Alliance Printing & Manufacturing Co Ltd v. Apollo Textiles Ltd

HCA002888/1976

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

ACTION No. 2888 of 1979

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Coram: Mr Commissioner Mills-Owens, Q.C.

Date of Judgment: 28th May, 1980.

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JUDGMENT

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1. The plaintiffs are printers, and they claim damages from the defendants for failure to deliver goods under a contract dated the 28th - originally dated the 28th December, 1978.

2. The matter started off in this way. The plaintiff had a sales contract with a company by the name of Shantex Ltd. That was dated the 20th December, 1978, and was for 60,000 metres of printed 100% cotton ticking cloth, to be delivered in February, March and April, 1979. That was sales contract No. LS-292. Shantex were apparently agents, and the goods were to be exported to probably Australia.

3. In order to enable them to fulfil that contract, the plaintiff had negotiations with the defendant as a result of which the original contract of the 28th December, 1978 was entered into.

4. Going through that contract, it provides for the description of the goods, 100% cotton 2/1 twill grey sheeting, and the particulars and construction are set out. The yardage was 65,000 yards, price HK$5.43 per yard ex-mill nett, and the total amount of the contract was HK$352,950. Against "Shipment" it provided for partial delivery during February/April, 1979. Under "Destination" it provided for "Local Delivery," and under "Terms of payment" it is stated "By Local Letter of Credit drawn at sight to be opened immediately in our favour." Just above the words "at sight" were inserted in handwriting the words "30 days", and then further in brackets in pencil "spoken on phone". Then the contract goes on against "Remarks" to provide "Drawn against presentation of Sellers' signed Invoices & Delivery Orders endorsed by Buyers." It is signed by the defendant at the bottom right hand corner, and also on behalf of the plaintiff on the bottom left.

5. The contract as typed was apparently prepared by the defendant, and it is not clear exactly how it came to be supplied to the plaintiff. Mr Paul Cheung gave rather confused evidence as to the circumstances in which he actually signed the contract on behalf of the plaintiff. The defendant's case is that it was dispatched by post to the plaintiff. In any event, the words "30 days" were written in by Mr Cheung, I think it was, on both copies, and one copy was returned to the defendant.

6. I find it unnecessary to decide as to precisely the circumstances in which those words "30 days" came to be written onto the contract for reasons which will become apparent in due course.

7. Continuing then with the chronology, the next thing that seems to have happened is that on the 13th February, 1979 a L/C was opened by the plaintiff in the defendant's favour. But that, however, was for only 10,000 yards of the goods, and covered an amount of HK$54,300. That L/C, among other provisions, stated, "Goods to be delivered to Alliance Printing ....." and also called inter alia for "Cargo receipt issued and signed by Alliance Printing ......" The credit was to remain in force until 12th March, 1979. I should mention also that the credit referred to drafts being 30 days sight drafts.

8. Now apparently there were complaints from the defendant regarding this provision over 30 days sight drafts, and the fact that the L/C was not for the full amount of the contract. However, the L/C was retained by the defendant and not returned to the plaintiff.

9. The next thing that happened is that a further L/C was opened on the 2nd March, 1979, again for 10,000 yards and in the amount of HK$54,300. Once again it referred to 30 days sight drafts and to "Official Cargo Receipt issued by drawee", and required the goods to be delivered to the buyer's premises latest 25th March.

10. This letter of credit again was retained by the defendant, but who again apparently complained regarding the fact that no letter of credit had yet been opened for the full amount and also that it referred to 30 days sight drafts.

11. It is conceded that at least by this stage the plaintiffs were pressing for deliveries. The defendants, however, were not doing anything with regard to actual manufacture of the goods. In fact, it is accepted that they never started manufacture.

12. Mr Chan Kai-hon was asked why the defendants retained these letters of credit rather than returning them since apparently they were not satisfied with them. His answer was somewhat curious. He said, "They were retained in case the time might come when the other side complained about our failure to make deliveries, in which case we could make use of the evidence in these letters of credit to show non-compliance." That seems to me to indicate that at a fairly early stage, the defendants regarded themselves as somewhat vulnerable to a complaint and possible litigation over the fact that they were not manufacturing or/making any deliveries. The delivery period was February/April, and this was now March, and no deliveries had been effected nor had they started to manufacture.

13. In the middle of March, the plaintiff took the precaution of placing an order with Valiant Textiles for the same goods, covering a total of 35,000 yards, at a price of $5.90 per yard ex-mill nett.

14. On the 19th March, a third letter of credit was opened by the plaintiff, again for 10,000 yards. However, here the terms were different in that the L/C was available against sight drafts, and the L/C did not call for the goods to be delivered to the plaintiff, but stated that the facilities would be available against cargo receipts stating quantity and value of goods received.

15. The position therefore by this date, 19th March, was that the plaintiff had opened three letters of credit covering a total of 30,000 yards of the goods ordered. The defendant had retained all three L/Cs, no doubt for the purpose indicated by Mr CHAN Kai-hon. The defendant had not commenced manufacture, although this was now more than halfway through the shipment period. The plaintiffs had not been asked to take delivery of any goods. The defendants were apparently sitting back doing nothing, although they say that there were numerous telephone communications. And no doubt, the opening of the letters of credit themselves would have costed the plaintiff in terms of bank margins and tied up part of their banking facilities.

16. So it is not surprising that on the 21st March, they wrote by registered post to the defendants, through their solicitors, referring to the contract and asking the defendants to observe the delivery dates stated in the contract.

17. The reply to that letter was a letter of the 27th March from Alfred Lau & Co. denying the allegations made in the plaintiff's solicitors letter, and complaining of two particular matters, namely that the terms of payment had been altered by adding "30 days", and secondly that the plaintiff should have opened an L/C for the full contract amount of HK$352,950, but that in fact three L/Cs for a total sum of only $162,900 had been opened and had been opened late. The solicitors went on to say that they were instructed to return the three L/Cs.

18. However, in the last paragraph of that letter, they said that their instructions were that their client was willing to make a fresh contract on the same terms provided that the date of delivery should be altered to May/June, 1979, and that the offer would only be open until the end of the month.

19. The plaintiff's solicitors replied on the 30th March, and in paragraph three, they stated clearly that they were instructed to accept the offer.

20. The next thing that happened is that there was apparently a telephone conversation on the 7th April, 1979 between Mr Paul CHEUNG of the plaintiff and Mr. CHAN Kai-hon. This is referred to in a letter of the 7th April, 1979 from the plaintiff to the defendant. I think I should read the whole of the second paragraph of that letter.

"We refer to the telephone conversation of this morning between your Mr CHAN Kai-hon and our Mr Paul CHEUNG, both agreed that the L/C for the entire quantity will be established by end April 1979 valid till 30th June. You are kindly requested to start weaving the material as soon as possible and complete delivery of the entire quantity during May/June. When you present your Delivery Orders for our endorsement, please always attach with 1 yard sample which bearing a stamp of your company."

21. That then refers to an agreement that the L/C for the entire quantity to be delivered under the new contract is to be established by the end of April, 1979, and is to be valid until the 30th June? secondly, that the delivery of the entire quantity is to be during May/June.

22. There was no - certainly no immediate, reply to that letter, and certainly no immediate response saying that the letter misrepresented the telephone conversation that had taken place. Indeed, Mr CHAN Yim accepted in his evidence that paragraph two of that letter represented the agreement between the parties. He said he offered to fulfil the original contract provided a letter of credit for the full amount was opened in April, and that delivery would be within one month from the dates under the original contract. Those dates, it will be recalled, were February/April, 1979.

23. The next step in the chronology appears to be a meeting on about 23rd or 24th April, 1979, when the defendants, in the person of Mr CHAN Kai-hon and Mr CHAN Yim, met with Mr LAI of the plaintiff. They came with a revised contract No. APL/054/78 for the plaintiff to sign. That draft contract, as it was, had been typed out by the defendants and signed on their behalf by Mr CHAN Kai-hon, and corresponded to the terms of the original contract, except that against the word "Shipment", it provided for "Partial delivery during June/July, 1979". Under "Terms of payment", the words "at sight" had been underlined.

24. The plaintiff refused to sign that contract. The reason for this was given that they had been advised by their solicitors that a new contract had already been concluded, and it was unnecessary for this further document to be signed.

