ShanghaiTongji CasilClearing

Shanghai Tongji Science & Technology Industrial Co Ltd v Casil Clearing Ltd
(2004) 7 HKCFAR Ribeiro PJ 79
A Shanghai Tongji Science &

Technology Industrial Co Ltd
and
Casil Clearing Ltd
B
Li CJ, Bokhary, Chan and Ribeiro PJJ and Nazareth NPJ

Final Appeal No 13 of 2003 (Civil)
15–17 March and 2 April 2004
C
Commercial law — letter of credit — whether parties entered into contract —
whether party merely intermediate finance house having taken benefit under
letter of credit as repayment of loan granted to third party
Contract law — implying contract by conduct — principles — “objective test”
D
— contract not lightly implied — contract must be unequivocally referable to
contract sought to be inferred — once objective test satisfied, it excluded actual
intentions of parties — subjective qualification — subjective qualification that
test did not apply in favour of party who knew truth
E Remedies — restitution — unjust enrichment — predicated on total failure of
consideration — whether defendant enriched at plaintiff’s expense —
restitutionary claim would generally not lie against intermediary conduit-pipe
— whether enrichment unjust — importance of identifying relevant transaction
and anticipated performance
F
P was a Mainland company that enjoyed foreign trading rights. D
was a Hong Kong moneylender. P and D separately had dealings with
a third party (the third party). The third party controlled a Mainland
corporation (TP-MC) and a Hong Kong company (TP-HKC). D had
G previously lent monies to TP-HKC, and the third party, on behalf of
TP-HKC, sought a further advance for TP-HKC on the basis this
could be repaid by getting one of the third party’s purchasers to
open a letter of credit (the L/C) in D’s favour. The third party then
approached P: (a) showing a sales contract for beauty goods with S
H as the seller and the buyer unnamed; and (b) as TP-MC did not enjoy
the foreign trading rights required to import these goods, arranged
for P to import them on TP-MC’s behalf (the entrustment agreement)
and open a L/C in D’s favour. P drew up a purchase agreement
that, contrary to what P and the third party had agreed, specified P,
I instead of TP-MC, as the buyer. Without waiting for D to sign, P
opened the L/C which was subject to the ICC Uniform Customs
and Practice for Documentary Credits (1993 Revision). D presented
the stipulated documents (the stipulated documents) and negotiated
the credit through its own bank. The stipulated documents included
J a commercial invoice which, consistent with UCP 500, was on its
face issued by D, the beneficiary, and made out in the name of P,
the applicant, and specified the draft contract number. Up until this
04P2_p.079-113_[4] 2 548 79 5/2/07, 4:07 PM

80 HONG KONG COURT OF FINAL APPEAL REPORTS (2004) 7 HKCFAR
point, P and D had no contact with each other. It was subsequently A

discovered that rather than beauty equipment, goods of insignificant
value had been shipped. P did not pursue the third party for payment
but brought proceedings against D claiming that: (a) there was an
implied contract of sale between itself and D that came into being upon
D negotiating the L/C, and the commercial invoice only made sense B
as evidence of this; or (b) P had a restitutionary claim against D. D
claimed it was no more than an intermediary finance house, having
taken its beneficial interest under the L/C as part-repayment of the
loan. The Court of Appeal found in favour of D. P appealed to the
Court of Final Appeal. C
Held, dismissing the appeal, that:

Legal basis for implying a contract by conduct
(1) A contract could be in certain circumstances inferred from the
conduct of the parties. The starting point was “an objective test” D
(Brandt v Liverpool Brazil and River Plate Steam Navigation Co Ltd
[1924] 1 KB 575, Allied Marine Transport Ltd v Vale do Rio Doce
Navegacao SA (The Leonidas D) [1985] 1 WLR 925, The Aramis
[1989] 1 Lloyd’s Rep 213 considered). (See pp.94J–96G.)
(2) The court would not imply such a contract lightly. The conduct E
relied on had to be unequivocally referable to the contract sought
to be inferred; it was not sufficient that it “might” be referable.
The objective test would only be met if the conclusion was reached
in each case that the parties’ conduct was consistent only with there
being a new contract implied, and inconsistent with there being F
no such contract. The burden of establishing such a contract was
on the person asserting its existence (Brogden v Metropolitan Railway
(1877) 2 App Cas 666, The Aramis [1989] 1 Lloyd’s Rep 213, Mitsui
& Co Ltd v Novorossiysk Shipping Co (The Gudermes) [1993] 1 Lloyd’s
Rep 311 considered). (See pp.95H–96D.) G
(3) Where the conduct in question satisfied the “objective test”, the
law would generally exclude as irrelevant evidence of a party’s
actual intentions apart from one subjective qualification: the
“objective test” did not apply in favour of a party who actually
knew the other party in fact had no intention to contract with H
him (Paal Wilson & Co A/S v Partenreederei Hannah Blumenthal
(The Hannah Blumenthal) [1983] 1 AC 854, Food Corp of India v
Antclizo Shipping Corp (The Antclizo) [1987] 2 Lloyd’s Rep 130,
Shogun Finance Ltd v Hudson [2003] 3 WLR 1371 considered).
(See pp.96H–99D.) I
Application
(4) Here, the conduct of P and D in relation to the L/C fell 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. Applying the objective test, a reasonable person J
in D’s position would not think it unequivocally clear that the
L/C represented an offer by P to enter into a contract to buy the
04P2_p.079-113_[4] 2 548 80 5/2/07, 4:07 PM

