ICI SWIRE PAINTS LTD. v. TECHI MOTOR ENGINEERING & TRADING CO.

HCA 7251/1995

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 7251 OF 1995

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J U D G M E N T

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1. This is the assessment of damages in respect of the Counterclaim made by Mr. Cheung Kin Man ["Mr. Cheung"] against ICI Swire Paints Ltd. ["ICI"].

2. In the course of this hearing, numerous points and arguments were raised by the parties. Whilst I have considered all the matters raised by both sides, I do not find it necessary to deal with each and every of them in this Judgment. Instead, the following assessment will only concentrate on the issues which are most pertinent.

A. Background

3. ICI and his predecessor, ICI (China) Limited, were at all material times suppliers of paints and paint-related products. Mr. Cheung purchased products from ICI and its predecessor in the name of Techi Motor Engineering & Trading Company ["Techi Motor"] and Techi Paints & Auto Accessories Specialties ["Techi Paints"] since 1987 and 1989 respectively. Techi Motor was the trade name used by Mr. Cheung for his dealings in ICI products in the Mainland market whilst Techi Paints was the trade name used for his dealings in the Hong Kong market.

4. Since around 1991, ICI and Mr. Cheung started to enter into sales agreements for the supply of ICI products. These agreements were renewed annually. The last one in respect of Techi Motor was dated 8th February 1994 ["TM Agreement"], whilst the last one in respect of Techi Paints was dated 21st January 1994 ["TP Agreement"].

5. The TM Agreement made provisions for trading discount, payment discount and annual rebate. Under clause (2), payment discount ranging from 5.5% to 1% was given to Techi Motor provided that there was no overdue. The exact discount rate depended on the time payment was made. Under clause (3), an annual rebate of 3% for purchases between 95,000 litres to 129,999 litres and 4% for 130,000 litres and above were given to Techi Motor. On the other hand, Techi Paints' claim does not turn on the provisions of the TP Agreement. Hence, it is not necessary to deal with them here.

6. Since June 1994, ICI stopped supplying ICI products to Mr. Cheung. This termination was further confirmed by a letter dated 5th July 1994 from ICI to Techi Motor. In July 1995, ICI commenced this Action against Mr. Cheung trading as Techi Motor claiming a total sum of HK$3,548,007.80, being the price of ICI products sold and delivered to Techi Motor pursuant to ICI's invoices issued in April and May 1994. Mr. Cheung did not dispute liability for this sum. He, however, counterclaimed against ICI for wrongful termination of the TM Agreement and the TP Agreement on the ground that they were fixed term contracts valid for the whole of 1994.

7. The trial on liability took place before Yam J. in November 1998. The learned Judge found that the TM Agreement and TP Agreement were contracts made for the entire year of 1994 and that ICI was in wrongful breach of these two agreements when it unilaterally terminated them in June 1994. Hence, an Interlocutory Judgment was entered against ICI for damages to be assessed.

B. Preliminary Matters

8. Before I set out my assessment, it will be convenient to deal with a few preliminary matters. First, the papers lodged before me include 12 bundles. Although ICI had queried the need to produce all these papers, the parties had agreed that all these documents be deemed to have been produced but without prejudice to any submission either side may make on costs concerning the necessity of producing these bundles.

9. Second, at the beginning of this hearing, Mr. Simon Chiu ["Mr. Chiu"], who appeared for Mr. Cheung, applied for leave to re-amend the Amended Defence and Counterclaim. Mr. Nigel Kat ["Mr. Kat"], who appeared for ICI, raised no objection to the proposed re-amendments save for the claim in respect of the 2% payment discount in the sum of HK$887,105.43. Having heard submissions from both sides, I allowed the application and granted leave to re-amend the Amended Defence and Counterclaim, with costs of and occasioned by the re-amendment to ICI in any event. I stated that I would give my reasons at the time when I hand down my decision on assessment, which I now do.

10. The claim for 2% payment discount by Techi Motor is a new claim. Mr. Cheung was alerted of the possibility of making this claim after his expert, Mr. Steven Li ["Mr. Li"], had looked at the papers and suggested that such a claim should be made. It is well established that the object of the court is to decide the rights of the parties and not to punish them for mistakes they made in the conduct of their case. Hence, unless the proposed amendment will cause irreparable prejudice to the other side, the court will generally grant leave to amend even if the amendment is for the purpose of rectifying mistakes made by the party applying for leave to amend. (See: Hong Kong Civil Procedure 2002, Vol. I, para. 20/8/6, at pp. 332-333.)

11. I do not think ICI would suffer any prejudice as a result of the re-amendment. In opposing leave, ICI submitted that the payment discount was subject to the proviso that there was no overdue. As it is ICI's case that there was overdue on the part of Techi Motor, Mr. Kat submitted that Techi Motor in effect invited this court to speculate how ICI would have operated the "no overdue" policy. Further, although no affidavit evidence was placed before this court, Mr. Kat sought to suggest that the relevant ICI staff had left ICI in or before 1999. On the hand, whilst accepting that the payment discount was subject to the proviso of no overdue, Mr. Chiu submitted that this claim can be dealt with by looking at the available documents and that the real issues are: (1) whether any payment pattern can be established by looking at the relevant documents; (2) if yes, whether such payment pattern justify an award of this 2% payment discount claim.

12. I accept Mr. Chiu's submissions. Having considered the way in which Techi Motor framed this claim (see Appendix 3 to Mr. Li's 2nd Report), I do not think further witnesses from ICI were required. Nor is it necessary to consider how ICI would have operated its "no overdue" policy. This claim can be adjudicated by considering the relevant documents. Besides, not only had ICI's expert, Mr. Ian Robinson ["Mr. Robinson"], dealt with this new claim in paragraph 2.8.1 of his 2nd Report, ICI did not suggest that it would need an adjournment to deal with this new claim should leave to re-amend be granted to Mr. Cheung.

