PARK AVENUE TOYS LTD v. CANDY NOVELTY WORKS LTD

cacv 89/2005 AND cacv 158/2005

cacv 89/2005

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 89 of 2005

(on appeal from HCA NO. 11135 of 1997)

cacv 158/2005

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 158 of 2005

(on appeal from HCA NO. 11135 of 1997)

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BETWEEN

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J U D G M E N T

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Hon Rogers VP:

1.  This is an appeal from Deputy High Court Judge Saunders given on 23 August 2004.  The action before the judge was a claim for breach of contract by the plaintiff in respect of the supply of novelty sweets made by the defendant.  Although the judge had found that the plaintiff had established that the defendant had been in breach of contract, the formal order was that the plaintiff’s claim was dismissed.  The reason was that the judge, clearly with some misgivings, held against the plaintiff on the basis that it had not mitigated its loss and was therefore not entitled to damages.

Background

2.  The relevant facts can be shortly stated.  The plaintiff apparently commenced business in 1969 as a manufacturer and trader of toys.  It acted as the buying and shipping agent of Hope Industries Inc. (“Hope”), which is a United States company and had been in existence since 1983.  It appears that the plaintiff’s business in Hong Kong is effectively under the control of one of its directors namely Mr Fung Chi-Keung Alaric.

3.  In March 1996, the plaintiff entered into two contracts with the defendant to produce two types of children’s toys.  The first was a candy yo-yo and the second was a candy laughing stick.  These were to be on sold to Hope which, in turn, was selling them to Kay-Bee Toy Stores Inc. (“Kay-Bee”).  Kay-Bee is a multiple store toy retailer in the United States.  Apparently a small portion of each order was to contain candies supplied by the plaintiff.  Another company had manufactured those candies.  Nevertheless, the greater portion of the toys were to contain candies supplied by the defendants.  The judge found that it was “absolutely clear that it was a term of the contracts that the ingredients of the candies supplied by” the defendant were to be exactly the same as the content of the candies which had been supplied by the plaintiff.  In order for that to happen the defendant was supplied with details of the ingredients of the candies supplied by the plaintiff so that those would be used and the correct details printed on the packaging of the toys.  The judge found as a fact that the defendant was aware that in order to meet the requirements of the Food and Drug Administration (“the FDA”), the ingredients of the candies would have to be printed on the packaging of the toys containing those candies.  The defendant was also well aware that the FDA was liable to test the candies and that the ingredients had to match the description.

4.  The FDA did indeed take samples and tested them in the summer of 1996.  On 20 December 1996 the FDA issued a “Notice of Detention and Hearing”.  That indicated that following examination of the samples the FDA concluded that they included two items which were:

“violative within the meaning of 801(A)(3) in that it appears to contain an unidentified non-permitted yellow color, a color additive which is unsafe within the meaning of section 721., and 801(A)(1) in that its labelling appears to be false and misleading; yellow #5, red #40 and blue #2 were declared on the label, but were not detected in the product [misbranding, section 403(a)(1)]; and is therefore subject to refusal of admission.”

5.  The notice was addressed to the Customs Broker (F.C. Gerlach & Co. Inc.), Kay-Bee Toy & Hobby Shops as the importer and Hope as the manufacturer/shipper.

6.  The notice indicated that there was a 10-day period following the date of detention, which was given as 20 December 1996, for an opportunity to appear at the district office of the FDA, at the address in Brooklyn from which the notice had been issued, so that evidence could be given as to the admissibility of the goods in question.  In paragraph 18 of the judgment, the judge accepted that Hope had not become aware of this notice until 6 January 1997 when a copy of the notice was faxed to them.  It appears that Hope then sent on a copy of the notice by fax to the plaintiff, although the date on which that happened is uncertain.

7.  On receipt of the fax, Mr Fung of the plaintiff telephoned Ms Chu of the defendant and asked what the colouring ingredients were in the candies and whether they were approved by the FDA.  The judge found that Ms Chu was evasive and forgetful in giving evidence.  There was another director of the defendant, a Mr Chan, of whose evidence the judge formed a similar view.  It appears, however, that the majority, if not all the dealings between Mr Fung and the defendant were with Ms Chu.  The judge found that it was “abundantly plain” to both Ms Chu and Mr Chan that the inquiries being made were not routine inquiries because Mr Fung had told Ms Chu that the goods had been detained by the FDA.  The judge further found that Ms Chu had access to all necessary information to answer Mr Fung’s questions and that although between January 1997 and April 1997 Mr Fung spoke with Ms Chu on a number of occasions each time asking for the same information because he sought to ascertain what were the unknown substances in the candies, Ms Chu did not inform Mr Fung that artificial colours Yellow 5, Red 40 and Blue 2 had not been used and that carmine and turmeric, which were classified as natural colouring agents, had been used.  Ms Chu had simply said that the ingredients were all approved by the FDA.  The judge found that, instead of being straightforward, honest and helpful, Ms Chu suggested that Mr Fung make inquiries with the defendant’s supplier of colour additives namely Warner Jenkinson.  However, that company refused to reveal any information because the plaintiff was not a client and it would be revealing information relating to its dealings with its clients.

