NIKKO BOEKI KABUSHIKI KAISHA v. MOTIVASIA HONG KONG LTD. AND ANOTHER

CACV 262/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 262 OF 1999

(On Appeal from HCA 12870 of 1995)

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J U D G M E N T

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Seagroatt J:

1. This is an appeal by the Plaintiffs against the judgment of Mr. Justice Stone in which on the 16th June of this year he dismissed the Plaintiff's claim against the two Defendant companies.

2. The claim was in respect of part of a quantity of porcelain goods which the Defendants refused to accept. It formed the balance of a large consignment approximately half of which the Defendants had already accepted and paid for in equal proportions. The issue on the face of it is whether the Defendants had contracted to purchase the balance. But this manufactured consignment has a history bearing on the dispute, in the form of an earlier contract to sell the total consignment to the 1st Defendant only.

3. The 1st Defendant contracted by a Purchase Order (009/94) dated 26th October 1994 to accept and pay for over 800,000 pieces of porcelain to be supplied by the Plaintiff company, a Japanese exporter. These goods were to be manufactured in Japan. Prior to the signing of this purchase order, the 1st Defendant had entered into a contract with the Wellcome Supermarket company to supply the same goods.

4. The total cost of the goods was to be approximately USD6m., or a little over ￥547m., payment being made as to 50% by Letter of Credit and 50% Documents against Acceptance. Mr. Hayashi, who conducted the business on behalf of the Plaintiff, and a Mr. Tatham who was a director and shareholder of the 1st Defendant company were acquainted by reason of earlier business transactions when Mr. Tatham was working for the Wallace Group. They were the negotiating representatives on behalf of the companies concerned in this particular contract. There is no disagreement that this contract came into existence.

5. At some stage Mr. Hayashi was concerned about the mode and therefore security of payment. He would have preferred all payment by Letter of Credit. The 1st Defendant in turn was concerned about its financial wherewithal and ability to secure adequate financial support. It turned to the 2nd Defendant a company which held 40% of its share holding. They had at least three directors in common.

6. A meeting took place on the 3rd November 1994. It was attended by a Mr. Robertson for the 1st Defendant, Messrs. Bloch, Dorfman and Tang (or Thong) for the 2nd Defendant and Mr. Hayashi for the Plaintiff. The Plaintiffs' case was that it was agreed between the parties at that meeting that in place of the original agreement by which only the 1st Defendant had contracted to purchase the goods, each Defendant agreed to purchase 50% of the goods.

7. The Learned Judge, having heard the evidence concerning this meeting held that it was nothing other than a negotiation. He accepted the evidence of the representatives of the 2nd Defendant that it was solely for that purpose, though he did not spell out in his judgment the extent of it. He appeared to be sceptical of the suggestion or argument that Messrs. Dorfman and Tang were unaware of the 1st Defendant's obligation under the original contract. He also accepted the evidence of Messrs. Block and Tang (or Thong) that financial arrangements (by that I assume was meant payment for the goods) were subject to the approval of the Plaintiff's bank, and to the placement of a firm order.

8. The Learned Judge went on to consider the form and content of four purchase orders dated 20th December 1994 - two signed by the 1st Defendant, numbers 009/94/01 and 03, and two by the 2nd Defendant, 009/94/02 and 04. Two of them, one signed by each Defendant (03 and 04) contained the following proviso in relation to the other purchase order of the respective Defendants.

"The Purchaser has placed P.O. (Purchase Order) No. 009/94/01(02) on the same date as this Purchase Order and shall confirm its commitments under this Purchase Order on or before February 28th 1995 in writing."

The parties have accepted this clause as purporting to set out that the order was subject to confirmation by the specified date.

9. It is common ground that the Plaintiff never accepted this proviso or option. For some reason not clear to me and equally unclear to the Learned Judge, those purchase orders with the proviso, were replaced by revised purchase orders dated 25th January 1995, but containing the same proviso.

10. The Judge's finding (at p.14 of his judgment) that the Plaintiff had failed to establish a concluded contract at the meeting of 3rd November 1994 is largely based on two extracts from Mr. Hayashi's evidence (pp.65-66 of the transcript)(Day 2). They are answers to somewhat convoluted questions in cross-examination. I am bound to say that I would find it difficult to draw the same conclusion as the trial Judge, from those two exchanges. The Judge was himself unhappy with the form of the question, the circumlocution as he justifiably described it on p.65 of the transcript. The second attempt, in my view, compounded the problem. All that those two exchanges indicate safely to me is that Mr. Hayashi was, in the first stating that receipt of the purchase orders of 20th December was the first time he knew the Defendants were not confirming the full orders; and in the second (p.66 of the transcript) that no one said anything directly to Nikko (the Plaintiff) at a meeting or in a telephone conversation to the effect that that they were not placing a confirmed order. The Judge in referring to those two exchanges said that it followed that no agreement was made on 3rd November 1994 as pleaded on behalf of the Plaintiff. I have indicated that I do not think that is a conclusion which can safely or properly be drawn from that evidence. It is to be noted that it is the only evidence directly referred to by the Judge on this crucial issue. However as will be apparent the Learned Judge was in my respectful view correct to conclude that there was, in fact, no new contract on that date.

11. Mr. Kayashi's evidence as to this 3rd November meeting is in short compass. It appears at pp.78 to 85 of Day 1 of the Transcript. He knew the 2nd Defendant was to become involved by 2nd November when Dun & Bradstreet carried out a check on Herald (p.215). It was not an encouraging financial picture. One can readily understand Mr. Hayashi's concern as to the financial reliability of the 2nd Defendant. The meeting which was to take place the next day was only eight days after the concluded contract with the 1st Defendant alone.

