QUALITOWN CO. LTD. v. KENLORD INDUSTRIES LTD.

DCCJ 2475/2000

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO.2475 OF 2000

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JUDGMENT

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Background:

[1] The Plaintiff was a small trading company that sources products for its clients. The Defendant was a large manufacturer of clocks and radios. On or about October 1999, the Plaintiff received an order from On-Line Company ("On-Line") to supply a number of three-item promotional gift sets consisting of a telephone, a desk calendar and a mini radio. The gift sets were for the Mild Seven brand of cigarette and were in Mild Seven's metallic blue and silver colours.

[2] The Plaintiff met with the Defendant's sales representatives in mid October 1999 and enquiries were made on the mini radios. Thereafter, some discussions were held between the parties in respect to the price, specifications, delivery date, quality, quantity and payment terms for the radios.

[3] Originally the quantity was about 5,000 pieces but on 23/11/1999, the parties reached an agreement and a sales invoice (the "Sales Invoice") was issued by the Defendant for 20,350 mini radios at the total price of HK$292,633.00. The delivery date was stated on the Sales Invoice as "on or before 15 December 1999". The term of payment was stated as "30% Deposit Balance COD". The radios were to be picked up by the Plaintiff at the Defendant's mainland factory.

[4] The required deposit in the sum of HK$87,789.90 was paid by the Plaintiff on 26/11/1999. There were further discussions on the colour samples and delivery dates. Deliveries were rescheduled on several occasions. Delivery was not completed until 10/1/2000.

[5] The Plaintiff alleged that due to delays by the Defendant in supplying the radios, it had suffered loss and damages as follows:

(1) Additional collecting costs	HK$ 14,400.00
(2) Additional delivery cost	28,000.00
(3) 20% Deduction by On-line	65,120.00

[6] The Plaintiff further alleged that 2,100 pieces of radios were defective and a different coloured lens had to be installed by the Plaintiff. There was an agreement to deduct the total price by HK$2,000.00 due to the defective lens.

[7] The Plaintiff also claimed that the Defendant had short delivered 12 radios and claimed a deduction of HK$189.60.

[8] Finally, the Plaintiff alleged that on 29/12/1999, when it sent its transportation company, Zhong Shan Shi Western District Transportation Company (the "Western Company") to pick up a batch of radios from the Defendant's factory, Western Company's truck was detained by the Defendant overnight. The Western Company charged the Plaintiff an additional sum of HK$5,000.00, and HK$1,000.00 as allowance and accommodation expense for the driver. The Plaintiff also claimed these items as damages.

[9] The Defendant's defence was based on two main allegations: First, the delivery date stated on the Sales Invoice was mistakenly stated as 15/11/1999. It was meant to be 25/12/1999. In any event, the Plaintiff had not approved the colour sample until 14/12/1999, making delivery by 25/12/1999 impossible. Second, one of the Plaintiff's cheques in settlement of part of the radios delivered, was returned by the Plaintiff's bank. The Defendant had the right to withhold delivery until payment was received.

[10] So far as the Western Company's truck was concerned, when the truck arrived at the Defendant's factory, the factory managers were at a meeting in their new building a few blocks away and there were no one available to sign the release form. The release form was signed half an hour later; however, by that time the driver was nowhere to be found.

[11] Finally, the Defendant alleged that although there were agreements to deduct HK$1,000.00 for additional transportation costs and HK$2,000.00 for the Plaintiff's costs to change the plastic panels on certain radios, these HK$3,000.00 had already been deducted from the Plaintiff's payments to the Defendant.

[12] Most of the facts are agreed by the parties, their interpretations are however different. I do not propose to repeat all of the facts alleged by the parties, as they are numerous. I will only state my findings on those relevant facts that are in dispute as I analysis the parties' actions according to applicable legal principles.

The delivery date:

[13] The Defendant's marketing executive Mr. Yip Chi Kin ("Mr. Yip") testified that although on 16/11/1999, the Plaintiff ordered 15,000 pieces of mini radio for delivery on or before 15/12/1999, after further negotiations, the Plaintiff increased its order to 20,350 pieces on 19/11/1999. Since the negotiation took sometime to complete, the date of delivery for these radios could not be 15/12/1999, as proposed by the Plaintiff. The new agreed delivery date was 25/12/1999, Mr. Yip had simply forgot to change the delivery date on the Sales Invoice.