8.  In paragraph 27, the judge found that had Ms Chu informed Mr Fung of the correct ingredients and also informed him that the three artificial colours named on the label had not been used the whole matter could have been resolved immediately.  The judge held that it would then have been a straightforward matter for the Importer of Record, namely Kay-Bee to provide an appropriate laboratory analysis identifying the colours used and seek approval for relabelling.  The judge summarised his finding by saying that the situation which arose was a direct result of what he found to be the deliberate failure on the part of Ms Chu and Mr Chan to inform the plaintiff promptly of the true ingredients of the candies immediately upon their first inquiry.

9.  On 21 February 1997, the FDA sent a notice to the Customs Broker and Kay-Bee extending the time to respond to the Notice of Detention and Hearing to 3 March 1997.  Apparently nothing transpired and a notice was issued, dated 14 March 1997, indicating that the goods would not be admitted into the United States and that they had to be exported or destroyed under Customs supervision within 90 days.  The goods were apparently recalled, repackaged and returned to Hong Kong.

10.  It is of significance, however, that Hope had arranged for an analysis of the colour additives to be conducted by Messrs Strausberger & Siegel Inc. (“S & S”) on 25 March 1997, evidently before the goods left for Hong Kong.  It is evident from the one page report that S & S had checked which colour additives were approved by the FDA.  These included those referred to on the labels of the products as well as others.  The analysis did not identify the yellow and red colouring ingredients of the candies.  As the judge noted, although turmeric and carmine are regularly used as natural colours in colouring candy, the analysis did not reveal their identity.  It may well be that S & S did not test for “natural colors”, since they are classified differently from artificial colouring.  That they may not have tested for “natural colors” is hardly surprising since the labels on the products did not refer to “natural colours” but to “Color Added” and “Artificial Colours”.  These latter were expressions which the judge held had to be used when artificial colouring was present.  From a consideration the FDA web site referred to in the S & S report, it would seem that there are a substantial number of “natural colors”.  The goods were rejected by Kay-Bee on 14 and 18 March.  Later tests on the products in Hong Kong have revealed that the candies contained carmine and turmeric.  The judge also held on the balance of probabilities, that in addition to the yellow colouring ingredient being turmeric, Yellow 6 was also used.  Again, it is significant that the plaintiff’s expert was unable to identify that.  There is no suggestion that that expert was incompetent in failing to do so.

11.  In paragraph 33, the judge referred to the Notice of Detention and Hearing and interpreted the expression “an unidentified, non-permitted-colour” as referring to carmine and turmeric for which the FDA would not have tested.  In the context “non-permitted” was an expression which apparently the FDA used as meaning unidentified.  The word “unsafe” was a reference to a presumption of the colouring ingredient being unsafe as it had been unidentified.  It is implicit from the judgment that the plaintiff may well not have been aware of this.  The plaintiff had had no previous experience of dealing with candies let alone their export to the United States nor had it any experience in dealings with the FDA.

12.  After the goods had been returned to Hong Kong, the plaintiff attempted to mitigate its loss by having the goods sold in another market.  To that end the goods required to be relabelled with the international code for the colouring ingredients that had been used.  By a letter from its solicitors, the plaintiff attempted to see whether the defendant would cooperate in the relabelling exercise.  Although the judge found that the letter could have been better worded, he came to the conclusion that the effect of the letter was clear enough and that the defendant had remained obstinate in failing to provide the plaintiff with information as to the colouring ingredients, which the defendant well knew and even if it had not known that, the defendant could have easily ascertained the details.  In consequence the sale, which the judge held had reached a final stage and was close to being concluded, fell through and the goods have remained unsold in a warehouse.

13.  The judge held that the defendant had been in breach of contract because the ingredients that had been used were not those contracted for and this, in turn, led to a breach of the labelling requirements because the labels referred to items that had not been used in the products.

14.  After reaching the conclusion that the defendant was in breach of contract and that the plaintiff was entitled to damages, the judge went on to consider the argument that had been raised as to mitigation.  The basis upon which the judge held that the plaintiff had failed to mitigate its loss was, first of all, that the goods could easily have been relabelled to show the correct colouring ingredients.  The judge went on to hold that carmine and turmeric were common colouring ingredients and that straightforward tests would have confirmed their existence in the candies.  The judge held that the plaintiff had unreasonably delayed from 6 January until 14 or 18 March and had not taken steps such as contacting the compliance officer of the FDA or in the alternative making inquiries of Kay-Bee or Hope with a view to their contacting the compliance officer and in failing to engage in any laboratory analysis and subsequent relabelling.

