LUEN WING SHIPPING AGENCY LTD. v. PACIFIC ENGINEERING LTD.

HCA 1771/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1771 OF 1998

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J U D G M E N T

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Introduction

1. The plaintiff brings this action against the defendant claiming damages for breach of contract. The defendant denies the claim and counterclaims the plaintiff damages for the plaintiff's breach of the same contract.

2. The plaintiff has been operating a transportation business, especially the transportation of building materials such as stone, gravel and river sand by vessel from the mainland to Hong Kong. The plaintiff was also a supplier of such building materials. The defendant was a wholly owned subsidiary of a company listed in Hong Kong. It was a contractor of various engineering and construction projects including Government projects, and required building materials for such projects. Further, the defendant has been a supplier of such materials to other contractors and required the materials for such purpose as well.

3. It is common ground that an agreement called "Transportation Contract" (運輸合約) ("the Agreement") dated 20 January 1997 (signed on 5 February 1997) was entered into by the parties. Further, another document headed "Supply and Transportation of Sand Contract" (供運沙合約) was entered into on the same day. The plaintiff was to transport building materials from the mainland to Hong Kong for the defendant for a reward.

4. Subsequently, a document headed "Quotation" dated 21 February 1997 was signed by the parties (the defendant's signature bears the date 18 March 1997). The place of loading in the Agreement was changed from Shekou (蛇口) to Tuen Mun, Hong Kong whereas the place of delivery, namely, Drunken Bay, Hong Kong, remained the same. Transportation of materials from Shekou to Tuen Mun was taken care of by barges from the mainland. The contract price was changed from HK$19 per cubic meter to HK$17 per cubic meter.

5. It is also undisputed that the Agreement (as varied) (henceforth also called "the Agreement" for convenience) was performed until about the end of August 1997.

The Issues

6. The plaintiff contends that the defendant has breached the Agreement by wrongfully terminating it by a letter dated 7 July 1997.

7. On the other hand, the defendant denies this and alleges that it entered into the Agreement by reason of the plaintiff's misrepresentation that the plaintiff would obtain the necessary navigation permits from the authorities in the mainland. The defendant's alternative case is that by reason of the said misrepresentation, it was a term of the Agreement that the plaintiff was to obtain the said navigation permits.

8. The defendant also alleges that the Agreement has been frustrated in August 1997 when the landlord of the berthing facilities at Drunken Bay informed it that the berthing facilities would not be available since then. Further, according to the defendant, the Agreement was discharged by the parties' consent in October 1997 when they agreed that the plaintiff was to use the shipyards at Mong Hau Shek, Tuen Mun.

9. The parties do not dispute that the credibility and reliability of witnesses' testimony is essential to the determination of this action.

10. Insofar as is necessary, the credibility aspect will be discussed in more detail under the separate headings below. However, this does not mean that the witnesses' overall credibility or reliability has not been considered in the light of the totality of the evidence. Further, even though express findings on the witnesses' credibility or reliability on certain parts of their testimony have not been made herein, (to avoid any doubt) those parts of their testimony which are consistent with the findings set out below have been accepted whereas those which are inconsistent have been rejected.

Issue (1) Misrepresentation

11. It does not appear to be disputed that navigation permits were needed for Hong Kong vessels to navigate to closed ports in the mainland (which was necessary for the plaintiff to perform the Agreement). Both sides allege the other side of having orally misrepresented that it would obtain the necessary navigation permits to enable the plaintiff's vessels to go to Ma Wan (Shekou) in the mainland to perform the Agreement.

12. The earliest document produced at trial which refers to the alleged misrepresentation was the Amended Defence and Counterclaim filed on 28 June 1999 (about 15 1/2 months after the Defence and Counterclaim was filed on 5 March 1998). The defence raised in the original Defence and Counterclaim was essentially this. One, the Agreement was frustrated because the berths at Drunken Bay were closed. Two, the plaintiff made use of confidential information provided by the defendant to entice the defendant's customer from the defendant thereby causing loss to the defendant. No misrepresentation was alleged.

13. Further, there was a series of pre-action correspondence between the parties or their respective solicitors. It commenced with the letter of 20 October 1997 from the defendant's former solicitors which stated in essence that the Drunken Bay berths had been closed and therefore the Agreement had been frustrated. By a letter dated 22 October 1997, the plaintiff's solicitors denied this and demanded for payment of the guaranteed transportation costs. The correspondence between the solicitors from 29 December 1997 to 7 January 1998 basically repeated the parties' respective stance.

