RICHLAM TRADING CO. LTD. v. ASHLEY TRADING LTD.

HCA 11594/99

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 11594 OF 1999

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J U D G M E N T

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1. The plaintiff was and is at all material times an exporter of garments and a textiles quota holder. The defendant also was and is at all material times an exporter of garments and a textiles quota holder.

2. To enable it to export a consignment of garments to the USA the defendant purchased 2,000 dozens of textiles quota in category 638/639 in December 1997 from the plaintiff. The defendant, as the exporter, shipped in 1998 462 dozens of ladies' polyester knitted blouses using 462 dozens out of the quota purchased from the plaintiff. This was under the export licence signed by Cindy Yu Mai Guen ("Cindy Yu") director of the defendant as the exporter. The name of the manufacturer of the said goods was Cindy Styles International Limited. On the unchallenged evidence of Cindy Yu she had no connection whatsoever with the manufacturer.

3. An important condition of the export licence was that the goods had to be of Hong Kong origin which meant that they had to be manufactured in Hong Kong. There is no dispute between the parties that the 462 dozens of the said goods exported from Hong Kong to the USA by the defendant as exporter utilising some of the quota purchased from the plaintiff had to be of Hong Kong origin i.e. that they had to be manufactured in Hong Kong. It is also not in dispute that in fact the said 462 dozens of goods were not manufactured in Hong Kong and that the said goods were exported from Hong Kong in breach of the said condition of the export licence.

4. It is common ground that the manufacturer was eventually charged and convicted of an offence in relation to the breach of the Hong Kong origin requirement in respect of the said shipment. As a result of this, the Director-General of Trade took administrative action against the quota holder, the plaintiff, and discounted the shipment performance of the said 462 dozens of quota utilised for the said shipment. The discount of the shipment performance was for the purpose of quota allocation to the plaintiff for the following year i.e. for the year 1999. Because of this administrative action, the plaintiff's quota allocation for the year 1999 was reduced. It was eventually reduced not only for category 638/639, which was the category of quota transferred to the defendant, but also for two other categories, namely, categories 338/339 and 338/339(1). All these categories were in Group C.

5. The plaintiff's claim against the defendant is for damages for breach of contract and also for an order that the defendant do transfer to the plaintiff the quantity of quota in the three categories that it has lost because of the discounting of the shipment performance of the said 462 dozens of goods utilising 462 dozens of the quota purchased.

6. The main issues are :

1. what was the contract between the parties?

2. whether the defendant was in breach of contract?

3. what loss has the defendant suffered?

4. whether the loss suffered was caused by the defendant's breach?

5. whether the loss and damages claimed are too remote to be recoverable?

7. An order was made on the first day of trial that the issues of liability and quantum be tried separately. The trial before me was on the issue of liability. Damages, if any, was ordered to be tried separately and to be assessed by a master at a later stage.

8. I heard evidence from Wong Lam Fung ("Lam") a director of the plaintiff, Cindy Yu, a director of the defendant, and Li Pok Man ("Li") the assistant trade officer of the textiles control office of the Trade Department dealing with textiles to be exported to the USA. I have no hesitation in accepting Wong and Li as witnesses of truth. I believe them and accept their evidence.

9. I also accept Cindy Yu as a witness of truth and accept her evidence save for certain parts of her evidence which I did not accept and which I will deal with later.

The contract

10. Although by the amended defence there was raised an issue between the parties as to whether there was a contract between them, it was accepted at trial that there was a contract between the parties whereby the defendant purchased 2,000 dozens of quota in category 638/639 from the plaintiff. The defendant's case, however, is that the agreement between the parties was contained in the one document, the letter of guarantee dated 23 December 1997 signed by Cindy Yu on behalf of the defendant and addressed to the transferor ("the letter of guarantee"). The plaintiff's case is that the agreement between the parties was contained in or evidenced by or is to be inferred from two documents, namely the letter of guarantee and the application for Type A transfer of quota for export of textiles to the USA signed, as to Part II, by Cindy Yu on behalf of the defendant on 23 December 1997 ("the transfer form").

