RICKEED INDUSTRIES LTD AND ANOTHER v. HONG KONG TOHKOH COMPANY LTD

CACV 72/2022, [2026] HKCA 105

On appeal from [2022] HKCFI 106

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 72 OF 2022

(ON APPEAL FROM HCA 2280 OF 2015)

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J U D G M E N T

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The Court:

Introduction

1.  This is the defendant’s appeal against the judgment of Deputy High Court Judge P Fung SC dated 13 January 2022 (“Judgment”) whereby he upheld the plaintiffs’ claim for damages for breach of contract relating to the sale and purchase of acrylic sheets.  Damages were awarded in the sum of just over RMB 5 million, being the difference between the price paid by the plaintiffs for 42,601 sheets and the amounts for which they were subsequently on-sold by the plaintiffs.

Factual background

2.  The primary facts are largely not in dispute and may be summarised from the Judgment as follows.

3.  The 1^st plaintiff is a Hong Kong company and the 2^nd plaintiff a Mainland company.  For the purposes of this appeal it is unnecessary to distinguish between them, and we shall refer to them collectively as “Ps”.  They are both subsidiaries of a Taiwan company called Gredmann Taiwan Ltd (“Gredmann”) and carried on business in trading industrial materials.

4.  The defendant (“D”) is the Hong Kong subsidiary of a Japanese company called Tohkoh Jushi Co Ltd (“Tohkoh Japan”).  At all material times they carried on the business of selling acrylic sheets manufactured by Mitsubishi Rayon Co Ltd (“MR”) in Japan.  MR would not sell its products directly to any customer but only through its authorized agents, of which Tohkoh Japan was one.

5.  The modus operandi of D and Tohkoh Japan was that when D received a purchase order for the products of MR, it would pass the order to Tohkoh Japan, which would in turn order the goods from MR.  Arrangements would be made for MR to ship the goods from its factory or warehouse to D’s customers directly.

6.  Ps started trading with D in December 2010 and placed various purchase orders with D for the supply of acrylic sheets described as “MR 200G PMMA”.  They were all of the dimension of 1120mm × 1320mm, but with 3 different thickness: 0.8mm, 1.0mm and 1.2mm.  They were suitable for making covers for mobile phones of Nokia, Motorola, Ericsson and similar brands, described by the judge as mobile phones of the last generation.  The details of the purchase orders were set out in a table annexed to the Judgment as Annexure 1.  We reproduce the table below, omitting irrelevant details.

PO Number	Order Date	Delivery Date	Thickness (mm)	Quantity	Unit Price (USD)	Amount (USD)
GKOF199B	2010/12/06	2010/12/24	0.8	3,200	26.70	85,400.00
GKOF225B	2011/03/16	2011/04/08	1.0	8,000	26.70	213,600.00
GKOF225B	2011/03/16	2011/04/08	0.8	12,000	26.70	320,400.00
Exchanged Goods	2011/07/20	2011/08/05	0.8	14,800	0.00	0.00
GKOF250B	2011/07/20	2011/08/05	1.0	6,800	26.70	181,560.00
GKOF258B	2011/08/24	2011/09/16	0.8	15,000	26.70	400,500.00
GKOF258B	2011/08/24	2011/09/16	1.0	14,800	26.70	395,160.00
GKOF273B	2011/10/21	2011/11/17	0.8	10,000	26.70	267,000.00
GKOF273B	2011/10/21	2011/11/17	1.0	10,000	26.70	267,000.00
GKOF277B	2011/11/01	2011/11/10	1.2T	350	41.00	14,350.00
GKOF278B	2011/11/02	2011/11/10	1.2T	50	41.00	2,050.00
GKOF283B	2011/12/15	2012/01/04	0.8	10,000	26.70	267,000.00
GKOF283B	2011/12/15	2012/01/04	1.0	20,000	26.70	534,000.00
GKOF289B	2012/03/27	2012/04/10	0.8	20,000	26.70	534,000.00
GKOF305B	2013/03/19	2013/04/08	0.8	10,000	26.70	267,000.00
GKOF305B	2013/03/19	2013/04/16	0.8	7,600	26.70	202,920.00
Returned Goods	2013/12/26	2014/01/26	0.8	-14,800	26.70	-395,160.00

7.  Although there were a number of transactions between the parties, Ps’ claim is only based on the 2 contracts arising from purchase orders nos. GKOF283B and GKOF289B, which we shall refer to as “PO1” and “PO2” respectively.  As can be seen, PO1 was for 10,000 pieces of 0.8mm and 20,000 pieces of 1.0mm, and PO2 was for 20,000 pieces of 0.8mm, totalling 50,000 pieces.

