KISHINGCHAWD DINGONAL RAMCHANDANI t/a RANEYKO ENTERPRISES v. NYLEX PLASTICS LTD

IN THE SUPREME COURT OF HONG KONG

(APPELLATE JURISDICTION)

CIVIL APPEAL NO. 33 OF 1971

(On appeal from Original Jurisdiction Action No.518 of 1970)

________________________

________________________

________________________

JUDGMENT

________________________

Leonard J.:

1.  I agree with the judgment of the learned President insofar as the first and second grounds of appeal are concerned. As to the third ground of appeal had I decided that condition 2 of the contract did cover the situation in which the appellant found himself I should have been reluctant to hold that he was obliged, in mitigation of the damages he suffered by reason of the respondent’s default, to refuse to pay his sub-purchaser. My reluctance would stem not from acceptance of the argument that he was justified in paying damages to maintain good business relations but because of the difficulty in construing condition 2.

2.  I should not have considered it equitable to hold the appellant liable to rely, in a dispute with his sub-purchaser, on a clause presenting such difficulties of construction. Knowledge that he might be required to rely on the condition would have placed him on the horns of a dilemma. He could have refused to pay his sub-purchaser in which case he might have been held liable to pay him both damages and costs. When he sought to recover those damages and costs from the appellant he might have been asked why he incurred those costs in fruitlessly defending the action by his sub-purchaser. I do not consider that an innocent party should be obliged to make such a choice.

3.  However, this particular aspect of the third ground of appeal was not the subject of argument and since the appellant is successful on the second ground of appeal it is not necessary to pronounce on that third ground.

Martin Lee (Johnson, Stokes & Master) for Appellant.

Charles Ching (Mak & Co.) for Respondent. 

IN THE SUPREME COURT OF HONG KONG

(APPELLATE JURISDICTION)

CIVIL APPEAL NO. 33 OF 1971

(On Appeal from O.J. Action No. 518/70)

________________________

________________________

________________________

JUDGMENT

________________________

Huggins, J.:

1.  It is convenient to refer to the Appellant as “the Buyer” and the Respondents as “the Sellers”. The Buyer paid to his sub-purchaser a sum of £1,400 as damages for breach of contract and it is half of that sum which he now seeks to recover from the Sellers. He claimed the whole £1,400 but it appears to be conceded that, as the learned judge has held, no more than half can be recovered. The learned judge said that the matter went to arbitration in Berbera and that £1,400 “was awarded”, that being equivalent to $20,106.80. There has been some discussion in this Court whether there ever was an award or whether the payment was made in pursuance of a compromise of the arbitration proceedings. The Notice of Appeal does not challenge the finding of the learned judge and it is, in any event, supported by the memorandum of 9th April 1971, where reference is made to payment of “the compensation”.

2.  The first ground of complaint argued on behalf of the Buyer is that the learned judge said the payment to the sub-purchaser was “an ex gratia payment”. If there was an enforceable arbitration award it clearly was not an ex gratia payment but a debt which could be recovered by legal process. The contention of the Sellers appears to be in the first place that the award was not enforceable because there was no enforceable agreement to arbitrate and secondly that, even if there was, the Buyer did not in the arbitration proceedings raise the issue that under the terms of the sub-contract he was in the circumstances under no obligation to pay compensation for non-delivery. I think the Buyer is in some difficulty here by reason of his having sought to argue as a pure point of law what is in reality a question of fact or of mixed law and fact, namely whether there was any evidence to support the finding that the payment under the arbitration award was an ex gratia payment or whether such finding was against the weight of the evidence. Only if it could be said that every arbitration award was of necessity enforceable could the Buyer succeed on the first ground of appeal as it has been drafted, since a payment made pursuant to an unenforceable award is in truth an ex gratia payment. There is no express finding as to the enforceability of the award and in the absence of the record of the evidence (which was not filed because it was thought to be irrelevant to the appeal) we cannot decide whether it was enforceable or not. In these circumstances I think the first ground of appeal must fail.

