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

HCA 7251/1995

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 7251 OF 1995

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J U D G M E N T

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

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

A. Background

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

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

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

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

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

B. Preliminary Matters

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

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

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

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

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

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

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

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

C. The Law

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

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

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

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

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

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

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

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

D. The Claims by Techi Motor

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

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

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

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

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

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

(a) The Expert Evidence: General Observations

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

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

(b) Mr. Li's Projection

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

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

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

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

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

less:

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

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

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

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

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

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

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

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

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

(c) Mr. Robinson's Projection

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

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

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

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

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

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

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

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

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

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

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

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

(d) Findings on Projected Purchases

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

E. The Claims by Techi Paints

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

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

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

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

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

F. Postscript

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

A. Damages for Techi Motor

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

B. Damages for Techi Paints

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

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

Representation:

Mr. Nigel Kat instructed by Messrs. Deacons for the Plaintiff for Original Action/Defendant by Counterclaim.

Mr. Simon Chiu instructed by Messrs. Pun & Associates for the Defendant by Original Action/Plaintiff by Counterclaim.

HCA7251/95

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.7251 OF 1995

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(by Counterclaim)

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J U D G M E N T

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1. The Plaintiff ("ICI") is a company trading in the supply of paints and paint-related products. A Mr Cheung Chi Chiu ("Mr C.C. Cheung") was its manager who dealt with the Defendant in the period between 1987 and 1990 and after 1993. Between 1990 and 1993 he had emigrated to Canada and worked in an ICI branch over there.

2. The Defendant (Cheung Kin Man,Barry - "Mr Barry Cheung") trades under the names of Techi Motor Engineering & Trading Company ("Techi Motor") and Techi Paints and Auto Accessories Specialties ("Techi Paints"). Mr Barry Cheung purchased the Plaintiff's products and resold them in Mainland China (under the name of "Techi Motor") and Hong Kong (under the name of "Techi Paints") respectively. The parties have started trading over the Mainland market since 1987 and over the Hong Kong market since 1989.

3. ICI's predecessor in the name of ICI (China) first established its relationship with Mr Barry Cheung for the year 1988. By a letter dated 13 November 1987 signed by Mr C.C. Cheung, Mr Barry Cheung was given 20% trade discount on the PRC list price. Mr Barry Cheung would have to purchase a total of 12,000 litres of paints in 1988 with an initial order of 3,000 litres in early 1988 to stock up for Mr Cheung's PRC clients. He was given a 30 days credit there and then.

4. Thereafter Mr Barry Cheung's annual performance increased year after year. For the year 1991, Mr Barry Cheung was given trade discount for certain purchases and special discount of 2% for early settlement before the payment due date from the invoices. I was told that the credit period was then changed to 60 days as stated in the invoices. He was also given an annual rebate scheme for purchases of goods exceeding 30,000 litres at 2% and 50,000 litres at 3%.

5. For the year 1992 he was given certain trade discounts for certain goods. He was given special discount for settlement of the invoices as follows : -

(1) 5.5% on or before 30 days;

(2) 3.5% on or before 60 days;

(3) 2% on or before 90 days, and

(4) 1% on or before 120 days.

6. Although it was stated that the period was from the date of invoices, the practice was from the end of the month of all the invoices of that month. The credit limit given to Mr Barry Cheung was stated in the letter to be $800,000.

7. For the year 1993, the same trading discounts and special discounts for settlement before 30, 60, 90 or 120 days were also provided. Similar provisions for annual rebates was also given. However there was no stated credit limit. It can be seen from the past dealings that in March 1991, the total outstanding amount had already exceeded $800,000. Between September and December 1991, the total outstanding amount had already exceeded $1,000,000. This is because of the increase of sale and for every year Mr Barry Cheung succeeded in exceeding the anticipated business volume.

