Faranrah Ltd v. Cherry Garments Co Ltd

cacv 163/2004

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 163 of 2004

(on appeal from HCA NO. 9974 of 1997)

____________________

BETWEEN

____________________

Before: Hon Stock, Le Pichon JJA and Barma J in Court

Date of Hearing: 14 January 2005

Date of Handing Down Judgment: 12 July 2005

____________________

J U D G M E N T

____________________

Hon Le Pichon JA:

1.This is an appeal from the judgment of Gall J dated 7 May 2004 whereby the defendant was adjudged to pay the plaintiff (a) HK$1,285,217.20 in respect of the cost of three export licences, (b) HK$356,320.28 in respect of freight charges, (c) HK$34,554 in respect of warehouse charges and (d) US$75,537.05 for loss of profits together with interest at the rate of 8% from 22 September 1997 until 7 May 2004 and thereafter at the judgment rate until payment.

The facts

2.The plaintiff is a Hong Kong company which exports garments manufactured in China to the US.  The defendant is also a Hong Kong company engaged in the same business but it also sold quota licences for the export of garments from China to the US.  The underlying proceedings concerned three such licences which the defendant agreed to sell to the plaintiff to cover garments of the plaintiff that had already reached the US.

3.At all material times, the quota system in place meant that no garments manufactured in China could be exported to the US unless the exporter had the requisite textile export licence.  These licences had to be issued by an approved Mainland authority although it did not need to be the actual exporter in the transaction.  The defendant traded in the sale of quotas as principal.

4.In April 1997, the plaintiff was in urgent need of quota licences to cover garments that had already reached the US and were being warehoused there.  Shortly before 18 April 1997 a telephone conversation took place between Mr Yang of the defendant and Mr Wong of the plaintiff.  Details of the consignment were faxed to the defendant on 18 April.  There had been a prior transaction between the plaintiff and defendant.  During the early part of April 1997, the plaintiff had purchased two licences directly from the defendant.  The telephone conversation culminated in the defendant agreeing to sell to the plaintiff a total of 2,238 dozens of category 636 textile export licence at the price of US$73 per dozen.  The judge found that, as a result, two licences were delivered from Henan Province to the plaintiff at about 11 pm on 24 April 1997 by courier, for which the plaintiff paid a fee of HK$10,000.  These licences were issued by the Henan Arts & Crafts Import & Export Corporation, the first licence covering 501 dozen garments and the second licence covering 1,237 dozen garments.  The third licence which was issued by the Qingdao Textiles & Export Corporation covering the balance of 500 dozen garments was collected by the plaintiff in Qingdao on 22 April 1997.

5.Upon receipt, the plaintiff sent the licences immediately to its agent in the US who presented them to the relevant authorities on 28 April 1997.  However, the licences were not usable with the result that the garments could not be released.  The plaintiff’s American buyer cancelled the purchase leaving the garments in the plaintiff’s hands in America. 

6.After the plaintiff’s original buyer had rejected the goods, it asked for a discount of US$100,000 or US$200,000 amounting to between one-third and one-half of the original contract price.  The plaintiff refused and tried to resell them in the US.  Had the original sale gone through, the plaintiff would have received US$401,457.67.  It attempted to resell them to J & J Imports Inc in the US for the sum of US$308,844.  The plaintiff signed a sale confirmation on 5 May 1997 for delivery before 20 May 1997.  That attempt failed because replacement licences were not available. 

7.As the original licences had been made out in the name of the plaintiff’s original buyer, these had to be amended by the issuers and re-issued for any resale to a US buyer.  The licences were accordingly sent by courier back to Hong Kong with a view to their being returned to the issuing authorities for amendment and re-issue.  In respect of the Qingdao licence, the judge found that the Qingdao authority was not prepared to re-issue the licence for policy reasons.  In respect of the two Henan licences, the authority demanded broad undertakings from the plaintiff as to liability in the event that the licences would be re-issued which the plaintiff was unwilling to provide.  The judge found that “the plaintiff complied as best as it could, consistent with prudence with the request by the defendant for undertakings”.  Meanwhile, the licences were lost on the way back in Hong Kong. 

