HO CHUNG t/a HO CHUNG KEE v. CHAN YIT YEE t/a MING FUNG TRADING CO.

1964 No. 8642

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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JUDGMENT

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1. The parties deal in wastepaper: the plaintiff as supplier, the defendant as buyer and exporter. They started doing business with each other before May, 1984.

2. It is not disputed that there are various types of wastepaper, and five different varieties were mentioned in evidence : paklam, grey card, day card, black and white and computer printout (CPO).

3. The defendant used to buy wastepaper from diverse other suppliers besides the plaintiff. All these suppliers would deliver it at the Kowloon Bay pier collection centre, where an employee of the defendant - DW3 - would take delivery, check the weight supplied, mark the name of the supplier on the goods and issue a receipt similar to page 1 of the bundle, indicating the kind of wastepaper, its gross and net weight in cattier. The net weight, for which payment was subsequently made by the defendant a week later, was reached by deducting three cattier per bale.

4. This action concerns CPO supplied by the plaintiff, which the defendant exported mainly to two buyers in India, the Simplex Mills Co. Ltd., and the Central Pulp Mills, through their local buyers, D.W.4 and D.W.5 respectively. It is agreed that on the 9th November, 1984, the defendant gave the plaintiff two post-dated cheques totalling $62,077.00., as to $30,000.00 post-dated to the 17th November and as to $32,077.00 post-dated to the 21st November, for nine deliveries of CPO wastepaper over the period 2nd November - 8th November, 1984. For reason which will become apparent presently, the plaintiff did not present these cheques for payment on their due dates. The defendant admits that he stopped payment on both cheques on the 26th November, so that when the plaintiff presented them at the bank on the 3rd December, 1984 both were dishonoured. This forms the first part of the claim of the plaintiff; the second part is for $96,666.87, the amended figure, being the price of wastepaper sold and delivered to the defendant over the period 9th November until the 26th November, 1984.

5. The defendant admits that all these deliveries were received, for which payment was not made by him. The defence is that the wastepaper supplied by the plaintiff was not according to description in that it had all to be CPO similar to that which the defendant pointed out to the supplier at the pier, but was not such and was not merchantable. The defendant said that on the 14th November four bales of wastepaper supplied by the plaintiff fell into the sea while being transferred onto a barge from the pier. They were fished out and taken to the defendant's workshop for drying, where one bale was opened up and found to contain some CPO together with other material like magazines, telephone directories etc. He claimed that on the following day, another bale was opened in the plaintiff's presence which similarly contained CPO with an admixture of the other material.

6. At about the same time, which D.W.1 described as a coincidence, the buyers in India also rejected the consignments of CPO sent to them for the same reason. D.W.4 said that, with the exception of the first consignment sent to Simplex in July, the subsequent five, the last of which was in November, were bad in that the outer layer was CPO but the inside was made up of envelopes, magazines, cardboard box, tracing paper and some other kinds of paper which made recycling of it to produce the kind of paper the buyers wanted not possible. D.W.4 said that at the time of rejection payment on two bills for US$25,148.25 and US$27,982.50 was outstanding from Simplex and the matter was settled by giving the buyer the bill for the smaller amount free, and paying for their demurrage charges totalling US$10,800.00. He said that he had recovered US$22,000.00 from the defendant and had no intention of suing him for the balance.

7. D.W.5 said that he inspected 30 - 40 bales of the consignment sent to the buyers in India. These contained some CPO, magazines, telephone directories, computer film, carbon paper and some black and white paper. The buyers claimed 50% to 60% of the CIF value, the LC amount being HK$180,000.00. He said that he stopped payment on a post-dated cheque for HN$48,000.00 which was the last payment due to the defendant.

8. Both the local buyers for the Indian Mills have since stopped buying wastepaper from the defendant.

9. D.W.1 said that the goods delivered by the plaintiff after the 14th November were stored at the pier - about 90 bales inside a barge for which storage charges are being paid, and some 200 bales are stored on the pier and are covered by a canvass sheet for which no charge is being incurred. A surveyor (D.W.2) of Andrew and Paulmaun (HK) Ltd. inspected five of these bales at the pier on the 4th January 1985 and his report is Ex. D2.

10. In his defence and counterclaim the defendant claimed that on or about the 26th November, 1984 he rejected all the purported CPO already delivered and sought to set-off so much of his counterclaim as would satisfy the plaintiff's claim, if any. He averred that the plaintiff failed to take back the rejected goods for which he incurred storage charges. He counterclaimed for damages for loss of profit or alternatively the return of $739,343.80 being the purchase price already paid to the plaintiff, a declaration that he is entitled to recover such damages as he might be held liable to his buyers, surveyor's fees of $700.00; storage charges and damages for loss of goodwill and reputation.

