HIN SANG HONG CO LTD v. KINGDOM OVERSEAS LTD

HCA 525/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 525 OF 2012

____________

____________

_______________

J U D G M E N T
_______________

Status of the defendant

1.  This is the trial of an action for damages for breach of a distribution agreement for infant formula products.  The defendant which is a company incorporated in the British Virgin Islands (“BVI”) has filed a defence but has since December 2014 not responded to these proceedings.  Its solicitors ceased to act on 22 December 2014.  It has also failed to appear at the trial, despite all documents had been served on its last known address. Enquiries made by the plaintiff subsequent to the trial have shown that the defendant had in fact been struck off the BVI register of companies on 1 November 2014 for non-payment of annual fees.  It appears that those behind the defendant have simply abandoned it as well as any defence of this action.

2.  Where the name of a Hong Kong company is struck off the register, the company is dissolved not immediately but upon the publication of a notice in the gazette: s 746(3) of the Companies Ordinance (Cap 622).  It appears that the position under BVI law is similar in that a company whose name has been struck off is not dissolved immediately, but continues to exist for another 7 years before it is dissolved automatically.  In particular, s 215(3)(b) of the BVI Business Companies Act 2004 provides that the fact that a company is struck off the Register does not prevent any creditor from making a claim against the company and pursuing the claim through to judgment or execution.  See also Maritime Investment Holdings Inc v Underwriting Members of Syndicate 1183 at Lloyd’s [2015] EWHC 2190 (Comm).

3.  On this basis I am satisfied that the proceedings herein including the trial conducted after the defendant was struck off are not a nullity, and that I should proceed to determine the case, though Mr Sae‑Pang who appeared for the plaintiff has accepted that execution of any judgment against the defendant should be stayed pending restoration of the defendant’s name to the register.

Background

4.  The plaintiff is a company established in Hong Kong in 1996.  It carries on the business of brand management, which includes the marketing, promotion and distribution of a range of branded products from skincare and cosmetics to personal care and family hygiene. 

5.  The defendant is a BVI company that carried on business as the importer or distributor of an infant formula produced in New Zealand of the “Golden Fern” brand.

6.  On 18 May 2011 the plaintiff and the defendant entered into a written distribution agreement (“Agreement”) in relation to three types of infant formula of the “Golden Fern” brand (referred to as “Formula 1”, “Formula 2” and “Formula 3” respectively).  By the Agreement the defendant appointed the plaintiff as the exclusive distributor for Hong Kong and Macau for 5 years from 7 July 2011.  The plaintiff was to order and purchase the products from the defendant and on-sell them to retailers.  The plaintiff promised it would order at least 12 containers of products in the first year and 24 containers in the second year (each container holding 9,000 tins of infant formula).

7.  It is not dispute that:

(1) pursuant to the Agreement, the plaintiff had on 29 August 2011 placed orders with the defendant for 10,000 tins of Formula 1, 7,000 tins of Formula 2 and 10,000 tins of Formula 3;

(2) the defendant should deliver the following products to the plaintiff pursuant to these orders: (a) by 8 February 2012, 3,000 tins each of Formulae 1, 2, and 3; (b) by 8 March 2012, 4,000 tins of Formula 1, 1,000 tins of Formula 2, and 4,000 tins of Formula 3; and (c) by 8 April 2012, another 3,000 tins each of Formulae 1, 2, and 3;

(3) by 31 January 2012, the defendant had only delivered to the plaintiff 2,960 tins of Formula 1, 3,300 tins of Formula 2, and 2,724 tins of Formula 3;

(4) the remainder of the plaintiff’s orders was not delivered to the plaintiff;

(5) on 13 February 2012, the defendant issued a notice to the plaintiff, seeking to terminate the Agreement with immediate effect;

(6) on 6 March 2012, the plaintiff wrote to the defendant stating that the Agreement had been terminated.

8.  By the Writ in this action, issued on 29 March 2012, the plaintiff claims against the defendant damages for breach of contract.

9.  The issues that arise are (i) whether by purporting to terminate the Agreement on 13 February 2012, the defendant wrongfully repudiated it; and (ii) the quantum of damages payable to the plaintiff.

Whether defendant wrongfully repudiated the Agreement

10.  The contemplated price structure along the supply chain was as follows. The Agreement provided that the defendant would supply the plaintiff with the products at the supplier’s price (called “供貨價” or “supply price” in the Agreement), which could be unilaterally adjusted by the defendant with 45 days’ written notice to the plaintiff.  The supplier’s price set out in the Agreement was HK$150, HK$145 and HK$140 for Formulae 1, 2 and 3 respectively.

11.  The plaintiff would be at liberty to sell the products to retailers at a wholesale price determined by the plaintiff.  There is no provision in the Agreement as to what the wholesale price should be.