8.  Pursuant to the purchase orders, the acrylic sheets purchased were shipped by MR and, upon arrival, delivered to Ps’ warehouses, where they were stored before being on-sold and delivered to Ps’ customers, the sub-buyers.

9.  Each acrylic sheet was protected by polyethylene protective sheets on the outside.  Once the protective sheets were peeled off, they could not be properly put back and no customer would accept the products as new acrylic sheets.  The protective sheets were therefore only removed by the end-buyers when the acrylic sheets were to be used. This meant that Ps could not themselves inspect the acrylic sheets and assess their quality, and would have to wait for complaints (if any) from their customers before they could know about any defects.

10.  There were complaints from customers regarding the quality of the acrylic sheets supplied under the earlier purchase orders.  The problems were relayed to MR. Eventually MR issued a report in November 2011 (“MR Report”), which D sent to Ps on 3 December 2011.  The relevant parts of the MR Report contained the following comments, as set out in §31 of the Judgment:

(i)     “Regarding the samples of unperceivable scratches, it is confirmed that the scratches indicated by you can be observed under strong light.  The observation results of each sample are as below.”

(ii)     There then followed a table regarding the various samples and, under the column “Reason of defect (presumption)” against each sample, there appeared the words “Caused by our manufacturing process”.

(iii)    “Since all of the scratches are in convex shapes, it can be confirmed that they were caused during our manufacturing process.  Upon comparison between the samples and the appearance standard of our products, all samples are qualified.  In connection with the abovementioned scratch problems, we will conduct maintenance on a regular basis and repair in sequence of their damage levels.  We believe the quality of products would improve gradually.

     Regarding the crystal point problem indicated by you, we have observed the samples but since the protective films have been torn off, the acrylic sheets are being mixed with foreign materials and with dirt being stuck to their surface such that the defects indicated by you could not be confirmed.

     We presume that the possible reason for the crystal points could be attributable to the defective gum/staining residues problems caused by the protective films, which were attached to the acrylic sheets in order to protect their surfaces.

     In connection with the defective gum/staining residues problem, we are considering introducing protective films with better quality and we are currently examining it in the introductory stage.

     We sincerely apologize for the inconvenience caused by this issue.  We will continue to improve the quality of our products and wish to have your understanding and continued support.  Thank you.”

11.  On 16 December 2011, Ps placed PO1 for 30,000 acrylic sheets.  They were delivered on 4 January 2012 and paid for shortly thereafter.

12.  On 16 January 2012, Ps relayed to D their customers’ complaints on the quality of certain 0.8T and 1.2T acrylic sheets.  On the same day, D replied, suggesting an inspection to confirm the abnormalities.[1]  It is, however, not clear whether that the complaints related to PO1 or some earlier order.  Insofar as the complaints concerned 1.2T, clearly they were not about PO1, for that order did not cover any 1.2mm sheets.

13.  On 27 March 2012, Ps placed PO2 for 20,000 pieces of 0.8mm acrylic sheets with payment within 90 days.  The goods were delivered on 10 April 2012.

14.  By an email dated 12 June 2012, one Ivy Huang of Ps wrote to Mr Nakayama of D as follows:

“Subject: GKOF 283B

Dear Nakayama,

Could you tell me whether the attached order GKOF283B of 10,000 PCS 0.8t and 20,000 PCS 1.0t delivered around December 2011 can be divided into MR200Z and MR200G? (in another word, is there any difference in quality?) Is there any difference in the labelling? The other 14800 PCS of 0.8t (which have been delivered to Hong Kong before) in this order are MR200Z, which are of inferior quality, right?” (emphasis added)

15.  By email dated 13 June 2012, Nakayama replied as follows:

“Subject : GKOF 283B

Miss Ivy,

Good morning!