11. Learned Counsel of both sides were agreed that three issues arose for consideration (1) was there a sale by description, (2) Were the goods that are involved of such description, and (3) Were the goods supplied by the plaintiff merchantable under the description.

12. On the first issue I do not see much dispute in the evidence. The defendant said that in his dealings with the plaintiff before May, he had not specifically asked for CPO only arid in his words, he "welcomed the plaintiff supplying any category of wastepaper"; but "eventually" he asked him specifically to supply CPO for export to India and took him round the pier to point out the kind of CPO that was required. Under cross-examination the plaintiff agreed that sometime in May, 1984, the defendant asked him to supply CPO similar to, or smaller than, Ex. D1 and D1(A). Besides the fact that both parties were in wastepaper trade and knew what the words of the description "computer print-out wastepaper" meant, their evidence indicates quite clearly that even, if a sample was in fact pointed to the plaintiff at the pier, this nevertheless remained a sale by description as what the defendant wanted was CPO wastepaper corresponding to that description.

13. The other two issues may conveniently be considered together. This necessitates a close scrutiny of the evidence. The burden clearly is on the defendant to prove that the goods which form the subject matter of this litigation were in fact those which were supplied by the plaintiff, that they did not correspond to the description and were unmerchantable. I accept learned Counsel for the defendant, Mr. Van Burren's submission that the agreement between the parties was not for the supply of individual bales but was for supply of bales of CPO wastepaper.

14. It was not disputed that the plaintiff delivered such wastepaper in bales, the weight of which varied as is abundantly clear from the various receipts which were issued by D.W.3. This witness said that in the initial stages soon after the plaintiff had started supplying wastepaper, he had opened up a couple of bales for inspection and found them proper. Thereafter he trusted the plaintiff whose bales generally were covered on four sides and he could see CPO wastepaper from the two uncovered sides

15. It is important also that I should bear in mind that the plaintiff was not the sole suppliers :  there were other people also who supplied CPO wastepaper to the defendant at the same pier. D.W.1 said that the supplies from the other suppliers were in bits and pieces which were transported to his workshop for pressing into bales. The evidence of D.W.3, who was the defendant's man at the pier and took all deliveries, was to the effect that wastepaper from other suppliers also came in bales and that bales of paklam and CPO were sent to the workshop for repacking into bales. Whereas D.W.3 also said that CPO supply from other people was in small quantity, about one or two bales in a week, D.W.6 who did the pressing at the defendant's workshop, said under cross-examination that on average he pressed seven to eight bales of CPO per day. At this rate, the monthly average of CPO that was pressed at the defendant's workshop would be in the region of 210-240 bales.

16. Such bales were then returned to the pier and stored together with those of the plaintiff to accumulate before a shipment abroad was made. D.W.3 said that CPO received in bales at the pier was marked by him with the individual supplier's name, those returned from the workshop with the name of the defendant's workshop, that is, Sun Sang. On this basis, it would seem that the goods accumulating at the pier would be a mixture of bales bearing the markings of the plaintiff's name and that of Sun Sang.

17. Now, it is the defendant's case that four of the plaintiff's bales fell into the sea on the 14th November and were subsequently seen to contain CPO with an admixture of other types of wastepaper. I bear in mind that five days previously, on the 9th November, the defendant had given to the plaintiff the two postdated cheques, the first of which was for the 17th November. Whereas the defendant maintained and was supported by his wife (D.W.7) that on the 14th November the plaintiff was asked to come to view the four bales, the latter denied such an invitation as indeed he denied having been shown any such bales at all. D.W.1 maintained that one other bale was unpacked in the plaintiffs presence on the 15th November. D.W.6 and D.W.7 said that the remaining three bales were all opened up. Mr CHAN, for the plaintiff, submitted that this discrepancy concerning the number of bales that were allegedly unpacked is a major discrepancy. As the defendant based his case on this occurrence, it is obvious that it was of immense importance to this litigation sufficiently for it to stick in the minds of these witnesses. I take the view that it is a discrepancy which ought to be taken into consideration.