11. The plaintiff's said case has been pleaded in the reply but not in the amended statement of claim which pleads the agreement as being the letter of guarantee. I do not think, however, that the defendant has been taken by surprise as to what the plaintiff's case is. It has been pleaded in the reply and has also been set out in the witness statement of Wong. Strictly speaking the said case should also have been pleaded in the amended statement of claim. But the defendant has not been taken by surprise and has not been prejudiced. Also, the evidence of Cindy Yu was that both of the said documents were supplied to her by her broker. It was through her broker that she made the purchase from the plaintiff and she signed both documents on the same day. If necessary, I would have given leave to the plaintiff to re-amend the statement of claim to plead what has already been pleaded in the reply.

12. Both the transfer form and the letter of guarantee were signed by Cindy Yu on the same day, 23 December 1997. These were supplied to her by her broker. The plaintiff also used a broker for this transaction. On Wong's evidence, which I accept, through the introduction of a broker the plaintiff came across the offer from the defendant to purchase 2,000 dozens of the said quota. The two documents, namely, the letter of guarantee and the transfer form had already been signed by the defendant when given to the plaintiff. I cannot accept the submission made by Mr Chan, counsel for the defendant, that the rights and obligations of the parties are governed solely by the terms of the letter of guarantee which is the agreement between the parties. That cannot be so. The letter of guarantee imposes no obligations at all on the plaintiff as transferor. The obligations under the letter of guarantee were all obligations on the part of the defendant.

13. In my view, the two documents constituted the offer made by the defendant to the plaintiff through the brokers. The plaintiff accepted the offer of the defendant by accepting the letter of guarantee and by Wong signing the transfer form on behalf of the plaintiff in part I of the same on 27 December 1997. I find that the contract between the parties was made upon the plaintiff's acceptance of the offer of the defendant and the contract is as contained in or evidenced by the two documents, namely, the letter of guarantee and the transfer form. It was after the contract was made that the transfer form was submitted for validation by the Trade Department and such validation was obtained on 8 January 1998 as stated in the transfer form.

The discounting

14. There can be no doubt that on the evidence of Li and the correspondence that has been referred to, the shipment performance of the 462 dozens was discounted by the Director-General of Trade for the purpose of quota allocation to the plaintiff for 1999 and I so find. This was because the goods were exported by the defendant in breach of the Hong Kong origin requirements.

15. Initially the nullification of the shipment performance resulted in the trade department reducing the plaintiff's quota allocation only for category 638/639 by 462 dozens so that only category 638/639 was affected by the reduction. This was set out in the letter dated 19 April 1999 from the trade department to the plaintiff. However, as explained by Li in evidence and which I accept, subsequently in June 1999 the plaintiff made representations to the trade department stating that account had not been taken in respect of three other export licences for the purpose of quota allocation for 1999. After investigating the matter, it was accepted that they had not taken such licences into account and a re-calculation was done by the trade department. This resulted in the application of the rule regarding temporary transferors ("the 50% rule"). By this rule, a quota holder which, during any one year, gross transfers out ("TA out") in any transfer group on a temporary basis 50% or more of its quota holding is liable to have its quota allocation in that group reduced in the following year. For the purpose of the rule, the temporary transfers are considered on a by-market and a by-group basis as opposed to a by-category basis. This is particularly important in this case as the evidence shows that all the three categories in the same group, namely, Group C, were affected by the reduction of the plaintiff's quota allocation for 1999 even though the 462 dozens were in respect of quota in one category only, namely, category 638/639.

