SAMSUNG HONG KONG LTD. v. KEEN TIME TRADING LTD.

CACV 240/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 240 OF 1998

(ON APPEAL FROM HCA NO. 12592 OF 1995)

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J U D G M E N T

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Liu, JA:

1. The plaintiff applied for assessment of damages. Its application was entertained by the now Acting Registrar of the High Court, then sitting as a Master. Master Chu awarded nominal damages of $100. From that assessment, the plaintiff appeals.

2. The parties had attended before some other Master for assessment of the same damages. This court, differently constituted, set aside the assessment and ordered damages to be re-assessed by another Master. The matter came to be heard by Master Chu.

3. The facts are not involved. The plaintiff sold polyester fibres to the defendant. The plaintiff's supplier was Reter Trading Limited (Reter). The sale by the plaintiff to the defendant was under a written contract for 1.5D polyester fibres (the Sales Contract). It was a sale by description and the law implied a condition that the goods sold under the Sales Contract should correspond with the description. The defendant sub-sold the polyester fibres to Wah Ming (the Sub-Sale). Wah Ming in turn sold to Beijing City Cotton and Hemp Company (the Further Sale). The Sub-Sale to Wah Ming and the Further Sale to Beijing City Cotton and Hemp Company were both for polyester fibres 1.5D. Under the Sales Contract, the defendant was to open a Letter of Credit directly in favour of the supplier, Reter. As known to the defendant, it was not viable for the plaintiff itself to finance the purchase from Reter. Upon the defendant's failure to establish the requisite Letter of Credit, the plaintiff was held by its supplier, Reter to be in breach. Reter commenced proceedings against the plaintiff and obtained judgment for damages. In turn, the plaintiff sought damages against the defendant in a follow-up action. After the issuance of a Writ by the plaintiff against the defendant, the parties entered into negotiation for a possible settlement.

4. The plaintiff's purchase of polyester fibres from Reter was of the specification of 1.4D, not 1.5D. The Bill of Lading issued under the supplier's contract (the Supply Contract) was for polyester fibres 1.4D. The same 1.4D description of goods appeared throughout in the documentation and correspondence between the plaintiff and its supplier, Reter under the Supply Contract. The supplier's polyester fibres were surveyed for a Certificate of Quality and Quantity (the Survey Certificate). The Survey Certificate specified the polyester fibres for delivery under the Supply Contract as 1.4D subject to "denier deviation of +/- 3%".

5. Liability had been established by the plaintiff against the defendant with damages to be assessed, but as ordered by this court for a second time by another Master. Master Chu awarded nominal damages of a $100; she nevertheless proceeded to quantify loss to the plaintiff at $441,867.92. The plaintiff is otherwise content with this quantification.

6. It is not strenuously disputed that subject to alleged commercial tolerance, goods under the Supply Contract were not in conformity with the description in the Sales Contract. The Master found that 1.4D polyester fibres did not correspond with the description of 1.5D polyester fibres specified in the Sales Contract. I am satisfied that there was sufficient evidence for the Master to reach this conclusion, but the Master was invited to and did consider, so counsel submits, the question of commercial tolerance. It is important to note that the Master found none of the witnesses tendered by the parties to be an expert for trade tolerance, including Dr. Tao. The Master held, despite evidence from some of the witnesses, 1.4D and 1.5D as "different specifications". She did not accept Dr. Tao's invitation to act on the 15% recommended in 1971 by the International Bureau for Standardisation of Man-Made Fibers. What is reasonably clear is that the Master did not affirm this 1971 15% recommendation. Mr Siao, the manager of a spinning mill in Shaoguan, Guangdong Province who was called by the plaintiff, merely gave evidence on the spinning process and the end-products for 1.4D and 1.5D fibres. Mr Rolland Chan, the plaintiff's manager, simply offered his factory experience. On the other hand, Mr Li, the defendant's manager, explained why 1.4D fibres were unacceptable. The reason he gave was: Wah Ming had contracted, through the plaintiff's Guangzhou office acting for the defendant, for 1.5D polyester fibres. Another Mr Li, manager of Wah Ming, testified that Wah Ming had also sub-contracted with Beijing City Cotton and Hemp Company to supply the same 1.5D polyester fibres. The defendant's expert, Mr Leung, from a research institute in Guangdong Province, described the difficulties in the change over to 1.4D from 1.5D fibres in manufacturing.

