WINNER CO (HK) LTD v. ARTHUR A. SEIDMAN & CO

IN THE SUPREME COURT OF HONG KONG

APPELLATE JURISDICTION

CIVIL APPEAL NO. 10 OF 1971

(On Appeal from O.J. Action No. 1340 of 1968)

________________________

________________________

________________________

JUDGMENT

________________________

Li J:

1.  This is an appeal from a decision of Pickering J. giving judgment in favour of the Plaintiffs, the present Respondents, against the Defendants, the present Appellants, for the sum of $191,656.10 being the total loss of profit and loss on the resale of goods sold by the Appellants to the Respondents together with interest at the rate of 9% per annum on the sum of US$9,773.79 (HK$59,229.17) being the difference between the landed costs of the goods (including duty but excluding charges and commission) and the gross proceeds of sale from the 16/9/68 till judgment.  It would be convenient to refer to the respective parties as Plaintiffs and Defendants.

2.  The facts giving rise to the proceedings are as follows:

3.  The Plaintiffs are dealers and wholesalers of cotton cloth in New York, U.S.A. for resale to processing and converting houses.  They have a buying agent in Hong Kong which is a limited company by the name of Universal Enterprise, Ltd.  The Defendants are a limited company in Hong Kong.  They and their associates in Singapore manufacture cloth for export.  There have been numerous business transactions between the Plaintiffs and Defendants.  The Plaintiffs have been buying cloth from the Defendants for resale in the U.S.A. since 1960.  But the subject matter of these proceedings relate to one of those transactions only.

4.  On the 29/4/66 the Defendants wrote to Mr. Seidman, the principal partner of the Plaintiffs in these terms:–

“We have available approximately 300,000 yds. of the above Osnaburg in Singapore which we should like to offer to you for prompt shipment at US16.5 cents per yard CIF.

We know you have extensive connections for selling this cloth and hope you will assist us to dispose of same. Samples are being sent out tomorrow.

Thanking you for your usual co-operation,”

To this letter the Plaintiffs replied on the 4/5/66 as follows:–

“Thank you for your letter 29/4, and I hope the product made in Singapore is equal to what we have been getting in Hong Kong. Upon receipt of the samples, we will cable you or Edward Chok.”

5.  The sample must have reached the Plaintiffs on or about the 4/5/66 because on that same day Mr. Seidman cabled the Defendants saying:–

“Fortyfive inch 40x30 12/10 osnaburg sample satisfactory prepare shipment optional discharge New York or Charleston at 16.5 CIF”

6.  Letters of credit were then opened in favour of the Defendants and osnaburg cloth in 297 bales totalling 346,327 yds were shipped by the Defendants from Singapore to Charleston to the order of the Plaintiffs in three shipments dated the 21/5/66, the 10/6/66 and the 15/8/66 respectively per s.s. Hong Kong Dolegate (128 bales) s.s. Hoegh Cairn (159 bales) and s.s. Johannes Maersk (10 bales).  The Plaintiffs paid for all these goods by letters of credit in the total sum of US$57,143.95 and the shipments reached Charleston in due course.

7.  In the meanwhile, on receipt of the sample sent to him by the Defendants in May 1966 Mr. Seidman showed it to Rose Textile Corporation of New York and signed a contract to sell to the latter the whole of these shipments of cloth at US20 cents per yard F.O.B. Charleston, South Carolina.  The contract was dated the 8/5/66.  In his evidence Mr. Seidman said:–

“I took the sample of about two yards to one of my biggest customers of osnaburg – Rose Textiles Corporation and offered them the goods for arrival in the United States July/August/September at 20 cents landed duty paid F.O.B. Charleston.”

It was a sale by sample.  The first shipment arrived at Charleston in July 1966.  They were released to Rose Textile Corporation who took delivery through their processor.  Later the contract was rescinded by Rose Textile Corporation.  The Plaintiffs allege that the contract was rescinded because the cloth delivered by the Defendants did not correspond with the sample which the Defendants sent them, the same sample he showed to Rose Textile Corporation.

8.  At that time the market was strong and Mr. Seidman thought that he would have no difficulty in disposing of the rejected cloth.  In evidence he said:–

“I wrote the warehouse where we stored them, to break open any bale and send us a 50-yard piece so that we can go out and try to sell the goods elsewhere. The market was very strong, and I thought I would find myself another customer who hadn’t ever rejected them or seen them. One month later I sold the goods for 10% more, and I was beginning to feel happy ...”

On the 26/8/66 he sold 1 bale totalling 1186 yards @ US22½ cents to Louis Hornick, a curtain goods converter.

On the 30/11/66 he sold 3 bales totalling 3404 yards @ US22 cents to Caravelle Textile Co., a converter of curtain, drapery fabrics.

On the 7/12/66 he sold 3,452 yards of the cloth @ US22½ cents to Rose Textile Corporation.

All these were trial purchases but there was no “follow up”. However, Mr. Seidman was not then unduly worried.  When asked whether he was worried about the cloth he said:–

“No, because there is a market for everything that is made at some price, if you can find a customer, and since the market value on similar goods in the States was so much higher, I did not relish the entire capital about $60,000, but I thought I would be rewarded with an extra price and move the goods.”

Then Mr. Seidman left New York early in December 1966.  He met Mr. C.K. Show of the Defendants on the 24/12/66 in Hong Kong and he complained to the latter about the poor quality of the goods.  Mr. Chow asked Mr. Seidman to sell it and offered to share half the loss.  Mr. Seidman cabled on the 29/12/66 to New York to effect a sale without success.  Then told of this Mr. Chow assured Mr. Seidman that he would pay half the loss.

In July 1967 Mr. Chow went to New York.  There was a meeting with Mr. Seidman.  When the question of osnaburg was raised Mr. Chow again assured Mr. Seidman that when the osnaburg was sold he (Mr. Chow) would pay half the loss.  When Mr. Seidman expressed his worry about his operating capital being tied up Mr. Chow was evasive.

There was another trial sale of one bale of the cloth on the 8/8/67 to Raynor Textiles, a converter of drapery goods and other types in Montreal, Canada @ US22 cents.  Again there was no follow up.  In May 1968 an offer was made to sell all the cloth (as seconds as are) to Dartmouth Finishing Corporation @ 17½ cents per yard.  Two bales of cloth were sent to them as samples.  Again the attempt failed.  Eventually the remainder of the cloth totalling 337,113 yds was sold to a firm called A & E Weeden in September 1968 @ US15 cents.  Consequently the Plaintiffs suffer not only a loss of profit but also a loss on re-sale.

9.  The Plaintiffs claim damages for breach of contract on the ground that the cloth shipped to them was of inferior quality and not of a quality equal to the sample submitted to them by the Defendants; and that it was not saleable to converters being not reasonably fit for the purpose of conversion into garments, draperies and bedspreads by the Plaintiffs’ customers.  The particulars are set up in the statement of claim as follows:–

"1.	LANDED COST OF GOODS
	Cost price of goods C.I.F. Charleston		US$57,143.95
	Duty paid		5,249.26
	Customs Clearance		135.00
	Wharfage and handling		157.83
	Buying Commission to Universal Enterprises Ltd.		1,142.86
			US$63,828.90
2.	NEW PROCEEDS WHICH WOULD HAVE BEEN RECEIVED IF GOODS OF CONTRACT QUALITY:–
	346,327 yards at US$0.20 per yard		US$69,265.40
	Less Sales Commission at 2%		1,385.31
	Net proceeds		US$67,880.09
3.	LOSS OF PROFIT
	US$67,880.09 - US$63,828.90 =		US$4,051.19
4.	LOSS ON RESALE
	LANDED COST AS ABOVE		US$63,828.90
	Add:–
	Interest to 15th September 1968 as per Schedule furnished to Defendant's solicitors		12,593.73
	Insurance in Warehouse as per like Schedule		710.94
	Storage as per like Schedule		1,708.69
	TOTAL COST		US$78,842.26

