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HCA003404/1986
1986, No. A3404
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HEADNOTE
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Contract of Sale
Express time limit of 7 days after signing of agreement stipulated for buyer to establish and issue letter of credit to seller.
Seller reserving right to approve issuing bank and terms of documents.
Buyer failing to establish and issue letter of credit to seller within prescribed time and blaming seller for not approving same.
Contract prescribing right of cancellation of contract for breach of payment clause and "compensation" sum of 3% of contract value.
Term that if no charterparty agreement signed within 14 days of signing of agreement, contract will be null and void.
Charterparty signed within 7 days.
| Held : (1) |
There being no evidence to the effect that the buyer had sought such approval from the seller within sufficient time to enable the buyer to comply with the payment clause within the time limit, the buyer was in breach of contract and the seller could cancel the agreement.
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| (2) |
In view of small percentage of the full contract price at which the sum stated as "compensation" was fixed, it was intended to limit damages as a matter of convenience and it could not be described as a penalty.
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| (3) |
The Master's decision entering judgment for Plaintiff in sum of 3% of the contract price was correct, and appeal against that decision dismissed with costs. |
1986, No. A3404
IN THE SUPREME COURT OF HONG KONG
HIGH COURT
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BETWEEN
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SHUN LUNG DEVELOPMENT LIMITED |
Plaintiff |
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UNIDOS SYSTEMS (HONG KONG) LIMITED |
Defendant |
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Coram: Hon. Hooper J. in Chambers
Date of hearing: 15th September 1986
Date of delivery of judgment: 3 October 1986
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JUDGMENT
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1. This is an appeal from the decision of a Master on the 18th August 1986 entering judgment for the Plaintiff on an Order 14 application for summary judgment.
2. The Plaintiff's statement of claim sets out its claim succinctly in the following way -
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1. By an agreement in writing dated 24th April 1986 and made between the Plaintiff and the Defendant (hereinafter called "the Agreement") the Plaintiff agreed to sell and the Defendant agreed to purchase 5,000 cubic metres of Indonesian Plywood (hereinafter called "the Goods") at the price of US$258.00 per cublic metre (total purchase price US$1,290,000.00) to be delivered by the Plaintiff to the Defendant at Whampoa, Guangzhou, Mainland China 50 days from the date of a letter of credit being opened by the Defendant in accordance with the Plaintiff's requirements.
2. The Plaintiff will refer to the Agreement at the trial herein for its full terms, meaning and effect.
3. Clause 3(a) of the Agreement provides, inter alia, that the Defendant should make payment of the purchase price by means of an irrevocable and transferrable letter of credit at sight opened in the name of Inworld Development Limited at the terms satisfactory to the Plaintiff and issued to the Plaintiff within 7 days from the date of the Agreement, namely, 24th April 1986.
4. Clause 3(b) of the Agreement provides, inter alia, that should the Defendant repudiate the Agreement or fail to perform or observe any of the terms therein contained, the Plaintiff is entitled to cancel the Agreement and in such event the Defendant should pay 3% of the purchase price to the Plaintiff as agreed compensation.
5. Notwithstanding the Plaintiff's repeated requests and demands, the defendant has in breach of the said Clause 3(a) failed to issue to the Plaintiff the said letter of credit within the said time limit. In the premises, the Defendant has by its conduct evinced an intention no longer to be bound by the Agreement and it has wrongfully repudiated the same, which repudiation the Plaintiff has accepted by a telex dated 5th May 1986 or alternatively by the issuance and service of the Writ herein.
AND the Plaintiff claims against the Defendant for :-
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(a) |
the said 3% of the purchase price in the sum of US$38,700.00 or its equivalent in Hong Kong dollars at the time of payment;
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(b) |
alternatively, damages;
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(c) |
interest thereon;
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(d) |
further or other relief; and
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(e) |
costs. " |
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3. The application was supported by an affirmation from a Mr Tony Cheng Fuk-choi, deposing to the fact that he is the manager of the Plaintiff company and verifying and confirming the facts stated in the statement of claim. He exhibited thereto a copy of the Agreement, the subject matter of this action, and a number of telexes culminating in a telex of the 5th of May by which the Plaintiff company purported to accept the Defendant's repudiation of the Agreement.
