ICI SWIRE PAINTS LTD v. TECHI MOTOR ENGINEERING & TRADING CO

CACV 270/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 270 OF 2003

(ON APPEAL FROM HCA NO. 7251 OF 1995)

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J U D G M E N T

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Hon Rogers VP:

1. This is a judgment in CACV 270 of 2003. Shortly prior to the hearing the parties arranged to have CACV 171 of 2004 also listed for hearing at the same time. As matters transpired at the hearing it became clear that it would not be possible to give effective consideration to CACV 171 of 2004 until the appeal in CACV 270 of 2003 had been decided. The present appeal concerns an assessment of damages in respect of what Yam J had held to have been a wrongful termination of the 1994 Sales Agreement and Authorised Dealer Appointment by the plaintiff. The assessment of damages was heard by Mr Rimsky Yuen sitting as a deputy master. In his judgment he held that the defendant was entitled to the sum of $2,938,743.04 on his counterclaim against the plaintiff.

2. The defendant appealed against that judgment on the footing that the master had awarded an insufficient sum. The plaintiff cross-appealed by respondent's notice on the basis that the master had ordered too great a sum. At the conclusion of the hearing of this appeal this court reserved its judgment which we now give.

Background

3. At least as far back as 1990 the defendant first entered a sales agreement with the plaintiff to sell the plaintiff's Autocolor Refinish Products and other Autocolour products in the Mainland. The relevant agreement covered the year 1994. It was a simple agreement which essentially provided for various levels of trading discount depending upon the particular products sold. It also provided for various discounts for payment depending on how quickly payment was made. Those discounts ranged from a discount of 5.5% for immediate payment to a discount of 1% if payment was made within 120 days following the end of the invoice month. There was also a provision for an annual rebate depending on the quantities sold.

4. The plaintiff terminated that agreement in May 1994. At that stage there was a considerable amount owing from the defendant to the plaintiff and the parties reached some agreement as to how those sums would be paid. It seems that full payment was not made as originally envisaged. As a result this action was commenced in 1995 seeking payment of $3,548,007.80. In turn, the defendant counterclaimed for loss of profit occasioned by the wrongful early termination of the contract. The matter came before Yam J in November 1998. At the commencement of that hearing the defendant conceded that the plaintiff was entitled to the amount claimed less any amount that would be awarded on the counterclaim. The question of whether the subject of the counterclaim constituted an equitable set-off appears to have been left over at that hearing. As a result of Yam J's judgment in November 1998 interlocutory judgment was entered for the defendant on the counterclaim with damages to be assessed.

5. As already indicated, the assessment of damages was held before Master Yuen. By his order he adjudged the defendant to be entitled to the sum of $2,938,743.04. The matter then went back to Yam J for the final order to be made. The judge held that the plaintiff was entitled to the sum of $609,264.76. That was the difference between the amount the plaintiff claimed and the amount to which the master held the defendant was entitled. However, for reasons which are not readily apparent, whereas the defendant was awarded interest running from 1 January 1995 on the sum adjudged in the counterclaim namely $2,938,743.04, the plaintiff was only awarded interest from the date of the writ, 21 July 1995, on the sum of $609,264.76. The plaintiff was awarded the costs of the action up to and including the first day of the trial namely in November 1998 whereas the costs of the counterclaim and the remaining costs, for example those incurred before Master Yuen, were awarded to the defendant. The matter of costs is the subject of the appeal in CACV 171 of 2004.

The assessment of damages by the master

6. The master was faced with the task of assessing the loss caused to the defendant for the wrongful early termination of the contract. The damages to which the defendant was entitled was the loss of profits which he would have made in the 7 months following the termination of the contract in May 1994.

7. The defendant calculated his loss of profits on the footing that in 1994 he would have made sales of some $55,696,637.69. He calculated that on the basis of a growth rate of his business of 226%. That growth rate was a figure which was arrived at as a result of a comparison of growth rates which the defendant had achieved in the two previous years in excess of the growth rate achieved by the plaintiff. On the basis of those calculations the defendant would have achieved sales of some $44,355,271.49 in the 7 months of 1994 after termination of the contract.

8. The master did not accept the defendant's assertion that the growth in the Mainland market was so rapid that the defendant's business would not have been affected by the increased competition caused by new dealers that had been introduced by ICI in recent months. In addition the master was not prepared to hold that the defendant's sales would have been anything like the HK$6.34 million which would have been the average amount had the defendant achieved sales in the last 7 months of 1994 of HK$44,355,271.49. Hence the master rejected the defendant's projections.

