SUPER DENSE INTERNATIONAL LTD v. INTERNATIONAL COMMUNICATION SERVICES LTD

DCCJ4888/2002

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 4888 OF 2002

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J U D G M E N T

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1. This is a claim by the Plaintiff against the Defendant in the sum of HK$256,305.92 being the balance of charge for development and moulding and the price for 3,400 sets of radio pursuant to a contract made between the Plaintiff and the Defendant.

2. It is not in dispute that such contract was first evidenced in writing on the 23rd June 2000, but changed subsequently and finally set out in a contract dated 6th March 2001.

3. The terms of such contract are stated at page 222 of the BD of Trial Documents (BDT). The terms of which are pleaded in paragraph 3(a) of the Statement of Claim:-

(a)	the unit price of each radio is HK$91.00 per set amounting to HK$317,408.00 for 3,488 sets together with HK80,000.00 development and moulding charge,
(b)	the Plaintiff has to deliver to the Defendant the goods within 21 days from the Defendant's written approval of the approval sample,
(c)	the Defendant has to make full payment of the price upon the Defendant's quality inspection approval to be evidenced in writing.

4. The Plaintiff pleads in paragraph 4 of the Statement of Claim that the Contract has the following implied terms:-

(a)	the Defendant shall give a notice of approval of the sample within a reasonable time;
(b)	the quality inspection shall be carried out in the Plaintiff's factory premises within a reasonable time before the Plaintiff's delivery; and
(c)	the standard for such approval will be AQL level II (Major 1.50/Minor 4.00).

5. It was the Plaintiff's pleaded case that the Defendant has approved the production of the goods by a letter dated 15th September 2000 addressed to the Plaintiff by fax. The Plaintiff is ready and willing to deliver 3,400 sets of the radio sets to the Defendant in accordance with the Contract.

6. It is the Plaintiff's pleaded case that the Defendant has

(a)	failed and/or refused to give a written approval of the sample diligently.
(b)	Unilaterally imposed the following terms:-
	(i) the standard for approval of the bulk would be in accordance with AQL 1 level III; and
	(ii) the goods would be inspected in Hong Kong.

7. It is on that basis that the Plaintiff claims the balance of the price.

The Defence

8. In paragraph 4 of the Defence, the Defendant pleaded that the Plaintiff had failed to deliver an approval sample of the goods to the Defendant in accordance to the Contract. The Defendant avers that in the failure of the Plaintiff to deliver an approval sample within a reasonable time was a repudiatory breach of the Contract, which was accepted by the Plaintiff.

9. By paragraph 5 of the Defence, the Defendant avers that the implied terms pleaded by the Plaintiff could not by law be implied.

10. The Defendant denied that by the letter dated 15th September 2000 addressed to the Plaintiff by fax, the Defendant has approved the production of the goods. The Defendant avers that:-

(i)	the Defendant did not approve the production of the goods by a letter dated 15th September 2000 or any other way;
(ii)	the Plaintiff did not produce the goods in accordance with the Contract;
(iii)	there has never been any agreement and/or Contract for the Plaintiff to deliver 3,400 radios to the Defendant.

11. The Defendant counterclaims repayment of the deposit paid pursuant to the Contract dated 6th March 2001 in the sum of HK$134,369.68 and damages for breach of Contract.

The Facts

12. Most of the facts of the case are not in dispute as the course of dealing between the parties is well documented. There is no issue as regards credibility of witnesses as Mr. Maurellet, Counsel for the Defendant stated in his closing submission that Mr. Ron Chan and Mr. Tang Yuk Kwai, witnesses of the Plaintiff were truthful witness. There is no allegation by the Plaintiff's Counsel, Mr. Wong of lack of credibility in Mr. Castagnet, the witness of the Defendant.

