WINHOI BUS CO LTD v. HOI KI BUS SERVICES LTD

DCCJ 3289/2011

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIIVL ACTION NO. 3289 OF 2011

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JUDGMENT

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Introduction

1.  This is a hearing of assessment of damages involving the sale and purchase of a 28-seater bus (“Bus”) and its passenger service licence (“Licence”).

2.  By a sales contract dated 4 October 2010 (”Contract”)”), the Plaintiff agreed to buy and the Defendant agreed to sell the Bus and Licence at total price of $1.35 million, completion of which would take place on 15 July 2011. However, the Defendant unilaterally terminated the Contract on 1 June 2011.

3.  As such, the Plaintiff has commenced this action to claim for return of the deposit ($150,000) and the difference in the market value of the Bus and the Licence as at the date of completion ($555,000).

4.  In defending the claim, the Defendant mainly avers that the Contract does not provide for any specific performance clause and that by virtue of the parties’ conduct, a so-called “double deposit mechanism” (雙賠機制/賠訂機制) was implied into the Contract. Under this alleged implied term, if it is the Plaintiff (as purchaser) who unilaterally terminates the Contract, the deposit already paid by it would be forfeited. But if it is the Defendant (as vendor) who refuses to complete, it would have to return the deposit together with the payment of an equal sum of the deposit to the Plaintiff.

5.  By a consent summons filed on 11 January 2012, the parties have agreed that the deposit of $150,000 be refunded to the Plaintiff, and that interlocutory judgment on liability be entered in favour of the Plaintiff with damages to be assessed.

Trade practice

6.  Before going into the issues and analysis of this case, I think it is necessary and prudent for me to say a few words on the Plaintiff’s summons taken out just 2 working days prior to the assessment hearing, which was dealt with by me in the same trial before evidence was heard.

7.  The Plaintiff’s summons seeks to exclude the admission of 2 witnesses statements of Chan Tung Yeung (陳東陽) and Chan Ka Wah (陳嘉宏) filed by the Defendant out of time on 3 September 2010. The said witnesses statements purport to prove that the “double deposit mechanism” is a trade practice in the non-franchised bus industry and thus an implied term of the Contract between the parties.

8.  The Plaintiff, however, does not take issue as to the late filing of the Defendant’s other witness statement of Kung Sze Kin (龔詩堅) and expert report.

9.  Upon hearing argument from both counsel, I ruled that the witness statements of Chan Tung Yeung (  陳東陽      ) and Chan Ka Wah (陳嘉宏) should not be admitted, mainly on the ground that the alleged trade practice of the “double deposit mechanism” is never pleaded in the defence (which is conceded by Mr Lam, Counsel for the Defendant). It follows naturally that any witness statement purporting to explain on this un-pleaded point should not be admitted as evidence in the trial.

10.  At some stage, Mr Lam tried to salvage such failure to plead by applying for an amendment to the defence on the spot. He referred me to the general principle that amendment should be allowed for the purpose of determining the real issues in the proceedings. Yet, there was not even a draft amendment placed before this court for consideration. No acceptable explanation was offered as to why an application to amend was not made earlier but on the doorstep of the trial. The alleged issue has never been made known to the court in any previous hearings. Further, if the alleged trade practice was truly its defence and the real issue in the mind of the Defendant, the value of the Bus and/or Licence (and thus the expert report) would be irrelevant to the defence case. It thus remains illogical and against common sense that the Defendant yet confirmed in its time tabling questionnaire (filed on 27 April 2012) that expert evidence on the valuation of the Bus was required. As such, I rejected this oral application to amend the defence.

11.  In the circumstances, I allowed the Plaintiff’s summons. I also directed that the said 2 witnesses statements (as well as the affirmation of Kung Man Hoi filed for the purpose for an interlocutory hearing) be taken away from the trial bundle and that no costs would be awarded for including these 3 documents into the trial bundle. Both Counsel have not shown any disagreement to this costs order.

12.  Further, Mr Lam for the Defendant indicates that he would not object to the inclusion of the supplemental witness statement of Chung Sing Man (鍾聲民) of the Plaintiff, though filed out of time without leave, into the trial bundle. Accordingly, the trial bundle is updated.

Issues

13.  In my view, the core issues for determination in this assessment hearing are:

(1) Whether the “double deposit mechanism” is an implied term of the Contract;

(2) If no, what should be the damages to be awarded to the Plaintiff.

14.  On these issues, the Plaintiff has called its director (Chung Sing Man鍾聲民) (“Mr Chung”) and its expert on the valuation of the Bus and the Licence (Kenneth Ng).