4. The Agreement which is comparatively short is set out in full below:
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THIS AGREEMENT made the 24th day of April
One Thousand Nine Hundred And Eighty-Six BETWEEN SHUN LUNG DEVELOPMENT LIMITED of Room 703, Chow Seng Seng Building, 229 Nathan Road, Hong Kong ---------------------------------- (hereinafter called "the Seller") of the one part and UNIDOS SYSTEMS (HONG KONG) LIMITED at 606 East Ocean Centre, 98 Granville Road, Tsimshatsui East, Kowloon, Hong Kong (Hereinafter called "the Buyer") of the other part.
WHEREAS the Seller is engaged in the business of selling Indonesian plywood and the Buyer is desirous of purchasing from the Seller Indonesian plywood subject to the terms stipulations and conditions hereinafter appearing.
NOW IT IS HEREBY AGREED AS FOLLOWS :-
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| 1. |
Definitions
"goods" means Indonesian plywood 4' x 8' 3mm thick DBB/CC Grade, Type II glue, JPIC standard.
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| 2. |
Price
The Seller agrees to sell and the Buyer agrees to buy Five Thousand Cubic Metre (5,000 m3 ) of the goods at the price of US$258.00 per m3 C & F Fo Whampoa Guangzhou, China.
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| 3. |
Payment |
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(a) |
The said contract price of US$258.00 per m3 is strict unit price without any right to any discount. The Buyer shall make payment for the same by means of an irrevocable and transferable letter of credit at sight opened in the name of Inworld Development Limited for the full contract price at the terms satisfactory to the Seller established by the Buyer and issued to the Seller within 7 days from the date of signing of this Agreement and payable by a bank acceptable by the Seller in Hong Kong upon presentation of the usual documents required together with certificate of origin and inspection certificate issued by the Indonesian Government Authorities in respect of the goods. The letter of credit shall provide that telegraphic transfer reimbursement be allowed and that third party documents and charterparties Bill of Lading are acceptable.
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(b)
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Should the Buyer repudiate this agreement or fail to perform or observe any of the terms herin-containing (including payment terms), the Seller is entitled to cancel this agreement. In such event, the Buyer shall pay 3% of the contract price to the Seller as compensation of the Seller's loss and expenses incurred under this agreement but no other claims and damages whatsoever.
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Delivery
The Buyer shall be responsible for taking delivery of the goods at Whampoa, Guangzhou from such port in Indonesia to be advised by the Seller in due course which shall take place within a period of fifty days from the date of the said letter of credit. The Buyer shall arrange for the goods to be covered by insurance during the period of shipment from the port of loading in Indonesia to Whampoa and thereafter and the Buyer shall bear all insurance charges of the goods.
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Passing of risk and property
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The risk of the goods shall pass to the Buyer immediately upon the goods are loaded onto flight at the loading port in Indonesia. |
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The property in the goods shall pass to the Buyer on delivery without prejudice to any right of rejection which may accure to the Buyer under these conditions. |
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| 6. |
Condition of Sale
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It is hereby agreed between the parties hereto that the stipulation hereinbefore contained as to the description and quality of the goods is a condition of this Agreement the breach of which shall give the Buyer the right to reject the goods and treat the contract as repudiated. |
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Neither the Seller nor the Buyer shall be responsible for any failure or delay in delivery or in taking the goods or any part thereof due to causes beyond their control including strikes and lock-outs. If by reason of any such circumstances the Seller or the Buyer is unable to supply or take delivery of the goods or any part thereof in accordance with this Agreement then either party shall after giving the other party notice of its intention so to do be at liberty to sell or purchase (as the case may be) elsewhere at its own costs and risks such quantities of the goods which deliveries are suspended. Irrespective of whether any such arrangement as aforesaid is made either party hereto shall not be under any liability arising out of its failure to supply or take delivery in such circumstances nor shall the period of this agreement be extended. |
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Should the Seller repudiate this Agreement or fail to perform or observe any of the terms herein contained, the Buyer is entitled to cancel this agreement. In such event, the Seller shall pay 3% of the contract price to the Buyer as compensation of the Buyer's loss and expenses incurred under this Agreement but no other claims and damages whatsoever. |
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Notwithstanding anything hereinbefore contained, it is expressly agreed between the parties hereto that a charterparty agreement in respect of the delivery of the goods shall have to be signed by the parties hereto within a period of 14 days from the date of this Agreement. If the terms and conditions of such charterparty agreement could not be agreed and such charterparty agreement is therefore not signed within the aforesaid period, this Agreement shall become absolutely null and void and neither party shall have any claim whatsoever against the other.
