HELMS-MAN TRANSFORMERS COMPANY LTD AND ANOTHER v. TOY STATE INTERNATIONAL LTD

DCCJ 135/2019

[2023] HKDC 541

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 135 OF 2019

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JUDGMENT

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A.  Introduction

1.  This is the trial of a claim by the 1^st and 2^nd plaintiff (“P1” and “P2” respectively, collectively “Ps”) against the 1^st defendant (“D1”) on the basis of a guarantee agreement, whereby D1 agreed to guarantee any payment up to the amount of HK$1,404,000 due from ShenZhen Nanling Toys Products Company Limited (“Shenzhen Nanling”), and to make such payments to Ps, including any damages payable by Shenzhen Nanling for breach of the Contracts that it entered into with P2.

2.  D1 has entered into voluntary liquidation on 10 May 2021. D1 subsequently made an application to stay the present proceedings but the application was dismissed by the court on 2 August 2021. At the trial, the attendance of the liquidator was excused.

B.  The parties’ cases

B1.  Ps’ case

3.  Ps’ case is as follows.

The Contracts

4.  Between 23 March 2018 and 28 June 2018, P2 and Shenzhen Nanling entered into sale and purchase agreements (“Contracts”) whereby P2 agreed to supply, and Shenzhen Nanling agreed to purchase, electronic products at a total price of RMB 1,232,133. The Contracts are constituted in part by (i) 15 purchase orders in writing (“POs”), and in part by (ii) an oral agreement entered into between the respective representatives of the parties at a meeting on 20 March 2018.

5.  The electronic products forming the subject matter of the Contracts are buyer-specific and customized to meet the specific requirements of Shenzhen Nanling.

6.  As to the written part of the Contracts, the POs were sent by Shenzhen Nanling and acknowledged and accepted by P2, as set out below:

No.	Date of PO	Date of P2’s acknowledgment of receipt of PO	Amount (RMB)
1	5 January 2018	23 March 2018	82,400
2	13 March 2018	23 March 2018	16,683
3	30 March 2018	3 April 2018	21,100
4	21 April 2018	23 April 2018	144,700
5	23 April 2018	24 April 2018	29,380
6	27 April 2018	30 April 2018	230,890
7	4 May 2018	7 May 2018	34,580
8	11 May 2018	14 May 2018	22,736
9	17 May 2018	21 May 2018	90,400
10	25 May 2018	28 May 2018	232,000
11	8 June 2018	11 June 2018	53,200
12	15 June 2018	20 June 2018	67,200
13	19 June 2018	28 June 2018	45,800
14	26 June 2018	26 June 2018	67,800
15	28 June 2018	28 June 2018	92,800

7.  The POs provide for a 2% discretionary discount on the purchase price. This discount is applicable if and only if payment is made on time and in the ordinary course of business.

8.  As to the part of the Contracts which was concluded orally:

(1)  On 20 March 2018, Mr Chen Wei (“Mr Chen”), Ms Xu Xiao Bo, Ms Lin Yue Mei (“Ms Lin”), Ms Dai and Ms Wang on behalf of Shenzhen Nanling met with Ms Judy Ng (“Ms Ng”) and Mr Sunny Kwok (“Mr Kwok”) on behalf of Ps (“20 March 2018 Meeting”). The meeting was necessitated because of the long overdue outstanding purchase price from Shenzhen Nanling in relation to products ordered between July and November 2017, which Shenzhen Nanling acknowledged. As a result, the parties made modified payment arrangements to address Shenzhen Nanling’s previous persistent failure to make prompt payment.

(2)  At the 20 March 2018 Meeting, Shenzhen Nanling (through Mr Chen) agreed to, inter alia, pay a deposit of 50% of the purchase price (“Deposit”) before delivery and the remaining balance after delivery, within 90 days’ credit period.

9.  P2 (through Ms Ng) and Shenzhen Nanling (through Mr Chen) agreed P2 would only issue VAT invoices to Shenzhen Nanling after receiving full payment of the electronic products from the latter.