13. The Plaintiff's Counsel in his closing submission has summarized the facts. I set it out hereunder.

(1)	The Plaintiff and the Defendant entered into contract C00/104R1 dated 23rd June 2000 (page 67 of BDT) for a PLL radio ("the First Radio") with the addition of 3 special narrow band channels for use in the race course to receive broadcast by the Hong Kong Jockey Club.
(2)	The Defendant paid HK$10,000.00 for mould development cost and HK$123,435.00 as deposit for the First Radios.
(3)	The Plaintiff replied to the Defendant's inquiry on specifications on the First Radios by fax before the signing of the contract (page 36-39 in BDT).
(4)	Changes were made to the contract in respect of the description of the First Radio because of the requests of the Defendant in changing some parts resulting in increases in the price for the First Radio. Revised versions are C00/104R3 (page 110 of BDT) and C00/104R4 (page 121 of BDT).
(5)	The Defendant asked the Plaintiff to proceed to produce the First Radio by a fax message of 15th September 2000 (page 132 of BDT).
(6)	The Plaintiff delivered 200 pieces of the First Radio to the Hong Kong Jockey Club pursuant to the Defendant's delivery order (page 139 BDT).
(7)	On 25th September 2000 the Defendant asked the Plaintiff to stop production. The Plaintiff asked the Defendant to inspect goods at Shenzhen factory before shipment (page 142 BDT).
(8)	The Defendant instructed the Plaintiff to modify the First Radio by changing parts of the First Radio (page 147 of BDT). The Defendant also embarked on developing a new radio for the Jockey Club (page 149 of BDT).
(9)	The Plaintiff sent fax of 18th October 2000 to the Defendant asking for settlement of the balance under contract C00/104R4 and asking the Plaintiff on how to settle incomplete radios and remaining materials (page 150 of BDT).
(10)	The Plaintiff asked the Defendant to settle the costs of materials for the First Radio (page 166 of BDT).
(11)	The Defendant requested the Plaintiff to use materials from First Radio and modify it into a new radio, without the special channels (page 177 of BDT).
(12)	The Plaintiff sent a piece of sample of the new radio (Second Radio) to the Defendant (page 178 of BDT). The Defendant did not give any comment.
(13)	The Plaintiff prepared two new contracts to replace C00/104R4, with one for the Second Radio and the other for the new radio for Jockey Club (Third Radio).
(14)	The Defendant gave to the Plaintiff technical specifications on the Third Radio (page 205 of BDT).
(15)	Parties signed the two new contracts on 6th March 2001, C01/104R for the Second Radio and C01/015R for the Third Radio.
(16)	The Third Radio was completed and delivered. The Third Radios were inspected by the Defendant in the Plaintiff's Shenzhen factory before delivery using the Plaintiff's equipment according to AQL Level II standard (uncontested evidence of PW 2 para. 17 of Statement).
(17)	After delivery of the Third Radios, Jockey club was not satisfied as to the response of the LED indicators. Tests were carried out at the Plaintiff's office and those that did not satisfy the requirement of the Jockey Club were sent to the Plaintiff's Shenezhen factory at the costs of the Defendant for the Plaintiff fine tuning by replacing an ic component therein with those ic having better response. (PW1's evidence, para. 33 of statement and oral evidence of PW-2 after lunch break on 6th August 2003).
(18)	On 5th October 2001 the Defendant asked the Plaintiff to make changes and improve on the Second Radio (page 406 of BDT). The Plaintiff attended to the changes and improvement and sent samples to the Defendant (page 414 of BDT).
(19)	The Defendant signed fax message sent by the Plaintiff on 5th October 2001 to guarantee that the Defendant would take delivery of the Second Radio by 31st December 2001 with condition of "providing the quality is acceptable" (page 412 of BDT).
(20)	On 31st October 2001, the Defendant agreed to take the Second Radios before June 2002 and the Plaintiff agreed to reduce the price to HK$81.00 at the request of the Defendant (page 422 of BDT).
(21)	The Plaintiff supplied two samples of the Second Radio to the Defendant and charged the Defendant for them (page 426 of BDT).
(22)	The Defendant gave instructions to the Plaintiff on changes to the colours of the casing, buttons and markings of the Second Radio on 11th December, 12th December, 13th December and 18th December 2001 (page 432, 434, 437 and 447 of BDT).
(23)	The Plaintiff supplied samples for approval (page 462 of BDT).
(24)	The Defendant did not take delivery by 31st December 2001 because:
	(a) no approval sample,
	(b) colours arrangement not yet fixed,
	(c) scolours of buttons and markings not yet fixed. DW1 was the person designing these colour arrangements and the Plaintiff had to wait for his initiation on changes (oral evidence of DW-1 in cross examination).
(25)	The Defendant confirmed colour arrangement on 6th February 2002. The Plaintiff sent sample from its Shenzhen factory to the Defendant (oral evidence of Mr. Tang Yuk Kwai PW-2).
(26)	The Defendant's fax of 23rd May 2002 set out final confirmed colour (page 472 of BDT).
(27)	The Plaintiff reduced price to HK$62.00 and sent on 30th May 2003 contract to the Defendant to sign.
(28)	Defendant required addition of three terms:
	(a) inspection in HK and
	(b) inspection by AQL Level III, and
	(c) cancellation of contract if rejected more than two consecutive times.
(29)	The Plaintiff wrote on 5th June 2003 (page 479 of BDT), if contract not returned by 12th June 2003 would revert to terms of 6th March 2000 and may be forced to take legal action. The Plaintiff also modified contractual terms to inspection at its Shenzhen factory by independent third party with AQL Level II (Major 1.5 / Minor 4.00).
(30)	The Defendant requested to extend time to sign and return to 17th June 2003 (page 511 of BDT) and accepted by the Plaintiff (page 485 of BDT).