LESS:–
SALE RECEIPTS:–

26th	August 1966	1186 yards at 22½ cents	US$	266.85
30th	November 1966	3414 yards at 22 cents		751.08
7th	December 1966	3452 yards at 22½ cents		776.70
9th	August 1967	1172 yards at 22 cents		257.84
5th	September 1968	337113 yards at 15 cents		50,566.95
			US$	52,619.42

Less:–

	Commission on Sale at 2%	US$1,052.39
	Freight on goods returned	300.00		US$1,352.39

NET PROCEEDS OF SALE			US$51,267.03	US$51,267.03
LOSS ON RESALE				US$27,575.23

5.	SUMMARY
	(1) LOSS OF PROFIT	US$4,051.19
	(2) LOSS ON RESALE	US$27,575.23
	TOTAL LOSS	US$31,626.42

The Plaintiffs claim US$31,626.42 which at the exchange rate of HK$6.06 = US$1.00 is equivalent to HK$191,656.10 plus interest at the rate of 9% per annum on US$9,773.79 (HK$59,229.17) (being the difference between the landed cost excluding charges and commission and the gross proceeds of sale;) from the 16th September 1968 until judgment or payment.”

By their Statement of Defence the Defendants admit that the sale was one by sample but deny that the cloth so shipped did not correspond with the sample submitted to the Plaintiffs.  The Defendants deny that the Plaintiffs suffered any loss.

10.  At the trial in the court below Mr. Seidman produced a piece of cloth (Exh. P.1) which, he claimed, was part of the sample he received from the Defendants on or about 4th May 1966.  He also produced a bale of 10 pieces of cloth which, he said, was taken from the bulk in Charleston, Exh. P.2.  This bale was chosen at random as being representative of the cloth shipped by the Defendants in fulfilment of the contract concluded in May 1966.  It is sufficient to say that when Exh. P.1 and 4 pieces of cloth in Exh. P.2. were examined and compared in Court it was found that Exh. P.2. was of inferior quality.  The expert witness, Mr. Woolfenden, called by the Defendants said that Exh. P.2. was not up to the standard of the sample.  Indeed he stated that in his view a superior yarn had been used for the manufacture of the sample, Exh. P.1.

11.  The main issue before the trial judge was whether Exh. P.1. was in fact a portion of the sample sent by the Defendants to the Plaintiffs.  On this the learned trial judge said:–

“The gravemen of the Plaintiffs complaint is that the bulk osnaburg delivered was of inferior quality to that of the sample submitted to them. Whilst the defendants’ admit that it was an implied condition of the contract that the bulk should correspond with the sample, it is their case that the 44” x 16” piece of cloth (exhibit P.1) produced by the Plaintiffs in Court as the remaining portion of the sample submitted by the Defendants is not in fact a portion of such sample and the managing director of the defendant Company went so far as to suggest that the plaintiffs’ claim was fraudulent.”

and

“Mr. Arthur A. Seidman, managing partner of the plaintiff firm, said that he received the sample by airmail on May 4th 1966 and that on a date which he placed as being either the 4th, 5th, 6th, 7th or 8th of that month but probably the 4th, the date of receipt, he endorsed upon it in his own handwriting the words

‘Received May 4th, 1966 from Winner 45” – 40 x 30 – 12/10 Singapore C.I.F. Charleston 16.5’

and added his signature.”

Mr. Seidman was positive that the sample he produced in Court was a portion of the sample sent to him by the Defendants in May 1966.

12.  On the other hand the Defendants produced 4 pieces of cloth which, they alleged, were the counterparts of the sample which they sent to the Plaintiffs.  On this issue the learned trial judge arrived at the following conclusion:–

“Mr. Seidman however was one of the most transparently honest witnesses I have encountered. His account of his business dealings both generally and in relation to this transaction had the convincing ring of truth and he says that the cloth produced in Court was part of the sample sent to him by the defendant company. I accept that statement unreservedly. It is supported by the inherent unlikelihood of a man of his experience in the trade buying unsaleable osnaburg on the basis of a sample which represented accurately the poor quality of the bulk.”

and he further said in his judgment:–

“I find as facts

(1) that Exh. P.1 is the remaining portion of the sample sent by the defendant company to the plaintiff firm in May, 1966; and on the strength of which the plaintiff firm bought 300,000 yards of Osnaburg from the defendants;

(2) that the bulk does not correspond with the sample in

(a) colour

(b) evenness of weave

(c) texture

(d) quality

Quite apart from the evidence of the expert and of the managing director of the defendant company these defects are apparent to my naked untrained eye;

(3)   Making all due allowance for the fact that I am dealing with part-waste Osnaburg, a low-grade material in which some defects are to be expected, that the inferiority of the bulk as compared with the sample is such as to entitle any reasonable buyer to reject the goods.”

13.  The grounds of appeal as stated in the notice of motion are as follows:–

“1.  The learned Judge misdirected himself on the burden of proof in failing to direct himself that on the pleadings it was incumbent on the Plaintiff to prove affirmatively that Exhibit “P-1” was part of the sample relating to the contract in question;

2.   The learned Judge misdirected himself on the aforesaid issue relating to Exhibit “P-1” in casting upon the Defendant (Appellant) the burden of proving a system for the preservation of counter-samples which guaranteed immunity from confusion of samples “so as to identity with certainty the four lengths produced in Court as being counterparts of the length sent to New York in May 1966”;

3.   In considering the question whether it had been proved affirmatively that Exhibit “P-1” was part of the said sample, the learned judge failed to take into account the inherent probabilities relating to that issue;

4.   The learned Judge misdirected himself by placing too heavy a reliance on the demeanour of the Plaintiff’s witness Arthur A. Seidman in considering the aforesaid issue and failed to give effect to the inherent probabilities of the case;

5.   The learned Judge erred in law in that on the pleadings it was not open to him to make the findings on pages 8 and 9 of the Judgment;

Liability – Fitness for purpose

6.   There was no evidence or sufficient evidence to support the finding that the bulk of 346,327 yards of Osnaburg was “unsaleable”;

7.   There was no evidence or sufficient evidence to establish a case of breach of implied warranty under section 16(a) of the Sale of Goods Ordinance: the learned Judge accordingly was wrong in concluding that the Osnaburg was “unsaleable”;

8.   On the pleadings it was not open to the Court to find that the Osnaburg was “unsaleable”;

Liability – Generally

9.   Inadmissible evidence was adduced by the Plaintiff and admitted by the learned Judge with regard to the Plaintiff’s sub-purchasers’ reasons for not buying the said Osnaburg in bulk from the Plaintiff;

DAMAGE

10.  The learned Judge erroneously awarded to the Plaintiff a sum of US$12,593.73 by way of interest and thereby failed to apply section 55(2) and (3) of the Sale of Goods Ordinance and section 30A of the Supreme Court Ordinance, Cap. 4;

11.  The learned Judge erroneously allowed to the Plaintiff the sum of US$5,249.26 when there was no evidence or reliable evidence that the Plaintiff incurred the said or any sum by way of duty or at all;

12.  The learned Judge erroneously allowed interest on the alleged loss of profit and on resale at 9½% per annum;”

14.  These may be separately considered conveniently under three main groups.

15.  The first complaint is that in accepting Exh. P.1 as “the sample” sent by the Defendants to the Plaintiffs the learned trial judge erred in placing too heavy a reliance on the demeanour of Arthur A. Seidman and failed to direct himself that the onus of proof was on the Plaintiffs.  The second complaint is that there was no evidence to show that the cloth was unsaleable and that the learned trial judge admitted inadmissible evidence as to the sub-purchaser’s reasons for not buying the said cloth.  The third complaint is that he erroneously awarded the sum of US$12,588.73 being interests on the interest on the full price from the date of the breach of contract to the date of resale and the sum of US$9,773.79 being interests on the loss of profit on resale.

