ULTIMATE WINNER LTD v. APO LTD

DCCJ 3580/2008

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 3580 OF 2008

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BETWEEN

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JUDGEMENT

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1.  This is a claim for damages arising from the alleged breach of a sale of goods contract.

Background

2.  The Plaintiff carried on the business of a trading company whilst the Defendant was a supplier of, inter alia, paper products.  The Plaintiff had business dealings with a company known as Rose Packaging & Design, Inc. in the United States (“Rose”) for the supply of binders used for the collection of coins.  For the previous two orders, the Plaintiff had engaged another supplier to supply those binders, and there were always some small issues with the quality of those binders such as the presence of unpleasant smell and the small holes in the gold foil letterings in the covers of the binders.

3.  On 16 July 2007, Rose placed another order for 20,000 sets of binders at a unit price of US$3.755 (“the Rose Agreement”), and the Plaintiff decided to engage another supplier to supply the binders for such order.  After the making of the initial contact, Mr. Calvin Huen who was the sales manager of the Defendant (“Mr. Huen”) met with Madam Silver Kwok who was the merchandiser of the Plaintiff (“Madam Kwok”) in the Plaintiff’s office on or about 22 October 2007.  During that meeting, Madam Kwok provided a sample binder produced by the previous supplier (Exhibit P-1) and a specification of the product to Mr. Huen for the quotation of the contract price.  There is some dispute as to whether Mr. Huen knew about the sub-sale of the binders to Rose in that meeting.  On 9 November 2007, the Defendant submitted a semi-finished sample of the binder to the Plaintiff (Exhibit P-4) mainly for the purpose of confirming the choice of the vinyl paper for the covers of the binders.

4.  Although the Plaintiff was not completely satisfied with the quality of the sample, the Plaintiff appreciated that the sample could not be perfect in view of the time constraint for the production of such sample.  The Plaintiff eventually decided to place the order with the Defendant.

5.  By an agreement as evidenced by an amended Purchase Order and a Sales Confirmation both dated 20 November 2007 (“the Agreement”), the Defendant agreed to supply the Plaintiff with 20,016 sets of turned edge binders (“the Binders”) by a date not later than 25 December 2007 in accordance with the specifications set out in the Agreement at a price of HK$210,168.  The amended Purchase Order also stated that the Defendant was required to submit to the Plaintiff 2 sets of pre-production samples upon the receipt of the vinyl paper for the covers of the Binders and 12 sets of the shipment samples on or before 20 December 2007.

6.  Pursuant to the terms of the Agreement, the Plaintiff paid the Defendant 30% of the contract price in the sum of HK$63,050.40 on 21 November 2007.

7.  Shortly before the confirmation of the order for the Binders, Mr. Thomas Choi, the Managing Director of the Plaintiff (“Mr. Choi”), paid a visit to the Defendant’s office.  Both Madam Kwok and Mr. Huen were present in that meeting.  There is some dispute as to whether Mr. Huen knew in that meeting about the resale of the Binders to the Plaintiff’s customer in the United States.

8.  Under the Rose Agreement, the Plaintiff was required to supply the Binders with complete set of accessories including the metal clips and the plastic display bags for the collection of the coins.  For the order under the Agreement, the Plaintiff only engaged the Defendant to supply the covers of the Binders.  The Plaintiff acquired the other accessories such as the 3-rings metal clips and the plastic bags from the other suppliers.

9.  On or about 14 December 2007, the Defendant submitted some pre-production samples including Exhibit P-5 to the Plaintiff for approval.  It is common ground that the Plaintiff was not satisfied with the quality of those samples, in particular the use of the vinyl paper for the covers of the Binders.  The Plaintiff therefore requested the Defendant to source the vinyl paper from another supplier.  It is clear that the covers of the samples supplied by the Defendant were warped, but there is dispute between the parties as to whether the Plaintiff had expressly made a complaint to the Defendant about the warping issue.

10.  On or about 29 December 2007, the Defendant submitted the pre-shipment samples to the Plaintiff which then passed the same to Rose for approval.  Both Rose and the Plaintiff were satisfied with the quality of those samples, and the Plaintiff and the Defendant signed on some of the samples including Exhibits P-2 and D-1 to confirm the approval of the pre-shipment samples.

11.  As there was delay caused by the choice of the vinyl paper for the covers of the Binders, both parties agreed to extend the delivery date of the Binders to 31 January 2008.  On 10 January 2008, the Plaintiff delivered the metal clips of the Binders to the Defendant’s factory in the Mainland.  On 19 January 2008, Madam Kwok, Mr. Choi and his brother Mr. C. Y.  Choi (“Mr. C Y Choi”) visited the Defendant’s factory to carry out an inspection of the production process.

