ATICO INTERNATIONAL (HK) LTD v. SPARKO (FAR EAST) LTD

HCA 428/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 428 OF 2004

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JUDGMENT

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1. This is an action for damages for breach of a contract for the sale of document laminators.

2. The plaintiff carries on the business of the import and export of goods.

3. Prior to mid May 2003 the plaintiff received an enquiry from Wm. Morrison Supermarkets Plc (“Morrison”) in the United Kingdom (“the UK”) for the purchase of document laminators.  The defendant was approached by the plaintiff to supply the same and a sample of a document laminator was obtained from them.  This was inspected by the plaintiff and was then sent to Morrison.  Pursuant thereto, the plaintiff received a purchase order dated 12 May 2003 from Morrison (“the purchase order”) whereby an order was placed for the purchase from the plaintiff of 3,468 pieces of document laminators on the terms and conditions set out in the purchase order.

4. By a purchase contract no. M03/15444 dated 30 May 2003 (“the contract”) made between the plaintiff as the buyer and the defendant as the seller, the defendant sold 3,468 pieces of document laminators as described in the contract(“the laminators”) and upon the terms and conditions set out  therein for the total price of USD 60,323.43 F.O.B. Hong Kong.

5. There is no dispute that the laminators were supplied by the defendant and shipped to Morrison in the UK.

6. In August 2003 the plaintiff learnt that Morrison’s customers were experiencing problems with the laminators sold.  As of 26 August 2003 Morrison had recalled 1,577 pieces of laminators from its customers.  Morrison claimed damages from the plaintiff.  Morrison claimed the total sum of GBP 92,564.08 from the plaintiff.  As a result of negotiations between the plaintiff and Morrison, the claim by Morrison was settled in the sum of GBP 80,000 in October 2003.  This was paid to Morrison by the plaintiff.  The plaintiff also incurred expenses in relation to the recalled laminators in the sum of GBP 653.57.  The plaintiff therefore claims the total sum of GBP 80,653.57 with interest and costs against the defendant.

The agreed issues

7. The agreed issues between the parties are:

(1) whether or not the defendant was in breach of contract in relation to the quality of the laminators supplied?

(2) whether or not the plaintiff has suffered loss and damage as a result of the defective laminators supplied by the defendant?  If so, how much?

(3) whether or not the plaintiff is entitled to recover such loss and   damage from the defendant?

The witnesses

8. I heard evidence from Lee Pak Nin (“Lee”) the merchandising manager of the plaintiff and from Raymond Tang (“Tang”) the financial controller of the plaintiff.  The defendant did not call any witnesses to give evidence.

9. I have no hesitation in accepting Lee and Tang as witnesses of truth. I found both of them to be honest and credible witnesses.  I believe them and I accept their evidence.

The purchase order

10. On the evidence I find that the purchase order was obtained from Morrison through the plaintiff’s UK branch office Atico International UK Ltd. (“Atico UK”).  This is not disputed.

11. It is obvious that by the time the purchase order was placed Morrison had already received the sample provided by the defendant and it can be inferred, and I so infer, that the sample was free from defects as otherwise Morrison would not have placed the purchase order with the plaintiff for the supply of the laminators.  Lee also said, and I accept, that he only sent the sample to Morrison once it was confirmed by the plaintiff that there was no problem with the sample provided by the defendant. 

12. The purchase order was subject to the terms and conditions therein set out.

13. By clause 3.3, it was provided that in the event of a decision being made to commence product withdrawal, the supplier was liable for “all costs involved including reasonable loss of profits on sales, administration charges, costs of withdrawal and disposal or return to the manufacturing unit and any other direct or indirect consequential costs which may be incurred”.

14. By clause 6.1.3 there was a warranty to comply in all respects with all relevant UK legislation including the Sale of Goods Act 1979.

15. By clause 6.2.2 it was provided that the supplier would fully indemnify Morrison against all loss, damages and costs arising in connection with any claim in, inter alia, contract for any damages, expense or costs (including any loss of profit or production or any other direct or indirect consequential losses) arising out of or occasioned by any defects in or failure of the goods or part thereof provided or occasioned by reason of any act or omission of the supplier or breach of the terms and conditions.

The contract

16. Lee gave evidence that when he asked the defendant for a sample of the laminators to send to Morrison he told the defendant that the goods were required for the English market.  Lee was not challenged on this in cross-examination.  I find that the defendant knew that the goods purchased by the plaintiff under the contract were to be sub-sold to purchasers in the UK.  The contract also states that “confirm having sold to (MOS/UK) through [Atico UK] subject to terms and conditions stated as below and on the back side thereof”. 

