LUCKY HORSE GARMENT FACTORY LTD. v. CHAN LIE HUNG t/a LUEN SANG TEXTILES CO. (a firm)

HCA 18682/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 18682 OF 1999

____________________

____________________

___________________________

ASSESSMENT OF DAMAGES

___________________________

This is an assessment of damages in respect of the plaintiff's loss pursuant to the judgment granted by Mr. Justice Cheung, as he then was, on 27 June 2000. It was the order of Mr. Justice Cheung that:-

(a) the defendant do pay the plaintiff damages and interest thereon to be assessed; and

(b) the defendant do transfer to the plaintiff or its nominee or assigns 2,024 dozens of category 347 quota on a Type B transfer basis (Permanent Transfer) within 14 days from 7 July 2000.

2. The plaintiff and the defendant were both engaged in garment export business. On 8 April 1998 the defendant acquired a temporary transfer of 2,000 dozens of category 347 quota from the plaintiff for the export of manufactured garments to the United States. A guarantee was signed by the defendant to acknowledge his obligation to utilize a minimum of 95% of the assigned quota, in default of which the defendant undertook to indemnify the plaintiff its loss arising out of the defendant's breach and to effect permanent transfer, on or before 30 April 1999, the quantity of quota that the plaintiff was deprived of as a result of the defendant's breach of his obligations.

3. The transfer was effected through the plaintiff's broker agent Cherry Empire Limited. Transfer fees in the sum HK$314,000, at HK$157 per dozen, was paid by the defendant to the plaintiff.

4. On 15 July 1999 the plaintiff was informed by the Trade Department that the manufacturer had failed to satisfy the Director-General of Trade that the goods exported with the use of the said transferred quota were of Hong Kong origin. The plaintiff was invited to make representation on why 2,024 dozens of Cat 347 quota ought not be deducted from the plaintiff's allocation. As the plaintiff was unable to persuade the Director-General otherwise, the plaintiff was notified by letter on 10 September 1999 that 2,024 dozens of category 347 quota was removed from its allocation.

5. Despite of demands, the defendant failed to honour his obligation under the guarantee to effect permanent transfer of the 2,024 dozen of category 347 quota back to the plaintiff, thus giving rise to the present litigation, summary judgment and assessment.

6. As at the date of the hearing the defendant has not made any transfer of category 347 quota to the plaintiff despite of the order granted by Mr. Justice Cheung.

7. Loss and damages suffered by the plaintiff can be quantified in the following manner :-

(a) damages in conversion for the defendant's wrongful use of the transferred quota resulting in the plantiff's confiscation of 2,024 dozens of category 347 quota; or

(b) alternatively damages for breach of the defendant's contractual obligations under his letter of guarantee and the defendant's failure to return to the plaintiff the quantity of quota which the plaintiff was deprived of on 10 September 1999 as a result of the defendant's default.

8. On the evidence I accept the defendant's obligation to effect permanent transfer of 2,024 dozens of category 347 quota arose on 10th September 1999 when the plaintiff was stripped of his allocation by the Department of Trade. Hence the date of contractual breach and the defendant's act of conversion occurred on 10 September 1999. Though the plaintiff has a duty to mitigate, his duty did not arise until 27 June 2000 when the issue of liability was resolved in court. After judgment was awarded the defendant was permitted time to effect permanent transfer of the 2,024 dozens of quota until 21 July 2000. Thus the plaintiff ought to acquire the replacement quota from the market after 21 July 2000.

9. Hence I accept the damages suffered by the plaintiff were as follows:-

(a) loss of profit in respect of its right to effect temporary transfer of 2,024 dozens of category 347 quota for the trading year of May 1999-March 2000.

I accept the evidence of Wong and Ho's, witnesses testifying on behalf of the plaintiff, about the prices of the private sales and agent sales of category 347 quota in the same period. According to Mr. Ho, the invoice prices represented the payments paid by the buyers and the sellers would take 98% of the invoiced sum with the balance of the 2% going to the agent's commission. Adding all the available data on the transactions executed by the plaintiff and the agent, I accept the average selling price of category 347 quota for the year of 1999/2000 to be about HK$250.589 per dozen. Hence the plaintiff's loss of profit in respect of his right to execute temporary transfer in the year of 1999/2000 was HK$507,192 ($250.589 x 2,024).

(b) Right to be reimbursed in respect of its financial outlay for the acquisition of permanent transfer of the confiscated quota after pronouncement of the judgment.

I accept Ho's testimony that the permanent transfer price of category 347 quota should be about HK$500 per dozen in the year of 2000. Hence the financial outlay of the plaintiff to secure a replacement of the quota in July 2000 should be HK1,012,000 ($500 x 2,024).

(c) The plaintiff also claimed a sum of legal expenses of $17,200 in the preparation of written submission to the Trade Department in July 1999. The bill presented, unfortunately covered also the work done in respect of the present litigation. The plaintiff was unable to quantify the portion of legal costs attributable to the submission to the Trade Department and invited this court to decide on the quantum of legal costs as though I was assuming the role of a taxing master.