16.  With reference to the first complaint Mr. Litton for the Defendants contended that the learned trial judge, relied entirely on the bare assertion of the Plaintiffs’ witness Arthur Seidman; he further contended that the judge misdirected himself on the burden of proof in that he failed to direct himself that it was for the Plaintiffs to prove affirmatively that Exh. P.1 was part of the sample relating to the contract in question and that certain passages in his judgment appeared to read as if the judge was under the impression that there was some sort of burden upon the defendants to prove a system for the preservation of counter-samples which guaranteed immunity from confusion.  Mr. Litton further contended that on the evidence, taken as a whole, the Plaintiffs’ system of keeping samples was as imperfect as the Defendants’ system; and being so, the learned trial judge should have found in favour of the Defendants.  In my view counsel’s last point begs the question.  If a trial judge finds that he is not satisfied as to where the truth lies and therefore is left in doubt he should dismiss the Plaintiffs’ claim on the ground that he has not discharged the burden of proving his case. In Ho Hau Yee v. Yu Ming alias But Yuk Yee^([1]) Rigby J., as he then was, said:–

“In my judgment all that the learned judge in the present case was saying in the passage complained of was ‘I do not know where the truth lies, I am, therefore, left in doubt, and so the burden is upon the plaintiff to prove her claim I must, and do, quote that she has failed to do so.’ In my view he was entitled to take such a course and I would therefore dismiss this ground of appeal.”

17.  In the present case the learned trial judge heard evidence from both parties, observed the demeanour of all the witnesses and came to the conclusion that he believed the Plaintiffs’ witness as a witness of the truth.  In the course of his judgment the learned judge said:–

“I am not satisfied that Mr. Luk’s evidence establishes a complete chain of identification of the sample sent to New York. He did not know what actually went into the envelope mailed to New York and Mr. Chow’s secretary was not called. Conversely the reputed retention of the four counterpart samples in an unlocked sample cabinet for two years can hardly be said to guarantee immunity from confusion of samples so as to identify with certainly the four lengths produced in Court as being counterparts of the length sent to New York in May 1966. In saying that I am not overlooking the fact that the defendants claim never to have sold any 45” Osnaburg apart from that the subject of this action.”

Another passage in his judgment reads as follows:–

“It may fairly be said that equally the Plaintiff firm’s method of storage of the half sample which remained after the other half had been given to Rose Textiles, likewise guaranteed no immunity from confusion of samples. Mr. Seidman’s evidence was that his firm has some fourteen cabinets for the storage of samples of different types of material including one for Osnaburg and that the remaining half sample was filed under this system until, upon the commencement of these proceedings more than two years ago, he brought the half-sample to Hong Kong upon one of his visits and gave it to his solicitors. There was no evidence as to whether the cabinets were kept locked or as to who had custody of or access to them.”

18.  One thing is certain.  Mr. Seidman was able to say positively that Exh. P.1 was the sample which he received from the Defendants for the contract and that he endorsed it in May 1966.  None of the Defendants’ witnesses could say what sample was dispatched by the Defendants to the Plaintiffs.  They relied on Mr. Chow’s secretary who was not called to give evidence.  Furthermore, there was no evidence that the Defendants sent any other samples of osnaburg to the Plaintiffs in May 1966. 

19.  The general principle of course is that the burden of proof lies upon the Plaintiffs in that he who alleges must prove.  A Plaintiff must establish a prima facie case.  If a Defendant also adduces evidence, however, such evidence is considered in relation to all the other evidence in the case; and in this case, in my view, there is nothing in the judgment which supports the view that the learned judge did not apply the proper principles to the evaluation of the evidence.  He accepted Mr. Seidman’s evidence.  He came to his conclusion on the balance of probabilities.  He did not misdirect himself on the burden of proof.

20.  The Defendants’ second complaint is that there was no evidence, or no sufficient evidence, to establish that the cloth was unsaleable and that the learned trial judge admitted inadmissible evidence with regard to the Plaintiffs’ sub-purchasers’ reasons, for not buying the said cloth in bulk.  Our attention is drawn to certain passages of the judgment.  The first passage reads:–

“I say ‘the remaining portion’ of the sample because it is the plaintiffs’ case that approximately one half of the original sample was cut off by them and handed to a customer of their own to who the plaintiffs had resold the whole consignment but who subsequently, after attempting to process (that is to dye and print) some five or ten bales from the bulk, rejected the goods as being the same ‘Singapore trash’ which they had previously rejected from another source. Similar rejections from various other customers were experienced by the plaintiffs.”

The second passage reads:–

“Nor must the acid test of marketability be overlooked. Four of the plaintiff firm’s customers took trial bales from the bulk, one of them twice, for test processing and none of them would buy the bulk or any further part of it. The accumulated expertise of more than fifty years’ experience in the textile trade was insufficient to enable Mr. Seidman to sell the goods except at a loss in the form of ‘seconds as are’. Yet he had been completely satisfied with the sample.”

Mr. Litton contended that there was no evidence to support the reason why the sub-purchasers returned the goods or did not follow up with a further contract for the purchase of the bulk other than hearsay evidence; that there was no evidence to show that the Plaintiffs could not have sold the bulk at a lower profit in 1966; that the difference in quality between Exh. P.1 and Exh. P.2 which was only marginal; and therefore that accordingly the question of unsaleability depended entirely on the learned judge’s assumption in Mr. Seidman’s infallability that he (Mr. Seidman) was unable to resell because of the poor quality of the bulk. 

21.  Taking the learned judge’s observation viz:–

“..... after attempting to process (that is to dye and print) some five or ten bales from the bulk, rejected the goods as being ‘Singapore trash’ which they had previously rejected from another source. Similar rejections from various other customers were experienced by the Plaintiffs”

out of the context may give an apparent impression that he was acting on inadmissible evidence.  However, in the course of his judgment the learned judge found that the osnaburg shipped by the Defendants did not correspond with the sample (Exh. P.1) which they sent to the Plaintiffs.  There was evidence that the Plaintiffs’ customers were converters who purchased the osnaburg for processing (dyeing and printing) into draperies and bed spreads. The first sub-purchaser rejected the goods after a trial of the cloth from the first shipment in July 1966.  After that there were no less than four trial sales but none of them was followed up by a purchase in bulk.  Indeed the sub-purchasers who first rejected the goods in July 1966 at the price of 20 cents per yard took delivery of a small quantity of the same at 22½ cents per yard for trial; but they did not follow it up with a bulk purchase.

22.  There was no evidence that any of the customers rejected the goods because of the price.  Nor was there evidence that the cause of rejections was that the market was so saturated with offers of osnaburg for sale.  If it had been the position, Rose Textiles would never be willing to pay 22½ cents per yard for a small quantity instead of paying 20 cents per yard for the bulk.  Nor can it be said that the difference in quality between the sample Exh. P.1 and the bulk as represented in Exh. P.2 is marginal.  Mr. Woolfenden, an expert called by the Defendant said that “the bulk was not up to the standard of the sample in that a different yarn had been used” and that “the yarn used in the sample is a better yarn than the yarn used in the two lengths (Exh. P.2A and P.2D)”

23.  Section 17 of the Sales of Goods Ordinance provides:–

“(1) A contract of sale is a contract for sale by sample where there is a term in the contract, express or implied, to that effect.

(2) In the case of a contract for sale by sample –

(a) there is an implied condition that the bulk shall correspond with the sample in quality .....”

In my view the defendants were in breach of a condition of their contract with the Plaintiffs.