14. When the defendant's only witness, Mr Golf Tam Kin Ming, testified, no explanation has been given as to why the alleged misrepresentation was never mentioned in the pre-action correspondence or the original Defence and Counterclaim. Mr Tam was the defendant's director of sales and marketing (building operations) and the person who represented the defendant to enter into the agreement with the plaintiff. The evidence also suggests that the defendant was a sizeable operation. Further, he disclosed in his testimony that he used to be in the banking business for a considerable period of time before joining the defendant. I conclude from the above that Mr Tam must have been a businessman with certain degree of sophistication.

15. Bearing the aforesaid matters in mind, I find that the defendant's evidence regarding the alleged misrepresentation by the plaintiff is incredible and should be rejected. On the other hand, despite the criticisms of defence counsel regarding the credibility and reliability of the plaintiff's 2 witnesses, I find that their testimony is credible and reliable and that it supports the plaintiff's case.

16. By reason of the matters aforesaid, I conclude that the plaintiff has not represented that it would obtain the necessary navigation permits. It was rather the defendant who has done so. Further, I find that on learning that navigation permits were unavailable, the defendant decided to engage mainland vessels to carry the goods from the mainland to Tuen Mun before handing them over to the plaintiff for onward transportation to Drunken Bay. This was the reason for changing the place of loading from Shekou to Tuen Mun (as evidenced by the "Quotation" dated 21 February 1997) and the reduction of price from HK$19 per cubic meter to HK$17 per cubic meter.

Issue (2) Frustration of Contract

17. This part of the defendant's case is also rejected for the following reasons.

18. First, in order to establish this part of its case, the defendant has to prove that the berthing facilities at Drunken Bay was no longer available from about August 1997. In a letter dated 9 April 1998 to the plaintiff's solicitors, the Marine Department stated:-

"... about [the Drunken Bay] Berths [also described in the letter as the "Rambler Channel Public Cargo Working Area (PCWA)"]

... [the Drunken Bay berths] remained open for public use throughout the year of 1997 other than the first and second days of the Lunar New Year;

... The usable seafront ... for cargo operation remained unchanged since 1st September 1997; and

... The specified berths ... and Tuen Mun PCWA under the management of this Department that can be used for handling dirty cargoes, including sand, cement, aggregates ... and other polluted building materials are marked on the attached sketches ... ".

It is undisputed that the berths shown on the said sketches included the ones used by the plaintiff and defendant for the purpose of the agreement.

19. By reason of the above matters, I am not satisfied that the defendant has proved that the berthing facilities were unavailable from about August 1997 onwards.

20. Secondly, as a matter of law, in order to establish this defence, the defendant will have to show that without the fault of the contracting parties, the contractual obligations became incapable of being performed because the circumstances would render them a thing radically different from what was undertaken by the contract (described in Chitty on Contracts (1999) 28th Ed., as the "test of a radical change in the obligation"): see Chitty, para. 24-012 to 24-013. There is no need to examine in detail the various decisions referred to in Chitty or by counsel save to restate the following basic principles which can be gathered from them (and summarized in textbooks such as Chitty):-

(a) there must be a radical or fundamental change in the circumstances between the time of the formation of a contract and the time for its performance;

(b) that change must have been to transmute the job the "contractor" had undertaken into a job of a different kind which the contract did not contemplate and to which it could not apply;

(c) when there is a dispute regarding this matter, the first step for the court is to construe the contract terms when they are read in the light of the nature of the contract and the surrounding circumstances at the time of the formation of the contract;

(d) the next step is the court should examine the subsequent events allegedly frustrating the contract and ascertain what would be the parties' obligation if the terms of the contract were enforced in those events;

(e) the test for frustration is objective;

(f) ultimately, the matter is a question of mixed law and fact and depends on the circumstances of each case. No single factor is conclusive;

(g) while an unforeseen event will not necessarily lead to frustration, a foreseen event will generally exclude the operation of the doctrine;

(h) self-induced frustration is not a valid defence

(see, for example, Chitty, para. 24-014 to 24-016 and 24-018, 24-042 and 24-057 to 24-059).

21. I do not regard it necessary to set out the terms of the Agreement in detail. Suffice it to say that I find that it was not the intention of the Agreement or the parties that the availability of the berthing facilities at Drunken Bay was fundamental (or important) to the Agreement. Even if those berthing facilities were unavailable after August 1997, I do not find that this resulted in a radical or fundamental change to the parties' contractual obligations. First, the task of transporting the goods from Tuen Mun to Drunken Bay rested with the plaintiff. Secondly, the defendant has not explained (and there is insufficient evidence to show) how changing the place of delivery from the Drunken Bay berths to some other berths in Hong Kong would significantly change the nature of its job (if any, bearing in mind the Agreement was about the transportation of materials by vessel from the mainland to Hong Kong) it undertook to perform under the Agreement.

22. Apart from the above, clause 2.3 of the "Transportation Contract" dated 20 January 1997 provided that:-

"如裝卸貨地點需更改，甲、乙雙方須另議新運輸費。除此以外，本合約其他條款保持不變。"

I agree with the plaintiff's argument that this shows that a change of the place of delivery was within the contemplation of the Agreement and the parties.

23. Insofar as is necessary, I find that the defence evidence regarding this matter to be incredible and reject it. Conversely, I find the plaintiff's evidence to be credible and reliable.

24. For the above reasons, this defence fails.

Issue (3) Full and Final Settlement of the Claim

25. It is undisputed that a written agreement was signed by the parties on 6 October 1997. The defendant alleges that the parties consented to this to compensate for its termination of the Agreement. This is denied by the plaintiff who claims that this agreement was only related to future cooperation but it has not been actually performed.

26. Again, I accept the plaintiff's evidence and reject the defence evidence. First, the recital at the beginning of the written agreement supports the plaintiff's case. It reads:-

"就有關進一步加强業務合作及好好利用現有之碼頭資源方面作出研討會，並將要點以備忘錄形式記錄在案，作為將來訂立合約之參考條文。"

Secondly, the alleged settlement between the parties was not referred to in the aforesaid pre-action correspondence, and was only raised in the Re-Amended Defence and Counterclaim filed on 13 June 2000. Lastly, to some extent this defence is inconsistent with the defence that the Agreement was frustrated without the parties' fault. If the Agreement had in fact been frustrated, it is difficult to see why the defendant would consider it necessary to "compensate" the plaintiff for an event for which the defendant was not responsible; and hence should not be liable.

Quantum of Damages

27. The quantum of the plaintiff's claim is undisputed. It is further undisputed that pursuant to the Agreement, the defendant should pay the plaintiff what in effect is a guaranteed payment of $475,000 per month. The Agreement was for a fixed term which should expire after 28 February 1999. The total amount claimed is $7.37 million which consists of the said monthly payment commencing 1 September 1997 (totalling $7.6 million) but reduced by $230,000 for substituted orders which the plaintiff was able to obtain during that period.

Conclusion

28. By virtue of the conclusion reached above, I find that the defendant repudiated the Agreement by purporting to terminate it by its letter of 7 July 1997. For this reason, there will be judgment in the plaintiff's favour in the sum of $7.37 million.

Counterclaim

29. I find that the defendant has not established any of the defence or the counterclaim. The counterclaim is therefore dismissed.

Other Matters

30. In the Skeleton Final Submission of defence counsel, he relies not only on events which occurred prior to but also those subsequent to the making of the Agreement in relation to the defendant's case regarding misrepresentation. In the course of his submission in court, counsel accepted that the events subsequent to the Agreement were strictly only relevant to the witnesses' credibility and do not by themselves ground a separate cause of defence of misrepresentation.

31. In another part of the Skeleton Final Submission, defence counsel argues that the burden of proving there was no misrepresentation by the plaintiff lies with the plaintiff. However, defence counsel fairly (and correctly) accepted in the court that the burden of proof for establishing misrepresentation on the plaintiff's part lies with the defendant.

32. Although no express reference has been made to the other parts of the written final submissions kindly presented by counsel for the parties, I have considered the arguments raised therein, especially with regard to the credibility and reliability of witnesses.

Costs

33. There is no apparent reason to depart from the usual rule that costs should follow the event. There will be a costs order nisi pursuant to RHC Ord. 42 r. 5B(6) that the costs of this action are to be paid by the defendant to the plaintiff to be taxed if not agreed.