In my other roles as a taxing master, I would usually be informed of the time spent in the drafting of the submission and the hourly charge. With the presentation of a gross sum bill, taxation is impossible. Taking into consideration that there were a few conferences and a few letter of correspondence with the Department of Trade, I am prepared to accept a sum of HK$8,000 as the reasonable amount of legal expenses incurred towards making representations to the Department of Trade.

The Award

10. I award the plaintiff damages in the sum of HK$1,527,192 ($507,192 + $1,012,000 + $8,000) and interest at 1% above prime from 21 July 2000 to the date of this judgment and thereafter at judgment interest from the date of judgment until payment.

11. I also award costs nisi in favour of the plaintiff for the assessment hearing. The quantum of costs, if not agreed, is to be taxed.

Representation:

Mr. Jonathan Yue Tin Kong instructed by Messrs. Lo & Lo for Plaintiff.

Defendant in person, Absent.

HCA18682/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.18682 OF 1999

----------------------

---------------------

D E C I S I O N

---------------------

1. After my decision on this matter, the plaintiff applied in writing to vary my order by seeking an additional order that the defendant do transfer to the plaintiff or its nominees or assigns 2024 dozens of category 347 quota on a Type B transfer basis ("permanent transfer"). It explained that it would ask for the damages to be assessed in default of the defendant transferring the quota to it.

2. The defendant had responded to this request by a written submission.

3. In my view, the plaintiff is clearly entitled to this relief. This is expressly provided for in the agreement itself. Failure by the defendant to effect the transfer on or before 30 April 1999 does not mean that it is no longer liable to effect the transfer. The claim for the transfer of the quota is expressly pleaded in the Re-Amended Statement of Claim and the Order 14 summons. As I have found for the plaintiff, I shall vary the order by ordering in addition that the defendant is to transfer the quota within 14 days.

HCA18682/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.18682 OF 1999

----------------------

---------------------

J U D G M E N T

---------------------

The applications

1. This is the plaintiff's appeal against the master's decision granting the defendant unconditional leave to defend the action. The plaintiff further asks for the determination of a preliminary question of law under Order 14A.

The Agreement

2. By a document in writing dated 7 April 1998 and entitled "Letter of Guarantee" ("the Agreement"), the defendant agreed to obtain from the plaintiff a transfer of 2,000 dozens of quotas ("the quotas") for the export of textile goods ("the goods") to USA. The Agreement provided that :

"We (i.e. the defendant) hereby give to you the following guarantees :-

(1) that we shall utilize a minimum of ninety-five percent (95%) of the said quota on or before Sept.30,98;

(2) that goods utilizing the said quota shall be of Hong Kong Origin and that should there be disputes over the goods or actions taken by the authorities under the Import and Export Ordinance and/or in cases of infringement of the textile origin and export control rules, we will indemnify you against all actions, claims, costs, penalties, losses and damages;

...

(5) that should we breach any of the guarantees aforesaid resulting in loss to you, or in the event of actions taken by the authorities mentioned in (2) above caused by us, our servants, agents or the ultimate contractor/s, then, in addition to the indemnities mentioned in (2) above, we further guarantee to transfer on a Type-B Transfer Basis (Permanent Transfer) to you or your nominees/assigns on or before April 30, 99 the ultimate quantity of quota that you lost or were short-allocated."

The transfer

3. Pursuant to this Agreement, on 8 April 1998, the plaintiff transferred the quotas to the defendant. The conditions of transfer provided, among other things, that the defendant shall comply with the conditions governing the allocation and utilization of the quotas as stipulated in the Quota Allocation Certificate and in the relevant notices to exporters issued by the Trade Department from time to time.

4. The defendant exported the goods using the quotas. The goods were manufactured by a company called Golson Limited ("Golson"). An export licence was required for the export. The printed condition of the export licence provided that the goods must be of Hong Kong origin.

5. The Trade Department informed the plaintiff on 15 July 1999 that the declared manufacturer, Gloson, was unable to establish that the goods were of Hong Kong origin and as a result the goods had failed to comply with the quota utilization conditions. The plaintiff was invited to make written representation. The letter further stated that the declared exporter, namely, the defendant, and the declared manufacturer, namely, Gloson, were also invited to make written representations. This was followed by correspondence between the plaintiff and the Trade Department.

6. In the letter dated 6 August 1999, the Trade Department repeated that the origin of the goods could not be established because of the unreliable records produced by Golson.

7. In a letter dated 10 September 1999, the Trade Department stated that Gloson and the defendant had failed to comply with the consignment check requirements and failed to produce sufficient evidence to prove that the goods were of Hong Kong origin. As a result, the Trade Department discounted the performance covered by the quotas transferred to the defendant for the purpose of subsequent quota allocation and the plaintiff's quotas for 1999 in respect of that product had been adjusted downwards by 2024 dozens.

8. The plaintiff claimed that the indemnity in Clause 2 of the Agreement was triggered, as action had been taken by the Government and the defendant was therefore liable to indemnify the plaintiff in the manner set out in Clauses 2 and 5. The plaintiff claimed that the defendant had refused to indemnify its loss and as a result the plaintiff had suffered loss and damages.

