PARK AVENUE TOYS LTD v. CANDY NOVELTY WORKS LTD

HCA11135/1997

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 11135 OF 1997

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D E C I S I O N

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Introduction

1. Following cross-appeals by the Plaintiff and the Defendant from the judgment of Deputy High Court Judge Saunders, as he then was, the Court of Appeal on 21 February 2006 entered judgment for the Plaintiff for the assessment of damages to be remitted to a Master.  Shortly before the return of the assessment, by consent summons dated and filed on 11 June 2007, the parties agreed to settle on the following terms:

(1)   The Plaintiff shall accept the sum of US$100,000 paid into Court by the Defendant on 29 May 2007 in full and final satisfaction of all causes of action, inclusive of interest, in respect of which the Plaintiff claims in this action;

(2)   The Defendant shall pay the Plaintiff’s costs of this action including the costs of the trial, up to the date hereof, such costs to be taxed if not agreed;

(3)   The said sum of US$100,000 paid into Court by the Defendant be paid out to the Plaintiff’s solicitors forthwith;

(4)   The sum of HK$600,000 paid into Court by the Plaintiff on 16 November 2005 as security for costs be paid out to the Plaintiff’s solicitors forthwith; and

(5)    The hearing of the assessment of damages fixed for 25 June 2007 (three days) be vacated.

Dated the 11th day of June 2007.

2. Requisitions were raised as to the scale of costs applicable as is the practice.  As the parties were of differing views, the matter was listed for argument before me on the first day of what was to have been the commencement of the assessment hearing fixed for three days.

A synopsis of the litigation

3. The Plaintiff, a manufacturer and toy trader, brought suit for breach of contract for the supply of novelty sweets to be made by the Defendant.  The goods to be supplied by the Defendant, the subject of two contracts, were of two varieties: a candy yo-yo and a candy laughing stick.  These were to be sold to Hope Industries Inc (“Hope”) for whom the Plaintiff was the buying and shipping agent.  Hope, in turn, was selling them to Kay-Bee Toy Stores Inc, (“Kay-Bee”) which had ordered the goods for summer distribution and sale through its many outlets in the United States.  Both Hope and Kay-Bee are American corporations.

4. Pursuant to the contracts, the Plaintiff supplied some candies to the Defendant for inclusion in a small portion of each order.  However, the greater portion of the toys were to contain candies to be furnished by the Defendant.  It was a term of the contracts that the ingredients of the candies to be supplied by Defendant were to be exactly the same as the content of the sweets that the Plaintiff had handed over.  For this purpose, the Plaintiff had supplied details of the candies’ ingredients to the Defendant so that those would be used and the correct information printed on the packaging of the toys.

5. The Defendant well knew that to meet the requirement of the Food and Drug Administration, (“the FDA”) the ingredients of the candies would have to be printed on the packaging of the toys containing those candies.  The Defendant was also fully aware that the FDA was liable to test the candies and that the ingredients had to match the description. 

6. As happened, the FDA did take samples and tested them in the summer of 1996 and found them wanting.  In December 1996, the FDA issued a “Notice of Detention and Hearing” to the Customs broker,       Kay-Bee Toy and Hobby Shops as the importer and Hope as the manufacturer or shipper in these terms.

“violative within the meaning of 801(A)(3) in that it appears to contain an unidentified non-permitted yellow colour, a colour additive which is unsafe within the meaning of section 721, and 801(A)(1) 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.”

7. What next transpired was concisely summarised in the judgment of the Hon. Rogers VP (with whom Le Pichon JA and Suffiad J were in full agreement) in CACV 89 of 2005 and 158/2005.

“6    The notice indicated that there was a 10-day period following the date of detention, which was given as 20 December 1996, for an opportunity to appear at the district of the FDA, at the address in Brooklyn from which the notice had been issued, so that evidence could be given as to the admissibility of the goods in question.  In paragraph 18 of the judgment, the judge accepted that Hope had not become aware of this notice until 6 January 1997 when a copy of the notice was faxed to them.  It appears that Hope then sent on a copy of the notice by fax to the plaintiff although the date on which that happened is uncertain.

