GERMAIN ELECTRONIC LTD v. LDB SALES CO LTD AND OTHERS

DCCJ 3336/2007

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 3336 OF 2007

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ASSESSMENT OF DAMAGES

1.  Germain, the Plaintiff, claims against the Defendants for damages for breach of a sale of goods contract.  LDB, the 1^st Defendant, was the other contracting party.  Chaiko and Liu, the 2^nd and the 3^rd Defendants respectively, were the directors of LDB.  They are also husband and wife.  Judgment has been entered against LDB for damages to be assessed for breach of contract.  The claim against Chaiko and Liu personally was dismissed subsequently.  So was the counterclaim by all the Defendants in this action.

2.  Germain’s claim is based on the purchase order dated 27 February 2001 placed by LDB for the goods, namely, touch lights, to be manufactured.  The key terms of the purchase order were as follows:

(1) The quantity was 80,004 pieces.

(2) The unit price was US$0.7.

(3) Payment was by letter of credit.

(4)  The goods would be shipped by sea FOB Hong Kong.

(5) 1^st release of 40,002 pieces would be shipped on 1 June 2001.

(6) 2^nd release of 40,002 pieces would be shipped on a date to be advised.

3.  The 1^st release of the goods was shipped in June 2001 and LDBS has paid for the same.  LDB has not advised on the shipment of the remainder of the goods ordered and the same has never been shipped.

4.  The goods were for resale to General Electric in the United States.  In defence, it was alleged that Germain was fully aware that it was up to General Electric to inform LDB of the further release of the goods and its shipment date.  However, Germain went behind the back of LDB and quoted to General Electric directly for LDB’s products at lesser price.  As Germain refused to retract the quotation, General Electric did not confirm the shipment of the 2^nd release of the goods.  For that, LDB also put forward its counterclaim.

5.  The High Court action commenced by LDB in 2001 resembling the counterclaim herein (HCA 5439/2001) was dismissed for want of prosecution in January 2008.  The counterclaim herein was dismissed later: see written decision of H H Judge Chow dated 24 April 2008.  Attempt to revive the counterclaim early this year was also dismissed: see written decision of H H Judge Chow dated 27 February 2009.  So was the defence herein and hence the judgment was entered against LDB.  None of these decisions has been overturned.

6.  In the circumstances, notwithstanding the reciting of the same allegations in the evidence of LDB in these proceedings, LDB cannot be heard to effectively re-open their defence and counterclaim.  These are strictly proceedings for assessing the loss and damage that Germain has suffered as a result of LDB’s breach.

7.  The pleaded claim is for damages to be assessed for breach of contract. Germain opened the case by contending that the damages should be equivalent to the balance of the contract price, i.e., US$28,001.40.

8.  In a nutshell, LDB contends that Germain has suffered no loss as a result of its breach.  The reason is that the remaining goods have not been manufactured.  Alternatively, the remaining goods have been manufactured out of Germain’s own accord and without LDB’s confirmation.

Discussion

9.  Chan, Assistant General Manager of Germain, and Chaiko and Liu of LDB have filed their statements for these proceedings.  The contents of the statements of Chaiko and Liu are identical.  All witness statements are brief.  All witnesses gave evidence.

10.  Considering the evidence, including those given by witnesses in court, I am satisfied that pursuant to the purchase order, Germain was not contractually bound or expected to withhold manufacturing of the balance of the goods ordered.  I reject the suggestion by Chaiko that Germain was somehow obliged to withhold manufacturing pending the confirmation by General Electric or LDB of the 2^nd release or its shipment date or the opening of letter of credit for such lot.  It was LDB which chose to place an order for the specified quantity.  Nothing prevented LDB from placing an order for a specific quantity only upon its customer’s confirmation to LDB as alleged.  It was also up to LDB, if it intended, to specify any terms and conditions in its purchase order including any condition precedent to manufacturing or shipment of the goods ordered.  Chaiko agreed in court that no such term was incorporated into the purchase order.

11.  Chaiko suggested that no reasonable manufacturer would have commenced manufacturing unless any of the above events happened.  I reject such suggestion.  There is no evidential basis for the allegation that this is some kind of common understanding as such in the trade.  Wisdom of Germain in deciding exactly when to manufacture all the goods ordered is really irrelevant.  Prior to the termination of the contract, Germain was also under no obligation to take any step, in anticipation of possible breach by LDB, to minimise potential loss by withholding committing resources to manufacturing.

12.  The contemporaneous correspondence between the parties evidence that Germain kept on chasing LDB for confirmation of the shipment date of the 2^nd release of the goods since late June 2001, i.e., after the 1^st release has been shipped.  The email dated 29 June 2001 suggests that Germain was then yet to prepare for the production schedule.  The email dated 18 July 2001 suggests that the whole lot of the goods could be manufactured after LDB approved the samples using new component.  By late July, Germain was asking LDB to confirm the packing.

13.  In court, Chan explained that some of the components of the goods had to be sourced from other suppliers while some had to be manufactured by Germain.  He confirmed that the moulds for tooling have been acquired with a view to manufacturing.  The relevant invoices evidence that.  I accept Chan’s evidence the components had already been sourced or manufactured for assembly.  The evidence suggests that the goods had yet to packed for shipment due to the lack of shipment instruction from LDBS.  One may therefore question whether Germain is entitled to claim for the balance of the contract price.

14.  I think this does not matter.  This is not a case where the buyer refused to pay for the goods because the goods were not in a deliverable state.  Germain could not proceed with shipment because of the repudiation by LDB.  What Germain is prima facie entitled to was the cost of production of the goods incurred and the profit from the sale of those goods.  In the normal course of events, adding the two together makes the contract price.  The balance of the contract price is therefore referred to for the purpose of measuring Germain’s loss.  If the goods have yet to be completely finished or shipped, this only entails deduction of part of the cost of production not incurred from the contract price in order to arrive at the actual loss suffered.

15.  Mr Ng for Germain conceded that the cost of the packing materials (or the blister cards) should be deducted.  The amount would have been US$0.015 x 40,002 pieces = US$600.03.

16.  The shipment term was FOB Hong Kong.  Mr Ng is right in that the obligation of Germain was to deliver the goods at its own expenses on board the vessel in accordance with the shipping instruction of LDB.  The freight was supposed to be paid by LDB or paid on its account.  Among the documentary evidence was an invoice from the freight forwarder in respect of the shipment of the 1^st release of the goods.  The invoice was not explained during the course of either side’s evidence.  This was an original invoice addressed to Germain which was demanded to pay THC charges, document fee and handing charges.  The amount was HK$3,120.  I tend to believe that these were the charges that Germain paid for delivering the 1^st release of the goods on board the vessel.  If that was the arrangement between the parties and the remaining goods have not been so delivered, I think it is fair that an amount equivalent to HK$3,120 should be deducted from the balance of the contract price.

17.  Were any other cost or expense saved as a result of the non-completion of the assembly or non-shipment of the goods?  I think not.  Cost such as wages, factory rental and utility charges are really overheads which could not realistically be saved.  In any event, there is no suggestion or evidence that any of such cost was saved as a result of not having to complete the assembly of the goods for LDB.

18.  Prima facie, Germain is entitled to claim damages in the sum of the balance of the contract price minus the cost of packing and delivery expense not incurred.  LDB has not raised the issue of mitigation by way of pleading.  In any event, I accept Chan’s evidence in explaining the limited scope of mitigation in the circumstances of this case.

19.  Chan explained that due to the specific design of the goods and the intellectual property rights asserted by LDB even by way of legal proceedings, there was no likelihood of any available market for the goods if LDB did not want them: see Chitty on Contracts (13^th ed) Vol.II at 43-399 to 43-406.  Germain has kept the goods for about a year.  Due to the lapse of time, the plastic components of the goods have been grinded and put in sacks for storage.  I accept his evidence that such materials could not really be made use of for Germain’s purpose.  I also accept his evidence in explaining why the various components such as the light bulbs and the metal parts of the touch lights could not be put to use for other purposes of Germain or be resold.  Chan admitted that some of these components have actually been lost in the past years and after the removal of warehouse.

20.  The duty to mitigate loss is a reasonable one and Germain is not expected to act more than having to deal with the goods or their components in a reasonable way.  There is no evidence that the goods or their components could be economically adapted for other purpose or resale economically.  Even assuming that they could be, the cost of such adaptation would have had to be added to damages payable by the party in breach: see Chitty on Contracts (above) at 43-411.  In the circumstances of this case, I do not think Germain could be criticised for being unreasonable.

21.  The loss suffered by Germain as a result of LDB’s breach was US$28,001.40 – US$600.03 – HK$3,120.  At US$1 to HK$7.8, the amount should be HK$210,610.69.

Order

22.  LDB shall pay to Germain damages in the sum of HK$210,610.69 with interest thereon at the judgment rate from the date of writ until full payment.  LDB has been ordered to pay the costs of this action.  LDB shall also pay the costs of the occasioned by these assessment proceedings.  Costs shall be taxed, if not agreed, with certificate for counsel.  This costs order is nisi and shall become absolute in the absence of any application in 14 days to vary.