8. The contract in question was the one for 1994 which was contained in the letter from ICI to Mr Barry Cheung dated 8 February 1994. It was stated as usual as the : "ICI Autocolour Refinished Products Sales Agreement (China) Market for 1994." The first sentence confirmed that "The Sales Agreement for the calendar year 1994 are as follows:". The usual trading discounts and payment discounts were given. Again there was no stated credit limit. However, an annual rebate of 3% for purchases between 95,000 litres to 129,999 litres and 4% for 130,000 and above were given to the Defendant. The letter ended by saying : "This Agreement is prepared for the year of 1994." This was signed by Mr Andy Mok, the then Sales Manager of ICI.

9. ICI in this action sued Mr Barry Cheung trading under the name Techi Motor for 12 invoices of goods sold and delivered to him less partial payment, leaving the outstanding balance at $3,548,007.80. These 12 invoices were goods order by Mr Barry Cheung in April and May 1994. This is not disputed by Mr Barry Cheung.

10. The Defendant counterclaimed under the trade name of Techi Motor that the Sales Agreement 1994 was for the whole year of 1994. It was an implied term of the Sales Agreement that the Plaintiff would apply ICI products to the order of the Defendant for the whole calendar year of 1994 in accordance with its current price-list applicable to the Mainland China market and the express terms contained therein.

11. However, wrongfully and in breach of the Sales Agreement, the Plaintiff in or about May 1994 purported to terminate the Sales Agreement unilaterally with immediate effect and/or refused to supply the Defendant with ICI products from June 1994 onwards for the Mainland China market. It has been agreed between the parties that this trial should concern with the liability of breach of contract as alleged by Mr Barry Cheung first. Should the Court find for him, assessment of damages would follow thereafter.

12. The Defendant also counterclaimed for 4% rebate on the purchase from January to May 1994 in the sum of $428,485.18 and the value of free tins allowance for May 1994 in the sum of $116,043.13. These two sums are not disputed by the Plaintiff.

13. Similarly the Defendant also counterclaimed under the trade name of Techi Paints that the Dealership Agreement for the Hong Kong market was for the calendar year 1994. It was an implied term of the Dealership Agreement that ICI was to supply its products to the orders of Techi Paints for the calendar year 1994 in accordance with its current price-list applicable to the Hong Kong market and the express terms contained in the Sales Agreement. Similarly Techi Paints alleged that ICI was wrongful and in breach of the Dealership Agreement by terminating the same in or about May 1994 with immediate effect and failed and/or refused to supply Techi Paints with ICI products from June 1994 onwards. Similarly, this trial is also concerned with the liability thereon with assessment of damages, if any, to follow.

The two issues

14. There are two main issues in this trial :

(1) "The implied term" issue : -

Whether the document described as "The Authorised Dealer Appointment" dated 21 January 1994 for Techi Paints and "The Sales Agreement" dated 8 February 1994 for Techi Motor are (as the Defendant contends) contracts which were intended by both parties to last for the duration of the whole calendar year 1994 under which the Plaintiff was bound to supply goods upon orders placed by the Defendant, or whether (as the Plaintiff contends) they were contracts which merely set out the trade terms and left the Plaintiff with the right to decide whether or not to accept the orders placed by the Defendant.

(2) "The breach of contract" issue : -

If Issue One is in favour of the Defendant, then whether (as the Defendant contends) the Plaintiff was in breach of those contracts when in late May 1994, it unilaterally declared that it would not supply goods to the Defendant and did not in fact supply goods to the Defendant since 1 June 1994, and later confirmed that refusal by letter dated 1 July 1994, or whether it was (as the Plaintiff contends) the Defendant who took the initiative to suggest that the two contracts should be terminated in May/June 1994 and it was so terminated by mutual agreement on 1 July 1994 as confirmed by the letter of the Plaintiff dated 5 July 1994.

The implied term

15. Admittedly there are no express terms stating that the Plaintiff was bound to supply the Defendant for the whole of 1994. Hence the Defendant pleaded an implied term as being obvious and necessary to give business efficacy to the Sales Agreement/Dealership Agreement.

