Kam Kee Co Ltd v. Ferrari Sportswear Ltd

HCMP007944/1981

"Parole evidence" rule.  Necessity to consider all surrounding circumstances - Heavy burden placed upon party seeking to admit oral evidence that contract is divided into separate parts namely written and oral agreements.  - Burden not discharged in this case. Duty to mitigate loss - Burden of proof is placed upon party endeavouring to establish that loss has not been mitigated.

No. 7944 of 1981

HIGH COURT

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BETWEEN

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Coram: The Hon.Mr. Justice Mayo.

Date: 18 March 1983

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JUDGMENT

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1. The plaintiffs are suing the defendants under a contract dated the 1st of September 1981 for the supply of 15,400 yards of material which they claimed were sold to the defendants at the price of US$26,950. It was a term of the said contract that the defendants should issue a letter of credit in favour of the plaintiffs to effect payment for the goods. The defendants issued a letter of credit but included in it a stipulation to the effect that the fabric which was being supplied should be of Japanese origin.  There was no such condition imposed in the contract and the plaintiffs accept that the material which they acquired to supply to the defendants was obtained from South Korea. The main issue which has to be determined in this case is whether it was a condition of the said contract that the material which was to be supplied must be of Japanese origin.

2. Mr. Ngan Ping who at the relevant time was the General Manager of the plaintiffs gave evidence on behalf of the plaintiffs. He left the employment of the plaintiffs in February 1982. He gave evidence that he conducted negotiations with the defendants which led to the contract being entered into. He was first approached by a Mr. So of the defendants company approximately two weeks before the contract was concluded. He understood that Mr. So had been given his name by a mutual acquaintance a Mr. Wong of King Shing Company. Mr. So had enquired whether he could supply him with some material containing a mix of 40% polyester 60% cotton 100 x 55 C.V.C. Mr. Ngan who has had about 10 years experience in the textile trade expressed the opinion that such a mix was rather unusual and he thought that such a material would in all likelihood be used for garments designed to be used while it was raining as there was a requirement that the material should be water resistant. He did not have such material in stock but as the plaintiffs had a trading relationship with a company which supplied such materials in South Korea he did not anticipate that there would be any difficulty in meeting the defendants requirements. He informed Mr. So of the position and in particular of the fact that the material would come from South Korea. Mr. So advised him of the amount of cloth required but Mr. Ngan was unable to quote a firm price until he obtained details from the South Korean supplier. In this first telephone conversation he also advised Mr. So that he would in due course be supplying him with samples and the defendants requirements for colour could be dealt with when the samples were supplied.

3. Mr. Ngan then caused a telex to be sent to the South Korean supplier, Pang-Rim Spinning Co. Ltd. Shortly thereafter Pang-Rim sent a telex in reply confirming that they would be able to supply the; quantity required at the price of US$1.57 per yard. Mr. Ngan then had a further telephone conversation with Mr So when he quoted a price of US$1.75 per yard which allowed him a `profit of 10% on the transaction. r The price was agreed and Mr. Ngan supplied samples to Mr. So. Mr. Ngan then prepared the appropriate documentation for the contract. He and one of the directors of the company then signed the documents in duplicate and submitted them to Mr. So for signature if he found them to be in order. Mr. So returned one of the sets of documents duly signed. Mr. Ngan was emphatic that at no time were there any discussions or agreement to the effect that the material should be of Japanese origin. In this connection Mr.. Ngan expressed the opinion that Japanese material was of a similar quality to South Korean material but there was a price differential of about 10%. The Japanese material was more expensive than the South Korean material.

4. Mr. Ngan then put in hand arrangements with Pang-Rim to ship the material to Hong Kong. He had a further conversation with Mr. So when it was mutually agreed that there should be a short extension of time for the opening of the letter of credit and the contract was amended accordingly.

