Civil Action1990

SHUM YIP-UTC (HONG KONG) CO., LTD. v. MASTER CO. (a firm)

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SHUM YIP - UTC (HONG KONG) CO. LTD. v. MASTER CO. (a firm)

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HCA007560A/1990

HCA 7560/1990

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 7560/1990

____________

BETWEEN:
	SHUM YIP - UTC (HONG KONG) CO. LTD	Plaintiff

	AND

	MASTER COMPANY (a firm)	Defendant

_____________

Coram: Hon Yuen J in Court

Dates of Hearing: 8 - 10 May 2000

Date of Decision: 15 May 2000

_____________

D E C I S I O N

_____________

1. This is an assessment of damages suffered by a seller of goods. The buyer, in breach of contract, had cancelled the contract and refused to accept delivery. In mitigation of his loss, the seller contracted to sell the goods to a third party. However, the third party dishonoured the cheques tendered for payment for the goods. Despite legal proceedings and enforcement action, the seller has failed to receive payment from the third party.

2. Apart from factual issues, the legal issue raised is whether, notwithstanding the sale to the third party, the seller can claim from the original buyer his original loss together with the legal expenses incurred in pursuing his claim against the third party.

Facts

3. The matter has a long history. It is necessary to go into the factual details because the buyer has challenged some of the factual evidence adduced by the seller.

Original Contract

4. In August 1989, the Plaintiff ("the Buyer") contracted to buy 62,210 men's jackets from the Defendant ("the Seller"). The jackets were to be manufactured by the Seller, a company in Hong Kong which was contracting the manufacture to a company in Nanjing, in accordance with specifications provided by the Buyer. The Buyer was on-selling the jackets to a company (later known to the Seller as Idea Industries) for sale to Russian customers, so the specifications were for relatively large sizes.

5. The price was US$50.30 per dozen CIF. The total contract price converted to Hong Kong currency was therefore $2,033,956 (62,210 pcs x US$50.30 ÷ 12 x 7.8). Delivery was to be by mid-December 1989.

6. At around the same time, the Buyer and the Seller had negotiations for a much larger order, of about 400,000 jackets in total. There was, however, no firm contract for the sale and purchase of these goods.

Cancellation of original contract

7. On or about 8 December 1989, however, when some of the jackets had been completed but none had yet been delivered from Nanjing to Hong Kong, the Buyer cancelled the contract.

8. It is not disputed that it was difficult to find a market for these goods in Hong Kong, given the sizes of the jackets. However, according to the evidence of Mr Alan Pau Kei Man ("Mr Pau") the sole proprietor of the Seller, Idea then approached him with an offer to buy the jackets.

Sale to Third Party (Idea Industries)

9. On 6 February 1990, the Seller contracted to sell 51,900 jackets to Idea at US$54.60 per dozen or US$4.55 (HK$35.49) per piece. This was higher than the unit price for the sale to the Buyer. It has not been disputed that the Seller had acted reasonably in agreeing to sell the jackets to Idea.

10. In April 1990, a quantity of jackets was delivered to Idea (as will be seen later, there is a dispute as to the quantity delivered). It is the Seller's case that 32,900 jackets were delivered, for which Idea gave 3 post-dated cheques with a total value amounting to $1,167,621.

11. The cheques were dishonoured on presentation in June 1990. In August 1990, the Seller sued Idea on the dishonoured cheques. In September 1990, the Seller obtained summary judgment against Idea. However Idea appealed and in November 1990, it obtained conditional leave to defend. However it failed to meet the condition and final judgment was duly obtained against it. Enforcement proceedings by way of garnishee proceedings were unsuccessful.

Present Action

12. At about the same time, in November 1990, the Buyer instituted the present action against the Seller for rescission of the contract for 62,210 jackets, return of certain moneys it had paid the Seller as deposit and/or prepayment, and damages in the sum of $220,000 which the Buyer claimed to be the value of accessories it had paid for and supplied to the Seller for use in the manufacture of the jackets.

13. The Seller filed a Defence and Counterclaim in which he asserted that the Buyer had agreed to buy 400,000 jackets and that it was the Buyer who was in breach. The Seller counterclaimed for damages for loss of profit from the alleged contract for 400,000 jackets, and loss suffered by him in reselling fabrics that he had acquired to perform that contract. He also counterclaimed for loss in the subsequent sale of 37,900 jackets to an alternative customer (whose identity was later revealed as Idea).

14. In the course of these proceedings, the Seller's business closed down. According to Mr Pau's evidence, the remaining 19,000 jackets which he had not delivered to Idea were sold together with office equipment for $18,000.

15. The trial of the Buyer's claim and the Seller's counterclaim was heard in September and October 1998 by Deputy Judge Chung (as he then was). In December 1998, Chung, Dep J dismissed both the claim and the counterclaim.

16. The Seller appealed. There was no cross-appeal by the Buyer. In June 1999, the Court of Appeal allowed the Seller's appeal, holding that the Buyer had been in breach in terminating the contract for the 62,210 jackets. The Court of Appeal gave the Seller judgment on his counterclaim with an order that the case be remitted to a judge or master for damages to be assessed.

