HUA YANG PRINTING HOLDINGS CO. LTD. v. PURE HEALTH PUBLISHING CO.

HCA5410/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.5410 OF 1998

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J U D G M E N T

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1. Ron Van der Meer ("Ron") is a Dutch gentleman now living in England. He is an artist and author of pop-up books. He is also a paper engineer in the setting up or design of these pop-up books.

2. In or about 1990, he was introduced to a Mr Karl Chan of the plaintiff Hua Yang Printing Holdings Co. Ltd ("Hua Yang"). According to Ron, Hua Yang did a lovely job in the production of his small pop-up book called "Tiny Kittens". Thereafter, he placed more projects with them under the name of Van der Meer. Van der Meer is the packager in the trade and Hua Yang is of course the printer.

3. Van der Meer therefore has a long history of contractual relationship with Hua Yang in the production of Van der Meer's books for designated publishers and Ron's family was enjoying very good relationship with Karl Chan's family.

4. Ron's brother, Guus, was in the health club business. In or about 1996, he joined his brother Ron in the pop-up book business. He did the research and wrote the text for the book "The Pure Health Pack". Ron and Guus established the defendant company called Pure Health Publishing Co. Ltd ("PHPC") in Holland. That was also the time when Ron had a matrimonial dispute with his then wife, Atie. Atie had been working with Ron under the name of Van der Meer before they were divorced. There were matrimonial dispute as to certain properties including copyright of some of the books which is not the subject matter of the action herein. In the course of the proceedings, I have tried very hard to forbid any witness to touch on this aspect in the interest of justice. This judgment should not be taken as any decision in that respect.

5. I understand from the documents that thereafter Ron and Guus traded under the umbrella of PHPC and PHPC sometimes used the name Van der Meer. For example, one of their famous books called "The Architecture Pack" stated that the copyright of that edition belonged to Van der Meer, a division of PHPC. The book was stated to be manufactured in China, i.e. by Hua Yang.

6. Somehow in May 1997, the relationship between Ron and Karl Chan broke down. This action is not concerned with why this relation broke down and who was responsible for the same. In April 1998, Hua Yang sued PHPC for US$1,746,729.26, basically for goods sold and delivered to various publishers at the direction of PHPC, the packager, over a period between February 1997 and January 1998 as evidenced by various purchase orders and Hua Yang's invoices. At the trial of the action, PHPC eventually agreed that all these goods were sold and delivered as claimed. However, it is PHPC's defence by way of set-off in the counterclaim that Hua Yang was in breach of various printing contracts between 20 January 1997 and 17 October 1997 by reason of their late delivery.

7. Further, PHPC alleged that Hua Yang, as bailee for various transparency films used in the printing of the books of PHPC, failed to return those films on time or at all.

8. The total loss claimed by PHPC at the end of the trial is a little bit less than US$1.4 million. (Something turned on the way PHPC pleaded its damages and loss which I shall consider later herein below.)

The issues

9. The main issues in this action are :

(1) in respect of the delivery of printing contracts, what were the agreed or varied delivery dates;

(2) after the delivery dates were ascertained, whether time is the essence of the contract;

(3) whether those or any of those contracts between Hua Yang and PHPC were based on PHPC's "General Terms and Conditions of Purchase";

(4) if time is the essence of the contract -

(i) whether Hua Yang failed to deliver goods on time in accordance with the agreed or varied delivery dates, and

(ii) if so, what, if any, loss or damages were caused to PHPC;

(5) in respect of the allegation of late delivery, Hua Yang contended that in mid August 1997 Hua Yang had full and final settlement with PHPC by paying US$75,000 to PHPC, which sum was accepted by PHPC. PHPC rejoined issue with Hua Yang and contended instead that the said sum of US$75,000 by way of Hua Yang's credit note was only for related airfreight costs, and thus the same was not a full and final settlement but only in part limited to the costs and expenses incurred in respect of delays up to 25 September 1997;

In respect of the return of the films,

(6) whether Hua Yang failed to return original films supplied by PHPC; and

(7) whether PHPC suffered loss and damages for having to remake films in light of the fact that Hua Yang did not return the original films but partly returned altered duplicates.

History of printing contracts

10. Both parties agreed that the printing contracts were evidenced by or contained in a Purchase Order sent by fax from the defendant to the plaintiff. For example, in this case the earliest Purchase Order No.97016 dated 14 May 1997, the delivery date was stated to be ETA (Estimated Time of Arrival) 15 August 1997.