3.  The substance of the second ground of appeal is stated as follows:

“That the learned trial judge had failed to construe correctly clause 2 of the Condition of Booking at the back of ... the contract made between the [Buyer] and the [sub-purchaser] ...... in that he failed to direct himself that on a true and proper construction of the said clause 2, the [Buyer] could not in law have succeeded in refusing to pay or alternatively was entitled to refuse to pay damages to the said [sub-purchaser] for the non-delivery of goods due to the [Sellers’] default”.

I have found this extremely confusing. The implication in the first instance is that the judge should have held that on a true and proper construction of the condition the Buyer was bound to pay damages. The “alternative” allegation implies that the judge should have held that the Buyer was not bound to pay damages. What in fact was it that the learned judge did find? He said:

“If the [Buyer] relied on the clause in the contracts which I have set out above their sub-purchasers would have had no redress in an action brought against the [Buyer] for breach of contract for non-delivery of the sandals since that non-delivery was caused by something beyond the control of the [Buyer]”.

The learned judge is there visualising a situation where the sub-purchaser brought an action against the Buyer for damages for non-delivery under the sub-contracts and he clearly states that in his view the action would fail. In other words he held that the Buyer was not bound to pay damages. Despite the confusing way in which it has been pleaded in the Notice of Appeal it is that decision which the Buyer now seeks to reverse.

4.  The learned judge decided that the negotiations between the Buyer and the sub-purchaser resulted initially in an agreement which was intended to be merely “a statement of the terms which are to cover any contract for the sale and purchase of goods to be made in the future” and subsequently in a series of contracts. The condition now in issue was included in each of those contracts and was in these terms:

“Suppliers are not responsible for non-execution, if exportation is prohibited by the Government or any other reasons which are beyond our control.”

(In this context the “Suppliers” were, of course, “the Buyer”).

The learned judge did not in his Judgment discuss the construction of this condition and whether he came to the conclusion which he did because he thought the contemplated reasons beyond the Buyer’s control were reasons for non-execution generally or only reasons preventing exportation does not appear.

5.  I sympathise with those who have been called upon to advise the parties as to the meaning of this condition but would add that if those whose native language is English often produce documents which are difficult to understand merchants whose knowledge of the language is limited may be excused for producing documents wanting in clarity and precision. It seems to me, and I do not think either side really contests this, that the ordinary grammatical construction of the condition is:

“Suppliers are not responsible for non-execution, if exportation is prohibited by the Government or [if exportation is prohibited by] any other reasons which are beyond our control”,

but neither side seems to be content to interpret the condition in that simple form. The arguments addressed to us on both sides assume that there is some ambiguity when the condition is so construed and counsel attempt to resolve that ambiguity in different ways. Counsel for the Buyer says that the condition was inserted for the protection of his client and that consequently it should be interpreted in favour of the sub-purchaser. It is further suggested on behalf of the Buyer that the ordinary grammatical construction would produce a result which the parties cannot conceivably have intended: no overseas purchaser would have agreed to a condition which would deprive him of any remedy should his vendor be prevented from performing his side of the contract because the vendor’s supplier failed to deliver or because of some other reason which did not amount at least to force majeure. Counsel for the Sellers has drawn our attention to various instances of obscurity and want of precision in the other conditions and he goes on to submit that the ordinary grammatical construction of the condition makes nonsense of it. The basis of that contention is that exportation is not, in common parlance, “prohibited” by a “reason” of any kind.