13. The third preliminary matter concerns the question of mitigation. Paragraphs 19(b) and 24A of ICI's Further Re-Amended Reply and 2nd Further Re-Amended Defence to Counterclaim raise the question of mitigation against both Techi Motor and Techi Paints. However, Mr. Kat confirmed in paragraph 13 of his Closing Submissions that ICI does not pursue its mitigation plea against Techi Motor. Hence, mitigation only remains a live issue in respect of Techi Paints.

14. The fourth preliminary matter concerns the scope of this hearing. After ruling that Mr. Cheung is entitled to judgment on his counterclaim, Yam J. directed that the question of whether Mr. Cheung's counterclaim constitutes an equitable set-off against ICI's claim and the question of costs be reserved pending the assessment of damages and preferably before him. For this reason, the parties have agreed that this court is only asked to deal with the question of assessment and that the questions concerning equitable set-off, costs (including the costs of this assessment, save and except the costs in respect of the re-amendment dealt with above) and interests will be reserved to be argued before Yam J.

15. The last preliminary matter concerns the witnesses. A total of 3 witnesses were called to give evidence before this court: Mr. Cheung, Mr. Li and Mr. Robinson. In addition, an edited version of Mr. Christopher Wall's Statement was put in as hearsay evidence by consent. No credibility issue arises from Mr. Wall's edited Statement since the information contained therein is not in dispute. As regards Mr. Li and Mr. Robinson, their expert evidence will be considered in detail below. As regards Mr. Cheung, I find that he is on the whole a credible witness. Save for his evidence on the effect of competition arising from ICI's appointment of additional dealers (which will be dealt with in paragraphs 35 to 37 below), I accept his evidence.

C. The Law

16. The claims by Techi Motor and Techi Paints are based on contracts. The principles for assessing damages for breach of contract are well established. In Robinson v Harman (1848) 1 Exch. 850, Baron Parke said (at p. 855): "The rule of the common law is, that where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed."

17. A party claiming damages has to prove, on the balance of probabilities, both the fact of damage and the amount. If the fact of damage is shown but no evidence is given as to its amount so that it is virtually impossible to assess damages, this will generally permit only an award of nominal damages. On the other hand, where it is clear that some substantial loss has been incurred, the fact that an assessment is difficult is no reason for awarding no damages or merely nominal damages. See: McGregor on Damages, 16th edn., para. 357 & 358, at p. 236; Chitty on Contracts, 28th edn., Vol. I, para. 27-006, at p. 1272; and Chaplin v Hicks [1911] 2 K.B. 786, per Vaughan Williams L.J. at p. 792.

18. In The Commonwealth v Amann Aviation Pty. Ltd. (1991) 174 CLR 64, Mason C.J. and Dawson J. expounded as follows (at p. 83):

"The settled rule, both here and in England, is that mere difficulty in estimating damages does not relieve a court from the responsibility of estimating them as best it can. Indeed, in Jones v Schiffmann, Menzies J. went so far as to say that the "assessment of damages ... does sometimes, of necessity involve what is guess work rather than estimation." Where precise evidence is not available the court must do the best it can. And uncertainty as to the profits to be derived from a business by reason of contingencies is not a reason for a court refusing to assess damages."

19. In Ratcliffe v Evans [1892] 2 QB 524, Bowen L.J. stated as follows (at pp. 532-533):

"In all actions accordingly on the case where the damage actually done is the gist of the action, the character of the acts themselves which produce the damage, and the circumstances under which these acts are done, must regulate the degree of certainty and particularity with which the damage done ought to be stated and proved. As much certainty and particularity must be insisted on, both in pleading and proof of damage, as is reasonable, having regard to the circumstances and to the nature of the acts themselves by which the damage is done. To insist upon less would be to relax old and intelligible principles. To insist upon more would be the vainest pedantry."

20. Where appropriate, the court may adopt a broad brush approach when assessing damages. Kaplan J. observed in Green Island Cement Co. Ltd. v The Owners of "Sunshine Island" & Anr., unrep., HCCL No. 12 of 1998 (4th June 1992) as follows:

"The difficulty of assessment by a court of a company's loss of profits varies enormously with the circumstances of the case. In this case it is not easy because there were a number of different factors at work of which it is necessary to take account. Fortunately the authorities make it clear that the court is not dealing with an exact science and that there is scope for taking a broad brush approach where necessary ..."

D. The Claims by Techi Motor

21. Before the re-amendment allowed at the commencement of this hearing, the amount claimed under this head was in the sum of HK$428,485.00. This was based on the total purchase figure of HK$10,712,129.40 for the months from January to May 1994 in respect of ICI Autocolour Refinish Products and is not disputed by ICI at the trial before Yam J.. After Mr. Cheung's expert reviewed the invoices, the total purchases was found to be HK$11,109,397.80 and the amount of this claim was accordingly revised to HK$444,375.91 (i.e. HK$11,109,397.80 x 4%).

22. In paragraph 12 of ICI's Further Re-Amended Reply and 2nd Further Re-Amended Defence to Counterclaim, it is alleged that this annual rebate would only be available if Mr. Cheung had no overdue account with ICI. I do not think this plea can be sustained. Whilst there is an express proviso for no overdue in respect of payment discount, the TM Agreement did not make any similar proviso for annual rebate. Furthermore, Mr. Kat indicated in paragraph 2.2 of his Closing Submissions that the construction and application of the clause in respect of annual rebate is no longer in issue. In other words, the 4% rebate would be applicable to all the purchases made by Techi Motor once the amount of purchase reached 130,000 litres and not just the portion of purchase exceeding 130,000 litres.