11. In respect of those allegedly late deliveries, the purchase orders have stated various time of ETA or ETD (Estimated Time of Delivery). For example, in respect of the book "Architecture Pack" under PO No.97009, the ETD was stated to be May 1997. Later on, Van der Meer or PHPC was last advised of the ETD to be 20 July 1997. The bill of lading was dated 20 July 1997 for one lot involving 24,000 copies. In other words, after the stating delivery date or estimated time of either arrival or departure on the Purchase Orders, the documents before me showed that the printer advised PHPC from time to time of the revised estimated date of delivery.

12. By letter dated 18 June 1997, PHPC wrote to Hua Yang enclosing the General Conditions of Purchase. Hua Yang was given 14 days to reply in case they do not agree with those conditions to be incorporated in all future purchase orders. The General Conditions of Purchase stipulated, in particular under Clause 15, that there would be consequential losses claimable by PHPC in case of late delivery.

13. Within the stipulated 14 days, by a letter dated 23 June 1997, Hua Yang replied and said that they would not accept the General Conditions of Purchase as they were preparing their own trading conditions for all their customers. Thus they would not even read those terms and conditions.

14. By PO No.97013 dated 22 July 1997, PHPC ordered 12,000 copies of "The Math Pack", out of which 3,000 copies were for the English publisher, W.H. Smith. The delivery date was stated to be ETA end September 1997. Under the Remarks column, it was stated that "the General Conditions of Purchase are applicable to all our Purchase Orders".

15. In Exhibit D1, PHPC stated all the late deliveries under various Purchase Orders concerning "Architecture Pack", "Brain Pack", "Kid's Art Pack", "Victorian Strait Advent Calendar" and "The Math Pack". Before I consider whether time is the essence of these printing contracts, I shall, first of all, deal with the legal position concerning stipulation as to time.

The law

16. Chitty on Contracts, 28th edition, has the following paragraphs concerning time stipulations :

" Classification of time stipulations. A number of cases have arisen relating to the question whether contractual stipulations as to the time of performance should be construed as making time of the essence of the contract (i.e. as conditions) or as intermediate terms. At common law, stipulations as to the time of performance were normally regarded as being of the essence of a contract. But in equity they were not generally so regarded, in particular in relation to contracts for the sale of land, and today the equitable rule prevails. The relationship between the common law and equitable rules was considered by the House of Lords in United Scientific Holdings Ltd v. Burnley Borough Council, where it was held that the time-table specified in rent review clauses for the completion of the various steps for determining the rent payable in respect of the period following the review was not of the essence. It is, however, clear that, although stipulations as to time will not ordinarily be construed as being of the essence, they will be so construed if expressly stated to be such or if the court infers from the nature of the subject-matter of the contract or the surrounding circumstances that the parties intended them to have that effect. In mercantile contracts, where it is of importance that the parties should know precisely what their obligations are and be able to act with confidence in the legal results of their actions, the courts will readily construe a stipulation as to time as a condition of the contract. Thus stipulations, for example, as to the time within which a ship must be nominated or is expected ready to load under a charterparty, goods must be delivered under a contract of sale, the loading port must be nominated, the vessel provided, notice of readiness to load must be given and the goods must be ready to be delivered under an f.o.b. contract, goods must be shipped, documents tendered and notice of appropriation given under a c.i.f. contract, a letter of credit must be opened, or hired paid under a time charter have been held to be conditions, entitling the innocent party in the event of default in punctual performance to treat himself as discharged. But there is no presumption of fact or rule of law that time is of the essence in mercantile contracts and a stipulation as to time in such a contract, may on its true construction, be found to be merely an intermediate term. (12-037)

Effect of failure to perform on time. Where one party to a contract fails to perform an obligation by the date fixed by the contract, the other party may be entitled, in certain circumstances, immediately to serve notice that he will treat the contract as discharged if the obligation is not performed within a reasonable time as stipulated in the notice. This matter is discussed in Chapter 22 (Performance) later in this work, but it is to be noted that, as a general rule, where the original stipulation as to the time of performance was merely an intermediate term, failure to perform the obligation within the time limited by the notice does not, in itself, constitute a repudiation irrespective of the consequences of the breach." (12-038)

In Chapter 22 on Performance and in particular on "Time of Performance", the learned author said :

" Time 'of the essence of the contract.' A number of difficulties surround the law relating to time stipulations in contracts. The first is that the phrase which is commonly employed, namely 'time is of the essence of the contract,' is potentially misleading in that the question in each case is whether time is of the essence of the particular term which has been broken, not whether time is of the essence of the contract as a whole. The second is that, historically, common law and equity adopted a divergent approach to time stipulations in contracts. At common law a strict approach was taken so that, as was once stated by Sir John Romilly M.R., 'at law time is always of the essence of the contract. When any time is fixed for the completion of it, the contract must be completed on the day specified, or an action will lie for breach of it.' However even at common law there were exceptional case where time was held not to be of the essence of the contract. But the thrust of the approach of the courts at common law was clear: stipulations as to time were generally of the essence of the contract, so that a party could treat the contract as repudiated if the other party's performance was not completed on the date stipulated by the contract. A different set of rules, however, evolved in equity where time was not of the essence of the contract, except in the three cases considered below. 'The court of equity was accustomed to relieve against a failure to keep the date assigned... if it could do justice between the parties'; 'relief is given against mere lapse of time where lapse of time is not essential to the substance of the contract.' (22-011)

Law of Property Act 1925, s.41. Section 41 of the Law of Property Act 1925, provides that:

'Stipulations in a contract, as to time or otherwise, which according to the rules of equity are not deemed to be or to have become of the essence of the contract, are also construed and have effect at law in accordance with the same rules.'

Thus the rules at law are now the same as those in equity: the effect of section 41 is that 'contractual stipulations as to time ... shall not be construed as essential, except where equity would before 1875 have so construed them-i.e. only when the strict observance of the stipulated time for performance was a matter of express agreement or of necessary implication'; or, in other words, section 41 'does not negative the existence of a breach of contract where one has occurred, but in certain circumstances it bars any assertion that the breach has amounted to a repudiation of the contract' which entitles the innocent party to treat the contract as terminated. Following the enactment of section 41, it is only in the three cases set out in the next two paragraphs that time is of the essence of a contract. (22-012)

Time made expressly or implicitly 'of the essence.' Time is of the essence: (1) Where the parties have expressly stipulated in their contract that the time fixed for performance must be exactly complied with, or that time is to be 'of the essence.' (2) Where the circumstances of the contract or the nature of the subject-matter indicated that the fixed date must be exactly complied with, e.g. the purchase of a leasehold house required for immediate occupation; the sale of business land or premises, such as a public-house as a going concern, the sale of a reversionary interest; the exercise of an option for the purchase or repurchase of property, or for determining a lease under a 'break' clause or an option to acquire a leasehold interest in futuro (since in these cases, 'the parties on the exercise of the option, are brought into a new legal relationship'); 'mercantile contracts,' such as a contract for the sale of goods where a time is fixed for delivery, or for the sale of shares liable to fluctuate in value (where the contract stipulated a time for payment), or a charterparty under which the owner is given the right to withdraw the vessel in default of 'punctual payment' of hire. However, the mere fact that the contract can be labelled 'mercantile' or 'commercial' does not determine the issue. The question is whether the time specified in the particular clause was (expressly or by necessary implication) intended by the parties to be essential, e.g. because they needed to know precisely what were their respective obligations. Thus, where the buyers were required to give 15 days' notice of readiness of the vessel so that the sellers could then nominate the port for loading, the House of Lords held time to be of the essence: performance by the buyer was a condition precedent to the seller's ability to perform his obligation. (However, under the Sale of Goods Act 1979, s.10, unless a different intention appears from the terms of the contract, stipulations as to time of payment are not deemed to be of the essence of the contract of sale.) (22-013)

Notice making time 'of the essence.' (3) Where time was not originally of the essence of the contract, but one party has been guilty of undue delay, the other party may give notice requiring the contract to be performed within a reasonable time. Notice can be served at the moment of breach: it is not necessary to wait until there has been an unreasonable delay by the party in breach before serving the notice. The period of notice given must, however, be reasonable and what is reasonable will depend upon all the facts and circumstances of the case. Factors to which the courts will have regard in assessing the reasonableness of the period of notice include what remains to be done at the date of the notice; the fact that the party giving the notice has continually pressed for completion, or has before given similar notices which he has waived; or that it is especially important for him to obtain early completion. A party who elects to give notice immediately upon the breach of contract would be well advised to be 'cautious' in his selection of the period to be included in the notice. Notice making time of the essence of the contract can be given in relation to any term of the contract: entitlement to give notice is not confined to essential terms of the contract. Once notice has been given, both parties are bound by it so that, if the party giving the notice is not ready to perform on the expiry of the notice, the other party may be entitled to terminate. If, by notice, a party has made time of the essence, but later allows a further extension to another fixed date, time remains of the essence. The notice procedure laid down in the contract may be held to be exhaustive of the rights of the parties so that it will not be open to them to serve a notice (for example, of shorter duration) under the general law rather than the contract." (22-014)

In Chapter 43 on the Sale of Goods and in the section concerning "Stipulations as to Time", the learned author said :

" Stipulations as to time. Section 10 [of the Sales of Goods Act] provides that:

'(1) Unless a different intention appears from the terms of the contract, stipulations as to time of payment are not deemed to be of the essence of a contract of sale.