12. The meeting on 3rd November 1994 took place at Herald's offices in Hong Kong. The text of the discussion and its purpose are encapsulated on pp.79-80 (from line 21); Mr. Hayashi said:

"What we discussed in that meeting was that since we received a purchase order from Motivasia on October 26th , in that purchase order the payment term was stated 50 per cent Letter of Credit, another 50 per cent D/A, and what I wanted to do was the following two things: one, to confirm the payment, second, if possible I wanted them to change the payment, improve the payment terms of possibly 100 per cent by letter of credit, and that is what I asked them."

That is an unequivocal piece of evidence. Mr. Hayashi went on to say that Mr. Dorfman assured him "that Herald was a big company and there should be no problem in financing" but because of demands upon their financial resources, payment would have to be 50% by Letter of Credit and 50% by D/A. Mr. Hayashi agreed that the discussion had centred on Herald's ability to make payment for this transaction. The question by the Plaintiffs' counsel specifically referred to "this transaction". This transaction meant no more and no less than the contract of 26th October to supply all the porcelain goods to Motivasia. Mr. Hayashi said that he also wanted "to confirm their [Herald's] commitment". That must mean to the payment for the transaction. When asked by his counsel to explain why he sought confirmation of Herald's commitment when all correspondence had been with Motivasia he replied that Mr. Tatham told him that Motivasia could not finance the contract alone and had to rely on Herald. He went on to say, in answer to the question (p.81 - line 6-8).

Q: "Did you understand that to mean that Herald were providing the finance, or that Herald would take up a share of the project."

A: "Herald will finance 100 per cent."

The only reference thereafter was to the order/contract of 26th October. That effectively is the end of the evidence as to the substance of the meeting of 3rd November. Apart from the one question to which I have referred as to what was meant by "Herald's commitment", the examination-in-chief did not direct Mr. Hayashi to the Plaintiff's pleaded case. Furthermore, at no time were any of the documents evidencing the contract with Motivasia, and between Motivasia & Herald, put to him in order to form the basis of any argument in support of the pleaded case. That then was the state of the case on the afternoon of the first day. It then proceeded for four more days. I do not need to review the evidence of the representatives of the Defendants which the Learned Judge dealt with in short form - the Defendants' case was that there was no new contract agreed at the meeting of the 3rd November by which Herald undertook to order and accept 50% of the goods.

13. In my view, it is beyond argument that the 3rd November meeting proceeded on the basis of the existing contract by Motivasia to purchase all the goods. The meeting was solely concerned with the mechanics of payment, Herald intervening to assist Motivasia as the financing company. That is how Mr. Hayashi approached the meeting from the start. Indeed from Mr. Hayashi's own statement, prepared for the purposes of this litigation, it is difficult if not impossible, to discern any assertion to the effect that on 3rd November the agreement was varied or replaced by one in which the two Defendants each agreed to order and pay for 50% of the goods.

14. This is of course entirely inconsistent with what the learned Judge expresses at pp.11/12 of his judgment (pp.17-18 of the Bundle) to be "accepted now by both parties that the original agreement with Motivasia was subsequently varied and that Motivasia was released from its pre-existing liability to purchase the entire quantity of the porcelain."

15. That statement cannot have proceeded from an understanding of the evidence but the Judge was misled by it. It seems to have been based on what counsel for the Plaintiff said at p.24 of the transcript (Day 1) in opening, (and later submissions by the Defendant's counsel):

"The common ground seems to be this: that there was an agreement, the original purchase order; that agreement was varied; the effect of the variation was that both Herald and Motivasia agreed to purchase some goods from Nikko ...... the amount of the goods being one quarter of the total of the original."

I regret that I just do not understand this statement of what was common ground. It was not common ground at all at the outset and the evidence did not support it. The statement of Mr. Hayashi does not support it. Should the Plaintiff be bound by it? My unqualified answer is that it should not. The statement proceeded from a misunderstanding of the Plaintiff's case and if the judge purported to make that a finding of fact, and I do not understand him to have done that, then it was in conflict with the evidence he had heard. It would be patently unjust and make a travesty of this case if the Plaintiff were to be so saddled. In fact as will appear later in this judgment, to do so would be to ignore the overwhelming inferences to be drawn from the documentation and manoeuvring on the part of the Defendants which followed from that meeting.

16. When Mr. Harris opened his case [Transcript Day 3 - p.2/3 from line 24] he said:

"They (referring to the Plaintiff) say, and we feel able to accept this line of analysis of what the parties intended, that the 26th October agreement was simply replaced by whatever arrangements were put in place in December."

Not surprisingly the Plaintiff's counsel immediately rejected that, though Mr. Harris' statement seemed to proceed from the Plaintiff's opening statement rather than from anything else. In his final submission [Day 5 - p.40] Mr. Harris reduced that statement to - "It is accepted by both parties that the 26th October agreement was subsequently varied."

17. The only common ground at the outset of the case was that the agreement of the 26th October was varied; there was no common ground as to how, when or in what form it was varied. But the evidence, as it emerged, was to the effect that only the liability for payment was changed by agreement.

18. Another problem however remains and that is the state of the Plaintiff's pleaded case. In a document which is not distinguished for its clarity - and it is a Re-Amended Statement of Claim - it pleads the first agreement as varied by a second agreement. It alleges the varied contract was for the sale of half the goods to the 1st Defendant and half to the 2nd Defendant.

19. At paragraph 12 it alleges delivery of one quarter of the goods to the 1st Defendant under the first Agreement as varied, and its refusal to accept another quarter of the goods as a wrongful repudiation of the first agreement. In relation to the 2nd Defendant it then embarks upon a case based on the second agreement.