12.  The Plaintiff was responsible for arranging the shipment of the Binders from the Mainland to Los Angeles in the United States. On 28 January 2008, the Plaintiff handed a copy of the shipping order to Mr. Huen, and the destination of the shipment of the Binders was clearly stated in such shipping order.  On 29 January 2008, after Madam Kwok had pressed the Defendant for inspection of the Binders on 31 January 2008, one Mr. Andrew Ip of the Defendant advised Madam Kwok that only 80% of the Binders would be completed on 31 January 2008 and requested the examination be postponed for one day to 1 February 2008.

13.  On 1 February 2008, Mr. C Y Choi examined the Binders in the Defendant’s factory in the Mainland.  When Mr. C Y Choi opened the cartons for inspection, he smelled something like glue coming from the Binders.  Apart from that, no major defect was found during the examination. The Binders were then shipped to the United States.

14.  Rose was not the end-buyer of the Binders.  Rose resold the Binders to one Stephen Gould Corporation (“Gould”) which further resold the same to a company known as “MCI” (“MCI”).  After the Binders arrived by sea in Los Angeles, the Binders were transported by truck to Connecticut in the East Coast of the United States.

15.  On 18 February 2008, the Plaintiff paid the balance of the contract price in the sum of HK$147,117.60 to the Defendant.

16.  After the Binders arrived in Connecticut, one of the sub-buyers claimed that the covers of the Binders were warped.  On 13 March 2008, Madam Kwok informed Mr. Huen by e-mail about such complaint.  The Plaintiff later supplied the photographs showing the warped covers of the Binders to the Defendant.  Several cartons of the Binders, including Exhibit P-3, were shipped back to Hong Kong from the United States.

17.  On 5 April 2008, Madam Kwok informed Mr. Huen by e-mail that the Plaintiff intended to engage an international surveyors’ firm, SGS, to inspect the alleged defective Binders.  Madam Kwok also informed Mr. Huen that the sub-buyer in the United States would charge storage fees for storing the defective Binders.  On 7 April 2008, Mr. Huen replied that the Defendant did not agree for the Plaintiff to appoint surveyor to inspect the Binders, and the Defendant would arrange its own inspection if necessary.

18.  There was then some correspondence between the parties as to how to deal with the alleged defective Binders.  By that time, the parties were concerned about: (i) the fees charged by the surveyor in the United States; (ii) the shipment cost in the case that the alleged defective Binders were to be shipped back to Hong Kong; and (iii) the charges of storing the alleged defective Binders in Connecticut.  As compared with the value of the Binders, these costs and charges were high.

19.  On 22 April 2008, the Defendant requested the Plaintiff to ship the alleged defective Binders back to Hong Kong.  On 23 April 2008, Madam Kwok put forward the two proposals to the Defendant: (i) the Defendant had to pay HK$50,000 as shipment cost for shipping the Binders back to Hong Kong for inspection by a local surveyor, and the Defendant would also be responsible for handling all the import and unloading process and to pay the related charges; and (ii) the Plaintiff would engage surveyor in the United States to inspect the Binders and to prepare a report, and then all the Binders would be disposed of as waste in the United States.  Madam Kwok asked the Defendant to reply on the following day, failing which the Plaintiff would proceed with the second proposal.  The Defendant did not respond whether before the deadline or at all.

20.  On 23 April 2008, the Plaintiff asked Rose to recommend a surveyor in Connecticut to inspect the Binders.  By that time, the Plaintiff was concerned with the high inspection fees charged by established surveyors’ firm such as SGS.  The Plaintiff therefore engaged an expert who had experience in the trade, Mr. Steven Anderson (“Mr. Anderson”), who prepared a very brief report about his inspection of the Binders.  According to Mr. Anderson, the Binders were not suitable for use due to the severe warping of the front and back covers of the Binders.  Further, such problem was probably caused by the defective production on the part of the manufacturer.  After the said inspection, the Binders were discarded as waste in the United States.

21.  The Plaintiff claims that the covers of the Binders were warped because of the sub-standard production on the part of the Defendant.  The Plaintiff also alleges that Mr. Huen of the Defendant had given an express assurance to the Plaintiff that the covers of the Binders would not warp.  By reason of such defect, it is Plaintiff’s case that the Defendant was in breach of the Agreement in that: (i) the covers of the Binders were warped contrary to the assurance given by Mr. Huen; (ii) the Binders were not of merchantable quality; (iii) the Binders were not fit for the purpose of which they were bought, namely for the collection of special coins; and (iv) the Binders did not correspond to the pre-shipment samples submitted by the Defendant on 29 December 2007.  As a result of the alleged breach of the Agreement, the Plaintiff claims against the Defendant for damages in the total sum of HK$826,415.93, being the aggregate of the Plaintiff’s loss of profit arising from the Rose Agreement in the sum of HK$198,889.87, wasted production costs in respect of the supply of the Binders in the sum of HK$438,766.37 and compensation paid to the sub-buyer in the sum of HK$188,759.69.

