MJH INTERNATIONAL B.V. v. ROME INTERNATIONAL HANDBAG COMPANY LTD

HCA 294/2021

[2023] HKCFI 2441

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 294 OF 2021

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J U D G M E N T

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INTRODUCTION

1.  In the present action, the Plaintiff claims damages against the Defendant as supplier of KN95 face masks for breaches of contract to fulfil the Plaintiff’s orders placed by the Dutch Government (the “Contract”).

2.  The Plaintiff’s case is that the Contract was for the sale of goods by description, and for the sale of goods by sample, pursuant to Sections 15 and 17, respectively, of the Sale of Goods Ordinance, Cap 26 (the “Ordinance”).

3.  The Plaintiff claims that the Defendant supplied face masks which, in breach of the Contract, differed from the description and sample of goods and, in particular, failed to comply with the KN95 (GB2626-2006)  standard for particle filtering efficiency.

4.  The Defendant filed its Defence on 20 May 2021 but has since taken no steps in this proceedings since filing its List of Documents on 4 May 2022.

5.  By an unless order of Master Dick Ho dated 30 August 2022, the Defendant has been debarred from adducing evidence at trial.

6.  By an order of Master Matthew Leung dated 9 September 2022, the Defendant’s solicitors came off the record.

7.  The Defendant chose to absent itself from the trial.  I am satisfied that proper notice of the pre-trial review and the trial dates have been given the Defendant.  The Plaintiff’s solicitors sent the Plaintiff’s application to set the case down for trial to the Defendant at its registered office on 9 February 2023.  Subsequently, on 10 February 2023, the Court sent a notice of the appointment to fix a date, and, on 6 March 2023, the Court sent a notice of the pre-trial review and trial dates, both to the Defendant’s registered office.  The Defendant did not attend the pre-trial review.

8.  The trial bundle together with the Plaintiff’s written opening submissions and list of authorities and chronology were served on the Defendant at its registered office on 24 August 2023

9.  Accordingly, this trial proceeded on the basis that the Plaintiff had to prove its case and I am satisfied that as far as liability is concerned, on the evidence, the Plaintiff has made good its case.

ANALYSIS OF EVIDENCE

10.  The Plaintiff called Mr Marc Jeroen Hertog, its CEO to testify before this Court and I accept his evidence.

11.  I am of the view that Sections 15 and 17 of the Ordinance apply in the present case. The Contract involves both a sale of goods by description and by sample.

12.  First, I note that the Defendant admits the Plaintiff’s pleaded case that the Contract was for the sale and purchase of KN95 face masks as stated on the proforma invoice dated 26 March 2020 issued by the Defendant to the Plaintiff.  (the “Proforma Invoice”).  Under the column with the heading “Products name” (sic), the description of goods in the Proforma Invoice was “KN95 FFP2—Mask”.

13.  Secondly, Mr Hertog, in his witness statement, in addition to the Proforma Invoice, relies on the following documents which demonstrate that the Contract was for the sale of goods by description – namely KN95 face masks:

(1)  The invoices issued by the Defendant to the Plaintiff, each of which contains (a)  the product reference “KN95 EARLOOP”; and (b)  the product description “KN95 Protective Mask”; and

(2)  The email from the Defendant’s Ms Cindy Shen dated 8 May 2020 confirming “as final agreement all cargos ship as KN95 as China GB test report, and with Joint declaration letter which stated clearly both sides accept as KN95”.

14.  I am of the view that from the documentary evidence, it is clear that Section 15 of the Ordinance applies in the present case.