20. There is a hint that the pleader is trying to keep his options open under the two alleged agreements - in other words he has not abandoned breach of the first agreement as his cause of action. However, in the prayer for damages at the end of the pleading, he omits to claim in the alternative the full amount of the outstanding balance against the 1st Defendant under the first agreement.

21. Mr. Ling who appears for the Plaintiff in this appeal, but did not appear in the court below, and did not settle the problematic pleading, has invited us to consider the prayer for "further or other relief" as being wide enough to include an alternative prayer for the price of goods ordered under the first contract. I think that would be importing to the words a construction which is wrong and it would not be appropriate when there is clearly a claim for a liquidated sum. However, in my view, the Defendants would not have been prejudiced if an application had been made at trial to amend. The Defendant's case has always been that the original agreement was varied to permit the Defendants to accept only half the goods between them. It is clear that the Plaintiff never accepted the purported option clause. If the Plaintiff's and Defendants' primary contentions fail the first agreement must be the operative one. One cannot have a state of affairs where no agreement subsisted. However no such application was made at trial either before or after Mr. Hayashi's evidence, and none has been made in the course of this appeal.

22. Mr. Ling's submission is that the pleaded case does in fact cover the alternative position of a claim against Motivasia (the 1st Defendant) on the original contract, for the balance of the goods. Regretfully, I cannot agree with him. Although the pleading at some stage flirts with the notion of a claim based on the original contract, it falls short of actually crystallising it and the prayer for damages, as I have indicated, fails to cover that fall back position which understandably the Plaintiff would like to have held.

23. What then was the upshot of the meeting of 3rd November? Mr. Hayashi's evidence that he was looking for security in respect of payment for the ordered goods already under manufacture is borne out by all that proceeded thereafter. It is clear to me that Herald undertook payment for 50% of the goods in order to secure Motivasia's position and need for financial support. Only by so doing could the contract be given the financial base which it was in the interests of all parties to secure. Mr. Hayashi wanted a Letter of Credit for all payment but Mr. Dorfman was able to persuade him to accept that 50% would be on D/A because of Herald's purported financial standing. There was no mention at that meeting of any reservation of half the order on an option basis. No witness for the Defendants attempts to say so.

24. An examination of the documentation over the period I have mentioned is necessary

25. On the 7th November 1994 the Plaintiff telexed or faxed the 1st Defendant referring to the discussions on the 3rd November seeking confirmation in relation to the opening of the Letter of Credit, and the sending by airmail of the balance sheet of the 2nd Defendant certified by Certified Public Accountant on 4th November - if it had not been done, it was to be sent express airmail. Item 3 is very significant. It required re-issue of the purchase order by Motivasia for L/C payment of 2.75 hundred million yen (i.e. half the total contract price) and by Herald Holdings for D.A. 50 day payment of 2.75 hundred million yen (i.e. the other half of the total contract price). Shipments were to be in respect of the 50% by end February 1995; the next 25% by end March 1995 and the final 25% by the end of April 1995. There was also to be a payment to the Plaintiffs in respect of the interest and insurance for the 50 day D/A.

26. The reply to this from the 1st Defendant dated 8th November confirmed that the annual report of Herald was sent out that day, and that the Purchase Order for the whole of the stock (my underlining) would be with Nikko hopefully by Friday, the delay being caused by the signatory for the 2nd Defendant being out of town. It put forward Motivasia's desire to pay for the first 50% by L/C for half and 50 day D/A for the other half. There is nothing in this faxed reply to suggest that there was other than a concluded arrangement on the 3rd November that each defendant would bear 50% of the obligation to pay. In fact quite the reverse.

27. The next document emanating from the Plaintiff, dated the 9th November, is described as a note. It is a comprehensive note of the two halves of the complete order. It itemises those for the 1st Defendant under Letter of Credit payment and those for the 2nd Defendant under a 50 day D.A. payment.

28. Then comes (at p.224) the Purchase Order 009/94-01 (2nd Revised) from the 1st Defendant dated 11th November but sent on 12th December by fax, for 50% of the goods to be supplied. It confirms payment by Letter of Credit. It is signed on behalf of the 1st Defendant.

29. Bearing the same date is the 1st Defendant's Purchase Order 009/94/02 for the second half of the goods to be supplied. It confirms payment by 50 day D.A. This carries the Remark - "This Purchase Order represents our forecasted requirements and can only be officially confirmed at a later date."

30. On the 17th November the Plaintiff sent a revised schedule of the goods, again divided more or less equally between the 1st and 2nd Defendants, requesting revised purchase orders to confirm. There was also a request to confirm when the telegraphic transfer of USD30,000 or 40,000 could be made in the name of the 2nd Defendant. The same day Motivasia faxed an inquiry as to whether shipment could start in mid-January i.e. earlier than originally agreed.

31. There was a telephone conversation on the 22nd November followed by a faxed letter of 24th November from the Plaintiff. The telegraphic transfer of USD30,000 had not arrived, and Motivasia was asked to check.

32. A note of urgency creeps in to a faxed letter of 5th December from the Plaintiff to the 1st Defendant.

"Please advise by return fax the exact date you can open L/C for the first part (i.e. 25% of goods).

Re-Revised P.O. issued by Herald We need to get above P.O. A.S.A.P. which must be shown as below."

33. Two highly significant letters are exchanged between the Defendants. On the 6th December from Motivasia to Herald is confirmation of an agreement by both to fund the purchase of the stock (in total). Point 6 has the telling sentence - "The Purchase Orders have to (be?) put in place now to ensure production." Point 7 says "Our suppliers have been very accommodating by commencing production before we issued any P.O. Thus ensuring that they can meet our production deadlines.