22.  The Defendant disputes the Plaintiff’s claim on the ground that the warping of the covers was not caused by the sub-standard production on its part.  As the warping could have been caused by various conditions during shipment and transit, the Defendant claims that the Plaintiff has failed to discharge the burden of proving that the Defendant was in breach of the Agreement.  Further, the Defendant denies that the Binders were not of merchantable quality or unfit for the purpose of which they were bought.  The Defendant further denies that Mr. Huen had ever given any assurance to the Plaintiff relating to the covers of the Binders or that the sale under the Agreement was a sale by sample.  On the issue of quantum, the Defendant claims that it had no knowledge that the Binders were ordered by the Plaintiff for the purpose of reselling them to a sub-buyer in the United States, and so the damages claimed by the Plaintiff are too remote to be recovered in the present proceedings.

23.  Based on the aforesaid contentions, the issues in the present case are as follows:

(i)   whether Mr. Huen had given an express assurance that the covers of the Binders would not warp;

(ii)   whether the sale of the Binders under the Agreement was a sale by sample within the meaning of the Sale of Goods Ordinance, Cap 26;

(iii)   whether the Binders supplied by the Defendant were of merchantable quality or fit for the purpose of which they were purchased;

(iv)   what was the cause of the warping of the covers; and

(v)   assuming that the Defendant was in breach of the Agreement, whether the Plaintiff is entitled to claim for all the damages pleaded in the Amended Statement of Claim.

24.  Before I deal with such issues, I would first set out the evidence presented by the parties at the trial.

Evidence at the trial

(i)   Factual evidence of the Plaintiff

25.  The Plaintiff’s first witness is Madam Kwok. According to her, there was serious warping in the covers of the semi-finished samples submitted by the Defendant on or about 9 November and 14 December 2007.  On both occasions, she and Mr. Choi or either of them had pointed out such defect to Mr. Huen.  In reply, Mr. Huen said that the samples were not perfect due to the limited time available for production, and he assured them that the final products would not have such problem.  As Madam Kwok believed in the words of Mr. Huen, she did not require the assurance to be put down in writing.

26.  Madam Kwok testifies that Mr. Huen at all material time knew that the Binders would be shipped to the United States. Further, the Binders had 3-rings metal clips.  3-rings metal clips were generally used in the United States whilst 4-rings metal clips were commonly used in the European market.

27.  The Plaintiff’s second witness is Mr. C Y Choi who was the Plaintiff’s Production and Product Manager.  He was responsible for inspecting the Binders in the Defendant’s factory in the Mainland on 1 February 2008.  When he opened some of the cartons for inspection on that day, he found that there was some smell of glue coming from the cartons.  Apart from that, he did not find any major defect with the quality of the Binders.

28.  The Plaintiff’s third witness is Mr. Choi who is and was the Managing Director of the Plaintiff.  He confirms that there was warping in the covers of the binder when the Defendant submitted the first pre-production sample to the Plaintiff on or about 9 November 2007.  On that occasion, Madam Kwok made a complaint to Mr. Huen about such issue during a telephone conversation in his presence.  By that time, Mr. Choi appreciated that the first pre-production sample could not have been perfect, and that the Defendant would supply further samples for approval in due course.  Hence, the Plaintiff proceeded to place the order for the Binders with the Defendant despite the said issue.

29.  Mr. Choi also confirms that he and Madam Kwok did place a visit to the Defendant’s office in Hong Kong around the time when the Plaintiff made the Agreement with the Defendant on 20 November 2007. During that visit, Mr. Choi looked at the samples of some of the products that the Defendant had supplied to its customers in the past, and he found that there were some samples similar to the binders in the present case used for the collection of coins.  He also informed Mr. Huen that the Plaintiff intended to resell the Binders to its customer in the United States.

30.  When the Defendant submitted the pre-production samples to the Plaintiff on or about 14 December 2007, both he and Madam Kwok made a complaint to Mr. Huen about the vinyl paper for the covers of the Binders and the warping issue.  He also emphasised that warped binders would not be acceptable because the Binders were used for the purpose of the collection of special coins.  He also mentioned that the Binders were for resale to the Plaintiff’s customer in the United States.