8.In those circumstances, the goods had to be returned to Hong Kong and a buyer was eventually found in Singapore.  The resale price was US$214,336 but commission amounting to US$53,186.81 had to be paid.

The judgment below

9.The two main issues the judge had to resolve were the following:

(1)	whether it was notorious, certain and reasonable and/or well-known or ought to have been well known to all persons involved in the buying and selling of export licences of the existence of the computer transmission system and that the licences would only be usable when the data have become on file in the computer of the US authorities (“the data transmission system”);
(2)	whether it was an implied term of the agreement between the plaintiff and the defendant that the three licences had to be/were usable or otherwise effective for the clearance of the garments upon immediate presentation of the licences to the US customs (“the Term”).

On the first issue, the judge found that the defendant had failed to make out its case that the data transmission system was notorious, certain and reasonable and/or well-known ought to have been well-known to all persons involved in the trade of buying and selling export licences.  That finding meant that the data transmission system was neither an express nor implied term of the agreement.  Specifically, he rejected the defendant’s allegation that the plaintiff had knowledge of the data transmission system prior to 25 April 1997.  There is no appeal on the first issue.

10.On the second issue, the judge found for the plaintiff and held the Term to be an implied term of the contract.

This appeal

11.The defendant challenged both liability and quantum.  I will deal first with liability.  That issue turns on the question whether the judge’s conclusion that the Term was to be implied as contended for by the plaintiff was correct.

Implied term

12.It is common ground that the correct test for an implied term is that set out in BP Refinery (Westernport) Pty Ltd v President, Councillors and Ratepayers of the Shire of Hastings (1978) 52 ALJR 20 at 26:

“(1)

it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that ‘it goes without saying’; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract.”

That was the test that the judge sought to apply.  The defendant challenged the judge’s application of the test and contended that:

(a)	the implied term was neither reasonable and equitable;
(b)	the agreement was effective even without the implied term; and
(c)	the implied term was not obvious.

13.As a preliminary matter, it is necessary to establish the facts that were common knowledge to both parties.  In this connection the telephone conversation between Mr Wong of the plaintiff and Mr Yang of the defendant merits close attention.  The evidence before the judge was that Mr Yang had been told (1) that the plaintiff’s goods had already reached the US, (2) that its previous supplier had failed to deliver the export licences, (3) that the plaintiff therefore had no export licences with which to clear customs and (4) “if it could not find any licences its customer would cancel the contract”.  It should be mentioned that in paragraph 26 of his witness statement, Mr Yang stated that Mr Wong did not mention to him the date by which he required the licences.  However, in paragraph 33, when referring to a later conversation which nevertheless took place prior to 18 April, Mr Yang accepted that he had been asked by Mr Wong to check whether the licences would be available by 21 April 1997.  So a date had been mentioned prior to the agreement.

14.The main thrust of Mr Yuen SC’s submissions was that in deciding whether the Term should be implied, the court must look at the position of both parties to the contract and not only at the position or requirements of only one of the parties.  It was said that had the judge considered the matter from the defendant’s position, he would have realised that it would be both unreasonable and inequitable to imply the Term when, on the evidence, the licences would only be effective after the relevant information had reached the computer system of the US customs and the time it took for the transmission of the information was something wholly beyond the defendant’s control.

15.In my view, the nub of those submissions was to re-introduce through the back door the defendant’s case that at the time of the agreement the plaintiff had knowledge of the data transmission system when the judge had found the defendant’s evidence wanting in this regard.  It should be borne in mind that whilst the plaintiff’s requirements had been made known to the defendant, that was not the case as regards the data transmission system.  On the judge’s findings, the plaintiff did not acquire such knowledge prior to 25 April 1997.