14. The summary in my view is accurate apart from the fact that the Defendant's witness disagreed that the functional sample had been approved as stated by Mr. Tang Yuk Kwai and it was only the colour sample and external features, that had to be approved. The Defendant's witness Mr. Castagnet stated that no approved sample had been supplied. He stated that they "agree on colour first. To help supplier they agree step by step." Having considered the evidence and the fact that the Defendant has by letters agreed to take delivery of 3,488 pieces of Second Radio before June 2000, I find that PW2 Mr. Tang's evidence must be correct that the functional version of Second Radio had been orally approved and the only features remaining to be approved related to the colour and the aesthetics. It may be that because the oral approval of the functional sample by the Defendant was conveyed to Mr. Tang Yuk Kwai the Plaintiff's engineer at the Plaintiff's Shenzhen factory, Mr. Ron Chan did not have any knowledge or awareness of it. I do not find the evidence of Mr. Castagnet that the Defendant was concentrating on colour and aesthetics step by step first before embarking on the functional aspect of the Second Radio, to be credible. In coming to this finding I bear in mind that no mention had been made by either party related to the functional features of Second Radio for some time. Despite that the Defendant on 31st October 2001 agreed to take delivery by June 2002. It therefore is highly likely that the only aspects of Second Radio left to be approved were the aesthetics aspect, and I so find. What is more the evidence shows that Plaintiff had exercised great patience in supplying samples to the Defendant to satisfy the Defendant's pursuit of a right combination of features of the external design of Second Radio. As far as the Plaintiff was concerned it had obliged the Defendant's whims. It cannot be doubted that the Defendant had taken a long time in deciding on a design which it finds suitable for the market.

The Issues

1.	Whether the contract is a contract for supply of sample only or whether it is a contract for the supply of 3,488 pieces of FM Auto Scan Stereo Radio as evidenced by the contracts at page 222 dated 6 March 2001 and the earlier contract at page 67 dated 23 June 2000.
2.	Were there implied terms in this contract as pleaded in the Statement of Claim.
3.	If the issues 1 and 2 were found in favour of the Plaintiff, then did the Defendant breach the implied terms as pleaded in paragraph 4 (a) of the Statement of Claim.
4.	Does the imposition of the terms of inspection in Hong Kong and the standard of inspection at AQL Level III by the Defendant amount to repudiation of contract by the Defendant?
5.	If the Defendant were found liable to the Plaintiff for damages what is the quantum of damage.
6.	Were the contract one for the supply of sample only, would the Defendant be entitled to its counterclaim?

1st Issue

15. The contract for the Second Radio at page 222 of BDT state the description of the radio, the quantity, the unit price and the amount in Hong Kong dollars. It then refers to "Development and Moulding Charge - HK$80,000." There is provision of a deposit in the sum of $123,094.00. In relation to Payment terms it states "Full payment to be settled upon receipt of your written quality inspection approval". "Delivery to be within 21 days upon receipt of your written approval of approval sample."

16. The Defendant's Counsel referred to the case Woods Component v. J Webster [1959] Lloyds Rep Vol 2 200 (hereinafter referred to as "Woods Component"). In this case, there was a contract in the form of a sale note which provided for the sale of "Prime Bulgarian Beech Squares" about 5100 cu. ft..." The clause related to Shipment stated, "The sample shipment to be delivered June/July. After buyers have approved the sample, delivery of the balance is to follow successively up to November 1959. Acceptance of the balance of the contract is subject to the sample parcel being satisfactorily received and approved by buyers."

17. In Woods Components case the Plaintiff buyers claimed for a declaration that upon a true construction of the contract, "(1) the plaintiffs upon receipt of the sample shipment referred to therein had the right to approve or disapprove the sample shipment at their complete discretion."

18. Lord Justice Sellers held that,

"On receipt of the sample shipment, the contract clearly does not provide for the delivery of the balance of the quantity specified to take place automatically, that is, without any other step being taken. The delivery of the balance is to follow successively up to November 1959, after buyers have approved the sample. If there is no approval of the sample, there is no duty or obligation on the sellers to deliver..."

"If therefore, there has been no approval by the buyers there is no obligation on them to accept. If I have read the shipment provisions aright, then the sample shipment has a vital bearing on the contract for it reduces it from being a firm contract for about 5100 cu. ft. of timber to one in which the balance of the quantity (after deducting the sample shipment) is dependent on whether the sample is approved.

The effect is that there is a concluded contract for the sample shipment with a firm offer or option for a further quantity up to a total of 5100 cu. ft. which offer has to be accepted or which option has to be exercised by the buyers approving the sample."

19. The Defendant's Counsel submits that the contract dated 6th March 2001 at page 222 of the BDT, reflected that at the date of the contract there was not nor could there be a sample nor a description with any degree of certainty. The need for a development process was an obvious feature of the contract, which was agreed by Super Dense and ICS. Neither Super Dense nor ICS knew what the final approval sample would look like until they had developed it.