(ii)   Factual evidence of the Defendant

31.  Mr. Huen testifies on behalf of the Defendant on the factual issues.  According to Mr. Huen, when the parties negotiated for the Agreement, Madam Kwok had not disclosed anything to him about the ultimate buyer of the Binders.  He suspected that the Plaintiff did not want the Defendant to have any direct contact with the ultimate buyer thereby jeopardising the Plaintiff’s business position as the “middle-man”.  Though without specific knowledge about the identity of the ultimate buyer, Mr. Huen nevertheless knew that the Plaintiff purchased the Binders for the purpose of reselling them to an overseas buyer.

32.  Mr. Huen further denies that he had given the Plaintiff any assurance about the warping issue of the covers of the Binders. According to Mr. Huen, when the Defendant negotiated the Agreement with the Plaintiff and submitted the pre-production samples to the Plaintiff on or about 9 November and 14 December 2007, the Plaintiff was only concerned about the vinyl paper used in the covers of the Binders and the quality of the gold foil letterings in the covers.  Madam Kwok also emphasised that the Binders should not give out any unpleasant smell.  The Plaintiff had not raised any complaint about the warping issue.  Had it done so, Mr. Huen would have insisted such matter to be put down in writing.

33.  Mr. Huen denies that the transaction under the Agreement was a sale by sample.  There was simply no discussion or agreement about such issue.  For a small-scaled transaction like that in the present case, there bound to have some slight variations between the sample and the final product.  Unless the Defendant was dealing with a sophisticated customer with detailed specifications about the quality of the goods, the sale should not be regarded as a sale by sample.  The samples submitted by the Defendant on 9 November, 14 and 29 December 2007 were therefore intended by the parties as reference only.  However, Mr. Huen in his cross-examination admits that the final products should at least have met the quality of the samples submitted on 29 December 2007.

34.  According to Mr. Huen, the Defendant was only required to supply a simple document binder and nothing else.  He did not know that the Binders were intended to be used for the collection of coins, as he did not notice the gold foil letterings or the artwork on the covers of the Binders.  When Madam Kwok and Mr. Choi visited the Defendant’s office on or about 16 or 17 November 2007, there was no binder used for the collection of coins in the sample room of the office.

(iii)   Expert evidence

35.  Both parties have engaged expert witnesses to testify on the possible causes of the warping of the covers.

36.  The Plaintiff’s expert witness is Mr. Wong Wai Man who has been in the trade of the supplying of box files and binders for over 30 years (“Mr. Wong”).  In the opinion of Mr. Wong, the sample binders submitted by the Defendant to the Plaintiff on or about 29 December 2007 were up to the standard acceptable in the trade.  However, that was not the case with the Binders rejected by Rose.  According to Mr. Wong, the warping of the covers could have been caused by the following factors:

(i)   quality of the clipboards, which was in turn dependent on the density, sizing, porosity and stiffness of the clipboards concerned;

(ii)   production procedures which included clipboards-mounting and shape-forming procedures;

(iii)   choice of the adhesive glue for the mounting of the clipboards; and

(iv)   post-production handling of the Binders, which included the humidity control process, in particular the duration of such process.

37.  According to Mr. Wong, it was a combination of the aforesaid factors which caused the warping of the covers.  In particular, Mr. Wong is of the opinion that insufficient time had been allowed for the shape-forming process and the humidity control process, and as a result the moisture in the clipboards released to the surrounding which caused the warping of the covers.   Although there is a natural tendency for paper to warp, a manufacturer can avoid such problem if it has paid attention to the various production procedures as mentioned above.

38.  According to Mr. Wong, if the production of the Binders had gone through proper shape-forming and humidity control procedures, the covers of the Binders would remain in a fixed shape and it would not be easy for subsequent conditions or factors to cause any warping of the covers. Unless the Binders were subject to extreme conditions such as intentional damage of the covers, extreme hot and cold conditions during shipment or storage, cartons flooded with water and intentional spraying of the cartons by water, the covers of the Binders would not warp.  By looking at the photographs showing the packaging of the Binders, Mr. Wong confirms that the Binders were packed and shipped in a satisfactory manner, and the wrapping paper wrapping the cartons could have prevented water from getting into the cartons.  Hence, it was unlikely that the warping was caused by factors relating to the subsequent shipment or storage of the Binders.

39.  The Defendant’s expert witness is Mr. Paul Chau who has been in the trade of the supplying and marketing of various paper products for about 26 years.  His evidence is not very much different from that of Mr. Wong.  Mr. Chau agrees that the Binders shipped by Rose back to Hong Kong were substandard because of the warping of the covers, but the Binders could still serve the purpose for the collection of coins.  He also agrees that one of the causes of the warping was the sub-standard production on the part of the Defendant.  However, Mr. Chau is of the view that such defect could also be caused by various conditions during the subsequent shipment or storage process, and he is not certain which was the more likely cause for the defect.