23. The revision from the original figure to the present figure of HK$444,375.91 is no more than arithmetic and is supported by the relevant documents. In these circumstances, I rule that Mr. Cheung trading as Techi Motor is entitled to the revised sum of HK$444,375.91.

24. Since this head of claim is not disputed by ICI, I rule that Mr. Cheung trading as Techi Motor is entitled to this sum of HK$116,043.13.

25. This is the claim for the loss of the profits which Techi Motor would have made during the 7 months from June to December 1994 ["Lost Months"] had ICI not terminated the TM Agreement. The approach adopted by Techi Motor for assessing this head of claim is as follows. Mr. Cheung first estimated the total purchases that would have been made by Techi Motor during the Lost Months. Then, he assessed the profit margin or "mark-up". By applying the profit margin/mark-up to the total purchases that would have been made during the Lost Months, Mr. Cheung derived the gross profits. By deducting the expenses from the gross profits, Mr. Cheung arrived at the net loss of profits which he claimed he would have made in the name of Techi Motor had the TM Agreement not been terminated by ICI.

26. This is one of the most controversial areas in this assessment and both sides relied on experts. Both experts are accountants and, as discussed below, both of them used different statistical methods to support their respective projections.

(a) The Expert Evidence: General Observations

27. Although both experts were cross-examined on their expertise and experience, the parties agreed that both experts' evidence should be received on a de bene esse basis. In his Closing Submissions, Mr. Kat indicated that he did not object to the admissibility of Mr. Li's evidence though he remained critical of his expertise. Likewise, although comments were made in respect of Mr. Robinson's expertise, Mr. Chiu did not suggest that Mr. Robinson's evidence should be ruled inadmissible. In the circumstances, it is not necessary for me to rule on the admissibility of the expert evidence.

28. However, as there remains the question of weight, it may be convenient to preface my ruling on projected purchases by making the following general observations before I deal with the expert evidence in detail. In Chan Pui-ki v Leung On [1996] 2 HKLR, Litton J.A. (as he then was) pointed (at p. 411E-G) out that assessment of damages for future pecuniary loss can never be a mere matter of mathematics and the process must always be one of judgment on the part of the trial judge rather than of mathematical calculation. Further, although professional people like accountants can testify as to past events and that their views may be helpful in assisting the court in interpreting data, Litton J.A. highlighted (at pp. 419J-420F) the undesirability of allowing expert to venture into the future since expert is no prophet. Even though these observations were made in the context of personal injury litigation, they do provide guidance in commercial disputes like the present case since they are nevertheless observations concerning assessment of future financial loss.

(b) Mr. Li's Projection

29. The total amount of ICI products purchased by Techi Motor from ICI during the period from January 1990 to May 1994 can be seen from the table set out in paragraph 11 of Mr. Cheung's Further Supplemental Statement. The figures in this table are different from the previous one in Mr. Cheung's 1st Supplemental Statement since Mr. Li had made various corrections. By reason of the handwritten figures on the ICI statements of account with the notion "實付" (the actual amount paid) or "實價" (discounted price), Mr. Robinson queried the accuracy of Mr. Li's revisions. Having heard evidence in this regard and having considered the relevant documents, I am satisfied that the figures in the table in Mr. Cheung's Further Supplemental Statement are correct and can be used for the purpose of this assessment. On the other hand, a comparison of ICI's sales figures and Techi Motor's purchase figures during these years can be found in Appendix 1 to Mr. Steven Li's 2nd Report.

30. Mr. Li suggested that there was a correlation between ICI's sales figures and Techi Motor's purchase figures. By using the "Pearson r" formula to calculate the correlation coefficient between ICI's sales and Techi Motor's purchases, Mr. Li arrived at the value of 0.82. As the value of +1 represents perfect positive correlation and a value of -1 means a perfect negative correlation, Mr. Li suggested that the "Pearson r" formula supported his observation that there was a strong correlation between the two sets of figures. Further, Mr. Li claimed that the t-test carried out by the Data Analysis function of Microsoft Excel confirmed his observation.

31. Having established this correlation, Mr. Li then observed that the growth rates of Techi in 1992 and 1993 were 1.60 (i.e. 297.23% / 185.60%) and 1.69 (i.e. 208.81% / 123.79%) times those of ICI respectively. Taking the median of 1.645 (i.e. (1.60 + 1.69) ( 2), the projected growth rate for Techi Motor for the year 1994 would be 243.11% (i.e. 1.645 x 147.79%, being ICI's growth rate in 1994). Mr. Li then adopted 226%, being the median of 243.11% and 208.81% (i.e. Techi Motor's growth rate for the year 1993), as the projected growth rate of Techi Motor for the year 1994.

32. Based on this growth rate of 226%, Mr. Li estimated the total amount of purchases Techi Motor would have made during the Lost Months at HK$44,355,271.49. This was arrived at as follows:

HK$24,644,529.95 (i.e. total purchase in 1993) x 226% = HK$55,696,637.69

less:

HK$11,341,366.20 (i.e. actual purchases made during January to May 1994)

33. ICI disputed this method of projection. Apart from the contention that the growth of Techi Motor's business was slowing down, Mr. Kat submitted that ICI's market was different from Techi Motor's market and that Mr. Li was comparing apples with oranges when he compared ICI's sales and Techi Motor's purchases. I accept that ICI's market was, to a certain extent, different from that of Techi Motor. Most notably, ICI only dealt with the first tier of dealers whereas Techi Motor dealt with the sub-dealers or other purchasers down the distribution chain. However, both markets dealt with the same products.