There is no difference on the labels of the goods in December, the other 14800 PCS of 0.8t are indeed of slightly inferior quality.” (emphasis added)

16.  Although the caption and the main parts of the emails clearly related to PO1, there is a dispute whether the underlined parts of these 2 emails of June 2012 relate to PO1 (as Ps suggest) or to some earlier order (as D suggests).  We deal with this in §§37-38 below.

17.  In the meantime, between March and December 2012, there was correspondence between Ps and D about a price reduction as compensation.  Finally, by an email dated 19 December 2012 to Ivy Huang of Ps, Nakayama said:

“Please confirm the following contents with Mr Leo again.

On 18 December, decided in the meeting between Ikegami Department Manager of our company and Mr Chen Dongshan (陳東山) of your company, US$534,000 will be fully paid this time.  The issue of payment deduction will be calculated after March 2013.”

18.  By his email dated 22 January 2013, D sent Ps an email attaching a draft document in Japanese.  The email bears the caption (in translation): “RE: The payment of MR 200 compensating the defective part by Mitsubishi and Tohkoh”.  D signed the document a few days later (“Negotiation Document”).  It had the title: “Negotiation on Compensation for Defective MR 200” and relevantly stated as follows (in translation):

“In respect of the captioned matter, the result of discussion of Tohkoh Jushi Co., Ltd are as follows

Tohkoh Jushi agrees that upon mutual negotiation Mitsubishi Rayon, Tohkoh and Gredmann jointly bear the loss of the defective MR200 that were already delivered and in subsequent sales (including those completely unusable parts and parts that need to be compensated to the customers)

The specific details are as follows

1. In respect of the goods already returned due to customers’ complaints, price adjustment will be performed at the next batch of new purchase orders. The amount for goods that had been returned to Gredmann and of which Gredmann had made compensation to the customer will be deducted from the payment for this order.

2. For defective goods that occur in subsequent sale, the three companies must confirm the cause of the defective products (residual glue, scratch). For defects which have been determined and confirmed not to meet the quality standard of Mitsubishi, Tohkoh and Mitsubishi will be responsible for it. If it is not caused by defective incoming materials, it will be the responsibility of Gredmann.

3.     For goods sold at lower price (loss arising from selling price below $26.7), Gredmann will truthfully provide the sales price and report to Tohkoh and Mitsubishi company.  Tohkoh and Mitsubishi are responsible for the said loss.  There will be unit price adjustment in subsequent PO to compensate for Gredmann’s loss.”

19.  Soon after that, on 4 February 2013, Lin wrote an email to Nakayama referring to the complaints by Ps’ customers about serious defects in the quality of the acrylic sheets in large quantities.  He also asked for a price reduction in relation to PO2.  By email dated 5 February 2013, Nakayama suggested a meeting to be held between the two sides.

20.  The parties did eventually have a meeting in Shenzhen in around March 2013 attended by both Ikegami and Nakayama for D and Lin and other personnel of Ps. Consequently, an undated document in Chinese (“Replacement Agreement”), drafted by Ps, was signed between the two sides.  Its English translation reads as follows:

“Gredmann MR200 Solutions to bad inventory

(Memorandum of Understanding of the defective MR200 in Gredmann’s stock)

1. For the 21400pcs of MRZ200 in the existing inventory, Tohkoh is responsible for returning the goods and replacing them with 21400pcs of MR200. For the replacement goods, Gredmann shall provide the required quantity and time schedule within one week. For the specific return and exchange operation, it shall be discussed and determined by both parties within one week.

2. In respect of the 21400pcs of MRZ200 inventory in Gredmann’s warehouse, Tohkoh entrusts to store temporarily in Gredmann’s warehouse and that Gredmann shall sell them on behalf of Tohkoh. The exact selling price will be determined by Gredmann and Tohkoh according to the situation of the customer. The mode of transaction between Gredmann and Tohkoh regarding this specific sales of goods by agency is to be determined.

