Ipsofactoj.com: International Cases  Part 4 Case 8 [CFA]
COURT OF FINAL APPEAL, HKSAR
Shanghai Tongji Science &
Technology Industrial Co Ltd
- vs -
Casil Clearing Ltd
CHIEF JUSTICE LI
MR JUSTICE BOKHARY PJ
MR JUSTICE CHAN PJ
MR JUSTICE RIBEIRO PJ
MR JUSTICE NAZARETH NPJ
2 APRIL 2004
Chief Justice Li
I agree with the judgment of Mr. Justice Ribeiro PJ. The Court unanimously dismisses the appeal and makes the order nisi and directions on representations as to costs referred to at the conclusion of the judgment of Mr. Justice Ribeiro PJ.
Mr. Justice Bokhary PJ
I agree with the judgment of Mr. Justice Ribeiro PJ.
Mr. Justice Chan PJ
I agree with the judgment of Mr. Justice Ribeiro PJ.
Mr. Justice Ribeiro PJ
After trial before Stone J, the plaintiff, Shanghai Tongji Science and Technology Industrial Company Limited ("Tongji"), was awarded judgment in the sum of US$401,394.84 against the defendant, CASIL Clearing Limited ("Casil"): see HCCL 140/1999, 22 August 2002.
The judge found that by their conduct, the parties had impliedly entered into a contract for the sale by Casil to Tongji of certain beauty treatment equipment. Casil was found to have broken that contract since, despite having received payment by a letter of credit provided by Tongji, it had failed to deliver the necessary goods. His Lordship also held that if he were wrong as to the existence of such a contract, Tongji would nonetheless be entitled to judgment in the sum awarded on the basis of a restitutionary claim founded upon total failure of consideration.
The Court of Appeal reversed the trial judge: see CACV 365/2002, 6 June 2003. Mr. Justice Rogers VP (with whom Le Pichon JA and Sakhrani J agreed) held that neither the contract nor the restitutionary claim could be made out. Tongji appeals to this Court by leave of the Court of Appeal.
THE ENTITIES AND INDIVIDUALS INVOLVED
Tongji is a mainland corporation listed on the Shanghai Stock Exchange and carrying on business in Shanghai. Casil is a Hong Kong company and a registered moneylender. It is a subsidiary of China Aerospace International Holdings Ltd ("China Aerospace"), a publicly-listed company in Hong Kong. Each of Tongji and Casil separately had dealings with one Madam Sung Lai Na ("Madam Sung") who controlled a mainland corporation called Shanghai Collina International Medical Beauty Co Ltd ("Shanghai Collina") as well as a Hong Kong company known as Collina International (Group) Co Ltd ("HK Collina").
It was pursuant to an agreement made with Madam Sung acting on behalf of Shanghai Collina that Tongji caused its bank, the Agricultural Bank of China ("Agricultural Bank"), to issue the relevant letter of credit in the sum of US$401,620 in favour of Casil as beneficiary ("the L/C"). It was likewise pursuant to an agreement made with Madam Sung acting on behalf of HK Collina that Casil negotiated the L/C and received its proceeds (amounting to US$401,394.84 after deduction of bank charges) at its own bank, Sin Hua Bank Limited ("Sin Hua"), in Hong Kong.
An important feature of the case involves the fact that Tongji and Casil had no contact at all with each other until after Casil had negotiated the L/C. Before then, each had dealt exclusively with Madam Sung acting on behalf of her respective companies. In relation to these dealings, Tongji's representative was an Assistant General Manager named Mr. Qin Hong Wei ("Mr. Qin"). Casil was represented by Mr. Choi Ming Kuen ("Mr. Choi") who was employed as Senior Treasury Manager by China Aerospace. Both Mr. Qin and Mr. Choi gave evidence at the trial. Madam Sung did not.
As Stone J pointed out, the basic events are essentially undisputed. This is certainly the case where the events are reflected in the documentary record. Moreover, although his Lordship stated that he accepted the evidence of Mr. Qin and found Mr. Choi less impressive, it appears, as Rogers VP notes, that he did not reject any particular aspect of Mr. Choi's version of events. Indeed, in so far as the present case gives rise to factual debate, such debate is largely occasioned by the unavailability of Madam Sung's evidence and, as appears below, by the fact that she evidently gave Tongji and Casil differing versions of relevant events to suit her own ends. Accordingly, while the evidence that was available is not in dispute, certain important questions were left unexplored, leaving gaps to be filled, if at all, by inferences to be drawn from what is known.
THE L/C TRANSACTION
The story begins in early June 1998 when HK Collina was already indebted to Casil in a sum exceeding HK$20 million. Madam Sung sought a further advance of HK$1 million for HK Collina saying that this could be repaid and the overall indebtedness to Casil reduced by getting one of her purchasers to open a letter of credit in Casil's favour.
Madam Sung then approached Tongji on behalf of Shanghai Collina with a view to making arrangements for the importation of the goods and opening the relevant letter of credit. She produced a somewhat illegible draft contract of sale dated 10 June 1998 ("Madam Sung's draft"), bearing the number SI98007-H and naming Casil as the sellers, but with the name of the buyers left blank. It described the goods as 18 units of "Cromogei" and 4 units of "Visocomplex" - said to be beauty equipment - with a contract value of US$401,620, to be shipped in Hong Kong, C&F Shanghai.
The evidence was that pursuant to the Foreign Trade Agency System Tentative Provisions ("the FTA Provisions") promulgated on the Mainland by the Ministry of Foreign Trade and Economic Cooperation on 29 August 1991, only corporations having foreign trading rights were permitted to import goods from foreign traders. An enterprise lacking foreign trading rights had to arrange for importation through an entity which enjoyed such rights. In the language of the FTA Provisions, the enterprise lacking the rights (termed "the entrusting party") had to enter into an "entrustment agreement" with the entity having the foreign trading rights (referred to as the "entrusted party") for the latter to import the goods on the entrusting party's behalf.
Tongji enjoyed foreign trading rights whereas Shanghai Collina did not. Accordingly, on 10 June 1998, Shanghai Collina executed a letter of entrustment in favour of Tongji ("the letter of entrustment") and both of them entered into an agreement drawn up by Tongji ("the entrustment agreement") whereby, for an "importation agency fee" of 2% of the FOB price of the goods, it was agreed that:
Shanghai Collina would sign a contract for the importation of beauty equipment, the entrustment agreement adding: "the Contract No. is SI98007-H and the amount .... US$401,620";
Tongji would accept appointment by Shanghai Collina and would "act according to the requirements of the contract and .... issue immediate outward letters of credit on Shanghai Collina's behalf";
Shanghai Collina would pay Tongji 10% of the contract price as "security" for the issue of the letter of credit and would then pay to Tongji the balance ten days prior to when payment under the credit was due; and,
Shanghai Collina would be responsible for dealing with all matters regarding delivery of the goods, including the customs declaration on arrival and payment of taxes.
Tongji then drew up a draft Purchase Contract dated 12 June 1998, also numbered SI98007-H and covering the same goods on the same terms, but naming itself rather than Shanghai Collina as the buyer ("the Tongji draft"). The motivation for seeking to depart from the entrustment agreement's scheme which envisaged Shanghai Collina signing and acting in all respects as the buyer was not fully explored. Mr. Qin merely suggested that the contract of sale had been redrafted "to suit the plaintiff's wishes, in particular to take out what were considered to be complex terms."