16.The purpose of the plaintiff acquiring the export licences was to enable its goods to clear US customs.  Mr Wong’s evidence on this issue which the judge accepted is clear:

Q.	And how did you attempt to procure those licences?
A.	On about 15 April, I contacted Mr Yang Zhonghua of the defendant’s company.  I informed him that I required about 2,000 dozens of category 636 and the goods had already arrived at America and I was in urgent need of licences for clearing the Customs.  Mr Yang said that he would help me in looking for the licences.
Q.	Yes.  Pause there.  Had anything -- had you mentioned anything about the whereabouts of the storage of the goods?
A.	Yes, I did.
Q.	What did you tell him?
A.	I said that the goods had already arrived at America and the warehouse fees has been paid.
Q.	What was the main stress you mentioned to Mr Yang in respect of procuring the licence?
A.	I emphasised that I needed some licences which could be given to me as soon as possible and to be useable.
(Tr. p. 80G-M)

In the context, “usable” can only mean “effective in clearing US customs upon immediate presentation”.  That was the whole point of the transaction between the parties.  It is beyond doubt that the defendant knew of the urgent need for usable licences as appears from the following passage in Mr Yang’s cross-examination:

Q.	Now, here in this document …, you stated that: “I remember your goods arrived in the US.  There was no certificate to clear the Customs.  It was told that if there was no certificate to clear the Customs the customer will cancel the order with you.  You asked for my assistance.  I feel that you are so pathetic so I asked my friend to assist.  He issued the three certificates including it’s over 500 dozen, two certificates from Henan.”  See that?  So at the time when you were approached by the plaintiff - Mr Wong of the plaintiff - you knew that the plaintiff required the licences to cover the garments desperately.
A.	Yes.  (emphasis added)
(Tr. p. 263I-M)

17.Given that evidence, it is hardly surprising that the judge reached this conclusion at paragraph 35 of his judgment:

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

I agree that without the Term being implied the agreement would have served no purpose whatsoever.

18.Having regard to the facts of this case, business efficacy required that the licences be usable upon immediate presentation to the US customs in the sense of being effective in obtaining clearance for the goods.  The suggestion that it was sufficient if in due course (i.e. within a reasonable time) such licences would have become usable is beside the point when to the knowledge of the defendant, the plaintiff “desperately” needed the licences.  The extravagant courier fee of $10,000 the plaintiff had to pay to get the Henan licences to Hong Kong as quickly as possible and the special trip the plaintiff’s employee made to Qingdao from Beijing to collect the Qingdao licence speak to the urgency of the situation because the order was on the verge of being cancelled by the plaintiff’s buyer.  To say that it was sufficient if the licences were usable “within a reasonable time” begs the question of what would constitute a reasonable time before which, on this analysis, the licences must not be presented to US customs.  That would wholly disregard the particular facts of this case which plainly demonstrated a desperate need to clear the goods from US customs as soon as practicable.  The fact that the date of the deadline was not mentioned made no difference provided the urgency of the situation was brought home to the defendant.  In view of Mr Yang’s evidence set out above, it is not open to the defendant to deny that that was the case.

19.Accordingly, I would uphold the judge’s finding that the Term was to be implied. 

Quantum

20.Mr Yuen SC challenged various aspects of the award.  It was said that there was no or no sufficient evidence to establish the US buyer’s entitlement to cancel the purchase inasmuch as no document evidencing the US buyer’s right to cancel the contract had been produced.  But the whole point of acquiring the licences by the dates they were delivered in April 1997 was to avoid the contract being cancelled.  Hence there were delivery dates for the licences which for present purposes can be taken to be the dates on which the plaintiff took delivery of the licences.  The defendant knew that the original buyer would cancel the contract if valid licences were not delivered by those dates.  As Ms Li SC who appeared for the plaintiff submitted, absent an express provision to the effect that the contract could be cancelled or the goods rejected for delay, it becomes a matter of construction whether by subsequent conduct of the parties a delivery date is made of the essence entitling the buyer to reject the goods.  As appears from the following passage from Mr Yuen’s evidence, the production date was late and the date of 28 April 1997 for delivery was agreed through negotiation:

Q.	I see.  Now, the goods originally would be shipped by sea.
A.	Yes.
Q.	But to your knowledge they were sent by air.
A.	Yes.
Q.	Why?
A.	The production date was late.
Q.	And this date, 28 April 97, US time - US time, 28 April, or rather New York time - was that the original final delivery date or what?  Was it the original delivery date?
A.	No.
Q.	So when was that - earlier than this date or later than this date?
A.	Earlier.
Q.	So on that score, your company was late.
A.	Right.
Q.	Now, your company was late.  Under what circumstances this day 28 April 97 was agreed upon?
A.	After negotiation with the buyer.
Q.	And this date, 28 April 97 New York time, was meant to be the date that the licence did reach them, or what?
A.	When goods could be collected.
(Tr. p. 145L-T)

Whilst the date specified was not made known to the defendant at the time, there was evidence that the original buyer was entitled to cancel if the goods were not delivered by 28 April.  Mr Yuen was cross-examined on this issue:

Q.	Now, before you have sight of this document on a date prior to 18 April, had you ever spoken to the buyer or its agent about the latest date of taking delivery of the garments in the US?
A.	I did.  I spoke with the agent.
Q.	What was the date then?
A.	The goods must be obtained on 28 April 97.
Q.	What about subsequent to receiving this fax, had you ever spoken with the buyer or his agent again?
A.	We had several telephone conversations.
Q.	And what’s the date?  Had that date changed or remained unchanged?
A.	The final date was 28 April.
Q.	Now, looking at this document, it stated that “You must ship visas for total air shipment.  Visa must arrive latest at Canisco 28 April.  No later will be accepted”.  You know that Canisco now is -- we now know it’s the name of the forwarder.
A.	Yes.
Q.	Okay.  Now, by this fax it didn’t spell out expressly that the goods must be taken delivery on that day.  What do you have to say about this document, then?
A.	But on the telephone they have emphasised for several times that they must have the goods on 28 April.
(Tr. p. 150D-L)

When it was later put to the plaintiff’s witness Mr Yuen in cross-examination that the original buyer had wrongfully rejected the goods, Mr Yuen disagreed.  The judge plainly accepted that the buyer was entitled to reject the goods and, in my view, it was open to him to do so on the facts.

21.Next, Mr Yuen SC challenged the judge’s award to the plaintiff of the total cost of the licences totalling approximately HK$1.285 million.  It was argued that the loss of the licences and the plaintiff’s refusal to provide the undertakings required by the Henan authority caused a break in the chain of causation and that the defendant should not be responsible for loss of the use of the licences.  I agree with the plaintiff’s submission that the contention that there had been a break in the chain of causation is misconceived.  The return of the licences to Hong Kong was but a step taken in mitigation of damages and it was reasonable in all the circumstances for the plaintiff to have done so.  Further, unless the defendant were to succeed in setting aside the judge’s findings set out in paragraph 7 above by showing that it was contrary to the evidence or the judge had misunderstood or overlooked material evidence, it is not open to the defendant to contend that the plaintiff was responsible for the refusal of the authorities to re-issue the replacement licences.  No such argument had in fact been advanced.

22.The net profit of US$236,684.24 the plaintiff would have stood to gain had there been no breach by the defendant is computed as follows:

Original sale price	US$401,457.67
Less cost of licences (HK$1,285,217.20 at exchange rate of 7.8 = US$1)	US$164,771.43
Net profit :	US$236,686.24

Instead, the resale price received was US$161,149.19 (US$214,336 less commission of US$53,186.81).  But in ascertaining the net profit (loss), all expenses incurred which must include the cost of the licences have to be deducted from that amount.  That would leave the plaintiff with a net loss of US$3,622.24 (US$161,149.19 - US$164,771.43 = US$3,622.24).