25. Mr LAI in evidence said that the meeting was an unpleasant meeting. He was not asked specifically why or in what terms it was unpleasant, but no doubt this was because the defendants had incorporated in this draft contract a provision for delivery to be June/July, whereas the telephone conversation and letter of 7th April had referred to delivery being May/June. Therefore if this contract was to be signed as drafted, the date when the plaintiff could expect to receive the goods would recede even further into the future.

26. According to Mr LAI, at that meeting, Mr CHAN Kai-hon apparently said to his father, CHAN Yim, in front of Mr. LAI, "I told you not to take this order. So much trouble. If we sell the yarn, we sell for a better price."

27. Apparently, as a result of the plaintiff's refusal to sign the document proffered at that meeting, the defendant then decided to call an end to the whole deal. Mr CHAN Kai-hon, having been asked when was the decision made to utilize the bales set aside for the plaintiff's contract for other purposes, said, "At that time, when the proposal for a new contract with delivery date postponed June/July which was refused by the other side, therefore we notified the other side of our intention not to fulfil this contract." He was asked, "Do you mean the letter of the 26th April?" He said, "Yes." He was asked, "Your factory had not yet received the last letter of credit from the plaintiff." And he answered, "Right, we did not expect to. We did not expect any more L/C coming from them."

28. On the 24th April, the plaintiff applied to the Banque Belge for the opening of an L/C in the defendant's favour, and that L/C was opened in due course. I will come to it in a moment.

29. Meanwhile, the letter of the 26th April was written by the defendant's solicitors to plaintiff's solicitors to inform the plaintiff that the defendant no longer had any interest to sell to the plaintiff the commodity referred to in the contract. They stated their reason to be that the plaintiff had failed to open a letter of credit for the whole sum by the end of March, although there had in fact been an agreement that it be opened by the end of April. It is not clear when that letter was actually written because it was not received by the plaintiff's solicitors until the 1st of May.

30. On the 28th April, the plaintiff's letter of credit No. 65972 was opened by the Banque Belge and was dispatched by registered post to the defendant on the 30th April. That letter of credit provided for sight drafts, and called for two alternative groups of documents. The first group required signed invoices and cargo receipts. The alternative group called for godown warrants, fire insurance policy and inspection certificate. I will deal with those in more detail later. The credit was for the full amount of HK$352,950 and was valid until 30th June, 1979. It was apparently received by the defendant on the 1st of May.

31. Thereafter there was some further correspondence between the parties, and on the 16th May, there was a slight amendment to one of the terms of the L/C whereby the inspection certificate was to be issued by the opener instead of by the beneficiary. But on the 16th May, the plaintiff's solicitors wrote to the defendant's solicitors stating that they had instructions to commence legal proceedings against the defendant for breach of contract and thereby, by implication, accepted the defendant's repudiation which I have referred to earlier.

32. Finally, as part of the chronology, I should refer to the contract of 23rd May, 1979 with Chun Sing Weaving & Dyeing Works Co. Ltd whereby the plaintiff placed an order for 35,000 yards of the same type of goods at a price of HK$6.05 per yard net ex-mill.

33. Turning briefly then to legal considerations, I entirely accept the authorities that have been cited to me by Mr FUNG with regard to the buyer's obligation, as regards opening letters of credit where this is a term of the contract for the purchase of goods.

34. He cited the case of Garcia & Page, 55 LI. L.R. 391, as authority for the proposition that where under the terms of the contract a confirmed credit has to be opened immediately, that means that the buyer must have such time as is needed by a person of reasonable diligence to get the credit established. Mr FUNG contends, and I entirely agree with him, that when the plaintiff did not open these letters of credit for a period of 40 days after the contract of the 28th December, 1978, that did not comply with the requirement that the L/C be opened "immediately."

35. I also accept that the buyer's duty is to open a letter of credit which conforms with the contractual requirements, and that the opening of a letter of credit is a condition precedent to the seller's obligation to perform his duties under the contract. The authority for that was Trans Trust S.P.R.L. v. Danubian Trading Co. Ltd, 1952, 2 Q.B. 397.