34. Herald's letter of the same date to Motivasia reveals Herald financial state in general and a desire to have the Plaintiff "carry back the inventory so that we can draw upon it quickly if we see that the programme is selling through." I have no doubt that both Defendants, particularly the 2nd Defendant, were hoping to lead the Plaintiff on in making the goods available for the Defendants so that they would draw upon them quickly without putting in formal revised orders. The decision was made by one or both Defendants (and if one only, the other went along with it) to issue Purchase Orders for the second half of the quantity of goods contracted for, but carrying the proviso 'subject to confirmation by the 28th February 1995'. These were the clutch of purchase orders dated the 20th December.

35. I can see no consideration of or reference to any of this documentation prior to these last purchase orders in the judgment of the trial Judge. Their significance is such as to establish beyond doubt in my view that there was an arrangement at the meeting on the 3rd November 1994 whereby both Defendants agreed to pay for 50% of the goods with the two forms of payment, the goods concerned already being the subject of the contract of the 26th October.

36. Thereafter the Plaintiff was strung along in the belief that the formal purchase orders would arrive without provisos or qualification, and that the uncertain financial position of both Defendants led to this change and to the eventual decision to replace the original purchase orders with those of 20th December. This state of affairs is wholly consistent in my view with the evidence of Mr. Hayashi in relation to the two convoluted questions to him upon which the Defendants and the Learned Judge relied. It is apparent that between the meeting of the 3rd November and the issue of the purchase orders of the 20th December, the 1st Defendant was also acting as the agent of the 2nd Defendant; the 2nd Defendant knew this and did not terminate that agency. That is why all contact by the Plaintiff continued to be with Motivasia.

37. Also within the documents for the period which I have considered is a manuscript note apparently written by Mr. Dorfman of the 2nd Defendant. It is dated 8th November 1994 and is one of a number of manuscript notes by him taken from a perforated sheet notebook. It related to the Wellcome deal and concerned Motivasia -

"To Supplier: issue P.O. for full orders but only confirm 1/2 of this 1/2 L/C and 1/2 50 day D/A."

Mr. Dorfman referred to this note (and quoted it) in his letter of 6th December which I have mentioned. Strangely, although Mr. Dorfman relies upon his note of 8th November and has, it appears, made many notes, there is no note relating to the meeting of the 3rd November with Mr. Hayashi. It was, after all, a meeting of some significance at which three or four directors of Herald attended. To find no record at all of it disclosed, causes one to raise an eyebrow at least. Was it a meeting of which Herald wanted no record? No letter was ever sent by Herald to Nikko in confirmation of what was agreed. Herald directors were at pains to impress the company's creditworthiness on Mr. Hayashi. In the event he was persuaded to rely upon Herald's assurances. He did not get the promise of a letter of credit for the 100% of the goods to be supplied. Perhaps there was a deliberate decision by the Defendants to leave it on the basis of a "gentleman's agreement", that highly suspect commercial term, which so often leads to litigation and a war of words.

38. Whatever may or may not have been the understanding between the two Defendants it was not until 12th December, when the Purchasers' Orders dated 11th November were faxed, that there was any hint of what change the Defendants were trying to effect late in the day, and well after the Plaintiff had committed itself to the manufacturing programme in reliance upon the original orders. It is absolutely clear that even if Mr. Dorfman's note of 8th November is a contemporaneous record, and a genuine one, it does not state or imply that either of the Defendants had so informed Nikko at the meeting of the 3rd November. When the indication of half the order being subject to confirmation came on 20th December to Nikko, it came out of the blue.

39. None of this changes the essential position on the pleadings and on the evidence at trial. The Plaintiff was unable to make out its pleaded case that Herald was a contractual party and liable to accept and pay for 50% of the goods. The Learned Judge's principal finding was correct in the circumstances. I would dismiss the appeal against his substantive judgment.

40. The evidence before the Judge and a consideration of the documents, has left me with a deep sense of unease as to the way both Defendants, and particularly the directors of the 2nd Defendant, conducted themselves in relation to this contract.

41. It is clear that the original contract of 26th October subsisted. Motivasia knew this of course and conducted the exchanges after 3rd November on that basis. It was only when Herald forced them, in effect, into trying to vary the contract, unilaterally, by issuing two Purchase Orders which reserved confirmation to on or before 28th February 1995, that they tried to change the basis. Motivasia's letter to Herald of 6th December at least had the semblance of wanting to maintain commercial integrity. Herald disposed of that residual integrity very quickly.

42. The Learned Judge thought it was "odd that Mr. Dorfman and Mr. Tang at least were unaware of Motivasia's contractual position as at 3rd November". Although he does not make a specific finding that they knew and therefore that Herald knew, - he thought that "on analysis this may not matter much", - I have little difficulty in concluding that had he felt that he ought to make such a finding he would have done. For the purposes of this appeal I have no difficulty in reaching that conclusion. There was evidence that Miss Lam faxed the contract from Motivasia to Herald; Herald knew of the Wellcome contract and the binding obligations under it; the two Defendant companies had at least three directors in common and these had been present at the meeting on 3rd November.

43. That being so what then is the implication of the failure of the Plaintiff's pleaded case, and that the contract of 26th October subsisted unvaried? The clearest is that Herald contrived to cause Motivasia, a company over whom it had control by reason not only of the directors they shared but also of the share holding, to break the contract by imposing an unacceptable variation. Motivasia was wholly dependent upon Herald financially and although it seems to have made an initial attempt to persuade Herald to honour the promise of financial support or guarantee, it then set about trying to break that contract. The Plaintiff never accepted the two conditional purchase orders. Motivasia therefore was in breach of contract and its controlling company induced that because it seems to have overstretched itself financially and wanted the 1st Defendant to extricate itself somehow. Its very proximity to and involvement inextricably in the affairs of Motivasia, enabled it to do so.