(2004) 7 HKCFAR Shanghai Tongji Science & Technology
RibeiroIndustrial
PJ Co Ltd v Casil Clearing Ltd 81
A beauty goods. Neither was it unequivocally clear that the tender

of documents under the L/C would have been regarded by a
reasonable person standing in P’s shoes as acceptance of such an
offer. First, there was no previous contact or negotiations between
the parties. Second, the L/C referred to a sales contract that
B apparently was already in existence. Third, it was not uncommon
for intermediaries involved in financing the transaction to be
named as parties to the credit although they were not parties to
the underlying sales contract. Finally, the commercial invoice
issued in Ds name was unobjectionable and reasonably explicable
C as an aspect of the financing arrangements. D plainly believed with
good reason that the third party had merely authorised it to receive
the L/C proceeds as a means of reducing the third party’s debt
(Montrod Ltd v Grundkotter Fleischvertriebs-GmbH [2001] EWCA Civ
1954 applied). (See pp.100I–101J.)
D (5) P’s claim also failed on the subjective qualification. D never
intended by its conduct to be bound as a party to any underlying
sale contract with P. D’s state of mind was known to P, which
consistently demonstrated that it did not regard D as so bound.
(See p.102A–B.)
E Restitution claim
(6) A claim for restitution based upon principles of unjust enrichment
predicated on the total failure of consideration involved asking four
questions: (a) was the defendant enriched? (b) was the enrichment
at the plaintiff’s expense? (c) was the enrichment unjust? (d) were
F there any applicable defences applicable? (Lipkin Gorman v Karpnale
Ltd [1991] 2 AC 548, Commissioner of State Revenue (Vict) v Royal
Insurance Australia Ltd (1994) 182 CLR 51, Banque Financière de la
Cité SA v Parc (Battersea) Ltd [1999] 1 AC 221, Kleinwort Benson
Ltd v Lincoln City Council [1999] 2 AC 349 considered). (See
G p.104D–J.)
(7) D, the ultimate recipient of the L/C proceeds, had been enriched
and at P’s expense. The L/C provided by the intermediate banks
was merely the mechanism whereby D received payment against
tender of conforming documents; the intermediate banks were
H not intermediate recipients unjustly enriched. A restitutionary
claim generally would not lie against an intermediary who was
no more than “a mere conduit-pipe” for payment to the ultimate
recipient (Banque Financière de la Cité SA v Parc (Battersea) Ltd
[1999] 1 AC 221, Australia and New Zealand Banking Group Ltd v
I Westpac Banking Corp (1988) 164 CLR 662 considered). (See
pp.105A–106F.)
(8) However, D’s enrichment was not unjust. Consideration in
the context of a restitutionary claim based on total failure of
consideration was the anticipated performance for which the
J money was paid, or the “basis or purpose” of the payment. It
was, therefore, critical to identify and correctly characterise
the transaction providing the basis for the enrichment for the
04P2_p.079-113_[4] 2 548 81 5/2/07, 4:07 PM

purposes of identifying the relevant anticipated performance A

and ascertaining whether it had totally failed (Wright v Newton
(1835) 2 CM & R 124, Simmons v Heseltine (1858) 5 CB (NS)
554, Chillingworth v Esche [1924] 1 Ch 97 not followed; Fibrosa
Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC
32 considered). (See pp.106G–107H.) B
(9) Merely opening the L/C did not constitute enrichment of D. D
was enriched by its receipt of money after tender of conforming
documents. The relevant transaction therefore embraced the
entire L/C transaction terminating in D’s receipt of the L/C’s
proceeds. Therefore, the consideration for the purposes of a C
claim in restitution included D’s tender of conforming documents
as an unseverable part of the performance forming the basis
of the payment. Such performance had been duly rendered so
there was no total failure of consideration (Stocznia Gdanska
SA v Latvian Shipping Co [1998] 1 WLR 574 considered). (See D
pp.107J–109C.)
[Chinese translation of headnote.]

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Mr Jat Sew Tong SC and Mr Jin Pao, instructed by Siao, Wen &
Leung, for the appellant.
Mr Michael Thomas SC and Mr Benjamin Chain, instructed by Sit,
Fung, Kwong & Shum, for the respondent.
I
Cases cited in the judgment
Allied Marine Transport Ltd v Vale do Rio Doce Navegacao SA
(Leonidas D, The) [1985] 1 WLR 925, [1985] 2 All ER 796, [1985]
2 Lloyd’s Rep 18
Aramis, The [1989] 1 Lloyd’s Rep 213 J
Australia and New Zealand Banking Group Ltd v Westpac Banking
Corp (1988) 164 CLR 662
04P2_p.079-113_[4] 2 548 84 5/2/07, 4:08 PM

RibeiroIndustrial
A Banque Financière de la Cité SA v Parc (Battersea) Ltd [1999] 1 AC