15.  I am also satisfied that this is a sale of good by sample.  First, the Defendant avers “that the Defendant provided samples of face masks to the Plaintiff which are in full compliance of the requisite standards and specification under the Agreement” (sic)  (See Defence §10(4), but otherwise pleads bare denials in respect of the Plaintiff’s pleaded case that:

(1)  “… Cindy Shen, on behalf of the Defendant, represented to the Plaintiff… that all the face masks would be produced… in accordance with the samples provided by Cindy Shen on behalf of the Defendant…” (Amended SOC §8; Defence §10);

(2)  “… the Defendant sent to the Plaintiff (a)  photographs of sample face masks produced by GPA for UFA… (b)  a photograph of packaging for a sample face mask produced by GPA for UFA; (c)  a video of a sample face mask produced by GPA for UFA, showing that the face mask consists of five layers; (d)  a report produced by … the Guangzhou Inspection Testing and Certification Group Co., Ltd (“GTTC”)  dated 18 March 2020 in respect of testing conducted by GTTC on a sample mask… (the “GTTC Report”)  (Amended SOC §8; Defence §10);

(3)  “… Accompanying the GTTC Report was a copy of the application form submitted by UFA, as license holder for the production of the sample mask; and (e)  a copy of the order that the Defendant placed with UFA for the face masks in order to fulfil the Contract, which contained a photograph of a sample of the mask” (Amended SOC §8; Defence §10);

(4)  “…Further, in respect of the deliveries of the masks ordered from the Defendant by the Plaintiff, the Defendant provided compliant samples of the masks against which the Plaintiff could test whether the bulk of the deliveries correspond with the samples in quality and looks” (Amended SOC §8; Defence §10); and

(5)  “… the Contract was also for the sale of goods by sample within the meaning of Section 17 SOGO” (Amended SOC §9; Defence §11).

16.  Mr Hughes for the Plaintiff drew to this Court’s attention that the GTTC Report referred to “K95口罩” and contained a photograph of a sample KN95 face mask.

17.  Secondly, the Contract was entered into and approved based upon sample KN95 masks shown to Mr Andy Jennings and Mr Ed Jennings by Ms Shen of the Defendant on 26 March 2020, received from the Defendant on 30 March 2020, and depicted in four photographs and a video sent to Mr Hertog for approval.

18.  Hence, I am of the view that the Contract is also a sale of goods by sample.

BREACH OF THE CONTRACT

19.  I am satisfied that this is a clear case that the Defendant has breached the Contract.  First, the Defendant admits that, under the Contract, it was required to deliver face masks which meet the KN95 standard (Defence §7(2)).

20.  It is not in dispute between the parties that the minimum standard for KN95 face masks is a particle filtering efficiency of 95%.  In other words, to be certified as a KN95 face mask, the face mask must filter at least 95% of non-oily airborne particles while being tested at a flow rate of 85 litres of air per minute (Amended SOC §5; Defence §7(2)).

21.  I find as a matter of fact that the test reports relied upon by the Plaintiff demonstrate that the 3^rd Shipment and the 4^th Shipment under the Contract failed to comply with the KN95 particle filtering efficiency standard:

(1)  Tests of samples from the 3^rd Shipment conducted in the Netherlands by Kalibra International B.V. on 6 May 2020 showing particle filtering efficiency of 55%, 67%, 74%, 73%, 91% and 69%, respectively;

(2)  Tests of samples from the 3^rd Shipment conducted in the Netherlands by GreenCycl B.V. on 15 May 2020 showing particle filtering efficiency of 83.5%, 67.7%, 80.6%, 81.9%, 89.3%, 54.3 and 27.1%, respectively;

(3)  Tests of samples from the 4^th Shipment conducted in the Netherlands by Landelijk Consortium Hulpmiddelen (“LCH”)  on 29 May 2020 showing particle filtering efficiency of 94%, 68% and 77%, respectively;

(4)  Tests of samples from the 4^th Shipment conducted in the Netherlands by LCH on 2 June 2020 showing particle filtering efficiency of 98%, 94%, 53%, respectively;

(5)  Tests of 15 samples from the 4^th Shipment conducted by the National Quality Supervision and Test Centre for Personal Protection Equipment in Beijing in July 2020 showing particle filtering efficiency of between 79.6% and 81.9%; and

(6)  Tests of a further 15 samples from the 4^th Shipment conducted by the National Quality Supervision and Test Centre for Personal Protection Equipment in Beijing in July 2020 showing particle filtering efficiency of between 88.5% and 91.0%.