Tongji signed the Tongji draft and handed it to Madam Sung, asking her to get Casil to execute it. It appears that Madam Sung subsequently reported to Mr. Qin that Casil had told her that it was acceptable. This is denied by Casil who say that they never saw the Tongji draft. In any event, Casil plainly never returned any signed version of the Tongji draft and it is common ground that the parties never entered into any written contract of sale.
On the same day, 12 June 1998, Tongji submitted an application to the Agricultural Bank to open the L/C. It was to be in the sum of US$401,620, naming Casil as beneficiary. The documents stipulated were
a signed commercial invoice in four copies "indicating .... Contract No SI98007-H";
a full set of clean on board bills of lading; and
a packing list in four copies.
The application form also contained a description of the goods ("Cromogei" and "Visocomplex") with their unit price and total contract value.
On 16 June 1998, Madam Sung showed Casil a copy of the L/C application form and obtained their agreement to the further loan of HK$1 million to HK Collina to be repaid from the proceeds of the intended L/C.
The next day, 17 June 1998, Agricultural Bank issued the L/C. This was on the terms set out in the application form referred to above and was available by negotiation at any bank against drafts drawn at sight. It was subject to The Uniform Customs and Practice for Documentary Credits (1993 Revision) ICC Publication No 500 ("UCP 500") and was advised to Casil via Sin Hua on 18 June.
Neither the application form nor the L/C itself specified the parties to be named on the stipulated documents. However, Art 37 of the UCP 500 provides that:
Unless otherwise stipulated in the credit, commercial invoices (i) must appear on their face to be issued by the beneficiary named in the credit .... and (ii) must be made out in the name of the applicant ....
Consistently with this UCP provision, the commercial invoice tendered by Casil was on its face issued by Casil, the beneficiary, and made out in the name of Tongji, the applicant. As stipulated in the L/C, the commercial invoice contained the words "REF: Contract No: SI98007-H." The packing list was also made out by Casil and addressed to Tongji; and Casil was named as shipper and Tongji the notify party in the bill of lading (which was consigned to order). As had been arranged with Madam Sung, the invoice and packing list were prepared by HK Collina using headed notepaper and a company chop provided by Casil.
After detailed checking and after making several amendments, these documents were tendered by Casil to Sin Hua on 23 June 1998 accompanied by Casil's sight draft in the sum of US$401,620 for negotiation under the L/C.
Casil and HK Collina then signed a loan agreement dated 25 June 1998 formalizing the loan arrangement previously agreed to. The loan was stated to be a short term loan in the sum of US$400,000 with a US$1,000 handling charge. The L/C and its supporting documents were to be held as security and its proceeds were to be used for repayment of the loan amount and interest.
On 27 June, having negotiated Casil's draft, Sin Hua credited Casil's account with the sum of US$401,394.84, representing the L/C's proceeds less bank charges. The Judge found that Casil in turn credited HK Collina with the proceeds, converted to HK$3,120,000, on 9 July 1998.
Shanghai Collina provided only about 10% of the L/C amount and failed to put Tongji in funds for the balance, as required by the entrustment agreement.
DEALINGS WITH THE GOODS
The container was duly shipped and landed in Shanghai. On 30 June 1998, before the goods had cleared customs, Madam Sung informed Tongji that she was using the container to smuggle cosmetics in order to avoid customs duty. Understandably, Tongji became extremely concerned at being implicated in such smuggling activities. Tongji was obviously in a difficult position. It had incurred a liability to the Agricultural Bank in respect of the L/C but had not been put in funds by Shanghai Collina as agreed under the entrustment agreement. In the normal course, it might have been able to look to the goods as a measure of security, but it did not wish to take delivery of a container containing smuggled goods.
Tongji's first response was to attempt to persuade Casil not to draw on the L/C or to defer drawing on it. It sent a fax dated 3 July 1998 addressed to Casil's "Financial Department". Mr. Qin explained that, never having had any prior contact with Casil, Tongji did not have the name of any individual to whom the fax could be addressed. The fax stated:
This Company issued a Letter of Credit 090LC984280706 to your company on behalf of Miss Sung Laina of Collina. As there exists the timing problem on the part of Miss Sung Laina of coordinating customs clearance in Shanghai and funds for retirement of bills, there is the possibility of failing to make payment on the expiry date of the draft -- 7 July 1998.
It is requested that your company promptly contact Miss Sung Laina and find out a solution. I have already faxed the following practicable solutions to Miss Sung and wish to let you know for your reference:
CASIL Clearing Limited informs Sin Hua Bank, the negotiating bank to advise Shanghai Agricultural Bank (the issuing bank) by telegram that:
Please choose either of the two and give an early reply as working days for operation merely are the afternoon of 3 July and 6 July. Time presses.
On 6 July 1998, Mr. Qin and Mr. Choi had a telephone conversation in which Mr. Qin was told that Casil had already negotiated the L/C via Sin Hua. In a fax from Tongji to Casil of that date (now addressed to Mr. Choi), Tongji stated:
"This Company contacted Miss Sung Laina of Hong Kong Collina and found that there were errors in the actual shipment of goods. Such goods will be delivered back and re-shipment will be made. So deferring payment is something that admits no delay.
Upon consultations with Shanghai Agricultural Bank, it is agreed that things should be done in line with the international practice as follows:
Kindly make immediate arrangements for the foregoing procedures. Please contact Miss Sung Laina or myself, Qin Hong Wei for anything not mentioned herein at your earliest convenience.
While thus pressing Casil to defer payment under the L/C, Tongji sent a fax of the same date (6 July 1998) to Madam Sung, Mr. Qin stating that he had discovered that Casil had already negotiated under the L/C and:
As a result, the solution will not work that [Casil] requests [Sin Hua] to inform [Agricultural Bank] of deferring payment by telegram.
Therefore, you are requested to pay Renminbi to this Company in the quickest possible way. Otherwise the bank will make an outward remittance tomorrow and the goods will be disposed of by the bank.
Negotiations ensued between Tongji and Madam Sung, resulting in an agreement ("the redelivery agreement") whereby
Tongji would release the bill of lading to Madam Sung who would cause the container to be returned to Hong Kong where the contraband goods would be removed and the correct goods re-shipped to Shanghai;
HK Collina would remit US$401,620 to Tongji before 30 August 1998; and
Tongji's position would meanwhile be secured by a guarantee and post-dated cheque in the sum of RMB3,476,847.00 provided by Ganzhou Yajian Wallpaper Co Ltd ("Ganzhou") a mainland corporation controlled by Madam Sung's husband, a Mr. Ke.
Pursuant to the redelivery agreement, Tongji, which had received the B/L from Agricultural Bank, handed it to the ship's agent in return for a delivery order for the container. It then handed the delivery order to Shanghai Collina in return for Ganzhou's post-dated cheque and Shanghai Collina then arranged for the container to be shipped back to Hong Kong.
The container was released to Madam Sung in Hong Kong on 25 August 1998. She applied Casil's chops to the documents effecting release so that, as the judge held, those documents "ostensibly" showed shipment and delivery to Casil. Casil's evidence that it was in fact unaware of the reshipment of the goods and that it did not receive any returned goods in Hong Kong is not disputed.
No funds were remitted by HK Collina to Tongji pursuant to the redelivery agreement and the post-dated cheque provided by Ganzhou was dishonoured on 8 September 1998. No goods were re-shipped from Hong Kong to Shanghai.
Unknown to Tongji or Casil at the time, the container had actually been opened and inspected by Shanghai customs authorities prior to its re-shipment to Hong Kong. It was found to contain wall paper paste, plastic boxes and other goods of insignificant value, rather than beauty equipment or cosmetics.