[14] The Plaintiff's director and account manager, Ms. Mak Shun Fong, Martha ("Ms. Mak") stated that the promotional sets were intended to be distributed to consumers as Christmas and New Year promotional gifts. The gift sets must be delivered to On-Line's distribution points in various locations on the Mainland by truck. Delivery on 25/12/1999 would be far too late for the Christmas and New Year promotion.

[15] After careful consideration of the allegations, I found that the original delivery date was 15/12/1999. I based my finding on the following facts: First, given the clear purpose of the radios, it made no sense for the Plaintiff to agree to a delivery date of 25/12/1999. Mr. Yip at first alleged that Ms. Mak only referred to a New Year promotion which he took as Lunar New Year. However, during cross-examination, Mr. Yip admitted that Ms. Mak said "Christmas and New Year" promotions, but he insisted that by New Year he took that as Lunar New Year.

[16] The holidays of Christmas and New Year (in accordance with the Georgian calendar) have been associated together since time immemorial. Any suggestion that when Ms. Mak said the radios were for Christmas and New Year, she meant the Lunar New Year is beyond comprehension. In any event, it was irrelevant whether Ms. Mak meant "New Year" or "Lunar New Year". The Defendant's contractual obligation was to supply 20,350 radios on or before 15/12/1999 and not "New Year" day or "Lunar New Year" day.

[17] Second, Mr. Yip testified that as late as 16/11/1999, the agreed delivery date was still 15/12/1999. Three days later, after the total number of radios was increased from 15,000 to 20,350, the delivery date had to be changed to 25/12/1999. If the increase of 5,350 radios represented a significant portion of the Defendant's production capacity, the change of delivery date by 10 extra days would make sense. However, Mr. Yip testified that the Defendant's factory had 18 production lines for radios alone. Each of these production lines was capable of producing 3,000 radios per shift. Plaintiff's total order of 20,350 radios would have taken one single shift for 7 production lines to complete, an insignificant part of the Defendant's total production capacity. Even if I assume the Defendant intended to assign only one single production line for the Plaintiff's radios, it would represent less than 2 shifts to complete the 5,350 additional radios, hardly justifies the extra 10 days Mr. Yip said was required for the extra number.

[18] Accordingly, I found that the original agreed delivery date was on or before 15/11/1999, as clearly stated on the Sales Invoice.

The colour sample:

[19] One of the difficulties alleged by the Defendant for the delay was the colour. It was agreed that the blue colour for the other two items in the promotional set was achieved by a combination of electrical plating and semi-transparent blue paint. During the parties' negotiation, it was agreed that the Defendant could not duplicate this colour process except at great costs. The Parties agreed that the Defendant would try to simulate the colour by metallic blue paint alone.

[20] Mr. Yip stated that Ms. Mak failed to approve the colour of the radio until 15/12/1999 and production of the same could not commence until that day. However, in his testimony, Mr. Yip admitted that he received a colour sample from Ms. Mak as early as 9/11/1999 and knew on that day the colour the Defendant was required to match. Mr. Yip stated that by 21/11/1999, he had delivered 2 colour samples to Ms. Mak, but both were rejected. However, during cross-examination, Mr. Yip admitted that on 9th or 10th November 1999, he gave Ms. Mak colour samples from the Defendant's standard colour samples and these were rejected because they were too light.

[21] Ms. Mak on the other hand, testified that except for one light metallic blue sample, the Defendant did not provide her with any other colour samples. It was not until 14/12/1999, when Ms. Mak visited the Defendant's factory, when the first colour sample was shown. The sample was approved on the sport.

[22] Prior to the agreement, the Defendant knew the colour it had to match. The obligation was on the Defendant to match the colour sample provided by the Plaintiff. Only after the Defendant has provided proper samples for the Plaintiff, will the Plaintiff's implied obligation to approve the colour samples expeditiously arise. Here it is clear that proper samples were never given to the Plaintiff until 14/12/1999. The Plaintiff's representative, Ms. Mak, approved the same immediately. No part of the delay in colour approval can be attributed to Plaintiff.

[23] Although Mr. Yip testified that even after the colour sample was approved, the Defendant continued to experience problems with matching the colour, because mixing the required paint for large scale production was different from mixing it for a small batch for colour samples. However, Mr. Yip admitted that the Defendant commenced delivery of the radios on 17/12/1999, which meant that the colour problem must have been resolved by then.

[24] With the Defendant's production capacity, the whole 20,350 radios could have been completed within 2 of the Defendant's production shifts. Although Mr. Yip stated that the Defendant had only one painting line, I wonder how much time the painting process would have held up completion of the Plaintiff's radios. As it is reasonable to expect all radios produced by the Defendant would require some type of painting process, it is not logical for the Defendant to have production capacity of 24,000 radios per shift and painting facility substantially below their production capacity. In any event, Mr. Yip testified that there were over 100 employees working on the painting line. I do not accept Mr. Yip's explanation that there was insufficient time for the Defendant to complete the radios after the Plaintiff approved the colour.

The delivery:

[25] So far as the dispute on whether there was an agreement to deliver the radios in one or several lots, given the fact that the total number of radios represented a small portion of the Defendant's production capacity; the Sales Invoice required balance of the purchase price be paid "COD"; and as soon as the first batch of 180 radios were delivered, the Defendant's accounting department issued an invoice for the total amount of the radios, reasonable interpretation points to an agreement to deliver in a single lot rather than several lots.

Breach of the delivery date and waiver by the Plaintiff:

[26] Failure to comply with the delivery date did not mean that the Defendant was in breach of contract, this will depend on whether time has been made an essence of the contract. The learned author of Chitty on Contracts stated, in paragraph 22-013 as follows:

"Time is of the essence: (1) Where the parties have expressly stipulated in their contract that the time fixed for performance must be exactly complied with, or that time is to be "of the essence." (2) Where the circumstances of the contract or the nature of the subject-matter indicate that the fixed date must be exactly complied with, e.g. the purchase of a leasehold house required for immediate occupation; the sale of business land or premises, such as a public-house as a going concern; the sale of a reversionary interest; the exercise of an option for the purchase or repurchase of property ...mercantile contracts, such as a contract for the sale of goods where a time is fixed for delivery,.... However, the mere fact that the contract can be labeled "mercantile" or "commercial" does not determine the issue. The question is whether the time specified in the particular clause was (expressly or be necessary implication) intended to be essential, e.g. because they needed to know precisely what were their respective obligations."

[27] Here, the parties knew that the radios were meant for a Christmas and New Year promotion and the agreement specified a delivery date of 15/12/1999, there is no question that by necessary implication, time was of the essence of the original agreement. Thus when the Defendant failed to deliver the radios on 15/12/1999, the Plaintiff was in a position to terminate the agreement and claim damages for breach of contract. However, the Plaintiff did not do so, it elected to affirm the contract by agreeing to accept a new delivery schedule. By doing so, the Plaintiff may have postponed the Defendant's obligations by waiver or subsequent variation of the original agreement.

[28] The Plaintiff's acceptance of new delivery schedules is better described as a waiver than a variation. In Chitty the learned author stated in paragraph 23-34:

" A mere forbearance or concession afforded by one party to the other for the latter's convenience and at his request does not constitute a variation, although it may be effective as a waiver or in equity. Such a forbearance or concession need not be supported by consideration and can be made orally even when the contract is one which is required to be made or evidenced in writing."

[29] Although the Plaintiff had waived its rights to the original delivery date and can no longer claim damages from the Defendant for breach, it did state in numerous subsequent letters to the Defendant that the new delivery dates must be strictly adhered to. By doing so, the Plaintiff had reiterated that time had remained of the essence. Chitty, in paragraph 23-041 described the relevant principle as follows:

"The party who forbears will be bound by the waiver and cannot set up the original terms of the agreement. If, by words or conduct, he has agreed or led the other party to believe that he will accept performance at a later date than or in a different manner from that provided in the contract, he will not be able to refuse that manner from that provided in the contract, he will not be able to refuse that performance when tendered. However, in the case of postponement of performance, if the period of postponement is specified in the waiver, then if time was originally of the essence, it will remain so in respect of the new date...."