20. Mr. Wong submits that the contract herein is distinguishable from the contract in the case of Wood Components of London v James Webster & Brother Ltd. There is no express term that the acceptance of the goods is subject to the sample being satisfactorily approved. The conduct of the Defendant is also inconsistent with such an interpretation. The Defendant guaranteed to take delivery by 31st December 2001 (see page 412 of BDT). He states that this is so despite the remark written in by the Defendant in the words "PS Providing the quality is acceptable". Mr. Wong submits that such words are not a part of the contract. The Defendant further agreed on 31st October 2001 that it would take delivery by June 2002 (page 422 of BDT).

21. He submits that the payment term is also inconsistent with this contract being only a contract for the supply of a sample. There is no provision on what would happen if the sample were not approved.

22. The Plaintiff's Solicitor has referred me to the background of this contract.

23. Before this contract, the parties herein had entered into an agreement to develop and produce the First Radio. In fact the production of First Radio had commenced pursuant to the instruction of the Defendant by fax dated 15 Sept 2000 at page 132 of BDT. At the Defendant's request by fax dated 25th September 2000, production of First Radio was stopped. The Defendant stated that there were problems with First Radio. However it cannot be disputed that they have previously given the Plaintiff instructions to go ahead with production of the First Radio. The Defendant requested the Plaintiff to modify the First Radio (see page 147 of BDT) and eventually, the Defendant embarked on developing a new radio for Jockey Club (Third Radio) in lieu of the First Radio. Some of the components of First Radio were used for the Third Radio. Eventually the Third Radio was developed, produced and delivery taken by the Defendant. The Defendant paid for the Third Radio.

24. The Plaintiff sent a fax to the Defendant dated 18th October 2000 asking for the balance of invoices under contract C00/104R4 (in respect of First Radio). It was then that the parties agreed that the remaining usable components in the First Radio would be used towards the development of the Second Radio.

25. The Defendant had already paid for the mould of the casing. There were some components from the First Radio that could be used for the production of the Second Radio.

26. The deposit from the former contract had been utilized as a deposit for this contract. The amount of deposit is substantial. It was at 30.97 % of the total sum of the entire contract sum of $397,408.00.

27. By their letter dated 5 October 2001, the Defendant guaranteed that they would take all 3,488 pieces of the Second Radios by December 31 2001 (see page 412 of BDT). By their letter dated 31 Oct. 2001, the Defendant stated that they would take delivery of the Second Radios on or before June 2002. Also in their letter dated 15 March 2002, at page 469 of BDT, Emma of the Defendant stated that she understood that they have to take the 3K PLL Radios by June that year.

28. The background clearly shows that there was an intention to use the components left by the aborted First Radio project that had not been used for the manufacture of the Third Radio in the production of the Second Radio. This is not therefore a case where there is no need for any expenditure on component parts until the approval sample had been approved because some such parts had been paid for by the Plaintiff and the Defendant had at one stage been approached to pay for them. However, it was agreed that an approval sample of the Second Radio has to be developed, and subject to the approval of such the 3,488 pieces of the Second Radio would be produced and delivered. This Contract was entered into it seems, in order to resolve the issue of the payment of the components of the First Radio, not used in the production of the Third Radio.

29. However, without approval of the approval sample, the Defendant is not obliged to take delivery of the 3,488 pieces of the Second Radio. A clear indication of the nature of agreement reached between the parties is that the Defendant had agreed to take the 3488 pieces of the Second Radio by their letter dated 5 October 2001 referred to above, subject to the quality being acceptable and further by their letter dated 31 October 2001 agreed to take 3,488 pieces of the Second Radio by June 2002. In the letter dated 15 March 2002 referred to above, the Defendant understood that they had to take the 3K PLL radios by June 2002.

30. Upon full consideration of the aforesaid, it seems to me that the Contract is for the production of 3,488 pieces of the approved sample of the Second Radio. The approved sample is to be developed between the parties. Without the approval of the approved sample of Second Radio, there is no obligation or liability on the parties to produce and deliver or to accept delivery of the 3,488 pieces of the Second Radio. It could be said that the contract was to be performed in two stages the first stage for the development of an approval sample of the Second Radio. The second, for the production, then delivery of 3,488 pieces of the approved approval sample of Second Radio within 21 days of the approval of approval sample. The second stage of the Contract could not be embarked until the first stage had been completed. Clearly from the wording of the contract there is a contractual obligation on the part of the Defendant to take delivery of 3,488 pieces of the Second Radio the moment the approval sample is approved. In this sense this case is not like Woods Component.