22.  In its pleading, the Defendant seeks to challenge the testing conducted in the Netherlands on 29 May 2020 and 2 June 2020 of samples from the 4^th Shipment, on the grounds the testing was conducted using the European standard flow rate of 95 litres per minute instead of the Chinese standard flow rate of 85 litres per minute (Defence §2(5)(a)).

23.  However, I agree with Mr Hughes for the Plaintiff that:

(1)  Even if the face masks are tested using flow rate of 95 litres per minute, the masks must still be able to provide particle efficiency of 85%, even allowing for a 10% margin for error (Reply §§2.2 & 2.8.1);

(2)  This was acknowledged and accepted by Ms Shen in her email to Mr Ed Jennings dated 8 May 2020; and

(3)  In any event, all 30 of the sample face masks from the 4^th Shipment tested with the National Quality Supervision and Test Centre for Personal Protection Equipment in Beijing failed, using a flow rate of 85 litres per minute (Reply §2.8.2).

24.  I note the Defendant’s contention that the face masks have been inspected, examined and accepted by the Plaintiff or its agents prior to delivery; and that the Plaintiff has accepted delivery of all of the face marks which were delivered to the Plaintiff (Defence §§2(2), 2(3)  & 16(2)).

25.  However, Mr Hughes for the Plaintiff correctly pointed to this Court that in an email from Ms Shen to Mr Hertog dated 9 June 2020, it is stated that:

“Hi Jeroen,

Noted, I should pay you.

But UFA still not returned me money.

I feel sorry for this situation.

UFA insisted the 500,000 pieces quality ok as KN95 and asked me to accept, but

impossible I can accept since MJH already rejected.

So pls help to wait and I'm trying to solve.

Cindy” (Emphasis added.)

26.  Hence, I reject the Defendant’s case that the Plaintiff and/or its agents have accepted the quality of the face masks that were delivered to it.  It is clear to this Court that the Plaintiff’s client MJH had rejected the face masks due to its poor quality.

ASSESSMENT OF THE QUANUTM OF DAMAGES

27.  First, I am satisfied that the Plaintiff accepted delivery of the 1^st Shipment (500,000 masks), the 2^nd Shipment (500,000 masks), 800,000 masks from the 3^rd Shipment and 827,000 masks from the 4^th Shipment – a total of 2,627,000 masks.  The Defendant admits that the payments in total of US$4,515,427.50 were made by the Plaintiff to the Defendant under the Contract.

28.  The unit price under the Contract is US$1.49 per face mask. The purchase price under the Contract for 2,627,000 face masks is US$3,914,230.

29.  Thus, the amount overpaid under the Contract is therefore US$601,197.50.

30.  Secondly, I am satisfied that the Plaintiff is entitled to seek reimbursement of freight charges and storage charges in respect of the 4^th Shipment, amounting to in total US$240,138.87.  The Plaintiff has produced the relevant air freight invoices.  In her emails to Mr Hertog dated 27 May 2020, 4 June 2020 and 5 June 2020,Ms Shen accepted and agreed that the Defendant would reimburse the Plaintiff for such expenses.

31.  Thirdly, I also agree that as a direct result of the Defendant’s breaches, the Plaintiff was forced to incur legal costs in the Netherlands in the US dollar equivalent sum of US$36,536.96, in obtaining advice with respect to, and resolving, potential claims against the Plaintiff in the Netherlands by the Dutch Government.  I am satisfied that the Plaintiff is entitled to claim such legal costs vis-à-vis the Defendant.

32.  Fourthly, in term of loss of profits, I notice that the Plaintiff entered into the Contract with the Defendant for the supply of 5,600,000 face masks on 30 March 2020.  The unit price was €2.75 per mask, so the total sale price was €11,000,000 (the “Existing Order”).  To the knowledge of the Defendant, the Plaintiff secured an order from the Dutch Government supplier (DSN Trade)  for 4,000,000 KN95 masks on 24 March 2020.

33.  I am satisfied that the Defendant well knew that the entire 5,600,000 would be further sold to the Plaintiff’s customers including the Dutch Government.  The Plaintiff was only able to supply 3,627,000 to the Dutch Government under this contract (having managed to mitigate its loss by securing an additional 1,000,000 masks from a company called Safjoy Trading Company Ltd (“Safjoy”), in addition to the 2,627,000 masks supplied by the Defendant under the Contract).

34.  I accept the Plaintiff’s calculation that the loss of profit under this head of damage amounts to in total US$654,615.

35.  Finally, the Plaintiff also claims for loss of profit due to its inability to sell another 1,000,000 face masks to the Dutch Government.  The Plaintiff’s case is that on 2 April 2020, the Plaintiff was informed by email from DSN Trade that it intended to place an order for a further 2,600,000 face masks (in addition to the 4,000,000 masks already purchased under the Existing Order)  – a total order of 6,600,000 face masks.

36.  As a result of the Plaintiff’s breaches of the Contract, the Dutch Government has lost all confidence in the Plaintiff and DSN Trade did not proceed with the additional order.

37.  Mr Hughes for the Plaintiff submitted that but for the Plaintiff’s breach of the Contract, the Defendant would have been able to supply an additional 1,600,000 face masks sourced from the Defendant under the Contract; and an additional 1,000,000 face masks sourced from, say, the Plaintiff’s alternative supplier, Safjoy (in order to make up the total of 2,600,000 further face masks).

38.  In respect of these heads of damage, the Plaintiff sought leave to amend its pleading in accordance with its Summons issued on 24 August 2023, in order to include the claim in respect of 1,000,000 face masks.

39.  I am of the view that the relevant legal test whether such loss can be shown to be in the particular circumstances in the contemplation of the contracting parties, as a consequence of the breach, applying Hadley v Baxendale.

40.  On the facts of the present case, I am of the view that the additional order of 1,000,000 face masks was not in the contemplation of the contracting parties.  All that the Defendant knew at the material time was a contract to the order of 5,600,000 to which 4,000,000, a bulk order, would be supplied to the Dutch Government.

41.  There is no evidence to show that the orders from the Dutch Government would be on a repeated basis.  The Plaintiff has adduced no evidence that the Defendant itself was made to understand that the Plaintiff would place repeated orders on the Defendant.  From the Defendant’s perspective, the Contract was the only contract that it entered into with the Plaintiff.

42.  In fact, it is accepted that the additional 2,600,000 order from the Dutch Government was not drawn to the attention of the Defendant.

43.  Further, it appears that the Plaintiff could have sourced supply from alternative supplier, Safjoy.

44.  Hence, on the existing evidence, I am of the view that it is not entirely just to land the Defendant with the loss of this additional 1,000,000 order from the Dutch Government to which the Defendant had had no knowledge about.  I will accordingly, disallow the amendment application.

45.  For the sake of completeness, I am also satisfied that the Plaintiff had tried its very best to mitigate its losses:

(1)  Notwithstanding the delivery of 200,000 defective masks in the 3^rd Shipment, the Plaintiff sought to mitigate its loss by requesting an additional 200,000 masks in the 4^th Shipment;

(2)  The Plaintiff managed to persuade the Dutch Government to accept 827,000 of the 1,200,000 masks from the 4^th Shipment; and

(3)  Mr Hertog has given detailed evidence regarding his attempts to mitigate the Plaintiff’s losses.

DISPOSITION

46.  For all the reasons stated above, I make the following orders:

(1)  The Defendant is ordered to pay the following sums to the Plaintiff forthwith:

(a)  The sum of US$601,197.50

(b)  The sum of US$240,138.87

(c)  The sum of US$654,615.00

(d)  The sum of US$36,536.69

(e)  The sum of US$2,808,000.00

(2)  Interest on the above sums at HSBC’s prime rate plus 1% from the date of the writ to the date of this judgment and thereafter at the judgment rate.

(3)  Costs of this action to be paid by the Defendant to the Plaintiff on a party to party basis to be taxed if not agreed.

47.  Finally, I thank Mr Hughes for the Plaintiff’s assistance in this trial.