18. According to D.W.1, it was on the 16th November when the plaintiff returned and asked for payment, that is, a day after he had allegedly viewed the four wet bales, that he was told not to present the two post-dated cheques for payment. To this the plaintiff is said to have agreed, as also to improve the quality of his wastepaper. The version of the plaintiff was different and it was that he was asked to defer presenting the cheques due to the financial difficulties of the defendant. However, it seems that there was an argument between the parties on the plaintiff's next visit for payment on the 26th November. By this date, according to D.W.1, he had received intimation of the rejection of the consignment by one of the Indian buyers. D.W.1 said that when he told the plaintiff that he would not be paid because of the claim, the plaintiff had retorted "You are on the wrong side" whereupon D.W.1 told him that he could sue him if that was what he thought. D.W.7 denied that the plaintiff made such a comment and I should point out that the plaintiff himself did not claim in his evidence to have said so either. However, D.W.7 supported her husband who, according to her, told the plaintiff: "I stopped payment on the cheques. You go to sue me because you have been irresponsible. My buyers are claiming compensation from me, and you are irresposible." I do not share Mr CHAN's confidence that the version of D.W.7 amounts to a discrepancy. The fact remains that payment on the two postdated cheques was stopped on the 26th November and the plaintiff agrees that he was advised that he could sue the defendant. The significance lies not in the slightly different versions but, as I see the situation, it is in the fact that it was not on the 14th or the 15th that payment on those cheques was stopped. That significant aspect is illustrated, I think, by what was done with those four bales.

19. According to D.W.1, the two unopened bales were discarded as rubbish when they moved to their new premises on 30th June, 1985. His wife denied this and said that they sorted out the CPO wastepaper from those four bales and pressed it into one bale which was later stored in the barge at the pier. This discrepancy is obviously irreconcileable on any view. It was on the basis of what they were seen to contain that, so D.W.1 maintained, payment to the plaintiff for all his supplies was stopped. Yet the manifest abandon with which those four bales were disposed of is not only inconsistent, thus confounding the discrepancy but, on either version, it resulted in what can only be described as a deliberate destruction of evidence which, in the absence of any survey reports either for those four bales or the consignments which were rejected by the Indian buyers, was of a very relevant and potent. Nature to the defence case. I find it was quite contrary not only to good business practice, but is highly prejudicial to the integrity of the defence case.

20. Besides, there are the explanations given by D.W.1 and his wife for retaining the supplies made by the plaintiff since the 14th November. In his direct testimony, D.W.1 said:-

"I have not told Mr. Ho that he could take those goods back. People in India have demanded compensation from me. I have got to have those goods in my possession in case compensation is required. I could use those goods as exhibits in Court, if required. Secondly, Mr. HO has not said that he would take the goods away. "

21. Earlier on, he had said that those goods were similar in content to the four bales that fell into the sea. He said that he and D.W.3 had unpacked one or two of those bales for inspection in December. But D.W.3 did not speak of any such inspection and all he said was that he could see the contents of some bales which had become loosened. Under cross-examination D.W.1 was to contradict himself. He denied saying that those goods could be used as compensation to the Indian buyers, and said:-

"But the goods exported for compensation are not this kind of goods. They were the bales which we pressed from bits and pieces in the workshop. "

22. D.W.1 must have realised his own blatant blunder in saying that the plaintiff's goods were retained for use as compensation for quite obviously it is utter nonsense to replace defective goods with similarly defective goods. Self contradiction of this magnitude does not improve an already tarnished image of credibility.

23. However, his wife had a different explanation which was that the goods were not returned to the plaintiff lest their other suppliers got the impression that they were closing down business. Quite clearly, they could not do this at the expense of the plaintiff.

24. Considering the evidence in its entirety with regard to those four bales which allegedly fell into the water, for the reasons I have endeavoured to give and taking into account the defendant's conduct in continuing to take further deliveries of wastepaper from the plaintiff after the 14th November without informing him of his rejection of them as was pleaded, I am driven to the conclusion that the preponderance indicates that the version of the plaintiff is distinctly the more probable. I find therefore that the plaintiff had agreed to not presenting those postdated cheques on due dates because of the defendant's financial difficulties; that it was on the 26th November for the first time that he was told that the goods supplied by him were defective and not according to description and that the defendant had in fact decided to retain and use the plaintiff's goods as compensation for the Indian buyers' claims.

25. This will leave the surveyor's report and the rejection by the Indian buyers of the various consignments sent to them. In both, the issue centres on the identity of those goods which were inspected by the surveyor on the 5th January, 1985 and the consignments which were rejected by the Indian buyers in November and December, 1984.

26. It will be recalled the goods exported to India comprised partly those supplied by the plaintiff and partly those supplied by other suppliers which were pressed into bales at the defendant's workshop. The evidence of D.W.3 is relevant on this issue. It is significant to note that, if, as was said by D.W.3, the bales of the plaintiff were marked with his name and those pressed in the defendant's workshop with his firms name, neither D.W.4 nor D.W.5 was asked about this identifying feature of the bales and neither mentioned seeing any such different markings on the bales. As I see it, this would point to two probabilities - first, that there were in fact no such different markings and secondly, that all bales exported had the same marking of the defendants firm's name, Sun Sang. Either way, D.W.4 and D.W.5 did not identify the bales except for saying that they were exported by the defendant. In the circumstances, I find that the defendant has not discharged the burden of proving on balance that any such defective goods which D.W.4 and D.W.5 might have seen were in fact those supplied by the plaintiff.