16. In this respect I accept the submission of Mr Simon Chiu, Counsel for the Defendant. The parties have started trading over the Mainland market since 1987 and over the Hong Kong market since 1989. In 1987, when they first established the relationship, it was Mr C.C. Cheung of ICI (China) who dealt with Mr Barry Cheung. However Mr C.C. Cheung emigrated to Canada between 1990 and 1993. He came back to assume the post of Business Manager in January 1994.

17. Mr C.C. Cheung admitted that many of the customers were "trader" with second line dealers and that they formed a sale network for ICI's products. In order to make the dealings with ICI by traders profitable, various incentives were given to them. In the case of Techi Motor, at least since 1992, there was in place a scheme for early settlement allowance on reducing scale, annual rebates/quarterly rebate and general discount on the price of goods sold. From time to time there were also promotions such as the "1 for 15 tins" free gift.

18. It is not in dispute that ICI knew that traders such as the Defendant would require credit lines and time, i.e. credit period, in order to recoup payments from the second line dealers in order to pay ICI. This is hardly surprising since the products, auto paints, are accessories for vehicles. They are not final consumer products and the purchasers from the Defendant would most likely to be second line dealers, garages, factories, workshops and the like, which are all business concerns as opposed to ordinary consumers.

19. It is also a common experience in the business world that for such chain of dealership to work, the trader relies heavily on the continuous supply of the goods from the supplier so that he can keep up the supply to his sub-dealers and thereby ensuring the next round of credit would be available while the sub-dealers settled their earlier round of outstanding accounts with the trader. Such practice of trade would have been both obvious, necessary and in fact beneficial to both ICI and the Defendant.

20. Since a continuous supply of goods is so vital to such type of trade operation, I accept the Defendant's submission that if the parties, when entering into the contracts, were asked by an officious bystander the question : "Can ICI stop supply the products at any time they like during the year?", both parties would have answered : "Of course not!". Otherwise, it would simply make no business sense. This is of course based on the assumption that stocks or goods are available at the time of the order.

21. The Defendant also pleaded the implied term by reason of past dealings between the parties. It can be seen that when the parties first started in 1987 the credit facilities granted the Defendant was only limited to 30 days in 1987. However, by practice of the parties, it was increased to 60 days since at least 1990. I was told it was so stated on the invoices since 1990 which was agreed by Mr C.C. Cheung. From Exh.D2, the Defendant settled the invoices within the 60 days limit for the first 10 months in 1990. It exceeded 60 days by 9 days only in November 1990 and settled the invoice for December 1990 within 90 days.

22. Although Mr C.C. Cheung of the Plaintiff insisted in evidence that the 60 days credit limit applied throughout from 1990 to 1994, his evidence was not borne out by the dealings between ICI and the Defendant both before and after Mr C.C. Cheung's return to Hong Kong in January 1994. The evidence showed that the Defendant was allowed to settle his monthly invoices from within 60 days to 150 days. The expansion of credit period is in fact consistent with the letter dated 20 December 1991 when the Defendant was given, since 1992, "early settlement allowance" on a sliding scale up to 120 days from the end of the month for invoices issued within that month.

23. Further, despite the fact that in the same letter dated 20 December 1991, the Defendant was only given a credit limit of $800,000 as aforesaid, this credit ceiling has been consistently exceeded with the full connivance of ICI in accordance with the table in Exh.D1. As I have said before since mid-1991, the total amount outstanding had already exceeded $800,000. At the end of 1992, the total amount outstanding was $5.69 million odd and 1993 $6,890,000. Mr C.C. Cheung agreed that the increase of total outstanding amount was due to the fact that there was a tremendous increase in the sales record of the Defendant. This is also because the payment was lengthened from 60 days to 90 days and sometimes 120 days and 150 days.

24. These two factors, namely, increased credit period and increased credit ceiling, show only one thing, that is ICI was apparently happy and willing to allow the trader to continue and to let the Defendant expand his business under the chain of dealership. ICI has, in the nearly seven years of dealings with the Defendant since 1987, never once refused to supply to the orders of the Defendant subject only to stock availability. It would therefore be most surprising indeed for ICI now to maintain that they have in fact reserved the right to cease to supply to the Defendant at will.

25. The Defendant further pleaded that the implied term was based on the fact that the Defendant was openly acknowledged by ICI as a dealer in the Mainland and Hong Kong markets respectively, and by the fact that the Defendant was required to incur costs, time and labour to facilitate the sale and promotion of ICI products with encouragement and co-operation of ICI. Mr C.C. Cheung admitted this to be the case prior to June 1994. This will mean that people in both Hong Kong and Mainland markets were given the expectation that ICI would, through the Defendant as one of the dealers, supply them with ICI products. In respect of Techi Paints, this commitment of continuous supply is further reinforced by various requirements imposed by ICI in Clauses A to H of the Dealers Appointment dated 21 January 1994, which were mere repetition of the terms imposed for the years 1991, 1992 and 1993. Clauses A to H clearly imposed the duty on the Defendant to promote the products of ICI.

26. In respect of Techi Motor, although such requirements were not made expressly, joint promotion exercises had in fact been carried out as evidenced by the various debit notes and credit notes given by ICI to the Defendant. Mr C.C. Cheung, though at first denied knowledge of it (on the ground that he was not in Hong Kong at that time), had to admit later in the cross-examination that at least in relation to Credit Note dated 10 January 1994, after he had returned to Hong Kong. In all these circumstances for ICI to suggest that it could unilaterally put an end to the supply at any time is plainly not within the contemplation of the parties.

27. Defendant further pleaded that the implied term can be inferred from the wordings of the contracts. In respect of Techi Paints, the contract dated 21 January 1994 clearly stated that it was for the calendar year 1994. By Clause L is stated that ICI had the right to review all the trading terms for post 1994. Apart from offering a quarterly bonus, Clause I(d) further offered the special annual bonus "if the said annual target is achieved within the year of 1994". It is therefore obvious that the trade terms were meant to give a contractual right to the Defendant trading as Techi Paints to achieve as much benefit as possible on meeting a threshold target in term of purchase volume for the whole year. This right of "special annual bonus" cannot be realised if ICI can unilaterally put an end to the contract before the year end. There is therefore no justification for ICI to take away a right so expressly given to Techi Paints to earn an annual bonus which, by definition, can only be concluded by the end of the year.

28. What were said above in respect of Techi Paints apply equally to the contract with Techi Motor. Although in the case of Techi Motor, there was no quarterly rebate, there was however annual rebate under Clause 3 of the Sales Agreement. Although in this case, the Defendant has already met the minimal requirement for annual rebate by May1994, he clearly was still entitled to further rebates should he make further purchases from June to December 1994 which would mean less cost and greater profit for him for that whole year.

29. In Attorney General v. Melhado Investment Ltd. [1983] HKLR 327 the Court of Appeal stated the conditions which have to be fulfilled before a term will be implied into a contract, citing with approval the words of Lord Simon in B.P. Refinery (Westernport) Pty. Ltd. v. President, Councillors and Ratepayers of the Shire of Hastings [1978] 52 ALJR 20 at p.26 :

"... for a term to be implied, the following conditions (which may overlap) must be satisfied:

(1) it must be reasonable and equitable;

(2) it must be necessary to give efficacy to the contract, so that no term will be implied if the contract is effective without it;

(3) it must be so obvious that 'it goes without saying';

(4) it must be capable of clear expression;

(5) it must not contradict any express term of the contract."

30. In conclusion I find that all five conditions of Lord Simon in the aforesaid case are satisfied for such an implied term for the Dealership Agreement and the Sales Agreement.

Breach by the Plaintiff or a mutual agreement to terminate by the parties

31. I shall start with Exh.D2 showing the annual turnover between Techi Motor and ICI. It actually increased greatly in excess of 100% for every year since 1991. In the years 1993 to 1994, ICI experienced an expanding market in the Mainland. This is confirmed by Mr C.C. Cheung for ICI. Why did the Defendant want to end and terminate this lucrative contract with ICI? Why did he want to get himself into the difficult situation of being unable to collect his debt from his sub-dealers/customers by abruptly cutting off the flow of goods from ICI?