On 31 August 1998, Tongji's mainland lawyers wrote a letter before action to Shanghai Collina seeking reimbursement for the L/C amounts. The first time it was alleged that a contract of sale existed between Tongji and Casil was in a letter from the mainland lawyers dated 22 October 1998. This was followed by a letter from Hong Kong solicitors acting for Tongji dated 5 November 1998, alleging fraud by reference to the goods actually found in the container. Hong Kong solicitors acting for Casil replied on 14 November 1998 stating:
Our client has in compliance with their Invoice No CS980601 dated 16 June 1998 supplied the goods viz 18 sets of "Cromogei" beauty equipment and 4 sets of "Visocomplex" beauty equipment to your client by container No INBV3057288 .... and the goods were duly discharged at the Shanghai port ....
THE LEGAL BASIS FOR IMPLYING A CONTRACT BY CONDUCT
It is clear that a legally binding contract may be inferred from the conduct of the parties. In deciding whether a contract should be implied, the court adopts as its starting-point what has generally been called "an objective test". Chitty puts this as follows:
In deciding whether the parties have reached agreement, the courts normally apply the objective test .... Under this test, once the parties have to all outward appearances agreed in the same terms on the same subject-matter, then neither can, generally, rely on some unexpressed qualification or reservation to show that he had not in fact agreed to the terms to which he had appeared to agree. Such subjective reservations of one party therefore do not prevent the formation of a contract.
[Chitty on Contracts, 28th Ed, §2-001]
An illustration of the objective test's application can be found in The Aramis  1 Lloyd's Rep 213. In the context of contracts implied by conduct as between persons tendering bills of lading and shipowners releasing cargo against bills so tendered, based on Brandt v Liverpool Brazil & River Plate Steam Navigation Co  1 KB 575, Bingham LJ stated (at 224):
Most contracts are, of course, made expressly, whether orally or in writing. But here, on the evidence, nothing was said, nothing was written. So regard must be paid to the conduct of the parties alone. The questions to be answered are, I think, twofold:
The burden of establishing such a contract is on the person asserting its existence: Brogden v Metropolitan Railway (1877) 2 App Cas 666 at 693. And the court will not imply such a contract lightly. The conduct relied on must be unequivocally referable to the contract sought to be inferred. As Bingham LJ said in a subsequent passage in The Aramis (at 224):
I do not think it is enough for the party seeking the implication of a contract to obtain 'it might' as an answer to [the above-mentioned] questions, for it would, in my view, be contrary to principle to countenance the implication of a contract from conduct if the conduct relied upon is no more consistent with an intention to contract than with an intention not to contract. It must, surely, be necessary to identify conduct referable to the contract contended for or, at the very least, conduct inconsistent with there being no contract made between the parties to the effect contended for. Put another way, I think it must be fatal to the implication of a contract if the parties would or might have acted exactly as they did in the absence of a contract.
In Mitsui & Co Ltd v Novorossiysk Shipping Co  1 Lloyd's Rep 311 at 320, Staughton LJ, following The Aramis, put the requirement of unequivocality in the following terms:
.... it is not enough to show that the parties have done something more than, or something different from, what they were already bound to do under obligations owed to others. What they do must be consistent only with there being a new contract implied, and inconsistent with there being no such contract.
Where the conduct in question satisfies the objective test the law generally excludes as irrelevant evidence of a party's actual intentions regarding the contract to be implied. In Allied Marine Transport Ltd v Vale Do Rio Doce Navegacao SA  1 WLR 925 ("The Leonidas D") at 936, Robert Goff LJ explained this as follows:
.... if one party, O, so acts that his conduct, objectively considered, constitutes an offer, and the other party, A, believing that the conduct of O represents his actual intention, accepts O's offer, then a contract will come into existence, and on those facts it will make no difference if O did not in fact intend to make an offer, or if he misunderstood A's acceptance, so that O's state of mind is, in such circumstances, irrelevant.
The general exclusion of evidence of subjective intent in determining whether the parties have impliedly created a contract by conduct is however subject to one qualification. As acknowledged in the passage from Robert Goff LJ just cited, A's belief that "the conduct of O represents his actual intention" is relevant. Professor Treitel formulates this qualification as follows:
.... the principle is not purely objective: A is not bound merely because 'a reasonable man would believe that he was assenting to the terms proposed by the other party'. In particular, there will be no contract if (in spite of the objective appearance of agreement) B actually knows that A in fact has no intention to contract with him, or to contract on the terms alleged. A subjective element thus qualifies the objective principle; and this follows from the purpose of that principle, which is to protect B from the prejudice he would suffer as a result of relying on a false appearance of agreement. There is clearly no need in this way to protect a party who knows that the objective appearance does not correspond with reality.
[GH Treitel, The Law of Contract, 11th Ed, p 1]
This qualification to the objective test was brought to the fore in a line of cases dealing with the question whether long periods of inactivity by parties to an arbitration can be taken to be conduct from which the creation of a fresh contract releasing each other from the arbitration agreement can be implied. The leading authority in that context is Paal Wilson & Co A/S v Partenreederei Hannah Blumenthal  1 AC 854 ("The Hannah Blumenthal"). While there are difficulties peculiar to the attempt in such cases to rely on silence as an offer and as consent to an offer, The Hannah Blumenthal continues to provide authoritative support for the subjective qualification to the objective test described above. Thus, at p 924, Lord Brightman stated:
The test in my opinion is not wholly objective. The basis of 'tacit abandonment by both parties,' to use the phraseology of the sellers' case is that the primary facts are such that it ought to be inferred that the contract to arbitrate the particular dispute was rescinded by the mutual agreement of the parties. To entitle the sellers to rely on abandonment, they must show that the buyers so conducted themselves as to entitle the sellers to assume, and that the sellers did assume, that the contract was agreed to be abandoned sub silentio. The evidence which is relevant to that inquiry will consist of or include: (1) What the buyers did or omitted to do to the knowledge of the sellers. Excluded from consideration will be the acts of the buyers of which the sellers were ignorant, because those acts will have signalled nothing to the sellers and cannot have founded or fortified any assumption on the part of the sellers. (2) What the sellers did or omitted to do, whether or not to the knowledge of the buyers. These facts evidence the state of mind of the sellers, and therefore the validity of the assertion by the sellers that they assumed that the contract was agreed to be abandoned. The state of mind of the buyers is irrelevant to a consideration of what the sellers were entitled to assume. The state of mind of the sellers is vital to a consideration of what the sellers in fact assumed.
In the passage just cited, the sellers were seeking to assert that the parties had, by their conduct, impliedly entered into a contract abandoning the pre-existing arbitration agreement. If, as the House of Lords held, to the sellers' knowledge, the buyers never intended to abandon the arbitration, the sellers would not be allowed to rely on the objective test as binding the buyers to such an abandonment agreement.
Thus, applying The Hannah Blumental in Food Corporation of India v Antclizo Shipping Corporation  2 Lloyd's Rep 130 ("The Antclizo"), Bingham LJ stated:
These have been cases in which there have for long periods been total or almost total silence and inactivity on the part of both parties to the arbitration under review. The Court's task has been to determine, on the facts of the particular case, how a reasonable respondent in the position of the respondent in question would have interpreted the silence and inactivity of the claimant in the arbitration; how the respondent in question did in fact interpret the silence and inactivity of the claimant; and how a reasonable claimant in the position of the claimant in question would have interpreted the silence and inactivity of the respondent.