6.  I must deal with this last argument at the outset. It is, of course, true that one does not normally talk of something’s being prohibited by a reason, but such lax language is all too commonly used by native Englishman and is surely not to be assumed never to be used by others. It is not necessary to go to the Oxford English Dictionary for an explanation of this usage: the Concise Oxford Dictionary gives “debar” as one meaning of “prohibit” and “debar” can mean “prevent”. If one substitutes “prevented” for “prohibited”, this condition is certainly comprehensible. But is the interpretation which thus results one which cannot possibly have been intended? The sub-contracts, which were on a printed form, were “C.I.F. Berbera nett” and this interpretation would, as Mr. Justice Blair-Kerr points out, be equivalent to “Heads I win: tails you lose” in favour of the Buyer. Unlikely though it may be that a merchant in Northern Somalia would wittingly contract upon such a basis, it seems to be to be going very far to say that he would never do so. It is such a basis which I think is indicated by the language the parties have used and though they could undoubtedly have made their intention clearer (and that applies whatever their intention in fact was) I am not persuaded that this is a proper case for the application of the maxim verba fortius accipiuntur contra proferentem, because that maxim should be applied only when all other rules of interpretation have failed. What in effect the Buyer asked us to say was that the condition should read:

“Suppliers are not responsible for non-execution, if exportation is prohibited by the Government or [if non-execution is due to] any other reasons [amounting at least to force majeure] which are beyond our control”.

This certainly does greater violence to the language which the parties have used and I see no need to read in all those words in order to make sense of the condition. For myself I would attach no weight to the comma, which, on either reading, is strictly unnecessary. The Buyer’s argument appears to me to take us beyond the limits of legitimate interpretation: it requires us to decide what the parties might reasonably be expected to have agreed rather than what they have in fact agreed, as evidenced by their written instrument. We have to ascertain the intention of the parties from what they have said and only if we can say that they cannot possibly have intended what the words appear to indicate may we interpret them in any other sense. The failure of the Sellers to deliver did prevent the exportation of the goods contracted for and that was the reason for the non-execution of the sub-contract by the Buyer. Accordingly I see no reason to disagree with the learned trial judge that the Buyer could have refused to pay damages to his sub-purchaser and that the payment made was an ex gratia payment.

7.  It is the third ground of appeal which has given me most anxiety: the Buyer contends that even if he was not liable in law to pay damages he did nevertheless pay damages, was justified in so doing for the maintenance of good business relations with his sub-purchasers and was entitled to recover those damages from the Sellers provided that they were reasonable in amount. The Sellers knew that the Buyer purchased the goods for resale and that it would be a direct and natural result of a failure by them to deliver that the Buyer would be unable to deliver to his sub-purchasers. If the Buyer had to pay damages for non-delivery to the sub-purchasers that would be a further direct and natural result of non-delivery by the Sellers. There may at first sight appear little reason in logic why the Sellers should be able to take advantage of a very stringent clause in their Buyer’s sub-contract, such as Condition 2 in the present case. The Buyer relies upon the principle of James Finlay & Co. Ltd. v. N.V. Kwik Hoo Tong H.M.^([1]). The question is whether that principle extends to such a case as the present. The principle is stated at p.410 in that case:

“But a seller who has committed a breach of contract cannot ... compel his buyer who has not broken his contract to take action to minimise the damage by claiming from another money to which he knows he is not entitled – a proceeding which will ruin his credit in the business world”.

It was, therefore, held that the buyers need not keep their sub-purchasers to the strict terms of the sub-contract since to do so would be to base their case against the sub-purchasers upon an assumption which they knew to be false. Greer, L.J. went so far as to say that in his view there was nothing immoral or unconscionable in an endeavour to hold to their bargain the sub-purchasers who had bought goods on different terms from those on which the buyers bought them. He said at p.415:

“The [buyers] would have been perfectly entitled, as a matter of business morals, to hold the sub-purchasers to their bargain and make them pay damages if they did not take the goods. But it is wholly unreasonable to say that that would be the ordinary course of business which they ought to pursue to diminish the damages. People have not to consider what is right in a strict court of conscience; they are to consider the effect of their conduct upon their business relations with other people, and I have little doubt that it would not have suited the [buyers’] business, nor would it be reasonable as a matter of business to require them, to do what is suggested in order to diminish the damages, if prima facie they are entitled to recover damages from the [sellers]”.