34. I accept that there was a correlation between ICI's sales figures and Techi Motor's purchase figures. However, this correlation can be one-sided. The sales figure of ICI depended on the amount of purchases made by its dealers including Techi Motors. Hence, the more products Techi Motor and the other dealers purchased from ICI, the higher the sales of ICI. On the other hand, the increase in ICI's sales might not necessarily be the result of an increase in Techi Motor's purchases. If the dealers of ICI other than Techi Motor increased their purchases, ICI's sales figure might still go up even if Techi Motor's purchases went down or remain the same. Thus, the fact that ICI's sales figure went up in 1994 does not necessarily mean that Techi Motor's purchase would also increase as Mr. Li suggested. Mr. Li's projection will only be valid if the market conditions remained unchanged.

35. On the evidence, it is clear that the market conditions were changing since late 1993. According to the edited Witness Statement of Christopher Wall, ICI introduced 2 new dealers into the Mainland market in late 1993 and thus competition in 1994 was more fiercer than in 1993. Similar observations were made by Mr. Cheung in paragraph 9 of his Statement dated 12th January 1998 (i.e. the one filed for the trial before Yam J.) where he said:

"Before 1993, ICI Swire and several other dealers had already signed dealership agreement similar to the one that Techi Motor had signed with ICI Swire. ICI Swire went on to enter into more dealership agreements similar to the one that it had with Techi Motor. The increase in the name of dealers increased competition amongst themselves and dampened the level of profits. In addition, my customers requested for more choice of products. I therefore introduced in or about April 1993, Techi Motor to its existing line of goods for sale to PRC the "PPG" brand of motor paints".

36. When testified at this hearing, Mr. Cheung sought to play down the effect of competition by suggesting that the growth in the Mainland market in 1994 was substantial and that Techi Motor had a good sales structure. Mr. Cheung explained that as Mainland's economy was improving, the number of vehicles increased and thus there was a big demand for car paints. I accept Mr. Cheung's explanation for the growth in the demand for car paints in the Mainland. Judging from ICI's 1994 sales figures, I also accept that that the Mainland car paints market was growing at the material time. Indeed, ICI does not seem to contend otherwise.

37. I do not, however, accept Mr. Cheung's assertion that the growth in the Mainland market was so significant that the introduction of more dealers by ICI would not have any negative effect on Techi Motor. Mr. Cheung testified that he had knowledge about the Mainland market because he kept in touch with the people in the trade even after ICI's termination in 1994. If so, Mr. Cheung would have known the 1994 market conditions when he made his first Statement in 1998. Thus, if the growth in the Mainland market in 1994 was so substantial that increased competition amongst ICI dealers would have no adverse effects on profits as he contended at this hearing, Mr. Cheung would not have said what he said in his first Statement. Besides, the table set out under paragraph 11 of Mr. Cheung's Further Supplemental Statement shows that the growth rate of Techi Motor's purchases dropped from 297.40% (1992) to 208.90% (1993).

38. In addition, if Mr. Li's projection were correct, the average monthly purchases made by Techi Motor during the Lost Months would have been HK$6.34 million (i.e. HK$44,355,271.49 ( 7). Looking at Techi Motor's performance during the first four months of 1994 and the 1994 purchases figures of the other ICI dealers (see P. Doc. 8, P. Doc. 9 and Appendix 2 to Mr. Li's 2nd Report), I find it improbable that Techi Motor could have achieved an averaged monthly purchase of HK$6.34 million. In this regard, I have not taken into account Techi Motor's performance in May 1994 since Mr. Cheung suggested in paragraph 13 of his first Statement that ICI was short in its supply in May 1994. Not only did ICI choose not to rebut this suggestion, Mr. Robinson took this into account in paragraph 8.1.5.6 of his 1st Report.

39. For these reasons, I do not accept Mr. Li's projection. In other words, I do not accept the contention that Techi Motor would have purchased HK$44,355,271.49 worth of ICI products during the Lost Months.

(c) Mr. Robinson's Projection

40. By comparing the purchases for every month from January 1991 to May 1994 to the corresponding month in the previous year and by plotting the results on a chart (i.e. Appendix 9 to his first Report), Mr. Robinson started off his analysis by suggesting that the growth of Techi Motor's business was slowing down. Further, Mr. Robinson used 3 alternative methods to project Techi Motor's purchases during the Lost Months: linear regression, moving average and proportional projection. By averaging the results obtained from these 3 methods, Mr. Robinson estimated Techi Motor's total purchases for the Lost Months at HK$17.9 million. This projection will only be valid if the 3 methods used by Mr. Robinson are appropriate. Hence, the key question is whether these 3 methods took into account the relevant factors which would affect Techi Motor's purchases for the Lost Months.

41. Mr. Robinson explained that linear regression is a means to develop an equation for predicting the value of a dependent variable (in this case purchases) given the value of an independent variable (in this case time). He used the Forecast function in Microsoft Excel to project Techi Motor's purchases for the Lost Months. This Forecast function, claimed Mr. Robinson, "estimates the equation of the straight line that best fits the actual data and then uses this equation to product a forecast for the required months" (see paragraph 8.1.3.2 of his 1st Report). The result of this calculation, which projected Techi Motor's total purchase for the Lost Months at HK$19,004,144, were set out in Appendix 16 to Mr. Robinson's 1st Report.

42. However, there is no evidence as to exactly how the calculation was done by the Forecast function of Excel. Nor is there any evidence as to the rationale or underlying assumptions behind the formula used in the calculation. Amongst others, there is no evidence that this method took into account the possible growth of the Mainland market in 1994. By way of a control test, Mr. Chiu had put forward a forecast of Techi Motor's 1993 purchases by using the data from 1990 to 1992 (see D. Doc. 16). This was also done by using Excel's Forecast function. The result showed a projected total purchase of HK$16,107,647.12, which was less than Techi Motor's actual purchases in 1993 by over HK$8 million.