16. In the letter from Li to the plaintiff's solicitors dated 29 October 1999, he explained, inter alia, that :

".......... the Director-General of Trade is satisfied that the origin requirements for export of restrained textiles under the captioned export licence which requires that all restrained textiles exported under the Hong Kong quota must be of Hong Kong origin have been breached. The Director-General of Trade has therefore decided to discount the shipment gained by the export licence as per paragraph 3 of the Department's letter of 19 April 1999 for the purpose of quota allocation. As a result of the discounting, your client's 1999 quota holding in Category 638/639 in respect of the USA market has been adjusted downwards by 462 dozen. Besides, in accordance with the rules regarding temporary transferors as promulgated in Notice to Exporters: Series 1 (USA) No. 71/97 dated 15 December 1997, a reduction of quota is applied in the following categories against your client's 1999 quota allocation entitlement :

Category	Quantity
338/339	1,367.93 dozen
338/339(1)	156.66 dozen
638/639	1,559.80 dozen	"

17. The plaintiff's claim is in respect of the loss of the said quantity of quota in the above 3 categories. In a later letter dated 21 January 2000, by a table annexed to the letter Li illustrated the application of the 50% rule. The letter dated 20 March 2000 with appendices explained the position further.

18. On the evidence of Li and as has been amply demonstrated by Ms Chan, counsel for the plaintiff, from the documents before the court, the 50% rule and how it was to be applied has been spelt out in detail at least since 1993 in the booklet 'Textiles Export Control System' ("the booklet") and also in the notices to exporters referred to in evidence. The notices to exporters that feature in this case are No. 71/97 dated 15 December 1997, No. 76/98 dated 15 December 1998 and No. 20/99 dated 23 March 1999. By the Notice No. 71/97 exporters were also reminded of the principles of quota allocation and control arrangements for 1998. The 50% rule and how it was to be applied is set out in, inter alia, para 29.

19. I am satisfied on the evidence that in considering and finally deciding upon the reduction which was applied for the plaintiff's quota allocation for 1999 the Director-General of Trade had applied the principles applicable as has been set out in the booklet and in the said notices to exporters. The discounting of the shipment of the said 462 dozens was an administrative action and was in accordance with the principles applicable. Li said that the 50% rule has been invoked at least since 1993 when the booklet was published and that the discounting exercise was something all along adopted by the trade department. He also said that this rule as well as the 95% rule (whereby the quota holder had to use 95% or more of his holding to get 100% allocation for the following year) would affect the quota allocation quantity of the quota holder. In this case, it was the application of the 50% rule and not the 95% rule that had resulted in the reduction of the quota allocation to the plaintiff for 1999.

20. I am satisfied that the discounting of the 462 dozens resulted in the application of the 50% rule. As is illustrated by Appendix 1V to the letter of 20 March 2000, on the basis of discounting the 462 dozens the gross TA out percentage exceeded 50%. It amounted to 50.49% and hence the 50% rule was infringed. The plaintiff's quota allocation for 1999 was, therefore, subject to reduction. The table in Appendix II to the said letter also shows that had the 462 dozens not been discounted, there would not have been a breach of the 50% rule as the gross TA out % would have been less than 50%, namely 49.70%. If there had not been the discounting of the 462 dozens the plaintiff's quota allocation for 1999 would not have been reduced. I am satisfied that the plaintiff's loss of quota for 1999 was 1,367.93 dozens in category 338/339, 156.66 dozens in category 338/339(1) and 1,559.80 dozens in category 638/639.

Construction of the contract

21. Both the transfer form and the letter of guarantee should be considered together as the contract, as I have found, was contained in or evidenced by the two documents.

22. By signing the transfer form, Cindy Yu on behalf of the defendant declared, inter alia, that she had read and understood the conditions of Type A transfer and the notice printed on the reverse and she also declared that the defendant undertook to abide by the conditions of Type A transfer. Condition (1) provided that :

"The transferee shall comply with all the conditions governing the allocation and utilization of this quota, as stipulated or referred to in the quota allocation certificate issued to the transferor and in the relevant Notices to Exporters issued by the Trade Department from time to time. The transferee should contact the Enquiry Section of the Trade Department if in any doubt as to the content and/or application of these conditions."

23. Also, by the 'warning' set out in the reverse of the transfer form, the defendant should have realised that if the export of the goods was not made in accordance with the provisions of the textile export system, the Director-General may decide to nullify the shipment performance of the quota concerned thereby affecting the plaintiff's future quota allocation. However, the 'warning' did not draw attention to nor did it mention the 50% rule. It only referred to the 95% rule.

24. On the evidence, the conditions governing the allocation and utilization of the quota were set out in the relevant notices to exporters as well as the booklet. At the time of the making of the contract, in my view, the defendant ought to have known about the booklet and the notice 71/97 dated 15 December 1997. Cindy Yu was the authorised representative of the defendant dealing with the trade department. Although Cindy Yu tried to distance herself away from knowledge of the booklet and the notices to exporters, I do not believe that the defendant would not have subscribed to or would not have obtained from the trade department the booklet and the notices to exporters. As an experienced exporter of garments to only one market, namely, the USA and as a quota holder as well since at least 1990, the defendant would have been interested to know and to be up to date with the principles governing the export of textiles to the USA and to the principles governing the utilization and allocation of quota for the following year. On these matters, I do not believe Cindy Yu. In my view, the defendant must have either subscribed to the notices or obtained them from the trade department.

25. By cl (1) of the letter of guarantee, the defendant guaranteed that it would utilize a minimum of 95% of the said quota on or before 30 June 1998, namely, 95% of 2,000 dozens. In my view the underlying rationale for the obligation on the defendant to use 95% of the quota was because of the application of the 95% rule governing the utilization and allocation of quota to the plaintiff for the following year's quota allocation. The plaintiff as the transferor wanted to protect his future allocation to 100% of his quota holding by ensuring that 95% of his allocation was going to be used. Hence the obligation on the defendant to use 95% of the quota purchased. The 95% rule must have been what the parties had in mind at the time of the contract. There was, however, no mention of or any reference to the 50% rule at all.

26. By cl (2) of the letter of guarantee, the defendant guaranteed :

"that goods utilizing the said quota shall be of Hong Kong Origin and that should there be disputes over the goods or actions taken by the authorities under the Import and Export Ordinance and/or in cases of infringement of the textile origin and export control rules, we will indemnify you against all actions, claims, costs, penalties, losses and damages"

27. By cl (5) of the letter of guarantee, the defendant guaranteed :

"that should we breach any of the guarantees aforesaid resulting in loss to you, or in the event of actions taken by the authorities mentioned in (2) above caused by us, our servants, agents or ultimate contractor/s, then, in addition to the indemnities mentioned in (2) above, we further guarantee to transfer on a Type B Transfer Basis (Permanent Transfer) to you or your nominees/assigns on or before 30/4/1999 the ultimate quantity of quota that you lost or were short-allocated."

28. It is readily apparent that it is only by cl (5) that there is an obligation on the part of the defendant as transferee to make a transfer in specie of quota to the transferor i.e. the plaintiff. I agree with Mr Chan, for the defendant, that as a matter of construction and looking at cl (2) and cl (5) together, the penalties, losses and damages mentioned in cl (2) are to be penalties, losses and damages of a monetary nature and do not deal with loss of quota. This is dealt with in cl (5) where the defendant agreed to transfer quota in specie to the plaintiff. Before it is obliged to do so, however, there has to be a breach of any of the preceding guarantees resulting in loss to the plaintiff or in the event of actions taken by the authorities caused by the defendant, its servants, agents or the ultimate contractors. Here it has been established that the breach of the Hong Kong origin requirement in the utilization of the quota was caused by the manufacturer which was the defendant's ultimate contractor. The additional obligation on the defendant in that event was to transfer to the plaintiff on a Type B - transfer basis (permanent transfer) "the ultimate quantity of quota that you lost or were short-allocated" on or before 30 April 1999.