9. The plaintiff's expert, Mr Robinson, gave evidence of 3 ways in which it was possible to estimate sales in circumstances such as the master was considering. The master rejected the first 2 ways namely those termed "linear regression" and "moving average". It is unnecessary to go into his reasons for so doing because it was not sought to support those on this appeal. The last method of estimating possible sales in the final 7 months of 1994 was referred to as the proportional projection. The master did not take Mr Robinson's figures as such but took what was referred to as a modified form of that, making further allowances for different factors. In short the calculations were made by taking the first 5 months of 1994 and discounting the figures for February, because that included Chinese New Year, and May 1994, which was apparently distorted by a shortage of the products in question. Thus by taking the months of January, March and April 1994 the master came to an average figure of HK$2,698,067.25. Multiplying $2,698,067.25 by 7 months, he arrived at HK$18,886,470.75. There was then an adjustment because of 3 factors:

(1) the growth of the Mainland market in 1994;

(2) the effect of increased competition as a result of ICI's introduction of more dealers; and

(3) the fact that the defendant's business was normally better in the second half of the year.

10. The master considered that these factors were beyond precise calculation. Balancing those factors, the master came to an overall figure for the projected purchases in the 7 months of HK$20 million.

11. Having estimated the probable sales that would have been made by the defendant in the 7 months after termination, the master then sought to assess what profit markup would have been made on those sales. The historical analysis of the defendant's sales showed that 42% of his sales had been invoiced in Hong Kong dollars. In respect of the remaining 58% of the defendant's sales there were 2 sets of invoices, one set in Hong Kong dollars and the other set in Renminbi (RMB). The Hong Kong dollar invoices showed a discount of some 20% on the price shown in the RMB invoices. This translated to a difference between a profit margin of 1.5% if the Hong Kong dollar invoices were taken as being the correct basis for calculation and a profit margin of 10% if the RMB invoices were taken as the correct basis. The plaintiff had taken the point that an examination of the defendant's financial statements and Inland Revenue tax returns showed that both those had been based upon the Hong Kong dollar invoices. Hence, before the master strong representations were made on behalf of the plaintiff that the Hong Kong dollar invoices were to be taken as the accurate basis upon which to estimate the defendant's historical markup.

12. The master, however, came to a different conclusion. The defendant had given evidence as to the reason for the maintenance of the 2 sets of invoices in his Further Supplemental Statement and in his oral testimony. The master accepted what the defendant had said and he considered that the financial statements and the tax returns, although relevant, were not conclusive. He went on to say that the weight to be given to them had to depend on the facts of each case and importantly he said:

"On the other hand, if a party's claim is supported by contemporaneous documents which are not suggested or proved to be bogus, the mere fact that the party's tax return shows a less favorable picture may not be fatal provided that the discrepancy can be satisfactorily explained."

13. The master then alluded to the fact that as a result of the discrepancies between the tax returns as originally filed and the defendant's contentions in the case, the defendant had been advised by his accountant to file corrected statements and returns. This might well lead to financial or other penalties against the defendant but that was not a matter which was relevant to the issues on the assessment. The master then took into account the expenses in making the sales and made an estimate of those but he did not make any provision for bad debts, despite the fact that Mr Robinson had pointed out that it would be conventional in assessing profitability of any business that an allowance for bad debts would be made. On the basis of the evidence before him the master had concluded that it was not appropriate in the present case to make an allowance for bad debts.

This appeal

14. The major issue taken on this appeal on behalf of the defendant was that the master had under estimated the likely sales which the defendant would have made in the 7 months after termination in 1994. On behalf of the plaintiff it was said that the master had been in error in relying on the RMB invoices and not on the Hong Kong dollar invoices and secondly, that the master should have made some allowance for bad debts.

Whether the figure of $20 million was a fair estimate?

15. In my view the master was justified in starting his assessment on the basis of an estimated sales of $20 million. As the master correctly pointed out, an estimate of future losses is really an exercise of guesswork with the assistance of such education as can be derived from the historical evidence in the case.

16. Mr Chiu, who appeared on behalf of the defendant both in this court and before the master, whilst accepting that the months of February and May should be excluded when calculating the average monthly sales which the defendant had achieved in the first part of 1994 raised arguments which were based upon the proposition that that average monthly figure, excluding the bad months, should be taken as an average figure over the 12 months of 1994. Quite simply, as was pointed out in the course of argument, that was to ignore the reality that in the first 5 months the sales figures for 2 of the months were well below the average. Hence that had to be taken into account.

17. Mr Chiu's other criticisms turned on the proposition that ICI's sales had been expanding rapidly in the Mainland and the master should have given a greater allowance for that. It was said that insofar as the master had discounted the effect growth of ICI's sales in the Mainland being reflected in growth of the defendant's turnover on the basis of the increased competition presented by the new agents appointed by ICI the master had overlooked the fact that he had already held that the element of competition had already been fully taken into account in the actual sales made prior to termination. It was also said that the historical sales figures showed that the defendant's sales in the latter part of each year had shown a substantial increase over the earlier part of each year. Argument was also raised that the percentage increase of the defendant's sales had been consistently higher than the percentage increase of ICI's overall sales.

