LINEA TRADING COMPANY LTD. v. NG SZE TAK

DCCJ 3651/2001

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO.3651 OF 2001

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JUDGMENT

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Background:

[1] Under the Agreement on Textiles and Clothing, an export quota licence is required to export garments from the Mainland to certain countries, including Canada. The Plaintiff, an exporter of garments, had been purchasing some of its required export quota licences from the Defendant, who was in the business of arranging such export quota licences.

[2] In or about August 1998, the Plaintiff received an order from Colby International Ltd. ("Colby"), buying agent for a Canadian company called Thrifty's, for 10,000 pairs of pants. The pants were to be shipped to Toronto, Canada, in two shipments of 5,000 each. Under the terms of the order, the Plaintiff was required to supply Thrifty's with all necessary export quota licences.

[3] On 4/9/1998, the Plaintiff and the Defendant entered into a written agreement (the "Agreement") for the Defendant to supply the Plaintiff with an export licence for 5,000 pairs of pants manufactured in the Mainland to enter Canada for the sum of HK$111,300.00. On the same day, the Defendant issued a deposit invoice (the "Invoice") for 30% of the purchase price or HK$33,150.00 to the Plaintiff. The Plaintiff paid the required deposit within 24 hours as required by the Invoice.

[4] On 15/9/1998, the Defendant informed the Plaintiff that the export licence had been issued and requested payment for balance of the purchase price in the sum of HK$78,150.00. The balance was paid and export licence number 829069 for 1998 textile year (the "Licence") was subsequently delivered to the Plaintiff.

[5] The Plaintiff forwarded the Licence to Thrifty's in Toronto. On or about 6/11/1998, after the arrival of the first shipment of 5,000 pairs of pants, Thrifty's presented the Licence to Canada Customs; however the Licence was rejected by the Canadian Department of Foreign Affairs and International Trade. The Defendant was duly informed of the rejection. In accordance with the Defendant's instructions, the Plaintiff re-submitted the Licence to Canada Customs on two subsequent occasions. On both occasions it was rejected by Canada Customs.

[6] On 18/11/1998, the Plaintiff informed the Defendant that the Licence would be returned for a refund of the purchase price. The Plaintiff then sent Thrifty's the export quota licence it had arranged for the second shipment to clear the first shipment through Canada Customs. On 19/11/1998, the Plaintiff purchased another export quota licence for the second shipment at a costs of HK$123,189.60.

[7] The Licence was subsequently returned to the Defendant, but the Defendant refused to refund the purchase price of the Licence. The Plaintiff now seeks to recover damages in the sum of HK$123,189.60 against the Defendant for breach of contract.

[8] Before commencement of the hearing, Mr. William Wong, counsel for the Plaintiff, informed me that there had been an error in the Statement of Claim. The total cost of the replacement licence was in fact HK$123,389.60 and applied to amend the Statement of Claim. Mr. Dickson Li, counsel for the Defendant, had no objection to the amendment and applied to amend certain typographical errors in the Statement of Defence as well. I allowed both applications.

[9] Against this background, Mr. Li advanced three defences: first, the Defendant had fulfilled its contractual duties; second, the Plaintiff had failed to mitigate its loss; and third, the Plaintiff had failed to satisfy its burden of proving the quantum of its damages.

Contractual Duty:

[10] Mr. Li argued that the Defendant was only required to supply an export licence for 5,000 pairs of pants for the textile export year 1998. So long as the licence was useable by the Plaintiff in 1998, even as late as 31/12/1998, the Defendant had completed its contractual duties under the Agreement.

[11] Furthermore, the Licence was a valid licence issued by the Chinese authority. Canada Customs rejected it solely because the necessary information was not transmitted by the Chinese Central Government to the Canadian Government and not due to any fault of the Defendant.

[12] The parties' agreement was in fact contained in two documents: the Agreement and the Invoice. Although neither the Agreement nor the Invoice specifically stated the licence must be effective on any particular date, it was reasonable to imply that the licence should be effective and useable upon delivery by the Defendant.

[13] In law, there are two situations where a term will be implied into a contract, these situations are stated in Chitty On Contract, 28 Ed., Vol. 1, page 664, as follows:

"...first, where it is necessary to give business efficacy to the contract, and secondly, where the term implied represents the obvious, but unexpressed, intention of the parties...."

[14] The first situation is generally referred to as the "Business Efficacy" test and the second situation, the "Officious Bystander" test.

[15] The general principle of the "Business Efficacy" test was stated by Bowen L.J. in the Moorcock (1889) 14 P.D. 64, 68, as follows:

"Now, an implied warranty, or, as it is called, a convenant in law, as distinguished from an express contract or express warranty, really is in all cases found upon the presumed intention of the parties, and upon reason. The implication which the law draws from what must obviously have been the intention of the parties, the law draws with the object of giving efficacy to the transaction and preventing such a failure of consideration as cannot have been within the contemplation of either said; and I believe if one were to take all the cases, and there are many, of implied warranties or convenants in law, it will be found that in all of them the law is raising an implication from the presumed intention of the parties with the object of giving to the transaction such efficacy as both parties must have intended that at all events it should have."

[16] The "Officious Bystander" test is stated in Chitty, on page 645, as follows:

"A term which has not been expressed may be implied if it was so obviously a stipulation in the agreement that the parties must have intended it to form part of their contract. Prima facie that which in any contract is left to be implied and need not be expressed is something so obvious that it goes without saying; so that, if while the parties were making their bargain, an officious bystander were to suggest some express provision for it in the agreement, they would testily suppress him with a common, 'oh, of course.' A term will not, however, thus be implied unless the court is satisfied that both parties would, as reasonable men, have agreed to it had it been suggested to them...."

[17] Accordingly, the goal in both tests was to find the intention of the parties, at the time of contract.

[18] Clause 1 of the Agreement stated:

"1. Party A (Defendant) shall provide service to Party B (Plaintiff) for the procurement of China (5000PCS) export quota under category 5A for export to CANADA ("the Quota") from the People's Republic of China (hereinafter referred to as the "PRC") in the textile year of 1998. Party B shall pay Party A USD$34.00 Per Dozen as service charges."

[19] The English translation of the Invoice stated:

"Issuing the licence takes 18 working days, counting from the day when the deposit is received. Deposit must be paid within 24 hours. If the export quota is not in existence as a result of your company being late in issuing cheque, our company shall in no way be held liable for anything and that our duty shall be limited to returning this cheque to you or refunding a sum equal to the (cheque) amount." (Emphasis added)

[20] One must bear in mind that an export quota licence is not merely a piece of paper, but it represents the permission from the Mainland to export garments into Canada and the corresponding permission from the Canadian Government to import the same garments from the Mainland. The terms of the agreement required more than delivery of a mere piece of paper, but the underlying permissions from both governments. Given the purpose of the export quota licence and the terms of the Agreement and the Invoice, clearly under either the "Business Efficacy" or "Officious Bystander" tests, the parties had to have intended the Licence to be in existence and useable when it was delivered to the Plaintiff on 16/11/1998. It did not matter which government department had failed to complete its obligations, so long as the Licence was not in existence and not useable by the Plaintiff, the Defendant had failed to comply with its contractual duties. The first ground of defence was without merits. The Defendant was clearly in breach.

Failure to Mitigate:

[21] The second defence was based on the fact that the Plaintiff had utilized the export quota licence it had arranged for the second shipment, to clear the first shipment through Canada Customs. Mr. Li suggested that since the second shipment was required to be shipped on 30/10/1998, 15 days after the first shipment, and the first shipment arrived in Toronto on or about 6/11/1998, it was surmised that the second shipment would not have arrived in Toronto until 21/11/1998. Mr. Li argued that the Plaintiff should have held on to the Licence and used it to try and clear Canada Customs for the second shipment, instead of rejecting the export licence on 18/11/1998.

[22] Whilst there was clearly an obligation for the Plaintiff to take reasonable steps to minimize and reduce its loss, this obligation is not a high one. The learned author in Chitty stated in paragraph 27-088 as follows:

"The claimant is not 'under any obligation to do anything other than in the ordinary course of business'; the standard is not a high one, since the defendant is a wrong doer."

[23] In Dunkirk Colliery Co. v. Lever (1878) Ch.D. 20, 25 (approved by Lord Haldane in British Westinghouse Electric Co. Ltd. v. Underground Electric Rys. [1912] A.C. 673, 689), it was stated:

"The law is satisfied if the party placed in a difficult situation by reason of the breach of a duty owed to him has acted reasonably in the adoption of remedial measures, and he will not be held disentitled to recover the cost of such measures merely because the party in breach can suggest that other measures less burdensome to him might have been taken."

[24] Here, after learning that the Licence had been rejected by Canada Customs, the Plaintiff immediately informed the Defendant and subsequently re-submitted the Licence to Canada Customs on two other occasions before rejecting it on 18/11/1998. At that time, demurrage was incurring daily and Thrifty's must have been extremely disappointed about the delay. On 18/11/1998, the Plaintiff received a facsimile transmission from Colby, confirming that Thrifty's had finally cleared the first shipment through Canada Customs with the second shipment's export quota licence. Colby also warned the Plaintiff that since the second shipment was expected to arrive in Toronto on 23/11/1998, it should arrange for a replacement export licence for the second shipment immediately.

[25] In the meantime, the Plaintiff had not received any confirmation from the Defendant that the Licence could be used. In fact, the Defendant did not receive this confirmation until 26/1/1999. Under this circumstance, it would be extraordinary foolish for the Plaintiff to risk further delays and expenses to wait for the second shipment to arrive and try to submit the Licence to Canada Customs, yet again. I found that the Plaintiff had done all it could do to mitigate its damages.

Quantum:

[26] The allegation here was that the Plaintiff had failed to show evidence that the invoices issued by King Ming Trading Company ("King Ming") for the purchase of the replacement export quota licence had been in fact been paid.

[27] Plaintiff's witness, Mr. Lam Cheung Choy, in his cross-examination, clearly stated that he remembered payment of these invoices. In any event, it was improbable that the Plaintiff could have received a replacement export quota licence for free. The amount charged by King Ming for the replacement export quota licence was HK$111,889.60, nearly identical to the HK$111,300.00, charged by the Defendant. However, my review of the invoice issued by King Ming dated 25/11/1998 revealed that the replacement export quota licence was for 5179 pairs of pants, where the Licence was for 5,000 pairs only. The costs for the extra 179 pairs of pants, did not flow from the Defendant's breach and HK$492.25 (179 x HK$33/12) should be deducted from the Plaintiff's claim.

[28] As to the extra HK$11,500.00 urgent charges, the Plaintiff did what the Defendant asked and re-submitted the Licence to Canada Customs again and again. It was not until 18/11/1998 that the Plaintiff finally gave up and returned the export licence to the Defendant. The Plaintiff then ordered the replacement export quota licence the following day. However, the second shipment was due to arrive in Canada on 23/11/1998, only 4 days later. Even the Defendant had stated in the Invoice, that it would normally require 18 working days to arrange an export licence. Under this circumstance, it was reasonable for the Plaintiff to have incurred extra costs to arrange a replacement export quota licence within the short time available. I therefore found that, except for HK$492.25, the quantum of damages claimed by the Plaintiff was reasonable.

Order:

(1) Judgment is for the Plaintiff in the sum of HK$122,897.35, together with interest, calculated at the judgment rate, commencing from the date of writ until payment.

(2) Costs of this action, together with all costs reserved, are to the Plaintiff, to be taxed on party/party bases unless agreed.

(3) Certificate for counsel.