3. Tohkoh shall bear all taxes and related expenses incurred in the replacement or replenishment of defective goods during the import process, it shall reimburse Gredmann by way of cash.

4. If the MR200 project is confirmed to be terminated (i.e., both parties confirm that Gredmann stops purchasing new MR200), Tohkoh shall be responsible to compensate Gredmann by cash in relation to the available inventory owned by Gredmann at the time of termination which is subject to customer complaints of poor quality (Gredmann’s current MR200 inventory is 50528pcs, the estimated defect rate is 10%~15%).

5. After Tohkoh confirms and signs the above agreement, Gredmann shall immediately pay the outstanding payment of the remaining 20,000 PCS.”

21.  On 28 March 2013, Ps paid D the price of the goods under PO2.

22.  Subsequently, there were other complaints by Ps’ customers about the quality of large quantities of the acrylic sheets in April to June 2013.  Some of these are mentioned in §40 below.

23.  In April 2013, D supplied 17,600 acrylic sheets to Ps free of charge as replacement sheets, and Ps returned 14,800 acrylic sheets to D in January 2014.

24.  In 2015, Ps brought the action below against D for breach of contract in relation to PO1 and PO2.  In the amended statement of claim, it was alleged that “a large quantity” of the acrylic sheets were not of merchantable quality and not fit for purpose, and that “most if not all” of the acrylic sheets were defective and worth far less than the price they were sold for.  Ps pleaded that they had been rendered liable to their sub-buyer, Shenzhen Golden Ken Optics Electromonic Co Ltd (“GK”), for defective goods, and claimed an indemnity from D in respect of GK’s claim.  Ps also alleged they had suffered loss and damage arising from the sale of 26,336 pieces of 0.8mm acrylic sheets from PO1 and PO2 at lower unit prices in the total sum of RMB 3,417,958.51 and 16,265 pieces of 1.0mm at lower unit prices in the total sum of RMB 1,607,068.06.

The Judgment below

25.  The trial judge dealt with a number of issues between the parties in his Judgment.  Two areas are of relevance in this appeal.  First, on the issue of liability and in particular whether the acrylic sheets supplied were defective, the trial judge said at §§82-86 of the Judgment:

“82. First, I find as a fact that there was no agreement between the Plaintiffs and D and/or any undertaking by the Plaintiffs to the effect that: -

(i) D would give no warranty for the quality of the goods to be sold to the Plaintiffs;

(ii) the Plaintiffs could not re-sell the acrylic sheets to competitors of D, including, in particular, GK.

I take the view that if there had been such agreement or undertaking, the same would have been recorded in writing between the Plaintiffs and the Defendant. Furthermore, if there had been such an agreement or undertaking and the Plaintiffs had committed a breach thereof, the same would have been raised D in the correspondence between the parties much earlier on and not only just after the commencement of the litigation. I therefore do not accept the evidence of Ikegami and Nakayama in this regard.

83. Secondly, in any event, I fail to see how GK could be a competitor of D in light of the fact that it was purchasing goods as a sub-purchaser from the Plaintiffs who themselves had to buy the goods from D. GK must have paid a price for the goods higher than that paid by the Plaintiffs to D and GK would naturally sell the same goods at an even higher price to the purchasers from itself. In those circumstances, GK would only be an indirect purchaser from D and not its competitor.

84. Thirdly, on the basis of the course of conduct between the parties from the commencement of their trading relationship and all the admissions made on behalf of D, mostly by Nakayama, including all the emails referred to above, in particular, those set out in paragraphs 23, 34, 37 and 53 above, and the contents of the MR Report sent by Nakayama to the Plaintiffs on 3 December 2011 as referred to in paragraph 31 above, I find that it has been proved by the Plaintiffs that the acrylic sheets sold by D to the Plaintiffs during their trading relationship had always had substantial quality problems.