[at 132, underline supplied]
Similarly, (at p 146), Nicholls LJ sought to explain certain (possibly problematical) passages from the speech of Lord Diplock in The Hannah Blumenthal (at 915-917) in terms of the subjective qualification to the objective test:
An explanation [of those passages] may be that Lord Diplock's reference to each party's actual understanding of the other's intention as communicated was intended only to exclude the formation of a contract in cases where one party knows that the other's actual intention is not in accordance with his apparent intention.
In the recent House of Lords decision in Shogun Finance Ltd v Hudson  3 WLR 1371 at 1406, §123, Lord Phillips explained the subjective qualification as follows:
A contract will not be concluded unless the parties are agreed as to its material terms. There must be 'consensus ad idem'. Whether the parties have reached agreement on the terms is not determined by evidence of the subjective intention of each party. It is, in large measure, determined by making an objective appraisal of the exchanges between the parties. If an offeree understands an offer in accordance with its natural meaning and accepts it, the offeror cannot be heard to say that he intended the words of his offer to have a different meaning. The contract stands according to the natural meaning of the words used. There is one important exception to this principle. If the offeree knows that the offeror does not intend the terms of the offer to be those that the natural meaning of the words would suggest, he cannot, by purporting to accept the offer, bind the offeror to a contract: Hartog v Colin & Shields  3 All ER 566; Smith v Hughes (1871) LR 6 QB 597. Thus the task of ascertaining whether the parties have reached agreement as to the terms of a contract can involve quite a complex amalgam of the objective and the subjective and involve the application of a principle that bears close comparison with the doctrine of estoppel. Normally, however, the task involves no more than an objective analysis of the words used by the parties. The object of the exercise is to determine what each party intended, or must be deemed to have intended.
Chitty provides a helpful summary in the following terms:
.... the objective test is .... subject to the limitation that it does not apply in favour of a party who knows the truth. Thus .... the party who did not intend to be bound would not be bound if his state of mind was actually known to the other party. Nor could a party who did not in fact intend to be bound invoke the objective test so as to hold the other party to the contract: to apply that test in such a case would pervert its purpose, which is to protect a party who has relied on the objective appearance of consent from the prejudice which he would suffer if the other party could escape liability on the ground that he had no real intention to be bound.
THE PRINCIPLES APPLIED IN THE PRESENT CASE
In reaching his conclusion in favour of a contract formed by conduct, Stone J emphasised particular aspects of the evidence. He was especially impressed by "the exact correlation between the content of the documents which had been presented to the bank for the negotiation of the credit and the unsigned Purchase Contract" - something which Casil could not have missed since it had made a minute examination of the documents before presenting them for negotiation under the L/C. He also placed reliance on the letter of 14 November 1998 from Casil's solicitors responding to a letter before action from Tongji's lawyers in which it was asserted on Casil's behalf that there had been due delivery of the goods. On the basis of these and other matters, his Lordship concluded that "when viewed objectively the defendant's conduct in presenting the documents under the credit is able to be characterized as an acceptance of the plaintiff's offer to buy the goods from the defendant."
With respect, it is my view, in common with the Court of Appeal, that Stone J did not apply the correct test. It was insufficient to find that Casil's presentation of documents under the L/C was capable of constituting an acceptance. A contract could only be established if the court was satisfied that such conduct, along with the Tongji's conduct in causing the L/C to be opened in favour of Casil was unequivocal: that it was consistent only with there being a contract of sale implied, and inconsistent with there being no such contract. Furthermore, the judge omitted to consider whether, in the light of the available evidence, the subjective qualification to the objective test excluded the implication of a contract in the present case.
It follows that it was open to the Court of Appeal and is, to the extent necessary, open to this Court, to re-examine the available evidence and to draw relevant inferences with a view to applying the correct legal tests.
APPLICATION OF THE OBJECTIVE TEST
Taking the objective test as the starting point, it is convenient to adopt the approach indicated by Bingham LJ (in The Aramis, supra at 224), asking:
whether the conduct of Tongji in causing the L/C to be issued in favour of Casil would be understood by a reasonable person standing in Casil's place as an offer by Tongji to enter into a contract for the sale of the goods referred to in the L/C; and (ii) whether the conduct of Casil in tendering documents and negotiating its draft under the L/C would be understood by a reasonable person in Tongji's position as an acceptance of such an offer.
It would not be sufficient to answer, "It might" to these questions. The objective test would only be met if the conclusion is reached in each case that the parties' conduct is consistent only with there being a new contract implied, and inconsistent with there being no such contract.
Mr. Jat Sew-tong SC, appearing with Mr. Jin Pao on behalf of Tongji, contended that the objective test is met. The argument advanced relied principally on the commercial invoice required by the L/C. By virtue of UCP 500, Art 37, it had to be made out by Casil (the beneficiary) to Tongji (the applicant), and, as stipulated in the L/C, it had to indicate the specified contract number on its face. Such a document, it was contended, could only make sense as evidence of a sale by Casil to Tongji of the goods identified in the invoice. Accordingly, so the argument ran, a reasonable person in Casil's position must have realised that the offer to allow Casil to draw on the L/C as beneficiary against tender of such an invoice implicitly required Casil first to enter into the underlying contract which would give the invoice commercial meaning. The L/C therefore amounted to an unequivocal offer made on Tongji's behalf which, by tender of the required invoice (and the other documents also made out in Casil's name), was accepted by Casil.
I do not accept this argument. In my judgment, upon receiving advice of the L/C naming Casil as beneficiary, a reasonable person in Casil's position would think it unlikely, and certainly would not think it unequivocally clear, that the L/C represented an offer by Tongji to enter into a contract to buy from Casil the goods referred to in the L/C. Neither is it likely, let alone unequivocally clear, that the tender of documents under the L/C would be regarded by a reasonable person standing in Tongji's shoes as acceptance of such an offer.
The reasonable person in Casil's position would, in my opinion, view the L/C on the following basis:
Casil had not previously had any contact with Tongji and had neither negotiated nor agreed the terms of any contract with Tongji.
The L/C referred on its face to a sale contract which was apparently already in existence, having been assigned the contract number SI98007-H and with the description and quantities of the goods, their unit price, C&F terms of sale and the shipment and delivery ports already established, none of these matters having previously been discussed with Casil.
What was being advised to Casil as beneficiary was an irrevocable documentary credit whereby the issuing bank undertook that it would make payment (in this case, by authorising negotiation of Casil's draft) against conforming documents, as would generally be understood by persons in business.
It is not objectionable to find that a letter of credit names as applicant and/or beneficiary parties other than the parties to the underlying sale contract since it is not uncommon for intermediaries involved in financing the transaction to be named as parties to the credit as part of the financing arrangements.
The fact that the L/C called for an invoice issued in Casil's name is again unobjectionable and reasonably explicable as an aspect of the financing arrangements. As noted by Potter LJ in Montrod Ltd v Grundkotter Fleischvertriebs-GmbH  1 WLR 1975 at 1992, in relation to documentary credit transactions, one comes across a "wide variety of circumstances in which documents come into existence in a commercial context which do not necessarily reflect the factual situation but which parties may none the less employ as a convenient means of progressing a particular transaction."
There is of course no question of Casil acting fraudulently in obtaining payment under the L/C. No allegation of fraud is or could be made. Casil plainly believed with good reason that the L/C was being provided by one of HK Collina's purchasers pursuant to an underlying contract between such purchaser and HK Collina; and that Casil had been authorized by HK Collina to receive the L/C's proceeds as a means of reducing its indebtedness to Casil. Indeed, the documents tendered were prepared by HK Collina, in Casil's name, to be used for that purpose.
It follows, in my view, that the conduct of Tongji and Casil in relation to the L/C falls far short of being conduct consistent only with the implication of a contract of sale between them and conduct inconsistent with the absence of such a contract.
APPLICATION OF THE SUBJECTIVE QUALIFICATION
In my judgment, Tongji's claim based on implied contract also fails because the evidence compels the inference that Casil never intended by its conduct to be bound as a party to any underlying sale contract with Tongji and that Casil's state of mind was known to Tongji, which consistently demonstrated that it did not regard Casil as so bound.
When Madam Sung first approached Tongji in relation to this transaction on 10 June 1998, she plainly did so on the footing that there was already a contract of sale in existence - to which Tongji was obviously not a party. She produced Madam Sung's draft which already contained detailed terms of the sale. Indeed, Mr. Qin's evidence was that Madam Sung told him that the transaction was urgent since a shipment date had already been arranged.
While it is true that Madam Sung's draft, while naming the seller as Casil, had left the buyer's name blank, it is clear that Tongji and Madam Sung both understood that the buyer was to be Shanghai Collina. This is demonstrated first by the letter of entrustment dated 10 June 1998 which declares that it is Shanghai Collina which is to import the goods and that Tongji is asked open a letter of credit favouring Casil on Shanghai Collina's behalf. This is mirrored in the entrustment agreement which was drawn up by Tongji. This obliged Shanghai Collina to sign Contract SI98007-H and Tongji to open an L/C on its behalf, with Shanghai Collina being responsible for all aspects of the importation of the goods.
It is therefore clear that as at 10 June 1998, Tongji and Madam Sung were both proceeding on the basis that the terms of sale had been agreed between Casil and Shanghai Collina, with a written Contract SI98007-H to be signed recording that agreement. It was obviously not then intended that Tongji should itself become a party.
Two days later, Tongji produced the Tongji draft seeking to substitute itself for Shanghai Collina as the buyer in the contract of sale. The motivation for doing so was not fully explored, but it may well be that Tongji was seeking to comply with the requirements of the FTA Provisions, which, by Art 15, apparently requires the entrusted party to sign the import or export contract with the foreign trader in its own name and to send a copy to the entrusting party. This no doubt indicates that Tongji wanted at that stage to become party to the sale contract. However, it is equally clear that this did not occur. Tongji was therefore left in the position reflected in the entrustment agreement with the contract of sale envisaged to be made between Shanghai Collina and Casil, without Tongji's being a party.
Tongji did not wait for the Tongji draft to be returned signed by Casil. It applied on the same day, 12 June 1998, to the Agricultural Bank for the L/C to be issued. It was plainly prepared to go ahead without a contract with Casil. In his witness statement, Mr. Qin explained that he was willing to do so because :
We thought we were guaranteed by the Bank making payment and by using the L/C in exchange of bill of lading/sales invoice even if the Contract was not yet signed back.
Tongji therefore did not consider itself to be making any contractual offer by conduct with the issue of the L/C. In so far as it had hopes of Casil entering into a contract of sale with itself, this would have involved Casil executing the Tongji draft. But Tongji was prepared to go forward without such a contract on the footing that any drawing under the L/C would provide Tongji with the bill of lading as a "guarantee" or security for the L/C amount. Tongji never chased up Casil for the signed contract and indeed, did not seek to make any contact at all with Casil until 3 July 1998, after the problems with the goods had surfaced.
When on 30 June, Madam Sung told Mr. Qin that there were undeclared cosmetics in the container intended to be smuggled onto the mainland, Tongji obviously realised that the transaction was in serious trouble. In this context, Tongji's first attempts to communicate directly with Casil by its faxes of 3 July and 6 July 1998 and its fax to Madam Sung of 6 July 1998 are telling.
In the 3 July fax, Tongji identifies itself as the person who had opened an L/C favouring Casil on behalf of Madam Sung "of Collina" and stated that Madam Sung was experiencing difficulties with customs clearance and raising funds for retirement of bills. Significantly, Tongji is not suggesting that it is the buyer of the goods, but merely referring to its financing role in providing the L/C on behalf of the buyer. The difficulties with customs clearance and funding to retire the bills are referred to as problems facing Madam Sung rather than itself.
The 3 July and 6 July faxes suggest "solutions" which, in respect of Casil, relate purely to the L/C transaction. Casil is requested to agree to a deferment of payment and to accept back the documents tendered. It should be noted that the 6 July fax was sent after Mr. Qin had been told that Casil had already drawn under the L/C. On Tongji's case, this should have meant that Casil had thereby bound itself to Tongji under the contract of sale as seller. Yet the fax contains not a word of complaint from Tongji as buyer about Casil as seller delivering a container housing smuggled goods. Such reticence is inconceivable if Tongji in fact regarded itself as buyer and Casil as seller.
Instead, in Tongji's fax of 6 July 1998 to Madam Sung, she was told that since Casil had drawn on the credit, deferring payment "will not work".
As the Court of Appeal noted, Stone J did not examine these matters, stressing instead a position taken by Casil's solicitors in November 1998. The judge stated:
There was thus manifestly no suggestion in the early correspondence between the legal representatives of the parties that the transaction had constituted other than a contract of sale.
The correspondence between the parties in early July when the problems first erupted are plainly a surer guide in this case to their mental states than the postures taken by solicitors in letters before action some five months later. Moreover, it is noteworthy that even in the solicitors' correspondence, the theory of an implied contract arising out of negotiation under the L/C was never put forward.
THE RESTITUTION CLAIM
The common law cause of action asserted by the plaintiff for money had and received where consideration has totally failed is now generally regarded as a species of claim for restitution based upon principles of unjust enrichment: see e.g., Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd  AC 32 at 61-64; Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221 at 255-257; Australia & New Zealand Banking Group Ltd v Westpac Banking Corporation (1988) 164 CLR 662 at 673; David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353 at 375; cf Gummow J's views in Roxborough v Rothmans of Pall Mall (2001-2002) 208 CLR 516 at 543 et seq, discussed in Birks, "Failure of consideration and its place on the map" (2002) 2 OUCLJ 1; and in Beatson & Virgo, "Contract, unjust enrichment and unconscionability" (2002) 118 LQR 352.
A useful framework for approaching such claims which was adopted by both parties involves asking four questions:
Was the defendant enriched?
Was the enrichment at the plaintiff's expense?
Was the enrichment unjust?
Are any of the defences applicable?
This approach was evolved and is generally accepted in academic writings: see e.g., Birks, An Introduction to the Law of Restitution, (1989 Rev Ed) Ch 1; Burrows, The Law of Restitution, (2002), p 15; Goff & Jones, The Law of Restitution, 6th Ed, §1-016; and Hedley & Halliwell, The Law of Restitution, (2002), §1-16; Virgo, The Principles of the Law of Restitution (1999) p 9. It has received substantial judicial support and will be adopted in this judgment: see e.g., Lipkin Gorman v Karpnale Ltd  2 AC 548 at 559 and 578; Commissioner of State Revenue (Vict) v Royal Insurance Australia Ltd (1994) 182 CLR 51 at 75; Banque Financière de la Cité v Parc (Battersea) Ltd  1 AC 221, at 227 and 234; and Kleinwort Benson Ltd v Lincoln City Council  2 AC 349 at 408.