43. As regards the method of moving averages, Mr. Robinson suggested that it is a technique that smoothes out fluctuations caused by seasonal variations. By using this method, Mr. Robinson projected Techi Motor's total purchases for the Lost Months at HK$18,083,002. Details of the calculation were set out in Appendix 17 to Mr. Robinson's first Report. In addition, there is also the table showing the results of 4-months moving averages is likewise not particularly helpful (P. Doc. 11).

44. The choice of the 3-month or 4-month period when using this method of moving averages was arbitrary. "The method of moving-averages for smoothing a time series a highly subjective and dependent upon the length of the period selected for constructing the averages": Mark L. Berenson & David M. Levine, Basic Business Statistics: Concepts & Applications, Prentice Hall, para. 19.4.1 at p. 862. (D. Doc. 5). Further, even if this method is appropriate in the present case, one should use 12-month moving averages. "One determinant of the number of items in the moving average is based on whether the moving average is being used to suppress any seasonality in the data. For example, if the data are a daily times series, a seven-item moving average can be used to remove any daily seasonality. Similarly, a moving average of 12 or more items would remove any monthly seasonality if the data were monthly.": see Robert Sandy, Statistics for Business & Economics, McGraw-Hill Publishing Co., p. 671 (D. Doc. 6).

45. The last method used by Mr. Robinson is proportional projection. The starting point of this method can be seen from the following table:

Year	Proportion of annual purchases made up by the months from January to May	Proportion of annual purchases made up by the months from June to December
1990	12.9%	87.1%
1991	20.6%	79.4%
1992	30.8%	69.2%
1993	36.9%	63.1%

Source: Revised Table 8.1.5.1 of Mr. Robinson's 2nd Report (p. 5)

46. Mr. Robinson observed that the proportion of annual purchases made up by the months from June to December was reducing over the years (i.e. from 87.1% to 63.1%). On this basis, Mr. Robinson opined that 5/12 is a reasonable estimate of the proportion of annual purchases made up by the first 5 months as the purchases would be spread smoothly over the year in the long run. However, Mr. Robinson recognized that it would not be fair to use the figure of May 1994 since, as stated above, ICI was short in its supply in May 1994. Thus, Mr. Robinson divided the total purchases for the months from January to April 1994 by 4 and then multiply it by 7 to obtain the projection for the Lost Months, which is HK$16,610,636 (i.e. HK$2,372,948 x 7).

47. The advantage of this method is that it takes into account the most recent data (i.e. the purchases made in the first few months of 1994). As both sides agree, recent data should, in the absence of special circumstances, be given more weight than prior data. However, Mr. Robinson's calculation is not without problems. After excluding the figure for May 1994, Mr. Robinson assumed that the average derived from purchases made from January to April 1994 also represented the average monthly purchases during the Lost Months. This assumption is open to at least two challenges.

48. First, the figure obtained by averaging the purchases from January to April 1994 is not truly representative. Mr. Cheung pointed out that Techi Motor's business in the month of February was not as good as the other months in the first half of the year. This, he explained, was because people in Mainland China had a rather long Chinese New Year holiday. I accept Mr. Cheung's evidence in this regard. The figures in the table set out in paragraph 11 of Mr. Cheung's Further Supplemental Statement support Mr. Cheung's evidence. Hence, in my view, apart from excluding the May 1994 figures, Mr. Robinson should also exclude the February 1994 figures.

49. Second, whilst the Revised Table 8.1.5.1 in Mr. Robinson's 2nd Report supports Mr. Robinson's observation that the proportion of annual purchases made up by the months June to December was declining, it does not justify his further proposition that the purchases would be spread smoothly over the year 1994. As can be seen from the table set out in paragraph 45 above, the drop was 7.7% from 1990 to 1991, 10.2% from 1991 to 1992 and 6.1% from 1992 to 1993. Not only was the decline rate diminishing, the purchases made during the Lost Months would still be 57% of the entire year of 1994 even if the decline rate of 6.1% persisted. Hence, although precise calculation in this regard is impossible, certain increment should have been made to reflect the fact, as Mr. Cheung said in his evidence, that Techi Motor's business was normally better in the second half of the year.

(d) Findings on Projected Purchases

50. Considering the evidence in the round, I project Techi Motor's purchases for the Lost Months at HK$20 million. My approach is, to certain extent, a modified version of the proportional projection used by Mr. Robinson, and is as follows.

51. As stated above, recent figures should, in the absence of special circumstances, be given more weight than prior figures. Hence, the starting point is the purchase figures in the first 5 months of 1994. For the reasons stated in paragraphs 48 and 49 above, the figures for February and May 1994 are excluded. The average of the purchases made in January, March and April 1994 is HK$2,698,067.25 (i.e. the total of HK$2,545,770.10, HK$2,994,238.25 and HK$2,554,193.40 divided by 3). If we multiply HK$2,698,067.25 by 7 months, we would arrive at HK$18,886,470.75. The remaining question is whether any adjustment should be made to this total figure of HK$18,886,470.75. The key factors involved are: (1) the growth of the Mainland market in 1994; (2) the effect of increased competition as a result of ICI's introduction of more dealers; and (3) Techi Motor's business was normally better in the second half of the year. Each of these factors is beyond precise calculation.

