I HUA TRADING CO LTD v. SRI JAYALAKSHMI TOBACCO CO PRIVATE LTD

No. 3664 of 1983

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

___________

__________

JUDGMENT

__________

1. The plaintiff sought and obtained leave to serve a writ of summons on the defendant in India in respect of a claim for damages for breach of three contracts for the supply by the defendant to the plaintiff of three consignments of tobacco. Service of the writ was effected on 26th December 1983. The defendant however has chosen to ignore the action taken against it and has neither acknowledged service of the writ nor given notice of intention to defend. Notwithstanding this the plaintiff has elected not to enter final judgment in default of defence but to prove its case and obtain judgment on the basis of evidence presented to the court.

2. Mr. Houghton, a director of the plaintiff, testified that in July 1981 he wrote to the defendant on behalf of the plaintiff with a view to purchasing tobacco for sale to customers in China. The defendant replied by telex that it was able to supply tobacco of the type required and indicated that its director Mr. Joshi would be visiting Hong Kong with samples in August 1981 and would contact the plaintiff in order to discuss the matter.

3. On his arrival in Hong Kong Mr. Joshi contacted Mr. Houghton who explained to him that the plaintiff's customers in China were basically interested in bright tobacco, that is to say, tobacco of a golden yellow colour. Mr. Joshi assured Mr. Houghton that the defendant was one of the bigger suppliers of tobacco in India and that one of its directors, a Mr. Rao, was also the vice chairman of the India Tobacco Board. He gave Mr. Houghton some samples of the tobacco which the defendant was able to supply and suggested that Mr. Houghton visit the defnedant's premises at Guntur in the State of Andhra Pradesh with a view to acquainting himself first hand with the tobacco trade in India.

4. In September 1981 Mr. Houghton, acting on Mr. Joshi's suggestion, visited the defendant's premises and entered into detailed discussions concerning the purchase of tobacco from the defendant. Mr. Houghton emphasised to the defendant that the plaintiff's method of operation was that it would place orders by telex which, if accepted, would be followed by a written contract setting out details such as shipping particulars which could not practicably be included in the original telex order. This proposal met with the approval of the defendant and it was further agreed that in respect of all shipments of tobacco ordered the plaintiff would be given a discount of 6% on the listed minimum export price.

5. After his return to Hong Kong Mr. Houghton on behalf of the plaintiff entered into four contracts with the defendant in the manner agreed, that is to say initially by an exchange of telexes followed by a written contract setting out all the terms and particulars of shipment.

6. The consignment sent by the defendant in pursuance of the first of these contracts met with the plaintiff's satisfaction. It is in respect of the three subsequent contracts that the plaintiff seeks relief.

7. The first of these three contracts was entered into by the parties in December 1981 and related to the supply to the plaintiff by the defendant of 300 metric tonnes of flue cured golden Virginia tobacco grade AGMARK-LBY at a discounted purchase price of IRS6,122,220.00. The second of these contracts was entered into later in December 1981 and shortly after was varied with the consent of both parties. It related to the supply of 100 metric tonnes of Golden Virginia tobacco grade AGMARK-4 at a discounted purchase price of IRS2,148,840.00. Finally, the third of these contracts was entered into in February 1982 and related to the supply of 100 metric tonnes of flue cured golden Virginia tobacco grade GMARK 4 at a discounted purchase price of IRS2,125,980.00.

8. In late January 1982 Mr. Houghton visited the defendant's premises in India in order to inspect the tobacco which was the subject of the first two of these contracts. Because there were insufficient coolies present at the time of the inspection Mr. Houghton was only able to gain access to part of the cargo assembled in crates. However Mr. Houghton was satisfied with the quality of the tobacco that he was able to examine in approximately twelve of the crates that were opened for his inspection. A photograph of the opened crates was taken at the time and has been tendered as an exhibit.

9. In accordance with the terms of contract both cargoes were shipped to ports in China. The plaintiff received bills of lading for these shipments and remitted payment for each to the defendant.

10. In March 1982 Mr. Houghton gain visited the defendant's premises in India with a view to inspecting the tobacco forming the subject of the third contract. On this occasion he insisted that each of some six to ten crates that he inspected be fully stripped. He observed that all the crates including those which he did not have opened were new. The contents of the stripped crates were found to be satisfactory. Later the plaintiff received a bill of lading in respect of this consignment and remitted payment to the defendant. The three advices of payment from the plaintiff's bank relating to each of the three contracts and indicating that the plaintiff's account had been debited with three amounts in United States dollars equal to the contract sums expressed in Indian rupees were tendered in evidence. These confirm Mr. Houghton's oral evidence that these three amounts were paid by the plaintiff to the defendant in respect of the three contracts.

11. Unlike the two earlier consignments the last shipment did not proceed direct to a port in China but arrived in Hong Kong for transhipment thereto. Mr. Houghton inspected part of this consignment on a lighter and on opening some five or six crates found that the quality of the tobacco fell well below that which had been ordered. The tobacco had not been properly packed and was entirely different from the tobacco which Mr. houghton had inspected at Guntur in connexion with this shipment. Furthermore the crates were constructed of old wood and the hinges were rusted.

12. Shortly afterwards in early April 1982 the plaintiff received a complaint from its customers in China concerning the first two shipments. Mr. Houghton then requested and was supplied surveyor's reports from the defendants. Later he obtained reports from the Import and Export Commodity Inspection Bureau of the Peoples Republic of China concerning the shipments. All reports were the subject of hearsay notices issued by the plaintiff. Accordingly these reports having been received in evidence are evidence as the matters contained therein.

