FEBEST EUROPE DISTRIBUTION OU v. ZHONG XING DA TECHNOLOGY CO, LTD

HCA 1759/2018

[2019] HKCFI 2373

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1759 OF 2018

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J U D G M E N T

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1.  This assessment of damages arises from the defendant’s breach of a contract for the sale of goods made between the plaintiff and the defendant.

2.  The defendant did not attend the hearing.

A.  BACKGROUND

A1.  Factual background

3.  The plaintiff and the defendant entered into a contract by email, supplemented by a pro forma invoice dated 25 January 2018 (the “Pro Forma Invoice”) and a document entitled “Product Details” (the “Product Details”), for the sale and purchase of: (1) GPU P106-100 mining systems; (2) 1600w atx power supply; and (3) P106-100 graphics cards (the “Contract”).  The purchase price of the aforesaid goods was US$298,560 plus shipping fees in the sum of US$898, ie a total of US$299,458.

4.  The plaintiff has paid the full sum of US$299,458 to the defendant.  On or about 25 January 2018, the plaintiff paid the sum of US$180,000 to the defendant, and on or about 31 January 2018, the plaintiff paid the balance of US$119,458 to the defendant. The defendant received the second of those payments on 2 February 2018.

5.  Purportedly pursuant to the Contract, the defendant shipped 40 carton boxes of goods to the plaintiff (the “Goods”), which arrived with the plaintiff’s forwarding agent in Hong Kong or about 11 April 2018.  Mr Anthony Lai for the plaintiff has, in his written submissions, alleged that such delivery was late.  He submits that the defendant should have made the delivery within about 20 days after payment “as agreed”, ie within about 20 days of 2 February 2018.

6.  The plaintiff’s case is that the Goods delivered by the defendant were used and/or defective, and that the Goods were not of merchantable quality, in contravention of s 16 of the Sale of Goods Ordinance (Cap 26) (“SOGO”).  What constitutes merchantable quality is defined under s 2(5) of SOGO.

7.  The plaintiff’s case is that the defendant’s aforesaid breach of the Contract was a repudiatory breach, and that by a letter of notification dated 2 May 2018 (the “Letter of Notification”), the plaintiff rejected the Goods, accepted the defendant’s repudiation of the Contract, and demanded repayment of the sum of US$299,458.

8.  By a letter dated 25 June 2018, the plaintiff issued a demand letter through its legal representatives, requesting the refund of US$299,458 from the defendant.

9.  As the defendant failed to take back the 40 carton boxes of Goods, the Goods have been stored in the warehouse of the plaintiff’s forwarding agent in Hong Kong, and the plaintiff has thereby become liable to pay the sum of HK$200,000 as the forwarding agent’s fees for storing and handling the Goods.

A2.  Procedural background

10.  The plaintiff commenced the present proceedings by a Writ dated 30 July 2018.

11.  The defendant failed to give notice of intention to defend, and default judgment was entered against the defendant on 4 October 2018, by which the defendant was ordered to pay the plaintiff damages to be assessed and with costs to be taxed.

B.  LEAVE FOR EXPERT EVIDENCE

12.  By way of evidence, the plaintiff filed a Witness Statement of Tsang Nung Keung Raymond (“Mr Tsang”) dated 19 November 2018, who exhibited a Goods Appearance Examination Report and Goods Valuation Report (the “Reports”), both dated 20 August 2018.  Both Reports contain the usual declarations by experts.

13.  However, no expert directions have been given in the present proceedings.

14.  In my view, it was not appropriate for the plaintiff to have asked Mr Tsang, whom the plaintiff is relying upon for expert evidence about the state of the Goods as well as the value of the Goods, to prepare a witness statement and to exhibit expert reports with expert declarations.

15.  However, as I stated at the hearing, I considered that I could grant leave for the expert evidence pursuant to O 38 r 36 RHC.

16.  I was satisfied that Mr Tsang has the requisite expertise for, inter alia, examining computer hardware items and components, and comparing them to the specifications for those items and components in order to opine on whether the items and components conform with the specifications.  I was also satisfied that Mr Tsang has the requisite expertise for testing computer hardware items and components to check whether they are defective and to opine on the value of the items and components.

17.  With respect to the relevance of Mr Tsang’s evidence, I was satisfied that that it would be relevant for Mr Tsang to give evidence on whether the Goods delivered by the defendant were defective and/or matched the description and/or appearance detailed in the Pro Forma Invoice and Product Details.  I was also satisfied that it would be relevant for Mr Tsang to give evidence on the value of the Goods since Mr Lai had submitted, inter alia, that:

“P is entitled to claim its expenditure in performing the contract, (chitty on Contract, 33^rd Edition, Vol. I, §§26-026, 26-029), which, in this case, means the amount paid by P to D as performance of its obligation. At this juncture, it is convenient to note that according to [Mr Tsang], the Defective Goods had no business value and their value was nothing more than scrap metals [sic]. Hence, P should be able to recoup the entirety of the purchase price, i.e. US$299,458.”

18.  I also did not consider that allowing Mr Tsang to give expert evidence on behalf of the plaintiff would cause any prejudice to the defendant since the plaintiff had already filed and served (and made available to the defendant) the two Reports, albeit as exhibits to Mr Tsang’s witness statement.