5. The material was then ordered from Pang-Rim. Pang-Rim then despatched the goats to Hong Kong and they arrived within the time stipulated by the contract. The defendants then drew a letter of credit pursuant to the terms of the contract. However they included in the letter of credit a condition to the effect that the material which was being delivered under the contract must be of Japanese origin. There was no such requirement contained in the contract. Mr. Ngan said that he raised this topic with Mr. So and Mr. So declined to agree to omit this requirement from the letter of credit. Mr. Ngan also advised King Shing Company of the position as it had been agreed that delivery of the material should be made to them. King Shing did not reply to the letter which was addressed to them on this subject.

6. When it became obvious to Mr. Ngan that the defendants refused to budge he made arrangements for the material to be stored in a godown. He realised that difficulties were likely to be encountered by the plaintiffs in mitigating their loss and selling the material to other interested parties as the mix of the fabric was an unusual one. There was a very thin market in fabric of this type. However he arranged for four cartons containing the materials in the four different colours to be delivered to him so as to enable him to supply potential purchasers with samples. His efforts to sell the material met with very limited success. He understood that after he left the plaintiffs employment one of his colleagues Mr. Yau Chi Ming had succeeded in selling a small proportion of the material.   He expressed the view that it was very difficult to make any accurate estimate of the price which could now be obtained when disposing of this material. Much would depend on whether an interested purchaser could be found. He doubted though whether it would prove to be possible to get more than 4 or 5 Hong Kong dollars per yard for the sale of the material.

7. The other witness to give evidence for the plaintiff was Mr. Yau Chi Ming who is presently a member of the sales force of the plaintiff. He did not take part in the negotiations for the sale of the fabric. He was entrusted with the responsibility of disposing of the fabric which had been received from Pang-Rim. He took delivery of four of the cartons which were being stored in the godown. These contained the four separate colours of fabric in question. He then made arrangements for a large number of samples to be prepared and these were distributed to customers of the plaintiffs. He did not cause any adver-tisement to be placed in a newspaper nor did he make any approach to any relevant trade association. He said that the reaction which was obtained from customers who received the samples which were sent to them was dis-appointing. Since December 1981 only 6,304 yards had been sold and the total sale price for this had been $55,770.40. A number of parties had come forward and made inquiries but these inquiries had not led to any substantial sales. Some of the potential purchasers had requested small amounts of fabric to be supplied to them to enable them to prepare samples but results were generally disappointing. One customer, Kingdom Garment Company had purchased the bulk of the fabric which had been sold and sales to date had been agreed mainly on the basis that they should pay HK$8.90 per yard. Mr. Yau was not optimistic that it would prove to be possible to dispose of the balance of the material held by the plaintiffs within the foreseeable future. There were a number of imponderable factors and much appeared to depend upon whether Kingdom Garment Company would continue to have a need for this particular mix of fabric.  He expressed the opinion that if the balance of the cloth was disposed of in one lot rather than being sold off as and when needed by potential purchasers it would not fetch more than about 34 per yard. The plaintiffs did not call any other witnesses.

8. Mr. Wong Siu Ping, the proprietor of King Shing Garment Factory gave evidence for the defendants. He agreed that he had introduced Mr. So of the defendants' company to Mr. Ngan of the plaintiffs company. He had done so when Mr. So had asked him if he knew where he could obtain C.V.C. material with a mix of 40% polyester and 60% cotton. Mr. Wong had given Mr. So Mr. Ngan's telephone number.  At the same time, namely in about August 1981, he had telephoned Mr. Ngan and advised him that Mr. So needed this fabric.  Mr. Spicer who was representing the defendants asked Mr. Wong if he remembered whether there were any discussions concerning the proposed country of origin of the material to be supplied. Mr. Wong said that when he had spoken to Mr. So there had been reference to supplies having been received in the past from a Japanese factory which operated in Malaysia. When he had spoken to Mr. So there had been reference to three conditions being imposed in the contract for the supply of the material. The first related to price, the second the mix of the material and the third was that it should be made clear where the material came from. When Mr. Spicer pressed him concerning the third condition he said that he had informed Mr. Ngan that he had in the past used Japanese material. He did not say that any condition had been imposed that the material should originate from Japan. Mr. Wong's evidence was basically inconclusive to the main issue which arises in this case.