36. I equally accept the passage that he cited from Cheshire & Fifoot on Contract in the 9th edition at page 574 where the case of Avery & Bowden is referred to in support of the proposition that where there is unilateral repudiation, nevertheless the contract continues in force and is still binding until that repudiation has been accepted.

37. I turn to consider my findings, and these are mostly of fact, but partly of mixed law and fact.

38. As regards the provision in the contract stating, "Price: HK$5.43 per yard ex-mill", I agree that strictly it was the plaintiff's duty both to arrange for the goods to be collected from the defendant's factory, and to pay for all transportation expenses incidental thereto. In fact, this is not really in dispute between the parties. This, of course, would be subject to any informal arrangements that might otherwise be made. For example, it will always be open for the defendant, by arrangement, to send over the goods at the plaintiff's expense. But as I said, strictly quite clearly it was the buyer's duty to collect the goods from the seller's factory under an ex-mill contract.

39. I have already indicated that in so far as the contract provided for the L/C to be opened immediately that it was the plaintiff's duty to act with diligence and cause that to be opened promptly, and that the plaintiff was in breach in this respect.

40. I am also of the view that in the absence of any specific agreement between the parties, the plaintiff's duty was to open the letter of credit in the full amount, notwithstanding that there were to be partial deliveries.

41. I note also that the three L/Cs that were opened did not cover the whole of the shipment period. The shipment period in the original contract provided for partial delivery during February/April, 1979, but the precise dates and amounts of each delivery are not spelt out. In those circumstances, the sellers could want deliveries to be taken either very early on or very late on in the shipment period. Therefore, they would be entitled to have the L/C opened for the full amount before the first date of shipment and covering the whole of the shipment period.

42. Whatever Mr LAI may regard as the practice of the trade with regard to the opening of letters of credit, the position in law is quite clear. If the contract says "open immediately", it must be opened as soon as the requisite formalities can be completed with due diligence. If the contract is silent as to when the letter of credit is to be opened, then it must be opened at the latest by the earliest date of shipment, here February. I cannot accept that what Mr LAI describes as a trade practice is in fact a trade practice. It may possibly have happened in his experience, but that would be by way of particular arrangement or concession between the parties.

43. Equally the plaintiff under the terms of the contract was clearly under a duty to open the letter of credit regardless of when the defendant started production. That is to say, the plaintiff was not entitled to wait until the defendant did in fact start production.

44. However, the position under the original contract is, in my view, academic because it is quite clear that the original contract was replaced by a new contract. I find that by the letter of the 27th March, a fresh contract was offered on the same terms except that delivery was to be May/June, and that offer was accepted by the plaintiff by a letter of the 30th March.

45. This fresh contract superseded the original contract. There was no question of them continuing to co-exist side by side. Thereafter the original contract went by the board except as a term of reference for the new contract.

46. The terms of the new contract were the same as the original contract. But as a result of the telephone conversation between Mr Paul CHEUNG and Mr CHAN Kai-hon on the 7th April, I find that it was agreed that the L/C had to be established by the end of April, and be valid until the end of June, and that the entire quantity was to be delivered during May/June.

47. I find that the defendants on about 23rd or 24th April proffered a revised contract which differed from the new contract which was already in existence. It differed in that it stipulated for shipment during June and July, whereas shipment in May/June had already been agreed. I consider, therefore, that the plaintiffs were entitled to refuse to sign that draft contract as they did.

48. On some date between the 26th April and the 1st May, the defendant's solicitors, on their behalf, repudiated the defendant's obligations under the new contract by the letter bearing the date 26th April, delivered, as stated by counsel for the defendant, by hand on the 1st of May.

49. The plaintiffs did establish a letter of credit for the full amount of the new contract by the end of April, namely L/C 65972 dated the 28th April, which was valid until the end of June, and this was advised to the defendants by registered post on the 30th April. There was evidence that at this stage the market was rising. Mr. HONG Cheung-wah stated that business was active and expecting a boom.

50. The principal question that then arises is as to whether the letter of credit which was opened by the plaintiff complied with the contract then in existence between the parties and on that I find as follows:

51. First of all, it was opened in time.

52. Secondly, it called for sight drafts, not 30 days drafts, which had been the particular complaint of the defendants previously.