44. Undoubtedly the fact that the purchase orders had to reflect Herald's financial involvement, so as to enable the Plaintiff to collect money from Herald, and so be certain of payment, had led to a degree of confusion in the Plaintiff's camp and, I anticipate, among its legal advisers. But for Herald's influence and manipulation of the documentation by instructions to Motivasia, the position would have been clear-cut.

45. In these circumstances both Defendants' actions led to the litigation. What compounds Herald's commercial dishonesty are the contents of its reply, through Dorfman, to Motivasia's pleading letter of 6th December. It was a cynical attempt to "have its cake and eat it" i.e. try to vary the contract by the conditional purchase orders but get the supplier to commit himself to supply of all the goods "so that we can draw on them, as, when and if we want".

46. This background was far from clear before the Learned trial Judge. It is now patently clear to me. After trial the Judge made an order nisi that the Plaintiff should pay both the Defendants' costs. He made then an order absolute after argument, two days before we heard this appeal.

47. On behalf of the Plaintiff Appellant Mr. Ling sought leave to appeal against this order in relation to costs although his Notice of Appeal did not provide for it. Mr. Harris, very fairly, took no point on this.

48. The Learned Judge said that he had to decide the issue of costs in the light of the substantive decision he made and nothing else. I fear he tied himself too strictly to that approach. He has a wide discretion which can properly be exercised to reflect inter alia, the merits of the case, and the conduct of the parties. We have had the opportunity of considering a number of matters in detail which were not canvassed before the trial judge. That is why I have set them out "in extenso" a little earlier in this judgment.

49. I understand that the principles in the decision Re-Elgindata (No. 2) (1992) 1 W.L.R. 1209 were put before the learned Judge Nourse, L.J. (as he then was) prefaced his statement of them and a later consideration with these words:

"They [the principles] do not in their entirety depend on the express recognition or provision of the rules [order 62 rules 2(4), 3(3) and 10]. In part they depend on established practice or implication from the rules."

The first was the general principle that costs are in the discretion of the court. The second is a slightly shortened form of rule 3(3) - they should follow the event except when it appears to the court that in the circumstances of the case some other order should be made. In fact this does no more than exemplify the discretion. The third and fourth, which I do not repeat, relate to specific circumstances which had a particular bearing on the facts of that case. They are not to be regarded as setting out the only circumstances in which there may be a departure from the basic principle that costs should follow the event, nor do I think that Nourse, L.J.'s treatment of them was intended to give that impression.

50. I note that the English Court of Appeal in Re-Elgindata (No. 2) did not refer to the Court of Appeal's decision in Ritter v. Godfrey [1920] 2 K.B. 47 nor was it cited in argument. That may well have been because of the particular circumstances of Elgindata. Lord Atkin (then L.J.) at p.60 stated:

"In the case of a wholly successful defendant ... the judge must give the defendant his costs unless there is evidence that the defendant 1) brought about the litigation or 2) has done something connected with the institution or the conduct of the suit calculated to occasion unnecessary litigation and expense, or 3) has done some wrongful act in the course of the transaction of which the Plaintiff complains."

He then went on to expand the principles. In relation to 1) it meant where the Defendant had so conducted himself as to lead the Plaintiff reasonably to believe that he had a good cause of action against the defendant, and to induce him to bring the action - relying on Bostock v. Ramsey [1900] 2 Q.B. 616, Lord Atkin said:

"In as much as the bringing of many actions of contract and most actions of tort is due to the effect upon the Plaintiff's mind of the Defendant's conduct, and the effect is at any rate to induce a belief that the Plaintiff has a good cause of action, it would appear to follow that provided the belief was reasonable, the judge in all such cases has grounds for depriving a successful defendant of costs."

Principles 2) and 3) he thought possibly overlapped with the former including improper conduct in or connected with the litigation calculated to defeat or delay justice.

51. I think these principles are more apposite to the question which we have had to consider than those enunciated in Elgindata, and the matters I have set out earlier exemplify the application of this classic approach.

52. I have come very firmly to the conclusion that the proper order for costs below should be no order as to costs. To give the Defendants any order for costs in their favour would be to favour the unmeritorious. If it were necessary to involve any principles of equity, and the exercise of the discretion is to allow for the proper application of principles of justice and equity, it is sufficient to say that neither Defendant has clean hands, and neither has done equity. In reaching this conclusion I have taken into account the issue pleaded in the counterclaim. Mr. Harris readily concedes that it more properly forms part of the substantive case.

53. The original costs order was an order nisi. The Plaintiff understandably sought a hearing in order to argue against it. At that hearing it did not succeed. In view of my finding it ought to have done. Therefore it should have an order for costs in its favour in respect of this hearing on the 6th December 1999.

54. That being my view as to the proper order for costs in respect of the trial action, what should be the proper order in relation to the costs of the Appeal? It is true that the costs issue has not occupied much of the time of this court. Nonetheless it is a discrete issue and the Appellant, in my view, succeeds on that. Of course the best part of one and a half days have been concerned with the substantive Appeal. We have been much concerned with the overall picture, with the content of and inferences to be drawn from a number of documents, and the conduct of the parties, particularly the Defendants. On the pleaded issue, which was the only subject at the trial, it had been very straightforward. We have hardly had to look at the transcript beyond Mr. Kayashi's evidence which was well-nigh conclusive of that main issue. However the insight we have gained into what was going on is very pertinent to the standing of the parties and the question of costs.