27. I need not spend much time on the surveyor's inspection of the five bales on the 5th January, 1985. He said that those bales bore the markings of the plaintiff's name. Mr CHAN pointed out that in that lot of goods, the plaintiff bad supplied also black and white wastepaper. He is of course correct. Various quantities of this type of wastepaper were supplied by the plaintiff on the 21st, 24th and 26th November. There is nothing in evidence to show conclusively, even if this was a random check by the surveyor, that the bales inspected by him were not of the black and white wastepaper. Accordingly I do not think that the survey report takes the defence case any further.

28. For these reasons, I find that the defendant has failed to prove on balance that the CPO wastepaper supplied by the plaintiff was defective and not according to description or that it was unmerchantable. The plaintiff must succeed on both limbs of his claim and the defendant's counter-claim must fail in its entirety.

29. Had I found for the defendant on his counter-claim, I would have gone on to consider the issue of damages that are claimed. His counsel conceded that, as the defendant had recovered from his buyers the price of all the goods sold to them before 1934, it will not be reasonable to ask the plaintiff for a refund of HK$739,343.80. Mr Van Burren however argued that the defendant is entitled to the loss of the profits which D.W.1 put at $18,000.00 a month. Mr Chan argued that no documentary evidence in this regard was adduced, but it must be said that the figure quoted by D.W.1 was not challenged during evidence. This witness said that with a decline in the trade of CPO wastepaper, his profit margin in early 1985 was reduced to $15,000.00. I accept, as was submitted by Counsel, that the claim for profit has to be limited to a reasonable period of time. I would have awarded damages for loss of profits under this heading at the rate of $15,000.00 for a period of four months.

30. With regard to general damages, Mr Van Burren submitted that reasonable damages would be the amount in which D.W.1 settled with Mr Batavia (D.W.4) and Mr Gopwani (D.W.5). Although Mr Batavia said that he had allowed his Indian buyers a bill of US$25,148. 25 free and undertaken to pay for demurrage, he had recovered US$22,000.00 only from D.W.1 and had no intention of suing D.W.1 for the balance. And from D.W.5, the defendant had not received the lt payment of HK$48,000.00. Again, Mr Chan submitted that there was no evidence of how these figures were arrived at or that the settlement reached was reasonable. However, D.W.4 and D.W.5 were not challenged on the settlements they had reached and I would have accepted their evidence. Under this heading, I would have awarded general damages limited to US$22,000.00 and HK$48,000.00.

31. With regard to the claim for the surveyor's fees of $700.00, D.W.1 said that he had no knowledge of the amount that was paid and this item was not proved. I would disallow this claim.

32. The last item on which I was addressed was the storage charges. It will be called that some 90 bales were said to be stored in a barge, and greater quantity on the pier. Storage charges are paid only for the barge. D.W.1 admitted that he had not asked the plaintiff to take the goods away and he gave no reasonable explanation for keeping part of the bales in the barge. It was conceded by his counsel that the defendant has a duty to mitigate damages and, in the circumstances, where he had an alternative of keeping all the bales fairly safely under cover of canvass free of charge, I am of the opinion that the plaintiff should not be lumbered with such charges for the barge. I would have disallowed this claim for storage charges.

33. D.W.7 said that they were prepared to accept the plaintiff's goods lying at the pier and the barge, which she said were about 90,000 catties, at the rate of $25.00 per 100 catties. Mr Chan said that the goods supplied over the period 2nd November to the 8th November should also be considered which were about 54,000 catties. It is clear that those goods are not entirely worthless and there was evidence to indicate that they could be taken as black and white wastepaper. The rate at which the defendant was buying black and white wastepaper was $32.00 per 100 catties. D.W.7 did not explain her offer of $25.00 and certainly there is no evidence of what the market value was of such paper at the time of the delivery. In the paucity of evidence on this issue, I can only go by the rate which the parties had agreed for black and white wastepaper. On this basis, I would have considered diminution of value of such goods to reflect that agreed rate, that is, $32.00 per 100 cat-ties for the goods supplied over the period 2nd November to the 26th November, 1984.

34. In the event, I enter judgment for the plaintiff in the sum of HK$158,743.87 with costs. The defendant's counterclaim is dismissed with costs to the plaintiff.

35. I will now hear the parties on the issue of interest.

36. After hearing parties, interest allowed as follows: