M BERGMANN AG v. TSINLIEN METALS AND MINERALS CO. LTD.

HCCL198/1997

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO.198 OF 1997

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J U D G M E N T

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1. This is a contractual dispute concerning the sale of 5,000 MT of cold rolled steel sheets. The plaintiff seller, M Bergmann AG ("Bergmann"), is a Swiss company; the defendant buyer, Tsinlien Metals and Minerals Co. Ltd ("Tsinlien"), against whom the plaintiff seeks redress under various heads, is a Hong Kong company. Regrettably, the trial of this action has been somewhat one-sided in that just under one month prior to the commencement of this case, the defendant's solicitors successfully applied to come off the record, and no representative from the defendant company appeared before this court during the conduct of the hearing. Accordingly, Mr Reyes, counsel for the plaintiff, embarked upon the task of proving his case.

THE PLAINTIFF'S CASE

2. The background, in broad compass, is relatively straightforward. Moreover, this is a case which is relatively well documented, and Mr Reyes has taken the court with great care through the contemporaneous documentation.

3. The plaintiff's case essentially is as follows. By a contract ("the 1st Contract") dated 5 August 1996, Bergmann agreed to sell and Tsinlien to buy 5,000 MT (+/-5%) cold rolled steel sheets ex the Zaporozhstal Steel Works in the Ukraine, at US$386/MT CNF FO Beihai/Haikou/Zhanjiang at Tsinlien's option, with shipment before 30 September 1996.

4. Tsinlien repudiated the 1st Contract by failing to open a letter of credit in time or at all, and Bergmann accepted such repudiatory breach, thereby terminating the contract.

5. As a consequence, Bergmann attempted to mitigate its loss by entering into a 2nd Contract, dated 9 October 1996, for the sale of the entire goods to a company known as Nation Union Trading Limited ("Nation Union"), which appears to have been understood by the plaintiff to be affiliated in some way with Tsinlien. However, as matters transpired, Nation Union eventually only bought 1,483 MT of the goods at US$365/MT CFR FO CQD Hong Kong.

6. This situation left Bergmann's supplier, a company known as Major Industrial Trade Corporation ("MITC"), which operates out of New York, and with whom Bergmann had entered a 'back to back' contract dated 5 August 1996 for the supply of the steel sheets required to fulfill Bergmann's own contract with Tsinlien, with the unshipped balance of the cargo of steel sheets of some 3,489.465 MT. This balance was in turn sold by MITC (which itself has made a financial claim against Bergmann) to a Turkish company, Kaptanoglu Dis Ticaret AS ("KDT"), at a price of US$303/MT FOB ST.

7. In this action, Bergmann seeks recovery of all loss and damage, including its own liability to its supplier, MITC, occasioned by Tsinlien's breach of contract.

TSINLIEN'S PLEADED DEFENCES

8. In addition to making out his own case, Mr Reyes did his considerable best to guide the court through the defences which had been pleaded to the plaintiff's claim. He isolated five such defences, and for ease of reference I adopt his notation.

(1) That Bergmann had never provided a Cargo Readiness Notice

9. This was alleged to be a precondition to the opening by Tsinlien of the required letter of credit under the 1st Contract. Whilst this may have possessed an initial attraction, for pleading purposes at any rate, closer examination of the contemporary documentation reveals that there is here little of substance. Mr Reyes submitted that the demonstrable sequence of events belied this assertion, pointing out that Tsinlien clearly had waived any right to a CRN as a precondition to the opening of a letter of credit. Since Tsinlien could not open a letter of intent by 15 August 1996, as required by the 1st Contract, it offered a "simple letter of credit" in place. This offer to open a letter of credit instead of a letter of intent was accepted by Bergmann, and Tsinlien clearly never asked for nor insisted upon a CRN.

10. I agree. In my view, there is nothing in this plea.

(2) A "tripartite agreement" resulting in a mutual contractual release

11. It is alleged that it was agreed, in return for Bergmann and Tsinlien mutually releasing each other from all claims and liabilities under the 1st Contract, that Nation Union would enter into the 2nd Contract with Bergmann.

12. There is no evidence of this alleged oral 'novation', nor is it supported by contemporaneous documents, nor (for that matter) does it make commercial sense. And in any event, as Mr Reyes also pointed out, it runs contrary to clauses 18 and 19 of Bergmann's contract with Tsinlien.

13. I reject this as a line of defence. I can see no reason, in principle, why Bergmann's relationship with Nation Union, necessitated as it was by Tsinlien's contractual breach, should result (as is said to have been agreed) in letting Tsinlien off the contractual 'hook'.

(3) Failure properly to mitigate loss

14. It is alleged in the defence that Bergmann failed properly to mitigate its loss by failing to insist upon the full performance of the Nation Union contract.

15. Mr Reyes submitted, correctly in my view, that this was nothing to the point, and that it was open to the plaintiff to elect who to sue. Bergmann was only required to act reasonably in mitigation of it loss, and thus, argued Mr Reyes, demonstrably it had so done. Moreover, he pointed out that the standard of reasonableness is not high given that the defendant is in contractual breach, citing in this connection McGregor on Damages, 16th Ed. (at paragraphs 282-288, 299 and 322-332).