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This Agreement shall be governed by and construed in accordance with the laws of Hong Kong. The parties accept the non-exclusive jurisdiction of the Courts of Hong Kong.
IN WITNESS the hands of the parties hereto the day and year first above written. "
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5. The Agreement was signed on the 24th April 1986 and the 7 days period referred to in Clause 3(a) (the Payment Clause) was therefore on the face of the Agreement due to expire on the 1st May 1986. It is common ground that no letter of credit was ever established or issued to the Plaintiff (as Seller) within that period.
6. Thus the Plaintiff, by its telex of the 5th May 1986 purported to accept the repudiation of the contract by the Defendant (as Buyer) and requested 3% of the contract value as agreed damages.
7. The application for summary judgment was opposed by the Defendant and reliance was placed on an affirmation by Mr Ng Kwok-leung, Ronald, a Director of the Defendant. It appears from this that a good deal of the facts are common ground.
8. The basis for the Defendant's defence is set out in the following paragraphs:
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I am informed and verily believe that at the time of signing the agreement, the Defendant was told that the Letter of Credit (hereinafter called "the L/C") should be opened in the name of one Inworld Development Ltd. (hereinafter called "Inworld") instead of the Plaintiff. Upon request, it was explained to Mr Fung of the Defendant that Inworld is the actual supplier of the plywood and an associate company of the Plaintiff and it would be more convenient if the L/C is opened in the name of Inworld.
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Since payment for the goods under the agreement is by L/C, it is necessary for the Defendant to confirm with Inworld (1) whether they have instructions from the Plaintiff to accept payment and be named as the beneficiary under the L/C, (2) what documents are required upon the presentation of the L/C and (3) which bank would be the receiving bank. Since the signing of the agreement, the Defendant has made numerous attempts to confirm the aforesaid with Inworld by telephone but to no avail. Numerous attempts have also been made by the Defendant to contact the Plaintiff since the Defendant was unable to confirm the said particulars with Inworld, but no reply was received from the Plaintiff. Therefore, the Defendant wrote to Inworld setting out the proposed terms in the letter dated 5th May 1986 to seek the confirmation of Inworld. A copy of the said letter is produced and shown to me marked "NKLR-2". No reply has yet been received until the date of this affirmation.
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However, in the afternoon of the 5th May 1986, the Defendant received a telex from the Plaintiff saying that they have purportedly accepted the alleged repudiation of the agreement by the Defendant.
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In the premises, it is only due to the failure of Inworld and the Plaintiff to confirm the matters referred to in paragraph 6 hereof that the Defendant was unable to open the L/C. I am advised and verily believe that the Plaintiff has repudiated the agreement by virtue of its failure to give instructions to Inworld or to confirm the matters aforesaid with the Defendant. In the circumstance, the Defendant is entitled to counterclaim against the Plaintiff for all loss and damages which has resulted.
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I am further advised and verily believe that if the Defendant is in breach of the agreement, which is denied, the amount claimed is irrecoverable being penalties in law. " |
9. That was the extent of the affidavit evidence which came before the Master.
10. On that evidence he entered judgment for the Plaintiff in the sum of US$38,700.00.
11. Before the hearing of this appeal, a further affidavit was filed by a Mr Fung Yiu-kui, Freddy, Sales Manager of the Defendant company producing a copy of a proposed "Defence and Counterclaim".
12. He also deposed to the fact that the agreement in question had been prepared by a Mr Kenneth Yeung, a Solicitor of Messrs. Poon, Yeung and Li who represented both the Plaintiff and the Defendant. He also produced a copy of a "Charterparty Agreement", signed on behalf of both the Plaintiff and the Defendant in accordance with Clause 7 of the Agreement.