It is true that in the present case the Buyer would not be doing anything so manifestly likely to ruin his credit in the business world. The case is perhaps closer to the one propounded by Sankey L.J., where a buyer refused to plead the Statute of Frauds or the Statute of Limitations against his sub-purchaser. However, counsel for the Buyer submits that Banco de Portugal v. Waterlow & Sons Ltd.^([2]) shows that the principle can be applied in a case like the present. The question there was whether the Bank should have mitigated its damage by declining to pay on the “forged” notes. It was held that it need not, because to do that would have destroyed all confidence in the paper currency issued by the Bank.

8.  As I see it, the matter boils down to the question whether the action of the Buyer in paying damages which, on the findings, he was not bound to pay was reasonable conduct for the protection of his business reputation. In my judgment it was going beyond what the most conscientious merchant would consider necessary. The fact that the Buyer may have been uncertain whether he could be held liable to his sub-purchaser was not, I think, sufficient reason for paying and looking to the Sellers for reimbursement: it was not impossible to obtain an authoritative interpretation from the Court which would have bound both the Sellers and the sub-purchaser. I do not, of course, express any view on the finding that the payment was an ex gratia payment beyond what I have said earlier: if the arbitration award was enforceable I have no doubt that the damages paid thereunder would have been recoverable against the Sellers.

9.  I would dismiss the appeal.

([1]) 1929 1 K.B. 400.

([2]) 1932 A.C. 452

IN THE SUPREME COURT OF HONG KONG

APPELLATE JURISDICTION

CIVIL APPEAL NO. 33 OF 1971

(On appeal from Original Jurisdiction Action No.518 of 1970)

________________________

________________________

________________________

JUDGMENT

________________________

Blair-Kerr, S.P.J.:

1.  The respondents (plaintiffs) contracted to sell sandals to the appellant (defendant) who in turn sub-contracted to sell those sandals to purchasers in Somalia.  There were a number of contracts between the respondents and the appellant on the one hand, and between the appellant and his Somalian customers on the other.   Each of the contracts between the appellant and the sub-purchasers in Somalia contained a condition, or exception, in the following terms:–

“Suppliers are not responsible for non-execution, if exportation is prohibited by the Government or any other reasons which are beyond our control.”

2.  The respondents were well aware that the sandals had been sold by the appellant. Indeed, they were responsible for putting the sandals on board the various ships destined for Somalia.  As regards one of those shipments, it appears that the sandals were placed on the deck of the ship and it was found that the relevant marine insurance policy did not cover the conveyance of sandals placed on the deck of a ship.  At any rate, a dispute arose; and the appellant stopped payment in respect of that particular shipment of sandals.  The respondents countered by refusing to deliver sandals which they had contracted to deliver under later contracts.  The learned judge found that the respondents were in breach of these later contracts.  He said:–

“It was in the minds of the (respondents) that they were entitled to refuse to deliver the goods under the second series of contracts because they had not been paid for the goods under the first series of contracts. This cannot be so. The contracts were not expressed to be dependent on each other. Each one stood on its own; and the breach of one contract, if breach there were, cannot operate to relieve liability under another contract.”

3.  In the court below, the respondents’ claim against the appellant succeeded and judgment was given in their favour.  But there was a counterclaim by the appellant for various sums.  On this appeal we are only concerned with one of those sums.  It appears that in Somalia there was some sort of arbitration award followed by an agreement whereby the appellant undertook to pay his Somalian customers damages in respect of his breach of contract; and it is common ground that he has paid the sum awarded, or agreed, as the case may be.

4.  Before the judge in the court below, the respondents argued thus:–

“The appellant was under no obligation to pay his Somalian sub-purchasers in respect of the later contracts. The respondents were in breach of contract with him; he could have invoked condition 2 of his contracts with his Somalian sub-purchasers and said: ‘I am unable to execute my contracts with you for a reason beyond my control.’ In paying his sub-purchasers, he was only concerned to maintain good business relations with them; but his good relations with them could not possibly have been affected if he had invoked condition 2.”