17. The Court of Appeal also dealt with the question of the payments received by the Seller from the Buyer, indicating that a sum of $1m would have to be taken into account, but not the other amounts received. Nothing was said about the accessories which had been paid for by the Buyer or their alleged value.

18. It was as a result of the above proceedings that the matter came before me for assessment of damages.

Factual issues

19. There were a number of factual issues. They can be grouped as follows:-

(1) What was the quantity of jackets delivered by the Seller to Idea?
(2) Did the Seller receive any money from Idea for the sale of jackets?
(3) Is the Buyer entitled to set-off against the Counterclaim the value of accessories it had supplied to the Seller, and if so, what was the value of those accessories?

(1) Quantity of jackets delivered

20. There is a dispute as to how many jackets had been delivered by the Seller to Idea. The evidence is analysed below. However, it must be remembered that what is important is not so much the quantity delivered, but what money had been received by the Seller from Idea.

21. In casting doubt on the Seller's case that only 32,900 jackets had been delivered, Mr Justin Wang counsel for the Buyer has drawn attention to a number of matters. First, the discrepancies in Mr Pau's Witness Statements. In his 1st Statement dated 14 April 1997, he had said that 37,900 jackets were sold to an alternative customer. In his supplemental statements however, he said that the contract with Idea was for the sale of 51,900 jackets, but that the actual quantity delivered was 32,900 jackets. In his oral evidence, Mr Pau said at first that the difference of 5,000 jackets had not been packed, but he also said that the reference to 37,900 jackets in the 1st Witness Statement could have been a typographical error.

22. Secondly, Mr Wang points out that in an affirmation filed by Mr Pau in the action against Idea, in response to Idea's allegation that the jackets were defective, Mr Pau exhibited 6 inspection certificates from Idea's buyer. The total quantity referred to in the certificates was 47,975 jackets; the transaction numbers referred to in the inspection certificates matched those on the Hong Kong - Russia bills of lading.

23. Those arguments are not unattractive. However, on the preponderance of the evidence, I find that 32,900 jackets had been delivered by the Seller to Idea, although more may have been delivered from Nanjing to Hong Kong in preparation for delivery to Idea.

24. I start with the contract between the Seller and Idea. The Seller's version of the contract states that 51,900 jackets were to be sold. Idea's version was of 2 contracts (1 for each style) which show that a total of 51,600 jackets were to be sold. However the bills of lading from Nanjing to Hong Kong show that only 37,900 jackets (or possibly another 400 jackets more if one took into account the writing on the bill of lading addressed to another company, Top Artery) had been delivered from Nanjing to the Seller in Hong Kong.

25. Further, the fact that 37,900 (or 38,300) jackets had been transported by the Seller's own supplier to the Seller does not mean that all those jackets had been delivered to Idea. Mr Pau's evidence was that Idea had also obtained supplies from another supplier in Hubei, and he said his goods had to be packed together with the Hubei goods in containers to be shipped to Russia. Mr Pau's evidence was that 5,000 jackets had not been so packed, thus leaving only 32,900 jackets delivered to Idea before the Seller stopped deliveries due to the dishonouring of the cheques.

26. The fact that the Seller's goods were packed together with other (Mr Pau says Hubei) goods is supported by the fact that the quantities of jackets in the inspection certificates (47,975 jackets) could not all have come from the Seller. There is first the point that the Nanjing-Hong Kong bills of lading only show 37,900 jackets. Further, the last inspection certificate showed that goods had been shipped from Hong Kong as late as on 12 July 1990. However, the 3 cheques had already been dishonoured in early and mid-June. The Seller would hardly be likely to have carried on delivering goods to Idea even after Idea had dishonoured its cheques.

27. Also of significance is what Idea's documents show. Both the Seller's and Idea's versions of the contracts are agreed that the purchase price was US$4.55 (HK$35.49) per piece.

28. The total amount of Idea's 3 dishonoured cheques was $1,167,621. Divided by 35.49 (the price per piece), that total amount, to the dollar, is the exact purchase price of 32,900 jackets. Although Idea alleged that it had honoured 2 other cheques in the sums of $289,900 and $112,060 respectively (totalling $401,960) in payment for the goods, this does not work out to a round number of jackets. The Seller's evidence was that these sums were for payment of completely unrelated goods.

29. Further, if all the 47,975 jackets referred to in the inspection certificates were from the Seller, then Idea would have had to pay him HK$1,702,632.75. However, Idea did not allege that it had paid the Seller that amount. Its only allegation was that it had paid the Seller by 5 cheques (3 being dishonoured) which amounted to $1,569,581 ($1,167,621 + $401,960). It is true that in Mr Pau's affirmation in the action against Idea, he did not specifically deny Idea's allegation that all 5 cheques had been in settlement of the contract for the jackets, an omission which Mr Pau blames on his former solicitors, but as Mr Albert Yau counsel for the Seller has submitted, the figure of $401,960 from the 2 cheques shows clearly that Idea's allegation could not have been true, because arithmetically, the figure cannot be divided into a round number of jackets, given the agreed price.