12.  The retailers would then sell the products to consumers.  The retail price is an incidence of the contract of sale between the retailer and the consumer, normally to be determined by the parties to that contract based on market and commercial conditions.  However, the Agreement referred to a “recommended uniform retail price” (建議統一零售價) (“RURP”), and contained the following provisions:

Clause 2

“甲乙雙方均保留規定零售價格變動權利，但變動一方在變動產品規定價格時須提前30天以書面通知另一方并協商一致後，方可變動產品之建議統一零售價格。”

(In English translation)

“Both Party A and Party B reserve the right to change the stipulated retail price, however, unless the party making the change informs the other party in writing 30 days prior to the change of the product stipulated price and consensus is reached upon negotiation, the proposed unified product retail price shall not be changed.”

Clause 9

“2. 乙方有責任規範和管理好經銷區域下級客戶的價格體系，一旦造成竄貨行為或者不良的低價影響或者遭到其他地區客戶的投訴，乙方應承擔完全責任。

3. 乙方因低價供貨造成下屬終端客戶的零售價低於市場正常零售價格，而遭到終端客戶投訴或者索賠的，乙方應承擔完全責任和損失索賠。如給甲方造成損害，乙方應當負責全額賠償，甲方有權終止本合同並有權委任其他經銷商在經銷區域經銷產品。”

(In English translation)

“2. Party B is obliged to standardize and properly manage the price system of customers of levels below in the sales region. Once cross-region sale, or adverse influence due to low price, or complaint from any customer of another region has resulted, Party B shall bear full responsibility.

3. If Party B has supplied goods at low prices, thereby leading to the retail price of its customer being lower than the normal retail price in the market, and as a result the end customers complain or claim for compensation, Party B shall be wholly liable and liable for compensation claimed for the loss.   If damage is caused to Party A, Party B shall be liable for compensation in full, and Party A shall be entitled to terminate this contract and be entitled to appoint another agent/other agents to sell the product in the sales region.”

13.  On about 20 July 2011, about two months after the Agreement was signed and before the products were launched on the Hong Kong market, the defendant requested to increase the RURP to HK$248, HK$238 and HK$228 for Formulae 1, 2 and 3 respectively, with effect from 1 September 2011.  The plaintiff disagreed with the increase, taking the view that an increase in the RURP before the products were launched would adversely affect sales.

14.  On about 16 January 2012, the defendant requested another increase of the RURP (to HK$278, HK$268 and HK$258 respectively for Formulae 1, 2 and 3). 

15.  Shortly after that request, on 6 February 2012, the defendant made another request to raise the RURP to HK$328, HK$318 and HK$308 respectively.  The plaintiff, with some reluctance, agreed to the increase.  In the same notice for that increase, the defendant also complained to the plaintiff that certain drug stores at Sha Tau Kok had not followed the RURP and had instead been selling the products at HK$253, HK$233 and HK$213 respectively, and requested the plaintiff to take action. 

16.  Mr Pang, a director of the plaintiff, then talked to Mr Cheong, a director of the defendant, about the pricing problem encountered at Sha Tau Kok.  In order to solve the problem, the plaintiff suggested installing a “price tag” at each retail shop indicating both the new RURP and the actual price at which the products were being offered at the shop.

17.  The parties were subsequently engaged in the discussion regarding the design and the implementation of the “price tag”.  On 7 February 2012, the defendant issued a warning letter, complaining that certain retailers at Sha Tau Kok were selling the products at a price lower than the RURP and demanding that the plaintiff take effective action to put an end to such conduct within a week.  While the plaintiff was still trying to tackle the problem, the defendant issued the letter on 13 February 2012 terminating the Agreement. 

18.  The defendant’s pleaded case is that it was justified to terminate the Agreement on 13 February 2012 because the plaintiff had itself been guilty of breaches of the Agreement.  It is alleged that (i) the RURP was mandatory and the plaintiff was bound under clause 9.2 of the Agreement to regulate and manage the pricing of the retailers to ensure that they complied with the RURP as adjusted from time to time; (ii) the RURP had been increased 3 times between 21 July 2011 and 8 February 2012; and (iii) the plaintiff had breached clause 9.2 of the Agreement.

19.  A question of construction arises in respect of clause 9.  Did the plaintiff “guarantee” the retailers would adhere to the RURP and would an instance of selling below the RURP automatically entitle the defendant to terminate the Agreement?  In my view, the plaintiff did not agree to a condition that the retail price in all future retail transactions would be the RURP, so that any occurrence of a retail transaction at a price below the RURP would entail a breach of condition by the plaintiff entitling the defendant to terminate the Agreement. 

20.  By clause 9.2 the plaintiff undertook the responsibility to standardise and manage the pricing system.  That it must make its best endeavours and take all reasonably necessary steps to achieve.  And if a retailer who has obtained its supplies from the plaintiff did not toe the line, the plaintiff must take action to stamp the non-conforming practice.  But this did not, in my view, make the plaintiff liable to be dismissed as the exclusive distributor once an instance of non-conforming retail price was discovered.  Even if the plaintiff took immediate step such as to cease its supplies to the retailer in question, this could not prevent that retailer from selling its remaining stock at below the RURP.  Clause 9.3 empowered the defendant to terminate the Agreement only where the plaintiff had supplied the products at too low a price and where damage had been caused to the defendant by low retail prices which had in turn been enabled by low wholesale prices. There is no plea or proof of such damage to the defendant.

21.  In fact, as Mr Pang of the plaintiff said, the defendant had complained before in September 2011 about the retail price of certain shops.  The plaintiff, after ascertaining the facts, stopped supplying those retailers.  The defendant did not raise further complaint until February 2012.

22.  I accept Mr Pang’s evidence that the plaintiff also responded immediately to the defendant’s complaint on 6 and 7 February 2012. The plaintiff designed a special price tag that indicated two prices, namely the original price or the “white-tag price”, which was in fact the RURP, and the sale price or the “yellow-tag price”, which was left in blank for the retailers to fill in.  Mr Cheong of the defendant considered these tags a “good idea”.  Mr Pang said the plaintiff also sent its employees to Sha Tau Kok to warn “disobedient” retailers who had marked a sale price significantly lower than the RURP.  The plaintiff notified the defendant of the arrangements and the defendant replied on 9 February 2012 thanking the plaintiff for its attention and response.

23.  In these circumstances I find on the evidence that there had not been any breach by the plaintiff justifying the defendant to terminate the Agreement whether pursuant to clause 9.3 or otherwise.  The defendant had therefore itself acted in breach by purporting to terminate the Agreement on 13 February 2012. The plaintiff was entitled to accept the repudiation which it did by letter on 6 March 2012.

Quantum of damages

24.  The plaintiff claims damages for 4 heads of loss: loss of profit ($54,136,560), expenses of human resources ($170,132), exhibition expenses ($35,268), and warehouse storage fee ($3,272).

25.  Mr Yeung, an assistant accountant employed the plaintiff, explained that the amount claimed for loss of profit is calculated on the basis of the gross sales of the products (no fewer than 972,000 tins) over 5 years, less certain expenses (warehousing charges and staff salaries) attributable to such sales.  This calculation is in my view problematic not least because it fails to take into account the potential increase in the supplier’s price as well as other expenses.  I prefer the approach adumbrated in the evidence of Mr Pang, who said that the plaintiff would mark up the supplier’s price by 35% to 40% to arrive at the wholesale price.  From its income, various items of cost and expenditure including promotion expense, warehousing and transportation cost, salaries of sales and supporting staff, retailers’ default and write-off of defective products had to be deducted.  On this basis Mr Pang said the plaintiff would hope to achieve a net profit rate of 10% of the cost price.  Taking into account other overheads I would assess the plaintiff’s expected profit at approximately 9% of the supplier’s price, i.e. the cost price for the plaintiff.

26.  It will be recalled that under the Agreement, the supplier’s price could be adjusted by the defendant unilaterally.  It had occurred to me that the defendant, if present, might have argued that, in assessing damages, the court should assume the Agreement would be performed in a way least onerous to the defendant.  In other words, the argument is that the court should assume that the defendant would have increased the supplier’s price so much that the plaintiff could make no profit from the sales to retailers at its wholesale price, and that the plaintiff has therefore suffered no loss of profit.  In order to make sense of the Agreement, however, I do not think it right, in assessing damages, to assume that the defendant would have raised the supplier’s price to such a level as effectively to kill the market. In assessing what would have happened had the defendant not acted in breach, the defendant did not have an unfettered choice of the manner of performance of the contract however unreasonable: see Abrahams v Herbert Reiach Ltd [1922] 1 KB 477; Paula Lee Ltd v Zehil & Co Ltd  [1983] 2 All ER 390, 394; Durham Tees Valley Airport Limited v Bmibaby Limited [2010] EWCA Civ 485.

27.  Instead, I consider that I should proceed on the basis that the plaintiff would earn around 9% of the supplier’s price at the inception, i.e. about $13.05, as its net profit per tin on average. Accordingly I would assess the plaintiff’s loss of profit over 5 years approximately in the sum of $13.05 x 972,000, rounded down to $12.6 million. Interest is awarded on this sum at prime plus 1% per annum from 1 January 2014 (roughly the mid-point of the 5-year term of the Agreement) to the date of judgment.

28.  I allow the other 3 heads of damages claimed which seem to me to be supported by the evidence and total $208,672. Interest is awarded on this sum at the same rate from the date of writ to the date of judgment.

Disposition

29.  Judgment is therefore entered for the above sums in aggregate against the defendant.

30.  There will be a costs order nisi that the plaintiff is to have the costs of the action to be taxed on the usual party and party basis.