5.  The learned judge accepted this submission and dismissed the appellant’s counterclaim, so far as it concerned this particular sum.  He said:–

“If the (appellant) relied on the clause in the contracts ...... his sub-purchasers would have had no redress in an action brought against (him) for breach of contract for non-delivery of the sandals since that non-delivery was caused by something beyond the control of (the appellant).”

This is an appeal against the learned judge’s decision on that point.

6.  The judge found that the sum in question was an ex gratia payment by the appellant; and the first ground of appeal is that he was wrong in so holding because if there was a binding arbitration award the payment could not have been ex gratia. 

7.  In the appeal papers, there is a copy of an agreement between the appellant and his sub-purchasers which reads in part:–

“As per the arbitration and decision taken by the Secretary, Somalia Chamber of Commerce .......... Mr. of (the appellant) and Mr. of (the sub-purchasers) agree to the following:–

1. That (the appellant) will pay the compensation of £        ................ towards the loss of profit sustained ..........”

But the appeal papers do not include a copy of the arbitration proceedings, if such took place, nor a copy of the arbitration award.  Nor do we have a copy of the evidence recorded in the court below.  On the appeal, counsel were not agreed as to the evidence; and it is impossible for this court to say what is implied by the opening words of the agreement viz. “as per arbitration and decision taken by the Secretary, Somalia Chamber of Commerce”.  Therefore we are unable to say whether or not there exists a binding arbitration award; and we are forced to decide this appeal by considering the other two grounds.

8.  The second ground of appeal is that the judge did not construe condition 2 correctly and that the appellant could not, in law, have refused to pay damages to his sub-purchasers.

9.  Mr. Martin Lee, for the appellant, argued thus :

If, instead of the word “prohibited” the word “prevented” had been used in the condition, the appellant would have found it more difficult to argue against the view taken by the judge; but the word used in the condition is “prohibited”; the “other reasons” in the contemplation of the parties must have been “reasons” which prohibited the exportation, such as a court order prohibiting exportation because of some infringement of patent rights; but simply because the respondents defaulted under their contracts with the appellant so that the appellant was unable to fulfil his contract with his sub-purchasers was not a “reason” covered by the condition.

10.  Mr. Ching for the respondents argued, inter alia:–

Exportation could not be prohibited by a “reason”; although the condition does specify one set of circumstances viz. exportation being prohibited by Government, the “other reasons” are not confined to reasons which are ejusdem generis; the expression “other reasons” does not refer back to prohibition of exportation but to non-execution of the contract.

11.  The respondents would, in effect, read the condition thus :

“Suppliers are not responsible for non-execution, if exportation is prohibited by the Government or [if there are] any other reasons [for non-execution] which are beyond our control.”

The appellant, on the other hand, would have us read the condition thus :

“Suppliers are not responsible for non-execution if exportation is prohibited by the Government or [if exportation is prohibited for] any other reasons which are beyond our control.”

12.  Does the phrase “other reasons beyond our control” refer back to exportation or to non-execution of the contract?  The former is the narrow interpretation.  The latter is the broad interpretation.  The former comprises situations in which exportation is, for any reason, prohibited but, so it is argued, it would not comprise the situation in which the appellant found himself by reason of the fact that the respondents were in breach of contract.  The latter interpretation would, of course, cover such a situation because if the appellant could show that, for any reason beyond his control, he could not fulfil his contract (non-execution), he would not be liable under the contracts with his sub-purchasers.

13.  The primary meaning of the word “prohibit”, as given in the Shorter Oxford Dictionary, is:–

“1. To forbid (an action or thing) by or as by a command or statute; to interdict.”

The other two meanings given in the dictionary read as follows:–

“2. To prevent, hinder or debar (an action or thing) by physical means.”

“3. To forbid or prevent (a person) from doing something.”

