BO HU DEVELOPMENT CO. LTD. v. SUEN KWAI KAM AND ANOTHER

CACV 148/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 148 OF 2002

(ON APPEAL FROM HCA 16913 OF 1999)

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J U D G M E N T

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Hon Mayo VP (giving the judgment of the Court):

1. This is an appeal from a judgment of Deputy High Court Judge Toh. She dismissed the plaintiff's claim for breach of contract.

2. The contract in question was an oral contract.

3. The plaintiff is a company incorporated in the People's Republic of China. The company was represented by Mr Chen Rong Tian (Mr Chen) who at the relevant time was its general manager.

4. D1 is a majority shareholder and director of D2 and for all practical purposes the interests of the two defendants can be considered as being the same.

5. A Singaporean company Lubrizol Southeast Asia (Pte) Limited (Lubrizol) agreed to sell to a Mainland Chinese company Maoming Lidren Chemical Industry Company Limited (Maoming) a quantity of lubricant additive. There were two purchase contracts. The first dated 6 April 1999 and the second 15 April 1999. The total purchase price was US$324,690.19.

6. The role of the parties to this litigation was to facilitate the financing of these contracts.

7. Mr Chen entered into two agency agreements with Maoming dated 9 and 18 April under which it was agreed that the plaintiff would open a letter of credit with Lubrizol for the purchase of the lubricant additive.

8. Mr Chen then entered into negotiations with D1 and it is common ground that an oral agreement was concluded between them whereby it was agreed that the defendants would assist in opening a letter of credit in favour of Lubrizol in respect of the said contracts. Mr Chen faxed copies of the contracts to D1.

9. It was agreed that D1 would be entitled to receive 3% of the total amount payable under the contracts upon the successful issue of the letters of credit.

10. It was also stipulated that the plaintiff must pay to D1 30% of the contract amount prior to the issue of the letter of credit and that the balance of the purchase price and the commission would be payable within 60 days of the delivery of the lubricant additive to Maoming.

11. There is no dispute between the parties as to these terms.

12. On 11 and 12 May the plaintiff deposited with D2 a total of HK$754,905.00 which moneys represented 30% of the purchase price of the goods.

13. On 20 May the plaintiff deposited a further HK$30,000.00 which represented part payment of the commission due to the defendants.

14. It is agreed that on 29 May D1 faxed to the plaintiff an application form of the Sin Hua Bank for a letter of credit.

15. Mr Chen signed the application form and returned it to D1.

16. She then issued the letter of credit and forwarded it to Lubrizol.

17. On or about 9 June Lubrizol pointed out some errors on the face of the letter of credit and required that amendments be effected to it.

18. D1 refused to countenance the proposed amendments.

19. The main issue before the Judge was the nature and extent of the oral discussions between Mr Chen and D1 on the subject of any amendments which may be required to the letter of credit.

20. D1's evidence was to the effect that she made it very clear to Mr Chen that she would not agree to any amendments whatever.

21. Mr Chen on the contrary testified that D1 assured him that the letter of credit could be amended so long as he agreed to defray any additional costs occasioned by the amendments.

22. Having heard the evidence of these two witnesses the Judge resolved the issue in favour of the defendants.

23. In doing so one of the matters she took into consideration was the presence of some Chinese characters appearing on the application form for the letter of credit which appeared to emanate from the plaintiff's office.

24. The Judge loosely translated these characters as stating "The plaintiff through Mr Chen had agreed the contents of the application and that he confirms it by signing the document and that there will be no dispute".

25. The plaintiff contended that this finding was wrong in law. What the Judge should have done was to imply a term in the contract that the letter of credit could be amended.

26. In the light of D1's evidence, which was accepted by the Judge that it had specifically been agreed by the parties that no amendments would be allowed to the letter of credit it is difficult to see how any such term could be implied.

27. It was also complained that the Judge attached undue importance to the Chinese characters above referred to.

28. No satisfactory reason has been forthcoming as to why the Judge should not have been entitled to weigh this evidence in the balance.

29. In the final analysis what we are being invited to do is to retry this case and substitute our own findings for those of the Judge below. There can be no merit in adopting such an approach.

30. Miss Ip, counsel for the plaintiff, was unable to point to any factual matter where it was manifest that the Judge had been in error.

31. The next matter which had to be resolved by the Judge was whether D1 was entitled to apply the moneys which had been paid as a deposit towards the commission payable.

32. From the facts which have been briefly outlined in this judgment it is clear that the defendants performed their part of the contract concluded between the parties.

33. The letter of credit was opened on the application of the plaintiff within a reasonable time. This being the case the defendants were entitled to receive the commission payable to them.

34. The next question which was to be considered is whether the Judge was in error when she found that the plaintiff was not entitled to restitution of the HK$784,905.00 he was claiming.

