THE CITY TRADING CO. LTD. v. GEARLAND CO. LTD.

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

Action No. A7570 of 1993

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J U D G M E N T

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1. The Defendant admitted liability for breach of contract to supply the plaintiff a quantity of fashion garment. The present dispute only relates to quantum of damages.

2. The Plaintiff company, through its director, Mr. Thomas So, entered into partnership agreement with Ms Lam Ming Hsian to deal in fashion garment. The arrangement was that Ms Lam would place order in the name of the Plaintiff company with suppliers for the goods to be supplied to the Plaintiff company in Hong Kong and then shipped to Ms. Lin in Taiwan for resale. The goods will be sold through a retail business called Good Harvest run by Ms. Lin and her sister but registered in her sister's name. The Plaintiff company will arrange for the letters of credit and pay for the cost of the purchase and shipment to Hong Kong, while Ms. Lin will bear the cost of retail and shipment from Hong Kong to Taiwan. They will then share the profit equally.

3. Since 1992, Ms. Lin had ordered goods under the brand name of "Replay" from a supplier called Fashion Box. In October 1992, she had a meeting at the office of Fashion Box in Paris and was informed that Fashion Box had appointed the Defendant as their agent in Hong Kong. Mr. Sunny Wong of the Defendant company was also present at that meeting. Ms. Lin negotiated with Mr. Wong who prepared an order form for her. Mr. Wong was informed that the goods were to be shipped by the Defendant to Hong Kong and to be ordered in the name of the Plaintiff for subsequent trans-shipment to Taiwan for Ms. Lin. Mr. Wong wrote down on the order form the name of the buyer as the Plaintiff and the address as "Taiwan - Lin Ming Hsian". That order was then re-documented as a revised proforma invoice to the Plaintiff. However, the Defendant failed to supply the goods. At the time of breach, similar garments were being sold in the retail market in both Hong Kong and Taiwan at a mark up of about 300%. As "Replay" is a specific brand name and as the Defendant is its sole agent, the Plaintiff could not buy alternative goods in either Hong Kong or Taiwan, except through retail outlets.

4. The Plaintiff claims damages on the basis of the difference between the retail market price and the contract price, i.e. 200%. Mr. Poon for the Plaintiff submitted that in accordance with section 53 of the Sales of Goods Ordinance, the Plaintiff is entitled to the price difference and cited as authority Re British Motor Trade Association [1951] 2 All ER 641 and Mout v. Betts Motors Ltd. [1959] AC 71.

5. Mr. Poon also put in an alternative claim for the same amount on the basis of the Plaintiff's loss of profit plus an indemnity to Ms. Lin. I do not need to go into further details about this alternative claim as I consider the above facts supports a partnership relation between the Plaintiff and Ms. Lin and the Plaintiff may claim for the total loss the partnership suffered.

6. Mr. Lam on behalf of the Defendant argued that the retail market price is irrelevant as a prerequisite for the operation of section 53(3) of the Sales of Goods Ordinance is that there is an available market. He cited Sun Wah Oil & Cereals v. Gee Tai Trading Co. Ltd., [1993] 1 HKC 132 as authority that the 'available market' referred to in that section is that which is available to the parties generally in Hong Kong. He argued that as the Defendant is the sole agent and there are no other suppliers there was no available market. He also submitted that the retail price is irrelevant and should not be taken in lieu of the market price.

7. I think section 53(3) only provides a prima facie formula for determining the measure of damages where there is an available market. Where, as in the present case, the goods, being one having a specific brand name with a sole agent, could only be obtained from the retail market or the Defendant sole agent who refused to perform the contract, the retail market price is irrelevant.

8. The damages will have to be assessed by using the second limb of the rule in Hadley v. Baxendale, (1854) 9 Ex 341. The application of this limb of the rule involves the consideration of two questions, one of fact and one of law. The first question is, what did the parties forecast as the probable course of event in relation to the contract when it was made?

9. On the facts, Ms. Lin negotiated the contract with Mr. Wong. Mr. Wong wrote down the words "Taiwan" and Ms. Lin's name. That suggests Mr. Wong had knowledge that the goods were to be shipped to Taiwan and in view of the quantity for resale and not personal consumption.

10. Mr. Lam submitted that the Defendant had no knowledge that the goods were purchased by the Plaintiff for retail and that damages should be assessed on the basis of 5 to 10% of the purchase price which represents a wholesaler's loss of profit on resale to a retailer but not to the ultimate consumer.