30. In the circumstances, I find on the balance of probabilities that the quantity of jackets delivered to Idea was 32,900 pieces.

(2) Seller did not receive money from Idea

31. The next, related and more important issue is whether the Seller received any money from Idea.

32. I have dealt above with Idea's allegation that the 2 honoured cheques were for the same contracts. By reason of the fact that those amounts cannot be divisible by the unit purchase price of HK$35.49, in the absence of any further evidence to explain the same, the conclusion I draw is that those amounts are unrelated to the contract for the jackets.

33. The 3 dishonoured cheques were of course the subject matter of summary judgment when the condition was not complied with, but the judgment was an empty one, as the Seller failed to recover any money from Idea, even after taking enforcement action.

34. I find therefore that no money had been received by the Seller from Idea.

(3) Buyer not entitled to set-off $220,000 as alleged value of accessories

35. The Buyer has alleged that it had supplied some $220,000 worth of accessories to the Seller and claims that it is entitled to set it off. The accessories included thread, elastic, zippers, buckles, polybags and packing tape.

36. The Seller's case is that he had not used the Buyer's accessories. He had found his own supply because the Buyer's accessories would not arrive in time to meet the delivery deadline. The Buyer's accessories were sent up to Nanjing in anticipation of the further contracts being negotiated. When the Buyer cancelled the contract, the Seller did not cause them to be sent back to Hong Kong because it would have cost thousands of dollars to do so, and the Buyer had not requested that to be done. I accept Mr Pau's evidence and the Seller's case.

37. I accept the Seller's evidence that he had arranged for accessories to be made available by the Nanjing manufacturer. I accept his evidence that the Nanjing Friendship Factory came under the aegis of the Nanjing Foreign Economic Corporation. The agreement made between him and the Nanjing Friendship Garment Factory shows that he ordered more than enough quantities of accessories for the contract of 62,210 pieces. As for the elastic bands which were temporarily not ordered, payment was separately made as evidenced by remittances.

38. I accept the Seller's evidence that because the Buyer's accessories did not leave Taiwan until early November as shown by the Harvard invoice, the time that would have to be taken for shipment to Hong Kong and then transport to Nanjing would have meant that the accessories could not be used in time for the deliveries in December. The fact that the polybags supplied by the Nanjing factory and the packing tape did not have the specified logo on it is neither here nor there. The parties were working under a deadline, and if the Buyer's polybags and packing tape could have arrived in time, as Mr Pau said, it would have been simple just to repack. No manufacturing process would have been necessary.

39. In any event, the only piece of evidence that Mr Wang has referred to as being relevant to the value of the accessories supplied by the Buyer was the invoice from Harvard Industries which showed that the goods cost, not HK$220,000 but US$12,503 (HK$97,523). The discrepancy has not been explained.

40. In the circumstances, I accept the Seller's evidence that the accessories had not been used and have been left in Nanjing with the Buyer's knowledge and acquiescence and I reject the Buyer's allegation of set-off of $220,000.

Legal issue - remoteness of loss?

41. I then come to the legal issue which is the question of remoteness of loss. In my view, it is not too remote for the Seller to claim the original loss, notwithstanding the interposition of the sale to Idea (which turned out to be worthless). This is clear when one returns to first principles governing the recoverability of loss.

42. In a breach of contract, the starting point is the rule that the innocent party is entitled to be placed in the same position as he would have been in had the contract been performed. This is subject to the limitations first imposed by the rule in Hadley v Baxendale and since refined, to the effect that the loss must be such as have been within the contemplation of the parties.

43. In the present case, had the contract not been broken by the Buyer, the Seller would have been entitled to receive the purchase price. Thus, it would have been within the reasonable contemplation of the parties that the Seller was entitled to the difference between the contract price receivable by him and any market value if there is a market. I shall refer to this as "the original loss".

44. Of course that is subject to the innocent party's duty to mitigate his loss, in other words, to take reasonable steps to avoid the consequences of the breach of contract. As it has been put in McGregor On Damages 16th ed paragraph 285, the innocent party cannot recover damages for any loss which he could have avoided - he "cannot recover for avoidable loss". So he must do what is reasonable to avoid or reduce the loss.

45. However, so long as he has made a reasonable effort to avoid or reduce the loss, the law does not impose a notional, "reasonable" loss. What he can recover is his actual loss, not a notional loss.

46. When mitigation of damages is understood in this light, it is clear, in my judgment, that the Seller here (the innocent party) should be entitled to nothing less than the original loss. The original loss is a loss which was within the contemplation of the parties. That loss was not avoidable even though he had taken reasonable steps in an attempt to avoid or reduce it.

47. The evidence in this case was clear. There was no other customer on the market. It has not been suggested that it was unreasonable for the Seller to contract with Idea. But the sale to Idea did not help the Seller to recoup any part of his loss because Idea turned out to be worthless. And since the Seller could not recoup anything, his original loss (for which the Buyer was liable) was not alleviated.

48. There was no new, intervening loss due to the contract with Idea - the loss remains the original loss which had not been avoided. Idea's impecuniosity was not the cause of the loss suffered by the Seller - it only rendered the Seller's attempt at mitigation unsuccessful.

