PARK AVENUE TOYS LTD v. CANDY NOVELTY WORKS LTD

HCA 11135 /1997

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 11135 of 1997

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J U D G M E N T

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Background

1. These proceedings revolve around the rejection by the Food and Drug Administration of the United States of America, (FDA), of children's toys containing candy novelties. The toys were rejected because the candy contained unidentified colouring matter. The central issue in these proceedings is whether or not the plaintiff has taken proper steps to mitigate its losses following the detention of the toys.

The parties:

2. The plaintiff, Park Avenue Toys Limited (Park Avenue), is a Hong Kong company operating a business as a manufacturer and trader of toys. Since its inception in 1969, it has acted in Hong Kong as the buying and shipping agent of an American company, Hope Industries Inc (Hope). A director of Hope, Mr Joseph Ang, (Mr. Ang), owns one of the two issued shares in Park Avenue, and he is a director of Park Avenue. The other issued share is held by Hong Kong based Mr Fung Chi-keung Alaric, (Mr Fung), and he too is a director of Park Avenue. Hope has been in existence since 1983 and is a trader and importer of toy and food products into the United States. A major United States chainstore, Kay-Bee Toys Stores Inc, (Kay-Bee), was a customer of Hope.

3. The defendant, Candy Novelty Works Limited, (Candy Novelty), is a Hong Kong company, which has been trading and manufacturing candy and candy related toys since about 1968. Mr Jim Chan (Mr Chan), is the managing director of Candy Novelty, and at the relevant time a Ms. Misan Chu (Ms Chu), was the business manager of Candy Novelty.

The contracts:

4. In about March 1996 Park Avenue entered into two contracts with Candy Novelty to produce two children's toys: a candy yo-yo and a candy laughing stick. A small portion of each order were to contain candies supplied by Park Avenue, known as "Tart N Tinys", manufactured by a company called Willie Wonka, but the greater portion of the toys were to contain candies supplied by Candy Novelty. The finished toys were to be supplied by Park Avenue to Hope, who in turn had sold them on to Kay-Bee, for sale to the public in the United States. The total value of the two contracts, when the details were finally settled, was some US$137,000.00

5. It is absolutely clear that it was a term of the contracts that the ingredients of candies supplied by Candy Novelty were to be exactly the same as the content of the "Tart N Tinys". That was specifically stated in a fax message from Park Avenue to Candy Novelty on 25 March 1996, and acknowledged by Candy Novelty in a fax to Park Avenue dated 5 April 1996. Candy Novelty were supplied with the details of the nutrition facts and ingredients of the "Tart N Tinys" by Park Avenue in order that those ingredients may be used and the correct details may be incorporated in the packaging of the toys.

6. Candy Novelty were very experienced in the importation of foodstuffs into the US and were fully aware of FDA requirements. They were aware that, in order to meet FDA requirements, the ingredients of candies they manufactured would have to be printed on the packaging of the toys containing those candies. Candy Novelty knew that the description of the ingredients on the packaging was important because that description may be reviewed by the FDA on the arrival of toys in the United States. They knew that the ingredients may be tested by the FDA to determine whether or not the ingredients matched the description on the package, and were ingredients permitted by the FDA. It was plainly an implied term of the contracts that the candies would have to be to a standard acceptable to the FDA, both as to ingredients and labelling.

How candy is coloured:

7. The evidence was that there are the two ways in which colour is introduced into candies. First, natural colouring agents may be used. Any natural colouring agents used must be agents which are permitted by the FDA, and, if used, need not be specifically described upon the label, but may be described generically as "natural colour". Two natural agents which are permitted are carmine which produces the colour red, and turmeric, which produces the colour yellow. Second, artificial colouring agents may be used. If used, again they must be permitted by the FDA, and must be specified on the label, using the expression "colour added", or "artificial colours". The actual colours used must be specifically identified by number in order that a consumer may know exactly which artificial agents have been used. The artificial colouring agents are identified by the number as may be seen in the Notice of Detention. Apparently some artificial agents may cause problems for a small group of consumers and they are entitled, before purchase, to know that colouring agents which may cause them problems are contained in the candy.