52. The growth of the Mainland market has, to a certain extent, already been reflected in the amount of purchases made by Techi Motor during the period from January to April 1994. The amount of purchases made in those months are higher than the amount in each of the corresponding months in 1993. However, if the market was growing, the trend would continue throughout 1994. Not only is there no evidence to suggest that the growth either stopped or slow down after May 1994, the overall growth of ICI's sales in 1994 also shows the growth of the Mainland market. Hence, it is probable that the purchases to be made by Techi Motor during the Lost Months would be higher than the corresponding months in 1993 as well as higher than the purchases made in the first 4 months of 1994.

53. On the other hand, for the reasons given in paragraphs 35 to 37 above, the negative impact brought about by increased competition is clearly relevant. However, the effect of competition would already be felt at the beginning of 1994 since competition started in late 1993. Hence, by using the figures of January, March and April 1994 to calculate the monthly average, the effect of competition has already been taken into account. It may be possible that the effect of competition might be even stronger in the latter half of 1994 since, as time went by, the newly appointed dealers might have developed a more mature sales network. However, considering the figures in P. Doc. 8 and Appendix 2 to Mr. Steven Li's 2nd Report, I do not think this factor carries any significant weight.

54. As regards the third factor, although the table set out under paragraph 45 above does provide some reference, it is difficult to assess to what extent Techi Motor's business in the latter half of the year would be better than that in the first half. However, looking at the past pattern, I am prepared to accept that this factor justifies some minor upward adjustment to the figure of HK$18,886,470.75 mentioned above.

55. Balancing all these factors, I find it appropriate to adjust the projected purchase for the Lost Months to HK$20 million. This upward adjustment is consistent with the overall picture. First, this means an increase of 127.17% (i.e. (HK$11,341,366.20 + HK$20 million) ( HK$24,644,529.95 x 100%) in the growth of Techi Motor's purchases when compares with the total purchases made in 1993. Although this growth rate is lower than the one for the previous year, it is consistent with the downward trend displayed by the evidence. As can be seen from the table set out in paragraph 11 of Mr. Cheung's Further Supplemental Statement, the growth rate dropped from 297.4% (1991/1992) to 208.90% (1992/1993). Hence, a further drop from 208.9% to 127.17% is not improbable after taking into account the effect of increased competition. Second, this projection means that Techi Motor's total purchases in 1994 would take up 16.86% of ICI's total sales in 1994 (i.e. HK$31,341,366.20 / 185,870,000.00 x 100%). This is slightly higher than Techi Motor's market share of 16.67% as at May 1994 (see P. Doc. 6). However, not only was ICI short in its supply in May 1994, one should take into account the fact that Techi Motor's business was slightly better in the second half of the year.

56. The sales made by Techi Motor can be divided into 2 groups. The first group was sales denominated in Hong Kong currency. This took up about 42% of Techi Motor's sales. There is no issue arising from this group of sales. The second group was sales denominated in Renminbi ["RMB"]. This group took up the remaining 58% of Techi Motor's sales. For this second group of sales, Mr. Cheung kept 2 sets of invoices: one set was denominated in RMB ["RMB Invoices"] and the other in Hong Kong currency ["HK$ Invoices"].

57. Apart from the difference in currency, the HK$ Invoices include a discount of around 20% which does not appear on the RMB Invoices. As Mr. Cheung's financial statements and tax returns were made on the basis of the HK$ Invoices, ICI contended that the HK$ Invoices should be used as the basis for assessing Techi Motor's mark-up. On the other hand, Mr. Cheung contended the RMB Invoices should be used to calculate Techi Motor's mark-up. If the HK$ Invoices are to be used for calculating the mark-up, the parties the correct percentage is 1.5% as contended by ICI (see paragraph 8.2.3 of Mr. Robinson's 1st Report). On the other hand, if the RMB Invoices are to be used, the mark-up would be 10.79% as suggested by Mr. Cheung (see paragraph 3 of Mr. Li's 2nd Report).

58. The reasons for maintaining 2 sets of invoices were explained in some detail by Mr. Cheung in paragraphs 17 to 23 of his Further Supplemental Statement and in his oral testimony. I do not think it is necessary to repeat them here. Having considered his reasons and having observed his demeanour when giving evidence, I accept Mr. Cheung's evidence and his explanation for keeping 2 sets of invoices. As there is no suggestion (nor can it be seriously suggested) that the RMB Invoices are bogus, I find that the RMB Invoices represent the true position of Techi Motor's sales and should be used for the purpose of calculating Techi Motor's mark-up.

59. In arriving at this conclusion, I am conscious of the fact that the RMB Invoices are inconsistent with Mr. Cheung's financial statements and tax returns. However, I do not think that fact is sufficient to enable this court to disregard the RMB Invoices. Whilst Mr. Cheung's financial statements and tax returns are relevant, they are not conclusive and should be considered with the other relevant evidence. The weight to be given to documents such as tax returns when assessing loss of profits depends on the facts of each case. For instance, if a party's claim is inconsistent with his tax return and is not supported by other evidence, the court is likely to act on the tax return. On the other hand, if a party's claim is supported by contemporaneous documents which are not suggested or proved to be bogus, the mere fact that the party's tax return shows a less favourable picture may not be fatal provided the discrepancy can be satisfactorily explained. In any event, upon being advised by Mr. Li that the RMB Invoices should be used for the purpose of filing his tax returns, Mr. Cheung has reported the matter to the Inland Revenue Department ["IRD"]. Hence, it is up to the IRD to decide whether to take any actions against Mr. Cheung.