18. The first point which should be noted is that the master appears to have had all these arguments well in mind. He had not overlooked them and hence what weight had to be given to them was very much a matter for him when making the overall estimate to which he had to come. He was, for example, justified in estimating that the expansion of the market in the Mainland might be considerably offset by the increased number of sales agents. Indeed, the figures show that the new sales agents for the Mainland market did seem to achieve very significant sales in 1994. Furthermore, the impact of new sales agents would be greater as time went by, since naturally it would take them time to build up their own businesses. Although the sales figures for previous years did show that in the latter half of each year the defendant's sales were increased over the earlier part, that percentage increase in the latter half had steadily reduced from 87.1% in 1990 to 63.1% in 1993, as shown in the table set out in paragraph 45 of the master's judgment.

19. I am strengthened in my view that the master's assessment was a reasonable and fair assessment by a comparison with the two other major sales agents for the ICI products in the Mainland. The first of those, Luen Fat, was perhaps, at least on paper, similar in quantities of sales to the defendant. Luen Fat's sales in the relevant 7 months of 1994 were just under $21 million. The other company, Silversound, had sales which in the early months of 1994 were considerably higher than the defendant's but in the remaining 7 months it appeared to have sales of a little under $17 million. Hence whilst the master had to give the best estimate he could, and it is possible to have a substantial variance in views as to what that estimate should be, the master's estimate in this case appears to me to have been fair and reasonable. Moreover, it must be borne in mind that when such an estimate is made there are no doubt a number of compensating factors which are taken into account whether articulated in the written reasons or not. It is a form of balancing exercise and the tools used in arriving at the final figure are merely tools and the resultant figure has to be, no doubt in most cases, adjusted here and there.

The cross-appeal

20. Mr Kat, who appeared on behalf of the plaintiff, both in this court and before the master, based his main argument on the footing that the master should have refused to give any effect to calculations based on the RMB invoices, because not only did those invoices conflict with the financial statements and tax returns but it had been impossible for the plaintiff's expert, Mr Robinson, to correlate the invoices and sums which should have been received under those invoices with actual receipts by the defendant in his Hong Kong dollar bank accounts. It was said, furthermore, that the defendant had not produced all the records which he could have done, and therefore, should have done, relating to his business and the receipts from the business.

21. Dealing with the last point first, this court was taken through various passages in the transcript of the evidence before the master and in particular, the evidence of the defendant. It is clear that the defendant's records were kept in what might be termed an esoteric form. It is also clear that Mr Robinson did not have the benefit of all those records when he made his initial assessment which resulted in his report. It would seem that a large quantity of those records were produced in the course of the hearing before the master. That was a matter for the master to deal with at the time. It also emerged that the defendant did not have remitted to him in a direct way all the sums which were received as a result of the RMB invoices. Those sums were received initially by other entities in the Mainland. The master accepted the evidence that those sums were then transferred to Hong Kong on an intermittent basis and in consolidated amounts which did not correspond to the invoices. It is evident that the master accepted the defendant's evidence that he had kept records of the amounts received by the Mainland entity and had checked that appropriate remittances had been made from time to time to him in Hong Kong.

22. Thus, whilst accepting Mr Kat's primary argument that a party seeking to recover damages should produce the best documentary evidence to support that and that if he does not he is liable to be debarred from obtaining any damages, it would seem that ultimately, at least, the defendant did not fall foul of that. Such records as he referred to from time to time in his evidence, albeit in some instances in a way that was slightly confusing, were produced. Furthermore, the judge accepted the defendant's evidence in relation to his financial statements and his tax returns. The defendant had said that he had considered that he did not have to disclose part of the sums received in the Mainland as part of his income for tax purposes. Whether that approach will now cause the defendant difficulties with the Inland Revenue is beside the point. The master accepted that the defendant received payment according to RMB invoices.

23. In relation to the question of bad debts, again this was a matter before the master. It may well be that in many, if not most, businesses an allowance has to be made for bad debts. The master accepted the defendant's evidence that bad debts were not a feature of his business in the Mainland. In my view therefore the cross-appeal by the plaintiff also fails.

24. I would therefore dismiss both the appeal and the cross-appeal. In order to avoid the unnecessary costs of taxation I would also make an order nisi that the there be no order as to costs on the appeal and cross-appeal since, effectively, those costs should balance each other out.

Hon Le Pichon JA:

25. I agree.

Hon Gall J:

26. I have read the judgment of Hon Rogers VP and I agree.