221, [1998] 2 WLR 475, [1998] 1 All ER 737
Brandt v Liverpool Brazil and River Plate Steam Navigation Co Ltd
[1924] 1 KB 575
Brogden v Metropolitan Railway (1877) 2 App Cas 666
B Chillingworth v Esche [1924] 1 Ch 97, [1923] All ER Rep 97
Commissioner of State Revenue (Vict) v Royal Insurance Australia
Ltd (1994) 182 CLR 51
David Securities Pty Ltd v Commonwealth Bank of Australia (1992)
175 CLR 353
C Dimskal Shipping Co SA v International Transport Workers
Federation (Evia Luck, The) (No 2) [1992] 2 AC 152, [1991] 3
WLR 875, [1991] 4 All ER 871, [1992] 1 Lloyd’s Rep 115
Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd
[1943] AC 32, [1942] 2 All ER 122
D Flywin Co Ltd v Strong & Associates Ltd (2002) 5 HKCFAR 356,
[2002] 2 HKLRD 485
Food Corp of India v Antclizo Shipping Corp (Antclizo, The) [1987]
2 Lloyd’s Rep 130
Kleinwort Benson Ltd v Lincoln City Council [1999] 2 AC 349, [1998]
E 3 WLR 1095, [1998] 4 All ER 513
Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548, [1991] 3 WLR 10,
[1992] 4 All ER 512
Mitsui & Co Ltd v Novorossiysk Shipping Co (Gudermes, The) [1993]
1 Lloyd’s Rep 311
F Montrod Ltd v Grundkotter Fleischvertriebs-GmbH [2001] EWCA
Civ 1954, [2002] 1 WLR 1975, [2002] 3 All ER 697
Paal Wilson & Co A/S v Partenreederei Hannah Blumenthal (Hannah
Blumenthal, The) [1983] 1 AC 854, [1982] 3 WLR 1149, [1983]
1 All ER 34, [1983] 1 Lloyd’s Rep 103
G Pan Ocean Shipping Ltd v Creditcorp Ltd (Trident Beauty, The)
[1994] 1 WLR 161
Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221
Roxborough v Rothmans of Pall Mall (2001–2002) 208 CLR 516
Shanghai Tongji Science & Technology Industrial Co Ltd v Casil
H Clearing Ltd (unrep., HCCL No 140 of 1999, [2002] HKEC 1064)
Shanghai Tongji Science & Technology Industrial Co Ltd v Casil
Clearing Ltd (unrep., CACV No 365 of 2002, [2003] HKEC 679)
Shogun Finance Ltd v Hudson [2003] 3 WLR 1371
Simmons v Heseltine (1858) 5 CB (NS) 554
I Stocznia Gdanska SA v Latvian Shipping Co [1998] 1 WLR 574,
[1998] 1 All ER 883, [1998] 1 Lloyd’s Rep 609
Wright v Newton (1835) 2 CM & R 124
Cases in List of Authorities not cited in the judgment

J Aiken v Short (1856) 1 H & N 210
Baird Textiles Holdings Ltd v Marks & Spencer Plc [2001] EWCA
Civ 274, [2002] 1 All ER (Comm) 737
04P2_p.079-113_[4] 2 548 85 5/2/07, 4:08 PM

Barclays Banks Ltd v WJ Simms Son & Cooke (Southern) Ltd [1980] A
QB 677, [1980] 2 WLR 218, [1979] 3 All ER 522, [1980] 1 Lloyd’s
Rep 225
Borealis AB v Stargas Ltd (Berge Sisar, The) [2001] UKHL 17, [2002]
2 AC 205, [2001] 2 WLR 1118, [2001] 2 All ER 193
British Steel Corp v Cleveland Bridge & Engineering Co Ltd [1984] B
1 All ER 504, [1982] Com LR 54
Buller v Harrison (1777) 2 Cowp 565
Carmichael v National Power Plc [1999] 1 WLR 2042, [1999] 4 All
ER 897
Colonial Bank v Exchange Bank of Yarmouth, Nova Scotia (1885) C
App Cas 84
Countrywide Communications Ltd v ICL Pathway Ltd [2000] CLC
324
Cox v Prentice (1815) 3 M & S 344
Day Morris Associates v Voyce [2003] EWCA Civ 189 D
Dextra Bank & Trust Co Ltd v Bank of Jamaica [2002] 1 All ER
(Comm) 193
Ficom SA v Sociedad Cadex Ltda [1980] 2 Lloyd’s Rep 118
G Percy Trentham Ltd v Archital Luxfer Ltd [1993] 1 Lloyd’s Rep
25 E
Haydon v Lo & Lo [1997] 1 WLR 198, [1997] 1 Lloyd’s Rep 336
Homburg Houtimport BV v Agrosin Private Ltd (Starsin, The) [2003]
UKHL 12, [2004] 1 AC 715, [2003] 2 WLR 711, [2003] 2 All ER
785, [2003] 1 All ER (Comm) 625
Investors Compensation Scheme Ltd v West Bromwich Building F
Society (No 1) [1998] 1 WLR 896, [1998] 1 All ER 98, [1998] 1
BCLC 531
Kelly v Solari (1841) 9 M & W 54
Kerrison v Glyn, Mills, Currie & Co (1912) 81 LJKB 465
Kleinwort Benson Ltd v Birmingham City Council [1997] QB 380, G
[1996] 3 WLR 1139, [1996] 4 All ER 733
Kwai Hung Realty, Re [1998] 1 HKC 145
L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235,
[1973] 2 WLR 683, [1973] 2 All ER 39, [1973] 2 Lloyd’s Rep 53
Lark v Outhwaite [1991] 2 Lloyd’s Rep 132 H
Latchin v General Mediterranean Holdings SA [2003] All ER (D) 54
Lloyds Bank Plc v Independent Insurance Co Ltd [2000] 1 QB 110,
[1999] 2 WLR 986
McCutcheon v David Macbrayne Ltd [1964] 1 WLR 125, [1964] 1
All ER 430, [1964] 1 Lloyd’s Rep 16 I
Mears v Safecar Security Ltd [1983] 1 QB 54
Niru Battery Manufacturing Co v Milestone Trading Ltd [2003]
EWCA Civ 1446, [2002] 2 All ER (Comm) 705
Orion Insurance Co Plc v Sphere Drake Insurance Plc [1992] 1 Lloyd’s
Rep 239 J
Portman Building Society v Hamlyn Taylor Neck [1998] 4 All ER 202,
[1998] PNLR 664
04P2_p.079-113_[4] 2 548 86 5/2/07, 4:08 PM