Some toys are detained by the FDA:

8. An importer of the products to the United States is known as an "Importer of Record", and that importer usually employs a Customs Broker who will provide liaison between the Importer of Record and the US Customs Service and the FDA. The evidence was that for US import purposes, Kay Bee, as the Importer of Record were considered to be the manufacturer and both US Customs and the FDA would only deal directly with Kay Bee or their officially designated Customs Broker or lawyers. Consequently all contact with government agencies in the United States was to be undertaken by US entities. A further consequence of this situation was that as a result, Park Avenue were dealing with the matter at third hand, having to go first through Hope, then through Kay Bee, in order to deal with the FDA.

9. The great majority of the toys were imported without difficulty into the United States. However, approximately 10% of all imports into the US are examined and tested by the FDA, that 10% being selected at random. As it happened, samples of both types of toys were taken by the FDA from a shipment that entered at Newark New Jersey, on about 24 July 1996. Although the entry was on about that date the sample was not taken until 22 August 1996. Following the taking of the sample, tests were undertaken by the FDA and on about 6 January 1997 a document entitled "Notice of Detention and Hearing" in relation to the goods was issued by the FDA. That notice informed Kay-Bee, as the Importer of Record, that the goods had been detained, the reason for detention being described in the following terms:

"contains a non-permitted color: labelling false and misleading."

The notice also contained the following statement:

"Violative within the meaning of 801(A)(3) in that it appears to contain an unidentified, non-permitted-color, a color additive which is unsafe within the meaning of section 721, and 801(A) (3) in that its labelling appears to be false and misleading, yellow #5, red #40, and Blue #2 were declared on the label, but were not detected in the product [misbranding, section 403 (a) (1)] and is therefore subject to refusal of admission."

The notice invited the recipient to respond to the attention of Mary Stenson, described in the document as a "Compliance Officer for Director of District".

The label on the toys:

10. The label on the toys containing "Tart N Tinys" was in the following terms:

INGREDIENTS: Dextrose, Maltodextrin, Corn Syrup, Malic Acid, and less than 2% of Artificial and Natural Flavours, Calcium Stearate, Colour Added, Carnauba Wax, Blue 1 Lake, Blue 1, Blue 2 Lake, Red 40 Lake, Yellow 5 Lake, Yellow 6 Lake, Yellow 6.

The label on the toys containing candies manufactured by Candy Novelty was in the following terms:

INGREDIENTS: Sugar, Dextrose, Malto-dextrin, Malic Acid, Magnesium Stearate, Natural & Artificial Flavors, Artificial Colours, Blue 1, Blue 2 Lake, Yellow 5, Yellow 6, Red 40, Carnauba Wax.

11. Subsequent testing establishes that it is beyond argument that the toys containing candies manufactured by Candy Novelty did not contain the artificial colours, Yellow 5, Red 40 and Blue 2, as had been used in the Tart N Tinys. To achieve yellow and red colours Candy Novelty had used carmine and turmeric. Those colours were permitted as natural agents. In addition Yellow 6 had been used. That too was a permitted colouring agent, and had been used in the Tart N Tinys.

Is Candy Novelty in breach of the contract:

12. It is important to identify the true issue in this litigation. The true issue is whether Candy Novelty were in breach of the contract between the parties. The true issue is not whether there had been breaches of FDA regulations. It may well be that a breach of FDA regulations would constitute a breach of contract, but there may be a breach of the contract without there being a breach of the FDA regulations.

13. The terms of the contract were clear. Candy Novelty was to use the same ingredients as were contained in the "Tart N Tinys", and they knew those ingredients, as details had been supplied to them. Willie Wonka had used Yellow 5 Lake, Yellow 6 Lake, Yellow 6 and Red 40 Lake in achieving the yellow and red colours in candies. Candy Novelty did not use precisely those ingredients. Candy Novelty instead used carmine, turmeric and Yellow 6 to achieve the yellow and red colours. Candy Novelty did not use Yellow 5, Blue 2 or Red 40 in the candies.

14. All parties knew that the toys were to be shipped to the United States of America and that accordingly they must comply with FDA requirements, not only as to the ingredients used, but also as to labelling. Candy Novelty did not use Yellow 5, Red 40, or Blue 2, yet those ingredients were contained on the label. The label accordingly, containing ingredients that were not present, was misleading, and is not acceptable to the FDA. The label was in breach of FDA legislation.

15. I accordingly hold that Candy Novelty were in breach of the terms of the contract, first, by failing to use the agreed ingredients, and second, by endorsing on the label ingredients that were not present, thereby creating a misleading label. Those breaches of contract lead directly to the rejection of the toys by the FDA.