55. In my view, it would pay proper regard to the fact that the Appeal could not succeed on the case as pleaded and as contested before the trial judge, if we were to allow the Defendants half their costs of the appeal. It would also recognise the advantage we have had over the trial judge in seeing all matters in context. I nonetheless allow them that measure with some reluctance. The Plaintiff has been ill-served and the commercial manipulation of the Defendants has been compounded by his own advisers.

56. The order I would make therefore is to dismiss the Appeal on the substantive issue with the Respondents to have half their costs, and to allow the Appeal in respect of the costs of the action and of the trial below by making no order as to costs.

Keith JA:

57. In this judgment, I shall refer to the Plaintiff, the 1st Defendant and the 2nd Defendant as Nikko, Motivasia and Herald respectively. All dates in this judgment are in 1994.

Nikko's primary case

58. Nikko's pleaded case was that Motivasia's purchase order of 26th October ("the initial purchase order") was varied by an oral agreement made on 3rd November. By that oral agreement, instead of Motivasia alone being obliged to purchase all of the items of porcelain which had been ordered in the initial purchase order, Motivasia and Herald were obliged to purchase 50% each of the items ordered. That variation was said to have been evidenced by the four purchase orders of 20th December ("the subsequent purchase orders"). However, two of the subsequent purchase orders contained a clause which made those two purchase orders conditional on the orders to which they related being subsequently confirmed by Motivasia and Herald in writing ("the escape clause"). Nikko was not agreeable to the escape clause. Accordingly, the subsequent purchase orders were of no effect, save to the extent that (apart from the escape clause) they evidenced the oral agreement to vary the initial purchase order, and the parties' contractual obligations were governed by the oral agreement of 3rd November.

59. To complete the story, and using round figures, Nikko's pleaded case was that Motivasia and Herald had accepted and paid for 50% of the items of porcelain ordered, but that they had refused to accept and pay for the balance. Accordingly, Nikko claimed to be entitled to damages for (a) Motivasia's failure to accept half of the balance of the items ordered, i.e. 25% of the items ordered, and (b) Herald's failure to accept the other half of the balance, i.e. the other 25%.

60. Success for Nikko on its pleaded case was dependent on the court finding that (a) there had been an agreement concluded orally on 3rd November, and (b) by that agreement Motivasia's obligations under the initial purchase order were replaced by an obligation on Motivasia and Herald to purchase 50% each of the items ordered. Stone J. felt unable to make either finding. To use his words:

"I am unable .... to find the evidence to visit upon Herald the contractual obligation contended for by Nikko (or indeed any contractual obligation) as crystallising at that meeting."

That finding was attacked in a careful and moderate submission by Mr. C.W. Ling for Nikko. He contended that in making that finding of fact the judge improperly took into account what the parties subjectively thought the purpose of the meeting had been or what had been agreed. Mr. Ling submitted that a careful analysis of (a) the evidence of the persons who attended the meeting on 3rd November and (b) the contemporaneous documents shows that an agreement of the kind alleged must have been reached.

61. I am very far from saying that the judge had fallen into error in the respect complained of by Mr. Ling. But it is wholly unnecessary to determine whether the judge had fallen into that error, because my reading of the evidence is that no-one, not even Nikko's main witness, Mr. Norihiko Hayashi, actually testified to the effect that at the meeting of 3rd November it had been agreed that the obligations of Motivasia under the initial purchase order had been replaced by an obligation on Motivasia and Herald to purchase 50% each of the items ordered. There was, therefore, not even the most minimal evidential basis for the judge to make the finding of fact which Nikko's pleaded case asserted. That is apparent from an examination of

(a) the relevant passages in those parts of the witnesses' witness statements which were treated as containing the witnesses' evidence-in-chief, and

(b) the relevant extracts in their oral evidence as revealed by the verbatim transcripts of the evidence.

62. What the evidence, in my view, reveals is that the meeting took place to allay Nikko's concern about whether all of the items ordered by Motivasia in the initial purchase order would be paid for. The initial purchase order had provided for 50% of the purchase price to be paid by a letter of credit to be opened in favour of Nikko, and for the remaining 50% of the purchase price to be paid "D.A. 45 days". The initial purchase order had not identified by whom the letter of credit was to be opened, and the only agreement which the evidence shows took place on 3rd November was an agreement that the letter of credit would be opened by Herald. In other words, although the obligation to accept and pay for all the items ordered was still that of Motivasia, Herald committed itself to finance Motivasia's obligation in part by paying for half of the items ordered itself. In terms of legal analysis, Herald's promise to finance Motivasia's obligation to that extent amounted to a collateral warranty, which Nikko could have sued upon if 50% of the price had not been paid.

63. I appreciate that some of the documents which came into existence between the meeting on 3rd November and the issue of the subsequent purchase orders on 20th December show that the parties themselves believed that at the meeting on 3rd November a commitment to take some of the items had been assumed by Herald. Thus, a fax sent by Nikko to Motivasia on 7th November, which contained a request for Motivasia and Herald to issue purchase orders each for 50% of the items previously ordered, shows that Mr. Hayashi thought that the effect of the agreement on 3rd November had been that Herald had taken over half of Motivasia's obligations under the initial purchase order. Again, a fax sent by Motivasia to Nikko on 8th November shows that Mr. John Tatham of Motivasia (who had not been at the meeting on 3rd November) thought that Herald was going to be a party to revised purchase orders for "the whole of the stock". On the other hand, one of the documents shows that there was uncertainty within Motivasia as to what the total commitment to Nikko then was: paras. 6 and 11 of a fax sent by Motivasia to Herald on 6th December show that Mr. Hugh Robertson of Motivasia (who also had not been at the meeting on 3rd November) thought that, despite the initial purchase order, there had been a commitment only to purchase 50% of the items. But the critical point is that, however the parties subjectively viewed their contractual obligations in the period after 3rd November, the evidence as to what was actually said at the meeting of 3rd November simply does not support Nikko's pleaded case. Accordingly, the challenge to the judge's finding that an agreement in the terms pleaded by Nikko was reached on 3rd November must fail.