17. Thus it is clear that the defendant knew that the laminators sold to the plaintiff under the contract were for sub-sale in the UK.

18. Clause 1 of the contract provided that the merchandise must be identical to the keep sample.

19. Clause 2 provided that in the event of the merchandise not being identical to the keep sample the buyers and/or agent may, at their option either reject the goods and cancel the contract or may accept the goods and claims for damages against the seller.

20. Clause 3 provided that the buyers and/or agent has the right to examine all finished and packed merchandise at the factory.  It was also provided that the inspection of the merchandise shall not constitute a waiver of the seller’s responsibility which continues until the ultimate acceptance of the goods by the overseas consignees or their clients and that it was clearly understood and agreed that no time limit is set for the presentation of claims to the seller.

21. Clause 8 provided that in the event of claims the seller undertakes to reimburse the buyers and/or the agent for the full amount involved immediately upon receipt of such claim in writing.

22. Clause 11 provided that the seller agrees to indemnify, keep indemnified and hold harmless the buyer and/or the agent against all claims, liabilities, losses, damages, sums, costs and expenses, including legal costs and expenses, on a full indemnity basis, arising out of the breach or non-performance of any term, condition or warranty on the part of the seller including but not limited to the sale to ultimate consumers of the goods including, but not limited to, any claim based upon breach of implied warranty or other liability arising from any defect in the goods.

23. Clause 20 provided that it was clearly understood and agreed that all and every claim due to faulty merchandise will be paid immediately by the seller upon notice in writing by the plaintiff.

24. Pursuant to the contract the defendant manufactured the laminators.  Lee gave evidence that about 50 pieces were inspected by the staff of the plaintiff’s quality control team.  At that time about 2,000 pieces had been manufactured.  He was cross-examined about why each and every piece was not examined but in my view it was reasonable to only inspect a portion of the finished goods as Lee said, and I accept, that the quantity inspected was within the acceptable standard in the trade.  Lee visually inspected the shipment samples.  As no defects were detected, the goods were shipped to the UK.  However, clause 3 of the contract provided that the inspection did not waive the seller’s responsibility.

25. The total quantity of 3,468 pieces of the laminators were shipped to the UK and delivered to Morrison.

26. The evidence shows that customers of Morrison were experiencing problems with the laminators and that Morrison had received numerous complaints from its customers.  Morrison contacted Steve Rice, the managing director of Atico UK, about this and the plaintiff was informed of this in August 2003.  Tang gave evidence, which I accept, that he was informed of this by Steve Rice.  The complaints which Morrison’s customers had are set out in the supplier trend report which Morrison supplied to Steve Rice and which he passed onto Tang.  The complaints included the following:

(1) the laminator did not seal;

(2) the laminator had set on fire;

(3) smoke came out when the laminator was in use or switched on;

(4) the motor burned out;

(5) the red light of the laminator was not working;

(6) the laminator stopped working after a few minutes;

(7) the laminator did not fit paper through more than one quarter of a page; and

(8) the laminator had blown the fuses of a customer’s home.

27. As a result of the complaints, the plaintiff, through Steve Rice, instructed an independent laboratory in the UK, Intertek Research & Testing Centre (“Intertek”) to test the laminators.  In August 2003 Intertek tested two reportedly faulty samples and a new sample i.e. a laminator that had not been onsold to a consumer by Morrison.

28. According to Intertek’s report in respect of the two reportedly faulty samples, significant constructional issues as set out in the report were found.

29. In respect of the faulty samples, initial testing by Intertek showed a short circuit between live parts and earth.  Initial visual inspection also revealed deformation of the air outlet grille.  A functional check showed the laminator’s heater coming on immediately when connected to the mains power supply.

30. It was also found that the new sample did not satisfy standard insulation requirements.  Intertek was of the view that the laminator did not satisfy the safety objectives of the Electrical Equipment (Safety) Regulations 1994.

31. The conclusion in the report was:

“ The heat resistant wire of the heating element conductors is touching sharp edges of earthed metal that is constantly heating and cooling during normal operation.  The wires may be trapped and damaged during assembly resulting in the problems revealed by this examination.

Given the number of constructional issues identified and the fact that the new sample does not satisfy standard insulation requirements, [Intertek] believes that the laminator does not satisfy the safety objectives of the Electrical Equipment (Safety) Regulations 1994.”

32. Although the report did not deal with all of the complaints raised by the customers of Morrison, it is plain, and I so find, that the laminators tested by Intertek were defective as shown by the report.  And the new sample which was a laminator not yet sub-sold to a consumer was found to be unsafe.