23.The plaintiff’s loss is accordingly US$240,308.48 made up of the net profit of US$236,686.24 plus the net loss of US$3,622.24.  The sum of US$240,308.48 is also the total of items (a) and (d) awarded by the judge: the cost of the licences expressed in US dollars (US$164,771.43) plus loss of profits of US$75,537.05 as computed in paragraph (c) of the answer to the request for further and better particulars under paragraph 10 of the Re-Amended Statement of Claim.

24.Finally, it should be mentioned that the defendant also criticized the plaintiff for not mitigating its loss by (1) failing to accept the buyer’s request for a discount; (2) failing to accept conditions for the reissue of the licences; or (3) failing to sell the licences to a third party such as J & J Imports.  None of these criticisms has substance.  Point (2) has already been dealt with.  See paragraph 21 above.  As to (1), the plaintiff has not been shown to have acted unreasonably in refusing the discount requested.  The sale confirmation with J & J Imports proves the point.  It was at a substantially higher price that the discount sought of up to 50% sought.  As to (3), the sale to J & J Imports could not go through because replacement licences were not available and the judge has found that that was not due to any fault on the part of the plaintiff.

Conclusion

25.For these reasons I would dismiss the defendant’s appeal.  I would also make an order nisi for costs in favour of the plaintiff. 

Hon Stock JA:

26.I have had the advantage of reading in draft the judgments of Le Pichon JA and Barma J and find that I must respectfully disagree with their conclusion as to the term to be implied.  As to quantum, I respectfully agree with their judgments.

27.The implied term for which the plaintiff contends is pleaded as follows in the Re-Amended Statement of Claim:

“...that the licences were valid usable or otherwise efficacious for clearance of the goods by the buyer upon immediate presentation of the licences to the authorities; and that time was of the essence of the said agreement.”

28.The following matters appear to me to be significant:

(1)	The data transmission system, whilst not notoriously known, was nonetheless a fact: in other words, such a system operated (see for example the plaintiff’s acceptance of that fact at page 128A of the transcript bundle), and its effect in practice was that after issue of a licence the issuer had to transmit licence data to Beijing and that data had then to be transmitted to the authorities in New York.  It was not until that transmission had been effected that the American customs authorities would clear goods.  It follows that there would inevitably be some delay between the issue of a licence and the receipt by the US customs authorities of relevant data pertaining to that licence.
(2)	There is no suggestion that the defendant acted other than bona fides.  It is not, for example, contended that the defendant was aware that the data transmission system was a fact unknown to the plaintiff, or that any relevant information was deliberately withheld.
(3)	There was no overt representation by the defendant that the licences would be usable immediately: see the testimony of Mr Wong for the plaintiff, page 116 of the transcript bundle.
(4)	Whilst the plaintiff company did not, apparently, know of the transmission procedure, the defendant company did.
(5)	The original licences delivered by the defendant to the plaintiff were not themselves sent to the United States.  Rather, as one would expect in such circumstances as this case, they were sent by fax to the USA.
(6)	It would not, therefore, be surprising that the customs authorities would need some verification, at least that the licences were genuine.  That some delay upon receipt of the licences was inevitable is evident, not only as a matter of commonsense, but from the following testimony of Mr Wong, at pages 123-124 of the transcript bundle:

"Q.	Did you know what your buyer had to check with the Customs with the copies? ... I should say check with the Customs with the number of copies.
A.	I think that they will check that if the licences were usable and when they have the numbers, they can prepare the importing documents.
Q.	Yes.  When they check whether they were usable, they wanted to find out whether the data transmission procedure relating to the licences had completed, you agree with me?
A.	I disagree, because I did not know about the data procedure before 20 April.
Q.	You told us that prior to April, from your experience you could tell your clients of the buyers could check with the customs with the numbers of the faxed copy.
A.	Yes.  My understanding was that the checking was about the genuineness of the licences and whether they are usable or not.
Q.	Right.  So you knew they had checked two things : first of all, whether they are genuine.
A.	Right.
Q.	And secondly, whether they are usable.
A.	Right.
Q.	How could they check whether the number of the copies is genuine with the Customs do you know especially when the original copy has yet to arrive?
A.	I don’t know.”