10.  Since early May 2018, Shenzhen Nanling failed to pay the Deposit and evinced an intention not to perform its obligation to pay. P2 exercised its legal right to withhold delivery of the products and accepted Shenzhen Nanling’s breach on or before 26 July 2018.

The Guarantee

11.  At a meeting between Mr Cheng Kung Hung (“Mr Cheng”) of D1 and Ms Ng of Ps on 26 July 2018 (“26 July 2018 Meeting”), Mr Cheng on behalf of D1 orally guaranteed to pay any sum due from Shenzhen Nanling up to the amount of HK$1,404,000 (“Cap”) to both P1 and P2 (“Guarantee”), in consideration of P2 agreeing to revive the Contracts and/or deliver the products under the POs despite Shenzhen Nanling’s failure to pay the Deposit, with Shenzhen Nanling paying for the products after delivery with 60 days’ credit period.

12.  The Guarantee was evidenced by a letter from D1 to Ps dated 30 July 2018 (“Guarantee Letter”), enclosing 3 post-dated cheques drawn by D2 and made payable to P1 by way of guarantee (“Cheques”).

13.  In consideration of and in reliance on the Guarantee:

(1)  P2 delivered products to Shenzhen Nanling valued at a total of RMB 543,773 (“Delivered Products”):

Date	PO	Value (RMB)
27 July 2018	#2	16,683
9 August 2018	#1, 3, 4, 5, 6 (partly) and 8	527,090

(2)  P2 manufactured the remaining products under the Contracts. As confirmed by Mr Kwok to Ms Dai via email dated 17 August 2018, P2 would deliver the remaining products under the POs (i.e. PO#6 (partly), 7, 9-15) valued at RMB 688,360 on 7 September 2018.

Shenzhen Nanling’s breach of the Contracts and D1’s breach of the Guarantee

14.  On 27 August 2018, P2 became aware that Shenzhen Nanling had closed down its factory and commenced winding up. As it became clear that Shenzhen Nanling would not be able to perform its obligation to pay and evinced a clear intention not to perform such obligations, P2 accepted Shenzhen Nanling’s anticipatory breach. It withheld delivery of the remaining products described §13(2) above (“Undelivered Products”).

15.  Apart from a payment of RMB 14,093.94, Shenzhen Nanling has not settled the remaining sums under the Contracts.

16.  Ps sought to enforce the Guarantee by presenting the Cheques for payment, but the Cheques were returned dishonoured. D1 has thereafter failed and/or refused to make any payment.

Mitigation by Ps subsequent to Shenzhen Nanling’s breach

17.  As the electronic products sold under the Contracts were customised to meet the specific requirements of Shenzhen Nanling, after P2 accepted the repudiatory breach of Shenzhen Nanling, it was unable to resell the Undelivered Products on the market. It was also unfeasible for P2 to take the components of the Undelivered Products apart and put the raw materials to other use, as the labour costs involved are disproportionate.

18.  By a rare coincidence, a company named 深圳藍貓均祥動漫科技有限公司(“Shenzhen Lanmao”) offered to purchase part of the Undelivered Products from P2. P2 sold and delivered 4,000 units to Shenzhen Lanmao in the total sum of RMB 82,400 on 28 October 2019.

Ps’ Claim

19.  Ps claim against D1 under the Guarantee for the sums due from Shenzhen Nanling as follows:

(1)  A debt claim for RMB 529,679.06 as the outstanding purchase price for the Delivered Products (being RMB 543,773 less RMB 14,093.94 paid by Shenzhen Nanling on 6 August 2018 as set out in §15 above).

(2)  Damages in the amount of RMB 605,960 (being the loss suffered by Ps in the sum of the purchase price of the Undelivered Products at RMB 688,360, less the actual avoided loss as a result of P2’s mitigation in the sum of RMB 82,400 as set out in §18 above).

20.  The total amount of the claim is RMB 1,135,639.06 (~HK$1,252,753.77), which falls within the Cap.

B2. D1’s Case

21.  D1 denies that the parties made part of their Contracts orally at the 20 March 2018 Meeting, and denies the terms of the Contracts concluded thereat and the contents of discussions pleaded by Ps. In particular, it is D1’s case that payments were only required to be made after delivery within 90 days’ credit period, and Shenzhen Nanling did not agree to pay the Deposit beforehand.

22.  Since D1 denies that Shenzhen Nanling was obliged to pay any Deposit, it denies that Shenzhen Nanling evinced any intention not to perform the Contracts by failing to pay the Deposit. As such, P2 was not entitled to terminate the Contracts and discharge itself from its obligations therefrom.

23.  D1 pleads that the only guarantee agreement is the Guarantee Letter, and there was no oral guarantee. In this regard, D1 admits the existence of the 26 July 2018 Meeting and avers that its purpose was to “discuss the non-delivery of goods by P2”, but denies, inter alia, :

(1)  that Mr Cheng or D1 agreed to guarantee payments due from Shenzhen Nanling or make payments to Ps.

(2)  that P2 agreed to revive the Contracts or change the payment terms therein.

(3)  that Mr Cheng is capable of entering into amendments of the Contracts which are binding on Shenzhen Nanling.

24.  D1 also contends that the Guarantee Letter is not binding for want of consideration.

25.  With respect to the revived Contracts, D1 denies that Shenzhen Nanling committed an anticipatory breach thereof, and that P2 accepted the same.

26.  As to the losses suffered by P2, D1 avers that (i) the Undelivered Products were resalable and as a result D1 did not cause any loss, (ii) D1 had no obligation to pay the price of the Undelivered Products due to want of delivery, and (iii) in any event, P2 failed to mitigate its losses.

27.  Further, D1 pleads that, in the previous business dealings between P2 and Shenzhen Nanling, the practice was that P2 would always issue prescribed VAT invoices upon the sale of goods, such that Shenzhen Nanling could properly record the transactions and claim VAT refund (“Alleged Standard Practice”). It is claimed that P2 is estopped by convention from enforcing the Guarantee since it failed to adhere to the Alleged Standard Practice for the issuance of VAT invoices.

28.  Finally, D1 pleads that the Contracts are invalid and/or unenforceable for foreign illegality by reason that P2 had breached the PRC laws on the issuance of VAT invoices. As such, the Guarantee is also invalid and/or unenforceable.

C.  Issues to be tried

29.  Ms Esther Mak, counsel for Ps, has identified the following issues:

(1)  What the terms of the Contracts are.

(2)  Whether Shenzhen Nanling breached the Contracts on or before 26 July 2018, and whether such breach was accepted by P2.

(3)  Whether D1 made the Guarantee, and whether P2 provided valuable consideration for the same.

(4)  Whether Shenzhen Nanling committed any anticipatory breach of the revived Contracts, which breach was accepted by P2.

(5)  Whether the Guarantee is void/unenforceable by reason of estoppel by convention.

(6)  Whether the Guarantee is void/unenforceable by reason of foreign illegality.

(7)  Whether D1 breached the Guarantee by failing to pay the outstanding sums owed by Shenzhen Nanling, and whether Ps suffered loss as a result and the quantum thereof.

D.  Evidence

30.  Ms Judy Ng, executive director of Ps, has on behalf of Ps filed a witness statement dated 15 October 2020 and a supplemental witness statement dated 21 May 2021. Mr Kwok Yan Sun, sales manager of Ps, has on behalf of Ps filed a witness statement dated 15 October 2020. Their testimonies were unchallenged and also supported by contemporaneous documents. There was no reason to doubt their veracity. Their evidence is therefore accepted.

E.    Issue 1: the Contracts and the terms thereof

31.  It is common ground that the parties entered into the POs. The difference is whether the parties reached any oral agreement with regard to the Contracts at the 20 March 2018 Meeting.

32.  In their witness statements, Ms Ng and Mr Kwok have given evidence, which I accept, about the events that occurred on the 20 March 2018 Meeting. In particular, they said the purpose of the 20 March 2018 Meeting was to discuss payment arrangements in light of Shenzhen Nanling’s previous persistent failure to make full and prompt payment.

33.  I agree with Ms Mak that the contemporaneous documentary evidence fully supports Ps’ case on the 20 March 2018 Meeting and the terms of the Contracts that were concluded thereat. On 21 March 2018 (at 12:28 PM), the day after the 20 March 2018 Meeting, Mr Kwok sent an email to Mr Chen, Ms Xu, Ms Lin and Ms Dai (copying Ms Ng), putting on record the agreement reached at the 20 March 2018 Meeting. As shown in the email:

(1)  It records Shenzhen Nanling’s late payment for orders made in July, August, September and November 2017.

(2)  It expressly records parties’ agreement that Shenzhen Nanling would pay the Deposit before delivery and the remaining balance after delivery, with 90 days’ credit period, for previous and future orders
(“倉存及新訂單付款方式改為50%預付，其餘50% 90天月結”).

(3)  VAT invoices would be issued by P2 after full payment of goods from Shenzhen Nanling (“我司將會在收到貨款後才會開出增值稅票”).

F.  Issue 2: Whether Shenzhen Nanling breached the Contracts on or before 26 July 2018

34.  It is undisputed that, on 8 May 2018, Shenzhen Nanling defaulted on the Deposit under the Contracts for the products under PO#1. Mr Kwok emailed Ms Dai enquiring when Shenzhen Nanling would pay the Deposit, to which no reply was received.

35.  I agree with Ms Mak that Shenzhen Nanling’s failure to pay the Deposit evinced its intention not to perform its obligation under the Contracts. This amounted to a breach of a term of the Contracts so fundamental that it amounts to repudiation of the agreement as a whole: Chitty on Contracts (34^th edn) §§27-009, 27-015 to 27-016. P2 was entitled to, and it did, accept Shenzhen Nanling’s repudiation and consider itself discharged from its obligations under the Contracts: Chitty on Contracts §27-066. It withheld delivery of all products under the Contracts (notwithstanding they were manufactured), so as to unequivocally indicate its decision to treat the Contracts as at an end.

G.  Issue 3: The Guarantee

36.  Ps’ case is that on 26 July 2018, Mr Cheng on behalf of D1 made the oral Guarantee, which was evidenced in writing by the Guarantee Letter. Under the Guarantee, Mr. Cheng orally guaranteed to pay any sum due from Shenzhen Nanling up to the Cap and make payment to Ps (“Agreement”), in consideration of:

(1)  P2 agreeing to revive the Contracts and/or deliver the products under the POs despite Shenzhen Nanling’s failure to pay the Deposit (“Promise to Revive and Deliver”).

(2)  Shenzhen Nanling paying for the products after delivery with 60 days’ credit period (“Variation in Payment Terms”).

37.  It is not disputed between the parties that Mr Cheng of D1 and Mr Kwok of Ps had a meeting on 26 July 2018. It is Ps’ case that the meeting was requested by Mr Cheng in order to persuade P2 to deliver the products under the POs and/or revive the Contracts despite Shenzhen Nanling’s failure to pay the Deposit. What D1 denies is the oral Guarantee made at the 26 July 2018 Meeting, and it further asserts that the Guarantee was in any event not supported by valuable consideration.

38.  I agree with Ms Mak that the contemporaneous documentary evidence supports Ps’ case on the Guarantee.

39.  On 27 July 2018, Mr Kwok sent an email to Mr Chan, Ms Xu, Ms Lin and Ms Dai (copying Ms Ng), putting on record the oral Guarantee made at the 26 July 2018 Meeting. It is stated, inter alia, that:

(1)  P2 would deliver products under PO#2 to Shenzhen Nanling on 27 July 2018 (despite Shenzhen Nanling’s failure to pay the Deposit). Further, P2 would deliver the products after receiving the outstanding amounts owing from Shenzhen Nanling in March 2018 and after the receipt of the Cheques. This clearly supports and evidences the Promise to Revive and Deliver.

(2)  The payment method for Shenzhen Nanling under the revived Contracts shall be varied from (i) payment of a deposit of 50% purchase price before delivery and the remaining balance after delivery, within 90 days’ credit period; to (ii) payment after delivery with 60 days’ credit period (“南嶺付款方式由50%預付50% 90天月結改為60天月結”). The Variation in Payment Terms is plainly documented and thus incontrovertible.

(3)  D1 guarantees to pay any sum due from Shenzhen Nanling for breach of the revived Contracts up to the amount of RMB 1,207,490.34, as evidenced by the Cheques to be issued by 3 August 2018 (“Toystate 將會3/8/2018 前開出香港3張期票，日期分別為2018年10月，11月及12月，以作擔保抵押”).

40.  As explained by Ms Ng and Mr Kwok in their witness statements, the amount orally guaranteed by D1 was up to RMB 1,207,490,34 (taking into account the 2% discretionary discount), which was equivalent to HK$1,404,000. Thus, the email above, together with the Guarantee Letter enclosing the Cheques totalling HK$1,404,000, fully support the Agreement.

41.  Even on D1’s own case, the purpose of the 26 July 2018 Meeting was to “discuss the non-delivery of goods by P2” because “the products manufactured by Shenzhen Nanling could not be shipped to its major client due to the missing chargers which were to be supplied by [P2] under the [POs]. This is clearly consistent with Ps’ version of events, which is additionally supported by the documentary evidence set out above.

42.  I also agree with Ms Mak that the Guarantee is supported by consideration and is enforceable for the following reasons:

(1)  As documented in the email dated 27 July 2018, P2 conferred benefit on Shenzhen Nanling by the Variation in Payment Terms.

(2)  Further, P2’s Promise to Revive and Deliver constitutes good consideration. It is well established that a promise provides consideration where, before the promise was made, circumstances have arisen which justify the promisee’s refusal to perform the original contract: Chitty on Contracts (34^th edn) at §§6-073 to 6-075. More specifically, if a guarantor guarantees past transactions in return for an undertaking by the creditor to continue to deal with the debtor or to grant him further credit, there will be good consideration: Chitty on Contracts (34^th edn) at §47-024.

H.  Issue 4: Whether Shenzhen Nanling committed any anticipatory breach of the revived Contracts

43.  As set out by Ms Ng and Mr Kwok in their witness statements, on 27 August 2018, P2 was informed by Shenzhen Nanling’s suppliers that Shenzhen Nanling had closed down its factory. Mr Kwok also paid a visit to the factory and discovered a notice stating that Shenzhen Nanling had closed down its factory and commenced winding up.

44.  I agree with Ms Mak that the cumulative impact of these events is to put Shenzhen Nanling out of its power to perform the revived Contracts. In particular, the complete cessation of Shenzhen Nanling’s operations means that it no longer has the business nor the capability to pay for product parts, or to ship them to its end customers: Chitty on Contracts (34^th edn) at §27-076. As a result, P2 considered itself discharged of its future obligations under the Contracts. It accepted Shenzhen Nanling’s anticipatory breach by withholding the delivery of the Undelivered Products, being an unequivocal overt act (and a continuing refusal to perform) which is inconsistent with the subsistence of the contract: Chitty on Contracts (34^th edn) at §27-066. To date, Shenzhen Nanling has not settled the outstanding sums under the revived Contracts (save for an undisputed payment of RMB 14,093.94), and continues to be in breach thereof.

I.  Issue 5: Whether the Guarantee is void/unenforceable by reason of estoppel by convention

45.  Regarding the defence of estoppel by convention, there are the following issues:

(1)  Factually, what was the practice between P2 and Shenzhen Nanling with respect to the issue of VAT invoices.

(2)  Legally, whether D1 has discharged its burden to show that the requirements for estoppel by convention are met.

I1.  P2’s practice of issuance of VAT invoices to Shenzhen Nanling

46.  Ps’ witnesses have explained, which I accept, the agreed practice between itself and Shenzhen Nanling with regard to the issuance of VAT invoices. In gist:

(1)  Prior to August 2016, for convenience sake, P2 would usually issue VAT invoices after delivery of the corresponding goods to Shenzhen Nanling. However, after the financial situation of Shenzhen Nanling deteriorated, and it repeatedly failed to make full and prompt payment, P2 insisted on receiving payment before issuing VAT invoices.

(2)  On 16 August 2016, Mr. Kwok wrote an email to Ms Shen, Ms Lin, Ms Wang and Ms. Dai of Shenzhen Nanling, informing them that P2 would only issue VAT invoices to Shenzhen Nanling after receiving payment of goods from it, to which Shenzhen Nanling never raised any objection.

(3)  This became the agreed practice between P2 and Shenzhen Nanling since around August 2016. Since then, P2 would only issue VAT invoices to Shenzhen Nanling after receiving full payment of the goods.

(4)  This is further confirmed in the email dated 21 March 2018, which states that VAT invoices would be issued by P2 after full payment of goods from Shenzhen Nanling: see §33(3) above.

I2.  Estoppel by convention

47.  An estoppel by convention arises where:

(1)  The parties share a common assumption of fact or law.

(2)  The assumption was communicated between the parties across the line and acted upon by them on the basis of the assumption.

(3)  One party attempts to depart from the assumption, which departure would be unjust because of the part taken by him in occasioning the adoption of the assumption by the other party.

(4)  The other party would suffer detriment if the opposite party were allowed to set up rights against him inconsistent with the assumption.

See Unruh v Seeberger (2007) 10 HKCFAR 31 at §§129-150 per Ribeiro PJ.

48.  D1 contends that P2 is estopped by convention from enforcing the Guarantee since P2 failed to adhere to the Alleged Standard Practice for the issuance of VAT Invoices.

49.  I agree with Ms Mak that D1’s contentions should be dismissed for the following reasons.

50.  First, estoppel by convention requires the parties to share a common assumption. There is no such common assumption between P2 and D1. Even if the Alleged Standard Practice exists, it is an understanding between P2 and Shenzhen Nanling only.

51.  Second, the contemporaneous evidence shows that there was never any common understanding on the Alleged Standard Practice as contended by D1, let alone a communicated common understanding. To the contrary, all the documentary evidence shows a consistent practice that P2 would only issue VAT invoices to Shenzhen Nanling after receiving full payment of the goods.

52.  Third, there is no evidence that D1 suffered any detriment. There cannot be any credible suggestion that it entered into the Guarantee and “exposed itself to potential liability” on the assumption that P2 would act in compliance with the Alleged Standard Practice. It is difficult to see how Shenzhen Nanling’s receipt of tax invoices has any bearing on D1’s willingness or intention to enter into the Guarantee.

J.  Issue 6: Whether the Guarantee is void/unenforceable by reason of foreign illegality

53.  D1’s case is that the Contracts are invalid and/or unenforceable for foreign illegality by reason of P2’s purported breach of PRC laws on the issuance of VAT invoices.

54.  The relevant principles on foreign illegality are summarized in Johnston, Conflict of Laws in Hong Kong (3^rd edn) at §5.012. In essence:

(1)  If the contract is unenforceable under its proper law, then it will not be enforced by the Hong Kong court (§5.012(1)).

(2)  If the performance of the contract requires or necessarily involves conduct which is illegal under the laws of the place where it is required to be performed, it will not be given effect regardless of its proper law (§5.012(2)).

(3)  While the violation of foreign laws in the actual performance of a contract may, even though not required or initially intended, lead to the unenforceability of the contract before a Hong Kong court, regardless of its proper law, not every breach of foreign law will result in unenforceability. There may be cases in which a contract may be unenforceable for sufficiently serious breach of foreign law in the actual performance of a contract, which reflected important policies of the foreign state or separate law district. Minor breaches of the law which amount to mere administrative contraventions will not result in a contract being unenforceable in Hong Kong (§5.012(4)).