Issue 2

Implied Term in paragraph. 4(a) of the Statement of Claim

31. This implied term states, "the Defendant shall give a notice of approval of the sample within a reasonable time".

32. In relation to the first stage of this contract dated 6 March 2001 both parties agreed to the development of Second Radio. In the development of Second Radio, co-operation between both parties are vital. The Plaintiff's Solicitor referred to the case of Barque Quilpu, Limited v. Brown. N(1) [1904] 2 KB264 at page 5 of the Judgment,

"The second point is, that in this contract, as in every other, there is an implied contract by each party that he will not do anything to prevent the other party from performing the contract or to delay him in performing it. I agree that generally such a term is by law imported into every contract, in the same way as you import into every contract a stipulation that the various things which are to be done by the one party or the other are, if no time is specified, to be done within a reasonable time. In each of these cases that may be called an implied contract."

33. The Plaintiff's Solicitor further referred to BP Refinery (Westernport) Pty Ltd v. President, Councilors and Ratepayers of Shire of Hastings (1978) 16 ALR 363. Page 10 of the Judgment states,

"Their Lordships do not think it necessary to review exhaustively the authorities on the implication of a term in a contract which the parties have not thought fit to express. In their view, for a term to be implied, the following conditions (which may overlap) must be satisfied: (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract so that no term will be implied if the contract is effective without it; (3) it must be so obvious that "it goes without saying"; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract."

34. As the 1st part of the contract is one whether both parties have agreed to develop Second Radio, the term that "the Defendant shall give a notice of approval of the sample within a reasonable time" does not necessarily arise from the contract as the Plaintiff has to first to provide the approval sample that is acceptable to the Defendant before the Defendant should give the notice of approval of the sample. Were this term to be implied, it would not truly reflect the intention of the parties wherein the obligations between them are interdependent. The implication of this term imposes a unilateral obligation on the Defendant without reference to the obligation of the Plaintiff to provide an approval sample that is acceptable to the Defendant. It is not reasonable and equitable to imply such a term for the reasons stated. It is not necessary to give business efficacy to the contract. Although there is clearly an obligation to co-operate in this undertaking, however I find that this term as framed in the way it is framed could not be implied.

Implied Term under paragraph. 4(b) of the Statement of Claim

35. This term states, "the quality inspection shall be carried out in the Plaintiff's factory premises within a reasonable time before the Plaintiff's delivery"

36. The Plaintiff's Solicitor referred to the fact that this was the adopted course of dealing in relation to First Radio as is stated in page 142 of BDT. This is a fax from the Plaintiff to the Defendant dated 25 Sept. 2000 wherein the Plaintiff requested the Defendant to "arrange inspector to inspect the goods at their Shenzhen factory for each shipment." There is no reply from the Defendant. Hence there is no clear written indication from the Defendant agreeing to this. The evidence of Mr. Ron Chan of the Plaintiff in paragraph 30, 32, and 33 of his witness statement adduced into evidence show that the Defendant's engineers have inspected Third Radio in the Plaintiff's Factory. Paragraphs 16 and 17 of the witness statement of Tang Yuk Kwai adduced into evidence by him show that Cheuksco, the engineer of the Defendant had conducted tests and inspection of the Radios in the Plaintiff's factory. Paragraph. 6 of the witness statement of Tang Yuk Kwai refers to the factory of the Plaintiff being in Shenzhen.

37. The Plaintiff's Solicitor refers to paragraph 13-021 Chitty on Contract Vol 1 [1999] 28th Ed. which states,

"When implied from previous course of dealing. It is, however, clear that a term may be implied in any given case from the circumstances of the parties having consistently on former and similar occasions adopted a particular course of dealing."

38. In my view there is a previous course of dealing between the parties where the Defendant had inspected Third Radio in the Plaintiff's factory. The Plaintiff had also requested the Defendant to inspect First Radio at the Plaintiff's factory. The reason why there was no reply from the Defendant was probably because the Defendant did not continue the production of First Radio. Ron Chan gave evidence stating the reason for inspection in the factory in Shenzhen. He explained that the necessary equipment for testing and inspection are in the factory. A thorough inspection could not be conducted without such. Further, were the Radios found to be unsatisfactory, they could be rectified at the factory without the need of having to send them back to the Plaintiff's factory in Shenzhen. I find that from the circumstances aforesaid, and also from the previous course of dealings between the parties, this term could be implied. From the circumstances under which this contract was entered into, an inference could be made that the parties must have intended for inspection to take place at the Plaintiff's factory. The implication of such term is necessary to give business efficacy to the contract. Without such term being implied, the parties would not know where inspection should take place. From the circumstances of the case it would seem that the term implied represented the obvious but unexpressed, intention of the parties.

