in the plaintiff's telex of 3rd November 1983 had been performed except in relation to the deposit.

11. The defendant after receiving the plaintiff's telex, in reply sent a telex to the plaintiff, at 7.45 p.m. on 3rd November 1983 which Mrs. Chan received when she returned to her office on 4th November 1983. The defendant's telex alleged that the deposit provisions in the plaintiff's telex were not in conformity with the parties conversation on 3rd November 1983. The defendant's position in relation to the deposit was recorded in these sentences:

"We did only confirm that we would return a 45 days postdated check of the deposit HK$150,000.00 until you have honoured the documents we surrendered in negotiation of your L/C for the dyed fabric covered by our sales contract JTMOC/430/83. It has nothing to do with the L/C for grey. "

12. The direct conflict between the opposing positions, summarised in these telexes, reflected the subsequent differences in the pleadings, as well as the opposing stance of the parties at the trial.

13. Mrs. Chan when giving evidence was clearly not as experienced in the textile trade as Mr. Kantor and Mr. Tang. On occasions she was unable to recollect the precise details of what had occurred. However, she remained consistently emphatic, that the telex she sent on 3rd November 1983, accurately summarised the agreement she considered she had reached on 2nd November 1983 with Mr. Tang. During the telephone conversation when agreement was according to her, finally reached, she took her own note of the main points discussed and agreed. Those notes were produced in evidence and she was vigorously cross-examined on their contents. I accept she made those notes at the times she alleged. I also find that those notes are consistent with both her recollection of the discussion and the contents of the telex she thereafter sent to the defendant.

14. Mr. Kantor did not have any discussions with Mr. Tang. But he was able to give evidence of his several discussions with Mrs. Chan during the course of the negotiations which reinforced her evidence. When asked why he personally arranged the letter of credit for the full $450,000, instead of either deducting the amount of the prior deposit or exchanging it for the deposit, he stated that he was anxious to obtain the cloth and accepted that business risk. He stated that he would never have opened the letter of credit for the full amount if he had anticipated there would have been any difficulty in having the deposit refunded. In cross-examination he denied that his company had any liquidity problems and pointed to the prompt payment of the deposit and the immediate opening of the letter of credit once the variation to the contract was negotiated. He pointed out that as the market price for the cloth was rising, he was anxious to complete the transaction. He queried whether the defendant was experiencing financial difficulties, pointing out that, because of the increase in market price, had the purchase not proceeded, the defendant could have resold the cloth, at a higher price than it obtained from the plaintiff.

15. Turning to the defendant's position, it may be noted that its telex also contemplated the refund of the deposit but in different terms. That telex itself creates its own internal difficulties. Because it refers to documents surrendered by the defendant in negotiation for the letters of credit for the dyed goods. In fact no documents for the dyed goods were ever surrendered by the defendant. The goods were never dyed. The plaintiff never opened a letter of credit for dyed goods. However, the telex does allege that the sale of the undyed goods was a separate contract and that the contract for the dyed goods was not cancelled but still existed. It further suggested that upon the dyed goods contract being fully performed, the deposit would be refunded. This stance was in direct contrast, of course, to the plaintiff's assertion, that the contract for the dyed goods under which no letter of credit had been opened or documents surrendered, had been cancelled by agreement and replaced by a new contract for natural undyed goods.

16. Looking at the telexes alone, among the possibilities remaining, was that Mrs. Chan and Mr. Tang had completely misunderstood each other during the crucial discussions on 3rd November 1983. In reviewing the evidence I also reminded myself that while I found Mrs. Chan an honest witness, her recollection on some issues was vague and in view of her relative inexperience I therefore considered whether she may not have appreciated the precise terms of Mr. Tang's apparent agreement. Mr. Tang's evidence on what had occurred would obviously be of considerable importance, in resolving the conflict between the parties.

17. In fact it was extremely helpful if, in the event, fatal to the defence position. Mr. Tang was obviously a businessman of considerable experience and apparent aplomb. He agreed that during the discussions on 3rd November 1983 he agreed to supply the as yet undyed cloth, to the plaintiff in its natural state and as a consequence, the price was reduced from $12.50 to $10.50 per yard. He agreed that within 2 days thereafter, his company made delivery of the undyed cloth to the plaintiff and received payment in full forthwith. He agreed that his company had retained the deposit under the prior dyed cloth contract

18. Mr. Tang's evidence on the status of the dyed cloth contract was confused and contradictory. At first he stated that the contract was null and void and that the deposit had been forfeited. Later again he stated that the contract was not null and void. He stated that the contract for the sale of the undyed cloth was completed as a separate transaction and that the plaintiff continued to have an option to call upon the defendant to proceed with the dyed cloth contract. In his view that option would continue to exist for 2 or 3 months after the delivery of the undyed cloth. If during that later period the plaintiff exercised the option and the dyed contract was performed, the deposit would be refunded.

19. Mr. Tang went into considerable detail on the position of the rising market for remie cotton from August to December 1983. When it was put to him why he had not elected to resell the undyed cloth at a profit to a third party, he replied that making money was not the only principle to follow in business. Further, that one of his companies was in the dyeing business and that if the plaintiff exercised its option, that would provide more work for the dyeing company. He also stated that his company had pre-purchased the undyed raw cloth and was holding it in a godown pending dyeing. If he had not promptly agreed to vary the contract by selling it in its undyed state, his company would have incurred another full month's godown charges which he wished to avoid. In addition, the date for payment by his company of the pre-purchased undyed cloth had arrived. Obviously, the speed with which the changes to the dealings between the parties were agreed to avoided the defendant having to incur additional godown charges and facilitated payment by the defendant to its supplier.

20. After reviewing the whole of the oral and the documentary evidence I substantially preferred the evidence of the plaintiff's witnesses to that of the defendant's witness. I found that the plaintiff's telex of 3rd November 1983 accurately recorded the agreement reached between the parties. From those findings, I went on to hold that the plaintiff, on the balance of probabilities, had established its claim for the return of the deposit of $150,000. I also confirm that the plaintiff is entitled to interest on $75,000 from 5th November 1983 and on the remaining $75,000 from 28th December 1983 until judgment at the appropriate rates, during that period, from time to time prescribed by the Chief Justice for judgment debts. The plaintiff is also entitled to its costs to be taxed if not agreed.