TINCHANT S A v. TAK WO METAL INDUSTRIES LTD & ANOTHER

CACV 16/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 16 OF 2004

(ON APPEAL FROM HCA NO. 578 OF 2001)

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J U D G M E N T

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Hon Rogers VP:

1. I agree with the judgment of Le Pichon JA.

Hon Le Pichon JA:

2. This is an appeal from the judgment of Lam J dated 25 September 2003 whereby the 1st and 2nd defendants were ordered to pay the plaintiff the sum of US$249,337.20 in respect of a claim for breach of contract.

Background

3. The plaintiff's claim arose out of a purchase order dated 8 March 2000 for 146,000 units of travel shaving sets with an optional order of an additional 102,000 sets. The unit price as agreed on 3 April 2000 was US$2.15 per unit. Prior to placing the purchase order, the plaintiff had already secured a sub-buyer, Tchibo, who was willing to pay a unit price of US$2.70 for 146,000 units and US$2.60 for the optional quantity of 102,000 units. The judge found that the defendants were aware of the subsale at the date of the purchase order. The order contained specific plating requirements which were those of Tchibo.

4. It transpired that the defendants had seriously underestimated the plating costs. Negotiations ensued resulting in the plaintiff agreeing not only to an increased unit price of US$2.232 but also to share the additional plating costs such that, by 28 July 2000, the unit price had become US$3.292.

5. However, on 18 August 2000, the defendants informed the plaintiff that the factories engaged by the defendants to produce the goods had asked for price increases and for deposits to be paid upfront for the start of production. On 21 August 2000, the defendants sent the plaintiff a fax stating clearly that they would not be able to carry out their obligations under the contract unless the plaintiff shared the increase in plating costs and payment of the deposits, reiterating that the plating factories would not start production without receiving the deposits. The judge found that to constitute an anticipatory breach of the contract which the plaintiff was entitled to accept and did accept on 24 August 2000. As a result, the plaintiff was itself in breach of a contract entered into with its sub-buyer, Tchibo ("the subcontract").

6. By letter dated 13 September 2000, Tchibo indicated to the plaintiff that it was willing to reduce its claim of DM1,888,159 (plus advertising costs) against the plaintiff for breach of the subcontract to DM500,000 but that the offer was conditional on the postponement of the subcontract for one year. By 23 November 2000 the plaintiff had found another supplier. On that day it entered into a new purchase order with Kwan Lick Metal Factory Limited for 200,532 sets of the same goods at US$3.60 per set plus a tooling cost of US$10,000 for delivery as to part in July and the balance in September 2001.

7. It is not entirely clear when the plaintiff accepted Tchibo's settlement offer. The debit note for the compensation sum of DM500,000 was issued by Tchibo on 1 June 2001 and in August 2001, the plaintiff made two payments of DM250,000 each to Tchibo.

8. The loss and damage claimed by the plaintiff were particularised in the Re-amended schedule of loss and damage annexed to the Re-re-re-amended Statement of Claim and comprised the following components:

(I) DM500,000 paid by the plaintiff to Tchibo as compensation;

(II) loss to the plaintiff of US$280,407.10, being the difference between the cost of the goods to the plaintiff less the price of the goods the plaintiff would have paid under the original purchase order with the defendants; and

(III) loss in the sum of DM190,297.97 sustained by the plaintiff due to exchange rate fluctuations.

The judge awarded DM214,569.24 in respect of the compensation claim and US$71,763.86 as loss to the plaintiff whilst allowing the loss due to exchange rate fluctuation in full.

This appeal

9. The appeal was brought on the basis that the judge ought to have allowed in full the plaintiff's claims for compensation and loss.

The compensation award

10. The plaintiff's compensation claim of DM500,000 was made on the basis that it had paid Tchibo that sum to settle a potential claim of DM1,888,159 plus advertising costs as asserted in a letter from Tchibo dated 13 September 2000 to the plaintiff. That letter gave no particulars as to how the sum of DM1.8 million odd had been computed. The computation appeared in a further letter from Tchibo dated 15 April 2003 which was well after the event. However, the amount arrived at in that letter was DM1,907,230.50 rather than DM1.8 million odd, based on a planned sale price by Tchibo of DM19.95 per unit.

11. Mr Sakhrani who appeared for the defendants, submitted that the judge's award was wrong because it was based on the contractual penalty of DM1.07 per unit which was not applicable because that only applied to late or defective delivery and not when there had been no delivery. Further, it was submitted that the settlement sum of DM500,000 was reasonable since it was paid in order to (i) prevent a claim of DM1.9 million being brought by Tchibo; (ii) preserve the longstanding business relationship between Tchibo and the plaintiff; and (iii) avoid further legal costs from being expended. Mr Sakhrani also referred to the evidence of the plaintiff's witness Mr Tinchant to the effect that the gross margin Tchibo was making on the transaction was a known fact and that he had done the calculation at the time.

12. It is clear from paragraphs 45 to 47 of the judgment that the judge's award was made on the basis of the contractual penalty for delay. He was not satisfied that there was proper justification for the figures claimed by Tchibo. The computation put forward had been premised on the cancellation of the subsale to Tchibo but in fact the Kwan Lick goods had been sold to Tchibo on the same terms as the original subcontract. Although the judge was not satisfied that DM500,000 claimed by the plaintiff represented a reasonable settlement, he was of the view that the plaintiff was, at the very least, entitled to claim the contractual penalty and made the award accordingly.

13. In my view, the judge's reasoning cannot be faulted. Tchibo's settlement offer, as spelt out in a letter of 13 September 2000, had two limbs to it: the sum of DM500,000 and the fulfillment of the subcontract, albeit its performance was to be postponed by one year. In effect, the DM500,000 represented compensation for the year's delay in the performance of the subcontract but there was no evidence as to the basis upon which that amount had been arrived at or the computation of any potential claim Tchibo had for the delayed performance of the subcontract. The breakdown of the DM1.9 million figure does not assist because it was computed on the basis that the subcontract would not be performed resulting in the loss of the profit that Tchibo stood to make had the subcontract been performed and had nothing to do with Tchibo's loss on delayed performance. Viewed in this light, the ex post facto explanation offered in the letter dated 15 April 2003 is equally irrelevant since it was based on the assumption that Tchibo's purchase order would not be filled. There was no evidence to explain why a delay in performance by one year would give rise to a claim of either DM1.9 million or DM1.8 million, or that DM500,000 represented a reasonable settlement for any potential claim arising by reason of the delay.

14. This was thus not a case of non-performance of the subcontract but a case of delayed performance. That analysis is wholly consistent with the claim for loss of profit formulated by the plaintiff. That claim was based on the difference in the cost of the goods purchased from Kwan Lick and that payable under the original purchase order with the defendants and not on the loss of profit arising from non-performance of the original purchase order. It is perhaps not surprising that the plaintiff adopted the approach that it did: it did not stand to reap any profit from the subsale to Tchibo once the unit cost under the contract with the defendants had been revised to US$3.2920. That exceeded the unit price under the Tchibo subcontract which was DM5.40 or US$2.67 at the exchange rate prevailing (DM2.02 = US$1) at the time of the original subcontract with Tchibo.

Loss to the plaintiff

15. As noted above, the judge's award of US$71,763.83 represented the difference between the amount paid by the plaintiff for the Kwan Lick order and the amount it would have had to pay under the original purchase order placed with the defendants. That was calculated based on a unit cost of US$3.2920. Mr Sakhrani sought to advance an argument that the unit cost of US$3.2920 was agreed to under economic duress exerted by the defendants on the plaintiff and that for the purposes of calculating the plaintiff's loss, the figure of US$2.232 per unit should have been adopted instead. It was said that the plaintiff was co-erced into agreeing the figure of US$3.2920. He referred to Mr Tinchant's evidence that the dilemma facing the plaintiff was that if it did not agree to the increase, it would risk breaching the subcontract, open itself to a huge potential claim for damages by Tchibo and lose the prospects of future trade with a treasured client. In other words, the plaintiff was left with no practical choice.

16. The difficulty with the duress claim that is now being advanced is that it was never pleaded. Para 9(9) of the Re-re-re-amended Statement of Claim reads:

"(9) On or about 28/7/2000, the Plaintiff agreed to alter the plating specifications to 5 um Copper, 8 um Nickel and 0.1-0.2 um Chrome respectively. Further the Plaintiff agreed to the formula devised by the 1st and/or 2nd Defendants (including the new unit price of US$3.2920) by counter-signing the breakdown provided by the 1st and/or 2nd Defendants. ..."

In para 18(b) of their Amended Defence and Counterclaim, both defendants admitted the plaintiff's allegation that the formula (including the new unit price of US$3.2920) was devised by the 1st defendant. There was never any reply pleaded by the plaintiff to the effect that the unit price of US$3.2920 was the result of economic duress exerted by the defendants.

17. Mr Sakhrani acknowledged the difficulty he faced given the state of the pleadings. In my view, it is not open to the plaintiff to advance the duress claim at this stage. It is too late. Had it been advanced before the judge, the pleadings would have had to have been amended. Although the defendants did not appear at the hearing, there would have had to have been an adjournment for re-service on the defendants. Quite how the judge would have ruled on this issue can only now be a matter of pure speculation.

Conclusion

18. For the reasons stated, I would dismiss this appeal.

Hon Yuen JA:

19. I agree.