7. The Master's analysis is somewhat obscure. Reading her reasoning with benevolence, the Master seemed to have accepted the Sales Contract between the plaintiff and the defendant as one for international sale by virtue of the provision "CIF HK", and she inferred from documents of one trader alone that even for an international sale, the usual variation for fibres of the kind under consideration was +/- 3% or +/- 4%. The Master concluded that with a +/- 3% commercial tolerance for a description of 1.4D, the lower end of the range of - 3% would not meet the 1.5D ordered under the Sales Contract. The inference drawn by the Master is not easy to support. However, the Master was not prepared to accept 15% as tolerable variation. In the result, the Master was left with no expert evidence on commercial tolerance regarding the 1.4D and 1.5D polyester fibres. In the absence of cogent evidence from which the Master could have properly drawn her inference, she had in effect no or no reliable basis for deciding on any margin of tolerance as regards the description of 1.5D.

8. There was thus no expert evidence on trade customs or practice on specification variation. The plaintiff had gone before Master Chu, as she then was, with an open eye as to what it had to prove. This was the second attempt to assess damages. The criticisms levelled against the Master stemmed from the plaintiff's own neglect in adducing expert evidence. The plaintiff should have been well prepared and must take the responsibility for and consequence of any shortfalls. If the Respondent's Notice is necessary to fortify the Master's finding, I would allow it.

9. Unaided by such expert's evidence on trade customs or practice on commercial tolerance, the Master relied on Arcos Limited v. E.A. Ronaasen And Son, [1933] AC 470 at p. 474. The Master concluded that 1.4D was decidedly different from 1.5D and that the goods shipped by the supplier "Reter to Hong Kong (were) not of the same description as that under the (Sales) Contract although the difference (was) small". She found that Reter's goods did not correspond with the description in the Sales Contract entered into between the plaintiff and the defendant. The Master invoked s. 15(1) of the Sales of Goods Ordinance.

10. As a matter of fact, the Master did not have to proceed to consider any margin of tolerance as regards description for the discharge of the plaintiff's delivery obligation as if the defendant had opened the requisite Letter of Credit. There was also little justification for the Master to assume that Reter would deliver any significant quantity close to the top range of 1.44D merely on the force of the Survey Certificate which provided a survey ranging between +/- 3% for denier deviation. That Survey Certificate did not specify what quantity of the examined goods was close to the lower range, in the middle range or near the top range. There was really no evidence for the Master to identify how much of the surveyed fibres would fall within the alleged commercial tolerance.

11. After fixation of liability, when it comes to assess damages against a party in breach, no more than nominal damages would be awarded unless the party not in breach i.e. the plaintiff in this appeal, is able to show that it could effect proper delivery under the Sales Contract in due course. The plaintiff could only supply 1.4D polyester fibres and was unable to deliver goods in conformity with the description in the Sales Contract. The defendant would have been legally entitled to terminate the contract on account of the delivery of the wrong description. The law would presume that the defendant here, having an option to reject delivery on account of wrong description, would exercise it to its best advantage so as to reduce or extinguish any claim for loss by the plaintiff. See The Mihalis Angelos, [1971] 1 QB 164 at p. 196H; The World Navigator, [1991] 2 Ll Rep. 23 at p. 33 left hand column where Staughton, LJ observed:

"But I cannot find any suggestion in the judgments of the Court of Appeal (in The Mihalis Angelos) that it was also an essential step to prove that the charterers would beyond doubt have exercised the right to cancel, rather than that they could have exercised it."

12. It stands to reason that the defendant in breach would seize upon any opportunity to elect, if it had an option, to instantly put an end to the plaintiff's right to claim. The authorities do not support counsel's proposition that it has to be shown not only that the defendant could have in law terminated the contract by rejecting delivery of the wrong goods, but that in fact, it would have, in all the circumstances, rejected the delivery. It is inconceivable that any buyer in breach would hesitate to save himself from having to pay damages. If a buyer in breach were entitled to shut out any possibility of having to pay damages, it would be absurd to suggest that he would need go on to consider whether he should have done so. The case sought to be relied upon by Mr Cheung for the plaintiff is unhelpful. In Paula Lee Limited v. Robert Zehil & Company Limited, [1983] 2 All ER 390 at p. 393, Mustill, J, as he then was, was considering assessment of damages claimed by a seller. The law recognises the reality that whenever possible a buyer in default would elect to take a position where he could look to minimum performance. In circumstances where the least burdensome position is not apparent, the court may have first to identify the content of the buyer's obligation before proceeding to evaluate the worth of that obligation to the promisee, i.e. the supplier. See p. 393e/j. Paula Lee dealt with the actual loss to a seller, not a buyer's election to pay no or little damages. When a buyer in breach has an option to escape or reduce penalty under a contract, a court need not consider beyond his legal right to reject a wrong delivery because no rational being could possibly have declined to take advantage of this option to reject. In the case of an inquiry into the actual loss of a seller, it would at times be necessary to ascertain first the nature of the buyer's broken obligation and then the extent of actual damages caused by the action the defaulter would have taken in any given scenario. The defendant here was rightly assumed to elect not to accept 1.4D for a contract to buy 1.5D polyester fibres. There was, in fact, ample evidence for returning a finding that the defendant would not have accepted delivery of 1.4D polyester fibres for the commitments made to Wah Ming and down the line, so to speak, to Beijing City Cotton and Hemp Company.

13. The parties negotiated after the plaintiff had instituted proceedings against the defendant for damages. It is difficult to appreciate how an unsuccessful attempt to settle a dispute could give rise to waiver. The judge accepted that during the negotiation the defendant and the supplier were aware of the 1.4D fibres to be delivered under the Supply Contract. Further, the defendant's manager, Mr Li, disclosed on affirmation that with that knowledge the defendant would have been able, ready and willing to tender payment to the plaintiff if the negotiation had been fruitful. It was only for a dispute over warehouse charges, so counsel maintains, that the negotiation collapsed. In fact, the parties in negotiation had apparently not been deterred by the then price-drop. But what is important to bear in mind is: given a live option after a failed negotiation, would not any buyer in breach have elected to exercise it in a way to his best advantage and least profitable to the seller? The Master was right to conclude that the defendant could elect to reject delivery of 1.4D polyester fibres.

14. In conclusion, the award of nominal damages of the Master can, in no way, be faulted. This is sufficient to dispose of the appeal. I would dismiss it with an order nisi for costs in favour of the defendant.

Leong, JA:

15. I agree.

Chan CJHC :

16. I agree that this appeal should be dismissed with costs.

17. The defendant has admitted that it was in breach of the Sales Contract made between the parties in that it had failed to open a letter of credit in accordance with the terms of the contract. However, it is argued that the plaintiff was only entitled to nominal damages because it was also in breach of the Sales Contract by supplying goods of a different description; hence the defendant was entitled to terminate the contract in any event and the plaintiff had therefore suffered no loss.

18. Counsel for the plaintiff submits that in order to succeed in this argument, the defendant must prove two matters. First, as a matter of law, it would have been entitled to lawfully terminate the contract by reason of the plaintiff's subsequent breach. Secondly, as a matter of fact, it would have accepted the plaintiff's breach. Counsel relies on the case of The Mihalis Angelos [1971] 1 QB 164 for the proposition that the defendant has to prove these two matters and that the burden is on the defendant to do so beyond a reasonable doubt. It is submitted that the Master was wrong in holding that it was not necessary to prove that the defendant would have, as a matter of fact, accepted the plaintiff's breach and that the Master had also failed to make such a finding of fact from the evidence in this case.

19. With respect, I do not think the case of The Mihalis Angelos supports the plaintiff's contention. In that case, Lord Denning M.R. explained the principle at p.196-197 :

"Seeing that the renunciation itself is the breach, the damages must be measured by compensating the injured party for the loss he has suffered by reason of the renunciation. You must take into account all contingencies which might have reduced or extinguished the loss. ..... It follows that if the Defendant has under the contract an option which would reduce or extinguish the loss, it will be assumed that he would exercise it. Again, if it is reasonable for him to take steps to mitigate his loss, he must do it. And so forth. In short, the Plaintiff must be compensated for such loss as he would have suffered if there had been no renunciation: but not if he would have lost nothing.

Seeing that the charterers would, beyond doubt, have cancelled, I am clearly of opinion that the shipowners suffered no loss: and it would be entitled at most to nominal damages."

20. Edmund Davies L. J. took a similar view and said at p.202-203 :

"As Mr. Mustill clearly brought out, the underlying fallacy is in assuming that the anticipatory breach was one which presupposes that he had a right to cancel will not be exercised - in other words, that you must always anticipate not only a breach, but the worst breach. But a true test in a case of anticipatory breach is: "What would the position of the parties have been if the Defendant had not wrongly announced his refusal to fulfil his part of the contract when the time for performing arrived?

One must look at the contract as a whole, and if it is clear that the innocent party has lost nothing, he should recover no more than nominal damages for the loss of his right to have the whole contract completed. The assumption has to be made that, had there been no anticipatory breach, the Defendant would have performed his legal obligation and no more.

A Defendant is not liable in damages for not doing that which he is not bound to do ..... In the light of the arbitrators' finding, it is beyond dispute that, on the belated arrival of The Mihalis Angelos at Hiaphong, the charterers not only could have elected to cancel the charterparty, but would actually have done so. The rights lost to the owners by reason of the assumed anticipatory breach were thus certain to be rendered valueless."

Megaw L. J. said at p. 209:

In my view, where there is an anticipatory breach of contract, the breach is the repudiation once it has been accepted, and the other party is entitled to recover by way of damages the true value of the contractual rights which he has thereby lost, subject to his duty to mitigate. If the contractual rights which he has lost were capable by the terms of the contract of being rendered either less valuable or valueless in certain events, and if it can be shown that those events were, at the date of acceptance of the repudiation, predestined to happen, then in my view the damages which he can recover are not more than the true value, if any, of the rights which he has lost, having regard to those predestined events."

21. It is true that in that case on the evidence there was an express reference to a cancellation beyond doubt of the agreement by the party in default. However, I do not think that the Court of Appeal there went so far as to require that a defendant must prove that he would have accepted the plaintiff's breach or that he had to prove that beyond a reasonable doubt. Staughton L.J. in the case of The World Navigator [1991] 2 Lloyd's Law Reports 23 analysed the same point in The Mihalis Angelo and said at p.32:

"It was held that the owners were only entitled to nominal damages. No doubt it was a necessary step to that conclusion that the ship would beyond doubt have missed her cancelling date. But I cannot find any suggestion in the judgments of the Court of Appeal that it was also an essential step to prove that the charterers would beyond doubt have exercised the right to cancel, rather than that they could have exercised it."

22. The learned Lord Justice also referred to other cases and then continued :

"That does not in my opinion impinge in any way on the general principle that a defendant, in performing his contractual obligations, is assumed to have chosen to perform them in the way least beneficial to the plaintiff where the contract gave him that choice. It is only in connection with the possible occurrence of events extraneous to the contract, whether in the control of the defendant or of anyone else, that probability has to be considered."

23. Further, when the judges in The Mihalis Angelos referred to "beyond doubt", and "predestined events", they were obviously addressing the particular finding of fact in that case.

24. In my view, the main issue in cases such as the present is : what damages is the "innocent" party entitled to for the breach of contract by the defaulting party? In the normal case, what he would lose would be what he can obtain from the bargain under the contract. But in order to acquire what he can obtain from the bargain, he has to perform his part. If, after the other party has defaulted, what the "innocent" party tenders as performance of the contract on his part does not correspond with the terms of the contract, the defaulting party is entitled not to accept such performance. If such situation arises, while the "innocent" party has indeed lost his bargain, he has also himself to blame because he has not performed his part of the deal. He has suffered no loss as a result of the breach on the part of the defaulting party. His promise under the contract is valueless. Hence the court would only grant nominal damages to him. The defaulting party is presumed to act reasonably and in protection of his own interest. If the "innocent" party has tendered a performance which does not correspond to the terms of the contract, the defaulting party can of course still accept such performance. But it is only reasonable to expect him to take advantage of this opportunity to reduce what he has to pay to the "innocent" party as damages if he can do so under the contract. Afterall all he is doing is to exercise his rights which are available to him under the contract. If however there is evidence which can rebut the presumption that he would act in such a way so as to protect his own interest, the court would no doubt take that into consideration. That, in my view, is the rationale behind the judgments of The Mihalis Angelos. Hence, unless there is some evidence which tends to rebut this presumption, it is not necessary to prove that he would, as a matter of fact, have refused the other party's defective performance.

25. Having read Paula Lee Ltd. v. Robert Zehil & Ltd. [1983] 2 All ER 390, it is clear, in my view, that it dealt with a completely different situation. It cannot be authority in support of the contention advanced by counsel for the plaintiff.

26. The plaintiff in this case had offered to perform his part of the contract by delivering goods under the contract. It is however clear from the evidence that what was delivered did not correspond to the description as required under the contract : the contract referred to fibre of 1.5D and what was delivered was fibre of 1.4D. This is not a case of a contract for the supply of fibre of 1.5D and the plaintiff had delivered goods purporting to be 1.5D and failed to do so but the goods delivered were within the margin of tolerance. This is a case where the contract specified fibre of 1.5D whereas the goods delivered were fibre of 1.4D. The mere fact that the plaintiff called evidence to show that there was no significant difference between fibre of 1.4D and fibre of 1.5D only illustrates that these two fibres were different. What the plaintiff said in this case was in effect that what it had delivered was still acceptable because the fibre delivered (although it did not conform to the contract description) was still within the margin of tolerance. That being the case, leading counsel for the defendant is right in submitting that it is for the plaintiff to show that this was in accordance with an express or implied term in the contract or with a trade practice or custom. The plaintiff had failed to prove either. There is no room for the argument of tolerance. In fact all the relevant documents in this case described the fibre delivered by the plaintiff to be fibre of 1.4D with a margin of +/- 3-4%. This is clearly different from 1.5D. In these circumstances, the defendant was, as a matter of law, entitled to reject the fibre delivered by the plaintiff since it did not correspond with the contract description. There is no evidence to rebut the presumption that the defendant would have rejected the non-conforming goods as it was entitled to.

27. The only remaining point is whether what the Defendant had done in this case amounted to a waiver of its right under the contract to reject non-conforming goods. In my view, there is no clear and unequivocal evidence showing that the defendant would not have exercised this right of rejection. What the defendant had done was done in the course of negotiation for the purpose of settlement after the plaintiff had commenced legal proceedings. There is no waiver in the present case. Nor can it be said that the presumption that the defendant would act reasonably and in protection of its own right under the contract had been rebutted.

28. For these reasons, I agree that the appeal should be dismissed. I would also agree and that there be an order nisi for cost against the plaintiff.

29. In the circumstances, this court unanimously dismiss the appeal with an order nisi for costs as proposed by Liu JA.