60. Mr. Kat submitted that the matter boils down to a choice of two options. First, Mr. Cheung could base his claim on the HK$ Invoices and thereby avoid the possibility of having to pay additional tax, though he would then have a smaller claim for loss of profit. Second, Mr. Cheung could do what he has now opted to do. Although Mr. Cheung may have to pay tax penalties by reporting the matter to the IRD, he still stands to gain since he could make a larger claim for loss of profits. To illustrate his point, Mr. Kat has helpfully produced a table showing the possible tax penalties (see P. Doc. 7). In essence, Mr. Kat suggested that the report to the IRD was made for the purpose of enabling Mr. Cheung to justify his present claim.

61. Whilst I can see some force in Mr. Kat's argument, I do not think it is necessary for this court to speculate on the motive behind Mr. Cheung's report to the IRD. As far as I see, the key question is whether the RMB Invoices are genuine documents which truly reflect Techi Motor's sales. As stated above, I find that they are.

62. For these reasons, I find that the appropriate percentage of mark-up for assessing Techi Motor's loss of profit is 10.79% as contended by Mr. Cheung.

63. Two groups of expenses are relevant here. The first group is Techi Motor's sundry operating expenses. Both parties have very sensibly agreed that a broad brush approach should be adopted for calculating the amount of this group of expenses. Adopting the formula proposed by Mr. Chiu, which is consistent with the approach adopted by Mr. Robinson on ICI's behalf, the amount of Techi Motor's sundry operating expenses is as follows:

HK$20,000,000 x 1.66% + HK$320,716.00.............................HK$652,716

64. The second group of expenses concerns the Mainland tax and agency charges. Again, both parties have very sensibly invited this court to adopt a broad brush approach. Having considered the matter, I will calculate this group of expenses by adopting the following formula:

Projected Purchase for the Lost Months x (0.877% + 0.8%) x 58%

65. The percentages of 0.877% and 0.8% are respectively the Mainland tax and the agency charges. As pointed out by Mr. Chiu, not all the sales attracted these expenses. Only those sales made in RMB attracted these expenses. As pointed out above, sales in RMB accounted for about 58% of Techi Motor's total sales. Hence, I assess this second group of expenses at HK$192,560 (i.e. HK$20,000,000 x 1.677% x 58%).

66. Mr. Kat submitted that Techi Motor's claim for loss of profit is based on the premises that Techi Motor could collect full payment from its customers. On the basis that Techi Motor would have difficulties in collecting payments, Mr. Kat submitted that Techi Motor's claim should be reduced by making an allowance of 10% of the projected purchases.

67. Apart from dealing with Mr. Kat's substantive arguments, Mr. Chiu submitted that it is not necessary to prove actual receipts in order to establish Techi Motor's loss of profits. I do not agree to this argument. As stated above, the principle for assessing damages for breach of contract is to put the innocent party in the position as if there were no breach. Hence, if it can be established by satisfactory evidence that Techi Motor's actual profit would be reduced by Mr. Cheung's inability to collect payments even if ICI had not terminated the TM Agreement, this factor should be taken into account when assessing Techi Motor's loss of profit.

68. The question is one of fact and the answer depends on the evidence. I should point out that this is not the first time ICI raised issues concerning Techi Motor's alleged difficulty in collecting payments. At the trial on liability, Techi Motor's alleged difficulty in collecting payment was raised in the context of termination. In his learned Judgment, Yam J. (at page 14M-O) pointed out that ICI had offered no evidence to expla in why Mr. Cheung would have difficulty in collecting payments in China. At this hearing, no factual witness was called by ICI. However, Mr. Kat has produced a table entitled "Collection of Receivables Ageing Analysis as at 31 March 1994 and 1995" (see P. Doc. 4). The figures in this table were derived from Mr. Cheung's documents, though Mr. Cheung had in the course of his testimony commented on the accuracy of this table.

69. Amongst the customers listed out in P. Doc. 4, the one owing the most significant amount of debt to Techi Motor is Guangzhou Feichi. As explained by Mr. Cheung in his evidence, he had a 50% interests in this business venture. Hence, it is not surprising that Mr. Cheung allowed longer credit period for Guangzhou Feichi. In addition, Mr. Cheung also pointed out that the debts owed by Haikou Senghui were not related to ICI products. Once Guangzhou Feichi and Haikou Senghui are taken away from the table, I do not think it is fair to say that Techi Motor had any significant bad debt problems for the year ended 31st March 1994.

70. P. Doc. 4 also shows the position as at 31st March 1995. However, I do not think the position after ICI's termination should be taken into account. Whilst Mr. Cheung agreed that he experienced difficulty in collecting payments after ICI's termination, he explained in paragraph 18 of his first Witness Statement and in his oral testimony that the difficulty was caused by the termination. In short, Mr. Cheung's customers used their moneys to pay their new suppliers once Mr. Cheung could not supply any more ICI products. The situation described by Mr. Cheung is understandable and I accept his evidence.

71. Apart from P. Doc. 4, Mr. Kat also relied on Mr. Robinson's evidence that he or his staff could not trace the payments made by Techi Motor's customers. As far as I see, the difficulty in tracing payments arose from the way in which the accounts were kept and the way payments were made. Amongst others, payments were made in round sum from time to time instead of as per any particular invoices. However, having considered the relevant documents and having heard Mr. Cheung's explanation, I accept Mr. Cheung's evidence that he had no difficulty in collecting payments from his Mainland customers.

72. Hence, on the whole, I do not think it is appropriate to make any allowance for bad debts whether at the 10% contended by ICI or at all.

73. In light of the above, Techi Motor's loss of profits for the Lost Months is as follows:

(1)	HK$20,000,000 x 10.79%	HK$2,158,000.00
	less:
(2)	sundry operating expenses	HK$652,716.00
(3)	Mainland taxes & agency fees	HK$192,560.00
	Total:	HK$1,312,724.00

74. ICI accepts that this head of claim can be calculated by applying 4% to the projected purchases for the Lost Months (see paragraph 10.3 of Mr. Kat's Closing Submissions). As I have assessed the purchases for the Lost Months at HK$20 million, the amount of damages payable is thus HK$800,000.00.