(2) Whether any other stipulation as to time is of the essence of the contract or not depends on the terms of the contract.'

.... As to delivery, it has been said that 'in ordinary commercial contracts for the sale of goods the rule clearly is that time is prima facie of the essence with respect to delivery,' although there is no presumption or rule of law to that effect and the question ultimately depends on the terms of the contract and the nature of the goods. Late delivery gives rise to a claim for damages in the usual way." (43-108)

" Express stipulation. The parties are at liberty to stipulate in their contract that time is to be of the essence in relation to the seller's obligation to deliver within an agreed time. If no such stipulation is inserted, but a time for delivery is nevertheless fixed, the question whether time is of the essence depends on the terms of the contract. There is no presumption or rule of law that stipulations as to time of delivery are of the essence of the contract but, in commercial contracts, they are frequently so construed." (43-243)

" Waiver of delivery time. Although the contract fixes a time for delivery, the buyer's right to require delivery within that period may be waived even after the expiry of that period. So in Hartley v. Hymans, where the buyer continued to demand and accept deliveries long after the fixed date and then alleged that the contract had been broken by failure to deliver punctually, the court held that the buyer, by his demands after the fixed date, had waived his right to insist that the period of delivery terminated on that date. He was also by his conduct estopped from alleging that the period for delivery terminated on the date originally fixed by the contract." (43-247)

Is time the essence?

17. PHPC submitted that time was the essence of the obligation of delivery because of one or a combination of the following factors :-

(1) the purchase orders provided for a 'delivery date';

(2) there was correspondence and oral discussion as to whether delivery could or would occur on such dates, or whether delivery would be made later;

(3) the 'nature' of the contract made time of the essence;

(4) in respect of at least one order relevant to the aforesaid W.H. Smith cancellation, return and loss of business claim, there was an express term incorporated as part of the standard terms and conditions of PHPC; and

(5) by various letters, PHPC made time of the essence, i.e. by giving notice.

18. The first question to decide is whether in this mercantile or commercial contract, the time specified in the particular clause under 'delivery date' was intended by the parties to be essential, i.e. whether time was the essence, failing which the other side would be entitled to accept the repudiation of the party in default. Under the Sales of Goods Ordinance, whether any stipulation as to time other than payment (as in the case here, the time of delivery) is of the essence of the contract or not depends on the terms of the contract.

19. The course of past dealings between the parties indicated that the delivery dates were only rough estimation of the time of delivery. It is evidenced by the terms "ETA" and "ETD" being the estimated time only. They were rough periods of time estimated for departure or arrival of the goods, for example, "ETA end September". It is particularly so for ETD since the shipping journey period would not be known in any particular case and there are a number of factors which would affect the eventual journey period. This supports the fact that these were but a rough indication of delivery dates. Thus time was not intended to be the essence of the contract.

20. There were numerous occasions as evidenced by the correspondences that Hua Yang used to revise the delivery dates from time to time and advised PHPC of the same. These correspondences were discussions about whether or not those estimations were still accurate or could be kept. A more realistic schedule of delivery would be given to PHPC whenever there was a likelihood that the original estimated time could not be kept. Thus, if an estimated date was not in due course accurate, the delivery made after the date estimated would not be a breach of contract. Likewise, delivery after the date of a new estimation, given after discussion in correspondence, also was not a breach of the contract.

21. In respect of those letters which PHPC relied on as notice to the other side and made time the essence of the contract, I am afraid on a proper reading of those letters they do not do so. It is correct to say the letters pressed for early or earlier delivery. They are, in general, exhorting Hua Yang to try to do its best to improve the delivery dates rather than setting finite and specific last acceptable dates. PHPC could not, and actually did not, unilaterally impose a condition by these correspondences that time became the essence of the contract in respect of delivery.

22. Even if those letters amounted to giving notice to the other side and made time the essence of the delivery, there is no suggestion in this case that PHPC chose to reject any goods on the basis that they were received after a time which had been made of the essence. In fact, on the contrary, the evidence is that PHPC always took delivery and indeed sold on the books to its own customers. Thus, PHPC had affirmed the contracts and waived its right as to time.

23. In the course of the trial, considerable time has been spent on PO No.97013 dated 22 July 1997 in respect of the title "The Math Pack", part of which were to be delivered to the reputabler publisher W.H. Smith in London for 3,000 copies. The delivery date was stated in the Purchase Order to be "end September 1997 ETA" (arrival). PHPC also relied on the special additional terms under the Remarks column which stated that "General Terms and Conditions apply", thus PHPC said these terms were incorporated into the contract. However, as stated hereinbefore after Hua Yang received PHPC's letter of 18 June 1997, it replied within the stipulated two-week period by letter dated 23 June 1997 that it did not agree to the general terms and conditions of purchase. Indeed, Hua Yang categorically indicated that it would not even study them since Hua Yang was proposing to draft its own standard terms and conditions and the same was anticipated to be completed by the end of July 1997. Within this period, the purchase order dated 22 July 1997 could not, in my view, surreptitiously or otherwise incorporate these terms and conditions of PHPC into the contract.