85. Fourthly, on the basis of the matters referred to in paragraphs 82 and 83 above and on the basis of the draft of the Negotiation Document sent by Nakayama to Michael Chen on 22 January 2013 as referred to in paragraph 41 above, the forwarding to the Plaintiffs of the actual Negotiation Document signed by Ikegami two days later as referred to in paragraph 43 above, the signing of the Replacement Agreement by Ikegami as referred to in paragraph 47 above and the delivery of the 17,600 replacement acrylic sheets in April 2013, I find that the majority of the acrylic sheets delivered under the 1^st PO and the 2^nd PO were defective.

86.  The quality problems are to an extent confirmed by the Report of Dr Parsons as referred to above.  With the limited information and materials supplied to her, she was able to come to conclude and consider ‘the returned products that I examined to be unsuitable for manufacturing the display screen of mobile telephones, which I understand to be their intended use.’”

26.  On the question of relief, the judge said there was no evidence that GK, who took delivery in 2013, had lodged any claim or serious claim against Ps.  He therefore declined to find D liable for the indemnity claimed by Ps.  He awarded damages as claimed by Ps based on lower resale prices, on the basis of the documents produced by Ms Yin Meng, an employee of Ps, in her supplemental witness statement as ‘YM-1’ to ‘YM‑14’.

The appeal

27.  The notice of appeal runs into many paragraphs but the main contentions on this appeal, based on Mr Wright’s submissions to us, may be set out as follows:

(i)     whether the judge was wrong to infer that the majority of the acrylic sheets delivered under PO1 and PO2 were defective;

(ii)     whether the Judge was wrong to find that D breached the conditions as to merchantable quality and fitness for purpose implied by sections 16(2) and (3) of the Sale of Goods Ordinance (Cap 26); and

(iii)     whether the judge was wrong to calculate loss based on the difference between the purchase price paid by Ps and the subsequent resale price received by Ps.

Whether majority of the acrylic sheets defective

28.  The critical paragraphs in the Judgment relating to the question of defects have been set out above.  Mr Wright submits that in §84, when the judge said “the acrylic sheets sold by D to the Plaintiffs during their trading relationship had always had substantial quality problems”, he was not dealing specifically with PO1 and PO2, which were the subject matter of the next paragraph.  This seems correct, since many of the matters referred to by the judge in §84, such as the MR Report, concern goods supplied under previous purchase orders.  In any event, the fact that there were “substantial quality problems” is not equivalent to a finding that the majority were defective, not of merchantable quality and not fit for purpose.

29.  In particular, it should be noted that the MR Report, which predated PO1 and PO2, whilst admitting defects caused by MR’s manufacturing process, stated that steps would be taken and the quality of products would improve.  It was not therefore of much probative value in relation to the quality of the goods under PO1 and PO2.

30.  At §85 of the Judgment, the judge set out the matters relied on for his conclusion that the majority of the acrylic sheets delivered under PO1 and PO2 were defective.

31.  The first matter, §§82 and 83 of the Judgment, concerns the separate question of whether the parties agreed that D would not give a quality warranty and that Ps would not re-sell to GK.  These paragraphs obviously do not tend to show that the goods were defective. 

32.  The Negotiation Document, signed in January 2013, stated that for goods already returned, price adjustment would be made, and that for defective goods occurring in subsequent sale, the 3 companies (i.e. MR, Tohkoh and Gredmann) “must confirm the cause” of the defects.  If the products were below standard, it would be MR’s and Tohkoh’s responsibility; otherwise it would be Gredmann’s responsibility.  Whilst it clearly shows there were complaints about defects, the document was intended to set out procedures for determining the defects and their cause, expressly contemplating that defects complained of by Ps’ customers might not all be D’s or MR’s responsibility.  This document does not show that any of the goods under PO1 and PO2, let alone the majority of them, were defective.

33.  The Replacement Agreement, signed in around March 2013, provided that D was responsible for replacing, at its own cost, 21,400 pieces in the existing inventory of Ps.  This could be evidence that there were problems with those 21,400 pieces, either because they were of the wrong model (MRZ200 instead of MR200) or otherwise defective.  But D did proceed to supply 17,600 replacement sheets in April 2013, and there was no finding that these replacement sheets were also defective.  Only 14,800 replaced sheets were returned by Ps in January 2014.  There was no finding by the judge as to why only 17,600 replacement sheets (instead of 21,400) were supplied by D, or why Ps only returned 14,800 sheets (instead of the 17,600 replaced). 