49. So understood, there is no problem of any remoteness of loss. The loss remains that which was within the contemplation of the parties when the Buyer broke the contract. That loss could not be avoided because nothing was recouped by the Seller notwithstanding his having made a reasonable effort to reduce the loss.

50. The original loss would thus be the contract price for the sale of 62,210 jackets less (i) any money recovered on sale; (ii) any money saved when manufacturing of some of the goods was stopped; and (iii) any payments made by the Buyer.

51. As far as (i) is concerned, there was no real challenge to the evidence that the rest of the jackets manufactured but not delivered to Idea (i.e. 51,900 - 32,900 = 19,000 pieces) were sold together with some office equipment for HK$18,000. As Mr Pau was unable to say how much the office equipment was worth, the entire amount would have to be taken for present purposes. As for unused material, I accept Mr Pau's evidence that the rest were valueless as they had been cut, though not completed into jackets. The delivery date under the contract was mid-December. The cancellation came virtually on the eve of the delivery. It is entirely plausible that by 8 December, the materials would already have been cut, ready for making and trimming.

52. As for (ii), there is also unchallenged evidence that manufacturing costs were US$10 a dozen, or HK$6.50 per piece. Thus for the jackets not manufactured (62,210 - 51,900 = 10,310 pieces), there would be a saving of HK$67,015. As for (iii), it is agreed that credit would have to be given for the sum of $1m paid by the Buyer to the Seller.

53. Further it is clear that since the Seller has taken reasonable steps to avoid the loss, he can recover for loss incurred in doing so. This has become well-established and Mr Wang did not seek to argue against it. Thus the Seller should also be entitled to the amount of legal costs incurred by him in the action against Idea. The evidence shows that HK$56,600 had been so expended. There is no dispute as to the quantum of costs.

Order

54. In the circumstances, I would assess the damages suffered by the Seller on his counterclaim at $1,055,541 as shown in the computation set out below. There will also be interest at the commercial rate of prime + 1%. I will also make an order nisi that the costs follow the event, i.e. that the Buyer (Plaintiff) bear the costs of the assessment.

COMPUTATION

Contract price	HK
(US$50.30 per doz ÷ 12 @ 7.8 x 62,210 pcs)	$2,033,956
less
(i) sale of undelivered jackets	(18,000)
(ii) savings on cost of unmanufactured jackets	(67,015)
(iii) deposit or part payment	(1,000,000)

add expenses incurred in Idea litigation	56,600
	$1,055,541
	========

	(MARIA YUEN)
	Judge of the Court of First Instance High Court

Representation:

Mr Justin Wang, instructed by Gary Mak, Dennis Wong & Chang, for the Plaintiff

Mr Albert Yau, instructed by WK To & Co., for the Defendant

18238-EN-1998-12-03

SHUM YIP-UTC (HONG KONG) CO., LTD. v. MASTER CO. (a firm)

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HCA007560/1990

1990, No. A7560

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO. 7560 OF 1990

__________

BETWEEN
	SHUM YIP-UTC (HONG KONG) CO., LTD.	Plaintiff

	AND

	MASTER COMPANY (a firm)	Defendant

__________

Coram: Deputy Judge A. Chung in Court

Date(s) of Hearing: 21, 22 and 24 September and 26, 27 October 1998

Date of Handing Down Judgment: 3 December 1998

__________________

J U D G M E N T

__________________

Introduction

1. This action arose out of a sale of men's jackets between the Plaintiff and the Defendant in 1989 ("the said agreement"), some 9 years before the date of trial. The Plaintiff was the purchaser of men's jackets for sub-sale and the Defendant was the supplier. The Plaintiff claimed the Defendant for the repayment of various sums, details of which are set out under the next heading. The Defendant counterclaimed for loss arising from the Plaintiff's breach of the said agreement and for the repayment of $370,000 being a loan due from the Plaintiff.

The Pleadings

2. The Writ and Statement of Claim was issued in November, 1990. In essence, the Plaintiff alleged that the Defendant breached the said agreement by failing to provide garment materials for approval, attempting to raise the quantity of garment materials and the sale price as well as failing to deliver the goods. It was further pleaded that the Plaintiff accepted the Defendant's said breach in December, 1989. The Plaintiff asked for the return of $1 million described as "deposit" and RMB334,500 described as payment to facilitate the Defendant's purchase of materials. The Plaintiff also claimed the sum of $220,000 said to be the costs of accessories purchased by the Plaintiff for the Defendant and another $195,000 as deposit paid to the Defendant.

3. By the close of the Defendant's case, it appeared from the witnesses' testimony that the Plaintiff's claim is different from that pleaded. I should mention that the testimony was given without objection being raised. From the testimony of the Plaintiff's witnesses, the $1 million was a pre-payment (and part payment) of the contract price. The sum of RMB334,500 was a loan to the Defendant and $195,000 was a sum due to the Plaintiff in relation to another transaction between the parties. More importantly, the repayment of these sums appears to be related to a meeting held between the parties on 21 November, 1989 and another meeting in about March, 1990. The testimony was in essence that the Defendant agreed during those meetings that the said agreement was to be cancelled and further to repay the unspent balance of $1 million and RMB334,500 and to return to the Plaintiff all the materials purchased. The sum of $195,000 was an over-payment in relation to another transaction made to the Defendant by mistake.

