Bian Bee Co Pte Ltd v. Philipp Brothers Hong Kong Ltd

HCA001139/1978

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

ACTION NO. 1139 OF 1978

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Coram: Mr Commissioner Wei, Q.C. in Court

Date of Judgment: 9th August 1980

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JUDGMENT

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1. In the middle of September, 1976, the defendant, a trading company in Hong Kong, sent two of its representatives Joachim Schweimler, (JS) and WONG Chong-chen (Wong) to Indonesia to promote sales of steel billets. There they had discussions with the P.T. Growth-Sumatra Industry Ltd (GS), a manufacturer of steel bars. They were then referred by GS to the plaintiff, a trading company in Singapore. There they had negotiations with NG Cheong-ling, a representative of the plaintiff. As a result of these negotiations the parties entered into a contract on the 29th September, 1976 whereby the defendant agreed to sell to the plaintiff 1000 metric tons of mild steel secondary billets.

Was the written contract coupled with an oral term?

2. Paragraph 2(i) of the Defence alleges that there was an oral term that the defendant should ship the goods on a chartered vessel but on "liner terms", whilst the plaintiff pleads only a written contract.

3. There is no dispute as to the contents of the written contract. Its relevant terms are as follows:

4. Ng the plaintiff's only witness stated that during negotiations it was agreed that the defendant should ship the goods by a liner or a non-chartered vessel. This oral agreement was reduced to writing and was a term of the written contract. To him the words "liner terms" in the price clause meant that goods were to be shipped by a liner or a non-chartered vessel.

5. On the other hand, the testimony of JS and Wong may be summarized as follows. As far as they could ascertain, there was no regular liner service, i.e. vessels travelling on regular schedule, between the loading port in India and Belawan. So shipment would be by a chartered vessel. The parties agreed on "liner terms", which meant that the contract price would include the costs of discharge at Belawan. Ng agreed to the use of a chartered vessel. The written contract Agreed Bundle pp. 1-2 (AB 1-2) is silent on what kind of vessel should carry the goods. That meant that the defendant had the option of using a liner or non-chartered vessel or a chartered vessel.

6. The International Chamber of Commerce's publication "Guide to Incoterms" 1980 Ed. states at p. 46, "If the goods are carried on so-called liner terms, the freight will ordinarily include loading and unloading costs." This statement supports the interpretation of JS and Wong of the words "liner terms". I accept this interpretation and find that this is the sense in which these words would be reasonably understood by the plaintiff and is also the sense in which they would be understood by reasonable businessmen engaged in international trade. If Ng was mistaken as to the meaning of these words, the plaintiff was nevertheless bound by them in their true technical sense. (Mallan v. May, 13 M. & W. 511 @ 517-8; Fowkes v. Manchester & London Assurance Association, 3 B. & S. 917 @ 929-930; Smith v. Hughes (1871) L.R. 6 Q.B. 597 @ 607).

7. I find that during negotiations, the parties agreed that the defendant should have the right to decide whether to make shipment by a liner or non-chartered vessel or a chartered vessel, and that that is also the meaning of the written contract which permitted either mode of shipment. The oral term pleaded in the Defence means that the defendant was not only entitled but also obligated to ship by a chartered vessel. In my view there was no such oral term.

Bill of Lading

8. On the 5th October, 1976, a letter of credit was opened on the instructions of the plaintiff by the Bank of America in favour of the defendant for the full amount of the contract price. The credit was subject to the Uniform Customs and Practice for Documentary Credits (1974 Revision), International Chamber of Commerce, Publication No.290, Article 19(a) (ii) of which provides that unless specifically authorized in the credit, bills of lading which are issued under and are subject to the conditions of a charter-party will be rejected. This provision has the effect of prohibiting, in the absence of specific authorization, shipment by a chartered vessel. The credit was therefore useless to the defendant as no liner or non-chartered vessel was available. On the same day, the defendant telexed to the plaintiff requesting amendment of the letter of credit to permit shipment by a chartered vessel. The request was refused. In my view, it was a condition of the contract that the plaintiff should establish a letter of credit in accordance with the contract, namely, a letter of credit which would permit shipment by a chartered vessel. As pleaded by paragraph 4 of the Defence, the plaintiff's refusal so to amend the letter of credit amounted to a breach of that condition.