33. The evidence shows, and I so find, that as at 26 August 2003 Morrison had recalled 1,577 pieces of laminators from the UK market.  Morrison through Steve Rice made a claim from the plaintiff for compensation in the sum of GBP 92,564.08.  The email from Morrison to Steve Rice sent on 22 September 2003 gives the breakdown of the claim as follows:

		GBP
(1) advertising charges in newspapers, poster News release preparation, and distribution		28,634.00
(2) stock cost, 3,468 pieces x GBP 12.22		42,378.96
(3) recall cost back to warehouse (40 p per unit)		1,387.20
(4) administrative and management time, damage to reputation etc.		6,500.00
(5) loss of profit		13,663.92
		---------------
Total (ex VAT)		92,564.08

34. After the claim was made by Morrison for payment of the said sum of GBP 92,564.08 there were negotiations between the plaintiff through Steve Rice and Morrison.  Eventually in October 2003 according to the evidence of Tang, which I accept, Steve Rice settled the claim on behalf of the plaintiff.  I find that it was agreed that the total sum of GBP 80,000 would be paid to Morrison.

Issue (1)

35. As to issue (1) I am satisfied that the defendant was in breach of contract in relation to the quality of the laminators supplied.

36. Pursuant to section 16(1) of the Sale of Goods Ordinance (Cap. 26) (“the Ordinance”)there was an implied condition in the contract that the laminators supplied would be of merchantable quality.  Pursuant to section 17(2) of the Ordinance there was an implied condition that the bulk of the goods supplied should correspond with the sample in quality and that the goods shall be free from any defect rendering them unmerchantable, which would not be apparent on reasonable examination of the sample.

37. Section 2(5) of the Ordinance provides that:

“Goods of any kind are of merchantable quality within the meaning of this Ordinance if they are—

(a) as fit for the purpose or purposes for which goods of that kind are commonly bought;

(b) ……………………………………..

(c) as free from defects (including minor defect);

(d) as safe; and

(e) as durable,

as it is reasonable to expect having regard to any description applied to them …………. and all the other relevant circumstances; and any reference in this Ordinance to unmerchantable goods shall be construed accordingly.”

38. I am satisfied that Morrison had to recall the laminators from its customers because of the complaints made by its customers.  The nature of the complaints made and the defects as found by Intertek clearly show that the laminators were unmerchantable.  As the samples tested by Intertek were not free from defects and were not safe, the laminators were unmerchantable within the meaning of the Ordinance.

39. Even though only three pieces (2 reportedly faulty samples and 1 new sample) were tested by Intertek as set out in the report, it can be inferred, and I so infer, that as the laminators originated from the same manufacturing source, the laminators would have the same construction defects.  Further, as the new sample failed to satisfy the standard insulation requirements rendering the same unsafe and therefore unmerchantable it can also be inferred, and I so infer, that the other laminators also failed to satisfy the standard insulation requirements rendering them unsafe and unmerchantable.

40. In my judgement, the defendant was therefore in breach of contract in relation to the quality of the laminators supplied.

Issue (2)

41. There is no doubt that the plaintiff has suffered loss and damage as a result of the defective laminators supplied by the defendant.

42. The evidence shows, and I find, that the plaintiff has paid the net sum of GBP 80,000 to Morrison being the settlement sum arrived at after negotiations with Morrison.  The plaintiff in fact sent a bank draft drawn on 12 December 2003 for the total sum of GBP 92,026.23 to Morrison as VAT had to be paid.  However, after VAT refunds were obtained by Morrison these were returned to the plaintiff and the plaintiff ended up paying a net sum of GBP 80,000 to Morrison.

43. On the evidence of Tang I also find that the plaintiff incurred expenses in the sum of GBP 653.57 for the transportation of recalled laminators to where they were destroyed.  This is the amount in the invoice from UPS SCS (UK) Ltd dated 1 December 2003.

44. I am satisfied that plaintiff has suffered loss and damage in the total sum of GBP 80,653.57 as a result of the defective laminators supplied by the defendant.

Issue(3)

45. I have found that the defendant knew at the time of the contract that the laminators were for sub-sale to the UK.  In my judgment it was within the reasonable contemplation of the parties at the time of the contract that the plaintiff would resell the goods to a sub-buyer in the UK, that the contract of sub-sale would or probably would contain similar contractual undertakings as to condition of the goods, and that it was not unlikely that a breach of the defendant’s undertaking would cause the plaintiff to be in breach of his undertaking to the sub-buyer who would claim damages from the plaintiff for loss and damage suffered.  That being so, as stated at para 17–076 Benjamin’s Sale of Goods 17 th Edn, if loss or injury occurs in these circumstances, the buyer who has paid damages and costs to his sub-buyer for breach of the undertaking in the sub-sale may recover this amount from the seller as damages for the seller’s breach of contract.