34.  In addition, the Replacement Agreement expressly stated that of the current inventory of 50,528 pieces held by Ps, “the estimated defect rate is 10% - 15%” – a provision the judge did not seem to have taken into account before arriving at his conclusion that the majority, i.e. at least over 50%, of the acrylic sheets were defective.

35.  For these reasons, the Replacement Agreement does not in our view support the judge’s inference that the majority of the goods under PO1 and PO2 were defective.

36.  The final matter relied on by the judge in §85 of the Judgment is the delivery of the 17,600 replacement acrylic sheets in April 2013.  This may be evidence that the sheets replaced by the new ones were defective, but it says nothing about the quality of the replacement sheets.  The replacement sheets, once accepted, took the place of the original sheets.  So the replacement does not prove any actionable defect.

37.  There is one other matter the judge appears to have taken into account, though not referred to in §85 of the Judgment, in concluding that the goods under PO1 were defective.  In §90 of the Judgment, the judge said:

“I further do not accept Nakayama’s evidence that, in his email dated 13 June 2012 to Ivy Huang as referred to in paragraph 37 above, he was referring to 14,800 acrylic sheets under an earlier contract which were defective. Quite obviously, he was referring to 14,800 acrylic sheets under the 1^st PO. His evidence on this point is simply disingenuous.”

In that email, Nakayama stated “ the other 14800 PCS of 0.8t are indeed of slightly inferior quality”.  Thus the judge thought that there was an admission by Nakayama of defects in 14,800 acrylic sheets under PO1.

38.  But in coming to this conclusion, the judge did not seem to have noticed that only 10,000 0.8mm sheets (and 20,000 1.0mm sheets) were supplied under PO1.  On the face of it, the reference to the other 14,800 pieces of 0.8mm sheets in Ivy Huang’s email and Nakayama’s reply in June 2012 could not have related to PO1.  Whilst Ms Queenie Ng, appearing for Ps, relies heavily on the email as an admission, she could offer no valid explanation how it could have related to PO1.  Moreover, the judge also appears to have overlooked that in his evidence, Ps’ main witness, Mr Lin, had expressly accepted that Nakayama’s reference to 14,800 sheets being of inferior quality concerned the acrylic sheets delivered under an earlier contract. 

39.  In §86 of the Judgment, the judge drew support from the evidence of the single joint expert, Dr Parsons.  Dr Parsons’ examinations revealed that 2 out of the 10 returned products that she examined had scratches on them, and she expressed the opinion that the most likely cause of the scratch damage was the manner in which products were handled and stored following their manufacture.  This does not suggest a majority of products were defective upon their departure from the factory.  Dr Parsons’ evidence also throws doubt on whether the sheets could have been scratched whilst they were within their packaging.  Further, the examined products were goods returned, which had been replaced.  All this means it was impossible to infer from Dr Parsons’ evidence that the majority of the goods supplied under PO 1 and PO 2 were defective.  To be fair, the judge only said the quality problems were “to an extent” confirmed by Dr Parsons’ report.

40.  At the hearing, Ms Ng sought to support the judge’s finding that the majority of the goods were defective by relying on subsequent customers’ complaints in April to June 2013 as recorded in certain documents spoken to by Lin during his re-examination.  There are several problems with this.  First, the judge did not base his finding of defects upon these documents, and the respondent’s notice filed by Ps in this appeal did not raise this point.  It is therefore not open to Ps to try to uphold the judge’s finding by these alternative reasons.  Secondly, many of the customers’ forms mentioned complaints that were not dealt with by the expert or investigated at trial.  In contrast, scratch was only infrequently mentioned and then only with a low percentage rate among the samples.  For example, there were complaints about residual glue, fog, “cleanable water mark”, pits, dirt, and indentation. It is wholly unclear whether these other complaints actually constituted defects and rendered the acrylic sheets unfit for purpose.  Thirdly, it is unclear whether any of the sub-purchasers rejected and returned the acrylic sheets.  There is no evidence they made a claim against Ps.  It is also unclear whether the complaints related to products already replaced by the 17,600 replacement sheets and the 14,800 returned sheets for which Ps were not charged by D.  Accordingly, we do not think that these documents can salvage the finding under attack.