32. There was no apparent reason why the Defendant should have chosen such an action but for the fact that it was unilaterally terminated by Mr C.C. Cheung for ICI. Mr Barry Cheung said he had since 1993 undertaken dealership of another line of similar products of the PPG Brand from Inchcape. The dealership was originally signed by him but later continued under the name Fanex Limited, a company he incorporated for that purpose. Before Mr C.C. Cheung's return to Hong Kong in early 1994, ICI did raise concern with him about the matter but took no serious objection to it. When Mr C.C. Cheung returned to ICI, he insisted that the Defendant should cease trading in PPG products, a direct competitor of ICI. Upon the Defendant's refusal, he stopped the supply in June 1994. When in the meeting of 1 July 1994, the Defendant still refused to succumb, Mr C.C. Cheung declared that there would be no more supply of goods for him and asked the Defendant to immediately repay all the monies outstanding. As a Business Manager of ICI charged with promoting its products, the aversion of Mr C.C. Cheung to his ICI dealers undertaking to promote goods of ICI's competitor was something perfectly understandable. This is particularly so when the Defendant has proved himself as such a effective dealer.

33. Mr Barry Cheung's version leading to the unilaterally termination of the agreement was fully pleaded in the original Reply to the Re-amended Defence to Counterclaim in response to the Plaintiff's allegations. The evidence of the Defendant did not come out as an afterthought.

34. In comparison, the Plaintiff's version of the matter is quite inconsistent and incredible. In the pleadings of the Plaintiff nowwhere was it alleged the reason why the Defendant would want to terminate the contract. In paragraph 16 of the Further Re-amended Rely and Defence to Counterclaim of the Defendant, the Defendant alleged that as early as May/June 1994, the Defendant already informed the Plaintiff that he did not want to sell ICI products. Then in paragraph 24 thereof, the Plaintiff pleaded that in relation to Techi Paints, "for whatever reason", the Defendant ceased to place orders with the Plaintiff since June 1994. The Plaintiff submitted that that paragraph 24 was only related to Techi Paints and not Techi Motor. This, in my view, is not tenable. The Defendant is counterclaiming as a natural person, (i.e. Mr Barry Cheung) against ICI. The dealings between him and ICI in May/June 1994 would directly bear on the mutual relationship between ICI and Mr Barry Cheung, whether it was under Techi Motor or Techi Paints.

35. Then in the supplemental witness statement of Mr C.C. Cheung, it was mentioned in paragraph 6 that during the meeting on 1 July 1994 the Defendant mentioned that he had difficulties in collecting payments from Techi Motor's customers in China and requested assistance to collect payments. He decided to close the trading accounts of Techi Motor with ICI. This was the first time it was alleged that the Defendant's closure of his accounts with ICI was due to difficulties in collecting payments. Mr C.C. Cheung, in his second supplemental statement, in paragraph 8 thereof, said that as a matter of business consideration the excess of credit limit and credit period would not bear heavily against a trader "provided that some payments were made in part settlement of the overdue amounts and/or bring the amounts due back within the credit limit". However, the evidence of Mr C.C. Cheung in the witness box gave a different picture. First, he brush aside all the past dealings between ICI and the Defendant as something which he had no personal knowledge since he was in Canada. He nevertheless asserted that the credit period for the Defendant was only for 60 days. He maintained that version in spite of the fact that it was pointed out to him that under the Sales Agreement the Defendant was entitled to at least 1% discount if he paid within 120 days. He simply offered no satisfactory explanation at all for the discrepancy between what he asserted and what was written on the Sales Agreement and the conduct between the parties, i.e. when ICI was paid within 120 days, Mr Barry Cheung was still given the aforesaid 1% discount. He then stated that since he seized hold of the Defendant's account, he became aware of the "trend" in the increased length of repayment and increasing credit. He first brought up the matter with the Defendant during a spring banquet in early March 1994 and continued on raising the matter with the Defendant in April to May 1994.