Implied Term under paragraph. 4(c) of the Statement of Claim

39. This states "the standard for such approval will be AQL level II (Major 1.50/Minor 4.00)".

40. The Plaintiff's Solicitor refers to paragraph 17 of the witness statement of Tang Yuk Kwai wherein he referred to the visit to the Plaintiff's factory by Cheuksco and his clients on 17th August 2001. Here Mr. Tang stated that Cheuksco and the Defendant's clients visited the Plaintiff's Factory and examined the New Radios according to AQL Level II standard by using their special equipment. Ron Chan stated in paragraph 41 of his witness statement that it is common practice to apply AQL Level II standard for inspecting radios. The Defendant had already conducted inspection of the 3,100 units of Third Radio at AQL Level II standard in the Plaintiff's factory and accepted the whole lot of the Third Radio. Ron Chan stated under cross-examination that it had never been agreed between the parties as regards what standard for testing and inspection applied. It was clear that the former standard of inspection in relation to Third Radio was AQL Level II.

41. The Plaintiff's Solicitor relied on the passage in Chitty on Contract paragraph. 13-021 for the legal basis for this term is an implied term. There is a previous course of dealing in relation to the inspection of Third Radio when this standard was consistently applied. There was no basis to apply a different standard. The Plaintiff was expecting the same standard to be applied. From the circumstances under which this contract was entered into, an inference that the parties must have intended this standard of inspection could be made. The implication of such term is necessary to give business efficacy to the contract. Without such term being implied, the parties would not know which standard for inspection to apply. The term implied must have represented the obvious but unexpressed, intention of the parties.

3rd Issue

42. As I found against the Plaintiff in relation to term in paragraph 4(a), of the Statement of Claim, there could be no breach of a non-existent term as stated in paragraph 4(a) of the Statement of Claim.

4th Issue

43. The Plaintiff had sent contract CO1/014R1 at page 474-5, on 30 May 2002 to the Defendant. By their letter dated 5 June 2002, they stated that the contract dated 6 March 2001 is still valid and is pending. However they requested the Defendant to sign on the revised contract (CO1/014R1) on a stipulated date upon which the new contract would automatically replace the original contract (CO1/014R). They state in the last paragraph of their letter dated 5 June 2002 that failing agreement on the revised contract, "will signify us that we have to stick to the agreed terms on the original contract and force us to take legal proceedings to enforce the execution of the original contract".

44. The Defendant's witness, Mr. Marc Castagnet stated in paragraphs 20 - 22 of his witness statement at page 25 of the Bundle of Court Document (BDC) referred to his imposition of the "AQL 1 Level III" requirement. By their undated Fax, which appeared to have been faxed on 30 May 2002, the Defendant requested to revise the contract CO1/014R1 by adding the following conditions,

"Terms: please add to 'SgT Warehouse'. Office

Remark (3) Goods will be inspected under AQL1 level III. If goods are rejected more than 2 consecutive times, the current contract will be cancelled and deposit refunded."

45. At paragraph 24 of the witness statement of Mr. Castagnet at page 26 of BDC, adopted by him as his evidence in chief, Mr. Castagnet stated that in the circumstances wherein the Plaintiff would not accept the quality inspection level imposed by the Defendant and the place of inspection referred to above, he considered that the only outstanding contract between ICS and Super Dense is the Disputed Contract which is that dated 6 March 2001. He stated that if the Disputed Contract is found by the court to govern the relationship between the parties, then the quality inspection term in that contract to which he has referred to applies. It seems that he was referring to quality inspection under AQL1 level III being the inspection level that would apply to the Disputed Contract namely that dated 6th March 2001. In other words, if goods are rejected more than 2 consecutive times during inspection under AQL1 level III, the current contract would be cancelled and deposit refunded. That would mean that the contract dated 6 March 2001 would be cancelled and the deposit paid there under would have to be refunded.

46. The Plaintiff sent a letter from their solicitors, dated 29th June 2002, at page 486-7 of BDT. In that letter they refer to the Defendant's breach of contract where they have,

1. failed and/or refused to give a written approval of the sample diligently

2. unreasonably required the goods to be inspected under AQL1 level III,

3. unreasonably required the goods to be inspected in Hong Kong.

47. They state that the Defendant's insistence of the above terms can be interpreted as a repudiation of the contract thereby giving to their client a right to claim against them for its loss and damage. They demanded that they forthwith withdraw their requirements and proceed to take delivery of the goods. Unless they hear from the Defendant within 7 days from the date of the letter, their client would accept their repudiation and institute proceedings against them to recover all its loss and damage without further notice.

48. In my view the Defendant had repudiated the contract by insisting on the addition of the terms stated in their Fax at page 516 of BDT. The Plaintiff plainly would not accept the imposition of the inspection level at AQL1 level III and the other terms. The Defendant had not withdrawn the imposition of the terms.

5th Issue

49. In my view, as I have found that the Defendant has repudiated the contract dated 6th March 2001, the Plaintiff is entitled to damages. In relation to damages, the Defendant's Counsel submitted that there is insufficient evidence for me to assess damages.