9. Mr. So Man Ho, the employee in the defendants company who was responsible for negotiating the contract then gave evidence. He is a buyer in the defendants company. He referred to the discussions which had taken place and confirmed that it had been Mr. Wong who had introduced him to Mr. Ngan of the plaintiffs company.  He said that the country of origin of the goods had definitely been a subject of discussion be himself and Mr. Ngan. He said that when he had spoken to Mr. Ngan he had referred to his telephone conversation with Mr. Wong. He had understood from Mr. Wong that the material should be Japanese material. Mr. Ngan had confirmed that this was the case. Even accepting this evidence at its face value it falls far short of amounting to the imposition of a condition of the contract that the material must be of Japanese origin. He attached importance to this as there was a difference in quality, between Japanese material and materials produced elsewhere. Japanese dyed materials were of superior quality. He did not want the material to come from South Korea. His company had an associate company in South Korea and if South Korean material had been required he could easily have obtained it from them.

10. It was evident from Mr. So's testimony that he made a number of references to the fact that he was only acting upon the instructions of his principal and clearly indicated that the extent of his authority within the defendants company was closely circumscribed. On several occasions in cross-examination he attempted to shelter behind his principal and repeated that decisions could only be made after reference to him. It would appear from his evidence that his principal was in New York at the time when these negotiations were conducted and when the contract was entered into. A copy of the contract document had been sent to his principal in New York and he had given instructions concerning the form that the contract should take. In particular he had been instructed that two of the printed conditions appearing on the reverse side of the contract should be deleted. Mr. So had communicated this requirement to Mr. Ngan who had acceeded to the proposed deletion. There had also been an amendment to the contract in relation to the name of the party which was to purchase the material.  Originally the contract had been in the name of Wideworld Exports Limited but at the request of Mr. So the contract had been amended so that it could be in the name of Ferrari Sportswear Limited. There had also been discussions concerning the cloth samples which were to be affixed to the contract for the purpose of indicating the colours of the four different colours of the cloth which were to be supplied. All of these matters were referred to by Mr. So in the context of establishing that there had been some delay in the matter and the defendants had not returned the documentation duly executed for some time after the submission of the contract documents to them. This had also necessitated a further amendment to the contract to provide for more time for the defendants to open a letter of credit for the payment of the material.

11. Mr. So claimed that the first time he knew that the material originated in South Korea was when he had a conversation with Mr. Ngan on the subject of the letter of credit. He, that is Mr. So, had includes a condition in the letter of credit which had been drawn by the defendants to the effect that the material must originate from Japan. $is motive for including this term was to protect his company's interests. Mr. Ngan had on receipt of the letter of credit telephoned him and had requested that this requirement should be excluded from the letter of credit. It was when this matter was discussed that he realised that the material was South Korean material. He felt that his company had been cheated and refused to comply with the request which was being made by Mr. Ngan to delete this requirement from the letter of credit.

12. Mr. Bharwaney who was representing the plaintiff subjected Mr. So to a searching cross-examination. Mr. So admitted that he did not have personal experience in dealing with 40/60 C.V.C. fabric. Leading on from this he admitted that if two samples of the material were produced to him, one originating from Japan and the other from South Korea, in the absence of being able to refer to the respective labelling, he would be unable to determine which material originated from which country. He also made the rather damaging admission that it was possible that when he had the first telephone conversation with Mr. Ngan reference had been made to Japanese standards rather than Japanese materials. This admission is of some significance because when Mr. Wong was giving evidence.concerning his experience with this type of fabric he said that he had had favourable experience of material which had been manufactured in Malaysia by a Japanese manufacturer.