4. That being the state of the testimony, it became necessary for the Plaintiff's pleading to be amended before the matter can properly be considered on its merits. An application for leave to amend the Statement of Claim was made to add in the following:-

"9A. Pursuant to a cancellation agreement concluded between the parties on 21 November, 1989, both parties agreed to cancel the said agreement. The Defendant undertook to return to the Plaintiff all pre-paid sums not yet used by the Defendant for the said agreement. The Defendant also undertook to deliver to the Plaintiff all the fabrics.

10. Alternatively, if the said agreement had not been cancelled as pleaded above, in breach of the said agreement ...".

5. The application was opposed by Mr. Ho for the Defendant on the ground that a new cause of action was pleaded. I did not agree and considered that it was merely an amendment to set out in a clearer way substantially the same facts in respect of which relief was already claimed (that is, the return of various sums advanced to the Defendant): see Ord. 20 r.5(5) and Leung Kin Fook v. Eastern Worldwide Co. Ltd. [1997] 1 H.K.C. 524. In fact, the agreement to repay was already referred to in para. 14 of the Amended Reply and Defence to Counterclaim. Mr. Ho did not complain that he lacked the chance to cross-examine the Plaintiff's witnesses about this matter, although he argued he might have done so in a different way. In fact, he accepted he was not taken by surprise by this amendment because the relevant facts had already been disclosed in witness statements served on the Defendant earlier. For these reasons, I also considered that no prejudice was caused to the Defendant which could not be compensated for by costs and therefore allowed the application. Mr. Ho then indicated that he would not seek to adjourn the trial or to have any witness called or recalled.

6. In his AmendedDefence and Counterclaim, the Defendant contended that although the said agreement was made between the parties, the quantity of goods should be 400,000 pieces of men's jackets, and not 62,210 pieces as pleaded by the Plaintiff. Further, the sum of $1 million was a deposit liable to be forfeited if the Plaintiff breached the said agreement. As regards the sum of RMB334,500,

(a) RMB200,000 was advanced to the Defendant to enable him to purchase materials;
(b) $195,000 was a sum owed by the Defendant to the Plaintiff in relation to an earlier deal between them;
(c) RMB4,500 was transportation costs owed by the Defendant to the Plaintiff in relation to the said earlier deal;

(d) all the above sums were agreed to be treated as a further deposit for the said agreement.

The Defendant claimed that the said agreement was breached by the Plaintiff in failing to approve samples submitted by him or to supply the necessary accessories for manufacturing the jackets in time. Further, the Plaintiff breached the said agreement by stating in a fax dated December, 1989 that the said agreement was cancelled and this breach was accepted by the Defendant. The Defendant claimed that he suffered losses for the breach because:-

(a) only 37,900 jackets were made and sold to another buyer at a loss;
(b) the unused fabrics were sold to other purchasers also at a loss;
(c) he lost the profits under the said agreement.

The Defendant claimed he was entitled to forfeit the sums claimed by the Plaintiff. He also claimed the repayment of a loan of $370,000.

The Issues

7. The issues in this action are mainly factual and are to be resolved almost entirely (subject to some points of mixed law and fact) on the credibility of the witnesses called by the parties. The main areas of dispute are:-

(a) the terms of the said agreement between the parties relating to the supply of jackets;
(b) the nature of the pre-payments by the Plaintiff to the Defendant;
(c) what caused the delay in the supply of the said goods;
(d) whether there was an agreement to cancel the said agreement and if so, its terms;

(e) if the said agreement had been breached by the Plaintiff, whether the Defendant suffered any loss or damage.

Credibility of Witnesses

8. The Plaintiff called two witnesses, Mr. Huang Guo Yin ("Huang") and Mr. Qin Yao Qi ("Qin"). The Defendant (Mr. Pau Kin Man Alan) also testified.

9. As observed earlier, quite a number of factual issues are involved in this action. They spanned over a relatively lengthy period of time from about August, 1989 to about February or March, 1990. Further, various documents have been referred to by the parties in relation to these issues. Each witness' credibility (and each factual issue) would have to be considered in the light of these documents. It would be an over-simplification (and inappropriate) to make a general finding of the credibility of each witness. For these reasons, I propose to deal with this question of credibility under different sub-headings in the following paragraphs. Although this approach has been adopted, it does not mean that this question has not been considered on a global basis, or that I have not borne in mind the witness' credibility over one aspect may have a bearing on his credibility over another.

(a) The Terms of the Said Agreement

10. I accept the Plaintiff's version and reject the Defendant's over this issue. The testimony of Huang and Qin was supported by 2 documents headed "Sale Confirmation" dated 19 August, 1989 and "Goods to be Processed" dated the same day. The quantity of garments disclosed by these documents was 62,160 pieces.