16. I accept the contention that there is no substance in this argument either.

(4) Had Bergmann delivered under the 1st Contract, the goods would have been damaged or of poor quality

17. It is said that, in consequence of the delivery of such goods, Tsinlien could have claimed consequential damages of about US$50/MT. This is a plea for which there is no evidential foundation whatever, and apparently the issue of expert evidence was not raised in this case at any stage. Copies of certain photos appear in the case papers. They are said to be of the 1,483.900 MT delivered to Nation Union under the 2nd Contract, albeit this is not apparent from anything in the photos themselves. Nor is it known by whom or when the photographs were taken or even, for that matter, of what the photos actually are about. As Mr Reyes pointed out, whatever Mr Lu of Tsinlien may or may not have seen in an unidentified sub-buyer's premises as to the poor quality of steel manufactured by a "Zaporozhstal Works" for another contract is irrelevant to these proceedings. Mr Reyes also submitted that Nation Union had made no claim on Bergmann's delivery, there was no counterclaim by Tsinlien in this case, and the Turkish sub-buyer in the mitigation exercise, KDT, had made no complaint as to the goods delivered by MITC.

18. In my judgment, on the present evidence, this line of defence is a non-starter.

(5) Bergmann has only itself to blame for its financial loss due to MITC, especially after 10 December 1996

19. Mr Reyes characterised this plea (at paragraphs 11(i)-(j) in the Defence) as "baroque". That may or may not be an apt description, but I agree that this plea is untenable on the material presently before the court.

LIABILITY

20. I am persuaded that the plaintiff has made out its case against the defendant herein. The situation is tolerably clear on the evidence of the contemporaneous documents, all of which were revealed on discovery and to none of which was objection taken as to authenticity. On Mr Reyes' application I admitted into evidence, pursuant to the hearsay provisions, the witness statement of Mr Oleg Kovaled, who at the time of Bergmann's dealings, the subject of this action, with Tsinlien, was the Authorised Representative of Bergmann - indeed, correspondence under Mr Kovaled's hand appears frequently in the contemporaneous documents. I am told that Mr Kovaled has been precluded from traveling to Hong Kong at the eleventh hour due to a heart condition. His witness statement was essentially a narrative relating to the existing documentation, and in the exercise of my discretion, I permitted it to go into evidence. Ironically, as matters transpired, had his health not prevented travel, he would merely have been required to produce his statement under oath absent cross-examination thereon.

21. Accordingly, I hold in favour of the plaintiff on the issue of liability, and find that in failing to open a letter of credit, or to provide alternative timeous means of payment, the defendant was in repudiatory breach of contract, which the plaintiff accepted, and that the contract was terminated on or about 4 October 1996 upon the passing of the shipment deadline.

QUANTUM

22. Paragraph 9 of the plaintiff's Statement of Claim pleads that the defendant's breaches of contract "caused the Plaintiff loss and/or damage and exposed them to liability to their suppliers, MITC, for additional storage costs and damages".

23. Particulars of loss and damage are thereafter provided. Six categories of such loss are therein set out, so that the total of the claim is US$430,151.53, after giving credit for the sum of US$25,000, which represented the fruits of a performance bond provided by Nation Union which was encashed upon Nation Union failing to fulfill its own obligations.

24. These categories of damage have been clearly explained by Mr Reyes, and on the evidence as it stands, I have no difficulty with the first five such categories, which in my view are amply made out. Mr Reyes, in this context, referred the court to McGregor, op.cit., at paragraphs 937-938, and to the well-known English Court of Appeal case of Trans Trust S.P.R.L. v. Danubian Trading Co. Ltd, [1952] 2 QB 297.

25. I do, however, find difficulty with the claim under Head 6 as pleaded, which in substance, as Mr Reyes explained it, is referable to MITC's cost of funds. Quite apart from a difficulty that may arise with varying interest rates, after overnight reflection, I am disinclined to allow this head of claim, notwithstanding Mr Reyes' persuasive argument that this was recoverable under the second limb of Hadley v. Baxendale. Whilst I accept that the contracts were indeed on a 'back to back' basis and that clause 12.1 of the contract with the plaintiff speaks of 'direct and indirect' losses, nevertheless on the present state of the evidence before the court, in my judgment this particular head falls on the wrong side of the line, and the plaintiff fails to get home in this regard. Accordingly, I disallow this specific head of claim.

ORDER

26. As a result of the foregoing, therefore, the Order of the court is that there is to be judgment in favour of the plaintiff against the defendant in the sum of US$369,680.80.

27. As to interest, in my view it is impracticable in this case to do other than to adopt a broad brush approach, particularly given the different constituents of the claim. I order that interest is to run on the principal sum as aforesaid at the rate of 1% over US dollar prime from time to time prevailing from the date of the issue of the writ herein (that is 30 October 1997) to the date of judgment herein, and thereafter on the said principal sum at the judgment rate from time to time prevailing until payment.

28. Turning now to costs. Mr Reyes submits that in this case it is appropriate immediately to make a gross sum assessment pursuant to the provisions of Order 62, rule 9, RHC. He suggests, in my view with justification, that in the particular circumstances his client wishes to avoid the additional cost of taxation. In this regard, he has handed up a schedule of costs incurred, which reveals that the total fees incurred are HK$497,739.52, together with disbursements of some HK$143,737.90.

29. I am minded to accede to this request on this occasion (albeit this court is often resistant so to do) and hereby made a gross sum assessment of HK$490,000.00. Accordingly, pursuant to this assessment, the defendant is to pay to the plaintiff the sum of HK$490,000.00 as the assessed costs of this action.

30. Finally, given that the plaintiff is a foreign company, I am told that it was required to pay a sum of money into court as security for costs. I order that such sum be paid out to the plaintiff's solicitors upon appropriate application to the court official seized with administering these matters.

31. I thank counsel for his assistance.