55.  In Ryder Industries Ltd v Chan Shui Woo (2015) 18 HKCFAR 544, it was held that “a more flexible approach having regard to the seriousness of the foreign illegality is required to determine whether public policy and comity really require enforcement of the contract to be denied in such a case” (§39).

56.  I agree with Ms Mak that the defence of foreign illegality should be rejected.

57.  First, the proper law of the Contracts is Hong Kong law, so §54(1) above does not apply. Even if PRC law were to be applied, both parties’ PRC experts agree that any violation of the PRC rules and regulations on the issuance of VAT invoices does not render Contracts void or unenforceable.

58.  Second, the distinction between the scenarios in §§54(2) and 54(3) above was set out in Peconic Industrial Development Ltd v Chio Ho Cheong & Others (unrep., HCA 16255/1999 & HCA 3083/2002, 1 June 2006) as follows:

“534. Atkinson J said at pp. 700 – 701 as follows:

‘In this contract the obligation is to pay certain money in London, and the contract is not concerned with the steps which the debtors may have to take to put themselves in a position to pay. It is concerned only with the payment itself, which is to be made in this country. This contractual obligation, in my view, does not come within the exception to the rule as stated in Dicey, or by Scrutton L.J. in Ralli's case. It would indeed be intolerable if English creditors, in respect of obligations to be performed here, could be deprived of their rights by Hungarian decrees making it unlawful for debtors to pay.

I would like to add that in my opinion there is nothing in the agreed statement of facts which negatives the possibility of the judgment being enforced in this country without involving any act on the part of the defendants contrary to Hungarian decrees.’

[…]

536. Chitty has pointed out in the passage extracted above that the explanation for cases like Kleinwort was that performance of the contract did not “necessarily” involve the doing of an act which was unlawful by the law of the place where it had to be carried out; indeed Atkinson J has said as much in the passage quoted above: Libyan Arab Foreign Bank v. Bankers Trust Co. [1989] QB 728, 743 – 746 (per Staughton J).

537. In my view, the essence of the test of “necessary involvement” is that it draws a distinction between the core facts of the claim and its background facts. An illegality that “necessarily” follows from, or leads to, facts crucial to a claim may logically and rationally be regarded as part and parcel of those facts. An illegality that may or may not follow from, or lead to, facts crucial to a claim should, on the other hand, be treated simply as part of the non-essential background of the claim. In the former case, it is right that the illegality should affect the claim because it forms part and parcel of the facts crucial to it. In the latter case, the background illegality should not be allowed to affect the claim.” (emphasis added)

59.  In the present case, the performance of the Contracts themselves (namely, the payment of price and the delivery of products) does not “necessarily require” conduct which is illegal. Any illegality in the issuance of VAT invoices (which is denied by Ps) is simply part of the “background facts” involved in the actual performance of the Contracts which happen to be illegal.

60.  Thus, the Contracts would only be void for foreign illegality if the Court is satisfied that any foreign illegality is sufficiently serious such that it would be contrary to public policy to enforce it.

61.  The undisputed evidence between Ps and D1 shows that such threshold is clearly not met in the present case. Ps’ expert and D1’s expert are in agreement as follows:

(1)  Assuming P2 has violated PRC laws on the issuance of VAT invoices, it does not need to bear any criminal liability.

(2)  The breach may amount to an administrative convention for which P2 is liable for a fine of RMB 10,000 or less.

(3)  Shenzhen Nanling bears the burden to show that it suffered loss as a result of P2’s late issuance of VAT invoices, and to prove the quantum of such loss. It is only if Shenzhen Nanling makes out its case that P2 is liable to pay compensatory damages.

(4)  Save for the above, P2 has no other liability under PRC law.