13. The Defendant's contentions are set out in the proposed Defence and Counterclaim and may be summarised as follows -
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There was an implied term that the Plaintiff should approve the issuing bank, the terms of the letter of credit and the documents proposed by the Defendant before the letter of credit was established by the Defendant. It was said that the Plaintiff was in breach of this implied term thus preventing the Defendant from complying with the express term.
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There was an implied term and condition that the letter of credit should only be established by the Defendant and issued to the Plaintiff after the signing of the Charterparty but before the expiry of 14 days from the date of the Agreement. It was said that the Plaintiff by its telex of the 5th of May was in breach of this term.
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Alternatively the 3% "compensation" was not intended to be paid for late issuance as distinct from non-issuance.
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Alternatively the sum claimed was irrecoverable as a penalty. |
14. Mr Law for the Plaintiff in support of the first contention argues that it is a necessary implication of the contract and the business practice of the parties that they intended confirmation by the Plaintiffs about the issuing bank, the terms of the letter of credit and the documents proposed by the Defendant, before the actual establishment and issue of the letter of credit itself. No purpose is served, he says, by the issuing to the Plaintiff of a letter of credit which was not or may not be acceptable to the Plaintiff.
15. I may add that, there was however, no evidence of the business practice of the parties other than what could be ascertained from the Agreement itself.
16. Mr Kwok for the Defendant whilst conceding that the contract gave his client the right of rejection of the letter of credit, argues that it does not necessarily follow that the Plaintiff has to give the approval to the Defendant before the Defendant establishes and issues the letter of credit. For a letter of credit to be rejected, there must be a letter of credit already in existence. Clause 3(a) provides two things : (1) timing of the letter of credit, (2) the right of the Plaintiff to reject it. The Clause has not provided a time limit for the Defendant to give the information nor for the Plaintiff to give its approval of that information. The Defendant is not required to obtain any approval from the Plaintiff to establish a letter of credit. Mr Kwok says that the Defendant had seven days to issue a letter of credit but that letter of credit is subject to the right of rejection by the Plaintiff. If the Defendant fails to issue a letter of credit within that seven day period, it is in breach of the agreement. He argues that his client could not exercise its right of rejection in breach of contract. The right of rejection must be fair and reasonable. The Plaintiff cannot escape its contractual liabilities by requiring most unusual terms in a letter of credit and exercising its right to reject it unreasonably. Alternatively, he argues, if the Defendant is required to seek information from the Plaintiff on these matters, it must do so within the seven day period and on the evidence in this case, he says it clearly has failed to do so.
17. I agree with Mr Kwok that since it was an express term in the contract that payment should be made by means of a letter of credit established by the Defendant and issued to the Plaintiff within seven days from the date of the signing of the contract and that was not done, the Defendant was in breach of Clause 3(a) of the Agreement.
18. The terms of the contract are express and clear on that point. Any reference to the Plaintiff for confirmation as to the terms of the letter of credit and the name of its issuing banker should have been submitted by the Defendant to the Plaintiff within sufficient time to enable the Defendant to establish and issue the letter of credit within the time scale laid down by the contract. There is no evidence that this was done.
19. It is my judgment that the Defendant was clearly in breach of Clause 3(a) of the contract in failing to establish and issue a letter of credit in the prescribed terms within seven days.
20. It follows that I reject the second contention that there was an implied term and condition that the letter of credit should only be established and issued after the signing of the charterparty but before the expiry of 14 days from the date of the Agreement.
21. There is no ambiguity on this point. The express terms are clear and there is therefore no triable issue on the question of liability.
22. So far as the specified sum for compensation is concerned, Mr Law did not seek to argue before me the point concerning a distinction between late issuance and non-issuance. I do not therefore propose to say anything on that.
23. The final point made in the proposed defence and counterclaim and supported by Mr Law in his final argument is on the question of whether the 3% sum referred to in Clause 3(b) is compensation or a penalty.
24. Whether it is one or the other is a question of law. The correct principles had been set out by Lord Dunedin in Dunlop Pneumatic Tyre Company Limited v. New Garage and Motor Company Limited(1) as follows -
" (1) Though the parties to a contract who use the words 'penalty' or 'liquidated damages' may prima facie be supposed to mean what they say, yet the expression used is not conclusive. The court must find out whether the payment stipulated is in truth a penalty or liquidated damages .................
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(2) The essence of a penalty is a payment of money stipulated as in terrorem of the offending party; the essence of liquidated damages is a genuine pre-estimate of damage.
(3) The question whether a sum stipulated is a penalty or liquidated damages is a question of construction to be decided upon the terms and inherent circumstances of each particular contract, judged of at the time of the making of the contract, not as at the time of the breach.
(4) To assist this task of construction various tests have been suggested which, if applicable to the case under consideration, may prove helpful or even conclusive. Such are :
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(a)
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It will be held to be a penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss which could conceivably be proved to have followed from the breach.
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(b)
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It will be held to be a penalty if the breach consists only in not paying a sum of money, and the sum stipulated is a sum greater than the sum which ought to have been paid ...........
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(c)
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There is a presumption (but no more) that it is a penalty when 'a single lump sum is made payable by way of compensation, on the occurrence of one or more or all of several events, some of which may occasion serious and others but trifling damage. '
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On the other hand:
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(d)
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It is no obstacle to the sum stipulated being a genuine pre-estimate of damage, that the consequences of the breach are such as to make precise pre-estimation almost an impossibility. On the contrary, that is just the situation when it is probable that pre-estimated damage was the true bargain between the parties. " |
25. Mr Law in his opening argument referred to the Defendant's contention on this point but did not really argue the matter except to say that it is the Defendant's contention that 3% is disproportionate to the type of breach in question. It was only when Mr Kwok referred me to the authorities on this point that Mr Law entered the fray in his reply by arguing that for the purpose of this application there is no way the court can tell whether Clause 3(b) or 6(c) is in fact a reasonable and genuine estimate of the parties' damage bearing in mind the wording of the two clauses which he says are in very wide terms.
26. Mr Kwok submits that there is sufficient evidence for the court to determine whether it is a genuine pre-estimate of damages or not. It is clear, he says, that the only intent is to limit the parties' liabilities but not hold the Defendant in terrorem. In support of this argument, he draws attention to the words used in both Clauses 3(b) and 6(c) "As compensation of ........ loss and expenses incurred under this agreement but no other claim and damages whatsoever". He argues that it is clear that the parties have considered the question of loss and damages or either of them and they have agreed 3% as a proper estimate of their loss. It is clear, he says, that the parties envisage that there may be great fluctuation in the market price of the goods in question and because of the fluctuation, it is better to stipulate the parties' loss in the event of breach. He also stresses the use of the word "compensation" expressly used by the parties.
27. Having taken into consideration the law as summed up by Lord Dunedin in the Dunlop case, and the evidence as revealed in the affirmations, bearing in mind the very small percentage of the full contract price at which the sum stated to be "Compensation" has been fixed under the contract, I consider that the parties intended to limit damages to this specific percentage and if anything, this is less than what would be a pre-estimate of damage but has been arrived at between the parties as a matter of convenience.
28. Neither of the affirmations on behalf of the Defendant refer to any facts from which it could be inferred that this 3% figure is in any way excessive. Mr Ng Kwok Leung, Ronald's affirmation merely states in paragraph 9 -
" I am further advised and verily believe that if the Defendant is in breach of the agreement, which is denied, the amount claimed is irrecoverable being penalties in law. "
29. In the circumstances I consider that the Master was quite right to enter judgment for the Plaintiff in the sum of US$38,700 being agreed compensation.
30. I thus dismiss this appeal and confirm the decision of the Master with costs to the Plaintiff.
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(N.B. Hooper)
Judge of the High Court
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(1) [1915] A.C. 79 at p. 86-88
Representation:
Mr Alfred Law (Chu & Law) for Appellant/Defendant
Mr W.K. Kwok (Lee, Ng & Lam) for Respondent/Plaintiff
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