Nikko's alternative case

64. Nikko's alternative case proceeds on the assumption that the challenge to the judge's finding that no agreement had been reached on 3rd November fails. In that event, Motivasia remained subject to the obligations which it had assumed in the initial purchase order. It was still obliged to accept and pay for all of the items ordered. Since in broad terms only 50% of the items ordered were accepted (25% by Motivasia and 25% by Herald on Motivasia's nomination) and paid for (by the letter of credit opened by Herald), Nikko was entitled to damages for Motivasia's failure to accept the remaining 50% of the items ordered.

65. Success for Nikko on this alternative case was dependent on the court finding that (a) the initial purchase order had not been varied by the subsequent purchase orders, and (b) the alternative case had been sufficiently pleaded. As for (a), the judge thought that it had been common ground between the parties that the initial purchase order had been varied by the subsequent purchase orders. As for (b), the judge held that only Nikko's primary case had been pleaded.

66. I have very considerable sympathy with the judge's belief that it was common ground that the initial purchase order had been varied by the subsequent purchase orders. What was undoubtedly common ground was that the initial purchase order had been varied. Where the parties differed was in the route by which it had been varied. Nikko's case was that it had been varied by the oral agreement allegedly reached on 3rd November. The Defendants' case was that it had been varied by the subsequent purchase orders. Thus, the transcript shows the judge repeatedly having been told that it was common ground that the initial purchase order had been varied. But if one takes the alleged variation on 3rd November out of the equation (in order to reflect the judge's ultimate finding on that issue), it can no longer be said that it was common ground that the initial purchase order had been varied. That is because Nikko's case was that the initial purchase order could only have been varied by the alleged agreement on 3rd November. Thus, Nikko's case was that once that supposed variation was removed, the initial purchase order had not been varied, and Motivasia was bound by the obligations which it had assumed under the initial purchase order.

67. So why did the judge think that in these circumstances it was nevertheless common ground that the initial purchase order had been varied by the subsequent purchase orders? After all, it was not disputed that Mr. Hayashi never accepted the subsequent purchase orders, because he never accepted the escape clauses to which they were subject. That was borne out by the fact that he never signed the subsequent purchase orders to indicate his acceptance of them. In my opinion, the reason why the judge thought that it was common ground that the initial purchase order had been varied by the subsequent purchase orders was because he thought that no alternative case had been pleaded. Since the alternative case depended upon a finding that the initial purchase order had not been varied by the subsequent purchase orders, the judge assumed that the fact that such a case had not been pleaded was because Nikko accepted that the initial purchase order had been varied by the subsequent purchase orders.

68. I am very far from blaming the judge for making such an assumption, but it is unnecessary to consider the topic further, because in my view the judge was right to conclude that only Nikko's primary case had been pleaded. On Nikko's alternative case, Nikko was entitled to damages for Motivasia's failure to accept all of the remaining items, whereas on its primary case its entitlement to damages was for Motivasia's failure to accept some of the remaining items and for Herald's failure to accept the remainder of the remaining items. It is the latter which was pleaded, not the former. But what is critical is that on Nikko's alternative case, Nikko was entitled to damages for breach of the agreement contained in the initial purchase order, whereas on its primary case its entitlement to damages was for breach of that agreement as varied by the agreement of 3rd November. It is the latter which was pleaded, not the former. Thus, there was no claim based on the unvaried agreement contained in the initial purchase order. Accordingly, even if the judge had treated Nikko's alternative case as one which should succeed, he could not have given effect to that view by virtue of the lack of any pleading to that effect.

69. This result is not as unjust as it sounds. We were told that Motivasia is "not worth powder or shot". It follows that a judgment against Motivasia would have been valueless to Nikko, save only for the impact which such a judgment might have had on the costs of the action.

The costs below

70. The judge made an order nisi that Nikko should pay Motivasia's and Herald's costs of the action. That order was made absolute at a hearing which took place two days before the hearing of the appeal. Nikko wished to appeal against the order for costs, and the Defendants generously agreed, subject to the court's approval, to treat the hearing of the present appeal as a costs-saving opportunity to address the judge's order as to costs.

71. Two points were taken by Mr. Ling. First, one of the Defendants' pleaded defences had been that the dispute between the parties had been compromised. Indeed, they had counterclaimed a declaration to that effect. That defence, and its consequential counterclaim, was dismissed by the judge. Mr. Ling contended that the Defendants should have been ordered to pay Nikko its costs of the counterclaim, and that the order for costs on Nikko's claim should have reflected the fact that about 25% of the hearing had been taken up with the settlement issue on which the Defendants lost. I cannot go along with this argument. The counterclaim added nothing to the defence, and the costs relating to the settlement issue were therefore all incurred on the defence to Nikko's claim. Moreover, the relevant principles relating to the costs of particular issues were set out in Re Elgindata Ltd. (No. 2) [1992] 1 WLR 1207 at p.1214A-B as follows:

"(i) Costs are in the discretion of the court. (ii) They should follow the event, except when it appears to the court that in the circumstances of the case some other order should be made. (iii) The general rule does not cease to apply simply because the successful party raises issues or makes allegations on which he fails, but where that has caused a significant increase in the length or cost of the proceedings he may be deprived of the whole or a part of his costs. (iv) Where the successful party raises issues or makes allegations improperly or unreasonably, the court may not only deprive him of his costs but may order him to pay the whole or a part of the unsuccessful party's costs."

