CTMA LTD v. CHESIL OF HONG KONG LTD

1986, No. A3654

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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ASSESSMENT OF DAMAGES

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1. The Plaintiff, a textile manufacturer and exporter, sued the Defendant, a textile exporter, for damages for breach of contract. Under this contract dated 20th August 1985 the Plaintiff agreed to transfer on a temporary basis 3,000 pieces of Ireland Category 5 quota for export on condition that the Defendant utilise at least 95% of the said quota before the end of December 1985. It was also agreed between the parties that if the Defendant failed to utilise all or any part of the said quota resulting in the Plaintiff's 1066 of quota allocation in the following textile year then the Defendant was liable to compensate the Plaintiff's loss by obtaining the permanent transfer of identical quota (as to both quantity and category) before the end of April 1986. The Defendant in breach of the agreement failed to utilise any of the said quota before the end of the 1985 year. As a result the Plaintiff's allocation of the said quota in the following textile year (1986) was reduced by 3,000 pieces. Further the Defendant failed to transfer on a permanent basis 3,000 pieces of the said quota to the Plaintiff before the end of April 1986.

2. On 26th September 1986 interlocutory judgment was entered by consent of the parties with damages to be assessed. The background to the textile quota market is aptly described on pages 2 and 3 of the decision of Mr. Justice Hunter delivered on 2nd March 1983 in Texwood Limited v. Jackson and Wendy (H.K.) Trading Company (H.C.A. No. 7219/81).  The Secretary for Trade appears to be content to allow holders of permanent textile quota to speculate in up to 50% of their quote allocation for a particular year by transferring the textile quota to others usually on a temporary basis. This artificial market in textile quota results in unjust enrichment or unearned profit to the holders of permanent textile quota at the expense of bona fide exporters of textiles. The rationale for allowing speculation in textile quota by those permanently allocated such quota must be open to question.

3. The first issue on this assessment was to establish the Plaintiff's actual loss arising from the Defendant's breach of contract. Counsel for the Plaintiff argues that the approach adopted by Mr. Justice Hunter at page 9 of the Texwood decision should be followed. The approach in that case was to determine the Plaintiff's actual loss and to consider whether such loss directly and naturally resulted from the Defendant's breach in the ordinary course of events. Put in another way, this approach is to consider how the Plaintiff would have made use of the 3,000 pieces of Ireland Category 5 export quota if it had been avai1able on 30th April 1986.

4. In adopting this approach there were 3 possible options available to the Plaintiff to utilise the 3,000 pieces of quota; namely

(1) To utilise the quota for textile export to Ireland; or

(2) To transfer the quota for cash on a temporary or permanent basis on the textile quota market; or

(3) To retain the quota until a free transfer market in the quota arose.

The Plaintiff, relying on the evidence called at this assessment of its pattern of dealing with quotas over a 5-year period from 1983 to 1987, submits that it would either have utilised all or part of the 3,000 pieces of quota for export, or, alternatively, would have transferred all or part of the quota for value in the textile quota market. There was evidence called by the Plaintiff that since 1986 it was the Plaintiff's declared policy to use 5O% of its allocated textile quota for export and the 50% balance of quota for transfer at value. This policy was adopted to coincide with the Secretary for Trade's directive for allocation of permanent textile quota which came into effect from that year.

5. The difficulty in following this approach is that there is no certainty or evidence to decide whether the Plaintiff would utilise all or what proportion of the quota for export or, alternatively, all or what proportion of the quota would have been transferred for value. Counsel for Defendant argued that in 1986 only 41.3% of Plaintiff's total Ireland Category 5 export quota was transferred for value, so that the same percentage should be applied to the 3,000 pieces of quota. On this basis the Plaintiff would be restricted to claiming that 1239 pieces (being 41.3% of 3,000 pieces) were transferred for value. The Plaintiff submits that there is no logical basis for such a reduction to a figure less than half of the 3,000 pieces claimed and that to do so would have been contrary to the weight of the evidence called by the Plaintiff.

6. The Plaintiff claims that by adding the 3,000 pieces of quota to its total allocation of 16,820 pieces of Ireland Category 5 quota for the 1986 year it could have transferred 2,950 of the 3,000 pieces without transgressing the Trade Department's 50% rule. However, the Plaintiff submits that whether the Plaintiff would have transferred all or a proportion of the 3,000 pieces for value without transgressing the 50% rule is irrelevant, as it depends on whether the Plaintiff can establish on the evidence that it could have found buyers for the 3,000 pieces of quota had such quota been available. The Plaintiff contends that on the balance of probabilities it has shown that such buyers were available, so that the Plaintiff would have utilised more of its allocated quota for export rather than transferring same so that all of the 3,000 pieces of quota could have been transferred for value.