46. If the plaintiff reasonably settled Morrison’s claim out of court, it may recover as damages from the defendant a reasonable amount paid under the settlement (para 17-078 Benjamin’s Sale of Goods; Biggin & Co. Ltd. v Permanite Ltd [1951] 2 KB 314).

47. The defendant disputes that the plaintiff is entitled to recover the settlement sum of GBP 80,000 paid to Morrison on the basis that it was not reasonable to settle the claim of Morrison for this sum. 

48. Of particular importance is the fact that as Tang said , and as I accept, the settlement in the said sum of GBP 80,000 was arrived at by the plaintiff as a result of legal advice from the plaintiff’s solicitors.    As was said by Somervell LJ in Biggin & Co. Ltd at page 321:

“ The question, in my opinion is: what evidence is necessary to establish reasonableness?  I think it relevant to prove that the settlement was made under advice legally taken.”

49. The settlement sum of GBP 80,000 is made up of the sums in three invoices from Morrison as follows:

		GBP
(1) advertising charges for laminator recall, August 2003		26,342.32
(2) stock withdrawal		42,378.96
(3) compensation as agreed re laminator stock withdrawal August 2003		11,278.72
		-------------
Total (ex VAT)		80,000.00

50. As to (1), Tang gave evidence that Morrison did in fact advertise the recall of the laminators as he had seen the advertisements in various newspapers.  An assessment was made in the UK as to the reasonableness of the advertising charges and it was confirmed to be a reasonable amount.  I am satisfied that the amount in (1) was reasonably paid to Morrison.

51. As to (2) this was the cost to Morrison of the total quantity of laminators (3,468 pieces x GBP 12.22).  The evidence showed that as at 26 August 2003 1,577 pieces of laminators had been recalled by Morrison.  However, Tang said, and I accept, that after 26 August 2003 Morrison continued to receive further laminators recalled from its customers although no figures were supplied to me.  What is important to bear in mind is that the laminators were unmerchantable for the reasons mentioned.  As a result of the recall that was widely advertised in the UK, Morrison was obliged to make a refund to all of its customers as and when the laminators were returned.  As the laminators were unmerchantable, they were of no use to Morrison and in my judgment it was reasonable to compensate them for the cost of all the laminators supplied.  I am satisfied that the amount in (2) was reasonably paid to Morrison.

52. As to (3), the sum of GBP 11,278.72 would include the recall cost as claimed by Morrison at 40 p per piece.  For the total quantity of 3,468 pieces this amounts to GBP 1,387.20.  It seems to me that it was reasonable for the plaintiff to allow this amount.  The balance of GBP 9,891.52 (11,278.72 – 1,387.20) would be compensation to Morrison for administrative and management time and loss of profit.  The plaintiff would have been obliged to compensate Morrison for this under the purchase order (clauses 3.3 and 6.2.2).

53. In  Biggin & Co. Ltd  Singleton LJ said at page 325:

“If, upon the evidence, the judge is satisfied that the damages would be somewhere around the figure at which the plaintiffs had settled, he would be justified in awarding the settlement figure.  I do not consider that it is part of his duty to examine every item in those circumstances.”

54. As the laminators were unmerchantable, Morrison lost the profit that it would have made on the entire lot of 3,468 pieces of laminators.  Morrison was also entitled to be compensated for administrative and management time in dealing with the recall.  Although a detailed breakdown was not provided, it seems to me that the balance of GBP 9,891.52 would be somewhere around the damages that Morrison would have been entitled to under the purchase order for loss of profit and administrative and management time.

55. In the circumstances in my judgment it was reasonable for the plaintiff to have settled Morrison’s claim for GBP 80,000.

56. As to issue (3), in my judgment the plaintiff is entitled to recover the loss and damage in the sum of GBP 80,000 plus the sum of GBP 653.57 mentioned above in paragraph 43.  The plaintiff is entitled to recover the total sum of GBP 80,653.57.

Conclusion

57. I give judgment to the plaintiff in the sum of GBP 80,653.57.  I also award interest on the said sum from issue of writ on 24 February 2004 to judgment at 1% above prime rate and from judgment until payment at judgment rate.

58. I also make an order nisi that the defendant should pay the plaintiff the costs of this action such costs to be taxed on a full indemnity basis as this is provided for in clause 11 of the contract.