7    On receipt of the fax, Mr Fung, of the plaintiff telephoned Ms Chu of the defendant and asked what the colouring ingredients were in the candies and whether they were approved by the FDA.  The judge found that Ms Chu was evasive and forgetful in giving evidence.  There was another director of the defendant, a Mr Chan, of whose evidence the judge formed a similar view.  It appears, however, that the majority, if not all the dealings between Mr Fung and the defendant were with Ms Chu.  The judge found that it was ‘abundantly plain’ to both Ms Chu and Mr Chan that the inquiries being made were not routine inquiries because Mr Fung had told Ms Chu that the goods had been detained by the FDA.  The judge further found that Ms Chu had access to all necessary information to answer Mr Fung’s questions and that although between January 1997 and April 1997 Mr Fung spoke with Ms Chu on a number of occasions each time asking for the same information because he sought to ascertain what were the unknown substances in the candies, Ms Chu did not inform Mr Fung that artificial colours Yellow 5, Red 40 and Blue 2 had not been used and that carmine and turmeric, which were classified as natural colouring agents, had been used.  Ms Chu had simply said that the ingredients were all approved by the FDA.  The judge found that, instead of being straightforward, honest and helpful, Ms Chu suggested that Mr Fung make inquiries with the defendant’s supplier of colour additives namely Warner Jenkinson.  However, that company refused  to reveal any information because the plaintiff was not a client and it would be revealing information relating to its dealing with its clients.

8    In paragraph 27, the judge found that had Ms Chu informed Mr Fung of the correct ingredients and also informed him that the three artificial colours named on the label had not been used the whole matter could have been resolved immediately.  The judge held that it would then have been a straightforward matter for the Importer of Record, namely Kay-Bee, to provide an appropriate laboratory analysis to identifying the colours used and seek approval for relabelling.  The judge summarised his finding by saying that the situation which arose was a direct result of what he found to be the deliberate failure on the part of Ms Chu and Mr Chan to inform the plaintiff promptly of the true ingredients of the candies immediately upon their first inquiry.

9    On 21 February 1997, the FDA sent a notice to the Customs Broker and Kay-Bee extending the time to respond to the Notice of Detention and Hearing to 3 March 1997.  Apparently nothing transpired and a notice was issued, dated 14 March 1997, indicating that the goods would not be admitted into the United States and that they had to be exported or destroyed under Customs supervision within 90 days.  The goods were apparently recalled, repackaged and returned to Hong Kong.”

8. After the goods were returned following Kay-Bee’s rejection of them they were warehoused and charges were incurred by the Plaintiff. 

9. The Plaintiff attempted to mitigate its loss by having the goods sold to a Singaporean buyer.  As the deal was about to close, the potential purchaser raised the label issue, requesting the international code for the artificial colours used in the sweets that were originally labelled using American codes.  The Plaintiff was unable to comply and the sale was aborted.

The claim

10. At the commencement of the trial before the Deputy Judge, the Statement of Claim was amended so that the amount of damages sought was reduced from about US$184,000 to US$161,130.30 plus interest from the date of the writ.  On the amended pleadings, the Plaintiff’s claim remains squarely within the High Court’s purview.  The claim had a number of components.  The Plaintiff sought damages in respect of its loss of profit and warehouse charges and further specified sums in relation to the claims brought by Hope and Kay-Bee against it.

11. At First Instance, the Deputy Judge, with some reluctance, dismissed the Plaintiff’s claims solely on the basis of the Plaintiff’s failure to mitigate its loss and damage and ordered each party to bear its own costs.  He took a dim view, a view apparently shared by the Court of Appeal, of the Defendant’s conduct in using colouring agents in breach of contract, in mislabelling the goods and in offering no assistance whatsoever to the Plaintiff’s attempt to rectify the problem and latterly to sell off the goods in mitigation.  The Court of Appeal in allowing the Plaintiff’s appeal and dismissing the Defendant’s cross-appeal on costs, entered judgment for the Plaintiff with damages to be assessed as earlier noted.