14.  It is said that because the word “prohibit” may mean “prevent”, we should assume that the parties intended that it should also have that meaning; that exportation was prevented by the respondents’ failure to deliver; that this was the reason for the non-execution of the contract; and that because the respondents’ failure to deliver was something beyond the control of the appellant, he would not have been held liable to his sub-purchasers.

15.  It would appear that in certain circumstances “prohibit” may mean “prevent”; but “prohibit” is not listed in the dictionary as an alternative meaning for the word “prevent”. Clearly the two words are not synonymous; and I would have thought that there were strong reasons for thinking that the parties to this contract intended the word “prohibit” to have its primary meaning viz. “to forbid ..... by or as by a command or statute.”  I agree, of course, that exportation could not be prohibited “by ..... a reason.”  But exportation could be prohibited by Government or “for ..... a reason.”  The language used by the parties is very loose, and it is very difficult to apply the ordinary rules of interpretation to a provision of this kind.  The most that can be expected of a court is that it should endeavour to ascertain the intention of the parties by doing as little violence as possible to the language which they have chosen to use.  The trouble is that one is forced to do about the same amount of violence to the language of the provision irrespective of whether we say the respondents’ or the appellant’s reading of it is the correct one.

16.  In my view, little is to be gained by looking at condition 2 under a microscope, so to speak, in order to ascertain the intentions of the appellant and his Somalian sub-purchasers.  In a situation of this kind, I do not see how we can do other than take a broad common-sense view.  When A and B enter into a contract whereby A agrees to sell and B agrees to purchase a specific quantity of goods, I should have thought that B would be entitled to assume that A had got goods of that type to sell and that A would be entitled to assume that B had got money to pay for them.  Therefore, should we take an entirely different view of this contract because of condition 2 and say: Oh no; the appellant was merely saying (and his Somalian sub-purchasers understood him to say): “I hope that I shall have sandals which I can deliver to you, in which case you shall pay for them; but if, for any reason whatsoever, I do not have sandals to deliver, or I am otherwise prevented from delivering them, the whole deal is off.  It is a case of: heads I win, tails you lose.”

17.  There is no reason why a businessman in Hong Kong and another in Somalia should not contract on such an extraordinary basis.  But if they did, I think that they would have expressed themselves in very much clearer language than that of condition 2.

18.  In this case, it is not necessary to decide what situations are covered by the words “any other reasons beyond our control”.  What I find impossible to believe is that they were intended by the parties to this contract to cover the situation in which the appellant found himself namely that he was unable to deliver because the persons with whom he had contracted had let him down following his refusal to pay for some sandals delivered under a previous contract which had been shipped in contravention of the provisions of the relative marine insurance policy.  For myself, I would have thought that the appellant would have been held legally liable to his sub-purchasers if they had sued him for breach of contract.

19.  On the third ground of appeal, I do not find the decisions in James Finlay & Co. Ltd. v. N.V. Kwik Hoo Tong^([1]) and Banco de Portugal v. Waterlow & Sons Ltd.^([2]) of much assistance.  But, if I had come to the conclusion that condition 2 did, and was intended to, cover the situation in which the appellant found himself so that he was not liable to his sub-purchasers under his contract with them, I would have found it very difficult to accept his argument that nevertheless he was justified in paying damages to them in order to maintain good business relations.  On this aspect of the appeal I agree with the view expressed by Mr. Justice Huggins.

20.  I would decide this appeal on ground 2, that is to say the respondents knew that the appellant purchased the sandals for resale; a direct and natural result of their breach was that the appellant was unable to deliver to his sub-purchasers; in an action by the sub-purchasers, the appellant would have been held liable to them in damages for breach of contract.  It is agreed that the sum paid to the sub-purchasers by way of damages was not unreasonable; he now seeks to recover part of those damages from the respondents.  In my view, this aspect of his counterclaim was well-founded. 

21.  For these reasons, I would allow the appeal.

Martin Lee (Johnson, Stokes & Master) for Appellant.

Charles Ching (Mak & Co.) for Respondent.

([1]) (1929) 1 K.B. 400.

([2]) (1932) A.C. 452.