36. However, according to the table in Exh.D2, by early March 1994 the Defendant would have left outstanding invoices for the months of November, December 1993 and January and February 1994 only. Prior to the invoices for November 1993, all the invoices were settled within 60 days, except the one in October 1993 which was settled within 90 days. Since it was still early March 1994, the outstanding invoices for November 1993 would only have been left outstanding for slightly over 90 days. If Mr Barry Cheung settled it within March 1994, he would still be entitled to 1% discount for settling it on or before 120 days' due. There was simply nothing which would have alarmed Mr C.C. Cheung in early March 1994.

37. As to the outstanding amount, the table in Exh.D1 shows that the outstanding sum in February was about $7.2 million. Although the statement of accounts for January shows a balance of $8,500,000, it is nothing alarming when compared with the percentage of increases in the earlier months in 1993. It only shows a gradual increase in purchase volume which ICI positively encouraged its dealers by their annual rebate incentive and promotion schemes. Again, there was simply nothing alarming about the increase in the outstanding sum that could have alarmed Mr C.C. Cheung in early March 1994. Thus, his original version that in March 1994, he started to worry about the long overdue payment was not correct at all.

38. The Plaintiff has offered no evidence to explain why the Defendant could have been in difficulty in collecting payments in China. However, assuming there was such difficulties, there is no reason why the Defendant would, as a long time business associate of ICI, suddenly want to cut off all trading relationship with ICI and thus putting himself in even greater difficulty to the cash flow problem. Mr C.C. Cheung, however, did inadvertently, in the words of Counsel for the Defendant, "let the cat out". He stated that after discussing with the Defendant who told him that he could not reduce the credit limit, it was he who informed Mr Barry Cheung in late May 1994 that ICI would not supply its products to the Defendant anymore. This led to the complete cessation of supply beginning in June 1994. In fact Mr C.C. Cheung himself used the vivid Chinese expression that he decided to "turn off the tap".

39. As an experienced business executive and by the adoption of that very expression, Mr C.C. Cheung clearly realised the drastic effect of a sudden "turning off the tap" might have on a trader's business. The Defendant relied heavily on the continuous flow of supply to secure reciprocal repayments from the second line dealers onwards. Mr C.C. Cheung's action clearly was intended to put a squeeze on the Defendant. But since Mr C. C. Cheung himself admitted that the Defendant had over the years been a satisfactory customer, one cannot but wonder why he would suddenly want to take such drastic measure. He was clearly putting great commercial pressure on the Defendant. The measure, however, was totally out of proportion with the alleged problem about credit limit and credit period, particularly in view of the fact that even by 1 July 1994, the Defendant was still settling his outstanding accounts as usual. One cannot help but conclude that the pressure exerted on the Defendant was made in order that the Defendant would cease trading in PPG products. Since the Defendant replied that he would have lost a few million Hong Kong dollar if he ceased to trade in PPG products under Fanex Limited, Mr C.C. Cheung decided that he, for the benefit of ICI, would cease supplying him with the goods. I must add here that Mr C.C. Cheung gave me the impression that he was over-zealous to prevent ICI from suffering should "Techi Motors" and "Paints" suddenly go buzz. However his worry was out of proportion with the business reality that the business volumes had (since his departure in 1990) increased several folds and a different payment scheme was already in operation.

Conclusion

40. In conclusion, I find that it is clearly an unilaterally action made by Mr C.C. Cheung for and on behalf of ICI, the Plaintiff, and the termination was not by mutual consent. Accordingly, the Plaintiff was in breach of both the 1994 Sales Agreement and the Authorised Dealer Appointment, and the Defendant is entitled to judgment on the Counterclaim.

Since it is not ascertained at the moment the amount of damages and the Defendant's Counterclaim was for equitable set-off against he Plaintiff's claim, no final judgment can be entered at this stage and all costs have to be reserved pending the assessment of damages on a date to be fixed, preferably before me.

Representation:

Mr M.C. Chiu, inst'd by M/s Deacons Graham & James, for the Plaintiff

Mr Simon Chiu, inst'd by M/s Pun & Associates, for the Defendant