15.  The Defendant has only called its director (Kung Sze Kin龔詩堅) (“Mr Kung”). Mr Lam for the Defendant confirms that the defence will not rely on its expert report but would accept the Plaintiff’s expert report subject to clarification of one point only in the Plaintiff’s expert report.

Issue (1) : Whether the “double deposit mechanism” is an implied term of the Contract

The factual evidence  

16.  According to the evidence of Mr Kung (of the Defendant), the Plaintiff and the Defendant started to have business dealing since 2007. So far, there were about 6 previous transactions between them (excluding the Contract). He concedes that in these 6 previous transactions (as well as for this Contract), there was no express discussion as to what would happen if either party unilaterally terminated the transaction, as it was a common practice as well as a common understanding (共識) between the Plaintiff (represented by Mr Lee Kwai Ping 李貴平 who is not a witness in this trial) and the Defendant (represented by Mr Kung) that the “double deposit mechanism” would apply. He adds that if compensation for price difference was contemplated, this would be discussed beforehand (若要賠差價,會講定先).

17.  Mr Kung pin-points on one previous transaction in 2008 where a company called Wah Kee (華記) (a company related to Mr Kung) purchased a 56-seater bus from the Plaintiff at $860,000. A deposit of $15,000 was paid by the Defendant to the Plaintiff. The Defendant failed to complete but the Plaintiff simply forfeited the deposit without claiming any further damages (“2008 Transaction”).

18.  The 2008 Transaction is actually admitted by Mr Chung (of the Plaintiff) in his supplemental witness statement. Mr Chung explains that the Plaintiff decided to just forfeit the deposit in the 2008 Transaction without further claims because (1) the transaction price was not big; and (2) it wanted to maintain a good business relationship with the Defendant. However, Mr Chung denies that there is any common/trade practice of “double deposit mechanism” in the trade and adds that it is rather a matter of discussion/agreement between the vendor and purchaser of the bus and/or its passenger service licence if any clause of forfeiting deposit (殺訂) and compensating an amount equal to the deposit (賠訂) would be included in the contract.

19.  In so far as this Contract is concerned, Mr Chung agrees that the actual negotiation with the Defendant was done by his junior staff, the said Mr Lee, who had reported the negotiation result to him. He then drafted the Contract for the Defendant to sign.  He further confirms that Mr Lee had not reported to him that there was an agreement of “double deposit mechanism” for this Contract; and he adds that if there was really such an agreement, Mr Lee would surely report to him and seek his approval.

Discussion

20.  It does not seem to me that both Counsel dispute the legal principles applicable to the implication of a term in a contract. The leading authority is BP Refinery (Westernfront) Pty Ltd v President, Councillors & Ratepayers of the Shire of Hasting (1977) 16 ALR 363 in which the Privy Council propound (at p376) that for a term to be implied into a contract, the following conditions 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 an express term of the contract.”

21.  The BP Refinery case is quoted with approval by the Court of Final Appeal in Kensland Realty Ltd v Whale View Investment Ltd (2001) 4 HKCFAR 381.

22.  In his oral closing submission, Mr Lam says that “double deposit mechanism” should be implied into the Contract by virtue of the usual/common trade practice and past dealing between the parties. He submits that all the conditions for the “double deposit mechanism” to be implied into the Contract are present in this case (paras 18-25 of his opening submission refer).

23.  Mr Lam also submits that the wording of the Contract, in particular clauses (iii) and (iv), shows that the Plaintiff did not have the intention to claim any price difference in case of any unilateral breach by either party during the first 9 months after the Contract was signed.

24.  There is no need for me to repeat verbatim the wording of the Contract. Suffice for me to say is that I do not read the wording of the Contract amounting to any forbearance on the part of the Plaintiff to sue for price difference or market value of the Bus and the Licence. In any event, Mr Chung of the Plaintiff also denies the suggestion that the Plaintiff would only forfeit the deposit without claiming further loss and damages. I note that it is in fact the Plaintiff’s stance ever since the Defendant unilaterally terminated the Contract on 1 June 2011.

25.  Further, since trade practice is never pleaded in the defence, I would simply disregard and reject any evidence or submission concerning usual/common practice, which to me is just another term to mean trade practice.

26.  Remaining for me to consider is whether “double deposit mechanism” can be implied into the Contract by the past dealings between the parties. The burden of proving the same rests on the Defendant.

27.  I should begin by noting that although Mr Kung claims that there were 6 previous dealings between the Plaintiff and the Defendant, the written contracts of these dealings (including the 2008 Transaction) are never disclosed for the purpose of the trial. Short of the details as to the terms of these previous contracts, it remains unclear if these previous contracts did (or did not) contain any express term of the “double deposit mechanism”. The extent of how comparable such previous dealings with this Contract sufficient enough to establish an adequate course of past dealing is thus doubtful.

28.  The evidence before me shows that the 2008 Transaction is the one and the only one past dealing between the parties that the “double deposit mechanism” seemed to have been adopted. Mr Chung of the Plaintiff has explained why the Plaintiff did not claim for further damages (apart from forfeiting the deposit) in that contract. I find his explanation reasonable and credible.

29.  In my view, it remains just a wishful thinking of Mr Kung/Defendant that due to what the Plaintiff did in the 2008 Transaction (ie forfeit the deposit only without further claims), a common understanding that the “double deposit mechanism” must apply or be implied in all future transactions between them, especially when it is Mr Kung’s confession that there was no express discussion in any of the previous dealings including this Contract in any of the previous dealings including this Contract as to what would happen if either party unilaterally terminated the transaction.

30.  In fact, a closer examination of Mr Kung’s evidence would reveal that the alleged common understanding that “double deposit mechanism” applies in case of any unilateral termination of the contract by either party (as stated in his witness statement) is in stark contradiction to his oral evidence in court. During cross examination, Mr Kung concedes for more than one times that there was in fact no common understanding between the parties that “double deposit mechanism” would apply, because there was no express discussion between them as to what would happen in case of unilateral termination of the contract.

31.  Mr Lam must have picked the inconsistency and thus in re-examination attempted to clarify this point with Mr Kung who, if I understand him correct, seemed to suggest that the “double deposit mechanism” was an all-along practice that both sides were aware of; and thus there was no previous discussion on this topic. I am bound to say that I do not find Mr Kung’s reply logical and thus believable. In my judgment, if there was no previous discussion on the “double deposit mechanism”, there could hardly be any room for a common understanding that this mechanism would apply. I also repeat what I have set out in paras 27 to 29 above.

32.  I thus conclude that Mr Kung’s evidence is not believable and is rejected by this court.

33.  Last but not the least, if there was any truth, however slight, that there was past dealing, or common understanding, or even trade practice (which I have already rejected) between the parties that the “double deposit mechanism” would apply, the Defendant should have pleaded in its defence something to the effect that if liability was established, the damages should be a liquidated sum of the deposit together with a sum equal to the deposit. It would be illogical and impossible of the Defendant to have pleaded in its defence that save and except the refund of the deposit, the Plaintiff is not entitled to claim for any further losses and damages (see paras 8, 10(a) and 12 of the defence). It is abundantly clear that the Defendant’s pleaded case does not sit well with its factual evidence.

34.  Due to the matters aforesaid, I find that the Defendant fails to satisfy the conditions set out in BP Refinery case, in particular conditions (2) and (3). I reject the Defendant’s evidence or argument on implying the “double deposit mechanism” into the Contract.

Issue (2) : What should be the damages to be awarded to the Plaintiff

Loss of chance

35.  According to the Plaintiff’s expert report, the market value of the Bus and the Licence as at July 2011 (time for completion) soared up to a median figure of $355,000 and $1,550,000 respectively. It thus claims the price difference of $555,000 ($1,550,000 + $355,000 - $1,350,000) as damages in this case.

36.  The Defendant does not seem to dispute the increase in market price of the Bus as alleged by the Plaintiff. In fact, Mr Lam is basically silent in his submission on this point. What he argues on concerns the Licence.

37.  The crux of this issue thus boils down to whether, in so far as the Licence is concerned, the Plaintiff should be compensated by measurement of actual loss or loss of chance of earning profit (as submitted by the Defendant), or by measure of market value as at July 2011 (as submitted by the Plaintiff).

38.  Mr Lam for the Defendant runs his argument like this. In State Bank of India & Anor v Lisbellaw Ltd & Others [1989] 2 HKLR 604, Godfrey J (as he then was) ruled that an interest in textile quota was an intangible thing of value. The eminent Judge commented at p608J that:

“An interest in ‘quota’ is (unusually for a public law right) capable of assignment. A right to transfer a taxi licence from one taxi operator to another is a similar example of an assignable public law right. The right to assign an interest in ‘quota’ is a right to assign it within a limited market, that is to say, a market consisting of other traders in the field. It is a right to assign of qualified character, subject to restrictions (similar to those imposed on a transfer by the holder of a share in a private company, or the owner of a short leasehold interest).” (italics added)

39.  Mr Lam submits that the Licence in this case is also an assignable public law right and an intangible thing of value. As such, the measurement of damages concerning sale of goods or property does not apply. Instead, this court should follow the approach adopted in Texwood Ltd v Jackson & Wendy (HK) Trading Co, HCA 7219/1981, judgment dated 2 March 1983.

40.  In Texwood Ltd, Hunter J (as he then was) ruled that since there was in fact and in law no true market for Type B textile quota (and Mr Lam is keen to say that there is no true market for passenger service licences), the court could not rely on market value as the measure of damages, but should discover what the plaintiffs’ actual loss was; and then consider whether such loss directly and naturally resulted from the defendant’s breach.

41.  Relying further on Chaplin v Hicks [1911] 2 KB 786, which was considered by Hunter J (as he then was) in Texwood Ltd (supra), Mr Lam asks me to adopt “loss of chance” of earning a profit as the measure of the Plaintiff’s damages.

Discussion

42.  As I have expressed during his final submission to Mr Lam, there is no direct evidence before me that the system of passenger service licences is comparable/similar to that of taxi licences (and thus comparable/similar to a quota system), Further, in State Bank of India (supra), what concerned before Godfrey J (as he then was) was whether a textile quota could be charged to secure lending. What the eminent Justice (as he then was) expressed about the taxi licence system must be the obiter of his judgment only.

43.  The case of State Bank of India (supra) does not, therefore, take the defence case or defence argument any further.

44.  As a general observation, it is pertinent for me to point out that Texwood Ltd (supra) was decided without full argument from both sides, as the defendant was absent. And in view of para 42 above, it follows logically that the measure of damages in relation to “quota” in that case cannot possibly apply to this case before me.

45.  Further, even if it was assumed that the Licence of this case was comparable to a textile quota, it does not occur to me, upon a closer reading of the Texwood case, that Hunter J (as he then was) was laying down a general principle that a “quota” must have no “true” or “available” market (in the words of the Sale of Goods Ordinance) and thus measure of damages must be by reference to actual loss or loss of chance rather than market value. Rather, the learnt Justice simply ruled that there was no true market for Type B quota because there was no willing seller (but there was market for Type A quota) and thus the court could not adopt market value as the basis for measure of damages.

46.  Mr Lam also quotes to me Chitty on Contracts: Hong Kong Specific Contracts, 2^nd ed, at para 11-369 that if the demand for the goods exceeds the supply, the test for “available market” may not be satisfied. He is adamant in saying that there was no true or available market of the Licence in this case mainly because the evidence of Mr Kung shows that the price of passenger service licences soured up a lot in early 2011.

47.  With the greatest respect to Mr Lam, I fail to see there is any factual basis to support his submission that there was no true or available market for passenger service licences in 2011. Such allegation is not expressly mentioned in the witness statement or oral evidence of Mr Kung.

48.  On the contrary, I have solid evidence from the Plaintiff that there were transactions of sale and purchase of passenger service licences in 2011, as evidenced by at least 5 written contracts produced by the Plaintiff which were made between May and July 2011. Some of these contracts involve the sale and purchase of more than one licences within one contract.

49.  I also fail to appreciate the logic of his submission, especially after Mr Lam confirms to the court at the beginning of the trial that the defence would not call its own expert to give evidence or rely on its own expert report, but would accept the Plaintiff’s expert report subject to clarification on one point only.

50.  The Plaintiff’s expert is able to give a valuation of the market value of the Licence (at $1,500,000 - $1,600,000), which tends to show more probable than not that there was available market for the sale and purchase of such licences at the relevant times, or else a valuation would not be able to be given. The Plaintiff’s expert is also able to clarify that the figure of $1,500,000 - $1,600,000 is not asking price (叫價) but his valuation of the current market value (as at July 2011). His valuation is not given out of the blue but is said to have based on valuation reports done to the financial companies as well as the published sales information from the Omnibus Operators Association (公共巴士同業聯會) of the relevant periods.

51.  I cannot find any reason why I should not accept the evidence of the Plaintiff’s expert, especially when his experience and expertise is not challenged by the defence.

52.  As such, I accept the evidence of the Plaintiff’s expert evidence and his report in all respects. I reject the Defendant’s argument that there was no true or available market for passenger service licences in 2011. The formula in Texwood Ltd (supra) thus does not apply to this case.

53.  I further conclude that the measure of damages of the Bus and the Licence should be the market price at the contractual time for delivery less the contract price, which is thus $555,000 (See: section 53 of the Sale of Goods Ordinance and McGregor on Damages, 18^th ed, at para 20-004).

Conclusion

54.  For the reasons set out above, I order that the damages assessed and awarded to the Plaintiff is $555,000 with interest at 1% above the prime rate of Hong Kong and Shanghai Bank from the date of Writ to the date of this judgment, and thereafter at judgment rate until full payment.

55.  I further make a costs order nisi that costs of the action including the costs of this hearing of assessment of damages be to the Plaintiff, with certificate for counsel, to be taxed if not agreed. The costs order nisi will become absolute within 14 days from the date of this judgment if there is no application to vary the same.