WEARBEST GARMENT MANUFACTURING CO LTD. v. CHERRY STIX (HONG KONG) LTD.

1989. No. A2497

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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ASSESSMENT OF DAMAGES

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1. The parties to this action are garment manufacturers and exporters. The Plaintiff is the holder of permanent quotas for export of textiles to the U.S.A. and one of the quotas it holds is in category No.341. In August 1989 the Plaintiff decide that it would be unable to fully utilize the whole of its quota in that category.

2. It is common ground that, if a quota holder fails to utilize at least 95% of its quota in any year, the Trade Department of the Hong Kong Government will reduce the quota in the succeeding year by the percentage amount of the shortfall. The shortfall being calculated on the difference between the amount of quota actually utilized and the full amount of the quota. Hence, if only 90% of the quota is used the percentage reduction in the subsequent quota will be 10%.

3. At the end of July 1988 the Plaintiff paid the Defendant to take a temportary transfer of 2929.84 dozen units of the said quota. The actual transaction was arranged through a quota dealer and involved a swing transfer of quota. A swing transfer of quota occurs when a quota holder in one category exchanges it through the Trade Department for quota in another category. There is a formula applied to the transfer whereby the quota holder may receive more or less units in the new category depending upon the nature of that category. In the present action the Defendant received slightly less.

4. In the event the Defendant under utilized its temporary quota by a substantial margin and consequent thereon the Plaintiff's case is that it suffered a concomitant lose of permanent quota for 1989 in category No. 341.

5. A writ was issued on the 12th May 1989 and, by consent, interlocutory judgment was entered on the 30th June 1989. Alternative remedies were provided for in the said judgment, but at the hearing before me the Plaintiff limited the relief sought to the transfer to it, at the Defendant's cost and expense, of such quantity of category No. 341 quota for U.S.A on a permanent basis as I assessed.

6. The factual matrix of this action is not in dispute. It is agreed between the parties that:-

(1) 2929.84 dozen of category No. 341 were temporarily transferred to the Defendant.

(2) The Defendant only utilized 883.14 dozen.

(3) In 1988 the Plaintiff's permanent quota of category No. 341 was 48,459 dozen and this was reduced by 3,107 dozen in 1989.

7. Further, if not agreed, it is certainly not disputed by the Defendant that the Plaintiff made several other temporary transfers of category quota No. 341 in 1988. Happily all these allocations were fully utilized with the exception of two. In the first of these only 545.25 dozen were utilized out of an allocations of 600 dozen and in the second 942.83 dozen were utilized out of an allocation of 1,000 dozen.

8. The Plaintiff's initial position was that, as the other two shortfalls in utilization were so small, if the Dependant had utilized at least 95% of its allocation there would have been no loss of permanent quota, because when taken with the other allocations - where there was not under utilization - the average utilization would have been over 95%. Hence, so the Plaintiff's argument went, the whole of the loss of permanent quota should be laid at the Defendant's door and accordingly it should make up the shortfall of 3,107 dozen.

9. However, whilst not abandoning this position Mr. Remedios did concede that there is some merit in the argument that account should be taken of the shortfalls by the two transferees of temporary quota mentioned above. He produced a short table, marked "A", the mathematics of which were not challenged by Miss Pinto, which showed that, after taking the other two shortfalls into account, the Defendant was responsible for a loss of 2,946 dozen.

10. Whilst Miss Pinto may have accepted the mathematics of table "A" she did not accept the hypothesis upon which it is based. She submitted that the Defendant's liability was limited to transferring 2,046 dozen to the Plaintiff, i.e. the actual under utilization of the temporary transfer by the Defendant.

11. In order to resolve the difference between the parties it is necessary to consider the terms of a letter of guarantee signed by the Defendant upon the transfer to it of the temporary quota - page 3 in the bundle.

12. Paragraphs 2 and 4 are relevant to this action and read as follows:-

"2. We also undertake that if for whatever reasons we fail to utilize at least 95% of the said quota on or before the validity date or misuse the said quota or failure to satisfactorily answer any queries raised by the Trade Department in connection with the use of the said quota or fail to abide by any rules and regulations laid down by the Trade Department in connection with the use of the said quota, as a result of which event your quota allocation entitlement is reduced by the Trade Department during the next and subsequent restraint periods, we shall procure to transfer to you from other quota holders at our cost and expenses an equivalent quantity of such quota (or its equivalent if the categorization of such quota is changed by the Trade Department) on a permanent (type B) transfer basis within one month from the date of Final Allocation of quotas for U.S.A. 1989 by the Trade Department.

4. We further undertake to indemnify you against any loss claims demands and expenses which you may sustain or incur as a result of our use or misuse of or omission to use the said quota or failure to satisfactorily answer any queries raised by the Trade Department in connection with the use of the said quota or failure to abide by any rules any regulations laid down by the Trade Department in connection with the use of the said quota after the said quota is transferred to us."

13. In essence Miss Pinto submitted that as the Defendant did not know the Plaintiff's total permanent quota, or the amount of quota it parted with to it and others on a temporary basis in 1988, it could not have a precise idea as to what it was letting itself in for when it signed the guarantee. Thus, so her submission continued, as the terms of the guarantee are ambiguous, and should be restrictively interpreted under the contra proferendum rule, the Defendant should only be liable for that loss which was within its reasonable contemplation at the time it took the transfer and signed the guarantee i.e. 2,046 dozen.

14. Firstly, no evidence at all was led by the Defendant as to what was or was not within the contemplation of its officers at the time of the temporary transfer of quota by the Plaintiff.

15. Although the evidence of the Defendant's witness, a merchandiser with the Defendant, was brief it was quite clear to me from listening to him, that he is well-versed in the operation of the quota market. Thus, whilst I accept that neither paragraph 2 nor 4 spells out in terms that any shortfall below 95% will result in a loss to the permanent quota of that shortfall below 95% plus 5%, I have no doubt, as Mr. Remedios submitted, that the Defendant company would be familiar, in general terms, with the Trade Department's notice to exporters - pages 9-40 in the bundle and that, in particular it would be aware of the provisions of paragraph 12A(c) which states:-

"(c) quota holders who have used less than 95% of their 1987 quota holdings will be offered quota allocation equal to the amount they used in 1987."

16. In the premises, I do not accept that the Letter of Guarantee is ambiguous or that the consequences of a failure to fully utilize the quota was not within the reasonable contemplation of the Defendant. Thus, in my judgment the Plaintiff is entitled to recover the full amount of its loss from the Defendant but that it should not bear this loss alone. It will bear it rateably with the other transferees of quota who utilized less than 95% of their allocation.

17. It follows from the above finding that the loss of permanent quota of category No.341 attributable to the Defendant's failure is 2,946 dozen and accordingly I order that it procures the transfer to the Plaintiff of that quantity on a permanent basis.

18. I sincerely hope that it will do so forthwith for otherwise there will be insufficient time for the Plaintiff to utilize it and the present action will be rendered nugatory. As time is so much of the essence in disputes relating to quotas, perhaps it may be preferable for parties to seek to have them listed in the Commercial List, particularly where a Plaintiff is seeking a transfer of permanent quota as against damages simpliciter.

19. Finally, I turn to the question of costs. Mr. Remedios submitted that paragraph 4 is sufficiently wide to enable me to depart from the general rule and award the Plaintiff indemnity costs. In this respect I agree with Miss Pinto's submission that in so far as paragraph 4 relates to legal costs it is insufficiently clear to enable me to depart from the usual order. Thus, whilst the Plaintiff will have its costs it will have them on a party and party basis.

20. Dated this 5th day of October 1989.