I pause at this stage to suggest that on that testimony alone, it cannot validly be asserted that it was an implied term that the licences were usable immediately upon presentation.  In circumstances such as these, a verification process involving the authorities of the exporting and importing countries must be, or must be presumed to be, within the contemplation of parties to the agreement.  If that be so, there can be no guarantee, so it seems to me, by a party in whose hands that process does not lie, to guarantee that the process will be effective forthwith.
(7)	The notion of data transmission for the purpose of such a verification process is not suggested to be an outlandish notion.  Indeed the testimony of Mr Wong, for the plaintiff, was that although the existence of such a system did not occur to him, it was logical to presuppose one:

"Q.	But as you told us, you expect the agent of your buyers in the US would provide the information to the authority for checking.
A.	Yes.
Q.	Invariably the US authorities had to check the information against their own records.
A.	Yes.
Q.	To compile their own records, and data should be transmitted from the issue in country to the US customs.
A.	Yes, that is right.
Q.	So would you agree with me that you knew the data should be transmitted from the mainland to the US in order that the licences would be validated and usable?
A.	I disagree.
Q.	Otherwise, when the agent of the buyer provided information to the US customs check, the licences must be bound to be rejected because there was no such record.
A.	I repeat at that time I had not thought of this point.  When you say that I knew about it in advance, it is impossible.  But when you tell me step-by-step about what should be taken place, I can imagine it.”  (Transcript bundle, page 127).

I pause again; this time to comment that if, on the plaintiff’s own version, the existence of such a data transmission system is accepted as one that might well be within the contemplation of a party to such a contract, it is difficult to see how there can be implied a term which effectively excludes the application of such a system and the time taken for the transmission of that data.
(8)	The deadline imposed by the purchaser of the garments for clearance of the goods, namely 28th April, was imposed only after the contract of 17th April between the plaintiff and the defendant had been concluded.  We see this from the fax (core bundle page 239) sent from New York during the afternoon (US Eastern time) of 17th April 1997 to the plaintiff, and received by the plaintiff on 18th April.  The testimony of Mr Yang, for the defendant, was that at the time the contract was concluded the defendant did not know of such a deadline (page 248 transcript bundle).  It was never suggested that that deadline was made known to the defendant before or at the time of the contract.  It is this light that the judge’s comment, at paragraph 35 of his judgment, that “Mr Yen was aware of this time constraint” must be viewed.  The time constraint to which the judge was there referring was not a deadline of 28th April but rather the “considerable time constraint” to which he referred at paragraph 34 of the judgment.  He goes on, at paragraph 35, that, even aware of the time constraint, Mr Yen “by agreeing to sell the licence quotas to the plaintiff in the circumstance must have known that if the licences were not usable then they were of little value to the plaintiff.”  The defendant’s case is that this is not to frame the true issue correctly, for the licences were indeed usable subject only to such time as it would take for the verification process to be conducted and concluded.
(9)	I acknowledge the passage to which reference has been made from Mr Wong’s testimony that he knew that the plaintiff required the licences desperately; yet that testimony (at page 264 of the transcript bundle) goes on as follows:

"Q.	To them, every day counts at that point in time; you knew that.
A.	I don’t know if to them every day counted or not... . I knew that they were anxious, but I do not know on which particular date they wanted to have them.
Q.	Obviously you knew the earlier the better.
A.	Yes, the earlier the better, but I told them that I could offer assistance to them on the 17th, but they did not give us the information until the 18th.  If it was really urgent they should have given us the information on the 17th.  I do not know what was in their minds.”