[30] Specifically, on 24/12/1999, the Defendant wrote to the Plaintiff and stated:

"Regarding the delivery time! Here confirm the approximate of 15,000 PCS will be completed & send to you on or before 26 Dec.! And the balance will be ready on 27th Dec.! Thank You!" (Sic)

[31] On 26/12/1999, the Plaintiff accepted the new delivery schedule and waived its rights to all prior agreed delivery dates. The Plaintiff had specifically reiterated that time for delivery of the balance of the radios remained of the essence. The Plaintiff wrote:

"Further to your fax dated Dec. 24, 1999 (Ref: 9912240) and the tele-conversation with our Ms Mak. We mutually agreed the delivery of the balance quantity of the captioned order is confirmed on Dec 26 and Dec 27, 1999. And all goods must be delivered on or before Dec 27, 1999. And we will not charge you the Air-freight of delay delivery (subject the balance quantity is delivered on or before Dec 27, 1999)." (Emphasis added)

[32] As the Defendant failed to comply with the new delivery schedule, the Defendant was again in breach and the Plaintiff was returned to the same position as before the waiver.

"COD" and waiver by the Defendant:

[33] The delivery date was not the only term in the agreement that was waived by the parties. The Sales Invoice also stipulated that balance of the purchase price was to be paid "COD" or "cash on delivery". The Defendant however, had waived strict compliance with this term. Prior to 26/12/1999, the Defendant made several deliveries to the Plaintiff without requiring the Plaintiff to pay balance of the price for the radios so delivered. As a matter of fact, except for an invoice dated 23/12/1999 for the 18 samples, which Mr. Yip agreed were not payable, there were only 2 other invoices issued by the Defendant. The first was dated 17/12/1999 for the sum of HK$292,633.00. Both parties agreed that this invoice was a mistake, since by 17/12/1999 the Defendant had delivered only 180 radios. The second invoice was for the 180 radios delivered on 17/12/1999, but it was agreed that the Plaintiff did not have to pay this invoice.

[34] Accordingly, although one of the terms of the agreement required the Plaintiff to pay for the radios on delivery, the Defendant had waived compliance of the same by conduct. The question is whether the Defendant was entitled to revert back to the original "COD" term on 26/12/1999, when it required the Plaintiff to settle the balance of the payment before delivery. The answer again is stated in Chitty, after stating the principle on wavier and postponement, paragraph 23-041 continued as follows:

"...Similarly, in other cases of forbearance, he may be entitled, upon reasonable notice, to require the other party to comply with the original mode of performance, unless in the meantime circumstances have so changed as to render it impossible or inequitable so to do. He cannot treat the waiver as entirely without effect...."

[35] Accordingly, upon reasonable notice to the Plaintiff, the Defendant was entitled to revert to the original agreement and demand cash on delivery of the radios. The problem was that the Defendant did not give any such notice to the Plaintiff. On 26/12/1999, during the 3-days banking holiday, the Defendant suddenly wanted payment by way of cash or bank draft before they would deliver balance of the radios. Knowing that it was impossible for the Plaintiff to comply with this request during the bank holidays, the Defendant's request was patently unreasonable. I found that the Defendant was not entitled to insist on payment by cash or bank draft before delivery of the balance of the radios on 27/12/1999. Defendant's subsequent failure to deliver balance of the radios was a breach of the new delivery date and the Plaintiff was entitled to treat the agreement as at an end and claim for damages.

The returned cheque:

[36] So far as the Defendant's allegation that balance of the radios were not released to the Plaintiff because one of the Plaintiff's cheques had been returned by the Plaintiff's bank. Mr. Yip alleged that he had asked for payment every time a batch of radios was delivered, but the Plaintiff had refused to pay for the same. Mr. Yip further alleged that the Plaintiff had promised him cash on the morning of 27/12/1999, but was only able to deliver 2 cheques. Although he was reluctant, he allowed 8,600 radios to be released to the Plaintiff on 27/12/1999, by 2 separate deliveries. The next morning, due to insufficient funds in Plaintiff's account, he was able to mark-good only one of the two cheques. Even under that circumstance, Mr. Yip released an additional 1,600 radios to the Plaintiff on 29/12/1999, leaving only 798 radios undelivered.