40.  Despite that, Mr. Chau confirms that the Binders were packed in a very satisfactory manner when they were shipped to the United States.  Further, he confirms that paper contains moisture and so it has the tendency to warp.  Hence, a supplier should know in advance the final destination of the products and the shipment arrangement, and in such circumstances, the supplier can adjust the production process and try to reduce the risk of warping to a minimum.

41.  When Mr. Chau is asked about the practice in the trade about sample sale, he agrees that if the Defendant submitted the samples to the Plaintiff on 29 December 2007, which was after the making of the Agreement, the final products supplied by the Defendant should correspond with the quality of those final samples.  He also agrees that the quality of the Binders shipped by Rose back to Hong Kong did not correspond with the quality of those final samples.

Cause of the warping of the covers of the Binders

42.  After setting out the evidence, I first deal with the issue about the cause of the warping.  Obviously, if the warping had nothing to do with the production process, the Defendant would not be liable to pay any damages to the Plaintiff.  But before I do so, I have to deal with an evidential issue raised by Ms. Gwilt, counsel for the Defendant.

43.  In her final submission, Ms. Gwilt points out that the Plaintiff has not arranged any person who had inspected the Binders in the United States to testify at the trial.  By reason of the absence of such evidence, it is not clear how the Binders were inspected in the United States, and what standard that Rose, Rose’s sub-buyers and Mr. Anderson had adopted in inspecting the Binders.  As there is no direct evidence on the inspection of the Binders and it is not possible to have perfectly straight covers, Ms. Gwilt says that the Plaintiff has simply failed to discharge the burden of proving that the Binders were in fact defective.

44.  I disagree.  Rose’s sub-buyer had taken photographs of the warped covers of the Binders, and Rose had also shipped some of the alleged defective Binders back to Hong Kong including Exhibit P3.  In such circumstances, I have no reason to doubt that the condition of the Binders was not the same as that shown in the photographs, or that Exhibit P3 is any different from the other Binders inspected by the sub-buyer in the United States.  Obviously, the Plaintiff is concerned about the costs of litigation if the sub-buyer in the United States has to come to Hong Kong to testify.  It is certainly not the case that the Plaintiff is seeking to hide anything from the Defendant, and so no adverse inference should be drawn against the Plaintiff in this regard.  Hence in my judgment, the court is entitled to rely on the photographs, the Binders shipped back to Hong Kong, the correspondence between the Plaintiff, Rose and the sub-buyers and the report prepared by Mr. Anderson to find that the Binders supplied by the Defendant were in fact defective. 

45.  I now come to the cause of the warping.  After listening to the evidence of both experts, I find the Plaintiff’s expert Mr. Wong to be an impressive witness.  With his experience in the trade, he has demonstrated to the court that he has a deep understanding of the production process relating to paper products such as the Binders in the present case. There were simply many stages in the production process that could have gone wrong which resulted in the warping of the covers of the Binders.  In particular, the rush production schedule tends to support Mr. Wong’s opinion that insufficient time had been allowed for the humidity control process.  Hence, I accept on the balance of probabilities that defective production on the part of the Defendant was the more probable cause of the warping of the covers.

46.  Although we do not know exactly what happened to the Binders during transit of the goods from the Mainland to Connecticut, I do not accept that the warping of the covers had anything to do with the shipment or storage condition of the Binders.  Firstly, from the photographs exhibited in the court, both experts confirm that the Binders had been packed in a very satisfactory manner, and the wrapping paper around the cartons could have prevented water from coming into contact with the Binders.  Hence, the risk of the Binders being subject to extreme condition or damage during transit was too minimal.   Secondly, both experts also agree that had the shape-forming and humidity control procedures been properly done, the shape of the covers would remain unchanged after the production and it would be most difficult for any extreme condition during subsequent transit or storage to cause any warping in the covers.

47.  In her final submission, Ms. Gwilt relies on my decision in Wiak Far East Ltd. v Min Hwa Plastic Manufacturers Ltd., unreported, DCCJ No. 14155/2001 (decision on 10 October 2003) to argue that the Plaintiff has failed to discharge the burden of proving that faculty production was the cause of the warping in the present case.  But in the Wiak Far East Ltd. case, there were simply many possible causes for the presence of the moisture in the chalk and the plaintiff there had failed to prove that faulty production was the more likely cause.  In our present case, the Plaintiff has engaged expert to testify as to why faculty production was the more probable cause for the warping of the covers.  As I accept the Plaintiff’s expert evidence in its entirety, the Plaintiff has discharged the necessary burden of proof and I therefore find that faulty production was the more probable cause of the warping of the covers.