The steps taken following the entry of the toys in the USA:

16. There appears to be no dispute that the particular toys were destined for what is known as the summer market in the US toy stores. They were goods intended to be sold during the summer period, which runs from about May to September each year. In late September the summer market toys are removed from the shelves and replaced with items aimed particularly at Halloween. Subsequently Christmas items take over. The shipments of the toys from Hong Kong were taking place from April to July of 1996. The particular shipment that was detained had arrived on 24 July 1996, and in the normal course of events would have moved from arrival to the shelves over the next few weeks for the latter part of the summer season.

17. The evidence established that the Customs Broker employed by the Importer of Record would have learned of the arrival of the goods on or just prior to the date of the entry. He would certainly have known that the goods had arrived by 25 or 26 July 1996. He would have learned that a sample had been collected on 22 August 1996, and it is reasonable to expect, although there is no evidence, that the Customs Broker would have notified Kay-Bee that the sample had been taken.

18. In those circumstances, it is somewhat surprising that the evidence is that the first that Hope learned of the matter was in January 1997 when the Notice of Detention and Hearing was sent by fax from Kay-Bee to Hope. There is no evidence at all of any steps taken by Kay-Bee to ascertain what had happened to the shipment between 26 July 1996, by which time the Customs Broker would have known that the goods had arrived, or at least between 22 August 1996, and 6 January 1997 when the Notice of Detention and Hearing was sent to them. Having regard to the fact that the goods were intended for the summer market that is somewhat surprising, although it is fair to say that the goods, if not sold would be returned to distribution centres and would be available for release the following summer. There is no suggestion of any "use by" date limitation in relation to the candies.

19. When Hope received from Kay-Bee the Notice of Detention and Hearing in January 1997, they sent it on, by fax, to Mr Fung at Park Avenue. The precise date on which this happened was not established. By the time the Notice of Detention and Hearing was received, all of the toys manufactured under the contracts, except the detained shipment had arrived in the United States and Kay-Bee had distributed most of the toys to its eight warehouse distribution centres throughout the United States. From there some had made their way into Kay-Bee's 1400 retail outlets.

20. Mr Ang gave evidence that Hope engaged a consultant, Pharmacentua Ltd., a chemical laboratory who were engaged in testing chemical compounds. They advised Hope that in order to get the FDA to approve the delivery of the toys it would be necessary to recall all the toys, then to ask an FDA specified, independent, laboratory to identify the "unknown" substances found in the candies. If upon identification the unknown substances were permitted agents, the toys would have to be re-labelled with approved labels, after which they may be sold. It appears that the system is such that even if a sample is taken, the goods are permitted entry, subject to the obligation of the Importer of Record to recall the goods if required by the FDA.

21. In Hong Kong, in January 1997, upon receipt of the Notice of Detention and Hearing, Mr Fung telephoned Ms Chu. Throughout virtually the whole of the first four months of 1997, Mr Chan was out of Hong Kong and all dealings in relation to the matter between the parties were between Mr Fung and Ms. Misan Chu. However Ms Chu was in daily contact with Mr Chan, and told him about the problem.

22. Mr Fung did not send a copy of the Notice of Detention and Hearing to Candy Novelty. Instead, in the course of his telephone conversation with Ms Chu he asked her what the colours were in candies, and whether they were approved by the FDA. I am satisfied that he asked both of those questions. Ms Chu's response was simply to assert that all of the ingredients were approved by the FDA. I found Mr Fung to be an honest and straightforward witness who told the truth. To the contrary, I found Ms Chu to be evasive, and forgetful, and consequently where there was a difference in the evidence between Mr Fung and Ms Chu, I preferred Mr Fung's evidence. Equally I found Mr Chan to be both evasive and forgetful, and I preferred Mr Fung's evidence to that of Mr Jim Chan.

23. Both Mr Chan and Ms Chu said that Mr Fung's inquiry was nothing more than a routine inquiry in which they believed he merely sought to ascertain information as to colours in candies. I reject that completely. It must have been abundantly plain to them from the repeated inquiries, and requests to be advised both as to what the colours in candies were, and whether they were FDA approved, that this was no routine inquiry.