11. I do not accept the Defendant's case relating to the undated Chinese document bearing the Plaintiff's letterhead (which mentioned, among other things, 400,000 pieces) or the document headed "Appendix". He contended that these documents were given to him for such purpose before August, 1989 and support his contention that there was an oral agreement for the supply of 400,000 pieces of garments.

12. I agree with Mr. Wang's submissions that the undated document did not bear the marks of a final agreement. It was written in a scribble. The information given therein was very rough and brief and almost all differed from the 2 documents dated 19 August, 1989, for example, those regarding quantity, colour assortments, quantity of materials, price, and the place and times for delivery. There was also information which apparently was not addressed to the Defendant. This document was either an internal document or at most a document used for preliminary discussions.

13. The contract price was US$50.30 per dozen and (according to the Plaintiff) the total quantity contracted for was 62,160 pieces. The total price was US$260,554 (or HK$2,032,321 @$7.8). According to the Plaintiff, $1 million and RMB334,500 were paid to the Defendant in relation to the said agreement. Mr. Ho for the Defendant submitted that this is unbelievable because it is inconceivable for a purchaser in effect to pay in advance a substantial part of the price. I do not agree. In this case, the then close relationship between the parties has to be taken into account. Further, at the time, the parties appeared to be confident that they would be getting a constant order for a substantial number of garments from the sub-buyer. The overall price receivable for such orders would have been more than $2 million.

14. Based on the above, I make the following findings over this issue. The original sub-buyer of the Plaintiff, one Idea Industries Ltd. ("Idea"), indicated to the Plaintiff that there would be a sustained order for the supply of totally 400,000 pieces of men's jackets to Russia over a period of time. Idea also told the Plaintiff that the ultimate buyer would need a constant supply of about 100,000 pieces each month. The Plaintiff and the Defendant commenced their discussions relating to this proposal on the basis that there would be a total order of 400,000 pieces of garments. However, the legally binding agreement finally made only related to the 62,160 pieces stated in the 2 documents referred to above.

15. The other terms of the said agreement were not in much dispute and I set out the more important ones below for completeness:-

(a) the Defendant was responsible for supplying most of the accessories and the Plaintiff was responsible for supplying some 7 to 8 items of those items (at the Defendant's costs);
(b) the Defendant was to provide the fabrics for manufacturing the garments;
(c) the Defendant was to supply the garments by mid-December, 1989;
(d) a down-payment of $2 million was to be paid to the Defendant.

(b) The Nature of the Prepayments

16. The Plaintiff contended that the payments made by the Plaintiff were advance payments and therefore when the said agreement was cancelled, the Defendant was liable to repay them. Mr. Wang referred to Chitty on Contracts (1994) 27th ed., Vol. 1, para. 26-070 and 26-071 and argued that in such a situation, in law the sums advanced were liable to be repaid by the Defendant. Para. 26-071 of Chitty stated: "If in a contract of sale there is no express forfeiture clause of the type discussed in the preceding paragraphs, and the seller terminates the contract upon the buyer's default, the buyer may recover any prepayment or instalments paid in part payment of the price, subject to a cross-claim by the seller for damages for the breach of contract.". This passage was part of Ch. 26 of Chitty the heading of which was "Penalty or Liquidated Damages".

17. On the other hand, the Defendant contended they were not recoverable in law when the said agreement was breached (relying on para. 29-042 of Chitty). The relevant passage in Chitty said: "... if there is a substantial prepayment of the purchase price which is not intended to be in the nature of a deposit or earnest ... the payer may still have a claim for recovery, despite the fact that the non-performance of the contract was due to his own fault. ... However, where, as in a contract for work and materials, the contractual obligations of the party to whom a part payment or an instalment is made mean that he is bound to incur expenses before completing performance, the right to the payment will be unconditional [upon the subsequent completion of the contract] and the payment will be irrecoverable although it is not required as security for due performance.". This passage came from Ch. 29 of Chitty which was headed "Restitution".

18. The witnesses for the respective parties described these payments using terms like down-payment, deposit or prepayment when they testified. I find that no weight should be given to the descriptions they used. I also find that at the material time, no one addressed their mind to what was the precise nature of these payments. I have already accepted the testimony of the Plaintiff's witnesses as to the disputed term of the said agreement. Taking into account the amount of the advance payments compared to the amount of the contract price, I consider that these payments were prepayments and not deposits. However, I find in this case the Defendant had to incur expenses before completing the said agreement in that he had to procure the fabrics and the accessories. For these reasons, the prepayments fell within the last sentence of para. 29-042 of Chitty quoted above, that is, the right to their repayment was not conditional upon the subsequent completion of the said agreement and they were irrecoverable although they were not required as security for due performance.

19. To support its claim for the repayment of RMB334,500, the Plaintiff produced a Chinese document bearing the Plaintiff's letterhead and dated 15 August, 1989 which appeared to be an I.O.U. signed by the Defendant. It stated that the Defendant had borrowed a total sum of RMB334,500 from the Plaintiff. The Defendant further acknowledged that that sum included an earlier sum of RMB130,000 and RMB4,500.