Breach of the Agreement

48.  On the basis that faculty production was the cause of the warping, I then have to consider the question whether the Defendant was thereby in breach of the Agreement.  In determining such question, I have to deal with the following issues: (i) whether Mr. Huen had given an express assurance to the Plaintiff that the covers of the Binders would not warp; (ii) whether the sale was a sale by sample, and if yes, whether the finished products did correspond with the approved samples submitted by the Defendant on 29 December 2007; (iii) whether the Binders were of merchantable quality or fit for the purpose of which they were purchased.  If the Defendant fails on any of such issues, the Defendant was in breach of the Agreement.

(i)   Alleged assurance given by Mr. Huen

49.  After listening to the evidence of the parties, I accept on the balance of probabilities that Mr. Huen had given an express assurance to the Plaintiff that the covers of the finished products would not warp.  According to Mr. Huen, the Plaintiff was only concerned with the choice of the vinyl paper and the quality of the gold foil letterings in the covers of the binders when the Defendant submitted the preliminary samples to the Plaintiff on 9 November and 14 December 2007.  However, I do have the opportunity of looking at those preliminary samples at the trial, and obviously there was serious warping in the covers of these samples.  In such circumstances, I find it extremely odd that Madam Kwok and Mr. Choi had not raised such issue as alleged by Mr. Huen.  The defect was simply too obvious to get unnoticed.  If the end products had the same problem, I am quite certain that Rose would not accept the Binders and it would cause considerable damage to the Plaintiff.  Hence, it would have made much more business sense that the Plaintiff had expressly raised such issue with the Defendant in the discussions.  Hence in my judgment, the evidence of Madam Kwok and Mr. Choi is much more creditable.

50.  According to Mr. Huen, if he had given such assurance to the Plaintiff, it would be extremely odd that the Plaintiff had not insisted to put down such assurance in writing.  But to me, there was nothing unusual for the Plaintiff to have relied on such oral assurance by Mr. Huen.  In most of the sale of goods transactions, one cannot expect the parties to reduce all the contents of their discussions in writing.  Even based on Mr. Huen’s own evidence, some of the important discussions, such as those relating to the use of the vinyl paper and the agreement for the extension of time for the submission of the pre-production samples, were not reduced in writing. Further, the Defendant would supply further pre-production samples to the Plaintiff for approval before the bulk production, and so there was no immediate necessity for the Plaintiff to insist to put down the assurance in writing.  Hence, I would prefer to accept the Plaintiff’s evidence in this regard.

51.  In the final submission, Ms. Gwilt seems to argue that Mr. Huen had no authority to give such assurance on behalf of the Defendant.  To me, such argument is wholly untenable.  Apart from the lack of such defence in the pleading, Mr. Huen at all material time acted on behalf of the Defendant in negotiating the Agreement.  In such circumstances, it is simply impossible for the Defendant to say that Mr. Huen had no such authority to act on its behalf.

52.  From the photographs taken of the Binders in the United States and the Binders shipped back to Hong Kong including Exhibit P3, one would have no difficulty in concluding that there was serious warping in the covers of the Binders supplied by the Defendant.  In such circumstances, the Defendant was in breach of the Agreement by failing to comply with the express assurance given by Mr. Huen. 

(ii)   Sale by sample

53.  In the case that I am wrong on such conclusion, I also find that the sale under the Agreement was a sale by sample and the finished products supplied by the Plaintiff did not correspond with the approved samples submitted by the Defendant on 29 December 2007.

54.  I have taken into account the explanation given by Mr. Huen as to why he says that the sale was not a sale by sample.  However if the subject transaction was not a sale by example, why did the Defendant have to submit pre-production samples for approval by the Plaintiff before the commencement of the bulk production?  In my judgment, the submission of the samples only served one purpose: they provided a yardstick and the end products were supposed to meet the quality and the other attributes of the samples.  Both experts also agree that according to the practice in the trade, the quality of the finished products should meet the standard set by the approved sample. Even Mr. Huen does not seek to dispute the same in his cross-examination. Hence, I have no difficulty in concluding that the subject transaction was a sale by sample.

55.  By reason of the warping of the covers, both experts agree that the Binders rejected and shipped back to Hong Kong by Rose did not correspond with the approved samples submitted by the Defendant on 29 December 2007.  In such circumstances, the Defendant was also in breach of the Agreement by supplying the Binders which did not correspond with the approved samples.

(iii)   Merchantable quality and fitness for purpose

56.  Based on the findings above, it is not necessary for me to consider whether the Binders supplied by the Defendant were of merchantable quality or fit for the purpose of which they were purchased.  However for the sake of completeness, I would also give my ruling on such particular issue.