24.  Section 55(1) of the Sales of Goods Ordinance provides:–

“(1) Where there is a breach of warranty by the seller, or where the buyer elects, or is compelled, to treat any breach of a condition on the part of the seller as a breach of warranty, the buyer is not, by reason only of such breach of warranty, entitled to reject the goods; but he may –

(a) set up against the seller the breach of warranty in diminution or extinction of the price; or

(b) maintain an action against the seller for damages for the breach of warranty.”

25.  The Plaintiffs were compelled to treat the breach of condition as breach of warranty because they had sold forward to Rose Textiles who actually took delivery of the cloth at Charleston. 

26.  There was evidence that the Plaintiffs were wholesalers and dealers of cotton cloth of standing in America and that Mr. Seidman has had fifty years experience in this trade.  Mr. Seidman described the cloth as follows:–

“They looked hungry – in other words as though they were missing some part of their meal, comparison with their original sample – with the sample out of the shipment should convince you that they are hungry – looking – the type of yarn was inferior to what when Hong Kong would be shipping and were shipping before I even sold to Rose Textiles the second shipment – they just refused to buy any goods – they did not think they could market them satisfactorily; in each and every case I indicated that I would trade downward if I can move the lot, and if they paid me 20 cents, I would have been happy to equal my original sale – I did not complain to Winner because I had no loss – I thought I was going to make more money – I left New York for Europe, Egypt, Pakistan.”

There was evidence that no less than four customers had not followed up with a contract to buy the bulk after a trial.  Having regard to the aforesaid evidence the learned judge was justified in coming to the conclusion that the osnaburg was unsaleable because of its inferior quality rendering it unsuitable for the use of the Plaintiffs’ customers.  To do otherwise will be turning one’s face from a simple process of deduction.  Whether the goods were referred to as “Singapore trash” would be of little significance. 

27.  Then there is the question whether the Plaintiffs could have disposed of the osnaburg at a smaller profit.  Mr. Litton contended that there was no evidence of the state of the market in America and whether the Plaintiffs could have sold the osnaburg in 1966 at a reasonable price.  As to that the Plaintiffs were in a very difficult position.  The Plaintiffs’ duty was to mitigate their damages.  Their duty was to make all reasonable endeavours to sell at a reasonable price. 

28.  In my view there was no evidence of the state of the market in America.  Such evidence is to be found in Mr. Seidman’s testimony – both in chief and in cross-examination.  After he gave evidence of the four trial sales, without any follow up he was asked whether he was worried about the goods and he said:–

“No, because there is a market for everything that is made at some price, if you can find a customer, and since the market value on similar goods in the States was so much higher, I did not relish the entire capital about $60,000, but I thought I would be rewarded with an extra price and move the goods.”

Later in cross-examination he said speaking of the market in August 1966:–

“I did not go through the 50 yard piece. I mean I did not examine it. I looked at it naturally, the cut off, a few yards, and went out to try and sell goods because the market was strong. I hoped I would find a buyer who had never seen it and wouldn’t identify it as that Singapore trash and pay me the prices the market was paying for similar goods.”

Of the market in 1967 he said that although he could not obtain top prices for some items his business was not affected.  Eventually he came to his final sale in September 1968.  He said that he could not sell the osnaburg in any other way except as “seconds” to A & E Wedeen.

29.  It is quite clear from this evidence that the American market was fairly buoyant in 1966-1968.  Mr. Seidman was not unduly worried even though four successive trial sales had not been followed with any substantial transaction.  Prices could be maintained at a reasonably high level.  He had samples taken from the bulk and was attempting to sell the osnaburg by sample hoping that the sub-purchasers were willing to accept a lower standard of the goods.  In other words as from August 1966 he had been trying to sell the goods “as are”.  There was no evidence that those who purchased the goods at small quantities declined further purchase because of the high price.  They did not follow up because the osnaburg were not suitable for their purpose. 

30.  The learned trial judge also found as a fact that in December 1966 when Mr. Seidman complained of the osnaburg, Mr. C.K. Chow urged him to sell it and offered to pay half of the Plaintiffs’ loss.  In view of this there was no reason why the Plaintiffs should hold on to the osnaburg and tie up their own capital for two years in speculation.

31.  Having regard to the total lack of any other evidence concerning the state of the American market and of any evidence that the Plaintiffs could have disposed of the osnaburg at a reasonable price I am of the opinion that the learned trial judge was justified in coming to the conclusion that the osnaburg could not be sold until September 1968.  The fact that they managed to dispose of the bulk at 15 cents in 1968 does not mean that they could have disposed of it at the same price in 1966 or 1967.  They had to find a buyer who had a use for their cloth.

32.  Finally there remains the quantum of damages awarded to the Plaintiffs.  Mr. Litton did not dispute the amount claimed by way of loss of profit.  However, as regards the loss on resale he contended that it was wrong to include as damages the sum of US$12,593.73 representing interests on the landed costs of the goods plus duty from the date of breach to the date of resale in September 1968.  Mr. Litton contended that the Plaintiffs should have rejected the goods in 1966 and sued for the purchase price with interest; but that they were not entitled to hold the goods for two years and claim interest on the purchase price plus the expenses of keeping and insuring the goods.  Mr. Litton also contended that the award of 9% interest on US$9,773.79 the difference between the landed costs of the osnaburg and their eventual proceeds on resale from September 1968 to the date of judgment was wrong.  To do so meant asking the Defendants to give an indemnity even if there was a breach of warranty.  Further he contends that to include the US$12,593.73 in the award amounts to awarding interest to the damage before the right to damage has accrued.  He argues that if the Plaintiffs had purchased the osnaburg with their own money then the award of the US$12,593.73 would be an award of notional interest on their own money.  He invites this court to put a limit to the extent that a Plaintiff, even if successful in his action, may recover damages for his actual loss only.

33.  Mr. Zimmern, on the other hand, contended that as from 1934 the courts in England have been given a discretion to award interest on damages on breach of contract.  He invited our attention to the case of Riches v. Westminster Bank Ltd.^([2]) where it was held that where the court awarded damages such damages never lost their nature in substance as interest.  This clearly establishes that the court has a discretion to award interests on damages.  In his judgment Lord Wright gave a clear explanation of the law in England relating to the Court’s power to award interest on money due and he said:–

“The appellant’s contention is, in any case, artificial and is, in my opinion, erroneous because the essence of interest is that it is a payment which becomes due because the creditor has not had his money at the due date. It may be regarded either as representing the profit he might have made if he had had the use of the money, or, conversely, the loss he suffered because he had not that use. The general idea is that he is entitled to compensation for the deprivation. From that point of view it would seem immaterial whether the money was due to him under a contract, express or implied, or a statute, or whether the money was due for any other reason in law. In either case the money was due to him and was not paid, or, in other words, was withheld from him by the debtor after the time when payment should have been made, in breach of his legal rights, and interest was a compensation whether the compensation was liquidated under an agreement or statute, as, for instance, under the Bills of Exchange Act, 1882, s.57, or was unliquidated and claimable under the Act as in the present case. The essential quality of the claim for compensation is the same and the compensation is properly described as interest. For reasons that go back far in history the distinction between interest proper as it has been called, that is, interest due under a contract, statute or the like, and interest by way of damages, that is, not due under an agreement express or implied has since very early days been recognised in England whether in the ecclesiastical or common law courts.”

Mr. Zimmern contended that in the present case if the goods were rejected the Plaintiffs could have claimed for the purchase price with interest.  Where the Plaintiffs chose to rely on breach of warranty the Plaintiffs should be allowed interest on the tied up capital.  The Plaintiffs had to pay interest to the bank which was a loss flowing naturally from the breach of contract on the part of the Defendants.  Whether the capital was Bank money or Plaintiffs’ own the Plaintiffs were deprived of the opportunity to make use of it. 

