1993, No.

A7033
IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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BETWEEN

WANG KU trading as SUN HING LUNG Plaintiff

(INTERNATIONAL) TRADING COMPANY

and
MAK CHI KONG trading as Defendant
ART TRADING COMPANY

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Coram : Hon Burrell J. in Court

Dates of hearing : 7th, 8th and 11th December 1995

Date of handing down judgment : 15th December 1995

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JUDGMENT
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By this action the Plaintiff, who is a garment manufacturer and

supplier, claims payment for 19,000 jogging suits which he supplied to the
Defendant, who is a garment trader, in early 1992.

No complaints are made about the quality or quantity of the goods

supplied. The reason for this litigation stems from problems in making payment.
The Defendant did not want the goods for himself - he was selling on to a
customer in the U.S.A. The method of payment was through letters of credit.
There was one letter of credit (USA L/C) between the Defendant and his US
customer and another one (HK L/C) between the Defendant and the Plaintiff. It
is part of the Defendant’s case that the Plaintiff would only be paid on the HK
L/C after he had been paid on the USA L/C.
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In skeleton form what went wrong was as follows. Firstly the goods
were shipped to Mexico about a week late. The last date for shipment was
April 30th. They left Hong Kong in early May. Secondly, the HK L/C opened
by the Defendant was dated a day after the last shipment date, May 1st. Thirdly,
the Banks refused to pay on the L/Cs because of a number of discrepancies on
the documents which had to be supplied. Fourthly, negotiations to settle the
matter during 1992 and early 1993 broke down. The Plaintiff at one stage agreed
to accept a reduced price and later agreed to accept the goods back at the
Defendant’s expense. Regrettably however further difficulties were encountered
with Mexican customs and the 19000 jogging suits remain in a warehouse in
Mexico (so far as the parties are aware). The Plaintiff has not been paid by the
Defendant and the Defendant has not been paid by the USA buyer.

The fundamental issue between the parties is - what is the nature of

the contract. The Plaintiff says it is a local-ex-warehouse purchase and sale. If
so, he must succeed in this action. The Defendant says it was an FOB contract.
If so, the matter becomes more complex both in law and fact.

Counsel for both parties, Mr H.Y. Wong for the Plaintiff and
Mr T.C Chong for the Defendant have researched, prepared and presented their
respective cases with commendable thoroughness.

The Plaintiff’s case

The Plaintiff’s case put at its simplest is that this was not an FOB
contract. His position is that the sale was to a local buyer, the Defendant. He
was not concerned with who the Defendant’s customer was. Initially he asked
for payment by cash or cheque and only later agreed to payment by L/C because
he thought this was the only way he would get paid. The Defendant arranged
collection of the goods from his warehouse and took them to the shipper. The
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Defendant prepared the documents for shipment and the L/Cs. The Plaintiff’s
only contribution was to supply such documentation, such as the invoice and
packing lists, to the Defendant on request.

The Defendant’s case

The Defendant’s case, according to Mr Chong’s final submission is

that the nature of the 1st agreement in May 1992 is no longer relevant because it
was superseded by a 2nd agreement in or about August 1992 when the Plaintiff
agreed to a reduction in price from HK$950,000 to $855,000. Mr Chong
submits that in order to resolve the dispute between the parties one must decide
who breached that agreement. As to the 1st agreement he submits that the
Plaintiff knew the goods were for onward sale to an overseas buyer, that it was
an FOB contract in which the Plaintiff accepted that he would only be paid on the
HK L/C after the Defendant had been paid on his USA L/C and that the failure of
the 1st agreement was due to the Plaintiff not complying with his obligations
under the FOB contract.

As will be seen from my decision in this case, many of the issues

and much of the evidence which has been canvassed before me need not be
dealth with in this judgment. I have concluded that this was in the first instance a
local ex-warehouse contract which the Defendant has breached by his failure to
pay for the goods supplied. All subsequent problems, that is for example, the
discrepancies in the L/Cs, the late shipment, the 2nd agreement, the attempt to
settle, all stem from the Plaintiff’s desire to get paid.

I shall concentrate therefore on those issues which require resolution

in order to determine the preliminary issue of :-

1. Ex-warehouse or FOB?
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My findings which have resulted in the decision that this was not an
FOB contract are these.

(a) The first step was taken by the Defendant when in or about April 1992 he
placed an order with the Plaintiff for 19000 suits at HK$50 per piece. The
Plaintiff originally requested cash or cheque. His later acceptance of the
L/C arrangement was merely in order to get paid.

(b) The Defendant arranged collection of the goods from the Plaintiff’s
warehouse in Tsuen Wan and undertook to handle and prepare the
documentation. Accordingly, after collection the Plaintiff sent an invoice
and packing list to the Defendant.

(c) The invoice states simply that the price of the goods was $50 per set and
not $50 FOB(H.K.)

(d) Miss Choi of the Defendant Company completed the documents (which
were later found to be inaccurate). I reject the suggestion made on behalf
of the Defendant that although Miss Choi did complete many of the
documents she was only doing so on the Plaintiff’s instructions.

(e) Had it been an FOB contract the Defendant should have made the L/C
available to the Plaintiff a reasonable time before the latest shipment date.
In our case the L/C in fact post dates the last shipment date. In evidence
the Defendant contended that the late shipment and the date on the L/C
were discussed between himself and the Plaintiff and that the Plaintiff
accepted that they could be rectified later and was prepared to take the
risk. This was one part of the Defendant’s evidence which I found
unconvincing.
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(f) Had it been an FOB contract the Defendant would have had to name the
ship so that the Plaintiff could deliver the goods to it. This did not happen.
The Defendant’s evidence was again unconvincing when he suggested the
actions he took in this regard were on the Plaintiff’s instructions.