13. Mr. So's evidence concerning the price of material coming from Japan and from Korea was also not very satisfactory. He agreed that the prices he had quoted for the respective materials were ex factory prices and that he had not made any allowance for any commission to be payable to the importer of the material. If a commission of 10% was to be chargeable on South Korean material costing US$.150 per yard, its price to the eventual customer would be US$1.68. By the same token if one takes the price of US$1.70 for the Japanese material, which was one of the estimates made by Mr. So, the eventual price to the customer would be something of the order of US$1.87. The unit price of the fabric under the contract between the parties was US$1.75 per yard. which is not conclusive one way or the other. It is not possible to draw any inference from the price of the material in the contract.

14. I have considered the evidence of all of the witnesses who gave evidence very carefully. I have endeavoured to weigh it against the background of the events which are common ground between the parties. There are a number of conflicts of evidence between the evidence given by Mr. Ngan on the one part and Mr. So of the other part. This is not so apparent with the evidence of Mr. Wong which did not really take matters much further. Subject to one or two minor details I found Mr. Ngan and Mr. Wong to be generally convincing and reliable witnesses. On the other hand I regret that I did not find Mr. So to be a reliable witness. On a number of occasions it was definitely my impression that he was prepared to make statements without due reflection and consideration. In particular he did not begin to give any plausible or satisfactory explanation for his preference for Japanese materials and his aversion to South Korean fabric. Nor was he at all convincing on the subject of the inclusion of the requirement for material of Japanese origin in the contract. On the one hand he said that it was a matter of great importance to him that the material should come from Japan and on the other he did not seem to think that it merited sufficient importance for its inclusion in the contract. He said that he was prepared to rely on trust. However he also gave evidence that he had spent a considerable amount of time scrutinising the fine print of the conditions on the reverse side of the contract and had insisted upon two of the conditions being deleted. Also he had not been prepared to trust Mr. Ngan to extend the date of providing the letter of credit for the payment of the goods without having a formal amendment to the contract.

15. Where there are conflicts between the evidence of Mr. Ngan and the evidence of Mr. So I am much more disposed to accept Mr. Ngan's version of the events and reject that of Mr.So. On the basic issue which arises in this case I find as a fact that there was no agreement between the parties to the effect that the material should be of Japanese origin. When I say this I mean that there was no oral agreement made by Mr. Ngan to this effect in any of his conversations with Mr. So.

16. At a comparatively early stage of the trial it was agreed by both counsel that I should hear the evidence of all witnesses notwith-standing the fact that part of the evidence may be inadmissible by virtue of the "parole evidence rule". It was further agreed that if this course was adopted Mr. Bharwaney would not be waiving any of his rights. With respect I consider this to be a sensible approach. I say this on account of the necessity for the trial judge to obtain an overall picture of the negotiations which were conducted before he is able to make a satisfactory determination of the issues. Put simply the parole evidence rule is as follows. Where the parties have embodied the terms of their contract in a written document, the general rule is that "verbal evidence is not allowed to be given ... so as to add to or subtract from, or in any matter to vary or qualify the written contract". I have taken this definition from paragraph 735 of the 24th edition of Chitty on Contracts. "General Principles" published by Sweet and Maxwell. Mr. Spicer sought to argue that the present case came within the exceptions referred to in paragraph 737 and 949 of that work. He also referred to the cases of Heilbut, Symons & Co. v. Buckleton ⁽¹⁾ and J. Evans & Son (Portsmouth) Ltd. v. Andrea Meriario Ltd.⁽²⁾   I regret that I do not consider that either of these cases are of assistance to Mr. Spicer as the circumstances of both cases were very different to those which are now before me. Each case has to be considered on its individual merits. I am satisfied that what is required of me is to determine, having regard to all the surrounding circumstances, whether it was the intention of the parties that the written instrument should embody all of the terms of the contract or whether it was the intention of the parties that part of the contract should be an oral contract and the remainder of the contract should be reduced to writing. As can be seen from the relevant case law a heavy burden is placed upon a party who is endeavouring to establish that the contract is divided into separate parts consisting of both oral and written agreements. I have no doubt whatever that it was the intention of the parties that the written contract I have referred to was intended by the parties to embody all of the terms of the agreement between them. In supoort of this conclusion I would refer to several matters. Condition 22 of the Conditions on the reverse side of the contract reads as follows:

I would also refer to the conduct of the parties. Although there was diagreement between Mr. Ngan and Mr. So as to the extent of the subsequent amendments which were made to the contract it is nonetheless common ground that some amendments were made to' the contract. I refer in particular to the amendment to extend the time for the opening of the letter of credit by the defendants and the deletion of two of the conditions on the reverse side of the contract. The parties conduct in agreeing and effecting these amendments is entirely consistent with an intention that the written instrument should embody all of the terms of the Contract concluded between them. I am therefore satisfied that Mr. Bharwaney has successfully established that the parole evidence rule is applicable to Mr. Sots evidence inasmuch as he attempts to give evidence of the agreement he claims Mr. Ngan concluded to supply material of Japanese origin. My ruling on this does not affect the result in this case as I have already indicated that even if the evidence of Mr. So was admissible I would have rejected it on its own merits for the reasons I have given.

17. To summarise the position on liability I find that the plaintiffs' claim for breach of contract succeeds and the defendants are liable to the plaintiffs for damages.

18. I will now consider the question of damages. I accept that it is correct to state that where a loss of has arisen there is a duty imposed upon the party bearing the loss to mitigate it. In this connection Mr. Yau Chi Ming's evidence concerning the action he took to mitigate the plaintiffs lossess was virtually unchallenged. I accept Mr. Yau as being a trufhful and reliable witness. I am also satisfied that he took all reasonable steps to mitigate losses which arose. Indeed I find myself in agreement with Mr. Bharwaney's contention that he did a great deal more than was strictly necessary. There is no necessity for the plaintiff to retain this material for an indefinite period. I consider that if the plaintiffs were now to dispose of the goods at the best price available they will have done everything necessary to mitigate their losses. Some difficulty arises in quantifying the amount of loss which has been suffered. Sales of materials which have been effected up to the present time have been made at the price of approximately $8 or $9 per yard. I am however mindful of the fact that most of sales of substantial quantities of material have been to one purchaser, Kingdom Garment Factory. It seems likely that Kingdom Garment Factory needed the material which they bought and would have been prepared to pay something approaching the full value of the material.  However if a purchaser does not have this immediate need he is not likely to be prepared to pay anything approaching the full value of the material. The best evidence I have available to me of the value of the material if it is disposed of immediately in one job lot is the evidence of Mr. Ngan.   He estimated that in such circumstances the material would fetch four or five Hong Kong dollars per yard. I can see no reason not to accept this evidence. It was not seriously challenged by Mr. Spicer. For the sake of simplicity I find that the value of the remaining material which is held by the plaintiffs is 75 cents a yard thus involving them in a loss of one dollar a yard under the terms of the contract. The final figures concerning the loss suffered by the plaintiffs are as follows. The total amount of material under the Contract was 15,400 yards. The sale price was US$1.75 per yard. 6,305 yards have been disposed of for HK$55,770.45. For this amount of material they should have received US$11,033.75. Their loss is therefore US$11,033.75 less US$8,450 (being HK$55,770.45 at an exchange rate of HK$6.60 to the US dollar) which amounts to US$2,583. There is then the balance of the material to be assessed, This amounts to 9,100 yards in round figures and at US$1 per yard being the loss the plaintiffs have suffered amounts to US$9,100. The amount of the totals for the loss on the material sold and for the balance of the material amounts to US$11,683.00. I accept the evidence for the storage of the material at HK$1,076.00. The plaintiffs will be entitled to judgment in these sums. The Counterclaim is dismissed. They will also be entitled to interest at 12% from the date of the issue of the writ. I will hear the parties as to costs.

Representation:

Mr. M. Bharwaney (C.C. Lee & Co.) for Plaintiffs.

Mr. R. Spicer (Hampton, Winter & Glynn) for Defendants.

(1)    1913 A.C. 30.

(2)    1976 1 W.L.R. 1078.