34.  In the case of A.B. Kemp Ltd. and Others  v. Tolland (Trading as James Tolland & Co.^([3]) where it was found that the Defendants were liable under the Sale of Goods Act for the purchase price of goods delivered Devlin J., as he then was, said:–

“I should award it on the simple commercial basis that if the money had been paid at the appropriate commercial time, the other side would have had the use of it.”

and later

“I think that where the case has been brought on commercial matters and where in ordinary commercial practice money would, if the facts which I have now adjudged to exist had been established, have been paid some time ago, it ought to carry interest.”

In Jefford v. Gee^([4]) Lord Denning having reviewed the authorities as to the basis on which interest should be awarded in personal injury cases said:–

“Gathering together the best of the reasoning from those various sources we would suggest that these principles should be applied in awarding interest in personal injury cases:–

              Interest should not be awarded as compensation for the damage done.  It should only be awarded to a plaintiff for being kept out of money which ought to have been paid to him ...”

35.  Our law on a judge’s discretion to award interest is the same as that in England.  Section 30A(1) provides:–

“Subject to subsection (2), the court may, in any proceedings brought in the court for the recovery of any debt or damages, order that there shall be included in the sum for which judgment is given interest at such rate as it thinks fit on the whole or any part of the debt or damages for the whole or any part of the period between the date when the cause of action arose and the date of the judgment.”

In the present case had there been no breach of warranty the Plaintiffs would have made a clean profit on resale in 1966.  As it was the Plaintiffs were obliged to sell the osnaburg at a loss.  The difference between the landed costs of the osnaburg in 1966 and the proceeds on resale paid on the 16th September 1968 was US$9,773.79.  As from the 16th September 1968 a right to recover this sum accrued to the Plaintiffs who had been kept out of the said sum.  It is appreciated that in the case of A.B. Kemp v. Tolland⁽³⁾ the sum claimed represented proceeds of sales of goods delivered.  But the award of interest was made on the basis of simple commercial practice that the money ought to have been paid sometime ago.  This principle was applied in personal injury cases in Jefford v. Gee.⁽⁴⁾ I am of the opinion that the same principle applies to the present case where the Plaintiffs who have been kept out of the use of money which should have received sometime ago. 

36.  Section 55(2) of the Sale of Goods Ordinance provides:–

“The measure of damages is the estimated loss directly and naturally resulting, in the ordinary course of events, from the buyer’s breach of contract.”

As a result of the breach in the present case the Plaintiffs took two years to dispose of the goods finally.  In the meanwhile he had to pay for the storage, insurance of the goods and bank interests for the tied up capital.  It is common commercial practice in these days that traders make use of banking facilities.  It has been proved that the Plaintiffs were out of pocket in the sum of US$12,593.73 for banking interest, US$710.94 for insurance and US$1,705.69 for storage in this transaction.  Such sums were part of his loss directly and naturally resulting in the ordinary course of events.  Thus it made no difference whether the Plaintiffs made use of their own money or banking facilities.  In the former case he lost the use of his capital money for 2 years.  In the latter he had to pay the banks for the use of the bank’s money.  In the course of his address Mr. Litton conceded that if the evidence established that the Plaintiffs could not have sold the osnaburg until 1968 then such sums would be payable.  For the reasons given on the question of saleability of the osnaburg I agree with the learned trial judge who concluded that the Plaintiffs could not sell the osnaburg until 1968.  It was proper for him to allow the inclusion of the aforesaid sums as part of the damages recoverable.

37.  In view of the aforesaid circumstances I am of the opinion that the learned trial judge is right and accordingly the appeal is dismissed with costs. 

([1]) 1962 H.K.L.R. 682 at page 693

([2]) 1947 1 ALL E.R. 471

([3]) 1956 2 Lloyds Reports 681

([4]) 1970 2 W.L.R. 702

(3) 1956 2 Lloyds Reports 681

(4) 1970 2 W.L.R. 702

IN THE SUPREME COURT OF HONG KONG

(APPELLATE JURISDICTION)

CIVIL APPEAL NO. 10 OF 1971

(On appeal from O.J. Action No. 1340/68)

________________________

________________________

________________________

JUDGMENT

________________________

Huggins, J.:

1.  Three main points were taken on the hearing of the appeal. The first was that the learned judge was not justified in finding that the exhibit relied upon by the respondent Plaintiffs as being part of the sample supplied by the Appellants was in fact part of such sample. Mr. Seidman asserted that it was and the learned judge believed him. In so believing him the learned judge must have been satisfied not only that the witness was honest but also that he was reliable. Before we could upset this clear finding we should have to be persuaded of the existence of strong evidence that Mr. Seidman was wrong and I agree that the Appellants have failed to indicate sufficient contrary evidence. It is clear the learned judge appreciated that the burden was on the Respondents to prove that the piece of cloth they relied upon was part of the original sample and the possibility of a mistake in the Respondents’ office must have been present to his mind. It would certainly have strengthened the case for the Respondents if Mr. Seidman had been more precise about the custody of the sample from the moment of its receipt up to the time of its production in court. Failure to produce evidence which would normally be available if a party’s case were true is a factor to be considered, but the judge had to decide the case on such evidence as was placed before him. It was also a factor to be considered that the Appellants had not called evidence which made it impossible for him to believe the Respondents’ evidence. Thus it would have been of great significance if the Appellants had been able to produce convincing evidence that what they alleged to be a piece of cloth from the same batch as the sample supplied to the Respondents was in truth from the same batch, because it was not superior to the goods delivered. By pointing out that the Appellants had not produced such evidence the learned judge did not imply that there was an onus of proof on them. In my view we cannot say that the learned judge was not entitled to make the finding which he did.

2.  The next contention on behalf of the Appellants is that the learned judge misdirected himself when considering the question whether the goods were up to sample. Not only did the judge have regard to evidence of comparison of the goods delivered with the sample: he also referred to “the acid test of marketability” of the goods delivered and, in this connection, to the fact that although four of the Respondents’ customers took trial bales from the bulk they did not subsequently place further orders. It must be conceded that the learned judge appears to have placed some reliance on hearsay evidence of the reason why these prospective customers made no further purchases and of the reason why their original sub-purchasers rejected the goods. It must further be conceded that some of the evidence of the initial attempts to sell the goods after their rejection by the Rose Textile Corporation left room for doubt whether the Respondents did not place a reserve price on them. It is asserted in Chitty on Contracts (23rd ed.) 685 (1471):

“... there is rarely any market price for damaged or defective goods ...”.

That is a very wide proposition and I think that marketability must depend on the nature of the “defective” goods: although not marketable under the contract description they may yet be marketable as seconds. Mr. Seidman himself said:

“.. there is a market for everything that is made at some price, if you can find a customer”.

That self-evident truth was followed by the words

“but I thought I would be rewarded with an extra price and move the goods”.

Again he said:

“Now when we got in 1968 I had exhausted every possible avenue of moving these goods at 20 or 22 or 19 and I then persuaded [someone whose name was not recorded] who is a big processor who handles plenty of trash that he ought to have a try at it at 17½”.