(10)	There is no suggestion that the licences themselves were other than genuine licences; and the case is not for the purpose of this appeal presented on the basis that the defendant was in breach of any term as to the required date of their actual delivery to the plaintiff.
(11)	The defendant was not itself the quota holder.  The defendant did not issue the licence.  The defendant had no control over the check conducted by the foreign customs authorities.  All these facts were known to the plaintiff.

29.I do not in these circumstances accept that there is to be implied into this contract a term that the licences were to be usable immediately upon their presentation to the US authorities.  I do not think that the term suggested is one which in all the circumstances was so obvious that it went without saying.  It is clear that the parties contemplated that the licences be secured by the defendant by the dates stipulated for the delivery and further that those licences would be valid licences.  It is clear that the parties knew that the plaintiff needed the licences for use urgently.  But it is equally clear:

(1)	that the urgency was not stated in terms of a specified deadline for clearance; and
(2)	that any reasonable party would have contemplated that between the point of presentation of the licences for clearance, and the point of actual clearance, it was likely that there had to be interposed such verification system as was demanded by the US authorities, a procedure over which the defendant had no control, a procedure the speed of which may vary from case to case.

30.The premise upon which the courts would imply a term is one based upon that which ‘most obviously have been the intention of the parties’, where:

“ ...the law is raising an implication from the presumed intention of the parties with the object of giving to the transaction such efficacy as both parties must have intended that it should have. ... what the law desires to effect by the implication is to give such business efficacy to the transaction as must have been intended by both parties as businessmen; that is not to impose on one side all the perils of the transaction or to emancipate one side from all chances of failure, but to make each party promise in law as much, at all events, as it must have been in the contemplation of both parties that he should be responsible for in respect of those perils and chances.”  See Halsbury’s Laws of England, 4^th ed. Vol. 9(1) para. 782.  (Emphasis added).

The well-known test formulated in Shirlaw v Southern Foundries (1926) Ltd [1939] 2 KB 206, 227 was this:

“Prima facie, that which in any contract is left to be implied and need not be expressed is something so obvious that it goes without saying; so that, if, while the parties were making their bargain, an officious bystander were to suggest some express provision for it in the agreement, they would testily suppress him with a common ‘Oh, of course!’.”;

and it is this formulation that is referred to in the rule summarized in BP Refinery, above, that before a term can properly be implied “it must be so obvious that ‘it goes without saying’”.

31.I do not think that the term formulated by the plaintiff is one that, in the factual context of this case, goes without saying.  It is not the only formulation that would give business efficacy to this contract.  An alternative, indeed a more reasonable, encapsulation of the intention of the parties was that the licences were valid for clearance subject to such administrative verification process as was normally required by the clearing authorities.  If that alternative is indeed a valid alternative postulation, then the term which the judge has implied is not one required to give efficacy to the contract and was not one that was obviously to be implied.

32.It is said that “usable” can only mean “effective in clearing US Customs upon immediate presentation” and that that was the whole point of the transaction.  I do not, with respect, agree.  Within the existing framework, that is to say one in which clearance was (and had to be expected to be) subject to such verification process as prevailed between the authorities of the importing and exporting countries, the licences were usable.  The point of the transaction between the plaintiff and the defendant was for the provision, as a matter of urgency, of valid licences that would, subject to those formalities, effect clearance.  It is one thing to say that urgency within the parameters of the system for clearance or for verification was mutually expected; another to say that urgency meant a guarantee of verification and clearance forthwith.

33.For these reasons, I would allow the appeal, set aside the judgment below, and enter judgment for the defendant.

Hon Barma J:

34.I agree with Le Pichon JA that this appeal should be dismissed.  So far as the question of quantum is concerned, I agree entirely with the reasons which she has given, and have nothing to add.  I would, however, add the following brief observations to the reasons which she has given in relation to the question of liability.