50. The Plaintiff claims the sum of $256,305.92 being the balance of charge for development and moulding and the price of 3,400 sets of radio at HK$256,305.92. The Plaintiff's Solicitor submits that the contract is a contract for the sale of future goods to be manufactured. He submits by reference to s.7 of the Sale of Goods Ordinance that a contract for the present sale of future goods operates as an agreement to sell the goods. He submits by reference to s.39 of the Sale of Goods Ordinance that a buyer who refuses to take delivery of the goods is liable to the seller for any loss occasioned by his neglect or refusal to take delivery. He further submits by reference to s.52(2) of the Sale of Goods Ordinance that damage for non-acceptance is the estimated loss directly and naturally resulting in the ordinary course of events, from the buyer's breach of contract. He submits by reference to page 20 of the judgment of Roskill J. in Harlow & Jones Ltd. v. Panex (International) Ltd. [1967] 2 Lloyd's Report 509, that the measure of damage is the difference between the contract price of the goods and the value of the goods to the Plaintiff as at the date of the breach by the buyer. In that case, it was stated to be "the loss which, in the language of the Act, on the facts of this case, flows directly and naturally from the defendant's breach".

51. The Defendant's Counsel refers to the passage in Chitty on Contracts (28th Ed. 1999) para.27-002 and refers to the two types of loss in assessing damages, namely:-

(1)	"Expectation loss" relates to the gains or benefits which the Plaintiff expected to receive from the completion of the contract, which failed to materialise as a result of the Defendant's breach of contract;
(2)	"Reliance loss" relates to the expense or loss which the Plaintiff has incurred in reliance on the Defendant's performance of the Contract, which were wasted by the Defendant's breach.

52. He refers to Cullinane v. British "Rema" Manufacturing [1954] 1 QB 292 at 302 per Evershed M.R. wherein it states,

"It seems to me, as a matter of principle, that the full claim of damages in the form in which it is pleaded was not sustainable, in so far as the plaintiff sought to recover both the whole of his original capital loss and also the whole of the profit which he would have made. I think that is really a self-evident proposition, because a claim for loss of profits could only be founded upon the footing that the capital expenditure had been incurred."

See also Jenkins L.J. at page 308:-

"... while no doubt the plaintiff can at his option claim damages based on the difference between the value to him of the article as actually supplied and the contract price of the article, he cannot claim both that amount, representing his capital expenditure thrown away by reason of the breach, and also the full amount of the profit which he can show that he would have made in the event of the article answering the warranty ... In certain circumstances it may be to the plaintiff's advantage to claim on the basis of the difference between the contract price and the value of the article, because it may be, in some instances, that that would give him a larger sum than any sum which he could prove as representing loss of profit. Where the loss of profit is the larger sum the plaintiff, of course, will elect to take that; but he cannot have both."

53. Defendant's Counsel submits that the Plaintiff must elect to claim between reliance loss and expectation loss.

54. It would seem from the manner in which the Plaintiff frames his claim that the sum claimed being "outstanding and due" to the Plaintiff under the Contract dated 6th March 2001 was premised on the expected gain were the said Contract performed. In other words the Plaintiff is claiming for "expectation loss".

55. Defence Counsel submits that to claim "expectation loss", or a loss of profit, the Plaintiff must first adduce evidence to show that there is at least a reasonable prospect that the profit or gain in question would have been acquired (but for the breach) such that the loss of which could be regarded as being proved with reasonable certainty.

56. He refers to Dirphys (Owners) v. Soya(Owners), The Soya [1955] 1 WLR 1246 at 1250, where Willmer J. stated in the headnote at page 1246:-

"Held, that the loss of profits arising from the detention of a vessel was a question of fact, to be proved with reasonable certainty, and was not a matter on which the court was entitled to speculate. A claim for loss of profits, at the enhanced rate, was not proved with reasonable certainty, and was thus a speculation and too remote to be considered a consequence in law of the detention."

57. The Defendant's Counsel showed that the Plaintiff had failed to adduce evidence to establish the amount of profit lost by the Plaintiff for the following reasons:-

(1)	It was never the Plaintiff's case that at any specified time, it has already manufactured all 3,400 radios in Shenzhen under the Second Contract, which were ready for delivery to the Defendant.
(2)	On the contrary, there was evidence from the Plaintiff at trial that at most only 40 radios had been produced, 1 or 2 of which were supplied to the Defendant as samples;
(3)	It was clear that there was no final approval as yet of the aesthetics aspect of Third Radio, namely its external appearance.

58. He further submits that the Plaintiff could not discharge its onus to show that the Second Radios would be ready for delivery to the Defendant such that there was a reasonable certainty that the profits under the said Contract could be acquired.