[37] Ms. Mak testified that the first time Mr. Yip asked for payment for balance of the purchase price was in his letter dated 26/12/1999. Due to the bank holidays, she was unable to arrange cash or a bank draft for the Defendant on the 27/12/1999. However, Mr. Yip agreed to accept two cheques dated 28/12/1999 as payment for balance of the purchase price. Two cheques were issued, because one of the cheques, in the sum of HK$94,016.44, was for radios already received and the other, in the sum of HK$110,826.66, was for radios to be received. The Plaintiff was not at all certain if any radios would be delivered by the Defendant on 27/12/1999. As it turned out, the Defendant released only 8,600 radios. The Plaintiff therefore counter-manded the HK$110,826.66 cheque. Mr. Yip was immediately informed and a new cheque in the sum of HK$86,567.60 was prepared for Mr. Yip.

[38] The problem with Mr. Yip's allegation on having demanded payment was that the Defendant had, contrary to the Defendant's usual practice, not issued any additional invoices to the Plaintiff. I also found it difficult to accept Mr. Yip's other evidence. First, if all of the outstanding radios were ready for release on 27/12/1999, there was no reason to release the 8,600 radios in two batches on that day. Second, If one of the two cheques had been refused payment due to insufficient funds as alleged by Mr. Yip, there was no reason for Mr. Yip to release another 1,600 radios to the Plaintiff on 29/12/1999, leaving only 798 radios as collateral for balance of the purchase price. Accordingly, I found that balance of the radios were not ready to be released on 27/12/1999, as promised by the Defendants and the second cheque being counter-manded had nothing to do with the fact that these radios were not delivered until January 2000.

[39] I found that the Plaintiff's order of 20,350 radios was a very small number in view of the Defendant's total production capacity. The Plaintiff's order was given very low priority and only when there was a gap in the Defendant's production schedule, the Defendant would produce the Plaintiff's radios. Thus the delay in completing the Plaintiff's order was in the Defendant's production scheduling and not related to the colour, the payment or the counter-manded cheque.

The Damages:

[40] I have already found that the Plaintiff was entitled to treat the agreement as at an end when the Defendant failed to comply with the 27/12/1999 delivery date. I also found that the Plaintiff's acceptance of all deliveries subsequent to 27/12/1999, were the Plaintiff's effort to mitigate its loss and were not further waivers of the delivery dates.

[41] It is trite that the fundamental principal in assessing damages for breach of contract is to put the injured party back in a position as if the contract had been performed. The issue in this matter is whether damages should be calculated from the agreed delivery date of 15/12/1999 or the last agreed delivery date of 27/12/1999. The decision depends on what type of waiver was elected by the Plaintiff when the Defendant failed to comply with the 15/12/1999 delivery date. The relevant principle is stated in paragraph 25-006 in Chitty as follows:

"...But the word 'wavier' is used in the law in a variety of different senses and so bears 'different meanings'. Two types of waivers are relevant here. The first type may be called 'wavier by election' and wavier is here used to signify the 'abandonment of a right which arises by virtue of a party making an election.' Thus it arises when a person is entitled to alternative rights inconsistent with each other and that person acts in a manner which is consistent only with his having chosen to rely on one of them. Affirmation is an example of such a waiver, since the innocent party elects or chooses to exercise his right to treat the contract as continuing and thereby abandons his inconsistent right to treat the contract as repudiated. It is important to appreciate that, in this context the Party who makes the election only abandons his right to treat the contract as repudiated; he does not abandon his right to claim damages for the loss suffered as a result of the breach. A second type of wavier may be called 'waiver by estopple' and it arises when the innocent party agrees with the party in default that he will not exercise his right to treat the contract as repudiated or so conducts himself as to lead the party in default to believe that he will not exercise that right. This type of waiver does not exist as a separate principle but is in fact an application of the principle of equitable estoppel deriving from the classic statement of Lord Cairns in Huges v. Metropolitan Railway Co."

[42] By letter dated 21/12/1999, the Plaintiff stated:

"As advised per my earlier telephone call, 20,350 nos of the above must be finished and ready for collection on or before 25 December 1999. Since the goods are for New Years promotion, any further delay and postpone may caused additional air-freight charges and late penalty from out client." (Sic)

[43] When the Defendant once again failed to deliver the radios on 24/12/1999, the Plaintiff wrote to the Defendant and stated:

"Further to your fax dated Dec 24, 1999 (Ref:9912240) and the tele-conversation with our Ms Mak. We mutually agreed the delivery of the balance quantity of the captioned order is confirmed on Dec 26 and Dec 27, 1999. And all goods must be delivered on or before Dec 27, 1999. And we will not charge you the Air-freight of delay delivery (subject the balance quantity is delivered on or before Dec 27, 1999)." (Sic)

[44] Finally, when Mr. Yip wrote to the Plaintiff on 26/12/1999, refusing to be responsible for airfreight charges, the Plaintiff replied:

"All airfreight charges will be born by us except the labour charges for replacing the incorrect silver colour plastic plate."

[45] Clearly, the Plaintiff's original intention was to reserve their right to claim against the Defendant in the event that it suffered damages as a result of the Defendant's failure to deliver the radios on the original delivery dates of 15/12/1999 and the amended delivery date of 25/12/1999. In light of all of the prior correspondences between the parties, the Plaintiff's reply to the Defendant's refusal to pay airfreight charges, must be construed as a waiver by estopple, subject to the condition that deliveries of all radios was completed by 27/12/1999. Since the Defendant failed to complete the delivery on the agreed date, the estopple was never effective against the Plaintiff.

[46] Accordingly, the Plaintiff is entitled to the following damages:

(1) Additional collecting costs	HK$ 14,400.00
(2) Additional delivery cost	28,000.00
(3) 20% Deduction by On-line	65,120.00

[47] So far as the Plaintiff's claim that there was a short delivery of 12 radios. The burden of proof is on the Plaintiff. The Plaintiff's evidence was that at the time of delivery, Western Company's drivers would count the number of boxes only. Therefore, the actual number of radios received is not determined by the Defendant's delivery note or the Plaintiff's pick-up notices to Western Company. Additionally, a number of radios were returned to the Defendant due to quality problems. The Plaintiff's problem was that there were no evidence on how the final counting of the radios was conducted. There was also no evidence on the number of radios returned to the Defendant. Accordingly, I found that the Plaintiff had failed in its burden to prove that the Defendant's delivery was 12 radios short.

[48] So far as the Plaintiff's claim that there was an agreement to deduct HK$2,000 from the purchase price, as the Plaintiff's labour costs to replace the lens on 2000 radios, Mr. Yip confirmed the existence of the agreement together with the deduction of HK$1,000 as compensation for the Plaintiff's additional pick-up charges; however, he alleged that the same had already been deducted when the plaintiff paid the last instalment of the total purchase price.

[49] Ms. Mak in paragraph 44 of her witness statement confirmed that in the last payment of HK$8,153.46, the sum of HK$3,000.00 had been already been deducted. Accordingly, this part of the Plaintiff's claim must fail. Additionally, HK$1,000 must also be deducted from the Plaintiff's claim for additional delivery charges.

[50] Finally, I come to the Plaintiff's claim for HK$6,000.00 charged by the Western Company. Ms. Catherine Wong, counsel for the Plaintiff, based this part of the Plaintiff's claim on Conversion.

[51] The nature of a claimant's interest in an action for Conversion depends on the right of actual possession. The learned author of Clerk & Lindsell On Torts, 18th Ed., stated in paragraph 14-46:

"A person has title to sue for conversion if and only if he had, at the time of the conversion, either actual possession or the immediate right to possession..."

[52] The Western Company was an independent company hired by the Plaintiff to pick-up the radios from the Defendant's factory. The Plaintiff did not hire Western Company's vehicle for a fixed period, it was merely one of several pick-ups and deliveries that the Western Company's driver must complete on that day. In effect, the relationship between the Plaintiff and Western Company was nothing more than a courier company and its clients.

[53] The Plaintiff never had any right to use or possess the Western Company's truck at any time. Accordingly, the Plaintiff lacked the required locus standi to sue in Conversion. The Plaintiff's claim under this item of claim must be dismissed.

Order:

(1) Judgment for the Plaintiff in the sum of HK$106,520.00 together with interest, calculated at the judgment rate, commencing from the date of writ until payment.

(2) Balance of the claim is dismissed.

(3) Costs to the Plaintiff, to be taxed on a party/party basis, if not agreed.

(4) Certificate for counsel shall be allowed.