SHUM YIP - UTC (HONG KONG) CO. LTD. v. MASTER CO. (a firm)

HCA 7560/1990

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 7560/1990

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D E C I S I O N

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1. This is an assessment of damages suffered by a seller of goods. The buyer, in breach of contract, had cancelled the contract and refused to accept delivery. In mitigation of his loss, the seller contracted to sell the goods to a third party. However, the third party dishonoured the cheques tendered for payment for the goods. Despite legal proceedings and enforcement action, the seller has failed to receive payment from the third party.

2. Apart from factual issues, the legal issue raised is whether, notwithstanding the sale to the third party, the seller can claim from the original buyer his original loss together with the legal expenses incurred in pursuing his claim against the third party.

Facts

3. The matter has a long history. It is necessary to go into the factual details because the buyer has challenged some of the factual evidence adduced by the seller.

Original Contract

4. In August 1989, the Plaintiff ("the Buyer") contracted to buy 62,210 men's jackets from the Defendant ("the Seller"). The jackets were to be manufactured by the Seller, a company in Hong Kong which was contracting the manufacture to a company in Nanjing, in accordance with specifications provided by the Buyer. The Buyer was on-selling the jackets to a company (later known to the Seller as Idea Industries) for sale to Russian customers, so the specifications were for relatively large sizes.

5. The price was US$50.30 per dozen CIF. The total contract price converted to Hong Kong currency was therefore $2,033,956 (62,210 pcs x US$50.30 ÷ 12 x 7.8). Delivery was to be by mid-December 1989.

6. At around the same time, the Buyer and the Seller had negotiations for a much larger order, of about 400,000 jackets in total. There was, however, no firm contract for the sale and purchase of these goods.

Cancellation of original contract

7. On or about 8 December 1989, however, when some of the jackets had been completed but none had yet been delivered from Nanjing to Hong Kong, the Buyer cancelled the contract.

8. It is not disputed that it was difficult to find a market for these goods in Hong Kong, given the sizes of the jackets. However, according to the evidence of Mr Alan Pau Kei Man ("Mr Pau") the sole proprietor of the Seller, Idea then approached him with an offer to buy the jackets.

Sale to Third Party (Idea Industries)

9. On 6 February 1990, the Seller contracted to sell 51,900 jackets to Idea at US$54.60 per dozen or US$4.55 (HK$35.49) per piece. This was higher than the unit price for the sale to the Buyer. It has not been disputed that the Seller had acted reasonably in agreeing to sell the jackets to Idea.

10. In April 1990, a quantity of jackets was delivered to Idea (as will be seen later, there is a dispute as to the quantity delivered). It is the Seller's case that 32,900 jackets were delivered, for which Idea gave 3 post-dated cheques with a total value amounting to $1,167,621.

11. The cheques were dishonoured on presentation in June 1990. In August 1990, the Seller sued Idea on the dishonoured cheques. In September 1990, the Seller obtained summary judgment against Idea. However Idea appealed and in November 1990, it obtained conditional leave to defend. However it failed to meet the condition and final judgment was duly obtained against it. Enforcement proceedings by way of garnishee proceedings were unsuccessful.

Present Action

12. At about the same time, in November 1990, the Buyer instituted the present action against the Seller for rescission of the contract for 62,210 jackets, return of certain moneys it had paid the Seller as deposit and/or prepayment, and damages in the sum of $220,000 which the Buyer claimed to be the value of accessories it had paid for and supplied to the Seller for use in the manufacture of the jackets.

13. The Seller filed a Defence and Counterclaim in which he asserted that the Buyer had agreed to buy 400,000 jackets and that it was the Buyer who was in breach. The Seller counterclaimed for damages for loss of profit from the alleged contract for 400,000 jackets, and loss suffered by him in reselling fabrics that he had acquired to perform that contract. He also counterclaimed for loss in the subsequent sale of 37,900 jackets to an alternative customer (whose identity was later revealed as Idea).

14. In the course of these proceedings, the Seller's business closed down. According to Mr Pau's evidence, the remaining 19,000 jackets which he had not delivered to Idea were sold together with office equipment for $18,000.

15. The trial of the Buyer's claim and the Seller's counterclaim was heard in September and October 1998 by Deputy Judge Chung (as he then was). In December 1998, Chung, Dep J dismissed both the claim and the counterclaim.