20. It was common ground that the sum of $195,000 was owed by the Defendant to the Plaintiff and that it was related to the earlier transaction. However, the Defendant disputed that he was liable to repay it to the Plaintiff and contended it was already taken into account as part of the RMB344,500. He further testified that this sum was referred to in the said Chinese document dated 15 August, 1989 as RMB130,000 (adopting an exchange rate of 0.66 and rounded off to RMB130,000). This was denied by the Plaintiff's witness, Huang, who testified that RMB130,000 was a sum advanced to the Defendant in relation to another transaction. There is however no document to support this part of Huang's testimony. Mr. Ho for the Defence submitted that Huang was not truthful in this regard.

21. The Defendant further contended that the Plaintiff owed him $370,000. He contended this was supported by the Plaintiff's I.O.U. dated 13 September, 1989. This was refuted by the Plaintiff whose case was that the alleged loan of $370,000 was in fact a foreign exchange arrangement; that is, $370,000 Hong Kong currency was exchanged for RMB300,000 (at the rate of 0.81). Support for the Plaintiff's case can be found in 2 Chinese documents also dated 13 September, 1989 stating that RMB334,500 was remitted by the Plaintiff to the P.R.C. to pay for fabrics.

22. I find the evidence (in particular, the testimony) regarding the exact nature of these sums to be unsatisfactory and the documents do not show which witness was truthful. I therefore reject the testimony of all the witnesses relating to the claim for these sums.

23. Mr. Ho argued that the alleged exchange arrangement ought not to be enforced because it contravened the currency control of the P.R.C. Because I already rejected the parties' claims regarding this sum (RMB300,000 according to the Plaintiff and $370,000 according to the Defendant), there is no need to deal with this argument. If it had been necessary to do so, the short answer to Mr. Ho's argument is there is no evidence that such a transaction was illegal under the P.R.C. law.

(c) The Cause of the Delay in the Supply of the Goods

24. The Plaintiff's case was that the delay in the supply of the goods resulted in the said agreement being cancelled. The Plaintiff also claimed that this was caused entirely by the failure of the Defendant to procure the supply of the fabrics, whether timeously or at all. The Plaintiff went further and suggested that this was part of the Defendant's pre-conceived plan to bypass the Plaintiff and enter into an agreement with the Plaintiff's sub-buyer, Idea.

25. The Defendant submitted that it was the Plaintiff who breached the said agreement (as summarized in the first paragraph under "The Pleadings" above). The Plaintiff further breached the said agreement by asking for its cancellation. The Defendant testified that he had performed his part of the said agreement by ordering the necessary fabrics in August and September, 1989 and these fabrics were available by about October, 1989.

26. It is unusual for the Court to reject the testimony given on behalf of both litigants. This however is one of those unusual cases in which I have to so conclude in relation to this issue.

27. I shall deal first with the testimony of Huang and Qin. They both testified that it was the Defendant who breached the said agreement by not obtaining the fabrics in time to complete the said agreement. In a fax dated December, 1989 from the Plaintiff, the Plaintiff referred to the said agreement and wanted to cancel it. The reasons given therein were the long delay in the Plaintiff ordering the materials and delay in the Plaintiff's sub-buyer confirming its acceptance. A further reason given was the fluctuations in the exchange rates. The Plaintiff stated as a result it was unable to perform its obligations under the said agreement.

28. When Huang was cross-examined about this document, he agreed that the reasons given therein were correct and were part of the reasons why the said agreement was "cancelled". However, Huang explained that this document was only written in such a way as requested by the Defendant. He contended it was in fact the Defendant's failure in obtaining the fabrics which necessitated the cancellation of the said agreement. I do not accept these assertions in the light of this document. Hence, although (as will be set out below) I have my reservations about the truthfulness of the Defendant's allegations that he did not breach the said agreement and it was only breached by the Plaintiff, I do not accept the testimony adduced on the Plaintiff's behalf over this issue.

29. I am of the view that the Defendant is not truthful or reliable over this issue either. He claimed that he had in full compliance with the terms of the said agreement ordered the required fabrics as early as in August and September, 1989. Mr. Ho drew my attention to a number of documents relating to remittances made in mid-August or mid-September, 1989 for purchasing accessories and for dyeing. The Defendant claimed that most of the fabrics were delivered by November, 1989 (see his cross-examination in the afternoon of 26 October, 1998). However, all the documents produced by the Defendant relating to the delivery of the fabrics showed that they were delivered at about the end of November, 1989 or early December, 1989. The Defendant explained that some of the documents were misplaced and could not be found. I do not accept his testimony and find that all the delivery documents were produced and they show an inconsistency in the Defendant's testimony. This is because if he had in fact placed confirmed orders for the fabrics, there was no reason why they were not delivered much earlier. The documents relating to the delivery of garments showed that they were delivered sometime around the end of February to mid-April, 1990.

30. By reason of the above findings on credibility, I find that neither party had been able to establish that it was the other party who breached the said agreement. If it had been necessary for me to make a finding, I would probably have found that it is possible that both parties had in some ways been responsible and this resulted in the transaction falling through. It is however impossible to find out what was the exact nature of the breaches (if any) and to what extent they caused the transaction to fall through.