57.  Firstly, I find that the Defendant at all material time knew that the Binders would be used for the collection of special coins.  In fact, when the Plaintiff handed the sample produced by the previous supplier to the Defendant for the quotation of the contract price before the making of Agreement, the gold foil lettering “The United States Presidents Coin Collection” clearly appeared in the covers of the binder, and so it is very difficult for the Defendant to deny knowledge of such matter.  Further, as I have mentioned above, I find Madam Kwok and Mr. Choi to be more creditable witnesses, and so I accept their evidence that they had expressly conveyed such infomation to Mr. Huen.

58.  As the Binders were no ordinary document binders, the Defendant should have known that the end users would have some expectation about the quality of the Binders.  In this regard, I accept the opinion of the Plaintiff’s expert Mr. Wong that the quality of the Binders was not acceptable according to the standard in the trade.  Further, the warping of the covers of the Binders was quite serious, and so I have great reservation whether the quality of the Binders was acceptable even if they were used as ordinary document binders.  Hence, I find that the Binders supplied by the Plaintiff were not of merchantable quality or fit for the purpose of which they were purchased.

59.  As mentioned by Mr. Wong in his expert testimony, the defect of warping could not have been detected so soon after the production of the Binders.  It would take a bit of time for the moisture in the paper to release to the surrounding causing the warping of the covers.  In fact, one Mr. Andrew Ip of the Defendant told the Plaintiff that the Binders were only available at the last minute.  Due to the rush in the production, it might be the case that there was insufficient time for the humidity control process, and the problem of warping would not have appeared so soon after the production of the Binders.  Hence, even if the Plaintiff had not raised any complaint about the quality of the Binders during the inspection on 1 February 2008, it would not debar the Plaintiff from pursuing its claim for breach of the Agreement.

60.  Based on the aforesaid, I find that the Defendant was in breach of the Agreement by supplying the Binders with warped covers to the Plaintiff.  I therefore proceed to assess the quantum of the Plaintiff’s claim.

Quantum of damages

61.  In the Reply to Request for Further and Better Particulars of the Statement of Claim filed on 14 July 2010 (“the Particulars of Quantum”), the Plaintiff has provided a breakdown of the amounts claimed in the then Statement of Claim.  According to the Particulars of Quantum, the Plaintiff claims damages under the following 3 main items: (i) loss of profit arising from the Rose Agreement; (ii) wasted production costs incurred by the Plaintiff in supplying the Binders to Rose, including the price for the Binders paid by the Plaintiff under the Agreement; and (iii) compensation paid by the Plaintiff to Rose for the breach of the Rose Agreement.  I will deal with each of these claims in turn.

(i)   Loss of profit

62.  The contract price under the Rose Agreement was US$81,750.80 which is equivalent to HK$637,656.24 (exchange rate of US$1 to HK$7.8).  According to the Plaintiff, the production costs under the Rose Agreement were in the total sum of HK$438,766.37 (including the payment of the contract price paid by the Plaintiff to the Defendant under the Agreement in the sum of HK$205,575.84), and so the quantum of the loss of profit under the Rose Agreement is HK$198,889.87 ($637,656.24-$438,766.37).

63.  In determining whether the Plaintiff is entitled to claim for such loss, the court has to decide whether the Defendant knew, at the time of the making of the Agreement, that the Plaintiff intended to resell the Binders to a sub-purchaser.  If the Defendant did have such knowledge,  the Plaintiff can rely on the second limb of the Hadley v Baxendale test to claim that, taking into account the Defendant’s special knowledge of the sub-sale, the loss of profit arising from the sub-sale agreement is a foreseeable loss.

64.  In this regard, I have no difficulty in finding that Mr. Huen did have such knowledge.  As admitted by Mr. Huen in paragraph 6 of his witness statement dated 4 June 2009, he knew that the Plaintiff was purchasing the Binders for resale purpose.  In his oral testimony, Mr. Huen also admits that, without knowing the exact identity of the sub-buyer, he nevertheless knew that the Binders were purchased for resale purpose.  As the Defendant knew about the resale, loss of profit arising from the resale agreement would be a foreseeable loss.  I therefore allow the Plaintiff to recover such loss in full.

(ii)   Wasted production costs

65.  By reason of the breach of the Agreement, the Binders could not be used for the collection of special coins.  The Plaintiff was not able to ask Rose to pay for the contract price under the Rose Agreement, and as a result the production costs of the Plaintiff had been wasted.  The Plaintiff is therefore entitled to claim for the contract price paid to the Defendant under the Agreement in the sum of HK$205,575.84.  The Plaintiff is also entitled to claim for the wasted inspection cost of the goods and the shipment cost for shipping the Binders to the United States in the sums of HK$1,440 and HK$54,256.98 respectively.

66.  Apart from such losses, the Plaintiff is also claiming for other wasted production costs in respect of the metal clips, plastic bags and printed cards which the Plaintiff was required to supply to Rose under the Rose Agreement.  The amounts claimed for such wasted costs are HK$39,893.55, HK$128,000 and HK$9,600 respectively.

