FARANRAH LTD v. CHERRY GARMENTS CO LTD

HCA9974/1997

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.9974 OF 1997

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J U D G M E N T

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1. The plaintiff is a company incorporated in Hong Kong and trades in garments. Its business includes the export of garments manufactured in Mainland China to USA. The defendant is also a company incorporated in Hong Kong and carries on the business of the export of garments from the Mainland to USA, and also of the sale of export quota licences for the export of garments from China to USA. In respect of garments manufactured in Mainland China which are exported to USA, they are classified into various categories and they required textile export quota licences issued by an approved Mainland Authority. The quotas of different categories of garments are held by various designated exporters in Mainland China who need not be the actual exporter in the transaction. Whenever a trader exports garments to USA he would have to obtain the quota to be covered by an export licence. There are companies which trade in the sale of quotas and the defendant was one of those companies.

2. There had been dealings between the plaintiff and the defendant prior to the events that give rise to this action. In March 1997, the plaintiff bought nine export licences from a company which obtained them from the defendant and sold them on to the plaintiff. Subsequently, two further licences were purchased directly by the plaintiff from the defendant.

3. The next dealing that took place between the parties was the one which gives rise to the present dispute. In April 1997, the plaintiff having already sent goods to USA was in urgent need of the export licences to cover those goods. Contact was made by telephone between Mr Wong of the plaintiff and Mr Yang of the defendant. As a result of an agreement between the two, two licences were delivered from Henan Province to the plaintiff at about 11 p.m. on 24 April 1997 by courier, for which the plaintiff paid a fee of $10,000 and a third licence covering the balance of the quota issued by the Qingdao Authority was collected by the plaintiff on the Mainland on 22 April 1997.

4. It is the plaintiff's argument that as a result of the conversation between Mr Wong and Mr Yang, Mr Yang must have known that the plaintiff was in urgent need of the export quota licences and that the export quota licences had to be immediately usable upon presentation to the US customs authorities. The plaintiff argues that it was an implied term of the agreement that the export quota licences were valid, usable or otherwise effective for the clearance of the garments upon immediate presentation of them to the US customs authority.

5. The plaintiff sent the licences immediately upon receipt to its agent in US and they were presented by those agents to the relevant authority on 28 April 1997 New York time where they were not usable. As a result of the failure to effect release of the garments with the licences, the American buyers cancelled the purchase agreement and the plaintiff was left with those garments on its hands in America.

6. The plaintiff sought the issue of fresh licences through the assistance of the defendant, but upon the carriage of the licences from US back to Hong Kong, they were lost and subsequent endeavours to have them re-issued failed.

7. The defendant alleges that it complied with all terms of the contract between it and the plaintiff by delivering the first two licences from Henan Province either on time or in circumstances where any breach of the condition as to time was unequivocally waived by the plaintiff, and that the Qingdao licence was delivered on time. It emerged in evidence that when a licence is issued by an authority in the Mainland, it is not effective until notice of the issue of the licence has been given to the relevant trade authority in Beijing who then transmits details of the issue of the licence to its Embassy in the US, which then notifies the US customs of the existence and the validity of the licences. It is not until this procedure has been effected that the presentation of the licence to release the goods will be effective.

8. The defendant says that it was an implied term and corporated by trade usage in the agreement between the parties that the licences would only be usable or otherwise effective for clearance of the plaintiff's goods after the completion of the data transmission procedure by the licence issuers and the relevant authorities in Beijing to the US authorities.

9. In answers to the plaintiff says that there was no direct agreement that the three licences were valid and usable for clearance of goods upon immediate presentation of the licences to the US customs authority, but that the term was implied.

10. Various issues were resolved during the trial, leaving only two main issues. I can do no better than quote Mr Wu on those issues :

"(1) whether it is notorious, certain and reasonable and/or well known or ought to have been well known to all persons involved in the buyer and selling the export licences of the existence of the computer transmission system and that the licences would only be usable when the data have become on file in the computer of the US authorities;

(2) whether it was an implied term of the agreement between the plaintiff and the defendant that the three licences had to be/were usable or otherwise effective for the clearance of the garments upon immediate presentation of the licences to the US customs."

11. The first issue I must resolve is whether or not the computer transmission system was notorious, certain and reasonable and/or well-known or ought to have been well-known to all persons involved in the trade of buying and selling export licences. In Cunliffe-Owen v. Teather & Greenwood [1967] 1 WLR 1421 at p.1438B, Ungoed-Thomas J said this :

" 'Usage' is apt to be used confusingly in the authorities, in two senses, (1) a practice, and (2) a practice which the court will recognise. 'Usage' as a practice which the court will recognize is a mixed question of fact and laws. For the practice to amount to such a recognized usage, it must be certain, in the sense that the practice is clearly established; it must be notorious, in the sense that it is so well known, in the market in which it is alleged to exist, that those who conduct business in that market contract with the usage as an implied term; and it must be reasonable.