A possible implication is that prior to 1968 the Respondents were never prepared to let the goods go for less than 19 cents and one is left asking oneself whether they could not in 1966 have sold the goods at a lower price which would nevertheless have resulted in a loss smaller than the amount of interest and other charges now claimed. However, this aspect of the case was not pursued. Mr. Seidman said that Rose Textiles sent a cable to the effect that they were not interested “at any price” and he also said that he could not sell the goods “other than the way they were sold”. A somewhat obscure answer he gave was

“In each and every case I indicated that I would trade downwards if I can move the lot”,

but the impression given is that he indicated he would accept some unspecified lower price than that at which sample bales were being offered. There was certainly no evidence to suggest that other willing purchasers were available prior to the date of the eventual sale to A. & E. Weeden. The questions which have to be answered are whether the admission of inadmissible evidence necessarily invalidates the learned judge’s finding and whether the remainder of the evidence supports the conclusion which he reached. First then, would he have made his finding in the absence of the inadmissible evidence? It is significant that when dealing with the question of marketability the learned judge, although he had referred to the inadmissible evidence at the beginning of his judgment, did not refer to it again: he merely mentioned the fact that the prospective customers who took trial bales did not place further orders, without mentioning the reasons why they placed no further orders. The judge’s view appears to have been that a man of Mr. Seidman’s experience would have sold the goods otherwise than “at a loss in the form of ‘seconds as are’” if it had been possible to do so. I am not sure that long experience was conclusive of his having taken all proper steps to mitigate the Respondents’ damages and, in particular, that they did not unreasonably delay offering the goods as seconds. However, the important thing is that the indications are that the learned judge did not reach his conclusion as to the marketability of the goods in reliance upon the inadmissible evidence. For my part I confess to lingering doubts whether the Respondents did make all proper attempts to sell the goods before the sale on 3rd September, 1968. Nevertheless I would not go so far as to say that there was no evidence upon which the judge could make the finding he did. That being so I have finally decided that we shall not be compelled to order a new trial.

3.  The last point relates to the award of interest and this has given me much anxiety. It is conceded that we are being asked to break new ground and I am reluctant to do this in a case which I believe to be founded upon a finding of fact which, although properly supported by evidence, seems to me divorced from reality: the question of interest arose only because of the finding that the goods delivered could not be sold for two years. The nearest precedent cited to us was Cullinane v. British “Rema” Manufacturing Co. Ltd.^([1]), which concerned the sale of machinery warranted to maintain a specified output but which, despite three years’ trial, failed to answer to the warranty, and it should be added that that decision has been criticised by academic writers: see, for example, Street on the Principles of the Law of Damages at p.243.

4.  The damages fell to be assessed under s.55 of the Sale of Goods Ordinance. The Respondents alleged that the Appellants knew the goods were intended for resale and it was for that reason that the award was made by reference to the loss of profit and not merely to the difference between the value of the goods at the time of delivery and the value they would have had at that time if they had answered to the warranty. The principle underlying an assessment of damages in contract was stated by Lord Atkinson in Wertheim v. Chicoutimi Pulp Co.^([2]):

5.  “.. it is the general intention of the law that, in giving damages for breach of contract, the party complaining should, so far as it can be done by money, be placed in the same position as he would have been in if the contract had been performed”.

6.  In the present case the learned judge took the actual loss on resale as being the sum of the landed cost, the cost of insurance and storage and interest at 9% per annum on the landed cost up to 15th September 1968 (the day preceding that on which the Respondents were paid by A. & E.Weeden). The rate of 9% was the rate that the Respondents were charged by their bank on loans. The learned judge then awarded interest at 9% per annum on the difference between the landed cost, including duty but excluding charges and commission, and the gross proceeds of sale for the period from 16th September 1968 until judgment. Finally, he stated (and this follows as a matter of course under s.30B of the Supreme Court Ordinance) that the judgment would carry interest at the rate of 8% per annum until payment.

7.  It is not disputed that the Respondents lost and are entitled to recover the profit which they would have made through resale to the Rose Textile Corporation but for the breach of warranty. Nor is it disputed that they are entitled to recover the expenses which they necessarily incurred by reason of the breach of warranty. In view of the judge’s finding these expenses included the cost of storing the goods until they were resold, the cost of insurance and the cost of freight on goods returned by the Respondents’ purchasers. The “expenses” cannot, of course, include the purchase price of the warranted goods since “the claim for loss of profits could only be founded upon the footing that the capital expenditure had been incurred” (per Lord Evershed in Cullinane⁽¹⁾), but the question is whether interest on the contract price must be excluded on the same basis. If it must, then the Respondents would receive the same damages whether resale took place two months after the breach or two years after the breach. The Appellants contend that while the Respondents may be entitled to interest on the amount of the loss on resale they are not entitled to interest on the whole contract price: they say that the damages they have to pay cannot depend upon the vagaries of the market. However, in so far as the vagaries of the market resulted in the Respondents’ being unable to sell the goods for two years it seems to me that even on their own case the damages must depend upon the vagaries of the market. Indeed, in the present case the vagaries of the market have enabled the Respondents to give credit for a substantial balance on a resale which, on the findings, was not possible in 1966. The Respondents say that interest on the contract price is itself part of the loss on resale and they have included it under that head in their Particulars of Claim. If they had not been required, under the terms of the contract of sale, to pay upon delivery (i.e. before they discovered the defects in the goods) they would have suffered all the other damage claimed but not the deprivation of their money. What the Respondents would have received if performance had been rendered as promised was their profit, but they would have received that in 1966. The significance of the delay in resale is two fold. In the first place, as we have seen, they necessarily incurred expense in keeping the goods. In the second place, not only were they in the mean time kept out of their loss of profit but they were also kept out of the capital. Had the goods answered to the warranty the Respondents would have made their profit in 1966 and they would at the same time have recovered the whole of their capital expenditure. It was, therefore, the whole of their capital expenditure which was tied up until the date of resale and not merely that part of it which they were eventually able to recover. If in 1968 the Respondents had been able to sell at a price which was exactly equal to the sub-contract price plus the costs of storage, insurance and freight there would have been no loss of profit at all, but it would still have taken two years for them to make their profit and to recoup themselves in respect of their capital expenditure: until then they would have been deprived of their capital as a direct result of the breach of warranty. Whether one called it “loss on resale” or used some other description, it would still be damage suffered by the Respondents. The test of remoteness of damage was stated thus by Lord Reid in The Heron II­^([3]):

8.  “The crucial question is whether, on the information available to the defendant when the contract was made, he should, or the reasonable man in his position would, have realised that such loss was sufficiently likely to result from the breach of contract to make it proper to hold that the loss flowed naturally from the breach or that loss of that kind should have been within his contemplation”.

9.  The terms of payment were known to the Appellants and it must have been obvious to them that if there were a breach of warranty the Respondents would have their money tied up until such time (if ever) as they were able to sell the goods. What they did not know was the length of time which would elapse before a sale could be effected and the length of time, therefore, for which interest might be claimed: they did not know that no market would be available but, on the evidence, it would seem to have been a possibility which should have been within their contemplation.

10.  It is contended that the judge has awarded interest as though there had been a breach of condition and the Respondents were entitled to reject the goods. That is not strictly correct because if there had been a breach of condition interest would have been payable under s.30A of the Supreme Court Ordinance on the contract price until judgment and such interest would have been compensation for the delays of litigation. Interest on the contract price was claimed in this case not under s.30A but as part of the loss sustained: it is not compensation for the delays of litigation. No interest has been awarded under s.30A on that part of the damages which is interest on the contract price.

11.  For these reasons, I agree that the appeal should be dismissed but I emphasise once more that this decision rests upon its special facts. It should not be thought that a buyer who could sell the contract goods but who chooses to keep them in the hope of making an increased profit can treat the seller as an insurer against a fall in the market. Moreover, a buyer who continues to store goods which he finds himself still unable to sell within a reasonable time runs the risk of incurring a loss which he will not be able to recover from the seller.

([1]) 1954 1 Q.B. 292

([2]) 1911 A.C. 301, 307.

(1) 1954 1 Q.B. 292, 302.

([3]) 1967 3 All E.R. 686, 691.  

IN THE SUPREME COURT OF HONG KONG

(APPELLATE JURISDICTION)

CIVIL APPEAL NO. 10 OF 1971

(On appeal from O.J. Action No. 1340 of 1968)

________________________

________________________

________________________

JUDGMENT

________________________

Blair-Kerr, S.P.J.:

1.  I agree that the appeal should be dismissed.  The evidence of the expert called by the defendant company was that the bulk was not up to the standard of the sample Ex.P1.  He said that a different and better yarn had been used in the manufacture of the sample; and I must say that even to the untutored eyes of the trial judge and the members of this court, it was quite obvious that the sample was a very superior fabric when compared with such of the bulk as was produced in court.