13. In mid 1982 Mr. Houghton visited China in order to see for himself the condition of the tobacco. It was not only a poor grade tobacco which did not correspond with the description in the contracts but in his view was worthless. He then notified the defendant of his findings and of the reports and urged the defendant to send a representative to China to examine the consignment and confirm his findings. However, the defendants were reluctant to do this and were most evasive.

14. In frustration Mr. Houghton wrote to the Indian High Commission in Hong Kong and the Indian Tobacco Board.  He visited India and spoke to officials in the Foreign Affairs and Trade Departments. Moreover he met with representatives of the defendant on two occasions.

15. Finally Mr. Rao of the defendant visited both Hong Kong and Peking. However whilst in Peking Mr. Rao announced that he did not have sufficient time to inspect the goods. Eventually Mr. Houghton succeeded in getting two representatives of the defendant to inspect the three shipments. Reports made by these representatives and Mr. Houghton and notes made by them and from which these reports were made were tendered in evidence. Mr. Houghton testified that the notes and the reports accurately reflect the condition of the tobacco in the shipments.

16. It is plain from the reports, from various samples of tobacco taken from the consignments and tendered as exhibits and from Mr. Houghton's evidence, that of the considerable quantity of tobacco inspected at random by the two representatives of the defendant almost all consisted of sandwiched packs, that is to say packs in which an outer layer of good quality tobacco surrounded an inner quantity of low grade and damaged tobacco, or of much lower grade tobacco not mixed with quality tobacco, or severely water damaged tobacco contained in undamaged liners in unstained crates, or scraps mixed with tobacco, or mouldy or worm ridden tobacco or a combination of some of these conditions. Indeed these reports not only confirm the findings In the reports that I have already mentioned of the Import and Export Commodity Inspection Bureau of the People's Republic of China concerning the first two shipments but also confirm the findings of the same Bureau in a report furnished in connexion with the third consignment.

17. I am completely satisfied from the evidence before me, supported as it is by samples and photographs of the tobacco concerned, that, apart perhaps from the sandwich packs, it was not the tobacco that Mr. Houghton inspected in India on either occasion and that a clumsy attempt had been made by the defendant to make it appear that at least part of the goods had been damaged in transit. The sandwich packs, the inferior tobacco and those quantities of tobacco with mixed in scrap speak for themselves.

18. An attempt by the plaintiff to reach a settlement of the matter with the defendant failed. In order to do whatever was possible to mitigate its loss the plaintiff made enquiries in China as to whether the tobacco was saleable for any purpose and was informed that due to the very small quantity of worthwhile tobacco in the consignments this was not feasible. This accorded with Mr. Houghton's own assessment. Subsequently Mr. Rao informed Mr. Houghton that he would settle the matter but ultimately failed to do so. No reparation has been made to the plaintiff.

19. In order to honour its commitments to its customers in China the plaintiff has succeeded in partially fulfilling its obligations to them by supplying them with tobacco obtained from other sources. Notwithstanding this the customers have made demands on the plaintiff for refund of outstanding monies paid by them to the plaintiff under letters of credit and have notified the plaintiffs of claims against them by sub sellers arising out of the defective performance by the plaintiff of its contracts. Until now the plaintiffs have been able to forestall full settlement of these claims by its prompt action in partially fulfilling the orders from other sources.

20. I found Mr. Houghton to be a completely honest and reliable witness and I accept his evidence. Moreover the photographic exhibits and the reports fully support his testimony in material respects. I have no doubt that the plaintiff has been thoroughly deceived by the defendant. The tobacco supplied did not correspond with the description of the tobacco stated in 'the contracts nor was it reasonably fit for the purpose for which the defendant well knew it was intended. Indeed it was worthless.

21. From a perusal of three contracts entered into by the plaintiff with its customers in China concerning the tobacco that the defendant contracted to supply to the plaintiff I am satisifed that the plaintiff has suffered a loss of profit of US$469,834.54. I am also satisfied that the plaintiff has suffered a loss of US$1,126,165.40 being the total sum paid by the plaintiff to the defendant in respect of its three contracts with the defendant.

22. The plaintiff also seeks a declaration that it is entitled to be indemnified for such sums of money that it is liable to pay to its sub purchasers by reason of the supply to it by the defendant of the defective tobacco. I have come to the conclusion that the plaintiff's claim for such incidental damages should be reserved until ascertained. It can then be brought before this court for determination.

23. Although in Household Machines v. Cosmos Exporters [1947] 1KB 217 relief was granted to a plaintiff in the form of a declaration of indemnity limited to such damages as in law were due from the defendant to the plaintiff in respect of damages which the plaintiff might be held liable to pay and might reasonably pay in respect of the discharge of his legal liability to his sub buyer, I am satisifed that the proper course to follow is that approved by Denning L.J. in Trans Trust S.P.R.L. v. Danubian Trading Co. [1952] 2QB 297 at 307 where he said:

"          If the liability of the sellers to a third party were within the contemplation of the parties, but had not been assessed, then the proper course for the judge was to reserve that head of damages. Judgment could be entered for the damages already ascertained, leaving the rest to be ascertained later by the same or another judge."

24. Somervell L.J. agreed and expressed the view that difficult questions might arise in quantifying damage, depending for example, on variation of the terms between contract and sub contract and on the question of whether the sub contracter had mitigated, and that therefore no declarations ought to prejudice or preclude a proper determination of these issues on which the defendants should be entitled to be heard.

25. Accordingly I give judgment for the plaintiff in the sum of US$1,595,999.94 and order that the defendant pay interest on that sum at the rate of 12% per annum from 30th April 1982 until the date of judgment. I further order that the defendant pay the plaintiff's costs and that such be taxed.