24. Mr Fung said that he told Ms Chu that the goods had been detained by the FDA, a suggestion she denied. I accept Mr Fung's evidence. Her evidence was further, and in this respect it was consistent with Mr Fung, that she told him to contact Mr Richard Lai of Warner Jenkinson, the firm who supplied the colour additives to Candy Novelty. Mr Fung's evidence was that he contacted Mr Lai only to be told that Mr Lai would not reveal information of that nature to someone who was not a client of Warner Jenkinson. Candy Novelty did not call Mr Lai as a witness, and in the circumstances I accept Mr Fung's evidence.

25. It is entirely inconsistent with Ms Chu's suggestion that the inquiry was a mere routine inquiry that she should refer Mr Fung to Mr Lai. On her own evidence she had access to all of the necessary information to answer both Mr Fung's questions. Had the inquiry being a routine inquiry she would simply have given the requested information, and there would be no need to refer Mr. Fung to Mr Lai. It was not a routine enquiry, and it was plain she that knew that colouring agents had been used which were not used in the Tart N Tiny's, and that she knew that there were items on the label which had not being used in the product.

26. Between January 1997 and April 1997, Mr Fung spoke with Ms Chu on a number of occasions, each time asking the same questions, as he sought to ascertain what the unknown substances in the candies were. At no stage at all did Ms Chu inform Mr Fung that the artificial colours, Yellow 5, Red 40, and Blue 2, had not been used, and that to achieve the yellow and red colours, the natural colouring agents, carmine and turmeric had been used.

27. Ms Chu was in direct contact with the factory and knew precisely, or could easily ascertain, what was in the candies. Had she immediately informed Mr Fung of the correct components, and also informed him that three of the artificial colours named on the label had not in fact been used, this whole issue would have been able to have been resolved immediately. It would then have been a straightforward matter for the Importer of Record to provide an appropriate laboratory analysis identifying the colours used, and seeking approval for relabelling.

28. But she did not do so, with the consequence that Mr Fung, Hope, and Kay-Bee all proceeded without any true knowledge of the ingredients of the candies. The matter was eloquently and accurately put in the course of his cross-examination by Mr Ang in the following terms:

"The whole issue revolved around us not knowing what was the content in the candy that we could provide to Kay-Bee and Kay-Bee could provide to the FDA so that they could make their own findings. And so the whole issue revolved around...... it looks like there is a standstill. We were all flummoxed from doing anything at that time. No one could do anything so the whole process just stop somewhere, that the bosses just couldn't move."

This situation was a direct result of what I find to be the deliberate failure on the part of Ms Chau and Mr Chan to promptly inform Park Avenue of the true ingredients of the candies immediately the first inquiry was made.

The toys are refused admission to the USA:

29. On 21 February 1997, after apparently hearing nothing from either the Customs Broker or Kay Bee, the FDA sent a notice to the Customs Broker and Kay-Bee informing them that 3 March 1997 was the last day to respond to the Notice of Detention and Hearing. If there was no answer by the date, the notice said, the shipment would be refused admission. If refused admission the distributed goods would have to be recalled and destroyed or shipped out of the United States. There is no evidence that that notice was sent on to Hope or Park Avenue by Kay Bee.

30. By notice dated 14 March 1997, in relation to the candy laughing sticks, and 18 April 1997, in relation to the candy yo-yos, a formal "Notice of Refusal of Admission" was given to Kay Bee, who were thereby notified by the FDA that the merchandise would not be admitted into the United States and must be exported or destroyed under Customs supervision within 90 days of the date of the notice. There is no direct evidence from Kay Bee as to the steps they took, but documentary evidence shows that the goods were recalled, repackaged, and returned to Hong Kong where they were placed in a warehouse.

Hope has the candies analysed:

31. An analysis of the candies which was undertaken on behalf of Hope in March 1997, by Messers Strausberger & Siegel Inc, (S & S), in USA, ascertained that the blue candies contained the certified colour Blue 1, but was unable to identify the yellow and red colours in the yellow and red candies. Notwithstanding the fact that turmeric and carmine are regularly used as natural colours in colouring candy the testing apparently did not reveal that those colouring agents had been used. There was no explanation from S & S as to why testing was not undertaken for other colouring agents usually or regularly used in colouring candy. There is no evidence that the analysis was made available to Park Avenue before the rejection of the goods on 14 and 18 March 1997.

32. Subsequently, tests were performed on the candies in Hong Kong by scientists who were called as expert witnesses by each side. Park Avenue's expert confirmed that carmine and turmeric had been used, and also determined that there was an unidentified yellow colour in the candy. I am satisfied from the evidence of Candy Novelty's expert that it is more likely than not that that colour was Yellow 6. That is a permitted colour that was on the label.