59. I agree with the Defendant's Counsel that as the Second Radios have not been manufactured, it would be speculative for the Plaintiff to assert that it would have been able to complete the said Contract and acquire the profit. Further the full measure of the expenses for the manufacture of the Second Radios could not have been expended. Since there is no evidence that 3,400 sets of the Second Radios have been manufactured, there is no evidence of the cost of manufacture of the 3488 pieces of Second Radio. Hence there is no evidence of "expectation loss."

60. The Defendant's Counsel stated that there is no contemporaneous invoices or any particularized schedules or documents evidencing the purchase of component parts of the Second Radios. There is no evidence demonstrating how much extra work was necessary to put all the parts together and construct the Second Radios. There is no evidence of all other items of expenditure that that would make up the cost price of the Second Radios. Commenting on the Plaintiff's evidence, the Defendant's Counsel submits that it would be an affront to common sense if the Plaintiff could claim loss of profit, that is the full outstanding price for the Second Radios if all it had in possession were distinct component parts which were yet to be put together. I have to agree with this submission of the Defendant's Counsel.

61. I agree with the Defendant's Counsel that the evidence of the Plaintiff falls far short of being able to prove both the "fact and amount" of damage sustained of loss of profit.

62. It would seem to me that as the Second Radios have not as yet been manufactured, the Plaintiff should have claimed damages on "reliance loss". However, there is no documentary evidence to show the items of expenditure towards the production of the Second Radios that had been lost by the Plaintiff arising from the Defendant's breach.

63. I find that the Plaintiff has failed to adduce evidence to establish the loss sustained as claimed.

64. The Plaintiff's Solicitor submitted that I could adjourn the assessment of damages to a date to be fixed upon a finding of the Plaintiff's entitlement to damages. The Defendant's Counsel referred me to the leading authority supporting the principle that stated that in the absence of an order for a separate trial on liability and damages, the Court should not direct an inquiry as to damages by the master at the conclusion of the trial, in the absence of evidence adduced on damages.

65. In Born Chief (t/a Beijing Restaurant) v. Tsai George & Anor [1996] 2 HKC 282, the trial judge had found the defendant liable in nuisance, but there was insufficient evidence showing quantum of damages. The Plaintiff had applied for no split trial. The trial judge ordered damages to be assessed by a master. The Court of Appeal held that such an order was not appropriate.

66. Liu J.A. stated at 288B-C as follows:-

"It was not right for the judge to take upon herself to order damages to be assessed by the master, thus providing a further opportunity for proving damages to the Plaintiff at the expense and to the prejudice of the defendants. It was incumbent upon the plaintiff to establish its claim at the trial and it must bear the consequences of its failure to do so."

67. Ching J.A. (as he then was) stated at 290G-H:-

"There are no grounds upon which a split trial could have been ordered at any time and it would appear that the judge below ordered the inquiry simply because the plaintiff had not called its evidence so that she was unable to arrive at a figure. That is not a proper reason for ordering an inquiry."

68. Finally, Narareth J.A. stated at 292F:-

"...the good, efficient and increasingly, the affordable administration of justice requires that parties present their entire cases and cannot expect a second bite at the cherry simply because they failed to apply for a split trial or to produce their requisite evidence. The judge was plainly wrong in directing an inquiry to be made by a master as to damages, and that order cannot be permitted to stand."

69. I accept the Defendant's Counsel submission that it is not open to me to adjourn the matter of assessment of damages to a date to be fixed. The Plaintiff has not been able to establish the damages claimed. However they are entitled to nominal damages for loss suffered as a result of the Defendant's repudiation of the contract. I award nominal damages for the Plaintiff in the sum of $1,000.

6th Issue

70. The Counterclaim of the Defendant for the return of the deposit paid is based on the Plaintiff's failure to provide approval sample of the goods to be supplied.

71. I had found that the Defendant had repudiated the contract by insisting on the terms related to inspection at AQL Level III and inspection in Hong Kong. The Plaintiff did not agree to the imposition of these terms. The imposition of such terms not accepted by the Plaintiff would have caused the ultimate aim of the contract, the production of 3,488 pieces of the approval sample to be derailed. In the Plaintiff's letter to the Defendant on the 5th June enclosing a revised Contract CO1/014R1 they stated that should the Defendant fail to agree to the revised contract, the parties would revert to the terms of the contract dated 6 March 2001. It was at this point that the Defendant proposed their new terms. By insisting on these terms, not agreed to by the Plaintiff, the Defendant had repudiated the contract dated 6th March 2001. The Defendant is not entitled to damages claimed in the Counterclaim.

72 ． I therefore give judgment for the Plaintiff for nominal damages in the sum of $1,000 together with interest thereon from date of claim to date of payment at judgment rate and I dismiss the counterclaim. I give an order nisi for costs of the action to the Plaintiff to be taxed if not agreed.