15.  It is, perhaps, implicit in some of the statements made by the judge in relation to costs that the judge was by no means happy with the conclusion to which he felt he had to come.  In paragraphs 67-9 of the judgment he said:

“67.      I have recorded that the situation that Park Avenue found itself in was brought about not only by a clear breach of contract by Candy Novelty, in both failing to use the agreed ingredients, but also in endorsing on the labels ingredients which were not in fact used.  That breach of contract was compounded by the deliberate failure of Candy Novelty to promptly disclose the true situation to Park Avenue.  The usual rule is that when a defendant succeeds in resisting a plaintiff’s claim he is entitled to his costs.  Costs are however in the discretion of the court. 

68.       Mr Sakhrani put the matter on the basis that Mr Fung did not ask the right questions.  That is correct.  The right questions were not asked, but they were not asked because Mr Fung did not appreciate that the statement from the FDA contained in the Notice of Detention and Hearing that includes contained an “unidentified non-permitted colour”, meant that the colour was not permitted simply because it had not been identified.  Had he been told immediately by Candy Novelty that they had used carmine and turmeric Mr Fung, he would have appreciated the true nature of the problem, and would then have been able to ask the right questions.

69.       Having regard to the conduct of Candy Novelty, both in using colouring agents in breach of contract, in mislabelling the goods, and in its response Mr Fung’s inquiries, this latter conduct being conduct which did nothing at all to assist Park Avenue in resolving the matter, I am satisfied that it would be quite unjust to penalise Park Avenue by an order for costs.  Each party will accordingly bear its own costs.”

16.  In my view, the plaintiff should be entitled to the normal damages in this case.  I commence my view of the matter on the basis that the goods could, indeed, have been relabelled, but asking what was the proximate cause of the failure to have the goods relabelled.  The answer in my view, on the findings made by the judge, was clearly that the defendant had failed to respond to inquiries and had, indeed, set the plaintiff on a wild goose chase telling the plaintiff to make inquiries of the defendant’s own supplier.  The basic rules of customer confidentiality would have prevented the supplier from answering questions about its dealings with the defendant.

17.  The defendant had caused the problem in the first place and it had refused to be of any assistance.  For the defendant to then, in effect, turn around and say to the plaintiff that the plaintiff itself should have appreciated what the defendant had done and taken steps to rectify the situation by relabelling the products, in my view, takes the law as to mitigation too far.

18.  Although it can be said that subjecting the candies to analysis to confirm the identity of the ingredients was not a complicated matter, the evidence only shows that the identification of turmeric and carmine was simple once it was known that that was what the analysis was searching for.  The practical evidence and the reality in the case was that when analysis was undertaken by S & S turmeric and carmine were not identified.  Also importantly, Yellow 6, which was an ingredient used by the defendant which was authorised and printed on the packaging, was only identified by the defendant’s own expert and the finding at paragraph 32 of the judgment was that the analysis by the plaintiff’s Hong Kong expert only revealed “an unidentified yellow colour in the candy”.  Hence even when knowing the identity of the colouring ingredient confirmation of the presence of which was being sought, chemical analysis by chromatography did not necessarily produce the desired result.

19.  As the judge acknowledged it was unlikely that the plaintiff could, in any event, have had direct contact with the compliance officer.  It was not disputed that the compliance officer would have only dealt with the Customs Broker or Kay-Bee.  Whether the plaintiff could have prevailed upon the ultimate purchaser or the Customs Broker to assist it in discussions with the compliance officer must be speculative.  Kay-Bee clearly had its own rights against Hope and, indeed, as events turned out, exercised those rights to the full.  Likewise whether the plaintiff could have had access to the candies is a matter that does not form part of the findings by the judge.  Ownership and possession of the candies had passed to Hope and then to Kay-Bee.  There they remained until Kay-Bee rejected the goods.  Even if any testing or relabelling exercise were to have been undertaken that could only have been done with the cooperation of Kay-Bee and, would in any event, have constituted a not inconsiderable expense.

20.  In my view, the appeal should be allowed, judgment should be entered for the plaintiff and the matter remitted to the master for the assessment of damages.  Since those damages will inevitably come to more than US$100,000.00 it is not appropriate for this court to consider whether the judge exercised his discretion as to costs correctly in view of the Calderbank letter, since the amount of the offer in that letter was US$30,000.00.

Hon Le Pichon JA:

21.  I agree.

Hon Suffiad J:

22.  I agree.