PERFECT LAND IND CO (a firm) v. SKYCITY UNIVERSAL LTD

DCCJ21981/2001

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 21981 OF 2001

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JUDGMENT

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Background

1. The Defendant ("D") showed the Plaintiff ("P") samples of souvenir racing car mugs and picture frames and P was able to manufacture same for D. The two parties signed 2 virtually identical contracts (differing only in numbers of items, their descriptions and prices), the first on 24th October 2000 for 30,000 items, the second on 5th December 2000 for 60000 items. Deposits of 30% of each contract was to be paid, and were duly paid. P purchased raw materials and commenced to manufacture in a factory in the mainland. D's agents had inspected samples 3 times before the 1st delivery and, apart from minor rectifications to be made, raised no objections. By D's requests on 12th January 2001 for delivery, P delivered 10,000 then 600 items on 13th and 17th January 2001 respectively and these were accepted by D and shipped overseas. D paid P with a post-dated cheque for the delivered goods but the cheque was dishonoured, and despite pursuits D never honoured the cheque. P decided not to deliver the remaining items even though they had been manufactured. D unilaterally repudiated the contracts by letter in July 2001 on the basis that (1) the CE and SGS certificates had never been secured and tendered, leading to rejection by its own customers, and (2) delivery was made half a month late, although at trial D testified to certain alleged unmerchantable aspects of P's products. P now claims payment for the delivered goods and wasted expenditures on raw materials, labour and related items. D counterclaims the excess paid over as represented by the deposits less the goods delivered, consequential loss namely loss of profits, and the return of moulds.

Itemised claim & counterclaim

2. P claims moneys for:

D counterclaims for:

I should say immediately that P's claim under items (2) and (3) are subsumed under item (1), because purchase of raw materials, labour and all incidental costs to the manufacturer are part of the sale price, and the amount on the dishonoured cheque is part of the money owed for goods delivered. As to D's claim in its item (2), this is a matter of evidence whether at the time of signing the contracts D had made P aware of its own contract, and even if so then whether P was at fault. As to D's counterclaim, item (4) is the subject between D and its own customer which this Court cannot entertain.

Goods delivered

3. It is not disputed that 11,600 items have been delivered to the Deft. The slightly raised prices were not denied (DW2's testimony). In any event because Deft had paid the two deposits based on the stated prices, I find there is no dispute as to prices. As to what the Plaintiff is now claiming for goods delivered, PW1 does not dispute he had received payment for the 3rd delivery (1,000 items). Regarding the 2nd delivery of 600 items, DW2 said they were only samples for her European and Japanese customers, but (a) if that was so I do not understand why D had wanted so many samples, and (b) the items having been completed, i.e. sealed with blisters and finalised, and delivered, I cannot see how D can say it is not liable to pay P on these items. Accordingly I find P is entitled to claim $112,500 for the first two deliveries, i.e. delivery on the 13th and 17th January 2001 (10,000 + 600 = 10,600 items).

Goods undelivered but which are subject to contract

4. Subject to the issues of "time was of the essence" and "merchantable quality", prima facie the Plaintiff was entitled to continue to deliver the items on the contracts, and if refused by the Deft the Plaintiff can claim the balance of the moneys i.e. $1,027,500 (for both contracts) less the moneys received i.e. $308,250 to a maximum of $600,000 being the jurisdiction of this Court. In other words, (1) if time had not been of the essence (whether express or implied), (2) if Plaintiff had not procrastinated in delivery of the goods, and (3) if the goods were of merchantable quality, then and only then will Plaintiff be entitled to the moneys for goods undelivered.

Deft's counterclaim for overpayment

5. There is no dispute that the Defendant has paid $308,250 to the Plaintiff. The Deft does not dispute it was liable for the delivered items worth $100,000 (even though Plaintiff says they were worth $112,500). Whether the Deft is entitled to its counterclaim, i.e. a refund from the Plaintiff, will be addressed below.

Deft's allegation of "Time is of the essence"

6. Although D's twice down-line customer AJC in France might have a requirement for QuickLink to deliver 40,000 items (later amended to 10,000 items) by the end of the year in 2000 because of an expected demand in during the Christmas and New Year period in Europe, this requirement had never been communicated to P. Certainly this requirement did not appear on any of the contracts. In any event, AJC had accepted 10,000 items in the middle of January 2001, and even QuickLink's president Mr Kawaguchi (DW1) said that the remainder of his order for 90,000 items were for the Japanese market, and with those there was no deadline delivery date.

Accordingly I find that as between P and D, time was not of the essence, and D was not entitled to repudiate the contracts on this basis.

"Unmerchantable quality"

7. Regarding the items themselves, D had made a request for amendments and P had complied with those. DW1 Mr Kawaguchi (D's customer) testified that he accepted the amended items (e.g. with the nose, eyes and mouth absent on the characters themselves).

Regarding the amended items, D had inspected the manufactured goods on 3 occasions by sending its staff Mr KWOK (DW3 a sales manager), Ms WAI, and Ms LAU to P's factory. On the 18th December 2000 D had sample checked goods and found faults such as dirt, abutting parts of mugs being uneven, and the blisters being too thin, etc, which were communicated to P. Apart from the blisters which would have applied to all items, there is no evidence that the other faults were found on every item. D re-inspected the goods on the 29th December 2000 and there is no evidence that the 2nd inspection revealed any or any core problems. In any event, P says the faults were rectified before the first delivery on the 13th January 2001, and we know D for one reason or another had not inspected the goods again between the 29th December 2000 and the date of its order to ship i.e. 12th January 2001 and of course the date of shipment which was the following day (the 13th), or the date of the second shipment (17th January).

D showed 4 samples of merchandise and PW1 agreed there were flaws, e.g. dust and some oil marks. However (a) the time when they were made was not proved, i.e. they could easily have been the early samples, (b) the flaws were not major, (c) one so-called final product allegedly sent back from Europe carried a "Namco" sticker but it was placed outside the blister packing which was contradictory to D's instructions to P (instructions were to be placed inside which made sense), and I find D had placed the sticker outside the blister packing only to make it appear to be a final product for the purpose of cross-examining PW1, (d) in any event D only produced 4 samples whereas D had accepted delivery of 11,600 items from P, and lastly (e) DW2 admitted that D successfully sold 7,500 items overseas via its Denmark branch. On the evidence I place no weight on the 4 samples if they were to tendered show that all the delivered goods, or even a substantial part thereof, were unmerchantable.

Accordingly I find that by the time P delivered the items to D, the items were of merchantable quality and fit for Deft's purpose.

CE and SGS certificates

Regarding who should have secured the CE and SGS certificates, I do not find this to be an essential term of the contract because (a) the contracts themselves do not state which party was responsible, (b) PW1 said this had not been settled, while DW2 said it was P's responsibility and it was an essential term of the contracts. However there is no document to show who was responsible for the tests, and D did not insist on the requirement at any of the three deliveries, (c) D only raised this as a requirement for the first time after it had dishonoured its cheque and found its own down-line customers had refused further supplies, (d) either P or D could have secured those certificates, (e) if the certificates were essential I cannot see why D had not insisted on sighting them before causing the goods to be shipped, and (f) finally and in any event, even DW2 only said she had wanted the certificates for the European market, but nothing was said about her Japanese market (QuickLink) who was interested in buying at least over half of the 90,000 items: there is no evidence that Japan required those certificates. Furthermore, the evidence showed that a substantial portion of the items which had gone to Europe had subsequently been sold - without CE or SGC certificates.

Accordingly I find that the certificates were not an essential term of the contracts. I find that D could not base its repudiation on the allegation that the items were not accompanied by those certificates. Alternatively, having heard the evidence in court, I find Clause 4 so vague (both in grammar and in who was responsible) that it is excluded from the contracts. The result is the same.

Why not all items in the two contracts had been delivered

8. P said he did not deliver the remainder of the items because of D 's dishonoured cheque. I find this to be a reasonable basis for refusal to manufacture further for D .

There was a hint that D had not agreed to buy all 90,000 items from P. This is untenable because not only had the contracts clearly specified the numbers, but D had also paid 30% of the total deposit, representing 90,000 items. In the end DW2 testified that the two contracts indeed were signed for the purchase of 90,000 items.

I find that D repudiated the contracts because D's own customers, including down-line customer AJC, had "missed the peak sales season" in Europe, and therefore D was willing to buy the products even if supplied by the Plaintiff. As stated above I do not find that any date was "of the essence", and even if it was it had not been communicated to the P to make it a condition precedent to the contracts.

Plaintiff's miscellaneous claims, e.g. wasted expenditure, wasted labour etc.

9. In principle P is entitled to claim for wasted expenditure namely on raw materials bought in expectation that the contracts would be completely performed had the Deft kept to its promise. However, as both Counsel also agreed, P is only entitled to the maximum extent of the moneys represented by the contracts, and any loss from "other items" is represented by the total contractual moneys less the $112,500 for goods already delivered and which is already due. For example, P cannot claim for "loss of profits" (as stated in Bundle page A029C) beyond the contractual moneys because he is not entitled to any more profits than those made from D as a result of the contracts. Further, if P had over-purchased raw materials he is clearly not entitled to claim from D on that. Any raw materials, factory rental and labour would have been calculated into the contractual prices.

Furthermore, in relation to the unused raw materials P had a duty to mitigate its losses. I do not find that the unused raw materials were of no monetary value. For example raw clear plastic could be used for other products and is worth money. In any event PW1 said his own supplier was able to break up even some of the used materials for manufacture of other things. There is no precise evidence how much P was able to recover from re-selling raw materials, but it appeared that P was or would be able to recover more than half. In this regard it should be noted that if P had ordered more raw materials than were needed to manufacture the full quota in the two contracts, it would have been P's wrong estimate and not D's fault, and so P is not able to claim for such excess wastage.

Under normal situations, therefore, had the two contracts been fulfilled, P should have had no excess materials left in its yard. But now P had over 80% of items undelivered (being 90,000 items less 11,600 items), and P was or will be able to at least sell the materials as usable or at least as recycled material. Regarding wastage of raw materials and general costs of manufacture PW1's evidence was unclear and he corrected himself several times. The best I could make of his evidence on an acceptable basis was that the overall cost of manufacture to him per item was close to $9. Of this, close to $7 was materials and the rest represented by wages and rent of premises, etc. Accordingly, the materials used in making the undelivered items came to 90,000 less 11,600 items x $7 which gives $548,800. Of this I allow 80% as salvage moneys available to P (the rest being lost in other non-recoverable expenses) i.e. $439,040. In due course, therefore, P's claim will be reduced by this amount in the end.

Findings & calculations of compensation

10. In the above paragraph I started with the full contracts moneys because by early February 2001 P had practically completed all the products on both contracts (except for minor finishes such as the final sealing with clear plastic), and he is therefore entitled to the moneys represented by all the goods whether delivered or undelivered. However D has already paid $308,250 by way of deposits, P's nett entitlement in this action becomes $1,027,500 less $308,250 which is $719,250. However because of mitigation as stated in the above paragraph, P's claim is reduced by salvage value of $439,040 and therefore P's nett entitlement now becomes $280,210.

11. As to whether D has succeeded in its defences, the evidence showed the following:

Accordingly I find that D has not established any credible basis to justify its unilateral repudiation, and therefore it (1) has not established any defence to P's claim, and (2) D is not entitled to any counterclaim.

Return of moulds and documents

12. P agrees that it has no further use of D's moulds and documents because P is prohibited to manufacture such items to sell to any other person.

Orders

13. Because of the abovestated reasons I make the following orders: