VINTECH CO. LTD. v. RADIO-HOLLAND HONG KONG CO. LTD.

DCCJ 5706/2001

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 5706 OF 2001

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JUDGMENT

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1. This is an assessment of damages claimed by the plaintiff arising from the defendant's failure to deliver 30 sets of marine radar systems before the end of February, 2001 pursuant to a purchase order placed on 8 January, 2001 by the plaintiff. Summary judgment having been entered for the plaintiff on 28 June, 2001 by HH Judge Lok for damages to be assessed.

The plaintiff's claim

2. According to para. 10 of the statement of claim, the plaintiff avers that "as a result of the defendant's breach, the plaintiff suffered loss and damages due to loss of subsequent contract" as follows:-

Particulars

(1)	Loss of profit	$ 98,049.00
(2)	Liquidated damages suffered	$ 150,000.00
		$ 248,049.00

The undisputed fact

3. It is common ground between the parties that the defendant is in breach of the contract entitling the plaintiff to treat the contract as repudiated.

4. It is further accepted and conceded by the defendant that it is in their contemplation that the radar systems are being purchased by the plaintiff for onward sale, under which the plaintiff may in turn be liable for general damages for actual loss of profit, if any, and subject to the end purchaser's duty to mitigate.

5. At the hearing, the defendant did not dispute that the plaintiff had in fact entered into an agreement with one Zhanwei Red Sea Fishing Boat Services Co. Ltd. ("Zhanwei") in mainland for the supply of 30 sets of radar systems for the price of $450,000. They also did not challenge the fact that the plaintiff did pay $150,000 as compensation to Zhanwei pursuant to clause 7 of their agreement with Zhanwei ("the agreement") as a result of its failure to deliver the radar systems on time which was evidenced by a remittance advice issued by Hua Chiao Commercial Bank to the plaintiff.

6. What the defendant seeks to challenge during this assessment can therefore be summarized as follows:-

a) that the plaintiff should have mitigated its loss by taking partial delivery of 15 radar systems which were available;

and

b) that the liquidated damages clause in the agreement is void as a penalty.

Issues

7. In the case of Re R and H. Hall Ltd., and W.H. Pim (Junior) & Co's Arbitration [1928] All ER 763, the House of Lord held that "the damages recoverable by the buyers should not be so limited, but included both the buyers' own loss of profit on the re-sale and the damages for which they would be liable for their breach of the contract of re-sale."

8. The issues that is fallen to be decided is thus twofold:-

a) what is the true measure of the plaintiff's own loss of profit? and

b) was the $150,000 paid by the plaintiff to Zhanwei a genuine pre-estimate of damages liable to be paid for its breach in the agreement?

The plaintiff's case

9. The director of the plaintiff, Miss Betty Liu, gave evidence at the assessment hearing. In the written statement which she adopted in the hearing, she stated that the plaintiff only entered into agreement with Zhanwei for the supply of 30 sets of radar systems after having received the defendant's confirmation of the purchase order.

10. Upon receiving the defendant's advice on 16 February, 2001 that 30 sets of radar systems could not be delivered on schedule, the plaintiff immediately requested Zhanwei to postpone the delivery of the 30 sets of radar systems but it was denied as it had already entered into subsequent supply contracts with its customers.

11. One Mr. Vincent Wong of the plaintiff also called up a number of local suppliers of the radar systems to make enquiry as to the availability of the radar systems but of no avail.

The defendant's case

12. On the other hand, Mr. Lui Yiu Tong, the general manager of the defendant testified and said that while it was clear to them that the plaintiff was purchasing the radar systems for onward sale, it was not in their contemplation that any sub-contract would contain a clause for a fixed charge for any delay in delivery and in particular one which exceeded the likely loss of profit suffered by the plaintiff itself and in excess of the maximum damages which would be suffered by Zhanwei.

13. Mr. Lui pointed out that he knew the ultimate purchasers of Zhanwei were individual fishermen so Zhanwei would be able to sell to individual fishermen after taking partial delivery of 15 sets. He further said that market price for each unit was about $16,000 to $17,000. For this reason, the maximum lost profit per lost sale would be $2,000 per unit.

14. The defendant, while contending that the liquidated damages clause is void as an unfair over-estimate of the maximum possible loss, avers that either:

a) the plaintiff and its end purchase should have taken all 30 sets, even though some were late, in order to fully mitigate their loss, as the ready market existed and no sale should have been lost; or

b) the plaintiff and in turn their customer shall have at least partially utilized their actual loss of profit by taking 15 of the 30 individual units. The loss in this case is:

Plaintiff		$49,024.50
Customer	$2,000x15	$30,000.00
		$79,024.50

The true measure of damages for loss of profit

15. In approaching the defendant's contention that the plaintiff should have taken full delivery albeit some were late or partial delivery of 15, I agree with the plaintiff's submission that in mitigation of damages, the plaintiff is not under any obligation to do anything other than in the ordinary course of business (see para. 323 MrGregor on Damages 16th Ed.). On the contrary, the onus is on the defendant to show why certain mitigating steps should be taken (para. 299 ibid.)

16. Under the law, the plaintiff is also not obliged to accept partial delivery.

s. 32(1) of Sale of Goods Ordinance, Cap. 26 provides:

"Where the seller delivers to the buyer a quantity of goods less than he contracted to sell, the buyer may reject them..."

17. Here I accept Miss Betty Liu's evidence and find that the plaintiff has fulfilled its duty by searching for other possible sources of supply of the radar system and also requested Zhanwei to post-pone the time for delivery.

18. It is unclear how Mr. Lui of the defendant came to know that the ultimate purchasers of the radar systems were individual fishermen. As the matter stands, Miss Liu, whose evidence on this point I accepted, had said that they had requested for a postponement of delivery from Zhanwei but it was rejected. In my judgment, the plaintiff is under no obligation to do anything other than in the ordinary course of its business and it has acted reasonably.

19. The defendant also argues that there is a ready market and hence, the plaintiff could have accepted the late delivery of all 30 sets. This suggestion is fanciful as well as far-fetched as this is a risk which the plaintiff is not bound to take.

20. The plaintiff's claim for actual loss of profit is in the sum of $98,049 for the 30 sets of radar system. Therefore for each set, the loss would be $3,268.30.

21. The defendant did not dispute this calculation, in its skeleton submission, they only argued for the alternative of taking the partial delivery of 15 sets, thereby reducing the plaintiff's loss of profit by half from $98,049 to $49,024.50.

22. Based on my finding that the plaintiff is not obliged to take partial delivery i.e. 15 sets of radar systems from the defendant, without any challenge to the calculation, the normal measure of loss of profit would have been $98,049 as pleaded by the plaintiff.

23. However, during cross-examination of Miss Betty Liu by the defendant, it became apparent that in calculating the loss of profit, no credit has been given to the fact that the plaintiff would have incurred RMB 3,000 per unit for the costs of import duties paid to the Mainland importing authority.

24. The relevant record of the proceedings is as follows:

Q: Is it correct that your claim for loss of profit in this case is $98,049?

A: Yes, but that doesn't include the fees of having it imported to China.

Q: Is it correct that the claim for the loss of profit-the difference of the profit made is $98,049?

A: Yes, you are right.

Q: If Zhanwei had taken delivery of goods, you would have incurred costs for import duties to China?

A: Yes.

Q: You would have paid to the Chinese import authority?

A: Yes.

Q: You know how much those would be? Any estimate of amount?

A: You are talking the total amount of 30 units?

Q: Or if it is easier if per unit, whatever way is easier.

A: About RMB 3000 per unit.

25. Counsel for the Plaintiff did not re-examine Miss Betty Liu on this point. In final submission, he argued that costs of this kind, like the costs of rent and salaries, could not have been taken into account in calculating the actual loss.

26. Clearly this argument is wholly untenable. The cost of import duties is unique and separate as opposed to the general running or fixed costs of the plaintiff's business. What Miss Liu was saying effectively was if the contract were to be performed as scheduled, the plaintiff would still have incurred an additional cost of RMB 3,000 as import duty paid for each unit.

27. In the premises, for each unit, the actual loss of profit has to be further reduced by the amount of RMB 3,000 per unit. As it has been agreed in the hearing that the exchange rate between RMB and HK dollar is 1:1, for each unit, the actual loss of profit would be $3268.30 - $3,000 = $268.30. The total loss of profit is therefore only $268.30 x 30 = $8,049

Is the liquidated damages clause void as penalty?

28. Liquidated damages clause is enforceable if it is a genuine pre-estimation of the likely loss from the breach in question. Dunlop Pneumatic Tyre Co. v New Garage and Motor Co. [1915] A.C. 79, 86.

29. A stipulated sum will, however, be classed as a penalty where it is in the nature of a threat fixed in terrorem of the other party.

30. Under clause 6 of the agreement between the plaintiff and Zhanwei, a deposit of $150,000 has to be pre-paid by Zhanwei. Under clause 7, if the plaintiff fails to deliver the goods on time, "twice of deposit shall be paid". In other words, after returning the deposit, the plaintiff has to pay a further sum of $150,000 as damages to Zhanwei.

31. Pursuant to clause 7 of the agreement, the plaintiff has paid $150,000 by way of damages to Zhanwei as a result of its failure to deliver the radar systems.

32. At the assessment hearing, the defendant contends that clause 7 of the agreement is void as a penalty clause because of 3 reasons:-

First, it is in excess of the maximum recoverable loss of profit which would have been suffered by the end customer ($2,000 x 30 units).

Second, it is 1/3 of the actual purchase price between the plaintiff and its customers.

Third, it exceeds the plaintiff own loss of profit, being the maximum figure which could seriously have been in the plaintiff's contemplation as their customer's loss of profit when entering the contract.

33. Of all the rules distinguishing liquidated damages from penalty, the one which is of particular relevance for consideration in this case and indeed the principal test for assessing the nature of the sum is what Lord Dunedin introduced as his fourth "rule" in Dunlop Pneumatic Tyre Co. v New Garage and Motor Co. supra.

34. "It will be held to be a penalty if the sum stipulated for its extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach."

35. According to the footnote on McGregor on Damages, p.495 ibid. "...the yardstick is the loss that the plaintiff, rather than the defendant, anticipated." In our case, therefore, it is the loss that Zhanwei, not the plaintiff, who was in breach, anticipated. Accordingly, even if the plaintiff's actual loss of its own profit is assessed to be $8,049, that alone cannot, in my judgment, prevent Zhanwei from anticipating its own loss to be $150,000 following from the breach by the plaintiff.

36. Mr. Lui of the defendant contends that the market price for the radar system to the ultimate purchasers in the mainland would be $16,000 to $17,000 per unit. i.e. the total maximum profit of the agreement would only be $2,000 x 30 = $60,000.

37. But this estimate is merely based on the understanding and experience of Mr. Lui as the general manager of the defendant. The defendant is a Hong Kong company and there is no evidence before me that it deals and for that matter Mr. Lui, extensively with its counterpart in the mainland China. The market condition in Hong Kong and the mainland is unique and different with each other. Mr Lui's own estimate is in the realm of speculation and has no place in the analysis of Zhanwei's anticipated loss of profit.

38. The fact that the damages paid is 1/3 of the actual purchase price is also neither here nor there. In a different market condition, one cannot say that it is altogether unlikely that Zhanwei can re-sell 30 units for a price at $20,000 per unit.

39. Thus, in my judgment, one simply cannot look at the plaintiff's own loss of profit in isolation and seek to compare this with the sum of $150,000 compensated to Zhanwei.

40. The purpose of a liquidated clause is to facilitate the recovery of damages without the difficulty and expense of proving actual damage. Realistic approach is always essential. In Philips Hong Kong Ltd v Attorney General of Hong Kong [1993] B.L.R. 41, P.C., the Privy Council has said that:

"...the power to strike down a penalty clause is a blatant interference with freedom of contract and is designed for the sole purpose of providing relief against oppression for the party having to pay the stipulated sum. It has no place where there is no oppression."

41. Here, there is no evidence of any oppression in the agreement. On the contrary, the plaintiff's evidence is that Zhanwei is their much valued customer in China and the fact that the plaintiff is willing and able to honour its obligation towards Zhanwei by paying them $150,000 following it's breach is a testimony of the absence of oppression of any kind at the time when the parties entered into the agreement.

42. Where there is no suggestion of oppression, "the court should not be astute to decry a 'penalty clause'." Robophone Facilities Ltd. v Blank [1966] 1 WLR 1428, 1447.

43. I therefore rule that the $150,000 paid by the plaintiff to Zhanwei is pursuant to a liquidated damages clause and therefore is also recoverable from the defendant by way of damages.

44. Finally, at the end of the final submission, the Defendant raised the point that the agreement was not properly certified. This point had never been raised before and no mention was ever made in their skeleton submission. The Plaintiff was caught by surprise as no issue was ever taken by the Defendant. In my judgment, the Defendant was barred from taking a technical point like this at the final stage of the hearing. I agree with the plaintiff's submission that the agreement is binding and that explained why they have to comply with it by paying the $150,000.

Assessment

45. Finally I assess the damages in the sum of $8,049 (plaintiff's actual loss of profit) and $150,000 (liquidated damages paid by the plaintiff to Zhanwei) totalling $158,049 to be paid by the Defendant to the Plaintiff with interest at judgment rate from the date of issue of the writ until payment.

46. I also made an order nisi that the Defendant pays the costs of this assessment to the Plaintiff, with certificate for counsel; such costs shall be taxed if not agreed. The order nisi is to be made absolute at the expiration of 14 days from the date of the handing down of the assessment.