41.  For the reasons set out above, it seems to us that the judge’s finding that the majority of the acrylic sheets sold under PO1 and PO2 were defective lacks evidential basis and is further vitiated by the errors above including the failure to take material evidence into account.

Whether implied conditions of merchantable quality and fitness for purpose breached

42.  In light of our conclusion above, it is unnecessary to consider whether there was any separate and additional error in holding that the implied conditions of merchantable quality and fitness for purpose were breached.

Whether Ps proved loss caused based on difference between price paid by Ps and subsequent resale price received by Ps

43.  It is also strictly speaking not necessary to deal with the third issue regarding whether Ps proved any loss caused by breach of contract, but we shall say a few words on it because there seems to us to have been a major flaw in the way in which damages were awarded and assessed. 

44.  First, we have to say that the finding that a “majority” (which could encompass any number from 25,001 to 49,999) of the acrylic sheets supplied under PO1 and PO2 were defective is a very vague foundation upon which to base a substantial and precisely calculated damages award for 42,601 sheets.

45.  Further, section 55 of the Sale of Goods Ordinance provides as follows:

“(2) The measure of damages for breach of warranty is the estimated loss directly and naturally resulting, in the ordinary course of events, from the breach of warranty.

(3)  In the case of breach of warranty of quality, such loss is prima facie the difference between the value of the goods at the time of delivery to the buyer and the value they would have had if they had answered to the warranty.”

46.  Ps did not adduce any expert evidence on the value of the acrylic sheets as delivered.  In their amended statement of claim, Ps claimed damages calculated on the basis of the difference between the price they had paid for 42,601 pieces of acrylic sheets under the PO1 and PO2 and the price at which they subsequently sold them to sub-buyers.

47.  This measure is not necessarily contrary to principle, and may be appropriate in a particular case, but it depends on the assumption that the subsequent resale price was depressed by the existence of defects in the goods and therefore reflected a loss caused by the defects.  The difficulty with using this approach in this case, however, is that the acrylic sheets were enclosed by protective sheets so that, as is common ground, their quality could not be meaningfully assessed until the protective sheets were removed, which would only be done by the sub-buyers after delivery.  It follows that when Ps agreed the sub-sale price with their customers, neither party knew the quality of the sheets.  On the face of it, therefore, the sub-sale price was the price of good acrylic sheets.  The sub-sales took place over several years from 2013 to 2016.  The fact that it was lower than the price Ps agreed to pay D could have been due to a downturn in the market, having regard to the decrease in popularity of mobile phones of the previous generation, or to other reasons. There is no evidence that it was due to the acrylic sheets being sold as defective goods.  Further, Ps’ case was that the customers raised complaints about defects after delivery, which militates against any suggestion that the acrylic sheets were sold to those customers with knowledge of the defects. Before us Ms Ng accepted there was no evidence that the goods were sub-sold in 2013 to 2016 as defective goods.

48.  Ms Ng relies on clause 3 of the Negotiating Document, but Ps’ action is not one for enforcement of the Negotiating Document but a claim based on breach of the contracts for the sale and purchase of goods.  In any event, that document can hardly be construed to mean that D had undertaken to pay the difference if Ps re-sold the acrylic sheets at a lower price for whatever reason.

49.  In these circumstances it seems to us that Ps have in any event failed to prove any loss caused by D’s alleged breach of contract.

Conclusion

50.  For the above reasons, we allow the appeal and set aside the Judgment.  Ps’ claim against D is dismissed.

51.  We make an order nisi that Ps do pay D the costs of the appeal and the costs of the action, but that D do pay Ps the costs of the counterclaim which D abandoned at the beginning of the trial.