VIKAY INTERNATIONAL (H.K) LTD v. KIN SON ELECTRONIC LTD

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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JUDGMENT

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1. The Plaintiffs and the Defendants entered into a contract under which the Plaintiffs agreed to sell and deliver to the Defendants and the Defendants agreed to purchase from the Plaintiffs 800,000 LCD units at US$0.32 per unit. LCD is an acronym for liquid crystal display. Installed in a calculator the unit becomes the window which displays for nimble fingers that 2 x 2 = 4.

2. The parties agree that Mr. Kong, the Plaintiffs' marketing manager called on Mr. So, who described himself in evidence as the proprietor of the Defendant company, on 9 January 1985 and that they reached agreement regarding the quantity and price. A document dated 10 January 1985 and signed by Mr. Kong on behalf of the Plaintiffs and Miss Rebecca Ng on behalf of the Defendants purports to be evidence of the agreement reached between the parties. The contents of the document are partly printed, partly typewritten and partly handwritten. Mr. Kong added the typewritten portion to the Plaintiffs' printed Sales Contract form. Under the printed heading "Terms" he inserted --

                 "i. 10% deposit to be paid.

                      a) US$9,600.00 for 300K pcs. upon confirmation.

                      b) US$16,000.00 for 500K pcs. by end of January, 1985.

                 ii. Balance to be paid against delivery by cash cheque. "

"K" is trade shorthand for "1,000".

3. The parties accept that those were the agreed terms regarding payment. Under the printed heading "Delivery" Kong inserted --

"300,000 pcs. by partial deliveries in January 1985. "

 

As an extension to that line Miss Ng wrote --

 

"100K/week. Starting from 14th January 1985. "

 

On the next line Kong's typewritten entry was --

 

"500,000 pcs. by partial deliveries in February 1985. "

 

To that line Miss Ng added in handwriting --

 

"100-150K/week by 4-5 shipment. "

 

4. The parties are in head-on conflict about how Miss Ng's entries came to be inserted in the document. On the Plaintiffs' evidence it was inserted after Kong had signed and without his agreeing to the insertion. On the Defendants' evidence it was inserted with Kong's concurrence before he signed. The parties do agree that the Plaintiffs were obliged to supply 300,000 units by the end of January and a further 500,000 by the end of February. Their only disagreement on this part of the case is over the question as to whether the Plaintiffs were obliged to conform to a weekly quota as well. The view which I have formed of the evidence of what subsequently happened makes it unnecessary to resolve this conflict. My ultimate decision remains the same whether or not I find that there was an agreed weekly quota to be met by the Plaintiffs.

5. The Plaintiffs did not manufacture the units but obtained them from Singapore. The Singapore factory was operated by a company with which the Plaintiffs were linked by the same majority shareholder. Deliveries began on 15 January but by the end of that month only 180,000 units had been delivered. Both Miss Ng and Mr. So said that they complained about default in compliance with the terms of delivery and were promised that deliveries would improve. Kong said that there was no complaint. It is common ground that when the Plaintiffs sent a demand note on 1 February for the deposit payable in respect of the 500,000 units to be delivered during February the Defendants complied with the demand. Both parties agree that whether I accept the Plaintiffs' or the Defendants' version regarding the delivery terms time was of the essence as regards delivery.

6. The following chronology of deliveries and payments is taken from Exhibit P55:-

7. From 15 February onwards, according to Kong and the Plaintiffs' sales representative, Mr. Mak, the Defendants refused to take delivery. According to Mak, when he informed Miss Ng on 8 February that 100,000 units would be ready for delivery on 12 February she said: "Stop sending so much. " She went on to say if the Plaintiffs delivered more than 50,000 in a batch the Defendants would not have the money to pay for the excess. On 15 February he telephoned Miss Ng again and informed her that a further batch was due to arrive from Singapore. She asked him to withhold further deliveries until after the Lunar New Year holidays. According to Kong, Miss Ng told him on another occasion when he telephoned to ask her to accept delivery that she wanted the delivery rate to slow down because the Defendants had too much stock on hand. By 18 February he had 175,000 units in stock awaiting delivery so, with the Lunar New Year holidays intervening between then and the end of February and "sensing that the other party did not want the goods", he "did not press the Singapore supplier" to make sure they arrived by the end of February. After the Lunar New Year holidays up to the second week of March Miss Ng continued to meet requests to accept deliveries of the stock in hand with pleas to delay deliveries for the time being. According to Mak, Miss Ng said: "Even if you deliver there is no money. " At no time, according to Kong, was it ever suggested by anyone on behalf of the Defendants that delivery was being refused because the Defendants considered the Plaintiffs to be in breach of the contract.

8. Miss Ng said that during January she had complained about the small quantities being delivered and that on 30 January she pointed cut to Kong that he had one more day left to deliver the balance of 100,000 units by the end of January. She said she warned him that if he continued to deliver in that manner the Defendants would not continue to accept any more goods after the end of February. On 8 February she became very angry because the batch delivered that day amounted to only 10,000 units. As a result she telephoned Kong, repeated the warning and added that she would not "press him again because he had not complied with the terms of the contract". She said that she accepted all deliveries offered during February and that she had never asked Kong or Mak to deliver less than was offered or to cease deliveries.

9. On this conflict in the evidence I accept the version given by Kong and Mak. The Defendants were the Plaintiffs' only substantial customer for this article. The Plaintiffs' stock sheets were exhibited. The only challenge to their accuracy was in respect of an entry dated 18 February 1985. The figure 145,650 appears in both the "Received" and the "Issued" columns. The entry in the Received column has two horizontal lines through it. The Plaintiffs called evidence to explain the entries. The explanation was that the stockkeeper wrongly entered the figure under the Issued column when he received the stock. Kong discovered the error on or about 15 March 1985. On his instructions the amendment was then made by crossing out the figure in the Issued column and inserting it in the Received column. I accept that explanation because the original entry is an obvious mistake. The quantity was added to the previous balance of stock on hand and no adjustment to that figure ever became necessary. The shipping documents also show that that quantity was airfreighted to the Plaintiffs from Singapore on 16 February 1985.

10. The sheets show that the Plaintiffs could have delivered 170,000 units on 12 February but only 50,000 were delivered. On the following day only 50,000 were delivered from a stock of 120,000 and again on 14 February only 50,000 were delivered from a stock of 70,000. There was no advantage to the Plaintiffs in splitting up deliveries in that way. The units are so small that the whole stock of 170,000 could have been delivered at the same cost as delivering 50,000. In fact, it was a disadvantage because three trips had to be made instead of one, three payments collected instead of one and payment for 120,000 units delayed. The Plaintiffs received a further 145,000 units on . 18 February. As Mak would have known of this expected addition to the stock it is highly likely that he would have telephoned Miss Ng to tell her of the expected arrival. The first day of the New Year was 20 February. The Defendants were obliged to hand over, in respect of each delivery, a cheque for 90% of the contract price of the goods delivered and had in fact always done so. It is unlikely that the Plaintiffs would have preferred to hold stock rather than cheques at any time and beyond belief that responsible employees would have adopted that preference just before New Year, particularly when they knew that, although the Defendants' cheques might be postdated, they had always been honoured. As it was so much in the Plaintiffs' interest to deliver the stock in hand the build-up of that stock from 15 February onwards is more consistent with the Plaintiffs' version than with the Defendants'. Thus, my impression that Kong and Mak were telling the truth when they said that the Defendants sought postponement of delivery beyond the end of February is fortified by other reliable evidence which 1 accept.

11. By 13 March the Plaintiffs had received from Singapore and were holding in stock the balance of the order. Kong, on behalf of the Plaintiffs, then wrote to the Defendants in the following terms:-

12. The letter was delivered by hand to the Defendants and a signed acknowledgment of receipt obtained. The Defendants did not reply but on 19 March Kong and So met. At the time the market price of the unit was falling. It is common ground that they entered into a separate agreement not related to the contract in question under which the Plaintiffs sold and delivered to the Defendants and the latter received and paid for 70,000 units at US$0.31 per unit. It is also common ground that So made no request that the deposit held by the Plaintiffs in respect of the 400,000 undelivered units should be credited in part payment of the purchase of the 70,000 units. At the same meeting So offered to take the outstanding 400,000 units if Kong would accept US$0.29 per unit. Kong refused and gave in evidence two reasons for that refusal. First, he said, he thought that So should "implement the contract", and second, that there was the risk that, if he accepted, So would be able to "squeeze (him) further". Kong said that thereafter the Plaintiffs continued to "press the Defendants to take delivery" but without success. On 25 June 1985 the Plaintiffs instructed solicitors who wrote to the Defendants threatening to institute legal proceedings for breach of contract if the Defendants did not take delivery of the 400,000 units within three days from that date. The Defendants did not take delivery but replied through its solicitors that it did not intend to take delivery as it regarded the contract as terminated. The Plaintiffs then issued the writ in this action in early July 1985.

13. The Plaintiffs' failure to deliver 300,000 units by the end of January was a breach which entitled the Defendants to terminate the contract by treating it as repudiated or to continue accepting deliveries whilst reserving their right to claim damages in respect of the breach. The Defendants did neither. By paying the deposit for the February deliveries and by accepting and paying for deliveries up to 14 February without any form of protest about the January shortfall and without any intimation of an intention to claim damages in respect of the breach the Defendants waived both the stipulation regarding the January deliveries and their right arising from the Plaintiffs' failure to comply with that stipulation.

14. The Plaintiffs were never thereafter in breach. The failure to deliver the whole of the agreed quantity by the end of February arose because the Defendants refused to take delivery. The Defendants have pointed to the Plaintiffs' stock sheets to show that the Plaintiffs could not have delivered the whole of the agreed quantity by the end of February had they been called upon to do so. It is true that the Plaintiffs did not have the balance of the order in stock in Hong Kong at that time but the unchallenged evidence was that due to the build-up in stock in Hong Kong during February because of the Defendants' inability to accept available stock the Singapore factory shipped to Kwangtung Province. This was a cheaper but slower method of completing the manufacture but the factory was able to do it because Hong Kong had more stock than the Defendants could handle at that time. Kong said, and I accept, that if the Defendants had been in need of the whole order by the end of February he could have delivered. I accept also that delivery was withheld beyond February for no other reason than to accommodate the Defendants. The Defendants' reply to the Plaintiffs' letter of 25 June expressly repudiating the contract gave the Plaintiffs the right to terminate it and claim damages for breach. They exercised that right in early July by bringing this action.

15. The Defendants contend that even if they be found to be in breach the Plaintiffs have no claim to damages. Had the Plaintiffs mitigated by accepting the Defendants' offer of 19 March of US$0.29 per piece for the balance of the order they would have received US$116,000 plus US$12,800 (the 10% deposit of the contract price of US$128,000), a total which exceeds the contract price by US$800!

16. The Defendants find support for the proposition in Payzu, Limited v. Saunders.⁽¹⁾ The headnote to that case reads as follows:-

 

In that case McCardie J., found, at p. 584, that

17. What the plaintiffs failed to do in that case was mitigate after acceptance of the defendant's repudiation. Here, even if one regarded the defendants' failure to take delivery within three days of the March letter as repudiation, there was no acceptance of it by the Plaintiffs. Kong's evidence, which I accept, that he refused the offer because he thought that the Defendants should "implement the contract", leads me to find that even if he thought that the defendants were repudiating he was still opting on behalf of the Plaintiffs not to accept the repudiation. He wanted the contract to subsist. Thus, no "duty" to mitigate could arise at that stage.

18. This is a case where a buyer has requested and obtained the seller's consent to waive the time for delivery fixed by the contract without any definite date or period being substituted by agreement. The market price for the purpose of applying "the prima facie rule" should therefore be the date when the Plaintiffs refused to give any further time.⁽²⁾ I take that date to be 3 July 1985 when the Plaintiffs decided to issue the writ which commenced this action. Although the Plaintiffs had threatened to resell, their conduct indicates that they were prepared to grant the Defendants further indulgence hoping that "the contract would be implemented". It was reasonable conduct because the Defendants were still showing, on 19 March, an interest in acquiring the goods. It was not until 3 July 1985 that the Defendants, for the first time, indicated that they would not accept the goods.

19. By 3 July 1985, however, there was not, and there has not been since, an available market for these goods. The market has collapsed. The Plaintiffs' unchallenged evidence is that they cannot sell these goods. Without the aid of a market price damages cannot be assessed in accordance with the rule laid down by s. 52(3) of the Sale of Goods Ordinance. The measure of the Plaintiffs' damages must therefore be 'the estimated loss directly and naturally resulting, in the ordinary course of events, from the Defendants' breach of contract".⁽³⁾ If the goods had no value at that date then the measure is the contract price less the Defendants' deposit. But calculators with LCD windows have not yet become outmoded. The units must therefore still be of some value. The Plaintiffs' damages should therefore be the contract price less the deposit less that value at 1 July 1985.

20. The value of goods at the time of breach is usually based upon the price at which they are eventually sold.⁽⁴⁾ That guideline is not available in this case. The best that I can do in order to assess the value is make a guess at the price at which the Plaintiffs could have sold had they auctioned the goods. I adopt this guesswork method of assessment on the authority of Chapman v. Hicks. ⁽⁵⁾

21. The collapse of the market followed a change in foreign currency regulations in China. Exporting calculators to China became a less attractive business than hitherto. Demand slackened considerably and the market became heavily oversupplied. The only sale by the Plaintiffs after 19 March 1985 was 10,000 units at US$0.29 per piece on 27 May 1985. Mak said in evidence that the undelivered units could not have been sold at the end of 1985 "even at US$0.18". Kong estimated the unit price to be US$0.22 at the time he gave evidence, that is, in mid-January 1986. Kong's estimate was not an indication that the market was recovering from the figure given by Mak. Kong's figure related to small "over-the-counter" sales. The only response the Plaintiffs received when they tried to sell the goods after issuing the writ came from two buyers who were only interested in buying "minimal quantities". Mak's evidence suggests, however, that there was a price lower than US$0.18 at which it would have been possible to sell. Using the prices given by Mak and Kong as a guide I think that if the Plaintiffs had auctioned the goods they would have realised US$0.10 per unit. I therefore estimate the value of the goods at the time of the breach at US$40,000.

22. I assess the Plaintiffs' damages at US$75,200 ($128,000-$40,000-$12,800). I give judgment for the Plaintiff in that sum with interest thereon at the rate of 8% per annum from 1 July 1985 and costs. I dismiss the Defendants' counterclaim with costs.

(1) [1919] 2 K.B. 581.

(2) Benjamin's Sale of Goods 2nd edn., p. 1330.

(3) Sale of Goods Ordinance, s. 52(2).

(4) McGregor On Damages 14th ed., p. 473.

(5) [1911] 2 K.B. 786, 792 (C.A.), per Vaughan.
     Williams L.J.: (footnote 19 to Para. 266. of Benjamin).