16. The Seller appealed. There was no cross-appeal by the Buyer. In June 1999, the Court of Appeal allowed the Seller's appeal, holding that the Buyer had been in breach in terminating the contract for the 62,210 jackets. The Court of Appeal gave the Seller judgment on his counterclaim with an order that the case be remitted to a judge or master for damages to be assessed.

17. The Court of Appeal also dealt with the question of the payments received by the Seller from the Buyer, indicating that a sum of $1m would have to be taken into account, but not the other amounts received. Nothing was said about the accessories which had been paid for by the Buyer or their alleged value.

18. It was as a result of the above proceedings that the matter came before me for assessment of damages.

Factual issues

19. There were a number of factual issues. They can be grouped as follows:-

(1) What was the quantity of jackets delivered by the Seller to Idea?

(2) Did the Seller receive any money from Idea for the sale of jackets?

(3) Is the Buyer entitled to set-off against the Counterclaim the value of accessories it had supplied to the Seller, and if so, what was the value of those accessories?

(1) Quantity of jackets delivered

20. There is a dispute as to how many jackets had been delivered by the Seller to Idea. The evidence is analysed below. However, it must be remembered that what is important is not so much the quantity delivered, but what money had been received by the Seller from Idea.

21. In casting doubt on the Seller's case that only 32,900 jackets had been delivered, Mr Justin Wang counsel for the Buyer has drawn attention to a number of matters. First, the discrepancies in Mr Pau's Witness Statements. In his 1st Statement dated 14 April 1997, he had said that 37,900 jackets were sold to an alternative customer. In his supplemental statements however, he said that the contract with Idea was for the sale of 51,900 jackets, but that the actual quantity delivered was 32,900 jackets. In his oral evidence, Mr Pau said at first that the difference of 5,000 jackets had not been packed, but he also said that the reference to 37,900 jackets in the 1st Witness Statement could have been a typographical error.

22. Secondly, Mr Wang points out that in an affirmation filed by Mr Pau in the action against Idea, in response to Idea's allegation that the jackets were defective, Mr Pau exhibited 6 inspection certificates from Idea's buyer. The total quantity referred to in the certificates was 47,975 jackets; the transaction numbers referred to in the inspection certificates matched those on the Hong Kong - Russia bills of lading.

23. Those arguments are not unattractive. However, on the preponderance of the evidence, I find that 32,900 jackets had been delivered by the Seller to Idea, although more may have been delivered from Nanjing to Hong Kong in preparation for delivery to Idea.

24. I start with the contract between the Seller and Idea. The Seller's version of the contract states that 51,900 jackets were to be sold. Idea's version was of 2 contracts (1 for each style) which show that a total of 51,600 jackets were to be sold. However the bills of lading from Nanjing to Hong Kong show that only 37,900 jackets (or possibly another 400 jackets more if one took into account the writing on the bill of lading addressed to another company, Top Artery) had been delivered from Nanjing to the Seller in Hong Kong.

25. Further, the fact that 37,900 (or 38,300) jackets had been transported by the Seller's own supplier to the Seller does not mean that all those jackets had been delivered to Idea. Mr Pau's evidence was that Idea had also obtained supplies from another supplier in Hubei, and he said his goods had to be packed together with the Hubei goods in containers to be shipped to Russia. Mr Pau's evidence was that 5,000 jackets had not been so packed, thus leaving only 32,900 jackets delivered to Idea before the Seller stopped deliveries due to the dishonouring of the cheques.

26. The fact that the Seller's goods were packed together with other (Mr Pau says Hubei) goods is supported by the fact that the quantities of jackets in the inspection certificates (47,975 jackets) could not all have come from the Seller. There is first the point that the Nanjing-Hong Kong bills of lading only show 37,900 jackets. Further, the last inspection certificate showed that goods had been shipped from Hong Kong as late as on 12 July 1990. However, the 3 cheques had already been dishonoured in early and mid-June. The Seller would hardly be likely to have carried on delivering goods to Idea even after Idea had dishonoured its cheques.

27. Also of significance is what Idea's documents show. Both the Seller's and Idea's versions of the contracts are agreed that the purchase price was US$4.55 (HK$35.49) per piece.