ENRICHMENT OF CASIL AT TONGJI'S EXPENSE
There is no doubt that Casil has been enriched by receiving the L/C's proceeds. However, Mr. Michael Thomas SC, appearing with Mr. Benjamin Chain for Casil, resists the restitution claim arguing that such enrichment was not "at the expense of" Tongji. The Supplemental Case puts this as follows:
Though Tongji's claim posits a payment of money to Casil, there was in fact no such payment. Tongji was liable to pay Agricultural Bank for the service the bank rendered in opening the L/C. Casil received a payment directly from Sin Hua who negotiated its draft and acquired conforming documents on its own behalf as a negotiating bank. Later, Agricultural Bank paid Sin Hua against the stipulated documents. The claim for restitution by Casil ignores these intermediate transfers of money, all for different consideration and in respect of different contractual obligations, and each involving bank charges.
In my view, this objection is unsound. A similar argument was rejected in Banque Financière de la Citév Parc (Battersea) Ltd  1 AC 221. There, a refinancing loan was to be made by a Swiss Bank to an entity referred to by the abbreviation "OOL" and, in order to avoid triggering a disclosure obligation under Swiss Federal Banking Regulations, the transaction was restructured by interposing an individual, one Mr. Herzig, as the immediate borrower. Lord Steyn stated (at 227):
Stripped to its essentials the argument of counsel for OOL was that the interposition of the loan to Mr. Herzig meant that the enrichment of OOL was at the expense of Mr. Herzig. The loan to Mr. Herzig was a genuine one spurred on by the motive of avoiding Swiss regulatory requirements. But it was nevertheless no more than a formal act designed to allow the transaction to proceed. It does not alter the reality that OOL was enriched by the money advanced by [the bank] via Mr. Herzig to Parc. To allow the interposition of Mr. Herzig to alter the substance of the transaction would be pure formalism.
Sin Hua made payment to Casil upon negotiating the latter's draft purely on the strength of Agricultural Bank's undertaking in the L/C to reimburse the negotiating bank in accordance with the relevant provisions of UCP 500. And the reason Agricultural Bank was prepared to give that undertaking was Tongji's assumption of liability to fund the transaction. The L/C was merely the mechanism whereby Casil received payment against tender of conforming documents at the direction and for the debit of Tongji. The fact that Casil was enriched was therefore undoubtedly at Tongji's expense.
Mr. Thomas submitted in the abovementioned context that the payee's unjust enrichment has to be directly at the expense of the payer. Such a rule is indeed recognized in certain contexts involving a benefit gained by the defendant from a third party rather than the plaintiff. One example, given in Goff & Jones, op cit, §1-046, is where X pays money to D with a view to him passing it on to P in discharge of a debt owed by X to P, but where D fails to pass the money on. Here, D is unjustly enriched at X's expense but P has no claim against D. Another example involves an attempt by a plaintiff to mount a restitutionary claim in respect of benefits conferred by him on an "immediate enrichee" who has passed it on to a second recipient. This raises the question as to the extent to which the plaintiff may sue the second recipient directly thereby, as Professor Birks puts it, "leapfrogging the immediate enrichee": see Birks, At the Expense of the Claimant: Direct and Indirect Enrichment in English Law (Oxford University Comparative Law Forum at http://ouclf.iuscomp.org) and Burrows, op cit, pp 31-41.
However, we are not concerned here with any such situation. The relevant relationship of enrichment is as between Tongji and Casil, at the expense of Tongji. The interposed banks merely provided the mechanism for making payment to Casil under the L/C. They were not intermediate recipients unjustly enriched. As the Australian High Court indicated in Australia & New Zealand Banking Group Ltd v Westpac Banking Corporation 164 CLR 662 at 673-674, a restitutionary claim generally does not lie against an intermediary who is no more than "a mere conduit-pipe" for payment to the ultimate recipient.
WAS THE ENRICHMENT UNJUST?
Tongji's case on unjust enrichment is primarily based on an alleged total failure of consideration. It also seeks to advance a case based on mistake.
Tongji's case on total failure of consideration is put on the basis that it made payment to Casil in anticipation of a contract which did not materialise. The principle relied on is summarised in Goff & Jones, op cit, at §26-006, as follows:
A plaintiff may have made a payment in anticipation that a contract will soon be concluded; if the parties fail to contract he may be able to recover the payment on the ground of total failure of consideration. In this context the claim is that the consideration is the expected formation of the contract.
This is a well-recognized category of unjust enrichment claims based on total failure of consideration arising, for instance, in a case where a deposit was paid "subject to contract" but the contract was not entered into (Chillingworth v Esche  1 Ch 97); or where completion of a contract was defeated by non-fulfilment of a condition (Wright v Newton (1835) 2 CM & R 124; Simmons v Heseltine (1858) 5 CB (NS) 554).
Tongji identifies the anticipated contract as a contract for the purchase of the beauty equipment from Casil. Its printed case states:
In the present case, the purpose or basis of Tongji causing the opening of the L/C was clearly that it had anticipated that a contract would have arisen for the sale and purchase of the Goods, with Tongji as the purchaser, and CASIL as the seller. Given that the restitutionary claim is an alternative claim and therefore premised on a failure to contract, the basis or purpose of the payment will have failed with the result that Tongji is entitled to recover in restitution, unless a valid defence is established by CASIL .... Accordingly, vis-à-vis CASIL, the basis or purpose of opening the L/C had failed upon the failure to contract with CASIL.
In my view, this mis-identifies the relevant transaction and the associated consideration.
"Consideration" in the context of a restitutionary claim based on total failure of consideration is the anticipated performance for which the money was paid, or the "basis or purpose" of the payment: see Birks, op cit, 223-6 and "Failure of consideration and its place on the map" (2002) 2 OUCLJ 1 at 3-4; Burrows, op cit, 324-6. Thus, in Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd  AC 32 at 48; Viscount Simon LC stated:
In English law, an enforceable contract may be formed by an exchange of a promise for a promise, or by the exchange of a promise for an act - I am excluding contracts under seal - and thus, in the law relating to the formation of contract, the promise to do a thing may often be the consideration, but when one is considering the law of failure of consideration and of the quasi-contractual right to recover money on that ground, it is, generally speaking, not the promise which is referred to as the consideration, but the performance of the promise. The money was paid to secure performance and, if performance fails the inducement which brought about the payment is not fulfilled.
It is accordingly crucial correctly to identify and characterise the transaction providing the basis for the defendant's enrichment. Only then can one identify the relevant anticipated performance and ascertain whether it has totally failed.
Thus, in Stocznia Gdanska SA v Latvian Shipping Co  1 WLR 574, once it was determined that the performance required of the shipyard was not merely to transfer property in the vessels, when built, to the buyers, but instead, to design, build, complete and deliver them in accordance with the agreed specification, it became clear that the shipyard had in fact rendered part of the expected performance, thereby excluding a claim based on total failure of consideration. Lord Goff stated (at 588):
In truth, the test is not whether the promisee has received a specific benefit, but rather whether the promisor has performed any part of the contractual duties in respect of which the payment is due. The present case cannot, therefore, be approached by asking the simple question whether the property in the vessel or any part of it has passed to the buyers. That test would be apposite if the contract in question was a contract for the sale of goods (or indeed a contract for the sale of land) simpliciter under which the consideration for the price would be the passing of the property in the goods (or land). However before that test can be regarded as appropriate, the anterior question has to be asked: is the contract in question simply a contract for the sale of a ship? or is it rather a contract under which the design and construction of the vessel formed part of the yard's contractual duties, as well as the duty to transfer the finished object to the buyers? If it is the latter, the design and construction of the vessel form part of the consideration for which the price is to be paid, and the fact that the contract has been brought to an end before the property in the vessel or any part of it has passed to the buyers does not prevent the yard from asserting that there has been no total failure of consideration in respect of an instalment of the price which has been paid before the contract was terminated, or that an instalment which has then accrued due could not, if paid, be recoverable on that ground.
Tongji's formulation focuses on the "opening of the L/C" as the enrichment and postulates as the performance to be rendered in return, entry into a sale contract with Casil.
However, merely opening the L/C did not constitute the relevant or any enrichment. Casil was enriched by its receipt of money from Sin Hua upon negotiation of its draft and tender of conforming documents in accordance with the L/C's terms. If Casil had made no such tender or if it had tendered non-conforming documents, it would not have received any payment. The relevant transaction therefore embraces the entire L/C transaction terminating in Casil's receipt of the L/C's proceeds.
Therefore, the consideration for the purposes of a claim in restitution arising out of this transaction must include Casil's tender of conforming documents as an unseverable part of the performance forming the basis of the payment. Such performance was duly rendered so there was no total failure of consideration. Moreover, in consequence of Casil's tender, the bills of lading came into Tongji's hands and were exchanged by Tongji for delivery orders which it then handed to Madam Sung in return for Ganzhou's post-dated cheque, with a view to improving its security vis-à-vis Madam Sung. The fact that the cheque was subsequently dishonoured and that the contents of the container turned out to be of insignificant value do not affect this conclusion.
I would add that even if Tongji's formulation of its total failure of consideration case was legally viable, it could not be sustained on the facts. As mentioned above, Mr. Qin's evidence was that he was willing to open the L/C without any contract with Casil since he thought the L/C mechanism would provide Tongji with the documents, including the bill of lading, as a "guarantee" or security for the L/C amount. Accordingly, it is factually inaccurate to assert that the purpose or basis of opening the L/C was Tongji's anticipation of a contract with Casil.
It is accordingly my view that the restitutionary claim based on a total failure of consideration must fail.
DOES THE ENTRUSTMENT AGREEMENT EXCLUDE RESTITUTIONARY RELIEF?
I should at this juncture deal with what is an analytically anterior argument which was accepted by the Court of Appeal as a basis for rejecting Tongji's restitutionary claim. It was held that the claim for restitution based on total failure of consideration must be excluded on the fundamental ground that Tongji made the relevant payment pursuant to a contractual obligation to do so. Mr. Thomas sought to uphold this ground for rejecting the restitution claim.
If this argument is correct, it matters not whether Tongji can show that Casil was unjustly enriched at its expense. Neither would any of the defences matter. The contention is that since Tongji caused payment of the L/C proceeds to be made to Casil pursuant to a contractual obligation it owed to Shanghai Collina to do so, no restitutionary claim for those proceeds can in principle be maintained against Casil.
In dealing with this argument, care must be taken to distinguish between cases
where the plaintiff makes payment to the defendant pursuant to a subsisting contractual obligation owed by him to the defendant; and
where the plaintiff makes payment to the defendant pursuant to a contractual obligation owed by the plaintiff to a third person.
It is generally accepted that in relation to the first category, a restitutionary claim based on total failure of consideration is excluded during the subsistence of the contract: see e.g., Dimskal Shipping Co SA v International Transport Workers Federation  2 AC 152 (" The Evia Luck") at 165; Pavey & Matthews Pty Ltd v Paul 162 CLR 221 at 256.
Professor Burrows explains the principle as follows:
.... the ambit of failure of consideration is rightly kept in check by the principle that, before a party can claim restitution for failure of consideration, he must establish that he has no contractual obligation to confer the relevant benefit on the defendant: any relevant contract must be ineffective. This may be, for example, because an initially valid contract has been discharged for breach or frustration; or because the contract was void, unenforceable or incomplete. It is by this principle that an undermining of contract by restitution is avoided and restitution is made subservient to contract. It is only when the parties' own allocation of risk is ineffective that the imposed standards set by the law of restitution can step in.
[op cit, at p 323-324]
See also Goff & Jones, op cit, at §1-063; Hedley & Halliwell, op cit, §§19.3-19.5.
While a contract continues to subsist between the parties, one party who makes a payment to the other party in accordance with his obligations under that contract cannot be allowed to mount a claim in restitution for the return of that sum since such a claim would be inconsistent with what the parties had agreed. It is in this sense that the contract would be "undermined" or, as Professor Birks puts it, that the restitutionary claim would "subvert bargains" (op cit, p 47).
It is clear, however, that this established principle does not apply in the present case and lends no support to Mr. Thomas' argument. There is no contract between Tongji, the payer, and Casil, the payee. The contract which Casil seeks to rely on for excluding restitutionary relief is the entrustment agreement between Shanghai Collina and Tongji.
Mr. Thomas relied on the House of Lords decision in Pan Ocean Shipping Ltd v Creditcorp Ltd  1 WLR 161 ("The Trident Beauty"), as authority for the proposition that the right to restitution is equally excluded in the second category of case: where the plaintiff (Tongji) confers the benefit on the defendant (Casil) pursuant to a contractual obligation owed by the plaintiff to a third party (Shanghai Collina).
I do not accept that The Trident Beauty is authority for that proposition. In my view, it was a decision which proceeded squarely on the basis of the established principle, applying that principle to a case where the benefit contractually required to be transferred to the other party had been assigned to a third person. The relevant facts are as follows:
The plaintiff, Pan Ocean, as charterer, entered into a time charter with Trident, the vessel's disponent owners. Creditcorp, the defendant, had provided finance to Trident and obtained, inter alia, an assignment of all receivables under the charterparty "free of all encumbrances and third party interests". Pan Ocean was given notice of this assignment.
The charterparty required Pan Ocean to pay charterhire 15 days in advance and also contained clauses providing for charterhire to be subsequently adjusted or repaid where the vessel was off-hire during a period covered by the advance charterhire. In particular, clause 18 gave the charterers a lien on the ship for moneys paid in advance and not earned and required overpaid hire to be "returned at once".
On 31 May 1991, Pan Ocean paid an instalment of advance charterhire in the sum of US$93,600 covering the period from 31 May to 15 June. Throughout that period, Pan Ocean did not have the use of the vessel because she was off-hire, undergoing repairs.
On 12 June 1991, the vessel was withdrawn from Trident by the head owners because Trident had failed to pay the shipyard for the repairs.
Since Trident was not worth suing, Pan Ocean brought proceedings in restitution against Creditcorp to recover the instalment of advance charterhire paid but not earned by Trident.
The House of Lords held that the claim against Creditcorp failed.
Having identified the relevant terms in the charterparty, Lord Goff (at 164) began by stating the established principle, focusing on the contract between Pan Ocean and Trident:
.... as between shipowner and charterer, there is a contractual regime which legislates for the recovery of overpaid hire. It follows that, as a general rule, the law of restitution has no part to play in the matter; the existence of the agreed regime renders the imposition by the law of a remedy in restitution both unnecessary and inappropriate. Of course, if the contract is proved never to have been binding, or if the contract ceases to bind, different considerations may arise, as in the case of frustration ....
The contractual regime provided not only for Pan Ocean to make the advance charterhire payment (which it did on 31 May) but also, during the contract's subsistence, for Trident to repay the unearned hire. The established principle therefore prevented Pan Ocean from mounting a restitutionary claim which would cut across the agreed regime. Lord Goff stated (at 164):
Here, it is true, the contract was prematurely determined by the acceptance by Pan Ocean of Trident's repudiation of the contract. But, before the date of determination of the contract, Trident's obligation under cl 18 to repay the hire instalment in question had already accrued due; and accordingly that is the relevant obligation, as between Pan Ocean and Trident, for the purposes of the present case .... It follows that, in the present circumstances and indeed in most other similar circumstances, there is no basis for the charterer recovering overpaid hire from the shipowner in restitution on the ground of total failure of consideration.
His Lordship then turned to the position of Creditcorp as assignee and held that the fact of the assignment did not take the case outside the ambit of the established principle (at 165-166):
In truth, all that happened in the present case was that the benefit of receiving the hire payment was assigned to Creditcorp and, in accordance with the terms of the charter, Trident remained liable to repay to Pan Ocean any part of the hire so paid to Creditcorp which was not earned. Under the charter there were two separate contractual obligations - an obligation on Pan Ocean to pay instalments of hire in advance, and an obligation on Trident to repay any part of any such instalment which was not earned. The assignment to Creditcorp of Trident's right to receive advance hire payments left undisturbed Trident's obligation to repay any hire which was unearned; and I cannot see that in these circumstances the assignment to Creditcorp can have carried with it any obligation upon Creditcorp, additional to the contractual obligation imposed upon Trident, to repay unearned hire on the ground of failure of consideration.
Lord Woolf was of a similar view, holding (at 171) that "Pan Ocean are in exactly the same position as against Trident as they would have been if there had been no assignment to Creditcorp of the right to receive payment" and therefore stood to have their restitutionary claim dealt with in accordance with what I have been referring to as the established principle.
It is true that, as Lord Goff (at 166) recognizes, there has been academic debate as to the viability and desirability of extending the principle to cover cases in the second category. Since publication of that dictum, the debate has, if anything, intensified: see e.g., Goff & Jones, op cit, at §1-074 to §1-077; Burrows, op cit, pp 347-350; Virgo, op cit, pp 344-346. Difficult questions arise in this debate. One can readily understand the need for the established exclusionary principle, based as it is on a desire to prevent subversion of contracts subsisting between the person conferring and the person receiving the benefit under the contract. But on what, if any, grounds should a restitutionary claim be excluded against an unjustly enriched recipient who is not party to any contract pursuant to which the benefit was conferred? The third party recipient may or may not be party to a different contractual regime whereby he may have acquired the right to receive the benefit, but even if he is, it is by no means clear that allowing a restitutionary claim in such circumstances would necessarily be inconsistent with or involve "subverting" that separate contract. Relevant defences may be available on the facts, making it highly debatable whether the established exclusionary principle should be so extended. There is, however, no necessity in the present case to grapple with these difficulties since the claim based on total failure of consideration fails in any event since there has been no such failure of consideration.
RESTITUTION ON GROUNDS OF MISTAKE
Mr. Jat sought to rely upon mistake as an alternative basis for a claim in restitution. In the printed case, the mistake is put in two ways.
First, it is suggested that Tongji caused the payment to be made via the L/C in the mistaken belief that Casil had already entered into the contract, based upon what Madam Sung orally reported.
Secondly, Tongji is said to have made the payment in the mistaken belief that it was "subject to a present or future legal liability to do so."
This is a new point, not pleaded and not taken either at trial or in the Court of Appeal. In Flywin Co Ltd v Strong Associates Ltd (2002) 5 HKCFAR 356, this Court made it clear that a party would be barred from taking such a point unless there is no reasonable possibility that the state of the evidence relevant to it would have been materially more favourable to the other side if the point had been taken at the trial. This requirement is plainly not satisfied in the present case. The very equivocality of Tongji's case as to the nature of the mistake made underlines the factual uncertainty attaching to the argument. Indeed, as previously pointed out, Mr. Qin's evidence as to the basis upon which he proceeded in the absence of a written contract with Casil militates against the existence of any mistake. There would no doubt have been extensive cross-examination on this question if it had been properly raised and taken at trial. This ground of argument is therefore not open to Tongji.
It is accordingly my conclusion that the claim in contract and the restitutionary claims based on total failure of consideration and on mistake must fail. It becomes unnecessary to deal with the defence of change of position relied upon by Casil in respect of the restitution claims.
I would therefore dismiss the appeal and make an order nisi that the respondent should have the costs. I would direct that any representations on costs be filed in writing by the appellant within 14 days from the date of this judgment and any representations from the respondents in reply be filed within 14 days thereafter.
Mr. Justice Nazareth NPJ
I agree with the judgment of Mr. Justice Ribeiro PJ.
The Aramis  1 Lloyd's Rep 213; Brandt v Liverpool Brazil & River Plate Steam Navigation Co  1 KB 575; Brogden v Metropolitan Railway (1877) 2 App Cas 666; Mitsui & Co Ltd v Novorossiysk Shipping Co  1 Lloyd's Rep 311; Allied Marine Transport Ltd v Vale Do Rio Doce Navegacao SA  1 WLR 925; Paal Wilson & Co A/S v Partenreederei Hannah Blumenthal  1 AC 854; Food Corporation of India v Antclizo Shipping Corporation  2 Lloyd's Rep 130; Shogun Finance Ltd v Hudson  3 WLR 1371; Montrod Ltd v Grundkotter Fleischvertriebs-GmbH  1 WLR 1975; Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd  AC 32; Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221; Australia & New Zealand Banking Group Ltd v Westpac Banking Corporation (1988) 164 CLR 662; David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353; Roxborough v Rothmans of Pall Mall (2001-2002) 208 CLR 516; Lipkin Gorman v Karpnale Ltd  2 AC 548; Commissioner of State Revenue (Vict) v Royal Insurance Australia Ltd (1994) 182 CLR 51; Banque Financière de la Cité v Parc (Battersea) Ltd  1 AC 221; Kleinwort Benson Ltd v Lincoln City Council  2 AC 349; Chillingworth v Esche  1 Ch 97; Wright v Newton (1835) 2 CM & R 124; Simmons v Heseltine (1858) 5 CB (NS) 554; Stocznia Gdanska SA v Latvian Shipping Co  1 WLR 574; Dimskal Shipping Co SA v International Transport Workers Federation  2 AC 152; Pan Ocean Shipping Ltd v Creditcorp Ltd  1 WLR 161; Flywin Co Ltd v Strong Associates Ltd (2002) 5 HKCFAR 356
The Uniform Customs and Practice for Documentary Credits (1993 Revision) ICC Publication No 500: Art.37
Authors and other references
Chitty on Contracts, 28th Ed
GH Treitel, The Law of Contract, 11th Ed
Beatson & Virgo, "Contract, unjust enrichment and unconscionability" (2002) 118 LQR 352
Birks, An Introduction to the Law of Restitution, (1989 Rev Ed)
Burrows, The Law of Restitution, (2002)
Goff & Jones, The Law of Restitution, 6th Ed
Hedley & Halliwell, The Law of Restitution, (2002)
Virgo, The Principles of the Law of Restitution (1999)
Birks, At the Expense of the Claimant: Direct and Indirect Enrichment in English Law (Oxford University Comparative Law Forum at http://ouclf.iuscomp.org)
Mr. ST Jat SC and Mr. Jin Pao (instructed by Messrs Siao, Wen & Leung) for the appellant
Mr. Michael Thomas SC and Mr. Benjamin Chain (instructed by Messrs Sit, Fung, Kwong & Shum) for the respondent
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