(d) The "Cancellation" Agreement

31. Both Huang and Qin testified that in November, 1989 a meeting was arranged in Shenzhen for the Defendant to discuss the fate of the said agreement.

They testified that the Defendant agreed at that meeting held on 21 November, 1989 to cancel the said agreement and further to repay to the Plaintiff the unused portion of the sums advanced to him earlier and to return any materials (or accessories) still kept by him. Despite this oral agreement, the Defendant failed to do so. Another meeting was arranged in about March, 1990 in Hong Kong. The Defendant also attended this meeting and in effect made the same promise but again failed to keep it.

32. I do not accept the testimony of Huang or Qin relating to these meetings or the Defendant's alleged promises. First, there is no record of any such meetings. Secondly, in para. 14 of the Amended Reply and Defence to Counterclaim, it was averred that the agreement was made by the Defendant orally over the telephone. The pleading went further to state that the Chinese document dated December, 1989 was made after the said telephone conversation; the meeting in around March, 1990 was not pleaded. Thirdly, it was suggested by Huang in his testimony that the Defendant pre-planned the non-delivery of the garments because the Defendant wanted to sell directly to Idea. If that was true, there was no reason why the Defendant should be so cooperative with the Plaintiff and anyway he would need the materials to fulfil the agreement he was planning to make with Idea.

(e) The Defendant's Counterclaim and Loss and Damage

33. I also do not find the Defendant to be truthful or reliable as regards whether he had suffered loss and damage. His testimony was that after the Plaintiff had allegedly breached the said agreement, he tried to mitigate his loss by completing a number of the garments originally contracted for but was unable to find any buyer. Idea learnt of this from some unknown source and contacted the Defendant. At the end, an agreement was made in February, 1990 between the Defendant and Idea for the supply of 51,900 pieces of garments at US$54.60 per dozen.

34. Mr. Wang submitted that the Defendant had concealed that the goods were sold to Idea until sometime shortly before the trial. He drew my attention to the Defendant's pleadings and his witness statement where it was only stated that the goods were sold to a purchaser without naming it. Although it was not clear from these documents whether the goods were sold at a profit or at a loss, no credit was given therein to the Counterclaim on account of profits made from the sale. As it turned out, the contract price of US$54.60 was some US$4.30 more than the price of US$50.30 under the said agreement. If what the Defendant said was correct, by about February, 1990, the goods were very much unwanted goods. He said Idea got wind of this and approached him. I find that it was implausible that Idea would offer to the Defendant such high price in these circumstances. Further, it was too coincidental that Idea would purchase about 83.5% of the garments previously ordered by the Plaintiff (10,260 less than the quantity under the said agreement). For these reasons, I reject the Defendant's evidence relating to his Counterclaim.

35. The Defendant was unable to obtain payment from Idea (despite Judgment having been obtained by him against Idea in High Court Action No. A5319 of 1990). By reason of my earlier findings on credibility, it is unnecessary to decide if the Defendant's loss arising from Idea's non-payment is a recoverable loss against the Plaintiff. If it had been necessary for me to do so, I would have found that this loss was not caused by the Plaintiff's breach (if any) and was too remote.

The Plaintiff's Amended Claim and Defendant's Counterclaim

36. It is the Plaintiff's burden to prove that it was entitled to the repayment of the prepaid sums. In view of the earlier findings relating to the credibility of the Plaintiff's witnesses, I find that the Plaintiff has not been able to discharge its burden of proof.

37. The Defendant has the burden of proving that the Plaintiff had breached the said agreement and that he had suffered loss and damage as result. As I have rejected the Defendant's testimony, I do not consider that there is any satisfactory evidence to establish either of the said matters relating to the Counterclaim.

38. I have rejected all the witnesses' testimony as being untruthful and unreliable in relation to the main issues in this case. In relation to the documents in the various trial bundles, the parties agreed that the copy documents therein could be referred to by the Court. However, this agreement only means that no issue would be taken as to admissibility or lack of formal production of documents (as required the rules of evidence). The truth of the documents' contents or their genuineness are still in issue. The same applies to the original documents formally produced.

39. I do not consider that the documents or copy documents per se are such that either party will be able to establish the claim or counterclaim (as the case may be). There is therefore no satisfactory evidence to establish either the Plaintiff's claim or the Defendant's Counterclaim and they are both dismissed.

Costs Order Nisi

40. Pursuant to Ord. 42 r. 5B(6), I consider that it is appropriate to make a costs order nisi that there be no order as to costs as to the Plaintiff's claim or the Defendant's counterclaim because they have both been dismissed. The Defendant is legally aided and his own costs are to be taxed in accordance with the Legal Aid Regulations.

	(Andrew Chung)
	Deputy Judge of the Court of First Instance

Representation:

Appearances: Mr. Justin Wang i/s by Messrs. Gary Mak, Dennis Wong & Chang for the Plaintiff

Mr. B.K. Ho i/s by Messrs. Liu, Chan & Lam for the Defendant

Remarks:
On appeal by the Defendant to the Court of Appeal: Appeal allowed. Judgment for the Defendant on the counterclaim and damages to be assessed. Please refer to judgment CACV000026/1999.