35. The rationale for this finding was that she was satisfied that the damages being claimed by the defendants were not a penalty and could be justified on the basis of the risk which the defendants had had to assume.

36. The Judge dealt with the matter in this way in her judgment:

"22. As to the restitution of the sum of HK$784,905.00 which is 30% of the deposit paid into the account of the 2nd Defendant by Mr Chen, the Plaintiff claimed that it was a penalty if the Defendants were allowed to keep that sum. Miss Suen said in evidence that she had made it very clear to Mr Chen that if the Plaintiff should fail to comply with the terms and conditions of the issue for the Letter of Credit, the said deposit of 30% will be forfeited as compensation and that Mr Chen had agreed to that. At the same time, Mr Chen had also agreed to pay a commission of 3% of the amount of the Letter of Credit upon the issue of the Letter of Credit to the Plaintiff. Mr Chen denies this. I have already observed that Mr Chen was, as he himself admitted, negligent when pursuing this matter of the issue of the Letter of Credit on behalf of Maoming. I was not impressed with his evidence and I accept the evidence of Miss Suen that she would have been anxious to stress the forfeiture of the deposit should the Plaintiff fail to comply with the conditions for the issue of the Letter of Credit and that the 3% commission would be paid to her for her service. As she said in the witness box, she would be sharing the 3% she would receive from the Plaintiff with the Letter of Credit applicant. As the Letter of Credit applicant would be taking a risk in this matter he would be anxious first of all, that once the Letter of Credit is issued that his credit line is ensured from any loss and that can only be done if full payment was made prior to the shipment of the goods. That is why the Letter of Credit applicant in the specimen application form at page 43 of the Agreed Bundle of Documents had stressed that partial shipment was not allowed. And that the goods had to be inspected prior to shipment by a representative of the Letter of Credit applicant.

23. I have also come to conclusion that the 30% forfeiture is not a penalty but a reasonable sum in view of the fact that the Letter of Credit applicant was taking a risk by issuing the Letter of Credit on behalf of the Plaintiff, who was only acting as an agent of Maoming, which is a mainland company. So the Plaintiff's claim for restitution against both Defendants also fails."

37. With the greatest respect to the Judge it is difficult to see how she was able to come to this conclusion.

38. What has to be considered is the nature and extent of the risk disclosed by the evidence which was before the Judge.

39. In this connection it is necessary to have regard to the terms of the letter of credit which was issued by the Sin Hua Bank.

40. These provide inter alia as follows:

"ISSUE OF A DOCUMENTARY CREDIT PAGE 02 SWIFT

2. FULL SET (3/3) OF ORIGINAL CLEAN ON BOARD OCEAN BILLS OF LADING MADE OUT TO ORDER AND BLANK ENDORSED MARKED 'FREIGHT PREPAID' AND NOTIFY APPLICANT WITH FULL ADDRESS.

3. PACKING LIST IN QUADRUPLICATE.

4. INSPECTION CERTIFICATE ISSUED AND SIGNED BY AUTHORISED PERSON(S) OF THE APPLICANT (WHOSE SIGNATURE MUST BE IN CONFORMITY WITH OUR FILE) CERTIFYING THAT THE GOODS HAD BEEN INSPECTED IN GOOD ORDER AND CONDITION MENTIONING THE INVOICE VALUE AND THIS CREDIT NUMBER."

41. It was accordingly the case that the applicant of the letter of credit could withhold issuing the Inspection Certificate referred to until it was satisfied that the balance of the 70% which remained outstanding had been secured. In such circumstances, it is not possible to see what risk was being assumed by the applicant or, for that matter, the defendants.

42. It is not clear if D1 or D2 was the applicant of the letter of credit. The Judge has not made any finding in that regard. Certainly there could be no question of the risk being such as to justify an order that the defendants were entitled to retain the 30% part payment which had been paid by the plaintiff.

43. Mr So for the defendants submitted that evidence had been given before the Judge by D1 that a considerable risk had been assumed by her in the transaction. This however had not been particularised. As we have already indicated, it is not possible on the available evidence to see how this arose.

44. This being the case there was no satisfactory evidence before the Judge concerning the risk.

45. As this had not been established there was no basis to justify the amount which was being claimed for the breach of contract in question. Having regard to the very substantial amount involved one must inevitably come to a conclusion that the amount being claimed constitutes a penalty and is thus unenforceable.

46. The consequence of all of this is that to a large extent this appeal must succeed.

47. The defendants are only entitled to the 3% commission which the Judge found was payable to them.

48. Subject to any deduction which may be necessary to take cognisance of this the plaintiff is entitled to the return of the part payment of the purchase price they paid.

49. The counterclaim is then rendered redundant.

50. To this extent the appeal is successful. We make an order nisi that the plaintiff should have the costs of this appeal and the costs before the Judge below.