We were informed that these principles were brought to the judge's attention. In the light of that, it is important to note what the judge actually said:

".... consideration of the Settlement Agreement was all part and parcel of the broad factual matrix, and indeed I think it would have been difficult to run this case absent reference to the events of the meeting wherein the Settlement Agreement was signed. In all the circumstances, and in the exercise of my discretion, I feel unable to 'split off' the Settlement Agreement issue and arrogate to it a separate order as to costs, even though in fact I was against the Defendants' argument in terms of the construction of that Agreement."

The circumstances in which an appellate court can interfere with the exercise of a discretion exercised at first instance are severely circumscribed, and I am unable to criticise the judge for treating the settlement issue as so discrete an issue as to justify a departure from the general rule.

72. The second point taken by Mr. Ling was that the Defendants did not "deserve" to have an order for costs in their favour in view of their behaviour towards Nikko. There are a number of echoes of thinking of that kind in the judge's judgment. He said that the outcome of the case

".... is not in the circumstances a result which provokes any great enthusiasm. Mr. Hayashi struck me as a dignified and honourable man who felt, perhaps with reason, that in the event he had been shabbily treated in his relations with Motivasia and Herald ...."

He added that

".... there is little doubt in my mind that Mr. Hayashi was subjected to a form of commercial 'squeeze' which left him to bear a greatly increased risk than hitherto had been the case, and which represented a hard-nosed approach very different from the manner in which this transaction was conducted by Mr. Hayashi ...."

I think that what he must have had in mind was that (a) Mr. Hayashi had been led to believe that Herald had committed itself to take some of the porcelain, and (b) Herald had instigated Motivasia to renege on its obligations under the initial purchase order by imposing variations (in the form of the escape clauses) which would have had the effect, if accepted, of significantly reducing the number of items which Motivasia would otherwise have been required to accept.

73. Stone J. said that he had to decide the issue of costs "in the light of [his] substantive decision .... and nothing else". Although counsel then instructed on behalf of Nikko agreed, that is not quite correct. Ord. 62 r. 3(2) of the Rules of the High Court provides that costs need not follow the event "when it appears to the Court that in the circumstances of the case some other order should be made". That enables this court to consider for itself what order for costs should have been made.

74. I do not think that it would usually be right for the general rule that costs should follow the event to be displaced simply because questionable commercial conduct is suspected. But the general rule may be departed from if a successful defendant has

(a) brought about the litigation, or

(b) done something connected with the institution or the conduct of the case which occasioned unnecessary expense, or

(c) done some wrongful act in the course of the transaction of which the plaintiff complains:

see Atkin L.J. (as he then was) in Ritter v. Godfrey [1920] 2 KB 47. Although Nikko lost the action because the only obligation which Herald assumed was to pay for half of the items ordered (which Herald honoured by its letter of credit), and because its alternative case against Motivasia was not pleaded, the correspondence does show that Mr. Hayashi had been led to believe that Nikko's primary case would succeed. That follows from (a) the failure to correct Mr. Hayashi's belief (so evident from Nikko's fax to Motivasia of 7th November) that Herald had taken over half of Motivasia's obligations under the initial purchase order, and (b) Motivasia's fax to Nikko of 8th November. Not without some hesitation, I have concluded that the combination of these factors justifies a departure from the general rule, and that Nikko, Motivasia and Herald should bear their own costs of the action.

Conclusion

75. For these reasons, I would dismiss Nikko's appeal from the dismissal of its claim, but I would allow Nikko's appeal from the order which the judge made as to costs. The order which I would make is that there should be no order as to the costs of the action, but since Nikko should have succeeded at the hearing at which the judge made absolute his order nisi as to costs, I would order Motivasia and Herald to pay Nikko its costs of that hearing to be taxed if not agreed.

76. All that remains is the costs of the appeal. Although Nikko has succeeded on the issue of costs,

(a) it failed on its substantive appeal,

(b) no costs prior to the hearing of the appeal were in fact incurred in relation to the appeal on the issue of costs,

(c) the oral argument relating to the issue of costs occupied only a fraction of the overall length of the hearing of the appeal.

On the other hand, much of the time spent on the hearing of the appeal related to an analysis of the contemporaneous documents, and it was those documents which have caused me to conclude that Mr. Hayashi had been led to believe that Nikko's primary case would succeed. Accordingly, I agree with Seagroatt J. (whose judgment I have read in draft) that this is not a case in which the costs of the appeal should necessarily follow the principal event, and that the order nisi which should be made is that Nikko must pay to Motivasia and Herald one half of the costs of the appeal to be taxed if not agreed.

Nazareth V-P:

77. I agree with the judgments of Seagroatt J and Keith JA.

78. However, I think I should add in relation to the costs of the action, that I also am satisfied that instead of those costs following the event, each party should bear its own costs of the action. My principal reasons are first, the inherent validity of the plaintiff's alternative claim in point of fact, which failed only because of the deficiency of his pleadings, and second, the conduct of the defendants referred to in the present context by my Lords.

Accordingly, we unanimously dismiss the plaintiff's appeal against the dismissal of his claim, and allow the plaintiff's appeal against the judge's order as to the costs of the action. We set aside that order and substitute an order that there be no order as to the costs of the action. As to the costs of the plaintiff's application to vary the judge's costs order nisi that was heard on 6 December 1999, we set aside the judge's costs order in favour of the defendants and instead order that the plaintiff is to have his costs of that application. Finally, we make an order nisi that the defendants are to have half their costs of the appeal.