33. It must be borne in mind when assessing the action taken by the FDA that their policy is to test only for the items described as being present, and not to test to determine, of the items discovered, which are not, and which are, in fact, permitted items. I am satisfied that the FDA, when referring in the Notice of Detention and Hearing to "an unidentified, non-permitted-color", was referring to the carmine and turmeric, for which they would not have tested. They were described as "non-permitted" because they were unidentified. The reference to those colours being "unsafe" was a reference to them being presumed to be unsafe as they were then unidentified.

Solicitors become involved:

34. On 30 April 1997, solicitors for Park Avenue wrote to Candy Novelty, forwarding to them the Notice of Refusal of Admission, a copy of the independent analyst's report obtained by Hope, and informed them that Hope was making a claim against Park Avenue for a sum in excess of US$123,000.00. They sought a solution to the matter. On 8 May 1997, Candy Novelty's solicitors responded, denying that there had been any violation of FDA requirements and informing Park Avenue, for the first time, that according to their client's records, natural colours turmeric yellow and carmine red had been used. They requested advice as to whether or not anyone had approached the Compliance Officer at FDA. Even in that letter Candy Novelty still did not inform Park Avenue that the colours Yellow 5, Red 40 and Blue 2 had not been used in the product, despite having been declared on the label.

35. The denial that there had been any violation of FDA requirements was of course quite wrong. It is plain that the labelling requirements had been breached, as the labels referred to items that had not in fact been used in the product. Technically, the use of carmine and turmeric did not constitute a breach of FDA regulations, and the use of those agents had been adequately described on the label by the use of the expression "Artificial and Natural Flavours". However, their use by Candy Novelty was a breach of the contracts.

The toys are returned to Hong Kong:

36. Following the issue of the Notices of Refusal of Admission, Kay-Bee recovered the toys from the stores back to the distribution centres from where they were packed together and returned to Hong Kong. Once there, they were placed in a godown.

37. As a result of negotiations between Kay Bee, Hope, and Park Avenue a settlement of the claim by Kay Bee was reached without recourse to litigation. The claim made by Hope against Park Avenue, who in turn were subject to a claim by Kay-Bee, was for the sum of US$123,452.82. This sum comprised the cost of retrieving the goods from the retail and wholesale outlets, packing them and shipping them to Hong Kong, and lost profit margins by both Kay-Bee and Hope. Park Avenue in turn seeks that sum, in this litigation, from Candy Novelty, together with godown costs in Hong Kong and lost profits.

Park Avenue tries to resell the toys:

38. Mr Fung's evidence was that once the toys were returned to Hong Kong he endeavoured to resell them to recover his losses. He contacted various people he knew in the industry but with little success. Eventually, he was able to make contact with an interested buyer called Playthings Pte Ltd, (Playthings), of Singapore. In the course of negotiations, which had reached a final stage and were close to being resolved, Playthings raised a label issue. The label on the toys used American codes for the numbering of artificial colours. Singapore and European countries used an international code which was similar but different. Playthings requested to know the equivalent numbers on the international code for the American code.

39. On 17 March 1998, Park Avenue's solicitors wrote to Candy Novelty's solicitors informing them of the potential sale, sending to them the fax outlining the colour code numbering problem and requesting whether Candy Novelty:

"would take steps to rectify labels so that the goods can be sold to the prospective buyer and the damages suffered by a client in this manner can be minimised."

The letter was perhaps somewhat unfortunately worded, and would have better sought an answer to two specific questions, namely:

(1) What are the international code equivalent numbers for the American code numbers for the artificial colours?

and

(2) Is your client prepared to take steps to rectify the labels?

However, notwithstanding the fact that both questions were not asked in those terms, I am satisfied that a sensible reading of the letter and the attachment, would have revealed to any intelligent solicitor that if his client was not willing to take steps to rectify labels, at least, the client ought to supply international code numbers.

40. Candy Novelty's solicitors replied on 1 April 1998, in a short and simple letter saying that their client was not prepared to rectify the labels. The did not comment on or supply the International code numbers. Mr Chan in evidence acknowledged, not only that he knew those numbers, or had access to them, but that it was a simple matter for him to determine them. He did not suggest any reason at all why he should not have supplied numbers, nor did he suggest any reason at all why Candy Novelty should not have assisted in a relabelling exercise.