7. In the absence of evidence from the Plaintiff as to the probable utilisation of the 3,000 pieces of quota, if same had been provided by the Defendant on or before 30th April 1986, it can only be assumed that the Plaintiff in accordance with its declared policy and to comply with the Trade Department directive would have used 50% of the 3,000 pieces of Ireland Category 5 quota for export and that up to 50% of such quota would have been transferred for value on a temporary basis. The Plaintiff's submissions as to the possible utilisation of all 3,000 pieces for transfer at value on a temporary basis by adding the 3,000 pieces to its total allocation for the 1986 year are not accepted as being either feasible or more importantly, an actual loss by the Plaintiff resulting directly and naturally from the Defendant's breach in the ordinary course of events. The Plaintiff in only utilising 41.3% of its 1986 allocated Ireland Category 5 export quota for transfer at value, where it c0uld have utilised up to 50% in the ordinary course of events during that year, can hardly expect to turn to the Defendant to make up the leeway. It might also be argued that as the Plaintiff was only able to transfer 41.3% of its allocated Ireland Category 5 quota in 1986, the necessary buyers were not available in the textile quota market to have transferred for value any of the 3,000 pieces of such quota. However, taking into account that two-thirds of the textile year still had to run after the 30th April 1986, as the date by which the Defendant had to compensate the Plaintiff by replacing the quota, it is accepted that the Plaintiff would have been able to transfer at value 50% of the 3,000 pieces of quota without being forced to resort to the free transfer market.

8. The second issue on this assessment is how to quantify the Plaintiff's actual loss being the value of 3,000 pieces of Ireland Category 5 export quota transferred on a permanent basis on the date (30th April 1986) that compensation should have been completed by the Defendant. In paragraph 8 of the Statement of Claim the Plaintiff claims that the value of Ireland Category 5 export quota transferred on a permanent basis was $75.00 a piece. The parties agree that there is no available market for export quota transferred on a permanent basis. This situation arises because of the recurring annual allocation of permanent export quota by the Trade Department to the existing holder of such quota on the basis of the previous year's utilisation of such quota for export.

9. There was evidence called by the Plaintiff that the average value of Ireland Category 5 export quota transferred on a temporary basis in April 1986 was $30.00 per piece. Evidence was also given that the value of export quota transferred on a permanent basis was 1.5 times the current market price of export quota transferred on a temporary basis. On this basis when the market value of temporary export quota was $30.00 then the market value of permanent export quota was $75.00. The Plaintiff's witness was unable to provide a satisfactory explanation for fixing the value of permanent export quota on this basis and the stated formula appeared to be little more than a rule of thumb or practive for those persons involved in the textile quota market.

10. Even after having decided the value of permanent export quota, that is not the end of the matter, because of the recurring allocation system for permanent export quota holders based on the previous year's utilisation. In this regard Counsel for the Plaintiff submitted that as there was evidence the quota system would continue in force for 6 years from 1986 a multiplier approach should be adopted and that on the basis of annuity tables produced the appropriate multiplier was 3.9.  To quote from Mr. Justice Hunter's on page 10 of his decision in the Texwood case -

"In no circumstances would I have been prepared to have assumed that degree of permanence or certainty in this peculiar market.”

The vagaries of this artificial textile quota market both as to fluctuations in price of export quota and changes in the system of allocating quota are such that the same multiplier should be applied in this assessment as was applied in the Texwood case, that is, 1.5.

11. Returning to the question of the value of the permanent Ireland Category 5 export quota this will be assessed at $70.00 per piece. In arriving at this figure reliance is placed on the evidence called by the Plaintiff that the average price for temporary Ireland Category 5 export quota was $30.00 per piece in 1986 and $35.00 per piece in 1987. Whereas, it is accepted that the value of permanent export quota is substantially greater than the value of temporary export quota the formula proposed for fixing that value is accepted only as a guideline. Also taken into account in fixing the value of permanent export quota in this case was the evidence of the settlement reached by the Plaintiff with another company defaulting in similar circumstances where the value of $50.00 per piece was accepted for a much greater quantity of export quota.

12. Lastly, Counsel for the Plaintiff argued that even though it is matter of some considerable difficulty a value should be placed on that proportion of the quota likely to have been utilised for export. The comments of Mr. Justice Hunter on page 4 of the Texwood decision are accepted that it is difficult to value quota used for export to earn a trading profit. In the absence on any real evidence on this point no more than a nominal value should be awarded. Accordingly, a nominal value of $10.00 per piece is awarded for the 50% of the 3,000 pieces of quota likely to have been used for export. The quota used for export also has a recurring value under the existing annual quota allocation system so that the same multiplier of 1.5 should also be applied to this sum.

13. A summary of the awards made under this assessment are as follows:-

(1)	1,500 pieces of Ireland Category 5 export quota transferred on a permanent basis @ $70.00 per piece	$105,000.00
(2)	(2) 1,500 pieces of permanent Ireland Category 5 export quota @ $10.00 per piece	$ 15,000.00
	SUB-TOTAL:	$120,000.00
(3)	Applying the multiplier of 1.5 to assess future loss on the 3,000 pieces of Ireland Category 5 export quota gives a total of	$180,000.00