24. The parties, and in particular the experts called by the parties, Mr Freddie Wong for PHPC and Mr Shapiro for Hua Yang, agreed that 1997 was a blooming period in this industry. In particular, in mid-1997 the volume far exceeded the preceding years. Publishers were pushing for larger sale and packagers would have to meet their demands. The contracts between publishers and packagers were quite stringent. In the end, packagers were trying to pass on these liabilities as a kind of back-to-back contract to printers. It was in this period of time PHPC was trying to incorporate its general terms and conditions into its contracts, but as I have said, in this case, they had failed to do so.

25. Everyone agrees that the process of producing a pop-up book is a complex one, requiring synchronized and orchestrated activities. It also appears to be common ground that in the pop-up book business, late delivery by printers is common for various reasons which might be caused by either printer or packager in the delivery of the films and CD for the printing. In fact, late deliveries in this industry are quite notorious.

26. In such circumstances, both the experts and Ron himself were all in agreement that the parties would attempt to resolve the position of late delivery by deciding the priority for delivery. Then, at the packager's direction, parcels of books would be shipped by air or by sea as is necessary and the parties would then discuss financially how to bear or share that cost or other losses. This discussion would centre about the best delivery dates, or even the threat of claiming consequential losses. But no expert gave evidence of any other situation in which such a claim had in fact been made or pursued. Mr Wong, called by PHPC, is a printer himself trading under the name of Tien Wah in Singapore. It is significant that Mr Wong said his company has for all these years been only threatened once for consequential losses by a packager. It was not sued and the matter was settled through negotiation.

27. Hua Yang's case is that in the absence of any express agreement providing for the printer to give an indemnity against 3rd party claims and consequential losses, it is the custom and practice of the trade that a packager would not claim against the printer for such matters. Otherwise, PHPC would not try to incorporate the standard terms and conditions into the purchase order which expressly provided for liability for consequential losses. Thus the experts agreed that no one had in fact claimed from the printer for the consequential losses.

28. In conclusion, I find that the terms of the contract did not provide that the time of delivery is the essence of the contract. It was never the intention of the parties that the delivery dates stated in the purchase orders were intended to be the essence of the contract with no variation possible. Further, the correspondences did not make time the essence of the contract. In the end, it is not possible, when the delivery date was extended, to claim the printer liable for the consequential losses. This is also evidenced from a particular compromise between the parties when there was late deliveries and the shipment would have to be effected by air instead of by sea, which I shall consider in the next section.

The compromise

29. The compromise included but not limited to the delivery to W.H. Smith in respect of "The Math Pack". Immediately after the purchase order, Amy of Hua Yang informed PHPC on 24 July 1997 that they would try to meet the delivery ETD early September 1997 in order to meet ETA end September 1997. PHPC received faxes from Hua Yang about the overload on capacity during August and that therefore they could not meet the delivery date. By 8 August 1997, Hua Yang informed PHPC that the delivery date has to be extended to end September 1997. Thereupon, PHPC, through their lawyers in Holland, threatened to claim all consequential losses therefrom as the new delivery date was unacceptable to PHPC. Eventually, by 22 August 1997, W.H. Smith cancelled half of the order and the other half, i.e. 1,500 copies, were agreed to be on sale or return basis.

30. It is against this background, together with other late deliveries on other titles to various other publishers, that this compromise came about.

31. Since this is a matter of construction of the agreement between the parties, I would set out the important letters passed between the parties. Guus of PHPC wrote on 22 September 1997 that :-

"As you told us, those problems are solved now and we sincerely hope that they will be definitive past time. You offered us a US $ 75,000.00 credit, in order to cover our costs due to the delivery problems. We know that the real costs are much higher, but it's difficult for us to estimate the losses we're making by loosing goodwill."

Sandra of Hua Yang replied on 23 September 1997 that :-

"Air Freight and Penalties: We understand that the delays in deliveries are problematic and will result in the need to air freight some orders and absorb penalties on others. We at Hua Yang are not in any sort of position to make decisions on how to best balance the competing demands from your customers. It is not our place nor our responsibilities to decide how to juggle timing between editions or dictate what is to be air shipped or subject to penalty. Thus, we offer, up front, a credit of US$75,000 on your account to help mitigate the costs to you associated with the delivery delays. We extend this credit with the understanding that it comprises our full obligation to you on expenses related to the delays in delivering the Architecture Pack, the Kids' Art Pack and the Math Pack. However, if at the end of this busy season, you have not paid air freight, penalties or other related expenses totaling at least US$75,000, it is inconsequential. The full value of the credit will stand on your account with us.