53. Thirdly, it did not oblige the defendants to effect delivery to the plaintiffs. It merely provided for one on several deliveries in Hong Kong, and did not differ from the contract in this respect. In particular the reference to cargo receipts referred to the goods having been "received" in good condition.

54. Fourthly, I find that although the letter of credit did itemize three documents - and I refer now to go down warrant, fire insurance policy and inspection certificate - which were not referred to in the original contract nor stipulated for in the new contract, the reference to these in the letter of credit did not impose additional obligations on the sellers.

55. In my view, on the true construction of the letter of credit, the sellers were given the option of proffering either documents 1 and 2 with their drafts, or documents 3, 4 and 5. The sellers did not in any circumstances have to furnish documents 3, 4 and 5 if they did not wish to do so. If they presented drafts with documents 1 and 2 to the bank, the bank would be obliged to honour its engagement to negotiate those drafts contained in the letter of credit and could not refuse to do so on the basis that documents 3, 4 and 5 had not been presented.

56. Fifthly, in so far as documents 1 and 2 are concerned, the provision calling for cargo receipt did not correspond literally with the written terms of the contracts, that is the new contract, and on that, my views are as follows.

57. I do not consider that the insertion in the letter of credit of a requirement that cargo receipts be provided rather than delivery orders amounts to a breach of the plaintiff's obligations for these reasons: - first of all, whether the defendant was to be required to present a delivery order duly endorsed or a cargo receipt signed by the plaintiff did not make any material difference. Both documents required the defendant to obtain the plaintiff's signature at the time that the goods were released to the custody of the plaintiff. If no signature was forthcoming then ex hypothesis the goods would not be released to the plaintiff. If no signed cargo receipt was forthcoming as called for in the letter of credit, the defendant would be quite entitled not to release the goods to the plaintiff or to the plaintiff's transportation company.

58. Secondly, it is said that a delivery order may be a document of title. That seems to me quite irrelevant in the present case since it is not the defendant who would be receiving the document of title but rather the defendant who was supplying the document of title, if indeed it was one in the particular circumstances of the case. If the letter of credit required merely a cargo receipt, that is all that the defendant had to supply to get his payment under that L/C.

59. Thirdly, under this sub-head, on the facts as I find them, it is plain that the defendants did not attach any importance to the fact that a cargo receipt rather than a delivery order was required by the letter of credit.

60. I say that for these reasons. Each of the first three L/Cs called in terms for cargo receipts. There was certainly no complaint in writing that these L/Cs called for cargo receipts rather than delivery orders, and no reference to this was made in the letter of 27th February. Again there was no response to the letter of the 30th March when the three L/Cs were returned making any point that there was a discrepancy between the contract and the L/Cs in this respect. Then again in the draft contract of the 23rd of April, although great emphasis was attached to the words "at sight", because they were underlined, no particular emphasis was placed on the point that delivery orders, not cargo receipts, were to be utilized for negotiation of the credit. In fact, the terminology under the draft agreement was virtually identical to that under the original contract, and no special emphasis was placed on delivery orders. Then again the letters of the 26th April, the 4th May and the 8th May made no mention of this point. It is not in fact mentioned in the correspondence until the letter of the 24th May, which of course was after litigation had been threatened by the plaintiff's solicitors. Even in that letter of the 24th May, there is no suggestion that the defendant had drawn or repeatedly drawn the plaintiff's attention to the necessity for delivery orders instead of cargo receipts. But there seems to be a more compelling reason for believing that in fact the point was never raised by the defendant, and that is this. The plaintiffs were anxious to get the goods. They opened three letters of credit, albeit for less than the contract amount. When the arrangements for the new contract were concluded, they took care to open the L/C for the full amount in time and on terms calling for "sight" drafts. It seems to me that in those circumstances it is inconceivable that if the defendants had been complaining about the provision relating to cargo receipts in the previous L/Cs that the plaintiffs would not also have ensured that the final L/C satisfied the defendants in this particular respect. It would have been very simple for the plaintiffs to have put in a requirement for delivery orders rather than for cargo receipts. It would have cost the plaintiffs nothing, and as is quite clear, the plaintiffs were most anxious to get the goods. I am quite certain that in those circumstances, they would have made whatever amendment was necessary to the L/C to conform to any complaint that had been made by the defendants in that particular regard.