2.  Therefore, it is hardly surprising that, before the trial judge, a vigorous attempt was made to discredit the evidence of Mr. Seidman, the managing partner of the plaintiff company, who said that Ex.P1  was part of the sample which the defendant company had sent to him, on which he had endorsed, in his own handwriting, the words:

“Received May 4th, 1966 from Winner 45”–40 x 30–12/10 Singapore CIF Charleston 16/5.”

The sample arrived by air mail on 4th May 1966; and Mr. Seidman said that he wrote those words on the sample on a day between 4th and 8th of that month, but probably on the 4th.

3.  The trial judge accepted Mr. Seidman’s evidence without reservation.  In his judgment he said:

“Mr. Seidman was one of the most transparently honest witnesses I have encountered.”

4.  The gravamen of Mr. Litton’s main submission to this court on the issue of liability was simply this:

Accepting that Mr. Seidman was a transparently honest witness, he may have been mistaken in alleging that Ex.P1 was part of the sample which he received from the defendant company.  He did not discharge the onus of proving this vital fact.  He did not say that he personally opened the postal packet containing the sample.  He did not say that he kept it in his personal custody at all material times or that he put it in a locked safe so that the possibility of confusion with other samples in his office could be said to be eliminated; and in the circumstances, it was not enough for Mr. Seidman to say simply that Ex.P1 was part of the defendant company’s sample and that he had put an endorsement to that effect upon it either on the day on which it was received in his office or within a few days thereafter.

This is an argument which could have been, and no doubt was, addressed to the trial judge.  It does not seem to me to be one which can prevail before this court.  It cannot be said that the trial judge’s finding is unreasonable in that it is based on no, or insufficient, evidence; and, for myself, I do not propose to lay down rules as to the nature and quality of the evidence necessary for the proof of a fact such as this in the circumstances disclosed in this case.  If it is clear that a finding of fact is unreasonable, this court will not hesitate to intervene.  But no question of that arises in this case.

5.  Mr. Litton submitted that the goods could not be said to be unsaleable because they were eventually sold in 1968 i.e. 2 years after delivery; and that although it may not have been possible to sell them in 1966 at, say, US$ 20 cents, it is difficult to believe that they could not have been sold at, say, US$ 19 cents or US$ 17 cents.

6.  The court did inspect a very small part of the bulk shipment and we were able to compare it with the sample Ex.P1.  I do not think that the plaintiffs’ sub-purchasers were exaggerating when they described the bulk shipment as “Singapore trash”.  It does not surprise me in the slightest that the plaintiffs were unable to find a buyer immediately–at any rate from among their own customers.

7.  Of course, I suppose it is true to say that every article has a value although it may not have a market value at any particular time.  On the evidence, there was no market for the goods in 1966 and 1967.  Mr. Seidman said:

“in each and every case I indicated that I would trade downwards if I can move the lot.”

Of course, as to how far he was prepared to “trade downwards” is not clear; and I must confess that I have had certain misgivings on this aspect of the case.  If the goods were saleable at all, as indeed they were, one might have expected that the plaintiffs would have been able to sell them within a much shorter period than 2 years.  On the other hand, I find it difficult to believe that experienced businessmen would wish to have their capital tied up in the way the plaintiffs’ capital was tied up in this case.

8.  Having considered the whole of the evidence, I am not prepared to disagree with the learned judge’s conclusions. What it amounts to is that the judge has found that the goods were, for a period of 2 years, unsaleable at a reasonable price; and it is on that basis that I now proceed to consider the question of damages.

9.  On this question, reference was made to sub-s. (1) and (2) of s.55 of the Sale of Goods Ordinance.  These subsections read:–

“(1) Where there is a breach of warranty by the seller, or where the buyer elects, or is compelled, to treat any breach of a condition on the part of the seller as a breach of warranty, the buyer is not, by reason only of such breach of warranty, entitled to reject the goods; but he may –

(a) set up against the seller the breach of warranty in diminution or extinction of the price; or

(b) maintain an action against the seller for damages for the breach of warranty.

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

10.  The plaintiffs’ claim is for (1) loss of profit and (2) loss on the resale.  There is no doubt at all as to the correctness of their claim for loss of profit.  They purchased the cloth from the defendants (who were aware that the goods were going to be resold) at US$ 16.5 cents per yard.  The total landed cost, including customs duty and certain other smaller items of expense, amounted to US$63,828.90.  The plaintiffs had contracted to sell the cloth to Rose Textiles Corporation for US$ 20 cents per yard; and the net proceeds which they would have received in the ordinary course of business (less certain commission) would have been US $67,880.09. Therefore, the loss of profit is US $4,051.19.  But for the defendants’ breach of warranty, the plaintiffs would have received this sum from Rose Textiles Corporation in 1966, and they could have put it to commercial use immediately. But they were deprived of the use of that money; and I see no reason why they should not have simple interest thereon from the date of the breach to date of judgment.  Indeed, the defendants do not attempt to argue otherwise.

11.  My note of Mr. Litton’s submission on behalf of the appellants (defendants) in regard to the computation of “loss on resale”, reads:–

“If the goods had been unmerchantable, the plaintiffs would have been entitled to reject them, to repudiate the contract and to demand repayment of the purchase price together with interest thereon until the date of repayment because the plaintiffs would have been entitled to argue that they had been deprived of the use of their money; but the goods were not unmerchantable; the plaintiffs were not entitled to reject the goods; they were not entitled to sue for the purchase price; they accepted the goods which were eventually sold for 15 cents per yard; the plaintiffs’ duty was to mitigate their loss; but a seller should not have to pay interest on the entire purchase price from the date when the cause of action arose to the date when the buyer chooses to sell; that is not a loss directly and naturally resulting in the ordinary course of things from the breach of warranty; such a loss is not foreseeable; although a buyer’s duty is to mitigate his loss, he must act reasonably; and it is a matter of commercial judgment as to when a buyer should sell; a seller’s liability to pay damages should not depend on the fickleness of the market; the law has always said that, in such circumstances, a buyer is only entitled to recover the actual loss he sustains on the resale; the defendants would not have objected if the plaintiffs had claimed interest on the loss sustained on the resale from the date of the breach to the date of the resale, but that is not the basis on which the US$12,593.73 was computed.”

My note of Mr. Zimmern’s submission on this point reads:–

“Failure of the bulk to correspond with the sample in quality is a breach of condition entitling a buyer to reject; the plaintiffs sold forward to Rose Textiles who actually took delivery of the goods upon their arrival in the United States; therefore the plaintiffs never had an opportunity of rejecting the goods; they had no alternative but to maintain an action for breach of warranty; upon Rose Textiles rejecting the goods, the plaintiffs’ duty was to mitigate, and they were unable to sell before 1968 although they did their best to do so; the fact that the plaintiffs were forced to treat the defendants’ breach of condition as a breach of warranty should make no difference; the plaintiffs’ capital was tied up for 2 years through no fault of their own while the defendants had the use of the plaintiffs’ money (the full purchase price of the goods); the fact that the defendants would lose money by having their capital tied up in goods which were, for a period, unsaleable at a reasonable price, is something which was foreseeable by the defendants; therefore, the defendants should be ordered to pay interest on the full purchase price of the goods (not only on the actual loss on resale) between the date of the breach and the date of resale, because that is something which directly and naturally resulted, in the ordinary course of events, from the breach of warranty, in as full a sense as the cost of storing and insuring the goods during that period.”