I hope our gesture is viewed positively and accepted by you. As soon as you confirm your understanding of our offer as described above, I will instruct Simon Chiu to issue the credit note of US$75,000."

Petra of PHPC replied on the same day concerning the air freight costs and pointed out that PHPC itself would decide what books should be sent by air freight.

32. Amy of Hua Yang then replied on 24 September 1997 that :-

"Thanks for your fax dated 23/9/97. Confirm we only air-freight the titles to your clients upon your request to do so. Also confirm we will pay the air-freight cost on your behalf and will charge you back on the invoice. Since our payment terms based open account on 90 days from Bill of Lading date, and Hua Yang have already credit your account for US$75,000.00. We suggest to issue separate invoice for air-freight costs, as you suppose to pay the air-freight cost immediately after the books were sent. Please let us have your comments in return.

So far we receive the following titles need to be air-freight, please confirm:

...

4) Math Pack (W.H. Smith) - 1,500 cps to W.H. Smith, ex HK 20/10/97

..."

On the next day, 25 September 1997, Guus replied to Sandra and said :-

"To be honest with you, we are very glad that we have solved all the problems. I fully understand your proposal regarding the extra costs for flying the books in and other related costs, due to your production problems.

As you understand, US $ 75,000.00 seems to be a reasonable amount, but if we have to fly all the Kid's Art Packs to the U.S., which we almost certain have to do, it will cost us that whole amount!

As I told you in one of my faxes to you, loosing goodwill is difficult to calculate, but that hurts the most. But, we accept the US $ 75,000.00 and do our best to limit the number of books that has to be flown in. As soon as we have that official credit note, we pay US $ 114,445.00 overdue and then subsequently the other amounts.

As you understand, we accept the US $ 75,000.00 for all the costs that are associated with your delays up till now! For new delays and other problems (like the one with Ars Edition) we have to make another settlement (if they do occur).

The billing terms are acceptable as you proposed."

Eventually, on 11 October 1997, Amy of Hua Yang informed PHPC that 1,500 copies of "The Math Pack" would be sent to W.H. Smith by air freight to UK the next week. On 11 October 1997, Sandra wrote again and complained that the outstanding balance was long overdue from PHPC to Hua Yang. She said :-

"When Karl and I were in London recently, we offered a US$75,000 credit to you in order for you to cover costs associated with air freight and penalties related to late shipment of products from Hua Yang to your customers. Later, I also responded to your request that we reconsider payment terms on orders from this season that were shipped late. I agreed that for this batch of shipments only, the clock on payment would start ticking upon shipment of the last batch in each order, rather from the shipment date for each individual batch of books. I also indicated that we needed immediate payment on your long outstanding balance due to Hua Yang. I received a letter back from you indicating that you understood and agreed to these terms."

Sandra went on to point out that there were two choices for payment of the air freight charges, i.e. either Hua Yang paid direct to the forwarder and deducted the same from the credit amount of US$75,000 or PHPC paid the freight forwarder itself.

33. Guus, by his letter dated 13 October 1997, decided to pay the freight forwarder directly themselves. He was silent on the agreement to pay the immediate balance which was long overdue.

34. It is evident from the aforesaid correspondences that the compromise related to :-

(1) any obligation which Hua Yang might have to PHPC relating to the delays involving all these titles;

(2) delays in delivering these titles involving "The Architecture Pack", "The Kid's Art Pack" and "The Math Pack"; and

(3) which delays had occurred until 25 September 1997, i.e. those anticipated delays, those delays need not have been completed until the orders themselves were completed.

35. Thus PHPC would have to prove that the losses they claimed were costs to other titles or those three titles by delay after 26 September 1997. However, PHPC had not proved any particular part of the loss or the losses claimed flow causatively from something beyond the scope of this compromise.

36. The wordings used by the parties were not simply "the costs or expenses of air freight" which was envisaged as part of the compromised matter. There were other losses, generally referred to as "penalties" or "loss of goodwill", and they were expressly included.

37. The sum of US$75,000 was expressly stated to be intended to comprise the "full obligation to PHPC on expenses related to the delay ...". This sum appeared to have been some form of genuine estimation or pre-estimation, and it was payable if accepted in relation to whatever the losses actually sustained by PHPC.

38. In response to that, PHPC expressed gladness that there had been resolved "all the problems". Even PHPC stated that losing goodwill was difficult to calculate and it hurt the most, yet it accepted the offered sum of US$75,000. Thus, in my view, this is a full and final settlement on all possible claims arising out of delay and PHPC could not claim consequential losses in respect of loss of goodwill.