RibeiroIndustrial
A R v Clarke (1927) 40 CLR 227

Rover International Ltd v Cannon Film Sales Ltd [1989] 1 WLR 912
Shamsher Jute Mills Ltd v Sethia London Ltd [1987] 1 Lloyd’s Rep
388
Smith v Hughes (1870–71) LR 6 QB 597, [1861–73] All ER Rep
B 632
Sobell Industries Ltd v Cory Brothers & Co Ltd [1955] 2 Lloyd’s Rep
82
South Tyneside Metropolitan Borough Council v Svenska International
Plc [1995] 1 All ER 545
C Taylor v Allon [1966] 1 QB 304, [1965] 2 WLR 598, [1965] 1 All
ER 557, [1965] 1 Lloyd’s Rep 155
Ting Kwok Leung v Tam Dick Yuen & Others (2002) 5 HKCFAR
336, [2002] 3 HKLRD 1, [2002] 1 HKC 601
WJ Alan & Co Ltd v El Nasr Export & Import Co [1972] 2 QB 189,
D [1972] 2 WLR 800, [1972] 2 All ER 127, [1972] 1 Lloyd’s Rep
313
Westdeutsche Landesbank Girozentrale v Islington LBC [1994] 1
WLR 938, [1994] 4 All ER 890
Whitworth Street Estates (Manchester) v James Miller & Partners
E [1970] AC 583, [1970] 2 WLR 583, [1970] 1 All ER 796, [1970]
1 Lloyd’s Rep 269
William Lacey (Hounslow) Ltd v Davis [1957] 1 WLR 932, [1957]
2 All ER 712
F Other materials mentioned in the judgment

Beatson and Virgo, “Contract, Unjust Enrichment and
Unconscionability” (2002) 118 LQR 352
Birks, Peter, An Introduction to the Law of Restitution (1989 Rev ed.)
chap.1, pp.47, 223–226
G Birks, Peter, “At the Expense of the Claimant: Direct and Indirect
Enrichment in English Law” (2000) Oxford U Comparative L
Forum 1 (at http://ouclf.iuscomp.org)
Birks, Peter, “Failure of Consideration and its Place on the Map”
(2002) 2 OUCLJ 1
H Burrows, Andrew, The Law of Restitution (2nd ed., 2002) pp.15,
31–41, 323–326, 347–350
Chitty on Contracts (28th ed., 1999) Vol.1, pp.89–90 para.2-001, p.156
para.2-148
Goff & Jones: The Law of Restitution (6th ed., 2002) paras.1-016, 1-046,
I 1-063, 1-074–1-077, 26-006
Hedley and Halliwell, The Law of Restitution (2002) paras.1.16, 19.3–
19.5
ICC Uniform Customs and Practice for Documentary Credits (1993
Revision) arts.15, 37
J Treitel, Guenter, Sir, The Law of Contract (11th ed., 2003) p.1
Virgo, Graham, The Principles of the Law of Restitution (1999) pp.9, 344–
346
04P2_p.079-113_[4] 2 548 87 5/2/07, 4:08 PM

Li CJ A
1. I agree with the judgment of Mr Justice Ribeiro PJ.
Bokhary PJ
B
Chan PJ
Ribeiro PJ
4. After trial before Stone J, the plaintiff, Shanghai Tongji Science C
and Technology Industrial Co Ltd (Tongji), was awarded judgment
in the sum of US$401,394.84 against the defendant, CASIL Clearing
Ltd (Casil): see HCCL No 140 of 1999, 22 August 2002.
5. 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 D
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 E
on the basis of a restitutionary claim founded upon total failure of
consideration.
6. The Court of Appeal reversed the trial judge: see CACV
No 365 of 2002, 6 June 2003. Mr Justice Rogers V-P (with whom
Le Pichon JA and Sakhrani J agreed) held that neither the contract F
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 G

7. 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- H
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). I
8. 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 J
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
04P2_p.079-113_[4] 2 548 88 5/2/07, 4:08 PM

A bank charges) at its own bank, Sin Hua Bank Ltd (Sin Hua), in Hong
Kong.
9. 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
B 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
C gave evidence at the trial. Madam Sung did not.
The facts
10. As Stone J pointed out, the basic events are essentially
D 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 V-P notes, that he did not reject any
particular aspect of Mr Choi’s version of events. Indeed, in so far as
E the present case gives rise to factual debate, such debate is largely
occasioned by the unavailabilty 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,
F 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

G 11. 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
H favour.
12. 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
I 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.
J 13. 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
04P2_p.079-113_[4] 2 548 89 5/2/07, 4:08 PM

on 29 August 1991, only corporations having foreign trading rights A

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 B
having the foreign trading rights (referred to as the “entrusted party”)
for the latter to import the goods on the entrusting party’s behalf.
14. 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 C
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:
(a) Shanghai Collina would sign a contract for the importation of D

beauty equipment, the entrustment agreement adding: “the
Contract No is SI98007-H and the amount … US$401,620”;
(b) 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 E
behalf”;
(c) 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, F
(d) 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.
15. Tongji then drew up a draft Purchase Contract dated 12 June G

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 H
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.”
16. Tongji signed the Tongji draft and handed it to Madam Sung,
asking her to get Casil to execute it. It appears that Madam Sung I
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. J
17. 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
04P2_p.079-113_[4] 2 548 90 5/2/07, 4:08 PM

A US$401,620, naming Casil as beneficiary. The documents stipulated

were (i) a signed commercial invoice in four copies “indicating …
Contract No SI98007-H”; (ii) a full set of clean on board bills of lading;
and (iii) a packing list in four copies. The application form also contained
a description of the goods (“Cromogei” and “Visocomplex”) with their
B unit price and total contract value.
18. 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.
C 19. 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
D (UCP 500) and was advised to Casil via Sin Hua on 18 June.
20. 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:
E 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
…
F
21. 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
G
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.
H
22. 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.
23. Casil and HK Collina then signed a loan agreement dated
I
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.
J
24. On 27 June 1998, having negotiated Casil’s draft, Sin Hua
credited Casil’s account with the sum of US$401,394.84, representing
04P2_p.079-113_[4] 2 548 91 5/2/07, 4:08 PM

the L/C’s proceeds less bank charges. The Judge found that Casil in turn A
credited HK Collina with the proceeds, converted to HK$3,120,000,
on 9 July 1998.
25. 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. B
Dealings with the goods