62.  Therefore, any violations would be mere administrative contraventions and not serious crimes under PRC law, or offences that violate public policy.

K.  Issue 7: D1’s breach and quantum of Ps’ loss

63.  I agree with Ps’ case for the following reasons.

64.  First, D1 contends that Shenzhen Nanling had no obligation to pay the price for the Undelivered Products due to want of delivery, and accordingly, D1 is not liable to guarantee such loss: see §26 above. This argument is legally unsustainable. Upon P2’s acceptance of Shenzhen Nanling’s repudiatory breach, P2 is released from its future obligations under the Contracts. The price of the Undelivered Products (less the actual avoided loss as a result of P2’s mitigation, as explained below) represents P2’s loss under the revived Contracts.

65.  Second, P2 has taken reasonable and adequate steps to mitigate its loss.

66.  The principles on mitigation are well established:

(1)  An innocent party is under a duty to mitigate, meaning (i) he must take reasonable steps to minimise its loss; and (ii) he must forbear from taking unreasonable steps that increase his loss. He cannot recover for avoidable loss, but he can recover the harm suffered following reasonable mitigatory steps and is limited to such loss: McGregor on Damages (21^st edn) §§9-004 to 9-006.

(2)  The onus of proof lies on the defaulting party to show that the innocent party has acted unreasonably in failing to mitigate. The standard of reasonableness in mitigation is not high in view of the fact that a defendant is an admitted wrongdoer: McGregor §9-079.

(3)  Once it is shown that the innocent party has taken reasonable actions – consisting of reasonable steps for the purpose of mitigating – it is entitled to recover its actual loss even if he does not succeed in reducing his loss: see Kramer, The Law of Contract Damages (3^rd edn) §§15-87 to 15-88, 15-91.

67.  While P2 has used its best efforts to resell the Undelivered Products since around late 2018 (upon its acceptance of Shenzhen Nanling’s anticipatory breach), the Undelivered Products have been virtually impossible to re-sell.

68.  The documentary evidence fully supports the fact that the electronic products forming the subject matter of the Contract are buyer-specific and customized to meet the specific requirements of Shenzhen Nanling. In particular:

(1)  The chargers underwent repeated revisions upon client’s comments;

(2)  The name and logo of the end-user were marked on the charger via laser printing which is irreversible; and

(3)  The specification of the chargers, its battery capacity, colour of light and number of flashes were customised to the specific requirements of Shenzhen Nanling.

69.  Save for a rare coincidence in which Shenzhen Lanmao offered to purchase part of the Undelivered Products for RMB 82,400 on 28 October 2019 (see §18 above), P2 has been unable to resell any of the Undelivered Products despite its best efforts.

70.  Given P2 has taken reasonable steps for the purpose of mitigation, it is entitled to recover its actual loss.

L.  Conclusion

71.  In summary, Ps should be entitled to the sum of RMB 1,104,803.86, calculated as follows:

(a)  Outstanding purchase price for Delivered Products at RMB 529,679.06, being:

(i)  Value of delivered products at RMB 543,773;

(ii)  Less RMB 14,093.94 paid by Shenzhen Nanling on 6 August 2018;

(b)  Damages for loss suffered from Undelivered Products in the sum of RMB 605,960, being:

(i)  Value of manufactured but undelivered products at RMB 688,360;

(ii)  Less the actual avoided loss as a result of P2’s mitigation in the sum of RMB 82,400;

(c)  Less the sum of RMB 30,835.20 which P2 received from the administrator of Shenzhen Nanling on 20 January 2020.

72.  I therefore grant judgment in favour of Ps against D1 in the sum of RMB 1,104,803.86 with pre-judgment interest at 1% above HSBC best lending rate from 27 August 2018 until the date of judgment, and thereafter at judgment rate until full payment.

73.  I also make an order nisi that costs of the action be payable by D1 to Ps to be taxed if not agreed, with certificate for counsel.

74.  Lastly, it remains for me to thank Ms Mak for her helpful assistance rendered to the court.