The scale of costs

12. Mr Wong for the Plaintiff urged the court to apply the High Court scale of costs.  He submitted that the effect of the Court of Appeal’s ruling was to order a “de novo” hearing on assessment, which not having commenced as none was required following compromise, brought into operation Order 22 r 3(1).  The Plaintiff was entitled to accept the money paid into court within 14 days after the notice of payment.  As the Plaintiff did accept the payment within the stipulated period, it was automatically entitled to the High Court scale of costs following the decision of Wellegant Development Ltd v Fine Telecom Ltd & others [2007] 2 HKC 427.  Alternatively, applying Lai Ki v B + B Construction Co Ltd & others [2003] 3 HKLRD 192, there being a reasonable prospect of achieving an award in excess of the District Court jurisdiction on full liability, it was contended that the High Court scale was equally applicable.

13. On behalf of the Defendant, Mr Sakhrani submitted that the acceptance of the sum of US$100,000 (expressed to be inclusive of interest) in the circumstances of the case was an acceptance after or during the trial of an action, the assessment proceedings being but a continuation of the trial that had begun.  By dent of Order 22 r 4(3) and Order 62            r 10(4), the Plaintiff did not have an automatic entitlement to costs, costs being entirely within the court’s discretion.

14. Order 22 r 4(3) states:

“(3)     Where after the trial or hearing of an action has begun a plaintiff accepts any money paid into court and all further proceedings in the action or in respect of the specified cause or causes of action, as the case may be, to which the acceptance relates are stayed by virtue of rule 3(4), then, notwithstanding anything in paragraph (2), the money shall not be paid out except in pursuance of an order of the Court, and the order shall deal with the whole costs of the action.”

Order 62 r 10 insofar as it is relevant reads:

“10	(1)	Where a plaintiff by notice in writing and without leave either wholly discontinues his action against any defendant or withdraws any particular claim made or question raised by him therein as against any defendant, the defendant may tax his costs of the action or his costs occasioned by the matter withdrawn, as the case may be, and, if the taxed costs are not paid within four days after taxation, may sign judgment for them;
	(2)	Where a plaintiff by notice in writing in accordance with Order 22, Rule 3(1), accepts money paid into court in satisfaction of the cause of action or of all the causes of action in respect of which he claims, or accepts money paid in satisfaction of one or more specified causes of action and gives notice that he abandons the others, he shall be entitled to his costs of the action incurred up to the time of giving notice of acceptance.
	(4)	Where money paid into court in an action is accepted by the plaintiff after the trial or hearing has begun, the plaintiff shall not be entitled to tax his costs under paragraph (2) or (3).”

15. Mr Sakhrani further contended that the decision of Fung J in Wong Lan v Hong Chang Construction Transportation Engineering Company Ltd [2007] HKCU 971 (unreported) and Lai Ki v B + B should be followed to determine whether the Plaintiff had a reasonable prospect of success in obtaining judgment in excess of the District Court jurisdiction.  He said the Plaintiff has failed to meet this hurdle, there being glaring deficiencies in its evidence.

16. I have no difficulty in concluding that the assessment proceedings cannot be viewed as a de novo hearing as Mr Wong would have the court accept.  The three-day fixture before me was no different from any assessment ordered following the entry of interlocutory judgment with damages deferred for later ventilation.  The fact that the order emanated from the Court of Appeal in this case does not change the situation in any way.  The trial on liability and quantum began and concluded with the judgment subjected to appellate scrutiny, resulting in an order for assessment.  The proceedings are clearly a continuation of the suit and no further comment is called for.

17. I also hold on a plain reading of Order 22, Rule 4(3) and Order 62, Rule 10(4), that the Plaintiff did not have an automatic right to costs.  However, as Mr Sakhrani quite pertinently observed, this is moot as the consent summons has given the plaintiff the costs of the action.  What remained in contention was the scale of costs.  In this connection, I refer once more to Wong Lan v Hong Chang Construction Transportation Engineering Co Ltd, supra.  Fung J had this to say:

“41      DHCJ L Chan has rendered a carefully considered judgment in Wellegant Development and I am fully aware that I should not likely depart from a decision of co-ordinate jurisdiction in the interest of consistency especially in a matter of practical and procedural ramification unless there are strong reasons to the contrary.  However, Lui Po Keung was not referred to before DHCJ Chan.  With the utmost respect to DHCJ Chan, I cannot agree that an automatic order for tax costs under O. 62, RHC means taxation under the High Court scale.

42       I agree with Mr Sakhrani that a party accepting payment in is automatically entitled to his/her costs, which means taxed costs unless there is anything in O. 62 which provides otherwise.  In the context of acceptance of payment in, there is no alternative to taxed costs.  Taxed costs means costs taxed in accordance with   O. 62, RHC, and also upon the ordinary principles of taxation as held in Lui Po Keung.  Taxation under O. 62, RHC has always been subject to the relevant common law principles, such as the indemnity principle of taxation.  The common law encompasses that costs in the High Court may be taxed either on the High Court scale or the District Court scale.  The repeal of section 43(2) of the District Court Ordinance has not affected the High Court’s jurisdiction to tax costs on the District Court scale, and such a course is not contrary to any provision in O. 62, RHC.

43      I note that the approach in Wellegant Development may produce a certain result, yet an unfair one as lamented by DHCJ L Chan.  On the other hand, the approach in para. 22(1) of Lai Ki v B + B is workable and has so worked for cases adjudicated or settled (whether upon acceptance of payment in) for sums within the jurisdiction of the District Court.  The amount accepted will prima facie indicate the relevant scale of costs and there is no such uncertainty as amounting to unfairness.

44     In the premises, I hold that the party accepting payment in under O. 22, r 3(1), RHC is automatically entitled to taxed costs under Order 62, r 10(2), RHC but not necessarily on the High Court scale, and the direction in para. 22(1) of Lai Ki v B + B as understood in para. 11 of OWT Asia shall be applicable in a situation where the payment accepted is within the jurisdiction of the District Court.”

18. The decision of Fung J is to be preferred to Wellegant Development as it represents more compelling and fairer jurisprudence, in my view.  The test I shall apply is therefore that advocated by Seagroatt J in Lai Ki v B + B.

Reasonable prospect of obtaining an award in excess of the District Court jurisdiction

19. Much was made of the fact that the Plaintiff had settled for just US$100,000 inclusive of interest, an award the District Court could readily have made.  Litigants compromise suits for a whole range of reasons and acceptance of a reduced amount of damages is not necessarily synonymous with a weak or insupportable claim.  I do not wish to speculate on why the Plaintiff accepted the much reduced amount of damages and interest.  One needs to look at the evidence on quantum and come to some view of what the Plaintiff is likely to achieve if the assessment proceeded.

20. I have considered the evidence in the assessment bundles.  I have also taken on board Mr Sakhrani’s submissions on the alleged deficiency in the Plaintiff’s evidence.  Whilst he is able to assert that the Plaintiff cannot hope to achieve an award that would attract the High Court scale of costs, I am not persuaded that this is necessarily so.  The burden is plainly upon the Plaintiff in this regard.  It is not a particularly high hurdle to clear. 

21. The Plaintiff has supplied witness statements and documentary support of its own claim as well as the claims brought by Hope and Kay-Bee.  Some of these documents counsel have taken me to in bundle 1, part 1.  None of the witnesses has been cross-examined and none of the documents has been subjected to searching scrutiny.

22. On the evidence as I read it, I am far from persuaded that the Plaintiff could not possibly have achieved an award falling within the High Court jurisdiction.  I accordingly hold that the Plaintiff has discharged the requisite burden.

23. I note in passing that I am not alone in coming to this conclusion.  the Deputy Trial Judge, in paragraph 65 of his ruling, observed:

“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.”

24. In the Court of Appeal judgment, at paragraph 20, the learned Vice President had this to say:

“In my view, the appeal should be allowed.  Judgment should be entered for the Plaintiff and the matter remitted to the Master for assessment of damages.  Since those damages will inevitably come to more than US$100,000, it is not appropriate for this court to consider whether the judge exercised his discretion as to costs correctly in view of the Calderbank letter, since the amount of the offer in that letter was US$30,000.”

25. The Plaintiff was perfectly entitled to have commenced and to have kept the litigation in the High Court even after the District Court jurisdiction was increased in December 2003.

26. In summary, on the issue as to the scale of costs that is applicable to the costs order, which the parties have agreed that the Plaintiff is entitled to, I order that the costs should be taxed on the High Court scale.

(Submission re costs)

27. There shall be no order for costs on the scale of costs argument, in other words, the application before me.  That would be a fair order, in my view.