67.  In my judgment, the Plaintiff is only entitled to recover such wasted costs only if the Defendant knew, at the time of the making of the Agreement, that the Plaintiff would also supply these accessories under the sub-sale agreement.  From the first sample supplied by the Plaintiff to the Defendant for the quotation of the contract price, the Defendant might perhaps know that the Plaintiff was required to supply the Binders with the metal clips to the sub-buyer, but there is no evidence to show that the Defendant knew that the Plaintiff was required to supply the plastic bags and the printed cards as well.   So far as the Defendant was concerned, the Defendant was only required to supply the covers of the Binders under the Agreement and it knew nothing about the details of the sub-sale agreement.  Hence, I only allow the Plaintiff to recover the wasted production costs in respect of the metal clips in the sum of HK$39,893.55 and not the wasted costs of the other accessories.

68.  The quantum of such head of damages is therefore HK$301,166.37 ($205,575.84+$1,440+$54,256.98+$39,893.55).

(iii)   Compensation paid to Rose

69.  Rose was not the ultimate purchaser of the Binders.  Rose actually made a sub-sale agreement with Gould, which then resold the Binders to MCI.

70.  As a result of the alleged breach of the Rose Agreement, Rose simply billed the Plaintiff a total sum of HK$188,759.69 as compensation.  So far as I understand it, such sum consists of the following 3 main items:

(i)   the price paid for the supply of certain labels as shown in an invoice issued to Gould;

(ii)   the charges for transporting the Binders from Los Angeles to Connecticut; and

(iii)   the fees for the storage and the disposal of the defective Binders.

Although some of the documents relating to these expenses have been included in the trial bundle, it is very difficult for the court to understand how these expenses were actually incurred.  Further, the court has no knowledge about the sub-purchase agreements and the arrangement between the different sub-buyers about the transportation and the disposal of the defective Binders.

71.  As I see it, the difficulty with the Plaintiff’s claim is that we know very little about the actual loss of the Plaintiff’s sub-buyers.  Although I accept that the Binders supplied by the Defendant were defective, I do not have any idea as to how the sub-buyers had tried to deal with the situation.  I understand from Mr. Choi that the sub-buyers had probably arranged other supplier to supply the substituted binders.  However, I do not know what was the price that the sub-buyers were paying for those substituted binders and whether they had in fact made such payment.  It was still possible that the sub-buyers were able to obtain cheaper substituted binders, and as a result the sub-buyers had suffered very little or no loss at all.  The sub-buyers should also have used the accessories provided by the Plaintiff thereby reducing some of their losses.  Without knowing all the details of the sub-buyers’ losses and the price that they had been paying for the substituted binders, the court would not be in a position to know whether the compensation paid by the Plaintiff to Rose or by Rose to the sub-buyers was reasonable.

72.  As there was no litigation involving the Plaintiff, Rose and the sub-buyers relating to the Binders, the Plaintiff seeks to recover from the Defendant for the amount paid under the settlement arrangement made between the Plaintiff and Rose.  However, it is trite law that it is necessary for the claimant of such kind of loss to show not only that the possibility of a settlement was within the contemplation of the parties but that it is a reasonable settlement (see: Biggin v Permanite [1951] 2 KB 314 CA and para. 20-094 of McGregor on Damages, 18 ed).  Sometimes, legal advice given to the claimant at the time of the settlement may be necessary to establish the reasonableness of the settlement amount.

73.  In the present case, whilst I may accept that the possibility of settlement was within the contemplation of the parties, the Plaintiff has failed to discharge the burden of proving that the amount billed by Rose was reasonable. According to Mr. Choi, Rose was one of the Plaintiff’s valuable customers and so the Plaintiff had to yield to the demand of Rose.  But that was not enough. The Plaintiff had not obtained legal advice before paying Rose, and even worse, there is some evidence to suggest that Rose’s sub-buyers had been acting unreasonably in throwing away the accessories provided by the Plaintiff for the Binders.  In the absence of evidence supporting the reasonableness of the amount of compensation billed by Rose, the Plaintiff simply cannot recover such loss from the Defendant.

74.  By reason of the aforesaid, I grant judgment in favour of the Plaintiff in the amount of HK$500,056.24 ($198,889.87+$301,166.37).  I also make an order nisi that:

(i)   there be interest on the said judgment sum at the rate of 8% per annum, which is the existing judgment rate, from 15 August 2008, which was the date of the Writ, to the date hereof and thereafter at judgment rate; and

(ii)   the costs of the action be to the Plaintiff with certificate for counsel.

The order nisi shall be made absolute 14 days after the date of the handing down of this judgment.