26. The container was duly shipped and landed in Shanghai. On
30 June 1998, before the goods had cleared customs, Madam Sung C
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 D
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.
27. Tongji’s first response was to attempt to persuade Casil not E
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: F
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 G
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 H
reference:
CASIL Clearing Ltd informs Sin Hua Bank, the negotiating

bank to advise Shanghai Agricultural Bank (the issuing bank)
by telegram that: I
(1) it agrees to defer payment to (day) (month)

1998.
(2) it agrees to return the complete set of accompanying
documents to the beneficiary in Hong Kong (CASIL J
Clearing Ltd).
04P2_p.079-113_[4] 2 548 92 5/2/07, 4:08 PM

A 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.
28. On 6 July 1998, Mr Qin and Mr Choi had a telephone conversation

B 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

C 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
D follows:
1. This company duly demands that your company requests Sin

Hua Bank to agree to defer payment under the Letter of Credit
090LC984280706 to 15 August 1998.
E 2. Sin Hua Bank is required to advise Shanghai Agricultural Bank
of the fore-said request by telegram before 17:00 pm (Beijing
Time) of this day of 6 July 1998.
3. This Company will in the meantime confirm to Shanghai
Agricultural Bank that this Company will accept your telegram
F request.
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.
G
29. 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:
H
As a result, the solution will not work that [Casil] requests [Sin Hua]
to inform [Agricultural Bank] of deferring payment by telegram.
He continues:
I
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.
J 30. Negotiations ensued between Tongji and Madam Sung, resulting

in an agreement (the redelivery agreement) whereby (i) Tongji would
04P2_p.079-113_[4] 2 548 93 5/2/07, 4:08 PM

release the bill of lading to Madam Sung who would cause the A
container to be returned to Hong Kong where the contraband goods
would be removed and the correct goods re-shipped to Shanghai;
(ii) HK Collina would remit US$401,620 to Tongji before 30 August
1998; and (iii) Tongji’s position would meanwhile be secured by a
guarantee and post-dated cheque in the sum of RMB3,476,847.00 B
provided by Ganzhou Yajian Wallpaper Co Ltd (Ganzhou) a mainland
corporation controlled by Madam Sung’s husband, a Mr Ke.
31. 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 C
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.
32. The container was released to Madam Sung in Hong Kong on
25 August 1998. She applied Casil’s chops to the documents effecting D
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.
33. No funds were remitted by HK Collina to Tongji pursuant E
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.
34. Unknown to Tongji or Casil at the time, the container had
actually been opened and inspected by Shanghai customs authorities F
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.
35. On 31 August 1998, Tongji’s mainland lawyers wrote a letter
before action to Shanghai Collina seeking reimbursement for the G
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 H
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 I
client by container No INBV3057288 … and the goods were duly
discharged at the Shanghai port …
The legal basis for implying a contract by conduct J

36. It is clear that a legally binding contract may be inferred from
the conduct of the parties. In deciding whether a contract should be
04P2_p.079-113_[4] 2 548 94 5/2/07, 4:08 PM

A implied, the court adopts as its starting-point what has generally been
called “an objective test”. Chitty on Contracts (28th ed., 1999) puts this
as follows:
In deciding whether the parties have reached agreement, the courts

B 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
C reservations of one party therefore do not prevent the formation
of a contract. (Chitty on Contracts (28th ed., 1999) Vol.1, pp.89–90
§2-001)
37. An illustration of the objective test’s application can be found

D in The Aramis [1989] 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 and River Plate Steam Navigation Co [1924] 1 KB 575,
Bingham LJ stated (at p.224):
E
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:
F
(1) Whether the conduct of the bill of lading holder in presenting
the bill of lading to the ship’s agent would be reasonably
understood by the agents (or the shipowner) as an offer to enter
into a contract on the bill of lading terms.
G (2) Whether the conduct of the ship’s agent in accepting the bill
or the conduct of the master in agreeing to give delivery or in
giving delivery would be reasonably understood by the bill of
lading holder as an acceptance of his offer.
H 38. The burden of establishing such a contract is on the person

asserting its existence: Brogden v Metropolitan Railway (1877) 2 App
Cas 666 at p.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
I The Aramis [1989] 1 Lloyd’s Rep 213 at p.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
J 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,
04P2_p.079-113_[4] 2 548 95 5/2/07, 4:08 PM

be necessary to identify conduct referable to the contract contended A

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. B
39. In Mitsui & Co Ltd v Novorossiysk Shipping Co (The Gudermes)

[1993] 1 Lloyd’s Rep 311 at p.320, Staughton LJ, following The Aramis
[1989] 1 Lloyd’s Rep 213, put the requirement of unequivocality in
the following terms: C
… 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 D
inconsistent with there being no such contract.
40. 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 E
Vale do Rio Doce Navegacao SA (The Leonidas D) [1985] 1 WLR 925
at p.936, Robert Goff LJ explained this as follows:
… if one party, O, so acts that his conduct, objectively considered,

F
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,
G
irrelevant.
41. 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 H
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 I

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 J
qualifies the objective principle; and this follows from the purpose
of that principle, which is to protect B from the prejudice he would
04P2_p.079-113_[4] 2 548 96 5/2/07, 4:08 PM

A 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., 2003) p.1)
B 42. 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
C context is Paal Wilson & Co A/S v Partenreederei Hannah Blumenthal
(The Hannah Blumenthal) [1983] 1 AC 854. 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
D 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
E 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
F 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
G 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
H 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.
I
43. 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
J abandon the arbitration, the sellers would not be allowed to rely on
the objective test as binding the buyers to such an abandonment
agreement.
04P2_p.079-113_[4] 2 548 97 5/2/07, 4:08 PM

44. Thus, applying the Hannah Blumental in Food Corp of India A

v Antclizo Shipping Corp (The Antclizo) [1987] 2 Lloyd’s Rep 130,
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 B
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 C
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 p.132) (Emphasis added.)
Similarly, (at p.146), Nicholls LJ sought to explain certain (possibly D

problematical) passages from the speech of Lord Diplock in The Hannah
Blumenthal (at pp.915–917) in terms of the subjective qualification to
the objective test:
An explanation [of those passages] may be that Lord Diplock’s E