29. It was submitted by Ms Chan that the proper construction of the words "the ultimate quantity of quota that you lost or were short-allocated" is that the defendant agreed to transfer all the quota in any category that the plaintiff lost or was short-allocated. This would include the total quantity in respect of all three categories claimed. Mr Chan, however, submitted that the contra proferentem rule should apply i.e. the words should be construed against the person for whose benefit they are inserted (para 6.07 Lewison's 'The Interpretation of Contracts 2nd Edn). I accept Mr Chan's submission. It seems to me that the particular provision has been inserted for the benefit of the plaintiff and that the plaintiff is the proferens. The clause should be construed strictly as there is, in my view, a doubt or ambiguity as to the construction of the words "the ultimate quantity of quota". The only category of quota referred to in the contract was category 638/639. There has been no mention of any other category at all. There is, in my view, an ambiguity as to whether the words "the ultimate quantity of quota that you lost or were short-allocated" refer to quota only in category 638/639 or whether it refers to quota in other categories as well. The clause should be strictly construed against the plaintiff. That being so, I am of the view that it should be construed as referring only to quota in the same category as the quota purchased, namely category 638/639 and not an all embracing term referring to quota in all categories whether mentioned or not.

Breach

30. By exporting goods utilizing 420 dozens of the quota purchased in breach of the Hong Kong origin requirements, the defendant was, in my judgment, in breach of contract. The defendant was in breach of its obligations under cls (2) and (5) of the letter of guarantee.

Causation

31. The defendant's case as pleaded in para 9(b) of the amended defence is that any loss to the plaintiff was caused by :

(1) the plaintiff's own mistake or fault in having gross transferred out in Group C 50% or more of the plaintiff's gross holding in Group C in 1999;

and/or

(2) the plaintiff's own failure to use up to 95% or more of the plaintiff's 1998 quota holding in all categories under Group C; and/or

(3) the breach, default, mistake, fault or failure of other transferees to whom the plaintiff had transferred out its quota holding in any of the categories in Group C.

32. There is no merit in any of these allegations. The evidence shows clearly that it was only the discounting of the shipment performance of the 462 dozens for the quota allocation for 1999 that resulted in the gross TA out to exceed 50%. Had there not been a breach of the Hong Kong origin requirements there would have been no discounting of shipment performance for the purpose of quota allocation and the 50% rule would not have been infringed. There is no evidence that the plaintiff itself had gross transferred out 50% or more of its holding. There is no evidence to show that the plaintiff failed to use up 95% or more of its holding in 1998 in the categories in Group C. The evidence shows that the 95% rule was not infringed. There is also no evidence that any of the plaintiff's other transferees of quota was in breach or had been at fault in respect of their shipments. As I have said, there is no merit in any of the said allegations and I reject the same.

33. It was also the defendant's contention that the plaintiff had adopted an over aggressive policy in transferring out its quota holding on a temporary basis. The evidence shows that in respect of category 338/339, which was the most expensive of the three categories, the plaintiff had transferred out the whole of its 1998 allocation.

34. It was demonstrated by Mr Chan by reference to the table Exh D1 that had the plaintiff reduced it gross TA out under category 338/339, by 312 dozens then the 50% rule would not have been infringed even if the 462 dozens had been discounted. That would also have been the case if the plaintiff had reduced its gross TA out under category 638/639 by 144 dozens. In my judgment this does not assist the defendant. There was nothing wrong in the plaintiff transferring out the whole of its holding in category 338/339. It was perfectly entitled to do that. Indeed Li said that a quota holder could, if he wished, transfer out 100% of his quota holding in a particular category. As long as the gross transfer out % on a by-group basis, as opposed to a by-category basis, did not exceed 50%, the quota holder could do that. The 50% rule would not be infringed. Wong also gave evidence that there was staff of the plaintiff whose duties were to monitor the shipment performance and that his staff knew about the 95% rule and the 50% rule. I accept the evidence of Li and Wong. The situation was under control by the plaintiff's staff monitoring the situation.

35. It has to be remembered that the plaintiff only found out about the breach of Hong Kong origin requirements when it was informed of the same by the trade department in about March 1999. By then, it was too late for the plaintiff to try and remedy the situation as the evidence shows that it was only shipments made in 1998 that were considered for quota allocation for 1999. It was too late for the plaintiff to purchase some permanent quota or to seek to reduce the gross TA out to a level below 50% for 1998 by that time. I would also observe that the defendant never informed the plaintiff that there might be a problem with the shipment of 462 dozens. This was despite the fact that in April 1998 the customs and excise department had attended the defendant's offices to investigate the Hong Kong origin problem in respect of the 462 dozens and had interviewed Ms Lam of the defendant about the same. Cindy Yu said that she ascertained from the manufacturer that there was no problem with the shipment and that she did not inform the plaintiff that there might be a problem.

36. I accept that a claimant may recover damages for a loss only where the breach of contract was the dominant or effective cause of that loss. (Galoo Ltd. (In Liquidation) and others v Bright Grahame Murray (a firm) and another [1994] 1 WLR 1360) In my judgment, the dominant or effective cause of the plaintiff's loss of the quantity of quota in the three categories was the breach of the Hong Kong origin requirements. I am satisfied that the plaintiff has established causation.

Remoteness of damage

37. Because of the discounting of the 462 dozens, the plaintiff's loss of its quota allocation for 1999 was 1,367.93 dozens in category 338/339, 156.66 dozens in category 338/339(1) and 1559.80 dozens in category 638/639. Even though such loss was caused by the defendant's breach of contract, I have to consider whether such loss was too remote to be recoverable.

38. The classic rule in Hadley v Baxendale (1854) 9 Ex. 341 is set out in the passage of the judgment of Alderson B. at 354-355 as follows :

"We think the proper rule in such a case as the present is this : where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally, i.e. according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it. Now, if the special circumstances under which the contract was actually made were communicated by the plaintiffs to the defendants and thus known to both parties, the damages resulting from the breach of such a contract, which they would reasonably contemplate, would be the amount of injury which would ordinarily follow from a breach of contract under these special circumstances so known and communicated. But, on the other hand, if these special circumstances were wholly unknown to the party breaking the contract, he, at the most, would only be supposed to have had in his contemplation the amount of injury which would arise generally, and in the great multitude of cases not affected by any special circumstances, from such a breach of contract. For, had the special circumstances been known, the parties might have specially provided for the breach of contract by special terms as to the damages in that case; and of this advantage it would be very unjust to deprive them. Now the above principles are those by which we think the jury ought to be guided in estimating the damages arising out of any breach of contract."

39. The rule in Hadley v Baxendale was restated in Victoria Laundry (Windsor) Ltd. v Newman Industries Ltd. [1949] 2KB 528 and qualified in C. Czarnikow Ltd. v Konfos [1969] 1 AC 350.

40. The rule was more recently considered by the Court of Appeal in England in Jackson v Royal Bank of Scotland (unreported, Lexis Transcript 28 June 2000). In the judgment of Potter LJ at para 29 of the transcript, he said :

"The rule in Hadley v Baxendale is necessarily stated in general terms, by reference to categories of loss. However, it is a rule as to remoteness, applied as a method of limiting damages for breach of contract and operating as the yardstick by which to measure the cut-off point for recovery in any given case. Thus, when a defendant has no knowledge of special circumstances, he will be liable under the first limb of the rule for loss arising 'in the ordinary course of things' (of which knowledge is imputed to every defendant), and no more. Where the claimant (upon whom the burden lies) asserts knowledge of special circumstances on the part of the defendant leading to additional loss, the defendant will still only be liable for so much of the loss as he should have anticipated on the facts known to him, but not for damage arising from circumstances of which he was unaware. In many cases however, there is no clearly defined line between the limbs of the rule, the defendant's liability under the second limb increasing over that to which he is subject under the first limb according to his degree of actual knowledge. As observed by Evans LJ in Kpohraror v Woolwich at 127j-128b:

... the starting point for any application of Hadley v Baxendale is the extent of the shared knowledge of both parties when the contract was made...When that is established, it may often be the case that the first and the second parts of the rule overlap, or at least that it is unnecessary to draw a clear line of demarcation between them. This seems to me to be consistent with the commonsense approach suggested by Scarman LJ in H. Parsons (Livestock) Limited v Uttley Ingham & Co. Limited [1978] QB 791 at 813, and to be applicable here."

41. In the present case, it is important to bear in mind that the loss of the quota in all three categories was as a result of the application of the 50% rule and not the 95% rule. As I have said the 95% rule must have been what the parties had in mind at the time of the contract. There was no mention or any reference to the 50% rule at all.

42. Li said in evidence that the 50% rule, which was the rule regarding temporary transferors, was formulated for the purpose of reminding the transferor, i.e. the quota supplier, of the need not to make excessive transfers out of quota. This was a matter that concerned the transferor. Although the defendant agreed by condition (1) of the reverse of the transfer form to comply with all the conditions governing the allocation and utilization of the quota purchased, this could not have included an obligation to comply with the 50% rule.

43. It is also relevant to bear in mind the evidence of Wong. He said that the 50% rule was not mentioned in the letter of guarantee because there was no need to do so. He also said that there was no need to tell the defendant how much quota the plaintiff was going to transfer out and that the 50% rule was just an internal matter for the plaintiff. He agreed with the defence suggestion that the plaintiff's main concern was to remind the transferee to comply with the 95% rule. He did say in evidence that in the letter of guarantee the plaintiff required the other party to use up 95% or more of the 2,000 dozens purchased. This was by cl (1) of the letter of guarantee. Wong also said, and I accept, that this was the first occasion that the 50% rule had been applied against the plaintiff.

44. I accept Cindy Yu's evidence that the defendant used to purchase large quantities of quota for its utilization in respect of garments that it exported. There was no need for her to study the 50% rule in detail because all the quota the defendant had were used by the defendant and they did not transfer out its own quota. She also said, and I accept, that this was the first occasion that the 50% rule had been applied against one of the defendant's transferors of quota.

45. It is also important to bear in mind that on the evidence the defendant was never informed at the time the contract was made (or at any time thereafter) and hence had no knowledge of :

(a) the plaintiff's quota allocation for the year 1998 and the quantity of quota it held in category 638/639 or in any other category under the same Group C;

(b) the quantity of TA-out quota that the plaintiff had agreed to temporarily transfer out to other transferees;

(c) the quantity of TB in quota the plaintiff had purchased or agreed to purchase for the year 1998.

46. Whether or not the 50% rule was infringed would depend on the above matters. As the defendant never had knowledge of the above matters at the time the contract was made, I am not satisfied that the application of the 50% rule in the event of the defendant's breach of contract was within the reasonable contemplation of the parties.

47. The total loss by the plaintiff of quota in all three categories are in my judgment too remote to be recoverable. I accept Mr Chan's submission that the defendant cannot be held liable to the plaintiff for more than the loss of 462 dozens of quota in category 638/639.

48. The plaintiff has also lost the use of the 462 dozens of quota for the year 1999 which the defendant was obliged to transfer to the plaintiff by 30 April 1999 but which the plaintiff failed to so transfer. It must have been reasonably foreseeable that the plaintiff would use the same in 1999 and that if unable to do so, the plaintiff would suffer further loss. The plaintiff is entitled to damages for such loss.

49. I give judgment to the plaintiff for :

(1) an order that the defendant do transfer to the plaintiff 462 dozens of quota in category 638/639;

(2) damages for loss of use of the 462 dozens of quota category 638/639 for the year 1999 to be assessed by a master.

50. I also make an order nisi that the defendant should pay the plaintiff its costs of the action.