11. He drew support for his assertion on the basis of Mr. So's answer to the interrogatories. The questions and answers are as follow:

Q4: Can the Plaintiff confirm that its principal activity is that of the wholesaler clothes?

A4: I say that to the best of my knowledge information and belief the principal activity of the Plaintiff is not restricted to clothings, but also include the business of clocks and watches.

Q6: Can the Plaintiff confirm that it does not undertake any retail operations whether in Hong Kong Taiwan or elsewhere. If it does, provide full particulars.

A6: I say that to the best of my knowledge information and belief Ms. Lin Ming Hsian and her sister Lin Ming Cheuk operate a boutique in Taipei, Taiwan.

Q7: Can the Plaintiff confirm whether it has sold clothes, whether as wholesaler or retailer or in some other capacity in Taiwan.

A7: I say that to the best of my knowledge information and belief Ms. Lin Ming Hsian and her sister Lin Ming Cheuk operate a boutique in Taipei, Taiwan.

12. Mr. Lam argued that A6 is an implied admission that the Plaintiff is a wholesaler of clothes. That is a possible inference to be drawn from Answer 4. However, looking at the other answers and Mr. So's evidence as a whole, I do not think Mr. So meant that he was a wholesaler of clothes. Of course, I bore in mind that in drafting the answers to the interrogatories, he might have had the benefit of advice from his solicitor. However, I accept his evidence in the witness box that the Plaintiff is not a wholesaler of clothes and that the clothing ordered were pursuant to the partnership with Ms. Lin for the purpose of retail.

13. Mr. Lam also argued that in its letters to the Defendant, the Plaintiff referred Ms. Lin as its customer and relied on that as evidence that the Plaintiff was a wholesaler. That on the face is possible inference to be drawn. However, that is inconsistent with the undisputed evidence that it was Ms. Lin who identified the types of clothing to be ordered and negotiated the contract in the name of the Plaintiff. It was inappropriate for the Plaintiff to describe Ms. Lin as its customer. However, the fact is clearly that Ms. Lin was not the Plaintiff's customer to whom the Plaintiff had resold the goods.

14. In my view, what is more conclusive is the size of the order placed with the Defendant. According to Mr. Wong of the Defendant, a wholesaler would order 200 to 2,000 pieces, but he admitted that his own sub-agent wholesaler in Taiwan ordered up to 5,000 pieces. I think his evidence is defensive. According to Mr. Yu, another defence witness, retailers would order one to two pieces per style per colour per size. I think Mr. Yu's evidence is more reliable and accords with common sense. A total of 1,268 pieces of 120 styles were ordered. On the average, about 10 pieces were ordered for each style and colour. In fact the majority was made up of a few pieces for each style, colour and size. This is consistent with resale by way of retail and not resale by way of wholesale as alleged by counsel for the Defendant.

15. I therefore find as a fact that when the contract was made the Defendant knew he was dealing with the Plaintiff who would buy the goods for resale by way of retail. Having made this finding of fact, the next question for me is what may be reasonably supposed to have been in the contemplation of the parties as the probable result of a breach of the contract, assuming the parties to have applied their minds to the contingency of there being such a breach.

16. As this is a specific goods with a brand name and other than the Defendant who chose not to deliver there are no other supplier, the Defendant must have contemplated loss of profit on retail as the probable result of its breach. I therefore reject Mr. Lam's submission to assess the loss as 5 to 10% contract price which he submits as the usual wholesaler's profit margin upon resale to a retailer.

17. I can draw little assistance from the witnesses as to what exactly was the loss of profit. I reject Mr. Poon's submission that damages should be assessed on the basis of the difference between retail price and contract price. That would in effect put the plaintiff in a better position than if the contract has been performed. The Defendant required its retailers to mark up to 280% its wholesale price. There is also undisputed evidence that the retail price in Taiwan is 300% mark up on the wholesale price. I have no information on what are the overhead costs, retail costs, freight and insurance costs etc. The nearest figure I have was Ms Lin's and Mr. So's uncontested evidence that they each obtained a net profit of 50 to 60% on the contract price for the goods. I have no doubt about their truthfulness. Allowing for the freight charges which they have saved, I therefore adopt the lower figure for the purpose of assessing the damages. I assess the damages to be 100% the contract price. I therefore award the Plaintiff Lira 79,018,240.00 or its Hong Kong dollar equivalent at the time of payment, interest on the said sum at judgment rate from the date of writ until payment and costs against the Defendant.