61. In these circumstances, I conclude that no complaints were in fact made on this point to the plaintiffs, and that the point was seized upon by the defendants after the event as one which they hoped will justify their repudiation. I do not accept the evidence of Mr CHAN Yim and Mr CHAN Kai-hon that this was raised with the plaintiffs at the time when the first three L/Cs were opened, and I consider that their evidence on this aspect at least has been enhanced by the realization that it may afford them ground to justify their repudiation which otherwise they must appreciate is quite unjustifiable.

62. Alternatively, if the provision in the letter of credit calling for signed cargo receipt was technically a breach on the plaintiff's part of his duty to supply a letter of credit conforming to the terms of the contract, I am quite clearly of the view that that of itself did not permit the defendant to treat the contract as at an end and their liability discharged. The plaintiffs had manifested their intention of complying with the requirements of the contract by providing a letter of credit in time for the full amount. If the defendants contended that one or more of the terms of the letter of credit did not conform to the contract in respect of the documents called for, then the defendants' duty was to draw this to the attention of the plaintiffs to give them the opportunity of amending the credit. They had already effected the amendments asked for regarding "30 days", the full amount etc. If this was an objection of substance, which in my view it is not, then the defendants should in such circumstances give notice to the plaintiffs of their objection and give them an opportunity to amend. There was ample time for the plaintiffs to amend before the defendants would be in a position to draw on the L/C since no goods had yet been manufactured anyway. This the defendants did not do. They had, in any event, already made up their minds to repudiate, in effect, whatever form of L/C was provided.

63. In the further alternative, I agree with counsel for the plaintiff, Mr YEUNG, that the words of Mr Justice Diplock as he then was, in Enrico Furst v. Fischer,1960, 2 Lloyd's 340, at page 350, where he cites Lord Denning in Rickards & Oppenhaim, are apposite. I won't read the full quotation because it is, of course, available. But the words that seem particularly appropriate are where Mr Justice Diplock said,

"If by his conduct the seller leads the buyer to suppose, and to act upon the supposition, that he, the seller, will not insist upon the opening of the credit within the specified time, he waives his right to treat the failure to open the credit within the specified time as a breach of condition entitling him to repudiate the contract, but he does not thereby waive his right to have the credit of the particular kind opened with a reasonable time, and to treat failure to open it as a breach of condition if it is not opened in a reasonable time."

64. Applying that to the present case, in the light of the defendant's conduct with regard to the terms of the previous letters of credit, that is to say the fact as I find that they made no objection to the reference to cargo receipts in the previous letters of credit, if they decided now to take objection on this point, then it was for them to give the plaintiff the opportunity of correcting the L/C in that particular respect, and this they did not do.

65. I accept and find, therefore, that the defendants repudiated their obligation under the contract because the market was rising, and that they thought they could do better, and no doubt have in fact done better, by selling elsewhere.

66. In conclusion, I find that the defendants were in breach of the new contract to deliver 65,000 yards of cotton sheeting during the period May/June. I accept that the plaintiffs purchased from Valiant and Chun Sing in order to supply Shantex at the prices that are pleaded, and that the plaintiffs' loss was as claimed, $35,050. Although the purchase from Valiant was on the 16th March, I accept that it was indeed for the Shantex contract. In fact, this is to the defendant's advantage because if the plaintiff had not bought then and had waited until May, no doubt they would have had to pay the higher price then prevailing, namely $6.05, which was the price paid to Chun Sing, and in which case the damages sustained by the plaintiff would have been $40,300.

67. Accordingly, there will be judgment for the plaintiffs in the sum of $35,050. I propose to award interest on that sum. One has to look at matters broadly in the context of interest. Interest rates have been very high over the last year. Apparently the prime rate has now dropped to 14%. In any event, in all the circumstances, I propose to award interest at a rate of 12% from the date of the Writ of Summons. The plaintiff is to have the costs of the action. I am obliged to counsel for their assistance

Representation:

Wally Yeung (Ng & Yung) for Plaintiff

Alfred Fung (Alfred Lau & Co.) for Defendant