GOLDEN HARVEST COMPANY v. J.W. INTERNATIONAL COMPANY AND ANOTHER

No. 4009/85

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HEADNOTE

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SALE OF GOODS - written agreement - provision that seller should pay compensation of $100,000 to buyer in the event of any breach - not a penalty but genuine pre-estimate of loss - subject-matter of agreement infringed trade-mark of third party - passing off - illegality - S.27(1) Trade Marks Ordinance (Cap 43) - SS 9, 23 Trade Descriptions Ordinance (Cap 362) - action dismissed.

1985, No. A4009

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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JUDGMENT

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1. On the 28th June 1985, the plaintiff issued a writ claiming against the defendant $100,000 "by way of liquidated damages" for non-delivery of certain goods, which the plaintiff had agreed to buy under a written agreement dated the 15th May 1985. On the 25th July 1985, the defendant filed a Defence pleading that the agreement was unenforceable on the ground of illegality and, in the alternative, that the so-called "liquidated damages" clause in the agreement was a penalty and as such unenforceable.

2. Although the plaintiff alleged that it had suffered loss and damage as a result of the. defendant's breach, there was no prayer for damages in the original Statement of Claim. However, the plaintiff later obtained leave to amend the Statement of Claim to allege that, as a result of the breach, it was unable to deliver the goods to a purchaser at a higher price pursuant to "a contract made on or about the 22nd May 1985". In addition to the $100,000 claimed as liquidated damages, the plaintiff sought to recover its loss of profit of $87,500, and a further $100,000 as "liquidated damages" which it had allegedly become liable to pay to its purchaser as provided in that contract.

3. Two witnesses gave evidence before me. The first was Mr. Tse Chi Ming, who appears to have been a partner of the plaintiff at the material time. The other was Mr. Luk Hung Choi, the alleged purchaser from the plaintiff. In spite of, or perhaps because of, its pleaded Defence, the defendant did not call any evidence. There were five agreed documents contained in the "Defendants' Bundle of Documents" and "Paginated Agreed Bundle of Documents", hereinafter referred to as "DB" and "PB". I should, perhaps, complete the picture by mentioning that the Third Party took no part in the trial. This was because he failed to file any acknowledgement of service. On the 23rd December 1985 the defendant obtained judgment against the third party for the return of a deposit of $70,000 and damages to be assessed.

4. By the written agreement (p.2 of PB) the plaintiff agreed to buy 250,000 pieces of "Zbera Be-pen'" on the following terms :-

These terms were prepared by the defendant, but I am satisfied that Mr. Tse fully understood and freely assented to them. Although Mr. Luk apparently saw a sample in April, it was neither produced nor identified by him. I would merely indicate that I am not satisfied that the pen produced by Mr. Tse (Exh P. 2) was one of the samples referred to in the agreement. The other pen shown to Mr. Tse when he was cross-examined (marked provisionally exhibit "D1") had characteristics which more probably resembled those the samples referred to in the agreement. There was, however, no direct evidence to prove that it had been used as a sample at the time the agreement was signed.

5. Mr. Tee also gave evidence of making an oral agreement with Mr. Luk Hung Choi of Leader Co. on the 17th May 1985 on terms more or less the same as those agreed with the defendant, except that the price was $1.50 per piece and the date of delivery was to be the 4th June 1985.  Further, if Leader Co. failed to take delivery, its deposit of $112,500 would be forfeited to the plaintiff. Mr. Tee also testified that after the defendant failed to deliver the pens, the plaintiff paid $50,000 by way of compensation to Leader and Co.and refunded its deposit. Mr. Luk gave evidence to similar effect, except that, according to him, the oral agreement was made in April, when he was given a sample by Mr. TSe, and the order was placed, and the deposit paid, on the 17th May 1985.

6. In my judgment, a distinct air of unreality and suspicion surrounds this alleged agreement with Leader Co. The suggestion that the breach by the defendant had prevented the plaintiff from delivering the goods to Leader Co. on the due date, i.e. the 4th June 1985, and had resulted in a loss of profit of $87,500 as well as a liability to pay "compensation" of $100,000, was not mentioned in the letter from the plaintiff's solicitors posted on the same day. No reference was made to these matters in the Statement of Claim, despite the fact that a deposit of $112,500 had supposedly already been repaid to Leader Co. and the first instalment of the compensation had been made on or about the 28th June 1985. Indeed, the sub-contract and the losses thereunder seem to have been forgotten or overlooked until December 1985, when the Statement of Claim was amended. Even then the date of the contract was alleged to be on or about the 22nd May 1985! Although Mr. Tse claimed that cash receipts and payments were recorded in the plaintiff's account books, no such records were produced.

7. In an attempt to prove payment of the $50,000 "compensation" Mr. Tse produced a passbook issued by the Bank of East Asia Ltd. (Exh. P1). This document was never disclosed on discovery, although Mr. Tse testified that he had to open the account to handle cash payments and receipts, and to open letters of credit. Although a letter of credit appears to have been opened by the Hang Lung Bank Ltd. in favour of the defendant on the 22nd May 1985, the account with the Bank of East Asia Ltd. was not opened until the 4th June 1985. Despite repeated requests, Mr. Tse was unable or unwilling to explain the first two entries in Exh. P1. I view the production of this exhibit with the gravest suspicion. I am far from satisfied that it is a genuine record of cash payments made by or to the plaintiff. Indeed, there is nothing on its face to indicate that it has any connexion with the plaintiff.

8. Although I think that Mr. Tse did enter into some kind of business arrangement to supply "Be-Pens" or sign pens to Leader & Co., I am not satisfied, on the evidence before me, that he did so on the terms alleged or even on terms which constituted a binding contract of sale. I think that it is more probable that Mr. Luk of Leader & Cwas looking for a substantial quantity of sign pens, known to him as "Zebra Be-Pens", and believed he could obtain them from the plaintiff because of a sample shown to him by Mr. Tse in April 1985. In turn, Mr. Tse, knowing of Mr. Luk's needs and believing that they could more or less be met out of goods belonging or available to the defendant, entered into the written agreement with the defendant. In all the circumstances, I am not satisfied that the plaintiff has substantiated, by credible evidence, any of the allegations contained in paragraph 3(i) and (ii) of the Amended Statement of Claim.

9. I now turn to the plaintiff's claim to the sum of $100,000 as liquidated damages for the defendant's admitted non-delivery of the 250,000 "Zbera Be-Pens", and the defendant's plea of illegality. There is rarely any merit in a defendant's plea to be excused from a clear breach of contract on the basis of illegality in the formation or performance of the agreement in question. This case is no exception, despite suggestions that the defendant did not become aware of the possibility of infringing the rights of others, or committing criminal offences, until after it entered into the written agreement with the plaintiff. But, apart from the question of illegality, there is, in my view, absolutely no merit in the defendant's alternative contention that clause (2) of the agreement is a penalty and, as such, unenforceable. Clause (2) and the other terms were devised by the defendant and imposed upon the plaintiff by the defendant. In the circumstances, it seems to me to be wholly inappropriate to regard clause (2)(b) as a provision stipulated in terrorem of the defendant. One might entertain entirely different views of the nature of clause (2)(a), insofar as it was intended to influence the conduct of the plaintiff, but merely to contrast the amounts specified in these provisions is, in my view, sufficient to dispose of the further contention that clause 2(b) is not a genuine pre-estimate of the actual loss likely to result from a breach by the defendant in the present case. If the defendant considered that it might suffer a loss of $287,500 as a result of a breach by the plaintiff (of clause (2)(a)), a figure of $100,000, as the probable loss of profit likely to be suffered by the plaintiff for a correlative breach by the defendant, is not so obviously unrealistic or capricious as to prevent it being regarded as a genuine and reasonable pre-estimate of loss. Accordingly, I would totally reject the defendant's second line of resistance to this aspect of the plaintiff's claim.

10. Returning to the question of illegality, I conceive that I must distinguish between what has been expressly pleaded and what may have emerged from the evidence at the trial. Of course, in this regard, the court is not tied or restricted by what the parties have pleaded. If it is satisfied that it is in full possession of all the facts, and they point to some form of illegality affecting the enforceability of the contract, or the remedy sought by one party, innocent or otherwise, the court must refuse its assistance completely, even though the objection is not raised by the pleadings. In other cases, it will only refuse its assistance if the party raising the issue substantiates its plea by proof in the ordinary way.

11. In the present case, the defendant contends and pleads that performance of its agreement with the plaintiff would be illegal as being an infringement of the trademark "ZEBRA" and passing-off goods not manufactured by the owner of such trade mark. On the basis of page 2 of D/B, I am satisfied that Kabushiki-Kaisha. Ishikawa Pensaki Seisakusho (Ishikawa Pen Company Ltd.), a Japanese corporation, is the registered proprietor of the "ZEBRA" trademark in relation to pens. Having regard to Mr. Luk's evidence that he was hoping to buy sign pens, known to him as "Zebra Be-Pens", and Mr. Tse's evidence that he was aware that he was buying from the defendant a product closely similar to a well-established and well-known Japanese product,viz, a Zebra Be-Pen, as well as the fact that such belief was apparently also held by his solicitors (c f p.1 of P/B), I consider that delivery of the goods more particularly described in the "specification" of the written agreement of the 15th May 1985 would have constituted an infringement of that trade mark. Having regard to the provisions of Section 27(1) of the Trade Marks Ordinance (Cap. 43), placing on an almost identical article in terms of shape, size and colour, the name or label of "ZEBRA" would, in my view, be a clear infringement of the mark in question. Whether one adopts the English or American pronunciation of the last letter of the alphabet, the word "ZEBRA" is phonetically identical with, or so nearly resembles, the trade mark as to be likely to deceive or cause confusion in the course of trade. In the present case, I am satisfied that the plaintiff and the defendant shared a common purpose to infringe that trade mark, although I accept that the plaintiff did not know the identity of the proprietor. In my view, that is sufficient to taint their agreement with illegality.

12. The second ground of illegality pleaded in the Defence is that performance of the contract would involve passing off these pens as the goods of the owner of the trade mark. Miss Wong submitted that the defendant had failed to discharge the burden on it of showing all the ingredients of the tort of passing off, such as reputation in China, where the pens were ultimately to be sold, deception and damage. It may be that such ingredients or features have not been or could not be established by the evidence before me. But I am not concerned with a passing off action. The question before me is whether a contract for the sale of goods is illegal because its object was the deliberate commission of a tort. That object may never be achieved for a variety of reasons because, e.g., the parties repent of their illegal purpose, or one party fails to carry out his side of the bargain. But their contract remains illegal, although the intended tort is never completed. The obstacles to establishing all the ingredients of the tort may be very real, but that, in my view, is irrelevant if it is clear, as I think it is in this case, that the parties intended to lead others to believe that the subject matter of their contract were the products of Ishikawa Pen Co. Ltd. On this ground, too, the contract would be illegal and unenforceable.

13. Finally, I consider a third aspect, which was not pleaded but adverted to in Mr. Chan's final address. He submitted that, in addition to being exposed to the risk of civil proceedings for infringement of trade mark or passing off, both parties would be guilty of criminal offences under Section 9 of the Trade Descriptions Ordinance (Cap. 362). Although that provision makes it an offence for any person, inter alia, to sell, or have in his possession for sale or any purpose of trade, any goods to which any mark so nearly resembling a trade mark as to be calculated to deceive is applied, I do not think that is sufficient to refuse relief in the present case. Mr. Chan has, with respect, overlooked Section 34 of that Ordinance which reads :-

"A contract for the supply of any goods shall not be void or unenforceable by reason only of a contravention of any provisions of this Ordinance. "

14. For the reasons I have given, the defendant's unmeritorious plea of illegality raised by the Defence has been established, with the consequence that the plaintiff's claim must be dismissed. In the light of my findings it follows, in my view, that the default judgment obtained against the third party, on the 23rd December 1985 was obtained by what is an abuse of process. The written agreement between the defendant and the third party was expressed in identical terms as to the specification of the goods. Any money paid under that agreement by the defendant would be irrecoverable by action and the defendant would not be entitled to any relief which is dependent upon its own illegality. As the third party has taken no part in these proceedings, and Mr. Chan has not had an opportunity to address me on this matter, I think the proper course is for me to direct that notice be given by the court to the defendant and the third party to show cause why the learned master's order of the 23rd December 1985 should not be set aside under Order 16 rule 5(3) of the Rules of the Supreme Court. Pending the determination of that matter, I will impose a stay of execution on the judgment entered against the third party in favour of the defendant.