12.  In calculating the actual “loss on resale” in their statement of claim, the plaintiffs have added to the total landed cost (US$63,828.90), two further items viz. US$710.94 and US$1,708.69 being respectively the cost of storing and the cost of insuring the goods during the two years (1966 to 1968) pending the resale.  The defendants do not object to that.  What they object to is the addition of a further US$12,593.73 which, for the most part, is interest at 9% per annum on the sum of US$62,393.21.  This latter sum is arrived at by adding the US$57,143.95 (cost price of the goods CIF the United States) and US$5,249.26 (the duty paid thereon in the United States).

13.  The actual “loss on resale” – using that phrase in the narrowest sense–might be calculated thus:–

Cost price plus duty	US$	62,393.21
Gross proceeds of sale			52,619.42
Loss:	US$		9,773.79

Of course, if one calculates on the basis of the total landed cost (US$63,828.90) and adds to that figure the US$710.94 for insurance and the US$1,708.69 for storage, the “loss on resale” may be said to be US$13,629.11. Calculated thus:

Total landed cost	US$	63,828.90
Insurance		710.94
Storage		1,708.69
	$	66,248.53
Less: Gross proceeds of sale	$	52,619.42
Loss:	$	13,629.11

When Mr. Litton said that he would not have objected if the plaintiffs had claimed interest on the actual loss on resale for the period from the breach to the date of resale, I presume that he was referring to the US$13,629.11 because, as I say, there was no dispute between the parties in regard to the insurance and storage.  But it is the lower figure (US$62,393.21) which has to be considered when dealing with the defendants’ objection to the inclusion of the US$12,593.73 in calculating the plaintiffs’ total cost.

14.  In my view, the plaintiffs’ argument is perfectly logical.  Their money was tied up for 2 years – in goods which, for that period of 2 years, the judge has found were, in effect, unsaleable at a reasonable price.  The “loss on resale” (US$9,773.79) plus the gross proceeds of resale in 1968 (US$52,619.42) equals US$62,393.21.  In other words, one way of looking at the situation is to regard the loss on resale as part of the plaintiffs’ total capital outlay up to September 1966.  But they did not get their capital outlay back in September 1966.  They had to wait for 2 years before they got it back. In the circumstances, why should the loss of interest on that money (or alternatively the bank interest which they had to pay to borrow an equivalent amount of money to enable them to enter into further commercial transactions) not be regarded as part of their “loss”?  It seems to me that it matters not whether one calls it part of the “loss on resale” or simply “loss”.  We should not allow ourselves to get bogged down by loose terminology.  And if (as the defendants say) there would be no objection to the court awarding interest for the period 1966 – 1968 on the US$9,773.79 or US$13,629.11, as the case may be, being the loss on resale in the narrow sense of that term, logically why should there be any objection to the court awarding interest on what is, in effect, the balance of the plaintiffs’ capital outlay viz. US$52,619.42?

15.  The defendants say that their contention is supported by authority; and that there is no reported case in which the courts have awarded interest as damages in circumstances of this kind.

16.  It is perfectly true, of course, that the common law rule was that, in the absence of express agreement, interest could not be recovered on a debt or damages.  There is a statement in the 3rd Ed. (1868) of Bullen and Leake to the effect that the ground for the refusal of interest in olden times was that it was “generally presumed not to be within the contemplation of the parties.”  Such an attitude is quite understandable in a society such as England prior to the Industrial Revolution; but can it be said that this is a solid basis for refusing interest in circumstances of this kind in Hong Kong today?  In England, during the 18th and 19th centuries, the law moved very haltingly in this regard.  The learned authors of Mayne and McGregor on Damages 12th Ed. say (p.265): –

“The case law upon the recovery of interest is riddled with inconsistency. This stems from the gradual weaning away of the law from the stigma attached by the religion and thought of an earlier day to the taking of usury. Calvinism, tracing out the narrow distinction between interest and usury, provided the first effective means for the removal of this stigma, but the law, slow to follow, moved haltingly between allowance and disallowance of interest.”

17.  The other day I came across a passage in an American text-book on financial mathematics^([1]) which appears to me to put into proper perspective the part which interest on money plays in a modern society organised on the basis of free enterprise.  It reads (p.1):–

“In the present structure of civilisation” [by which, I presume, the learned author means the United States and such other parts of the world as approve of commercial and industrial life being organised on the basis of free enterprise] “interest is of fundamental importance. All the vast financial and credit machinery rests upon the basic concept of paying for borrowed capital. Virtually the entire income of our banks is derived from loans and investments. The stock exchanges with their imposing list of securities dealt in day by day, the mortgage and loan companies, the savings banks, co-operative societies of producers, building and loan associations, insurance companies, investment trusts – all these would vanish if our laws did not recognise and enforce the obligation to pay for the use of borrowed funds. Business without interest is almost inconceivable.”

18.  This is a far cry from the attitude adopted by the common law courts in England.  But it is said that any change must be effected by statute.  With respect, I disagree.  The common law is not static.  Over the years it has developed; and, by and large, it has kept pace with ever-changing social conditions.

19.  In this day and age in countries such as the United States and Hong Kong, how can it be argued that if A has been deprived of the use of his money because of B’s breach of warranty under a contract with A, the latter’s loss is something which could not have been foreseen by B, something which was not within the contemplation of the parties; and that therefore A may not look to B for compensation for his loss because (as Mr. Litton put it) such loss is too remote?

20.  Reference was made to s.30A of the Supreme Court Ordinance, which section is substantially in the same terms as s.3 of the Law Reform (Miscellaneous Proceedings) Act 1934.  It reads in part:–

“(1) ................. the court may in any proceedings brought in the court for the recovery of any debt or damages, order that there shall be included in the sum for which judgment is given interest at such rate as it thinks fit on the whole or any part of the debt or damages for the whole or any part of the period between the date when the cause of action arose and the date of the judgment.

(2) Nothing in subsection (1) shall –

(a) authorise the giving of interest upon interest;”.

21.  The defendants say that this section gives the court a discretion in actions for damages to order that there shall be included in the sum, for which judgment is given, interest; but that the section does not give the court power to make an award of interest by way of damages. Furthermore, there was some suggestion during the hearing of the appeal that the plaintiffs were claiming interest upon interest contrary to sub-s. (2).

22.  There is nothing in s.30A which authorises or prohibits an award of interest by way of damages; but I do not think that this court should be deterred from making such an award if we feel that this is the proper course in the circumstances of this case. In my view, it matters not that there is no precedent in the books which is precisely in point. If this is the first case of this nature, then so be it.

23.  As regards sub-s.(2), this declares that sub-s.(1) does not authorise the giving of “interest upon interest”. In my view, this merely means that the court must not award compound interest. But in any case, even although the US$12,593.73 is interest on the total cost price plus duty (US$62,393.21), the plaintiffs are not claiming interest on the US$12,593.73; and what the defendants seek is an order that this sum be deleted from the statement of claim. The result would then be that the plaintiffs’ “total cost” would not be US$78,842.26. It would be US$66,248.53. Their “loss on resale” would not be US$27,525.23. It would be US$14,981.50; and their “total loss” (i.e. as at 15th September 1968) would not be US$31,626.42. It would be US$19,032.69.

24.  As regards the period 15th September 1968 to date of judgment, the plaintiffs are claiming interest at 9% on the “loss on resale” (US$9,773.79) i.e. on the difference between US$62,393.21 (i.e. the cost price of the goods plus the duty) and US$52,619.42, the gross proceeds of sale. This claim for interest in respect of the period September 1968 to date of judgment is not affected in any way by the presence or absence in the statement of claim of the US$12,593.73.

25.  I can see no objection to the plaintiffs’ claim for damages.

26.  For these reasons, I would dismiss the appeal.

Litton, Q.C. & Caesar Wong (Johnson, Stokes & Master) for Appellant.

Zimmern (Deacons) for Respondent.

([1]) Handbook of Financial Mathematics by Justin H. Moore
Pub. by Prentice Hall Inc, New York, 1930.