75. This is the claim added by the re-amendment dealt with above. Under clause 2 of the TM Agreement, Techi Motor was entitled to payment discount on a sliding scale. The relevant provisions in clause (2) is clauses (2d) and (2e). Clause (2d) provided that a 2% payment discount would be given if payment was made within 90 days following the end of the invoice month. Clause (2e) provided that a 1% payment discount would be available if payment was made within 120 days. In other words, if payment was made after the 120-day period, there would not be any payment discount.

76. Originally, Mr. Cheung said in paragraph 13 of his Supplemental Statement that what he "would have done in respect of timing of payment in June to December 1994 is rather uncertain" and thus no claim was made. Upon reviewing the papers, Mr. Li has prepared a table setting out Techi Motor's payment patter (see Appendix 3 to Mr. Li's 2nd Report). Based on this table, it is now contended that Mr. Cheung would have been entitled to a 2% payment discount on the purchases made during the Lost Months had ICI not terminated the TM Agreement.

77. The key question here is whether Mr. Cheung would have made payment within the stipulated credit periods and thus would have been entitled to payment discount had ICI not terminated the TM Agreement. Looking at the table prepared by Mr. Li, Techi Motor had consistently enjoyed payment discounts at various rates since January 1991. In view of this, it is not improbable that Techi Motor would continue to enjoy some payment discount had the TM Agreement not been terminated by ICI. However, as rightly pointed out by Mr. Kat, only 1% payment discount had ever been payable since November 1993 and there is no evidence that this trend would be reversed. Having considered the parties' submissions and all the evidence relevant to this head of claim, I will only allow a 1% payment discount. Hence, the amount of this claim is HK$200,000 (i.e. 1% of the projected purchase of HK$20 million).

E. The Claims by Techi Paints

78. After the re-amendment, Techi Paints only claims the expenses thrown away as a result of ICI's termination of the TP Agreement. In law, there cannot be any doubt that expenditure wasted as a result of a breach of contract can be recovered. (See: Chitty on Contracts, 28th edn., Vol. I, para. 27-058, at pp. 1300-1301.)

79. Techi Paints' claim consists of two heads. The first one concerns rental expenses. A unit in Tsuen Wan was rented for the use of Techi Motor and Techi Paints at the monthly rental of HK$17,000.00. Hence, Techi Paints' half share of the monthly rental was HK$8,500.00 Under clause (1) of the Tenancy Agreement made by Mr. Cheung and his landlord, Mr. Cheung had to give 3 months notice before he could terminate the tenancy. As ICI only formally gave termination notice in July 1994, Mr. Cheung could only terminate the tenancy at the end of October 1994. On this basis, Techi Paints claims the loss of rental expenses for the 5 months from June to October 1994 in the sum of HK$42,500.00.

80. Mr. Kat submitted that no loss was suffered since Techi Paints enjoyed the use of the premises during the 5 months in question. This cannot be right. Techi Paints only remained in possession of the premises until end of October 1994 because the Tenancy Agreement provided for a 3-month termination notice and thus tenancy could not be terminated earlier. Since ICI took no point on the 3-month notice provision in the tenancy (see paragraph 12.4 of Mr. Kat's Closing Submissions), I rule that Mr. Cheung trading as Techi Paints is entitled to the claim for wasted rental in the sum of HK$42,500.00.

81. The second head of Techi Paints' claim concerns the staff salary. Before ICI's termination, Techi Paints had 3 employees. Their total monthly salaries amounted to HK$23,100. As Mr. Cheung retained these 3 employees until the end of October 1994, Techi Paints claimed a total of HK$115,500.00 (i.e. HK$23,100.00 per month x 5 months). During cross-examination, Mr. Cheung admitted that he could have given one month's notice to terminate all the 3 employees. However, as Techi Paint would only be giving up possession at the end of October 1994, he decided to retain the 3 employees until that time as he did not want to be cruel to them. When re-examined by his counsel, Mr. Cheung said that he required the 3 employees to sell the remaining ICI products.

82. I do not doubt Mr. Cheung's reasons for not terminating his employees' contracts before end of October 1994. From a moral point of view, Mr. Cheung's mercy deserves respect. However, as a matter of law, Mr. Cheung had a duty to mitigate his loss and should have terminated the services of his 3 employees by giving one month's notice. Besides, even if the remaining ICI products held by Techi Paints could not have been disposed of within a month, there is no suggestion that the other staff working under Mr. Cheung in his other companies (such as Fanex Co. Ltd.) could have assisted him in completing the task. For these reasons, I rule that only HK$23,100 (i.e. the total salaries for Techi Paints' 3 employees for a month) should be allowed.

F. Postscript

83. The total amount of damages payable by ICI to Mr. Cheung are thus as follows:

A. Damages for Techi Motor

(1)	4% Annual Rebate on Purchase from 1-5/94: HK$444,375.91.
(2)	"1 for 15" Free Tins Promotion: HK$116,043.13.
(3)	Loss of Profits for the Lost Months: HK$1,312,724.00
(4)	Loss of 4% Rebate for the Lost Months: HK$800,000.00.
(5)	Loss of the 2% Payment Discount for the Lost Months: HK$200,000.00
	Sub-total: HK$2,873,143.04

B. Damages for Techi Paints

(6)	Wasted Rental: HK$42,500.00.
(7)	Wasted Salaries: HK$23,100.00
	Sub-total: HK$65,600.00

84. Last but not least, I wish to thank counsel for their assistance.