39. Further, it is significant that PHPC accepted that once it has received the credit note, it would pay US$114,000 odd which was long overdue and then subsequently the other amounts when the last delivery in respect of the order was effected. There was no suggestion that there would be other claim to damages or any right to set off in respect of other losses. Indeed, none was raised until the filing of the counterclaim in these proceedings. The credit note was ultimately issued on 21 November 1997 and it is accepted that the compromise was concluded by these letters and the subsequent letters in October related to the mechanics of effecting the settlement.

40. Thus, in my view, whatever consequential losses which PHPC said they were entitled to as a consequence of the delay of delivery (assuming that they are entitled to claim the same), this was settled by an overall settlement and compromise when PHPC agreed to receive this sum of US$75,000.

Late return or non-return of films

41. It is common ground between the parties that these films for printing are meant to be returned upon request by PHPC. Hua Yang was the bailee of these films. I consider that the films would have to be returned within a reasonable time, and what is a reasonable time depends on the facts of the case. In order to understand the magnitude of this task of returning films for all the books involving 51 titles and as an example, the title : "Even More Fantastic Fairy Tales" involved nine cartons of gross weight 115 kg (see pp.387-388 of BD2).

42. The first request for the return of the films was 19 August 1997. This was the early period of difficulties and concerns in respect of late shipment dates. The reasons given under this letter were :

(1) PHPC's decision to store its own films for all its books at its own air-conditioned storage space in Holland;

(2) the desire for more flexibility; and

(3) that the storage of its own films would allow more easy change and updating of the films for reprints.

43. There was no expression of urgency in the request for return of films other than one particular set of films needed for a book by 30 October 1997. In particular, PHPC did not press for any particular film in order to enable it to meet an order in hand.

44. There is no evidence that Hua Yang was deliberately withholding the return of films. There was, however, an initial confusion caused by Sandra's fax of 13 November 1997 which suggested that the films had already been collected together. It was later on made clear that those films were actually in the China factory and Hua Yang was attempting to collect and return the films in accordance with a timetable. PHPC was informed of the progress from time to time. Ron accepted this in evidence and said that it is a possible way of looking at the matter.

45. Some of the films were being used by Hua Yang for production of existing order. There was no direct evidence as to when the use of those films would have been completed so as to allow their return. It is not unreasonable to retain those films for any title until the last shipment of that title had been effected. The last set of films in respect of the title "The Architecture Pack" was eventually returned in February 1998.

46. PHPC is now claiming for the costs of remaking those films. Ron's oral evidence was that PHPC had to remake those films because it did not believe that the films would be returned and there were some orders in hand which required those films. It was never made known to Hua Yang that they would have to remake the films if they were not returned by a certain date as they had some orders in hand.

47. The original suggestion of remaking those films was because of the quality or condition in which they were returned to PHPC. However, it was not until June 1998 that PHPC had received a report from Offsetkopie indicating which films were said to have been returned in original, duplicate or mixed condition. Both "The Math Pack" and "The Kid's Art Pack" were identified in June 1998 as having been returned as duplicate but they were not films for which there is any claim to the costs of remaking. Thus the complaints about the difference between original and duplicate, or complaints as to quality in general are irrelevant. Further, it should be noted that PHPC had not complained about the quality of the books they received. These films had been used for the production of these books and thus there cannot have been any real complaint about the quality of the films. The inference to be drawn from the fact that books had just been produced with these films without complaints as to quality, is that there was no change to the films such that quality was affected. No evidence had ever been adduced as to the quality of any particular film which Ron said was unacceptable or low as a result of duplication. No evidence has been adduced as to why it was duplicated and for what apparent purpose. Even PHPC's experts were not invited to examine and comment on the films' condition when they are apparently qualified to do so.

48. The claim of PHPC that they had no alternative but to remake the films is not made out on the evidence of the documents and the chronology of events they have revealed. The reasons given to PHPC's customers for not being able to provide books by any particular date was the non-viability of a print-run in the small order sizes requested and not the non-availability of films on hand. There were no firm orders in hand which, on the chronology of events, required the remaking of the films which apparently had already begun in November 1997.

49. PHPC agreed that the films are the "family jewels". However, they were sent with the directed stated value of just US$100, and the same was apparently uninsured. Ron said that there was no original film kept by PHPC or Van der Meer. Apparently, it appeared that PHPC or Van der Meer knew that it could quickly obtain another set of films, whether original or duplicate, from the colour separator which had the master material stored by them for some time.