The burden lies on those alleging 'usage' to establish it-in this case, the defendants.

The practice that has to be established consists of a continuity of acts, and those acts have to be established by persons familiar with them, although, as is accepted before me, they may be sufficiently established by such persons without a detailed recital of instances. Practice is not a matter of opinion, of even the most highly qualified expert, as to what it is desirable that the practice should be. However, evidence of those versed in a market-so it seems to me-may be admissible and valuable in identifying those features of any transaction that attract usage and in discounting other features which for such purpose are merely incidental; and if there is conflict of evidence about this, it is subject to being resolved like other conflicts of evidence. Arrangements or compromises to the same effect as the alleged usage do not establish usage; they contradict it. They may be the precursors of usage; but usage presupposes that arrangements and compromises are no longer required. It is, in my view, clearly not necessary that a practice should be challenged and enforced before it can become a usage, as, otherwise, a practice so obviously universally accepted and acted upon as not to be challenged could never be a usage."

In Dickson Watch & Jewellery Co. Ltd v. Mow Tai Insurance & Reinsurance Co. Ltd [1985] 1 HKC 505 at p.513G, Cruden DJ said this :

"...I should at this stage refer to the fact that during the trial there was some dispute in relation to whether persons giving evidence of trade custom were expert or ordinary witnesses. The plaintiff had not made any pre-trial application under O 38 r 38 for calling expert witnesses and so the restriction under O 38 r 36 applied. The defence objected to the calling of expert witnesses at the trial. There are a number of alternative methods open to a party seeking to adduce evidence of a trade custom or usage. One alternative is that direct evidence may be adduced as to actual instances within witnesses personal knowledge. This type of evidence is recognized by Phipson on Evidence (13th Ed) para 9-29. Where this alternative is adopted the evidence may be given by an ordinary witness and it is not necessary to establish his status as an expert witness. Although the weight to be given to the evidence of such an ordinary witness may be affected by the occupation of the witness, the latter qualities may in some cases establish him as an expert, but this is not essential, so long as he limits his evidence to transactions within his own actual knowledge and refrains from expressing an opinion. Of course it is also open to an expert witness not only to offer his expert opinion but to give direct evidence of facts within his knowledge."

12. To establish the custom or trade usage of the knowledge of existence of the computer transmission system existed the defendant called Mr Yang and three other witnesses. Mr Yang testified that he joined the defendant company in 1990 and from that time until 1997, he dealt with about 10,000 licences. He said that it took some several days for the procedure to be completed, in other words, there would be a time gap for several days from the issue of the licence to it being effective. He said that he learned about the procedure from his customers and made further enquiries about it with his mother company which is a state-owned company in the Mainland in about 1993 and 1994.

13. Whilst he testified that he learned of the procedure from customers, that does not indicate how broad was the knowledge of the procedure among those customers. He testified that he obtained information about the procedure from his own company but that must be viewed in the light of the fact the company is owned by the state and may have access to knowledge unavailable to others.

14. The second witness was Mr Feng Shan Tian. He had worked for one Cheng Hing Company dealing with export licences since 1991, and until April 1997 had dealt with some 20,000 export licences. He said that he first learned of the fact that there was such a procedure about two years after he entered the trade i.e. in or about 1993, and that he learned about it from people in the trade. He could not nor could any of the other witnesses who testified as to the trade usage, produce any documents setting out the computer transmission procedure and other than his learning of the existence of the system from sources he could not recall, he was unable to do more than to say that he did not at any time promises purchasers that when they obtained licences from him they would be immediately usable.

15. His evidence as with Mr Yang's evidence was that whilst the transmission procedure was known in the trade, it was not so notorious that it was something which came to the attention of a dealer in the licences immediately upon his commencement in the industry. Both Mr Feng and Mr Yang did not learn of the system for some years after their entry into the business.

16. Madam Ko Man Lok started dealing with export licences in 1992 and from then until 1997 had dealt with about 2,000 licences. She said that she learned about this transmission system from her customers as each year there were several customers whose goods failed to clear with the licences. She was then requested to expedite the verification of the licences through the issuers. Since she said she first learned of the transmission system from her customers in 1992 from exporting companies. In re-examination, she told the court she could not recall how she came to know of it.

17. The final witness in respect of this issue was Chu Wai San, the husband of Madam Ko, and who was assisted her in her business. He said he learned of the transmission system from his friends in the trade, who acted as both buyers and sellers, but could not recall when he first heard about it since it were so long ago.

18. The plaintiff conceding that it learned of the system when the goods were not cleared because the licences that obtained from the defendant were not usable upon their receipt by their customer in America.

19. The evidence called by the plaintiff from its members of staff, Mr Yuen, Mr Wong and Mr Li all testified that they had no knowledge prior to April 1997 of the computer transmission system.

20. The second major issue in this trial whether it was implied term of the agreement between the plaintiff and the defendant that the three licences were usable otherwise effective the clearance of garments upon immediate presentation, is also one of fact.

21. I accept that the definition of an implied term in a contract as set out in a case of BP Refinery (Westernport) Pty Ltd v. President and Councillors and Ratepayers of Shire of Hastings [1978] 52 ALJR 20 at 26E where their Lordships said :

"Their Lordships do not think it necessary to review exhaustively the authorities on the implication of a term in a contract which the parties have not thought fit to express. In their view, for a term to be implied, the following conditions (which may overlap) must be satisfied : (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that 'it goes without saying'; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract."

22. The onus was upon the plaintiff to establish that it was an implied term of the agreement between the parties that the three licences had to be usable or otherwise effective for the clearance of garments upon immediate presentation of the licences to the US customs.

23. It was the case for the plaintiff that the shipments of the garments under the three licences had already been made and that at the time they sought to purchase the licences from the defendant, the time of delivery of the items to the purchaser in USA was fast approaching. A fax from the US buyer indicates that they had set a deadline for taking delivery of goods at 28 April 1997.

24. Mr Wong testified that he was willing to pay a higher than market price for the quota covered under the three licences and that he paid a higher price the sum being US$73 per dozen. When the market price was US$60-70 per dozen.

25. Mr Li testified that he travelled from Beijing to Qingdao by air to pick up the Qingdao licence on 22 April 1997, and that a courier charge of $10,000 was paid by the plaintiff in respect to the two Henan licences.

26. Mr Wong testified that he worked late to enable those licences to be sent to the USA by the soonest air express delivery. The Henan licences were received by the plaintiff at about 11 p.m. on 24 April 1997 and clearly from the chronology of events had been immediately dispatched to the USA.

27. The plaintiff relies upon admissions by Mr Yang that he knew that the plaintiff was purchasing the three licences on an urgent basis and that Mr Wong had asked him the quickest way by which the licences would be available, and that because of the late delivery of the garments to the USA the US buyer might not accept the goods which were seasonal.

28. The plaintiff argues that the fact that they did not ask the defendant to urge the issuing authorities of the licences to effect the computer transmission quickly was indicative of the fact that the plaintiff did not know of the existence of the system.

29. The plaintiff further relies upon the telephone conversation on 17 April 1997 between Mr Wong and Mr Yang in which Mr Wong testified that he told Mr Yang that the goods had been shipped by the plaintiff to New York and the warehouse charges were accruing and the licences were essential for clearing of the goods.

30. The case of the defendant was that the plaintiff had actual knowledge of the computer transmission system prior to 25 April 1997. They relied upon the evidence of Mr Wong who testified that when he received the Henan licences on 24 April 1997, he faxed the copies of the same to the plaintiff's buyer in the USA and that he knew their brokers or forwarders would check with the US customs with the numbers of the licences. He said his understanding of the purpose was to check whether the licences were genuine and whether they were usable.

31. Further, Mr Yang testified that he discussed the computer transmission system with Wong on or about 22 March 1997, this is denied by Mr Wong who maintained that he did not talk with Yang at all in March 1997. There is a direct conflict between the evidence of the two witnesses on this matter.

32. The plaintiff argues that the various checks carried out by the plaintiff in respect of the usability of the licences through a firm in America called Broker Power, and their action in checking whether the licences were on the files of the US custom office indicates that they were well aware that the licences may be in existence but nonetheless not be effective licences, and that therefore there was a strong influence that they were aware that the computer transmission system was in place and that the details of the licences had to be transmitted from Beijing to the USA.

33. The defendant argues that given the clear and knowledge of the computer transmission system on the part of the defendant and the fact that Mr Yang was never in a position to tell the plaintiff when the licences would become effective and usable, it could not have been the obvious intention of Yang that the licences were immediately usable by the buyer of the plaintiff upon presentation of the same and that therefore there could not have been an implied condition in the contract that the licences were immediately usable upon their presentation.

34. As I have said, this issue is a matter of fact and this argument only succeeds if I find that the evidence given by Mr Yang is truthful and credible. I had the benefit of seeing and hearing all of the witnesses as well as considering their affidavits prepared prior to trial. I was satisfied on what I saw and heard that the witnesses for the plaintiff were honest and truthful witnesses, clearly at the time when they contracted to purchase the quota licences, they were acting under a considerable time constraint the goods having already arrived in New York, and without effective licences they could not be released. The actions taken by the plaintiff to obtain the licences quickly and the expenses incurred by the payment of courier fees and by the flight of Mr Li to the Mainland to collect the licences are evidence of this considerable lack of time.

35. I accept that Mr Yang was aware of this time constraint and that by agreeing to sell the licence quotas to the plaintiff in the circumstances must have known that if the licences were not usable then they were of little value to the plaintiff.

36. I was not convinced by the evidence of Mr Yang nor the three supporting witnesses who gave evidence concerning trade practice that it is notorious or well-known in the trade that the computer system of transmission exists. Clearly the information was not discovered by any of these witnesses by any formal means but only from information from informal discussion with customers who had had difficulties and other sellers of licences.

37. Mr Yang, in particular, was in a position, being employed by a state-owned company, the licencing conditions being controlled by the state, to put before the court some documentary evidence setting out the system and advice to the trade of the existence of this system because it clearly would effect the manner in which business must be done within that trade, if the system was in fact known to him at the time of the sale of the export quota licences to the plaintiff.

38. I am not prepared to find on the evidence which I accept to be true, on the balance of probabilities that the defendant has made out a case for that it is notorious, certain and reasonable and/or well-known or ought to have been known to all persons involved in the buying and selling of export licences that the computer transmission system meant that licences would only be usable when verification of those licences had become "on file" in a computer of the US authorities. I am not prepared to make a finding that it is a trade usage and the defendant fails on this point.

39. The next question is, as a matter of fact, the requirement that the licences be effective for the release of the goods in America upon presentation to them by the plaintiff is an implied term of the contract. In all the circumstances, I find that it is. I find that the term is reasonable and equitable given that Yang knew of the urgency of the matter and that the goods being in America and the purchasers in America having set a deadline that the licences would need to be used immediately when they were received in America. It was reasonable that this should be so and equitable between the parties the defendant receiving a higher than the market value at that time for the quotas it sold.

40. I am satisfied that it is necessary to give business efficacy to the contract because without that implied term the goods would most probably not be released in time, and without that implied term it was pointless for the plaintiff to have purchased the quotas. In the circumstances it was obvious that such implied term was necessary, is capable of clear expression and does not contradict any express term of the contract. I find for the plaintiff in respect of liability on this matter.

Quantum

41. As to quantum, the plaintiff paid the sum of $1,285,217.20 for the licences. Those licences were not useable by the due dates when the U.S. buyer was prepared to take delivery pursuant to the contract between the plaintiff and the U.S. buyer, and the evidence shows that the licences only became effective after the time when the contract had been rescinded between the U.S. buyer and the plaintiff. It is to be regretted that the three licences were lost on their way to Hong Kong on their return to the plaintiff. It is clear that negotiations were taken place between the plaintiff and the defendant for the reissue of those licences. Newspaper advertisements were made and written guarantees were given by the plaintiff.

42. I accept that in respect of the Qingdao licence the authority there was not prepared to reissue the licence for policy reasons and nothing that the defendant could do to procure a replacement.

43. In respect of the two Henan licences, requests were made by the defendant for undertakings from the plaintiff as to liability in the event that the licences were reissued. This procedure was undertaken with the intervention of a company called Winsource. At the end of the day notwithstanding attempts to do so the licences were not reissued. The defendant argues that this was a fault of the plaintiff. The plaintiff was unwilling to give an undertaking of such broad terms and delivered a rather narrower undertaking.

44. In my view, the plaintiff complied as best as it could, consistent with prudence with the request by the defendant for undertakings. I am satisfied that the defendant is liable to the plaintiff for the costs of the three licences in the sum of $1,285,217.20.

45. In respect of the damages claimed in paragraph 10 of the Writ of Summons, I am satisfied that the goods had to be returned to Hong Kong and had to be returned by air given the nature of the containers in which they were packed. The goods could not be released from U.S. Customs without a quota licence and repacking was not possible.

46. I further find that the warehouse charges in Hong Kong were properly incurred and were reasonable. The plaintiff was obliged to mitigate their damage by the sale of the returned goods and I accept that the evidence of resale resulted in a loss of profits of US$179,455.76.

47. There will be judgment for the plaintiff in the sum of $1,285,217.20 together with the damages set out in particulars (a) to (c) of paragraph 10 of the Writ of Summons, with interest at the rate of 8% from the date of the Writ until the date hereof and with interest thereafter at the judgment rate.

48. Costs for the plaintiff.