41. Again, when an opportunity arose, Candy Novelty still did not inform Park Avenue that the colours Yellow 5, Red 40 and Blue 2, had not been used in the product. With the failure to supply the international code numbers the sale fell through. Ultimately, by December 1998, Mr Fong was reduced to offering the toys to a Hong Kong purchaser who apparently had access to flea markets in Hong Kong. Even that failed to achieve the sale. The toys remain in the warehouse where, having regard to the fact that they contain foodstuffs, they are now, six years after the event, worthless.

The law as to mitigation:

42. It follows from my findings that Candy Novelty are in breach of the contract that Park Avenue are entitled to damages. It is here that the central issue in the case finally arises. It is the case for Candy Novelty that Park Avenue have failed to properly mitigate their losses. If they have failed to properly mitigate their losses there will be no damages.

43. The law does not allow a plaintiff to recover damages to compensate him for loss which he would not have been suffered if he had taken reasonable steps to mitigate his loss: British Westinghouse Electric & Manufacturing Co v Underground Electric Rly Co of London [1912] AC 673 at 689, per Lord Haldane. It must be noted that it has been held that it is wrong to express this rule by stating that the plaintiff is under a duty to mitigate his loss: Sotiros Shipping Inc v Sameiet, The Soholt [1983] 1 Lloyds Rep 605.

44. In taking steps to mitigate, a claimant is not under any obligation to do anything other than in the ordinary course of business. He is not required to go to extreme steps and is not bound to nurse the interests of the defendant: Harlow & Jones v Panex (International) [1967] Lloyds Rep 509. In mitigating his loss the claimant victim of a wrong is only required to act reasonably, and the standard of reasonableness is not high in view of the fact that the defendant is an admitted wrongdoer: see Banco de Portugal v Waterlow [1932] AC 452 per Lord Macmillan at 506. The criterion for reasonableness is stated in Dunkirk Colliery Co v Lever (1878) 9 Ch D 20 CA, and was approved in British Westinghouse (above). Whether the claimant has acted reasonably is in every case a question of fact, not of law: Payzu v Saunders [1919] 2 KB 581 CA.

45. At the time when the contract is broken it is not always clear what to do next. A plaintiff will not be treated as behaving unreasonably when he chooses one of the possible reasonable alternatives only to find out later that the other one would have been cheaper: Gebruder Metalmann GmbH & Co KG v NBR (London ) Ltd [1984] 1 Lloyds Rep 614.

46. The onus of proof on the issue of mitigation is on the defendant. If he fails to show that the claimant ought reasonably to have taken certain mitigating steps, then the normal measure of damages will apply: McGregor on Damages 17th Ed, para 7-019.

47. These are the principles that I apply in determining the issues in this case.

Has Park Avenue taken proper steps to mitigate its loss:

48. Whether Park Avenue has acted reasonably must be assessed in the light of the facts. The evidence was that if goods were rejected by the FDA and the reason for rejection can be remedied by re-labelling the goods, arrangements can be made for the FDA to permit the admission and distribution of the re-labelled goods. It is common ground that no re-labelling exercise was undertaken. To determine whether Park Avenue have taken proper steps in the mitigation of loss therefore it must first be determined if this is a case in which re-labelling was a practical option. Second, if it is a practical option it must be determined whether Park Avenue acted reasonably in not undertaking re-labelling.

Was a re-labelling exercise a practical option:

49. I accept the evidence of Mr Cardile, who was previously employed by the FDA, now an independent FDA consultant, with wide experience in dealing with the FDA, who was called by Candy Novelty. His evidence was that once it was determined that the content of the candies in fact complied with FDA requirements, all that needed to be done was to re-label the toys with a label which correctly described the ingredients.

50. Mr Richard S Morey, a US attorney from Washington DC, who specialises in FDA law, was called by Park Avenue. While I accept his evidence that in his experience an application for re-labelling will be more readily received and dealt with by the FDA if it is accompanied by a clear explanation of the circumstances in which the application has arisen, it is clear that an explanation is not a requirement. That is plain from FDA form F 766 which, while not a required form, is a form suggested by the FDA as an appropriate means by which an application for re-labelling may be made. There is no provision in the form for an explanation of the circumstances in which the application arises. Mr. Morey did not suggest that there was any specific provision in the legislation under which the FDA operates that makes provision for the requirement of an explanation.