9. It appears that from the 3rd November, 1976 until the 19th November, 1976, the defendant was unable to provide a direct steamer for the shipment. As will be explained later, I do not think it is open to the plaintiff to complain because so long as the plaintiff failed to open a letter of credit in accordance with the contract, the defendant had no obligation to make shipment. The parties carried on negotiations for a compromise until the 22nd November, 1976 when the negotiations broke down and the defendant by telex to the plaintiff (AB - 30) rescinded the contract on the ground that the plaintiff had failed to open a workable letter of credit. In my view, the defendant was justified in doing so.

The 5% Clause

10. The plaintiff claims a 5% compensation on the contract price amounting to US$8,375 under sub-paragraph (2) of the Remarks Clause of the contract on the ground that the defendant failed to make shipment on or before the 31st October, 1976. The deadline was in fact extended at the request of the defendant to the 7th November, 1976. The plaintiff in my view can no longer rely on the original date for making such a claim. Furthermore, as contended by the Defendant's Counsel, the opening of a letter of credit which would permit shipment by a chartered vessel was a condition precedent to the obligation of the defendant to make shipment (Trans Trust. S.P.R.L. v. Danubian Trading Co. Ltd (1952) 1 Lloyd's Rep. 348 @ 355; Lindsay v. Cook (1953) 1 Lloyd's Rep. 328 @ 335). The position is therefore that as long as the plaintiff failed to open a letter of credit in accordance with the contract, the defendant had no obligation to ship the goods. Such an obligation never arose because the plaintiff never opened such a letter of credit. In any event, the defendant was discharged from any such obligation on the 22nd November, 1976 when they terminated the contract which the plaintiff had repudiated by refusing to open a workable letter of credit. For these reasons the plaintiff's claim must fail.

Penalty or Liquidated Damages

11. As there was considerable argument as to whether the 5% compensation was a penalty or liquidated damages, I think I should state my views even though they are obiter. The onus of showing that a stipulation is a penalty is on the party who is sued upon it - in this case, the defendant. According to Ng, the 5% was agreed because it was a "reasonable percentage for the contract". I do not think that statement carries the matter one way or the other. On the evidence, the percentage may or may not bear some relation to the loss or damage that might result to the plaintiff from a breach of that clause. The question was simply not gone into. In Law v. Local Board of Redditch (1892) 1 Q.B. 127, it was held that in as much as the sums agreed to be paid as liquidated damages were payable on a single event only, viz. non-completion of works, they were to be regarded as liquidated damages, and not as penalty. In the present case, the 5% was to be paid on a single event only, i.e. non-shipment by the date stipulated. For these reasons I think the 5% compensation should not be regarded as a penalty.

12. Defendant's Counsel also contended that the 5% clause applied only to late shipment and not to non-shipment and that as the present case was one of non-shipment, there was no liability to pay the 5%. As a matter of construction, it appears to me that the words are clear and unambiguous. Sub-paragraph (2) of the Remarks Clause, particularly the word "latest", which appears twice, together with the Shipment Clause shows clearly that the intention of the parties was that the latest shipment date or the extended date was of the essence of the contract and that failure to make shipment by such date would discharge the buyer from further performance of the contract. Counsel for the defendant sought to rely on Ng's testimony that the 5% clause was to make sure that the defendant would make shipment on time and that no provision was made for non-shipment as he was persuaded by JS and Wong that the defendant would in any event make shipment. I do not think that I can take such evidence into account. Firstly, the words are clear and un-ambiguous, so surrounding circumstances cannot be looked at (Cheng Kwei Sheng v. Li Shek Ting (1976) H.K.L.R. 121). Secondly, evidence of negotiations or of the parties' intentions should not be received as part of the surrounding circumstances. What is admissible is evidence of the factual background known to the parties at or before the date of contract, and objectively the 'aim' of the transaction. (Prenn v. Simmonds (1971) 1 W.L.R. 1381 @ 1385).

Counterclaim

13. The defendant's counterclaim is for damages for the breach of the term and condition that the plaintiff should open a letter of credit in accordance with the contract. The sum claimed of US$2,500.00 represents the difference between the contract price and the price obtained upon re-sale on the 22nd November, 1976 when the contract was terminated. Wong gave evidence of such resale which I accept. The other claim for US$3,580.27 was abandoned.

14. The plaintiff's action is dismissed. There will be judgment for the defendant in the sum of US$2,500.00 together with interest thereon at the rate of 10% per annum from the 22nd November, 1976 to the date of judgment.

Representation:

K.S. Lee (Woo, Kwan, Lee & LO) for Plaintiffs

Lester Kwok (Deacons) for Defendants