The defendant's case

9. In essence, the defendant's case is that the indemnity would come into play when the goods are not of Hong Kong origin, otherwise the use of the words in Clause 2 "that the goods shall be of Hong Kong origin" would be superfluous. Although the clause does not expressly provide that the indemnity would arise when the goods are not of Hong Kong origin, this clearly was the intention of the parties. Whether the goods are of Hong Kong origin is a question of fact. The matter cannot be dealt with in an Order 14 hearing because evidence is required on this issue.

The quota system

10. In order to deal with this case it is necessary to refer to the operation of the quota system in Hong Kong. This is not a matter that was disputed by the defendant. In Hong Kong, because of the restrictions on the export of textile products to the United States of America, an exporter can only export textile products to that country if it has the requisite quota. Quotas are transferable by the quota holders to other companies. The quantity of quotas used up against the shipment in a particular period governs how many quotas the quota holder may receive in the subsequent year. For the allocation of 1999 quotas, a quota holder which used less than 95% quota holdings in 1998 in a category would be offered quota allocation equal to the amount it utilized in 1998.

11. If there is a breach of the textile export control system, the Director General of Trade may nullify or discount the shipment performance of the quota. If the discounting of the performance of the quota leads to a less than 95% utilization of its quota holding, the quota holder will receive a substantial reduction of his quotas for the following year. According to the plaintiff, as a result of this risk, it is the practice of the industry that the transferee of quotas is invariably required to give a full and blanket indemnity to the transferor for all losses and damages if the transferor holder's holding is affected as a result of the nullification or discounting.

12. According to a Notice to Exporters issued by the Director General of Trades, applicants for export licence are reminded that consignment checks may be conducted by the Customs and Exercise Department. In such checks, the declared exporter and the declared manufacturer on an export licence application must produce the necessary documents and goods to show that the goods have been and/or will be properly exported in accordance with the provisions of the export quota control system. In particular, they must produce the relevant documents to substantiate the origin of the textile products covered by the licence application. The notice further provided that in case the declared exporter and manufacturer cannot produce sufficient evidence to prove that the textile products are of Hong Kong origin, the shipment performance gained by these licences would become ineligible for calculation of quota allocation to the quota suppliers and transferors of temporary quotas. Under the consignment check system, unless otherwise specified, goods claiming Hong Kong origin must have undergone principal processes of manufacture in Hong Kong.

The principle

13. In Investors Compensation Scheme Ltd. v. West Bromwich Building Society [1998] 1 WLR 896, Lord Hoffmann set out the principles in construing a document. The starting point is that an interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would otherwise have been available to the parties in the situation in which they were at the time of the contract.

Construction of Clause 2

14. Mr Zimmern, counsel for the defendant, formatted Clause 2 in order to illustrate his point on how this clause works. I would adopt his format :

"that goods utilizing the said quota shall be of Hong Kong origin and

that should there be disputes over the goods or actions taken by the authorities under the Import and Export Ordinance and/or in cases of infringement of the textile origin and export control rules,

we will indemnify you against all actions, claims, costs, penalties, losses and damages."

15. It is clear from Clause 2 that the defendant guaranteed two matters :

(1) the goods covered by the quotas shall be of Hong Kong origin and;

(2) if there shall be dispute over the goods or action taken by the authorities, then the defendant will indemnify the plaintiff.

In my view, bearing in mind the background in which the quota system works, the liability of the defendant arises when actions had been taken by the Trade Department on the goods. The use of the word "and" between the first part and second part of Clause 2 does not contradict this interpretation. This is the only way in which one could give some sense to the clause. The disputes and the actions that may be taken are obviously referable to the goods not being of Hong Kong origin or not proved to be of Hong Kong origin. The burden of proving that the goods are of Hong Kong origin is on the exporter and the manufacturer. This is something that has to be done before actions are taken by the Government. This being the case, there is no need for the plaintiff to establish by evidence afresh that the goods are not of Hong Kong origin before it can rely on the indemnity.

16. If action had already been taken by the Government to discount the shipment performance because of problem concerning the origin of the goods, it will make no sense if the matter has to be dealt with again by hearing factual evidence at the trial on the origin of the goods. Whatever may be the finding of the court, what really matters is the decision of the Trade Department. It is the decision of the Trade Department that will result in the discounting of the shipment performance and a subsequent reduction of the quota allocation to the quota holder. The intention of the parties is that the defendant will indemnify the plaintiff after action has been taken by the Government.

Appeal allowed

17. Accordingly, the plaintiff is entitled to summary judgment with damages to be assessed. The appeal is allowed and the master's decision is reversed. There shall be costs nisi to the plaintiff of the appeal and of the costs below.

18. The Order 14A summons seeks a determination on whether on the true construction of the Agreement, the defendant is obliged to indemnify the plaintiff in the event of actions being taken by the authorities. As my decision on the summary judgment application effectively disposed of this issue, I shall make no order on this summons.