19.  Under the circumstances, I gave leave to the plaintiff to rely on the Reports as expert evidence from Mr Tsang and to call him to give evidence as an expert.

C.  DISCUSSION

20.  Having considered the evidence of Mr Tsang, both in the form of his two Reports as well as his oral evidence, I accept Mr Lai’s submission that the Goods were used and/or defective, and that the Goods were not of merchantable quality.  In particular, I have regard to paragraph 30 of the Goods Appearance Examination Report (though some sub-paragraphs therein are merely observations rather than defects, such as sub-paragraph (c)), and also to Mr Tsang’s oral explanation about some graphics cards not being properly connected to the motherboards.

21.  I accept that the plaintiff was entitled to reject the Goods, and that the plaintiff did in fact reject the Goods by the Letter of Notification.  In that regard, I note that pursuant to s 38 of SOGO, the plaintiff was not bound to return the rejected Goods to the defendant, and it is sufficient that the plaintiff intimated to the defendant that the plaintiff refused to accept the Goods.

22.  On this basis, I also accept Mr Lai’s submission that the plaintiff is entitled to claim damages for its wasted expenditure in performing the Contract, which in the present case means the amount paid by the plaintiff to the defendant in performance of the plaintiff’s payment obligation under the Contract.  See Chitty on Contracts, 33^rd ed, paragraphs 26-026 and 26-029.

23.  I would add that it has been said that where there has not been a total failure of consideration, a party cannot claim the price paid as a form of damages for wasted expenditure, since to allow that would undermine the total failure of consideration requirement.  See paragraph 26-029 of Chitty, supra.

24.  Perhaps because of this discussion in Chitty and in an attempt to show that there has been a total failure of consideration, as indicated at paragraph 17 above, Mr Lai submitted that the Goods had no business value and were worth nothing more than scrap metal.  However, in my view, that submission is not borne out by Mr Tsang’s evidence. Mr Tsang’s evidence is that some of the Goods were defective, but others were old and/or dusty, rather than defective.  When asked in court how he knew that the old and/or dusty items (as opposed to defective items) were valueless, Mr Tsang admitted that he had not tested those items to see whether they work or not, and that he does not in fact know whether some of those items might work.  In the premises, I am unable to accept Mr Tsang’s evidence that the Goods had no business value and were worth nothing more than scrap metal.

25.  In spite of that, I nevertheless consider that there was total failure of consideration in the present case given that the plaintiff had exercised its right to reject the goods.  As explained in Goff & Jones, The Law of Unjust Enrichment, 9^th ed, paragraphs 13-37 and 12-25, if a purchaser has exercised his right to reject goods which are not of satisfactory quality, the assessment of whether the basis of payment has failed takes place after that right has been implemented; in such circumstances, since the purchaser has received nothing for the payment, there is a failure of basis.  Under the circumstances therefore, my view is that the plaintiff is entitled to claim for the price that it paid under the Contract as wasted expenditure in performing the Contract.

26.  Thus, I find that the plaintiff is entitled to the sum of US$299,458.

27.  I also find that the plaintiff is entitled to the sum of HK$200,000, being the forwarding agent’s fees that the plaintiff has become liable for since the defendant has failed to take back the Goods.

28.  As to interest, the plaintiff asks for interest on the sum of US$299,458 at the rate of 1% above the prime rate from the date of 4 March 2018.  Mr Lai proposed the date of 4 March 2018 in the following manner.  As explained above, Mr Lai has in his written submissions alleged that the Goods were delivered late, and that the defendant should have delivered the ordered goods within about 20 days after payment, namely about 20 days after 2 February 2018 (being the date that the defendant received the second part of the purchase price from the plaintiff). In his written submissions, Mr Lai went on to submit that “Giving the greatest latitude of 30 days for D to deliver the Ordered Goods, D should have delivered the Ordered Goods by latest 4 March 2018.  Interest on US$299,458 should run from that day.”

29.  No contractual terms concerning the date of delivery have been pleaded by the plaintiff.  From the documents, it appears that Mr Lai may have in mind a term in the Pro Forma Invoice which states “1. Production time: About 20 days.”  The only other term in the Pro Forma Invoice that appears to be relevant to delivery is “3. Ship terms: By AIR”.  I find it far from clear (and it has not been pleaded) that the defendant was under an obligation to deliver the ordered goods about 20 days after payment.  Even more importantly, the pleaded breach of the Contract relied upon by the plaintiff in the present proceedings concerns the delivery of defective goods, rather than late delivery of goods.  Thus, I decline to order interest on the sum of US$299,458 from the date of 4 March 2018.

30.  I order that the defendant pay interest at the rate of 1% above the prime rate of HSBC from 2 May 2018, being the date of the Letter of Notification by which the plaintiff rejected the Goods and accepted the defendant’s repudiation of the Contract.  It was on 2 May 2018 that the plaintiff’s cause of action accrued.

D.  CONCLUSION

31.  In the premises, I order that the defendant do pay the plaintiff damages as follows: (1) the sum of US$299,458, together with interest thereon at 1% over the prime rate of HSBC from 2 May 2018 to the date of this judgment, and thereafter at judgment rate until payment in full; and (2) the sum of HK$200,000, together with interest thereon at judgment rate from the date of this judgment until payment in full.

32.  The defendant do pay the costs of this action to the plaintiff, to be taxed if not agreed.