PACIFIC CO LTD v. GREAT SUPREME LTD

DCCJ 4424/2010

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 4424 OF 2010

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J U D G M E N T

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1. The plaintiff (“Pacific”) claims against the defendant (“Great Supreme”) for alleged wrongful repudiation of a sale of goods agreement between them in 2010. Great Supreme says it was the other way round; and puts forward a counterclaim.

BACKGROUND

2. Pacific is a Japanese supplier of shell buttons for garment.  The persons in charge of Pacific were mother Yuko Ohno and son Hideo Ono (“Hideo”).  They are respectively the wife and son of Yoshio Ohno (“Yoshio”), who operated a related company called Ban-Yu Company Limited in Japan (“Ban-Yu”). Great Supreme has been a trading company in Hong Kong since 2003; and had business with both Ban-Yu and Pacific.

3. On 14 July 2010, Great Surprise placed a purchase order with Pacific for Japanese shell buttons at the total price of HK$236,400 (“the Agreement”). The purchase order provided that delivery was to take place by the end of September 2010; and payment was to be made 10 days after receipt of the buttons. The order was accepted by Pacific via email on the same day.

4. The buttons were not delivered.  Pacific contends that it was Great Supreme which has evinced an intention not to perform the Agreement by email dated 16 August 2010.  Pacific accepted such repudiation and terminated the Agreement.

5. On 22 December 2010, Pacific commenced the present action, claiming for loss being the difference between the contract price of HK$236,400 and the resale value of merely ¥250,000.

6. By way of counterclaim, Great Supreme alleges that as a result of Pacific’s failure to deliver the buttons pursuant to the Agreement, it has suffered loss of profits from the resale of the buttons under a contract with its sub-buyer in the sum of HK$113,040.

7. The dispute lies in whether it was Great Supreme which, by its email dated 16 August 2010 (or any conduct), conveyed the intention not to be bound by the Agreement or it was Pacific which was in breach by failing to perform the Agreement.  Depending on the answer to the question, there will be the issue of the loss and damage that the parties allege respectively.

WHICH PARTY WAS IN BREACH

8. Pacific has the burden to prove that Great Supreme had refused to perform its side of the Agreement or had made a clear and unambiguous assertion that it would be unable to perform when the time of performance arrived.

9. Great Supreme’s email dated 16 August 2010, which forms the pleaded basis of Pacific’s claim, was not a legal document and therefore is not to be construed as such. Instead it needs to be read fairly against the background and in the context of the other contemporaneous communications: see Jaks (UK) Ltd v Cera Investment Bank SA [1998] 2 Lloyds Rep 89 at 93.

10. Short of any express refusal or declaration, one would then have to ascertain whether the conduct of the party alleged to have repudiated was such as to lead a reasonable person to conclude that it no longer intended to be bound by the parties’ agreement.  The test is objective: see The Hermosa [1982] 1 Lloyd’s Rep 570 at 572; 580.

11. To begin with, one should note that Great Supreme’s email dated 16 August 2010 was actually a reply to the email from Hideo of Pacific earlier on the same day.  In his email, Hideo recited the information he had received about the closing down of Great Supreme.  Expecting the Agreement to be the last order and Great Supreme to cease to exist, Pacific requested down payment of 50% of the contract price for the buttons forthwith.

12. Sandra Lam (“Lam”) of Great Supreme replied.  Literally her email mentioned that Great Supreme was closed down; and Ohno still owed her company money so that it had no money to run.  However, to better understand the context of what Lam was referring to, one needs to consult the emails in the evidence that were dated even earlier.

13. There was in fact a series of emails between Lam’s predecessor in Great Supreme, Alex Lee (“Lee”) and Yoshio and a Toyoda of Ban-Yu from 30 June to early July 2010.  Those emails apparently arose out of the disagreement between Ban-Yu and Lee.  Against such background, rightly or wrongly, Lee informed them that he would be leaving Ban-Yu; and suggested that Great Supreme would terminate its service to them with effect from 31 August 2010.

14. In his email to Toyoda of Ban-Yu dated 2 July 2010, Lee proposed to close down Great Supreme and to set up a new limited company with a view to avoiding any future dispute.  However, as suggested in that email, a lot of issues were yet to be settled by then.  In his reply on the same day, Toyoda urged Great Supreme not to close down at once.  The subsequent document from Great Supreme also referred to the taking of account between the parties including money that Yoshio or Ban-Yu was said to be owing to Great Supreme upon such account.  This was the background of what Lam mentioned in Great Supreme’s email dated 16 August 2010 above.

15. Back to email itself, Great Supreme referred to the Agreement whereby payment was supposed to be made 10 days after receipt of the buttons.  It therefore complained about the change in the payment terms that Pacific was seeking to impose.  It warned that if Pacific was so concerned that Great Supreme would not pay for the buttons, Pacific should consider withholding mass production or shipment.

16. At the end of the email, Pacific was requested to reply within that day, or it would be taken to be cancelling the order.  In court, Lam explained that she was then anxious about the situation because a month had already passed since the placing of the order; and her company’s customer had also enquired about the possibility of early delivery.

17. 3 days later, on 19 August 2010, Hideo of Pacific replied, complaining that Great Supreme should have informed him that Great Supreme would be closed down before placing the purchase order.  Hideo suggested that their lawyer (in Japan, according to Hideo) advised that if Great Supreme refused to pay what was described as the 50% deposit on the same day, Pacific would claim against Great Supreme for all the loss.

18. According to Lam, she never doubted that Hideo had the means of knowing what had been happening between Great Supreme and Ban-Yu, as Yoshio is Hideo’s father and Yoshio shared the same address with Pacific.  However, in court, Hideo seemed to suggest that he came to learn about what had happened between Ban-Yu and Great Supreme only by chance from the staff of Ban-Yu.  According to Hideo, even the staff of Ban-Yu was surprised that he had no idea about what had happened between his father’s company and Great Supreme.

19. As to the various emails between Ban-Yu and Great Supreme mentioned above, Hideo confessed that he counted on the staff of Ban-Yu to explain to him.  He did not grasp the whole picture.  Nor did he know the details.  All he remembered and firmly believed was that Great Supreme was closed down.

20. In my judgment, it matters not whether Great Supreme was then closing down its business with Ban-Yu or entirely to be replaced by a new company.  There is no pleading that Great Supreme placed the order for the buttons with the intention that it would not pay for them when delivered.  Had that been pleaded, the case would have been one of a plot to obtain property by deception.

21. As a matter of fact, another company by the name of Great Supreme Enterprise Limited was set up in July 2010.  Nevertheless Great Supreme’s business registration was lasted updated by the company on 22 October 2010 with regard to its business address.  The fact was that both Great Supreme and the new Great Supreme Enterprise Limited co-existed at the same business address.  This is not a case where the contracting party of Pacific ceased to exist.

22. More importantly, Great Supreme did place the order and had since been bound to pay for the buttons in accordance with the payments terms of the Agreement.  Has Great Supreme by words or conduct evinced an intention not to perform the Agreement after the Agreement was made?  Properly read, the email from Great Supreme dated 16 August 2010 did not have that effect.

23. Even assuming that Great Supreme was somehow repudiating the Agreement, Pacific had the right to accept the repudiation and terminated the Agreement.  Had it done so, Pacific would have been discharged from further performance of the Agreement, i.e., delivery of the buttons.  Alternatively, Pacific could keep the Agreement alive and proceed to perform the Agreement as agreed; and in case of actual breach on the part of Great Supreme, claim damages against Great Supreme.

24. What Pacific was not entitled to do was to unilaterally altering the terms of the Agreement or insisting the counterpart to accept the alteration while the Agreement was subsisting.  What Pacific sought to do by its emails dated 16 and 19 August 2010 was precisely that.  Its imposition of the 50% payment, call it down payment or deposit, was extraneous to the payment terms under the Agreement and was itself repudiatory of the Agreement.

25. Not surprisingly, Pacific’s request met the refusal by Great Supreme.  By its email dated 20 August 2010, Great Supreme made clear that if Pacific would deliver the buttons, payment would be guaranteed in 10 days after their arrival (i.e., as agreed).  A reminder that good quality would be expected was added.  In court, Lam added that she was quite angry about the situation when she bluntly stated in the email that her company had no money to pay any deposit as requested.  But the reality was that her company was under no obligation to accede to the request.

26. Pacific’s reaction escalated.  By its email dated 26 August 2010, it requested Pacific to pay the entire contract price as advance payment that day or it would cancel the order and claim against Great Supreme.  In its reply on the same day, Great Supreme reiterated its stance contained in the email dated 20 August 2010 above.  This was followed by Pacific’s further email whereby it insisted on 100% payment of the contract price within the following day.

27. In reply to the written demand from Pacific’s solicitors dated 8 September 2010, Great Supreme complained that Pacific had yet to confirm the time of shipment of the buttons.  It demanded that the buttons should be delivered by the end of September 2010 as agreed; and reserved the right to claim for any loss and damage as a result of late shipment or quality problem.  Great Supreme also repeated its readiness to pay for the buttons according to the payment terms contained in the purchase order and repeated in the previous emails; and refused to accept the change by Pacific’s request for 100% payment upfront.

28. I accept what Lam said above was true.  Objectively, the circumstances, in my judgment, are clear.  Out of its concern about Great Supreme’s ability to pay for the buttons, Pacific chose to react by unilaterally altering the payment terms of the Agreement as a pre-condition for delivery; and has thus rendered itself repudiatory of the Agreement.  As to that, Great Supreme, as it was entitled to do so, elected to wait until the deadline for the performance of the Agreement.  That having been passed, Pacific was in breach for non-delivery. Great Supreme is entitled to claim against Pacific for the consequential loss and damage.  These are my findings.

LOSS AND DAMAGE

29. It was said that Pacific lacks proper and sufficient proof of its alleged loss and damage.  I can see why.

30. To begin with, Pacific pleaded that the buttons had no available market or value because they were custom made.  Therefore the entire contract price of HK$236,400 was claimed.  It was only after amendment of the statement of claim in February 2011 when Pacific alleges that the buttons had a limited market and had been sold at ¥250,000.

31. In support, Pacific produced its invoice in February 2011 for the sale of the buttons to an insurance company for the amount of ¥250,000.  According to Hideo, he had tried to contact a list of over 200 potential customers to absorb the stock of the buttons.  The attempt was said to be a complete failure.

32. When asked how special the design of the buttons was so that they became impossible items for resale, Hideo explained that they were thicker than usual and of the most unique quality.  According to the purchase order, the buttons were 2.6 mm thick.  Hideo explained that other customers would not use buttons of that thickness.  But interestingly, the reason the buttons were said to have been sold to the insurance company, according to Hideo, was that the insurance company had “routes” for reselling the buttons, presumably to someone who could and would use them.

33. The uniqueness of the buttons is not immediately apparent.  The suggestion that no one other than Great Supreme’s customer would use the buttons of such thickness is not quite appealing.  One may doubt the alleged reasonable effort spent by Pacific to mitigate.  Having said that, I need say no more, in view of the above finding on liability.

34. According to Great Supreme, the buttons were ordered to fulfil the earlier order placed by Ascot Chang Co Ltd, a bespoke shirt maker and tailor.  It produced the proforma invoice issued by Ascot Chang Co Ltd dated 12 July 2010 for the buttons.  The contract price was HK$349,440 and the delivery date was 5 October 2010.  Great Supreme then placed its order with Pacific 2 days later.  The profits expected from the transaction would have been HK$(349,440 – 236,400) = HK$113,040.  Great Supreme now claims such sum being the loss of profits.

35. That Great Supreme is a trading company and required the buttons for resale to garment makers should be within knowledge or reasonable contemplation of Pacific when the purchase order was placed.  This was not the first transaction between the parties, as recited in Great Supreme’s email when placing this particular order.  In his evidence, Heido admitted that.

36. Mitigation is in issue.  However there is no question of whether Great Supreme could have secured alternative supply once Pacific had indicated its unwilling to deliver the buttons unless on its new payment terms.  Great Supreme was under no duty to mitigate upon affirming the Agreement and electing to wait for Pacific to perform the same.

37. Upon the expiry of the time for Pacific to perform the Agreement, i.e., the end of September 2010, less than a week remained before Great Supreme had to meet the deadline for delivery set its own customer’s order.  According to Lam, Great Supreme did not manage to do so.  Even according to Hideo, his company had to take about 2 months to get the buttons ready.  In court, Lam added that as at the date of trial, she was uncertain if her company’s customer would be claiming against her company.

38. I am satisfied that Great Supreme is entitled to damages to compensate its loss of profits as claimed.

ORDER

39. The claim by Pacific is dismissed; and there shall be judgment on the counterclaim of Great Supreme in the sum of HK$113,040 with interest thereon at 1% above HSBC best lending rate from the date of writ until today and thereafter at the judgment rate until full payment.  Following this event, I make a nisi order that Pacific shall pay Great Supreme its costs of this action, including any costs reserved.  Costs shall be taxed, if not agreed.  For clarity, I certify the engagement of counsel.  In the absence of application within 14 days to vary, the nisi costs order shall become absolute.