35.In my view, it is important to bear in mind the matters which were common knowledge as between the parties when considering whether or not the implied term contended for should be implied here.

36.The judge found that the particular verification process that existed, constituted by the data transmission system whereby details of the import licence were transmitted by the issuing authority to Beijing for onward transmission to the United States was not a matter of common knowledge among those who dealt in the export of garments to the United States.  It cannot therefore be suggested that the plaintiff was, or ought to have been aware of the particular system that was in place.

37.While I would accept (as did Mr Wong of the plaintiff when it was suggested to him) that there had to have been some verification process by which the United States customs authorities had to be satisfied of the genuineness of any import licence presented to them, I do not think it follows that the implied term contended for by the plaintiff is in consequence ruled out.

38.Even allowing for the need for and existence of such a process, there is no reason for a party unaware of the workings of the process actually in place to suppose that it would have been a particularly time consuming one.  What would have been involved would be some form of authenticated transmission of details of the relevant licence from the issuing authority to the customs authorities in the United States.  Given modern means of communication, in particular electronic transmissions and other means of communication such as faxes or telexes, there is no reason to suppose that this would be a particularly lengthy process.

39.Further, it is also pertinent to note that there would inevitably have been some delay between the issue of the licences and their presentation to the customs authorities in the United States.  It was necessary first for the licences to be delivered to the plaintiff.  In the case of the two licences issued by the Henan Arts & Crafts Import & Export Corporation, these were sent to the plaintiff from Henan Province by courier, at the plaintiff’s expense.  In the case of the third licence issued by the Qingdao Textiles & Export Corporation, this had to be collected by the plaintiff in Qingdao.  Having obtained the licences, it was necessary for the plaintiff to send them on (whether by fax or some other means matters not) to its customer in the United States.  It would only be after the licences were received by the customer in the United States that they could be presented with a view to clearing the goods covered by them through customs.

40.In my view, there would be no reason for a party in the position of the plaintiff to think that the process of transmission of information between the relevant authorities for verification purposes would take any longer than the length of time it would take for the licences to be delivered to the plaintiff and then transmitted by it to its customer.  Given that there would necessarily elapse a period of time between the issue of the licences and their eventual presentation in the United States, it does not seem to me that there is anything in the term sought to be implied which excludes the existence and application of such a system and the time that might be taken for relevant data to be transmitted.  Nor does it seem to me that the term sought to be implied requires the licences to be effective forthwith upon their issue.  What is required is that they should be effective upon presentation, which will necessarily take place some time later.

41.Against the background of the matters mentioned by Le Pichon JA in paragraphs 13 and 16 of her judgment, it seems to me that when Mr Wong told Mr Yang of the defendant that he needed licences urgently, and that they had to be usable, there could be no doubt in Mr Yang’s mind that what Mr Wong needed were licences which could immediately be sent on to the plaintiff’s customer in the United States and which could thereupon be used to clear the goods through customs without further delay.  As the data transmission system was not notorious, Mr Yang could not assume that Mr Wong would have been aware of it, and thus had no basis for thinking that “usable” in this context meant anything other than what the plaintiff contended for.

42.That being so, and given that Mr Yang was aware of the data transmission system and its workings, it was for him to decide whether or not he could supply licences that would meet the plaintiff’s needs.

43.In these circumstances, it seems to me that the implied term contended for by the plaintiff is indeed one which is to be implied in order to give business efficacy to the contract which the parties entered into, and the learned judge was right so to find.

Hon Stock JA:

44.The appeal will therefore be dismissed with an order nisi as to costs in favour of the plaintiff.

Miss Gladys Li SC and Mr Paul K N Wu, instructed by Messrs Angus Tse, Yuen & To, for the Plaintiff/Respondent

Mr Rimsky Yuen SC and Mr Kent Yee, instructed by Messrs Tsang, Chan & Wong, for the Defendant/Appellant