50. All three experts before the court agreed that there were circumstances in which a printer might duplicate and/or "cut and paste" original films without first securing permission from the film owner. There is no evidence before the court to show any change to the original films in this case was not one of those changes which the experts agreed would be acceptable.

51. In my view, those films were returned in time and Hua Yang's liability as bailee has already been fulfilled. There might be a slight delay in returning the films when Hua Yang was struggling with its manpower to fulfill the shipment dates of the books. In the circumstances of this case, I cannot find any liability on Hua Yang in the course of returning all these films as requested.

Quantum

52. I have found that PHPC totally failed in its counterclaim in respect of the allegations of delay in deliveries and late or non-return of films. Before I say something on quantum in case this case was taken further, I would like to say a few words about how the claim and the counterclaim was brought about.

53. The claim of Hua Yang for goods sold and delivered were well documented. Those documents were received by PHPC from the time of each of the shipment. PHPC knew it had received the goods and it had on-sold them. It was only during the trial that PHPC eventually accepted that all those shipments were effected. It still at one time claimed there were short-shipments and therefore they should not be liable for those goods not shipped. It then agreed that Hua Yang only charged for goods shipped and thus there is no point in the allegation of short-shipment. PHPC should have known this in its long course of dealings with Hua Yang.

54. It was not until the filing of the Defence and Counterclaim in these proceedings that PHPC claimed to have a right to set off in respect of the aforesaid two defences they raised.

55. Even on the pleading point, all heads of loss and damage set out in the Third Schedule thereto were in respect of making new films to replace those films not returned and as a result of Hua Yang's failure and/or refusal promptly, or at all, to return and/or wrongful detention of original films entrusted to it by PHPC and of their duplicates. That was under paragraph 15 of the Re-amended Counterclaim. Thus, strictly speaking, there was no pleaded claim to loss and damage flowing either from late delivery of books or from the inability to use any film during its loss and/or detention.

56. Part of the Counterclaim has been abandoned in the course of the trial and the remaining heads of Counterclaim are not supported by any evidence. I accept Mr Coleman's submission for Hua Yang that the amounts and the elements smack of the attempt somehow to put together a counterclaim as high as possible. But even that the amount was US$250,000 short of Hua Yang's claim. For example, the claim to the legal fees of the Dutch and English lawyers, based on fee-note, are clearly not relevant. It was a startling example of pulling together whatever expenses might have been incurred in the business for any reason around the material time of the dispute.

57. PHPC relied its evidence in support of its counterclaim on the contents of two Walgemoed Reports. But the reports are only made to evaluate the validity of the calculation of damages. In other words, the reports only confirm that the arithmetic is correct. It did not constitute either audit or review in accordance with the ISA (International Standard of Accounting) and no assurance was offered by the accountants.

58. In respect of the lost income claim, there was no real material adduced in evidence. No witness was called to give specific and financial detail of PHPC in support of the claim. No documentary material has been provided to support the claim and, in particular, the claimed margin of profit per book. The number of books claimed is based on the blooming year, in the previous year 1997, without any reference to the agreed fact, as agreed by the experts that there was a significant decline in business for all books packagers in 1998 and 1999. In any event, there is no proof of a causation that these losses flow from Hua Yang's failure and/or refusal to return and/or wrongful detention of the original films as pleaded in the aforesaid paragraph 15 of PHPC's Counterclaim. The lost order claim cannot have flowed from the late return or non-return of films.

59. In respect of the returned/cancelled books in the W.H. Smith order, there was no evidence as to how many copies were in fact returned out of 750 copies for which authority was given for their return. In any event, W.H. Smith cancelled the order on its contract with PHPC but PHPC did not cancel the order with Hua Yang. Instead, it asked for the goods to be kept in stock by Hua Yang and Hua Yang had not charged for them as the same had not been shipped. There is no evidence that W.H. Smith cancelled any intention it might have to buy books from PHPC let alone the intention to sell an average of 15,000 books per year per book for three books for three years as claimed. It has not been shown that such a cancellation was because of the delay in the delivery of the books.

60. In respect of the other publisher Dorling Kindersley, the pleaded case that it has cancelled its order was not supported on evidence. It was accepted by Ron that in fact there was no such order, let alone a likelihood of a firm order in any particular quality. Thus this claim for lost orders is highly remote, wholly speculative and wholly unsupported by any documentary evidence whatsoever as to the causation or quantum.

Conclusion

61. In the end, I will give judgment for the plaintiff Hua Yang in the sum of US$1,746,729.26 together with the usual order on interest at 10% from the date of the writ until judgment, i.e. from 4 April 1998 until today. I found there was no agreement between the parties as to the position on interest. There shall also be an order nisi on costs to the plaintiff Hua Yang on the claim and the counterclaim of the action.