28. The total amount of Idea's 3 dishonoured cheques was $1,167,621. Divided by 35.49 (the price per piece), that total amount, to the dollar, is the exact purchase price of 32,900 jackets. Although Idea alleged that it had honoured 2 other cheques in the sums of $289,900 and $112,060 respectively (totalling $401,960) in payment for the goods, this does not work out to a round number of jackets. The Seller's evidence was that these sums were for payment of completely unrelated goods.

29. Further, if all the 47,975 jackets referred to in the inspection certificates were from the Seller, then Idea would have had to pay him HK$1,702,632.75. However, Idea did not allege that it had paid the Seller that amount. Its only allegation was that it had paid the Seller by 5 cheques (3 being dishonoured) which amounted to $1,569,581 ($1,167,621 + $401,960). It is true that in Mr Pau's affirmation in the action against Idea, he did not specifically deny Idea's allegation that all 5 cheques had been in settlement of the contract for the jackets, an omission which Mr Pau blames on his former solicitors, but as Mr Albert Yau counsel for the Seller has submitted, the figure of $401,960 from the 2 cheques shows clearly that Idea's allegation could not have been true, because arithmetically, the figure cannot be divided into a round number of jackets, given the agreed price.

30. In the circumstances, I find on the balance of probabilities that the quantity of jackets delivered to Idea was 32,900 pieces.

(2) Seller did not receive money from Idea

31. The next, related and more important issue is whether the Seller received any money from Idea.

32. I have dealt above with Idea's allegation that the 2 honoured cheques were for the same contracts. By reason of the fact that those amounts cannot be divisible by the unit purchase price of HK$35.49, in the absence of any further evidence to explain the same, the conclusion I draw is that those amounts are unrelated to the contract for the jackets.

33. The 3 dishonoured cheques were of course the subject matter of summary judgment when the condition was not complied with, but the judgment was an empty one, as the Seller failed to recover any money from Idea, even after taking enforcement action.

34. I find therefore that no money had been received by the Seller from Idea.

(3) Buyer not entitled to set-off $220,000 as alleged value of accessories

35. The Buyer has alleged that it had supplied some $220,000 worth of accessories to the Seller and claims that it is entitled to set it off. The accessories included thread, elastic, zippers, buckles, polybags and packing tape.

36. The Seller's case is that he had not used the Buyer's accessories. He had found his own supply because the Buyer's accessories would not arrive in time to meet the delivery deadline. The Buyer's accessories were sent up to Nanjing in anticipation of the further contracts being negotiated. When the Buyer cancelled the contract, the Seller did not cause them to be sent back to Hong Kong because it would have cost thousands of dollars to do so, and the Buyer had not requested that to be done. I accept Mr Pau's evidence and the Seller's case.

37. I accept the Seller's evidence that he had arranged for accessories to be made available by the Nanjing manufacturer. I accept his evidence that the Nanjing Friendship Factory came under the aegis of the Nanjing Foreign Economic Corporation. The agreement made between him and the Nanjing Friendship Garment Factory shows that he ordered more than enough quantities of accessories for the contract of 62,210 pieces. As for the elastic bands which were temporarily not ordered, payment was separately made as evidenced by remittances.

38. I accept the Seller's evidence that because the Buyer's accessories did not leave Taiwan until early November as shown by the Harvard invoice, the time that would have to be taken for shipment to Hong Kong and then transport to Nanjing would have meant that the accessories could not be used in time for the deliveries in December. The fact that the polybags supplied by the Nanjing factory and the packing tape did not have the specified logo on it is neither here nor there. The parties were working under a deadline, and if the Buyer's polybags and packing tape could have arrived in time, as Mr Pau said, it would have been simple just to repack. No manufacturing process would have been necessary.

39. In any event, the only piece of evidence that Mr Wang has referred to as being relevant to the value of the accessories supplied by the Buyer was the invoice from Harvard Industries which showed that the goods cost, not HK$220,000 but US$12,503 (HK$97,523). The discrepancy has not been explained.

40. In the circumstances, I accept the Seller's evidence that the accessories had not been used and have been left in Nanjing with the Buyer's knowledge and acquiescence and I reject the Buyer's allegation of set-off of $220,000.

Legal issue - remoteness of loss?

41. I then come to the legal issue which is the question of remoteness of loss. In my view, it is not too remote for the Seller to claim the original loss, notwithstanding the interposition of the sale to Idea (which turned out to be worthless). This is clear when one returns to first principles governing the recoverability of loss.

42. In a breach of contract, the starting point is the rule that the innocent party is entitled to be placed in the same position as he would have been in had the contract been performed. This is subject to the limitations first imposed by the rule in Hadley v Baxendale and since refined, to the effect that the loss must be such as have been within the contemplation of the parties.

43. In the present case, had the contract not been broken by the Buyer, the Seller would have been entitled to receive the purchase price. Thus, it would have been within the reasonable contemplation of the parties that the Seller was entitled to the difference between the contract price receivable by him and any market value if there is a market. I shall refer to this as "the original loss".

44. Of course that is subject to the innocent party's duty to mitigate his loss, in other words, to take reasonable steps to avoid the consequences of the breach of contract. As it has been put in McGregor On Damages 16th ed paragraph 285, the innocent party cannot recover damages for any loss which he could have avoided - he "cannot recover for avoidable loss". So he must do what is reasonable to avoid or reduce the loss.

45. However, so long as he has made a reasonable effort to avoid or reduce the loss, the law does not impose a notional, "reasonable" loss. What he can recover is his actual loss, not a notional loss.

46. When mitigation of damages is understood in this light, it is clear, in my judgment, that the Seller here (the innocent party) should be entitled to nothing less than the original loss. The original loss is a loss which was within the contemplation of the parties. That loss was not avoidable even though he had taken reasonable steps in an attempt to avoid or reduce it.

47. The evidence in this case was clear. There was no other customer on the market. It has not been suggested that it was unreasonable for the Seller to contract with Idea. But the sale to Idea did not help the Seller to recoup any part of his loss because Idea turned out to be worthless. And since the Seller could not recoup anything, his original loss (for which the Buyer was liable) was not alleviated.

48. There was no new, intervening loss due to the contract with Idea - the loss remains the original loss which had not been avoided. Idea's impecuniosity was not the cause of the loss suffered by the Seller - it only rendered the Seller's attempt at mitigation unsuccessful.

49. So understood, there is no problem of any remoteness of loss. The loss remains that which was within the contemplation of the parties when the Buyer broke the contract. That loss could not be avoided because nothing was recouped by the Seller notwithstanding his having made a reasonable effort to reduce the loss.

50. The original loss would thus be the contract price for the sale of 62,210 jackets less (i) any money recovered on sale; (ii) any money saved when manufacturing of some of the goods was stopped; and (iii) any payments made by the Buyer.

51. As far as (i) is concerned, there was no real challenge to the evidence that the rest of the jackets manufactured but not delivered to Idea (i.e. 51,900 - 32,900 = 19,000 pieces) were sold together with some office equipment for HK$18,000. As Mr Pau was unable to say how much the office equipment was worth, the entire amount would have to be taken for present purposes. As for unused material, I accept Mr Pau's evidence that the rest were valueless as they had been cut, though not completed into jackets. The delivery date under the contract was mid-December. The cancellation came virtually on the eve of the delivery. It is entirely plausible that by 8 December, the materials would already have been cut, ready for making and trimming.

52. As for (ii), there is also unchallenged evidence that manufacturing costs were US$10 a dozen, or HK$6.50 per piece. Thus for the jackets not manufactured (62,210 - 51,900 = 10,310 pieces), there would be a saving of HK$67,015. As for (iii), it is agreed that credit would have to be given for the sum of $1m paid by the Buyer to the Seller.

53. Further it is clear that since the Seller has taken reasonable steps to avoid the loss, he can recover for loss incurred in doing so. This has become well-established and Mr Wang did not seek to argue against it. Thus the Seller should also be entitled to the amount of legal costs incurred by him in the action against Idea. The evidence shows that HK$56,600 had been so expended. There is no dispute as to the quantum of costs.

Order

54. In the circumstances, I would assess the damages suffered by the Seller on his counterclaim at $1,055,541 as shown in the computation set out below. There will also be interest at the commercial rate of prime + 1%. I will also make an order nisi that the costs follow the event, i.e. that the Buyer (Plaintiff) bear the costs of the assessment.

COMPUTATION