(g) It is fundamental to the Defence case that the Plaintiff agreed to “back to
back” L/Cs resulting payment to him only after the Defendant had been
paid on his USA L/C. I simply do not accept that the Plaintiff did or would
have agreed to such a term. The Defendant’s stance on this particular
issue illustrates the not uncommon attitude in Hong Kong that party B
need only fulfill his obligations to party A, after he has made his profit
from party C.

2. Subsequent conduct

For the sake of completeness, although not strictly necessary, I shall

deal with additional issues between the parties concerning later events. They are
worthy of mention because in each case they tend to support the Plaintiff’s claim
and in each case where matters turn on issues of credibility it is the Plaintiff’s
evidence which has been the more probable.

(a) Discrepancies in the L/C

On May 14th, 1992 the issuing Bank for the HK L/C gave written
notice to the Defendant of eight discrepancies which prevented the Bank from
paying out on the L/C. For example the number of cartons on the packing list
differed from the number on the Bill of Lading; the description of the goods on
the L/C differed from the description on the Invoice and the Defendant’s address
on the L/C was different from his address on other documents.
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Any bank is entitled to refuse payment under an L/C because of any

discrepancy however minor. In these circumstances the seller, the Plaintiff, could
never be paid. He could only be paid either once the discrepancies have been
rectified or the buyer, the Defendant, accepts the discrepancies.

Given my earlier finding that it was the Defendant who arranged the
collection of the goods from the warehouse and to the ship and given that it was
the Defendant’s employee who prepared the documentation it could not be said
that the discrepancies were attributable to the Plaintiff nor could it be said that he
was capable of rectifying them nor could it be said that he was permitted, as
seller, to accept them. In the circumstances it is unnecessary to examine each
discrepancy.

(b) Subsequent payment of $50,000 to Plaintiff. Part payment or personal loan?

In August 1992 the Defendant paid to the Plaintiff $20,000 cash and
in October 1992, $30,000 by cheque. The Defendant says these were personal
loans unrelated to this contract. I find that this contention seriously weakens his
credibility. The first time any claim is made for the repayment of these alleged
loans is in the Amended Defence and Counterclaim. On the other hand the
Plaintiff first pleaded it as part payment of the purchase price in the original
Reply and Defence to Counterclaim over two years earlier.

I am satisfied that this money was paid at a time when the Plaintiff
was becoming more frustrated by the fact that he had still not received any
money for his goods. Negotiations were taking place to try and settle the matter.
The Plaintiff was being accommodating. On October 21st, by a written
document, the Plaintiff even agreed to take the goods back subject to the
Defendant arranging for and paying for their shipment back to Hong Kong and
him forfeiting the $50,000 part payment already made.
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(c) Alleged settlement agreement

On both the 1st and 2nd day of this trial Mr Chong for the Defence
applied to further amend the Defence, notably paragraph 18, so as to allege that
there had been a settlement agreement between the parties in or about October
1992 and that the Plaintiff was in breach of this agreement. I disallowed the
applications to amend for three reasons. Firstly, its lateness. Different
amendments had been proposed a week before the trial - the contents of which
the Plaintiff did not oppose - which did not include this amendment. Secondly,
its nature. The effect of the proposed amendment was to significantly change the
issues at trial. Thirdly, its consequences. The Plaintiff would, very properly,
have asked for further and better particulars and would have had to make further
consequential amendments, of a not insignificant nature, to his pleadings. I was
further assisted by the case of Wellfit Investments Ltd. v. Poly Commerce
[1995]3 HKC 56. The observations made at p.59 in the judgment of Nazareth V-
P, which it is not necessary to recite herein, have direct application to the
exercise of my discretion in this instance.

It was nonetheless necessary for evidence concerning the parties’

discussions and negotiations at the time of the alleged settlement to be heard. I
shall therefore deal with it briefly.

The Defendant’s claim that there was a settlement agreement which

supersedes and cancels the 1st contract and which the Plaintiff has breached
cannot be entertained. The alleged settlement was, in short, that the Plaintiff
would accept the goods back. The alleged breach by the Plaintiff, in short, is that
he failed to take the necessary steps to ensure they were shipped back from
Mexico. The problems encountered in getting the goods back were not dissimilar
from the problems relating to the original L/C in May 1992. Again, the
Defendant’s contention that these problems should be laid at the door of the
Plaintiff is without merit. The reasons it is without merit are substantially the
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same as those already referred to earlier in the judgment. The reality of the
situation was that from the Plaintiff’s position it was a final attempt to extract
something of value from this troubled contract. The Plaintiff cannot be criticized
for not writing to the Mexican customs in an attempt to resolve the problems
because by the time he was asked to do so, it was late March 1993. A further 5
or 6 months had passed and by that time litigation seemed the more appropriate
method of seeking satisfaction.

Accordingly, I now give judgment for the Plaintiff in the sum of

HK$855,000 plus interest at 10% from September 1st, 1992.

There will be an order for costs in the Plaintiff’s favour on the

claim. The counterclaim is accordingly dismissed with costs.

(M.P. Burrell)
Judge of the High Court

Mr H.Y. Wong, instructed by M/s Olham Li & Nie, for the Plaintiff

Mr T.C. Chong, instructed by M/s John Ip & Co., for the Defendant.