51. The use of carmine and turmeric as colouring agents is clearly permitted by the FDA. For the reasons set out in paragraphs 31-33, I am satisfied that the unidentified colouring agents were carmine and turmeric and that all the colouring agents used were permitted by the FDA. All that was required for a re-labelling exercise was the production to the FDA of appropriate tests establishing the identity of the colouring agents used, together with a new label complying with the requirements of the FDA. That label would of course not include, as Candy Novelty had included, colouring agents that had not been used.

52. Mr Cardile's evidence, which was not challenged in this respect, and which I accept, was that it would be an inexpensive exercise to apply a new label to the toys by using a "stick on" label to cover the old label. I am satisfied that, having regard to the total value of the goods rejected, some US$123,000, that the cost of re-labelling was neither prohibitive nor unreasonable.

53. I accordingly conclude that re-labelling was a realistic and practical option for Park Avenue to mitigate its losses.

Release with comment:

54. One of the options open to the FDA when there has been a breach of FDA legislation is, after considering any explanation of the circumstances, including demonstration that the goods in fact comply with FDA requirements, is to allow the admission of the goods subject however to comment by the FDA, which comment constitutes a public message concerning the goods. Such a procedure is known as "Release with Comment". It was argued for Candy Novelty that in the circumstances of this case, where the colouring agents used were permitted natural colours, a prompt presentation of a chemical analysis of the candies to the FDA demonstrating that fact, would have resulted in a Release with Comment.

55. I do not accept that argument. The reason why I am satisfied that the FDA would not have been prepared to Release with Comment is that the label would still have been deficient, in that it described colouring agents in candies as being present when they were in fact not present. I am satisfied that an approach to the FDA with a request for Release with Comment was not a practical option for Park Avenue to mitigate its losses.

56. Whether Park Avenue have acted reasonably in not undertaking a re-labelling exercise must be determined in the light of the factual circumstances they were in, and applying the principles identified in paragraphs 44-45 above. In my view the following facts are relevant to this determination.

57. On the one hand, Park Avenue were, as I have held, frustrated in their efforts to determine why the candies in the toys contained unidentified, non-permitted colour additives and a false and misleading label, by the deliberate refusal of Candy Novelty to disclose the true ingredients until after the goods had been rejected by the FDA. As Mr Ang said, the parties were flummoxed in their efforts to determine the true nature of the colouring agents used.

58. On the other hand however, the evidence was that a relatively straightforward series of chemical tests for the limited number of colouring agents that were likely to be used would, in all probability, have disclosed the true colours actually used in the candies. The evidence was that such a series of tests would not cost more than about US$1000. It was suggested for Park Avenue that testing would be prohibitively expensive in the absence of any knowledge as to what may have been used in the candies. I am satisfied however, that as relatively few colouring agents are used in candies, the scope of testing could have been contained, and was relatively narrow, thereby greatly reducing the time and cost involved in the testing.

59. When Mr Fung received the Notice of Detention and Hearing in January 1997, he did not send it to Candy Novelty, but instead simply spoke with Ms Chau by telephone, and informed her as to what had happened. He requested, as I have described, information about colours. It would have been better for him to have sent the notice by fax to Candy Novelty, but I am satisfied that he had adequately informed Candy Novelty as to what had happened. But all he did was to communicate with Candy Novelty on several occasion seeking advice as to the colours. He reported his lack of progress to Mr. Ang, of Hope, but nothing more was done. In the absence of information from Candy Novelty as to the ingredients, it was open to Park Avenue to take their own steps to determine the ingredients.

60. It is right that Park Avenue were not informed as to what ingredients had actually been used in candies, but the receipt of the notification from the FDA must have alerted them to the possibility that there were ingredients contained in the candies other than those described on the label and which may not be permitted. I have accepted the evidence that a relatively straightforward testing procedure, confined to the colouring agents used normally for colouring candies would in all probability have revealed the true colours that had been used, and that all of the colours used were in fact colours permitted by the FDA. That would have revealed the essence of the problem to be a labelling issue.

61. On the evidence, Park Avenue did nothing other than make a series of telephone calls to Candy Novelty in an effort to learn what colouring agents had been used. There were other reasonable steps open to them. They could have commissioned their own testing. They could have sought legal or technical assistance in New York from experts such as Mr. Morey or Mr Cardile. They could have requested Hope to liase with Kay-Bee's Customs Broker in an effort to ascertain what steps needed to be taken to remedy the situation. They could themselves have suggested a re-labelling exercise and an investigation to ascertain what should be on the new label. I am of the view that all of these steps would have been both reasonable and steps that someone in the position of Park Avenue would expect to take in the ordinary course of business, this situation having arisen. Park Avenue took none of these steps.