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.
F
45. In the recent House of Lords decision in Shogun Finance Ltd v
Hudson [2003] 3 WLR 1371 at p.1406, §123, Lord Phillips explained
the subjective qualification as follows:
G
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 H
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 I
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 [1939] 3 All
ER 566; Smith v Hughes (1871) LR 6 QB 597. Thus the task of J
ascertaining whether the parties have reached agreement as to the
terms of a contract can involve quite a complex amalgam of the
04P2_p.079-113_[4] 2 548 98 5/2/07, 4:08 PM

A 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.
B
46. Chitty on Contracts (28th ed., 1999) provides a helpful summary
in the following terms:
… the objective test is … subject to the limitation that it does not

C 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
D 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. (at p.156 §2-148)
E
The principles applied in the present case
47. 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
F 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
G 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
H the credit is able to be characterized as an acceptance of the plaintiff’s
offer to buy the goods from the defendant.”
48. 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
I 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.
J 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.
04P2_p.079-113_[4] 2 548 99 5/2/07, 4:08 PM

49. It follows that it was open to the Court of Appeal and is, to A
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.
B
Application of the objective test
50. Taking the objective test as the starting point, it is convenient
to adopt the approach indicated by Bingham LJ (in The Aramis [1989]
1 Lloyd’s Rep 213 at p.224), asking:
C
(i) 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 D
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.
51. It would not be sufficient to answer, “It might” to these E

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.
52. Mr Jat Sew Tong SC, appearing with Mr Jin Pao on behalf F
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 G
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 H
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
53. 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 J
L/C. Neither is it likely, let alone unequivocally clear, that the tender
04P2_p.079-113_[4] 2 548 100 5/2/07, 4:08 PM

A of documents under the L/C would be regarded by a reasonable person

standing in Tongji’s shoes as acceptance of such an offer.
54. The reasonable person in Casil’s position would, in my opinion,
view the L/C on the following basis:
B (a) Casil had not previously had any contact with Tongji and had
neither negotiated nor agreed the terms of any contract with
Tongji.
(b) The L/C referred on its face to a sale contract which was apparently
already in existence, having been assigned the contract number
C 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.
(c) What was being advised to Casil as beneficiary was an irrevocable
D 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.
(d) It is not objectionable to find that a letter of credit names as
E 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.
(e) The fact that the L/C called for an invoice issued in Casil’s name
F 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 [2002] 1 WLR 1975 at p.1992,
in relation to documentary credit transactions, one comes across
a “wide variety of circumstances in which documents come into
G 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.”
55. There is of course no question of Casil acting fraudulently

H 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
I 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.
56. 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
J with the implication of a contract of sale between them and conduct
inconsistent with the absence of such a contract.
04P2_p.079-113_[4] 2 548 101 5/2/07, 4:08 PM

Application of the subjective qualification A
57. 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 B
Tongji, which consistently demonstrated that it did not regard Casil
as so bound.
58. 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 C
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.
59. While it is true that Madam Sung’s draft, while naming the D
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 E
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. F
60. 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. G
61. 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 H
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 I
agreement with the contract of sale envisaged to be made between
Shanghai Collina and Casil, without Tongji’s being a party.
62. 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 J
without a contract with Casil. In his witness statement, Mr Qin explained
that he was willing to do so because:
04P2_p.079-113_[4] 2 548 102 5/2/07, 4:08 PM

A 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.
63. Tongji therefore did not consider itself to be making any

B 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
C 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.
64. When on 30 June 1998, Madam Sung told Mr Qin that there
D 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.
E
(a) 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.
F 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.
G (b) 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
H 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
I regarded itself as buyer and Casil as seller.
(c) 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”.
J 65. 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:
04P2_p.079-113_[4] 2 548 103 5/2/07, 4:08 PM

There was thus manifestly no suggestion in the early correspondence A

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 B
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.
C
The restitution claim

66. The common law cause of action asserted by the plaintiff for
money had and received where consideration has totally failed is D
now generally regarded as a species of claim for restitution based
upon principles of unjust enrichment: see eg, Fibrosa Spolka Akcyjna
v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32 at pp.61–64; Pavey
& Matthews Pty Ltd v Paul (1987) 162 CLR 221 at pp.255–257; Australia
and New Zealand Banking Group Ltd v Westpac Banking Corp (1988) 164 E
CLR 662 at p.673; David Securities Pty Ltd v Commonwealth Bank
of Australia (1992) 175 CLR 353 at p.375; cf Gummow J’s views in
Roxborough v Rothmans of Pall Mall (2001–2002) 208 CLR 516 at p.543
et seq, discussed in Birks, “Failure of consideration and its place on
the map” (2002) 2 OUCLJ 1; and in Beatson and Virgo, “Contract, F
unjust enrichment and unconscionability” (2002) 118 LQR 352.
67. A useful framework for approaching such claims which was
adopted by both parties involves asking four questions:
(a) Was the defendant enriched? G

(b) Was the enrichment at the plaintiff ’s expense?
(c) Was the enrichment unjust?
(d) Are any of the defences applicable?
68. This approach was evolved and is generally accepted in H

academic writings: see eg, Birks, An Introduction to the Law of Restitution
(1989 Rev ed.) chap.1; Burrows, The Law of Restitution (2nd ed., 2002)
p.15; Goff & Jones: The Law of Restitution (6th ed., 2002) §1-016; and
Hedley and Halliwell, The Law of Restitution (2002) §1.16; Virgo, The
Principles of the Law of Restitution (1999) p.9. It has received substantial I
judicial support and will be adopted in this judgment: see eg, Lipkin
Gorman v Karpnale Ltd [1991] 2 AC 548 at pp.559 and 578; Commissioner
of State Revenue (Vict) v Royal Insurance Australia Ltd (1994) 182 CLR
51 at p.75; Banque Financière de la Cité SA v Parc (Battersea) Ltd [1999]
1 AC 221 at pp.227 and 234; and Kleinwort Benson Ltd v Lincoln City J
Council [1999] 2 AC 349 at pp.408.
04P2_p.079-113_[4] 2 548 104 5/2/07, 4:08 PM

A Enrichment of Casil at Tongji’s expense

69. 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
B 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
C 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
D intermediate transfers of money, all for different consideration and
in respect of different contractual obligations, and each involving
bank charges.
70. In my view, this objection is unsound. A similar argument was

E rejected in Banque Financière de la Cité SA v Parc (Battersea) Ltd [1999]
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
F individual, one Mr Herzig, as the immediate borrower. Lord Steyn
stated:
Stripped to its essentials the argument of counsel for OOL was that
the interposition of the loan to Mr Herzig meant that the enrichment
G 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
H 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. (at p.227)
71. Sin Hua made payment to Casil upon negotiating the latter’s
I 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
J 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.
04P2_p.079-113_[4] 2 548 105 5/2/07, 4:08 PM

72. Mr Thomas submitted in the abovementioned context that A

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: The Law of Restitution
(6th ed., 2002) §1-046, is where X pays money to D with a view to B
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 C
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” (2000) Oxford U Comparative L Forum 1 D
(at http://ouclf.iuscomp.org) and Burrows, The Law of Restitution
(2nd ed., 2002) pp.31–41.
73. 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 E
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 and New Zealand Banking Group
Ltd v Westpac Banking Corporation 164 CLR 662 at pp.673–674, a
restitutionary claim generally does not lie against an intermediary who F
is no more than “a mere conduit-pipe” for payment to the ultimate
recipient.
Was the enrichment unjust? G

74. 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.
75. 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 H
did not materialise. The principle relied on is summarised in Goff &
Jones: The Law of Restitution (6th ed., 2002) 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 I
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.
76. This is a well-recognized category of unjust enrichment claims J

based on total failure of consideration arising, for instance, in a case
where a deposit was paid “subject to contract” but the contract was
04P2_p.079-113_[4] 2 548 106 5/2/07, 4:08 PM

A not entered into (Chillingworth v Esche [1924] 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).
77. Tongji identifies the anticipated contract as a contract for the
B 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
C 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. …
D Accordingly, vis-à-vis CASIL, the basis or purpose of opening the
L/C had failed upon the failure to contract with CASIL.
78. In my view, this mis-identifies the relevant transaction and the

associated consideration.
E 79. “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, An Introduction to the Law of Restitution (1989 Rev ed.)
pp.223–226 and “Failure of consideration and its place on the map”
F (2002) 2 OUCLJ 1 at pp.3–4; Burrows, The Law of Restitution (2nd ed.,
2002) pp.324–326. Thus, in Fibrosa Spolka Akcyjna v Fairbairn Lawson
Combe Barbour Ltd [1943] AC 32 at p.48, Viscount Simon LC stated:
In English law, an enforceable contract may be formed by an exchange

G 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
H 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.
I 80. 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.
81. Thus, in Stocznia Gdanska SA v Latvian Shipping Co [1998] 1
J 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
04P2_p.079-113_[4] 2 548 107 5/2/07, 4:08 PM

them in accordance with the agreed specification, it became clear that A

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 p.588):
In truth, the test is not whether the promisee has received a specific B
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 C
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 D
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 E
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 F
which has then accrued due could not, if paid, be recoverable on
that ground.
82. Tongji’s formulation focuses on the “opening of the L/C” as the

enrichment and postulates as the performance to be rendered in return, G
entry into a sale contract with Casil.
83. 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 H
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.
84. Therefore, the consideration for the purposes of a claim in I
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 J
exchanged by Tongji for delivery orders which it then handed to
Madam Sung in return for Ganzhou’s post-dated cheque, with a view
04P2_p.079-113_[4] 2 548 108 5/2/07, 4:08 PM

A 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.
85. I would add that even if Tongji’s formulation of its total failure
B 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.
C 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.
86. It is accordingly my view that the restitutionary claim based
on a total failure of consideration must fail.
D
Does the entrustment agreement exclude restitutionary relief?
87. 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
E 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.
88. If this argument is correct, it matters not whether Tongji
F 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
G maintained against Casil.
89. In dealing with this argument, care must be taken to distinguish
between cases (i) where the plaintiff makes payment to the defendant
pursuant to a subsisting contractual obligation owed by him to the
defendant; and (ii) where the plaintiff makes payment to the defendant
H pursuant to a contractual obligation owed by the plaintiff to a third
person.
90. 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 eg, Dimskal Shipping Co SA
I v International Transport Workers Federation (The Evia Luck) (No 2) [1992]
2 AC 152 at p.165; Pavey & Matthews Pty Ltd v Paul 162 CLR 221 at
p.256.
91. Professor Burrows explains the principle as follows:
J … 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
04P2_p.079-113_[4] 2 548 109 5/2/07, 4:08 PM

to confer the relevant benefit on the defendant: any relevant contract A

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 B
only when the parties’ own allocation of risk is ineffective that the
imposed standards set by the law of restitution can step in. (Burrows,
The Law of Restitution (2nd ed., 2002) at pp.323–324; see also Goff
& Jones: The Law of Restitution (6th ed., 2002) at §1-063; Hedley and
Halliwell, The Law of Restitution (2002) §§19.3–19.5) C
92. 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 D
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” (Birks, An
Introduction to the Law of Restitution (1989 Rev ed.) p.47).
93. It is clear, however, that this established principle does E
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. F
94. Mr Thomas relied on the House of Lords decision in Pan
Ocean Shipping Ltd v Creditcorp Ltd (The Trident Beauty) [1994] 1 WLR
161, 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 G
contractual obligation owed by the plaintiff to a third party (Shanghai
Collina).
95. I do not accept that Pan Ocean Shipping Ltd v Creditcorp Ltd (The
Trident Beauty) [1994] 1 WLR 161 is authority for that proposition.
In my view, it was a decision which proceeded squarely on the basis H
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:
(a) The plaintiff, Pan Ocean, as charterer, entered into a time charter I
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. J
(b) The charterparty required Pan Ocean to pay charterhire 15 days
in advance and also contained clauses providing for charterhire
04P2_p.079-113_[4] 2 548 110 5/2/07, 4:08 PM

A to be subsequently adjusted or repaid where the vessel was

off-hire during a period covered by the advance charterhire. In
particular, cl.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”.
B (c) 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.
C (d) 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.
(e) Since Trident was not worth suing, Pan Ocean brought proceedings
in restitution against Creditcorp to recover the instalment of advance
D charterhire paid but not earned by Trident.
(f ) The House of Lords held that the claim against Creditcorp failed.
96. Having identified the relevant terms in the charterparty, Lord

Goff (at p.164) began by stating the established principle, focusing on
E 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;
F 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 …
G
97. 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
H Ocean from mounting a restitutionary claim which would cut across
the agreed regime. Lord Goff stated:
Here, it is true, the contract was prematurely determined by the

acceptance by Pan Ocean of Trident’s repudiation of the contract.
I 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
J 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. (at p.164)
04P2_p.079-113_[4] 2 548 111 5/2/07, 4:08 PM

98. His Lordship then turned to the position of Creditcorp as assignee A

and held that the fact of the assignment did not take the case outside
the ambit of the established principle:
In truth, all that happened in the present case was that the benefit
of receiving the hire payment was assigned to Creditcorp and, in B
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 C
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 D
upon Creditcorp, additional to the contractual obligation imposed
upon Trident, to repay unearned hire on the ground of failure of
consideration. (at pp.165–166)
99. Lord Woolf was of a similar view, holding (at p.171) that “Pan E
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. F
100. It is true that, as Lord Goff (at p.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 eg, Goff
& Jones: The Law of Restitution (6th ed., 2002) at §1-074 to §1-077; G
Burrows, The Law of Restitution (2nd ed., 2002) pp.347–350; Virgo,
The Principles of the Law of Restitution (1999) 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 H
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 I
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 J
the established exclusionary principle should be so extended. There
is, however, no necessity in the present case to grapple with these
04P2_p.079-113_[4] 2 548 112 5/2/07, 4:08 PM

A 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

B 101. 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,
C 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.”
102. 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
D 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
E 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
F question if it had been properly raised and taken at trial. This ground
of argument is therefore not open to Tongji.
Conclusion
G 103. 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.
H 104. 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.
I
Nazareth NPJ
Li CJ
J 106. 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.
04P2_p.079-113_[4] 2 548 113 5/2/07, 4:08 PM

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Shanghai Tongji Science & Technology Industrial Co Ltd v Casil Clearing Ltd

(2004) 7 HKCFAR Ribeiro PJ 79

A Shanghai Tongji Science &

Li CJ, Bokhary, Chan and Ribeiro PJJ and Nazareth NPJ

04P2_p.079-113_[4] 2 548 79 5/2/07, 4:07 PM

point, P and D had no contact with each other. It was subsequently A

Held, dismissing the appeal, that:

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A beauty goods. Neither was it unequivocally clear that the tender

04P2_p.079-113_[4] 2 548 81 5/2/07, 4:07 PM

purposes of identifying the relevant anticipated performance A

[Chinese translation of headnote.]

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04P2_p.079-113_[4] 2 548 83 5/2/07, 4:07 PM

04P2_p.079-113_[4] 2 548 84 5/2/07, 4:08 PM

A Banque Financière de la Cité SA v Parc (Battersea) Ltd [1999] 1 AC

Cases in List of Authorities not cited in the judgment

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04P2_p.079-113_[4] 2 548 86 5/2/07, 4:08 PM

A R v Clarke (1927) 40 CLR 227

F Other materials mentioned in the judgment

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The entities and individuals involved G

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The L/C transaction

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on 29 August 1991, only corporations having foreign trading rights A

(a) Shanghai Collina would sign a contract for the importation of D

15. Tongji then drew up a draft Purchase Contract dated 12 June G

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A US$401,620, naming Casil as beneficiary. The documents stipulated

E Unless otherwise stipulated in the credit, commercial invoices

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Dealings with the goods

This Company issued a Letter of Credit 090LC984280706 to your

CASIL Clearing Ltd informs Sin Hua Bank, the negotiating

(1) it agrees to defer payment to (day) (month)

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28. On 6 July 1998, Mr Qin and Mr Choi had a telephone conversation

This Company contacted Miss Sung Laina of Hong Kong Collina

1. This company duly demands that your company requests Sin

Kindly make immediate arrangements for the foregoing procedures.

J 30. Negotiations ensued between Tongji and Madam Sung, resulting

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Our client has in compliance with their Invoice No CS980601 dated

The legal basis for implying a contract by conduct J

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In deciding whether the parties have reached agreement, the courts

37. An illustration of the objective test’s application can be found

H 38. The burden of establishing such a contract is on the person

I do not think it is enough for the party seeking the implication

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be necessary to identify conduct referable to the contract contended A

39. In Mitsui & Co Ltd v Novorossiysk Shipping Co (The Gudermes)

… it is not enough to show that the parties have done something

… if one party, O, so acts that his conduct, objectively considered,

41. The general exclusion of evidence of subjective intent in

… the principle is not purely objective: A is not bound merely I

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A suffer as a result of relying on a false appearance of agreement. There

The test in my opinion is not wholly objective. The basis of “tacit

(1) What the buyers did or omitted to do to the knowledge of

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