The delays in taking action:

62. The question of delay is relevant. I fully appreciate, as I have recorded, that Park Avenue were operating at third hand, and they cannot be blamed, or held responsible for, or have to account for the delays prior to December 1996, when they received the Notice of Detention and Hearing. The evidence established first that between the entry of the goods on 24 July 1996 and 22 August 1996 when the Notice of Detention and Hearing was issued no steps whatsoever were taken by at Kay Bee or their Customs Broker to ascertain why release of the goods was delayed. Next, there is no evidence at all to explain the delay between 22 August 1996 and 6 January 1997 when Hope received the copy of the Notice of Detention and Hearing from Kay Bee. However, as park Avenue did not learn of the problem until 6 January 1997, those delays do not count against Park Avenue in the assessment of its conduct.

63. Mr Fung received the Notice of Hearing and Detention on approximately 6 January 1997. That document invited the recipient to contact the compliance officer. There is no evidence that any contact was made with the compliance officer. Both Mr Morey and Mr Cardile were of the view that a reasonable importer would have contacted her within 10 days of the receipt of the notice. There is no evidence that Park Avenue took any steps at all to contact her or to have someone contact her on their behalf. I accept that the FDA will only deal with the Importer of Record or its Customs Broker, but that would have not, in the circumstances, prevented Park Avenue from making enquiry, either directly to Kay-Bee or through Hope to either of those entities. The failure, or delay in taking steps between 6 January 1997 and18 march 1997, when the final Notice of Refusal of Admission was issued by the FDA must count against Park Avenue.

Conclusion:

64. Having regard to all of these matters, I conclude that Candy Novelty has discharged the onus of proof on it in establishing that Park Avenue has failed to mitigate its loss. It is established that not only have Park Avenue unreasonably delayed in their response to the Notice of Detention and Hearing, but also that, having regard to the whole of the circumstances, the failure of Park Avenue to promptly arrange for appropriate chemical testing of the candies, and to engage in re-labelling exercise, was in the circumstances unreasonable. For these reasons I regret that I am obliged to hold that Park Avenue has failed to mitigate its loss. I say regret, for it is plain that Candy Novelty were in breach of the contract, and did nothing at all to ease the situation when the problem arose.

Damages:

65. Having so determined it is not necessary for me to consider in detail the submission made by Mr Sakhrani in support of his contention that the evidence as to the damages was deficient. It is sufficient if I say that, had Park Avenue taken proper steps in mitigation, I would have found the evidence sufficient to establish the losses claimed.

66. It is right that its the Statement of Defence, Candy Novelty "put Park Avenue to strict proof" as to the damages. But that pleading, so often made, does not alter in any way the standard of proof to be applied in a civil claim. On the balance of probabilities I am satisfied that the damages were sufficiently proved.

Costs:

67. I have recorded that the situation that Park Avenue found itself in was brought about not only by a clear breach of contract by Candy Novelty, in both failing to use the agreed ingredients, but also in endorsing on the labels ingredients which were not in fact used. That breach of contract was compounded by the deliberate failure of Candy Novelty to promptly disclose the true situation to Park Avenue. The usual rule is that when a defendant succeeds in resisting a plaintiff's claim he is entitled to his costs. Costs are however in the discretion of the court.

68. Mr Sakhrani put the matter on the basis that Mr Fung did not ask the right questions. That is correct. The right questions were not asked, but they were not asked because Mr Fung did not appreciate that the statement from the FDA contained in the Notice of Detention and Hearing that includes contained an "unidentified non-permitted colour", meant that the colour was not permitted simply because it had not been identified. Had he been told immediately by Candy Novelty that they had used carmine and turmeric Mr Fung, he would have appreciated the true nature of the problem, and would then have been able to ask the right questions.

69. Having regard to the conduct of Candy Novelty, both in using colouring agents in breach of contract, in mislabelling the goods, and in its response Mr Fung's inquiries, this latter conduct being conduct which did nothing at all to assist Park Avenue in resolving the matter, I am satisfied that it would be quite unjust to penalise Park Avenue by an order for costs. Each party will accordingly bear its own costs.