RICKEED INDUSTRIES LTD AND ANOTHER v. HONG KONG TOHKOH COMPANY LTD

CACV 72/2022, [2026] HKCA 105

On appeal from [2022] HKCFI 106

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 72 OF 2022

(ON APPEAL FROM HCA 2280 OF 2015)

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J U D G M E N T

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The Court:

Introduction

1.  This is the defendant’s appeal against the judgment of Deputy High Court Judge P Fung SC dated 13 January 2022 (“Judgment”) whereby he upheld the plaintiffs’ claim for damages for breach of contract relating to the sale and purchase of acrylic sheets.  Damages were awarded in the sum of just over RMB 5 million, being the difference between the price paid by the plaintiffs for 42,601 sheets and the amounts for which they were subsequently on-sold by the plaintiffs.

Factual background

2.  The primary facts are largely not in dispute and may be summarised from the Judgment as follows.

3.  The 1^st plaintiff is a Hong Kong company and the 2^nd plaintiff a Mainland company.  For the purposes of this appeal it is unnecessary to distinguish between them, and we shall refer to them collectively as “Ps”.  They are both subsidiaries of a Taiwan company called Gredmann Taiwan Ltd (“Gredmann”) and carried on business in trading industrial materials.

4.  The defendant (“D”) is the Hong Kong subsidiary of a Japanese company called Tohkoh Jushi Co Ltd (“Tohkoh Japan”).  At all material times they carried on the business of selling acrylic sheets manufactured by Mitsubishi Rayon Co Ltd (“MR”) in Japan.  MR would not sell its products directly to any customer but only through its authorized agents, of which Tohkoh Japan was one.

5.  The modus operandi of D and Tohkoh Japan was that when D received a purchase order for the products of MR, it would pass the order to Tohkoh Japan, which would in turn order the goods from MR.  Arrangements would be made for MR to ship the goods from its factory or warehouse to D’s customers directly.

6.  Ps started trading with D in December 2010 and placed various purchase orders with D for the supply of acrylic sheets described as “MR 200G PMMA”.  They were all of the dimension of 1120mm × 1320mm, but with 3 different thickness: 0.8mm, 1.0mm and 1.2mm.  They were suitable for making covers for mobile phones of Nokia, Motorola, Ericsson and similar brands, described by the judge as mobile phones of the last generation.  The details of the purchase orders were set out in a table annexed to the Judgment as Annexure 1.  We reproduce the table below, omitting irrelevant details.

PO Number	Order Date	Delivery Date	Thickness (mm)	Quantity	Unit Price (USD)	Amount (USD)
GKOF199B	2010/12/06	2010/12/24	0.8	3,200	26.70	85,400.00
GKOF225B	2011/03/16	2011/04/08	1.0	8,000	26.70	213,600.00
GKOF225B	2011/03/16	2011/04/08	0.8	12,000	26.70	320,400.00
Exchanged Goods	2011/07/20	2011/08/05	0.8	14,800	0.00	0.00
GKOF250B	2011/07/20	2011/08/05	1.0	6,800	26.70	181,560.00
GKOF258B	2011/08/24	2011/09/16	0.8	15,000	26.70	400,500.00
GKOF258B	2011/08/24	2011/09/16	1.0	14,800	26.70	395,160.00
GKOF273B	2011/10/21	2011/11/17	0.8	10,000	26.70	267,000.00
GKOF273B	2011/10/21	2011/11/17	1.0	10,000	26.70	267,000.00
GKOF277B	2011/11/01	2011/11/10	1.2T	350	41.00	14,350.00
GKOF278B	2011/11/02	2011/11/10	1.2T	50	41.00	2,050.00
GKOF283B	2011/12/15	2012/01/04	0.8	10,000	26.70	267,000.00
GKOF283B	2011/12/15	2012/01/04	1.0	20,000	26.70	534,000.00
GKOF289B	2012/03/27	2012/04/10	0.8	20,000	26.70	534,000.00
GKOF305B	2013/03/19	2013/04/08	0.8	10,000	26.70	267,000.00
GKOF305B	2013/03/19	2013/04/16	0.8	7,600	26.70	202,920.00
Returned Goods	2013/12/26	2014/01/26	0.8	-14,800	26.70	-395,160.00

7.  Although there were a number of transactions between the parties, Ps’ claim is only based on the 2 contracts arising from purchase orders nos. GKOF283B and GKOF289B, which we shall refer to as “PO1” and “PO2” respectively.  As can be seen, PO1 was for 10,000 pieces of 0.8mm and 20,000 pieces of 1.0mm, and PO2 was for 20,000 pieces of 0.8mm, totalling 50,000 pieces.

8.  Pursuant to the purchase orders, the acrylic sheets purchased were shipped by MR and, upon arrival, delivered to Ps’ warehouses, where they were stored before being on-sold and delivered to Ps’ customers, the sub-buyers.

9.  Each acrylic sheet was protected by polyethylene protective sheets on the outside.  Once the protective sheets were peeled off, they could not be properly put back and no customer would accept the products as new acrylic sheets.  The protective sheets were therefore only removed by the end-buyers when the acrylic sheets were to be used. This meant that Ps could not themselves inspect the acrylic sheets and assess their quality, and would have to wait for complaints (if any) from their customers before they could know about any defects.

10.  There were complaints from customers regarding the quality of the acrylic sheets supplied under the earlier purchase orders.  The problems were relayed to MR. Eventually MR issued a report in November 2011 (“MR Report”), which D sent to Ps on 3 December 2011.  The relevant parts of the MR Report contained the following comments, as set out in §31 of the Judgment:

(i)     “Regarding the samples of unperceivable scratches, it is confirmed that the scratches indicated by you can be observed under strong light.  The observation results of each sample are as below.”

(ii)     There then followed a table regarding the various samples and, under the column “Reason of defect (presumption)” against each sample, there appeared the words “Caused by our manufacturing process”.

(iii)    “Since all of the scratches are in convex shapes, it can be confirmed that they were caused during our manufacturing process.  Upon comparison between the samples and the appearance standard of our products, all samples are qualified.  In connection with the abovementioned scratch problems, we will conduct maintenance on a regular basis and repair in sequence of their damage levels.  We believe the quality of products would improve gradually.

     Regarding the crystal point problem indicated by you, we have observed the samples but since the protective films have been torn off, the acrylic sheets are being mixed with foreign materials and with dirt being stuck to their surface such that the defects indicated by you could not be confirmed.

     We presume that the possible reason for the crystal points could be attributable to the defective gum/staining residues problems caused by the protective films, which were attached to the acrylic sheets in order to protect their surfaces.

     In connection with the defective gum/staining residues problem, we are considering introducing protective films with better quality and we are currently examining it in the introductory stage.

     We sincerely apologize for the inconvenience caused by this issue.  We will continue to improve the quality of our products and wish to have your understanding and continued support.  Thank you.”

11.  On 16 December 2011, Ps placed PO1 for 30,000 acrylic sheets.  They were delivered on 4 January 2012 and paid for shortly thereafter.

12.  On 16 January 2012, Ps relayed to D their customers’ complaints on the quality of certain 0.8T and 1.2T acrylic sheets.  On the same day, D replied, suggesting an inspection to confirm the abnormalities.[1]  It is, however, not clear whether that the complaints related to PO1 or some earlier order.  Insofar as the complaints concerned 1.2T, clearly they were not about PO1, for that order did not cover any 1.2mm sheets.

13.  On 27 March 2012, Ps placed PO2 for 20,000 pieces of 0.8mm acrylic sheets with payment within 90 days.  The goods were delivered on 10 April 2012.

14.  By an email dated 12 June 2012, one Ivy Huang of Ps wrote to Mr Nakayama of D as follows:

“Subject: GKOF 283B

Dear Nakayama,

Could you tell me whether the attached order GKOF283B of 10,000 PCS 0.8t and 20,000 PCS 1.0t delivered around December 2011 can be divided into MR200Z and MR200G? (in another word, is there any difference in quality?) Is there any difference in the labelling? The other 14800 PCS of 0.8t (which have been delivered to Hong Kong before) in this order are MR200Z, which are of inferior quality, right?” (emphasis added)

15.  By email dated 13 June 2012, Nakayama replied as follows:

“Subject : GKOF 283B

Miss Ivy,

Good morning!

There is no difference on the labels of the goods in December, the other 14800 PCS of 0.8t are indeed of slightly inferior quality.” (emphasis added)

16.  Although the caption and the main parts of the emails clearly related to PO1, there is a dispute whether the underlined parts of these 2 emails of June 2012 relate to PO1 (as Ps suggest) or to some earlier order (as D suggests).  We deal with this in §§37-38 below.

17.  In the meantime, between March and December 2012, there was correspondence between Ps and D about a price reduction as compensation.  Finally, by an email dated 19 December 2012 to Ivy Huang of Ps, Nakayama said:

“Please confirm the following contents with Mr Leo again.

On 18 December, decided in the meeting between Ikegami Department Manager of our company and Mr Chen Dongshan (陳東山) of your company, US$534,000 will be fully paid this time.  The issue of payment deduction will be calculated after March 2013.”

18.  By his email dated 22 January 2013, D sent Ps an email attaching a draft document in Japanese.  The email bears the caption (in translation): “RE: The payment of MR 200 compensating the defective part by Mitsubishi and Tohkoh”.  D signed the document a few days later (“Negotiation Document”).  It had the title: “Negotiation on Compensation for Defective MR 200” and relevantly stated as follows (in translation):

“In respect of the captioned matter, the result of discussion of Tohkoh Jushi Co., Ltd are as follows

Tohkoh Jushi agrees that upon mutual negotiation Mitsubishi Rayon, Tohkoh and Gredmann jointly bear the loss of the defective MR200 that were already delivered and in subsequent sales (including those completely unusable parts and parts that need to be compensated to the customers)

The specific details are as follows

1. In respect of the goods already returned due to customers’ complaints, price adjustment will be performed at the next batch of new purchase orders. The amount for goods that had been returned to Gredmann and of which Gredmann had made compensation to the customer will be deducted from the payment for this order.

2. For defective goods that occur in subsequent sale, the three companies must confirm the cause of the defective products (residual glue, scratch). For defects which have been determined and confirmed not to meet the quality standard of Mitsubishi, Tohkoh and Mitsubishi will be responsible for it. If it is not caused by defective incoming materials, it will be the responsibility of Gredmann.

3.     For goods sold at lower price (loss arising from selling price below $26.7), Gredmann will truthfully provide the sales price and report to Tohkoh and Mitsubishi company.  Tohkoh and Mitsubishi are responsible for the said loss.  There will be unit price adjustment in subsequent PO to compensate for Gredmann’s loss.”

19.  Soon after that, on 4 February 2013, Lin wrote an email to Nakayama referring to the complaints by Ps’ customers about serious defects in the quality of the acrylic sheets in large quantities.  He also asked for a price reduction in relation to PO2.  By email dated 5 February 2013, Nakayama suggested a meeting to be held between the two sides.

20.  The parties did eventually have a meeting in Shenzhen in around March 2013 attended by both Ikegami and Nakayama for D and Lin and other personnel of Ps. Consequently, an undated document in Chinese (“Replacement Agreement”), drafted by Ps, was signed between the two sides.  Its English translation reads as follows:

“Gredmann MR200 Solutions to bad inventory

(Memorandum of Understanding of the defective MR200 in Gredmann’s stock)

1. For the 21400pcs of MRZ200 in the existing inventory, Tohkoh is responsible for returning the goods and replacing them with 21400pcs of MR200. For the replacement goods, Gredmann shall provide the required quantity and time schedule within one week. For the specific return and exchange operation, it shall be discussed and determined by both parties within one week.

2. In respect of the 21400pcs of MRZ200 inventory in Gredmann’s warehouse, Tohkoh entrusts to store temporarily in Gredmann’s warehouse and that Gredmann shall sell them on behalf of Tohkoh. The exact selling price will be determined by Gredmann and Tohkoh according to the situation of the customer. The mode of transaction between Gredmann and Tohkoh regarding this specific sales of goods by agency is to be determined.

3. Tohkoh shall bear all taxes and related expenses incurred in the replacement or replenishment of defective goods during the import process, it shall reimburse Gredmann by way of cash.

4. If the MR200 project is confirmed to be terminated (i.e., both parties confirm that Gredmann stops purchasing new MR200), Tohkoh shall be responsible to compensate Gredmann by cash in relation to the available inventory owned by Gredmann at the time of termination which is subject to customer complaints of poor quality (Gredmann’s current MR200 inventory is 50528pcs, the estimated defect rate is 10%~15%).

5. After Tohkoh confirms and signs the above agreement, Gredmann shall immediately pay the outstanding payment of the remaining 20,000 PCS.”

21.  On 28 March 2013, Ps paid D the price of the goods under PO2.

22.  Subsequently, there were other complaints by Ps’ customers about the quality of large quantities of the acrylic sheets in April to June 2013.  Some of these are mentioned in §40 below.

23.  In April 2013, D supplied 17,600 acrylic sheets to Ps free of charge as replacement sheets, and Ps returned 14,800 acrylic sheets to D in January 2014.

24.  In 2015, Ps brought the action below against D for breach of contract in relation to PO1 and PO2.  In the amended statement of claim, it was alleged that “a large quantity” of the acrylic sheets were not of merchantable quality and not fit for purpose, and that “most if not all” of the acrylic sheets were defective and worth far less than the price they were sold for.  Ps pleaded that they had been rendered liable to their sub-buyer, Shenzhen Golden Ken Optics Electromonic Co Ltd (“GK”), for defective goods, and claimed an indemnity from D in respect of GK’s claim.  Ps also alleged they had suffered loss and damage arising from the sale of 26,336 pieces of 0.8mm acrylic sheets from PO1 and PO2 at lower unit prices in the total sum of RMB 3,417,958.51 and 16,265 pieces of 1.0mm at lower unit prices in the total sum of RMB 1,607,068.06.

The Judgment below

25.  The trial judge dealt with a number of issues between the parties in his Judgment.  Two areas are of relevance in this appeal.  First, on the issue of liability and in particular whether the acrylic sheets supplied were defective, the trial judge said at §§82-86 of the Judgment:

“82. First, I find as a fact that there was no agreement between the Plaintiffs and D and/or any undertaking by the Plaintiffs to the effect that: -

(i) D would give no warranty for the quality of the goods to be sold to the Plaintiffs;

(ii) the Plaintiffs could not re-sell the acrylic sheets to competitors of D, including, in particular, GK.

I take the view that if there had been such agreement or undertaking, the same would have been recorded in writing between the Plaintiffs and the Defendant. Furthermore, if there had been such an agreement or undertaking and the Plaintiffs had committed a breach thereof, the same would have been raised D in the correspondence between the parties much earlier on and not only just after the commencement of the litigation. I therefore do not accept the evidence of Ikegami and Nakayama in this regard.

83. Secondly, in any event, I fail to see how GK could be a competitor of D in light of the fact that it was purchasing goods as a sub-purchaser from the Plaintiffs who themselves had to buy the goods from D. GK must have paid a price for the goods higher than that paid by the Plaintiffs to D and GK would naturally sell the same goods at an even higher price to the purchasers from itself. In those circumstances, GK would only be an indirect purchaser from D and not its competitor.

84. Thirdly, on the basis of the course of conduct between the parties from the commencement of their trading relationship and all the admissions made on behalf of D, mostly by Nakayama, including all the emails referred to above, in particular, those set out in paragraphs 23, 34, 37 and 53 above, and the contents of the MR Report sent by Nakayama to the Plaintiffs on 3 December 2011 as referred to in paragraph 31 above, I find that it has been proved by the Plaintiffs that the acrylic sheets sold by D to the Plaintiffs during their trading relationship had always had substantial quality problems.

85. Fourthly, on the basis of the matters referred to in paragraphs 82 and 83 above and on the basis of the draft of the Negotiation Document sent by Nakayama to Michael Chen on 22 January 2013 as referred to in paragraph 41 above, the forwarding to the Plaintiffs of the actual Negotiation Document signed by Ikegami two days later as referred to in paragraph 43 above, the signing of the Replacement Agreement by Ikegami as referred to in paragraph 47 above and the delivery of the 17,600 replacement acrylic sheets in April 2013, I find that the majority of the acrylic sheets delivered under the 1^st PO and the 2^nd PO were defective.

86.  The quality problems are to an extent confirmed by the Report of Dr Parsons as referred to above.  With the limited information and materials supplied to her, she was able to come to conclude and consider ‘the returned products that I examined to be unsuitable for manufacturing the display screen of mobile telephones, which I understand to be their intended use.’”

26.  On the question of relief, the judge said there was no evidence that GK, who took delivery in 2013, had lodged any claim or serious claim against Ps.  He therefore declined to find D liable for the indemnity claimed by Ps.  He awarded damages as claimed by Ps based on lower resale prices, on the basis of the documents produced by Ms Yin Meng, an employee of Ps, in her supplemental witness statement as ‘YM-1’ to ‘YM‑14’.

The appeal

27.  The notice of appeal runs into many paragraphs but the main contentions on this appeal, based on Mr Wright’s submissions to us, may be set out as follows:

(i)     whether the judge was wrong to infer that the majority of the acrylic sheets delivered under PO1 and PO2 were defective;

(ii)     whether the Judge was wrong to find that D breached the conditions as to merchantable quality and fitness for purpose implied by sections 16(2) and (3) of the Sale of Goods Ordinance (Cap 26); and

(iii)     whether the judge was wrong to calculate loss based on the difference between the purchase price paid by Ps and the subsequent resale price received by Ps.

Whether majority of the acrylic sheets defective

28.  The critical paragraphs in the Judgment relating to the question of defects have been set out above.  Mr Wright submits that in §84, when the judge said “the acrylic sheets sold by D to the Plaintiffs during their trading relationship had always had substantial quality problems”, he was not dealing specifically with PO1 and PO2, which were the subject matter of the next paragraph.  This seems correct, since many of the matters referred to by the judge in §84, such as the MR Report, concern goods supplied under previous purchase orders.  In any event, the fact that there were “substantial quality problems” is not equivalent to a finding that the majority were defective, not of merchantable quality and not fit for purpose.

29.  In particular, it should be noted that the MR Report, which predated PO1 and PO2, whilst admitting defects caused by MR’s manufacturing process, stated that steps would be taken and the quality of products would improve.  It was not therefore of much probative value in relation to the quality of the goods under PO1 and PO2.

30.  At §85 of the Judgment, the judge set out the matters relied on for his conclusion that the majority of the acrylic sheets delivered under PO1 and PO2 were defective.

31.  The first matter, §§82 and 83 of the Judgment, concerns the separate question of whether the parties agreed that D would not give a quality warranty and that Ps would not re-sell to GK.  These paragraphs obviously do not tend to show that the goods were defective. 

32.  The Negotiation Document, signed in January 2013, stated that for goods already returned, price adjustment would be made, and that for defective goods occurring in subsequent sale, the 3 companies (i.e. MR, Tohkoh and Gredmann) “must confirm the cause” of the defects.  If the products were below standard, it would be MR’s and Tohkoh’s responsibility; otherwise it would be Gredmann’s responsibility.  Whilst it clearly shows there were complaints about defects, the document was intended to set out procedures for determining the defects and their cause, expressly contemplating that defects complained of by Ps’ customers might not all be D’s or MR’s responsibility.  This document does not show that any of the goods under PO1 and PO2, let alone the majority of them, were defective.

33.  The Replacement Agreement, signed in around March 2013, provided that D was responsible for replacing, at its own cost, 21,400 pieces in the existing inventory of Ps.  This could be evidence that there were problems with those 21,400 pieces, either because they were of the wrong model (MRZ200 instead of MR200) or otherwise defective.  But D did proceed to supply 17,600 replacement sheets in April 2013, and there was no finding that these replacement sheets were also defective.  Only 14,800 replaced sheets were returned by Ps in January 2014.  There was no finding by the judge as to why only 17,600 replacement sheets (instead of 21,400) were supplied by D, or why Ps only returned 14,800 sheets (instead of the 17,600 replaced). 

34.  In addition, the Replacement Agreement expressly stated that of the current inventory of 50,528 pieces held by Ps, “the estimated defect rate is 10% - 15%” – a provision the judge did not seem to have taken into account before arriving at his conclusion that the majority, i.e. at least over 50%, of the acrylic sheets were defective.

35.  For these reasons, the Replacement Agreement does not in our view support the judge’s inference that the majority of the goods under PO1 and PO2 were defective.

36.  The final matter relied on by the judge in §85 of the Judgment is the delivery of the 17,600 replacement acrylic sheets in April 2013.  This may be evidence that the sheets replaced by the new ones were defective, but it says nothing about the quality of the replacement sheets.  The replacement sheets, once accepted, took the place of the original sheets.  So the replacement does not prove any actionable defect.

37.  There is one other matter the judge appears to have taken into account, though not referred to in §85 of the Judgment, in concluding that the goods under PO1 were defective.  In §90 of the Judgment, the judge said:

“I further do not accept Nakayama’s evidence that, in his email dated 13 June 2012 to Ivy Huang as referred to in paragraph 37 above, he was referring to 14,800 acrylic sheets under an earlier contract which were defective. Quite obviously, he was referring to 14,800 acrylic sheets under the 1^st PO. His evidence on this point is simply disingenuous.”

In that email, Nakayama stated “ the other 14800 PCS of 0.8t are indeed of slightly inferior quality”.  Thus the judge thought that there was an admission by Nakayama of defects in 14,800 acrylic sheets under PO1.

38.  But in coming to this conclusion, the judge did not seem to have noticed that only 10,000 0.8mm sheets (and 20,000 1.0mm sheets) were supplied under PO1.  On the face of it, the reference to the other 14,800 pieces of 0.8mm sheets in Ivy Huang’s email and Nakayama’s reply in June 2012 could not have related to PO1.  Whilst Ms Queenie Ng, appearing for Ps, relies heavily on the email as an admission, she could offer no valid explanation how it could have related to PO1.  Moreover, the judge also appears to have overlooked that in his evidence, Ps’ main witness, Mr Lin, had expressly accepted that Nakayama’s reference to 14,800 sheets being of inferior quality concerned the acrylic sheets delivered under an earlier contract. 

39.  In §86 of the Judgment, the judge drew support from the evidence of the single joint expert, Dr Parsons.  Dr Parsons’ examinations revealed that 2 out of the 10 returned products that she examined had scratches on them, and she expressed the opinion that the most likely cause of the scratch damage was the manner in which products were handled and stored following their manufacture.  This does not suggest a majority of products were defective upon their departure from the factory.  Dr Parsons’ evidence also throws doubt on whether the sheets could have been scratched whilst they were within their packaging.  Further, the examined products were goods returned, which had been replaced.  All this means it was impossible to infer from Dr Parsons’ evidence that the majority of the goods supplied under PO 1 and PO 2 were defective.  To be fair, the judge only said the quality problems were “to an extent” confirmed by Dr Parsons’ report.

40.  At the hearing, Ms Ng sought to support the judge’s finding that the majority of the goods were defective by relying on subsequent customers’ complaints in April to June 2013 as recorded in certain documents spoken to by Lin during his re-examination.  There are several problems with this.  First, the judge did not base his finding of defects upon these documents, and the respondent’s notice filed by Ps in this appeal did not raise this point.  It is therefore not open to Ps to try to uphold the judge’s finding by these alternative reasons.  Secondly, many of the customers’ forms mentioned complaints that were not dealt with by the expert or investigated at trial.  In contrast, scratch was only infrequently mentioned and then only with a low percentage rate among the samples.  For example, there were complaints about residual glue, fog, “cleanable water mark”, pits, dirt, and indentation. It is wholly unclear whether these other complaints actually constituted defects and rendered the acrylic sheets unfit for purpose.  Thirdly, it is unclear whether any of the sub-purchasers rejected and returned the acrylic sheets.  There is no evidence they made a claim against Ps.  It is also unclear whether the complaints related to products already replaced by the 17,600 replacement sheets and the 14,800 returned sheets for which Ps were not charged by D.  Accordingly, we do not think that these documents can salvage the finding under attack.

41.  For the reasons set out above, it seems to us that the judge’s finding that the majority of the acrylic sheets sold under PO1 and PO2 were defective lacks evidential basis and is further vitiated by the errors above including the failure to take material evidence into account.

Whether implied conditions of merchantable quality and fitness for purpose breached

42.  In light of our conclusion above, it is unnecessary to consider whether there was any separate and additional error in holding that the implied conditions of merchantable quality and fitness for purpose were breached.

Whether Ps proved loss caused based on difference between price paid by Ps and subsequent resale price received by Ps

43.  It is also strictly speaking not necessary to deal with the third issue regarding whether Ps proved any loss caused by breach of contract, but we shall say a few words on it because there seems to us to have been a major flaw in the way in which damages were awarded and assessed. 

44.  First, we have to say that the finding that a “majority” (which could encompass any number from 25,001 to 49,999) of the acrylic sheets supplied under PO1 and PO2 were defective is a very vague foundation upon which to base a substantial and precisely calculated damages award for 42,601 sheets.

45.  Further, section 55 of the Sale of Goods Ordinance provides as follows:

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

(3)  In the case of breach of warranty of quality, such loss is prima facie the difference between the value of the goods at the time of delivery to the buyer and the value they would have had if they had answered to the warranty.”

46.  Ps did not adduce any expert evidence on the value of the acrylic sheets as delivered.  In their amended statement of claim, Ps claimed damages calculated on the basis of the difference between the price they had paid for 42,601 pieces of acrylic sheets under the PO1 and PO2 and the price at which they subsequently sold them to sub-buyers.

47.  This measure is not necessarily contrary to principle, and may be appropriate in a particular case, but it depends on the assumption that the subsequent resale price was depressed by the existence of defects in the goods and therefore reflected a loss caused by the defects.  The difficulty with using this approach in this case, however, is that the acrylic sheets were enclosed by protective sheets so that, as is common ground, their quality could not be meaningfully assessed until the protective sheets were removed, which would only be done by the sub-buyers after delivery.  It follows that when Ps agreed the sub-sale price with their customers, neither party knew the quality of the sheets.  On the face of it, therefore, the sub-sale price was the price of good acrylic sheets.  The sub-sales took place over several years from 2013 to 2016.  The fact that it was lower than the price Ps agreed to pay D could have been due to a downturn in the market, having regard to the decrease in popularity of mobile phones of the previous generation, or to other reasons. There is no evidence that it was due to the acrylic sheets being sold as defective goods.  Further, Ps’ case was that the customers raised complaints about defects after delivery, which militates against any suggestion that the acrylic sheets were sold to those customers with knowledge of the defects. Before us Ms Ng accepted there was no evidence that the goods were sub-sold in 2013 to 2016 as defective goods.

48.  Ms Ng relies on clause 3 of the Negotiating Document, but Ps’ action is not one for enforcement of the Negotiating Document but a claim based on breach of the contracts for the sale and purchase of goods.  In any event, that document can hardly be construed to mean that D had undertaken to pay the difference if Ps re-sold the acrylic sheets at a lower price for whatever reason.

49.  In these circumstances it seems to us that Ps have in any event failed to prove any loss caused by D’s alleged breach of contract.

Conclusion

50.  For the above reasons, we allow the appeal and set aside the Judgment.  Ps’ claim against D is dismissed.

51.  We make an order nisi that Ps do pay D the costs of the appeal and the costs of the action, but that D do pay Ps the costs of the counterclaim which D abandoned at the beginning of the trial.

Mr Colin Wright and Ms Jacqueline KK Chan, instructed by Robert Lee Law Offices, for the defendant (appellant)

Ms Queenie WS Ng and Mr Kev LH Wan, instructed by Cheung & Co, for the 1^st and 2^nd plaintiffs (1^st and 2^nd respondents)

CACV 72/2022

[2023] HKCA 231

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 72 OF 2022

(ON APPEAL FROM HCA 2280 OF 2015)

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J U D G M E N T

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Hon Barma JA (giving the Judgment of the Court):

1.  This is the defendant’s renewed application, by a Summons filed on 26 September 2022 (“the Summons”), seeking a stay of execution of the judgment of DHCJ P Fung SC (“the Deputy Judge”) dated 13 January 2022 (“the Judgment”) (see [2022] HKCFI 106) pending the determination of its appeal against the Judgment, pursuant to RHC Order 59 rule 13. By the Judgment, the defendant was ordered to pay damages to the plaintiffs in the amount of RMB5,022,268.87, together with interest on such damages at the rate of 1% above HSBC’s best lending rate, from the date of the writ in these proceedings until payment.

2.  After the Judgment was handed down, the defendant lodged its Notice of Appeal on 10 February 2022, and the plaintiffs filed a Respondent’s Notice on 2 March 2022. Having lodged the Notice of Appeal, the defendant applied for a stay of execution of the Judgment. 

3.  That application was heard by Au-Yeung J (“the Judge”) and by her Decision dated 8 August 2022 (see [2022] HKCFI 2458) (“the Stay Refusal Decision”), she refused the application, and ordered that the plaintiffs’ costs (which she summarily assessed in the sum of HK$100,000) be paid by the defendant.  The defendant was subsequently ordered by the Judge on 26 September 2022 (upon a joint application by the parties) to pay the sum of HK$100,000 into court pending the determination of the renewed stay application by this court.

4.  On 15 June 2022, pursuant to an order of G Lam JA on 7 June 2022, the defendant has also paid into court a sum of HK$300,000 as security for the plaintiffs’ costs of the appeal.  The parties have also (on 15 August 2022) filed a Joint Checklist for the appeal, the hearing date of which has not yet been fixed.

5.  The Summons is supported by the 2^nd Affirmation of Robert Osborne Lee and the Affirmation of Manabu Ikegami (“Ikegami 1^st”) both filed on 26 September 2022.  The application is opposed by the plaintiffs, who filed the Affirmation of Yau Yuen Mei on 21 October 2022.  The defendant thereafter filed the 3^rd Affirmation of Robert Osborne Lee on 3 November 2022 in response.

6.  Mr Colin Wright (appearing with Ms Jacqueline KK Chan) for the defendant lodged written submissions in support of the Summons on 18 November 2022.  Written submissions in opposition dated 30 November 2022 were lodged for the plaintiffs by Ms Queenie WS Ng (appearing with Mr Kev LH Wan).  Thereafter, reply submissions on behalf of the defendant were filed on 9 December 2022.

The Deputy Judge’s Judgment

7.  In the court below, the Deputy Judge presided over the trial of the plaintiffs’ claim by an Amended Writ of Summons re-filed on 30 December 2015 seeking damages for allegedly defective goods sold to them by the defendant.  The defendant brought a counterclaim against the plaintiffs for (among other things) damages for breach of an undertaking, but this was abandoned at the beginning of the trial.

8.  The background to this matter and the parties’ respective positions were set out by the Deputy Judge at [3] to [14] of the Judgment.  For the purposes of this application, it suffices to highlight the following:

(1)  the 1^st and 2^nd plaintiffs are respectively companies incorporated in Hong Kong and the mainland, and are both owned by a Taiwanese company, Gredmann Taiwan Ltd.  They collectively carry on the business of purchasing and trading in certain industrial / sheet materials (in this case, acrylic sheets);

(2)  the defendant is a company incorporated in Hong Kong, which is owned by a Japanese company, Tohkoh Jushi Company Limited (“Tohkoh Japan”).  It carries on the business of selling acrylic sheet materials manufactured in Japan;

(3)  the way in which sales by the defendant to its customers took place was that when an order was received by the defendant, it would be passed on to Tohkoh Japan (who would make arrangements for the production of the orders), with the finished products being shipped directly from the manufacturer to the defendant’s customers;

(4)  the dealings between the plaintiffs and the defendant began in late 2010 and lasted until early 2014;

(5)  at trial, the plaintiffs’ case was that:

(i)     acrylic sheets supplied by the defendant under various purchase orders have always been, to varying degrees, defective;

(ii)    the acrylic sheets supplied by the defendant which form the subject matter of these proceedings (as well as the replacement sheets supplied by the defendant in respect of some of these sheets) were substantially defective;

(iii)   by reason of the defects, the plaintiffs and their sub-purchasers have had to sell the acrylic sheets in the market at reduced value, resulting in loss;

(iv)   the defects in the sheets were not due to the plaintiffs’ misconduct, mishandling or improper storage, but were defects inherent in the sheets at the time of delivery;

(6)  the defendant’s position, however, was that as a general dealer (and not the manufacturer) of acrylic sheets, it did not provide any warranties to the plaintiffs as to the quality or fitness for purpose of the sheets sold.  They also contended that due to of the lapse of time and delay in the plaintiffs’ complaints of defects, they could no longer reject the goods.  On quantum, the defendant’s case was that the plaintiffs had failed to prove their loss and/or had failed to mitigate the damage claimed to have been suffered.

9.  At the hearing of the trial, the Deputy Judge had the benefit of evidence from lay witnesses called by both sides, which he considered in detail together with documentary evidence of the contemporaneous correspondence (see [18] to [68] of the Judgment).  There was also evidence from a joint expert on the cause of damage to a sample of the acrylic sheets supplied by the defendant to the plaintiffs (discussed at [69] to [71] of the Judgment).

10.  On liability, the Deputy Judge’s key findings were that:

(1)  it had not been agreed between the plaintiffs and the defendant that the defendant would not give any warranty as to the quality of the goods to be sold (see [82] of the Judgment);

(2)  on the evidence, including in particular admissions contained in various emails sent by the defendant’s representatives to the plaintiffs, there was a pattern of defects in the acrylic sheets sold by the defendant to the plaintiffs during their trading relationship (see [84] of the Judgment);

(3)  based on (but not limited to) the expert evidence, the majority of the acrylic sheets delivered by the defendant to the plaintiffs under purchase orders dated 15 December 2011 and 27 March 2012 (respectively for 30,000 pieces and 20,000 pieces (as well as an additional 17,600 replacement pieces) of acrylic sheets) were defective (see [85] to [86] and [100] of the Judgment);

(4)  the defendant had failed to prove any mishandling or improper storage of the acrylic sheets by the plaintiffs;

(5)  as to the delay in making the plaintiffs’ complaints, since the plaintiffs were in the business of resale of acrylic sheets, it was natural for them to only have learnt of the defects upon complaints raised by their customers, and, on the facts, the plaintiffs notified the defendant of the defects “very soon” after such notification by their own customers (see [93] to [95] of the Judgment);

(6)  in the circumstances, the defendant was in breach of its obligations under the relevant purchase orders (these being the conditions implied pursuant to sections 16(2) and (3) of the Sale of Goods Ordinance, Cap 26) (“SOGO”) by supplying defective goods to the plaintiffs which were not of merchantable quality or suitable for the purposes of the plaintiffs, thus rendering the defendant liable to the plaintiffs in damages;

(7)  as to quantum, the evidence of quantification of loss was set out in a witness statement of one of the plaintiffs’ witnesses, which was reproduced by the Deputy Judge at [107] of the Judgment (with a minor revision as stated in [110] of the Judgment);

(8)  the plaintiffs’ overall loss was RMB5,022,268.87, a sum which was, according to the Deputy Judge, not “seriously challenged” by the defendant.  The Deputy Judge also noted that the defendant had not sought to cross-examine the plaintiffs’ witness on the amount claimed, and had not adduced any positive evidence to suggest a failure to mitigate loss by the plaintiffs.

11.  Accordingly, the Deputy Judge found for the plaintiffs and (i) ordered the defendant to pay damages in the sum of RMB5,022,268.87 with interest at the rate of 1% above the HSBC Best Lending Rate from time to time from the date of the writ until the date of the Judgment; (ii) dismissed the defendant’s counterclaim; and (iii) ordered the defendant to pay the plaintiffs’ costs of the action and of the counterclaim.

The Judge’s Stay Refusal Decision

12.  As noted above, after the defendant filed its Notice of Appeal (appealing against both liability and quantum), it applied to the Judge for a stay of execution of the Deputy Judge’s Judgment pending appeal.  The Judge determined that application on paper and rejected it for the reasons which she gave in the Stay Refusal Decision.

13.  Although the grounds of appeal against liability are extensive, the Judge correctly observed that they were for the most part complaints about the Deputy Judge’s findings on issues 3 to 5 in the parties’ Agreed List of Issues at trial.  The Judge summarised these grounds, which primarily targeted the findings of fact or inferences of facts made by the Deputy Judge, as (a) the complaint that the Deputy Judge’s found that the goods were defective without evidence in support (“the Defectiveness Ground”); and (b) the complaint that the Deputy Judge failed to have regard to the plaintiffs’ burden of proof to show that defects in the goods were present before risk passed and misdirected himself that the defendant had the burden of proving that the defects were caused by something that occurred whilst the goods were in transit (“the Burden of Proof Ground”) (see [7] to [9] of the Stay Refusal Decision).

14.  As to quantum, the grounds of appeal were that (a) the Deputy Judge should have but failed to calculate the plaintiffs’ recoverable loss in accordance with section 55(3) of the SOGO, (b) the Deputy Judge failed to have regard to the fact that the plaintiffs had not proved that the goods used in the calculation of damages were the goods delivered by the Defendants and (c) that the plaintiffs elected not to call expert evidence to establish that the diminution in value of the goods arose from breach of the contractual warranty (see [16] to [17] of the Stay Refusal Decision).

15.  The Judge came to the view that while all the grounds of appeal (whether against liability or quantum) were arguable, they could not be said to be so strong as to justify the grant of a stay without more (see [7] to [19] of the Stay Refusal Decision).

16.  The Judge went on to conclude that the defendant had failed to demonstrate that the appeal would be rendered nugatory without a stay, as it appeared to her that the defendant had had the means to repay certain debts owed to its parent company, Tohkoh Japan, to pay legal fees to its own lawyers, and to provide security for costs of the appeal from its own resources.  Further, the defendant (when the matter was before the Judge) rejected the plaintiffs’ offer to accept payment of the judgment sum into court.

17.  The Judge accordingly dismissed the defendant’s application for a stay of execution.

Legal principles

18.  The principles on the granting of a stay of execution pending appeal are well-settled, and have been set out in the judgment of Ma J (as he then was) in Star Play Development Ltd v Bess Fashion Management Co Ltd [2007] 5 HKC 84 and repeated by this court (Cheung CJHC and Macrae JA, as they then were) in SNE Engineering Co Ltd v Chim Kee Machinery Co Ltd, unrep., CACV 101/2016, 15 July 2016. 

19.  An appeal does not operate as a stay of execution of the decision below.  Unless an appellant can justify a stay by demonstrating that good reasons for granting one exist, a stay will not be ordered.  The existence of a strong appeal will usually by itself constitute a good reason for granting a stay, whereas the existence of a merely arguable appeal (i.e. one with reasonable, but not strong, prospects of success) does not by itself amount to sufficient reason for a stay. 

20.  Where there exists only an arguable appeal (and not a strong one), the appellant must show additional good reasons to justify a stay, such as that the appeal would be rendered nugatory if a stay were not granted.

21.  For the purpose of a stay application, the court is only required to form a preliminary view on the merits.  It would be impractical and undesirable for the court to go deeply into the strength of the appeal, and the court should refrain from embarking upon detailed discussion and analysis of the grounds of appeal.  See Ming Hsieh v Xu Zhe & ors[2018] HKCA 390 at [9], per Kwan JA (as she then was).

22.  Ultimately, the court carries out a balancing exercise and uses its common sense, but bearing in mind at all times the starting point that the successful party is not to be deprived of the fruits of his success.

Discussion

(i) Merits of the appeal

23.  In the parties’ written submissions to this court, they raise essentially the same arguments which had been canvassed before the Judge below.

24.  As it did below, the defendant contends that the Deputy Judge erred in his material findings of fact and law in the respects summarized by the Judge in the Stay Refusal Decision, leading him to erroneous conclusions on both liability and quantum.  The defendant’s primary position is that an unconditional stay should be granted, but in the alternative (which was not offered in the stay application in the court below), suggests a conditional stay be granted – the condition being the making of a payment into court (to achieve which the defendant would require the assistance of its parent company, Tohkoh Japan, which would be forthcoming).  The plaintiffs oppose the present application and submit that a stay should be refused, contending that there are no special factors that would justify a stay.  That said, they are also amenable to this court granting a conditional stay requiring a payment into court.

25.  Although the Notice of Appeal spans 6 pages and 28 paragraphs, the grounds of appeal were accurately summarized by the Judge as set out in [13] and [14] above.

26.  In accordance with established principle, we do not think it necessary or appropriate to embark upon a detailed discussion of the merits of the appeal. The application before us is not a dry run of the appeal, and it will suffice to express a broad preliminary view on the merits.

27.  While the existence of a strong appeal would tend to lead the court to exercise its discretion in favour of granting a stay, the threshold is a high one.  This court has held that the requisite strength of the grounds of a “strong appeal” must be such that would lead the court to conclude that “something has grievously gone wrong with the process of law in the court below”, or in other words, the appellant is “almost bound to succeed” in the appeal.  See [10] of Ming Hsieh, per Kwan JA (as she then was).  Failing this, something more needs to be demonstrated. 

28.  Having considered the Judgment and the Notice of Appeal, while we, like the Judge, would accept that the appeal is arguable, both in relation to liability and quantum, we agree with the Judge that it is not as strong as it needs to be to justify the granting of a stay without more.

(ii) Would the appeal be rendered nugatory without a stay

29.  On the issue of whether the appeal would be rendered nugatory without a stay, Mr Wright for the defendant submitted that the “unchallenged evidence” is that execution of the Judgment would put the defendant in a state of financial ruin from which it would not be able to recover.  But this submission immediately runs into difficulty, as it is the defendant’s own evidence in support of this application that notwithstanding its own apparent inability to pay the judgment sum, its parent company would be prepared to make additional funds available to the defendant should the court grant a stay conditional upon a payment into court which exceeds the assets of the defendant (see [23] of Ikegami 1^st). 

30.  Even if it is accepted that the defendant is unable to make payment of the judgment sum and that it did not itself contribute to its difficulties in doing so by repaying part of its debt to its parent (or paying its own legal costs rather than any part of the Judgment debt), it appears that Tohkoh Japan is prepared to assist the defendant to the extent necessary to make a payment into court if that is required, and there is nothing to suggest that Tohkoh Japan itself does not have the financial ability to do so.

31.  This is relevant because in assessing a party’s financial ability as a relevant factor in this sort of application, the court looks not only at whether the party in question itself has the ability to raise the necessary funds, but also whether money can be raised by its backers or other interested persons.  See Contract Facilities Limited v Estates of Rees (Deceased) & ors [2003] EWCA Civ 465 at [10]; Hearst Holdings Inc. & anor v A.V.E.L.A. Inc. & ors [2014] EWCA Civ 1316 at [51].  In the present case, in light of the defendant’s evidence that the necessary funds for a payment into court as a condition of a stay could be provided by Tohkoh Japan, we are of the view that there would not be any prejudice caused or risk of injustice to the defendant if an unconditional stay was refused.

(iii) Balance of justice and the court’s discretion in granting a stay

32.  Although it might be said that in these circumstances a stay could simply be refused, the court retains the discretion to grant a stay subject to appropriate conditions if the balance of justice so dictates. 

33.  As to this, Mr Wright submits that there is an appreciable risk that the defendant would have difficulty recovering any amount paid to the plaintiffs should the defendant’s appeal ultimately succeed, because the plaintiffs are owned by a Taiwanese company and the 2^nd plaintiff is incorporated in the mainland.  He contends that by reason of this, without a stay, there would be a real risk that any sums received by the plaintiffs would be taken out of the jurisdiction with “consequent serious problems of recovery after a successful appeal”.  Along similar lines, Ms Ng submits that in the event there is an unconditional stay but the appeal is ultimately dismissed, the defendant’s self-confessed impecuniosity would mean that the plaintiffs would risk not only incurring more legal costs in the appeal but also that they might be left with an empty judgment.  She therefore submits that if a stay were to be granted, it should be subject to a condition that the defendant pays into court a sum representing the Judgment debt plus interest, as well as costs in the proceedings below, totalling some HK$11,207,099.76.

34.  Each party therefore shares the same concern, that there is a risk that they would not be paid (or repaid) the judgment sum should the appeal be determined in their favour, and both parties adopt the (fall back) position of being amenable to the grant of a stay which is conditional upon a payment into court.

35.  Having considered the parties’ submissions, we are satisfied that the balance of justice in this case lies in favour of the grant of a stay of execution of the Deputy Judge’s Judgment (subject to the qualification mentioned in [37] below), subject to a condition requiring a substantial payment into court to be made by the defendant.  In this way, the plaintiffs will be substantially protected against the risk of an empty judgment, while the defendant will be protected against being unable to recover amounts paid over to the plaintiff if its appeal should succeed. 

36.  In our view, the appropriate condition to be imposed would be that the defendant do pay into court a sum of RMB6,500,000 representing the judgment sum of RMB5,022,268.87 plus interest (albeit not the full amount of interest which will by now have accrued) within 28 days from the date of this decision.  We regard this as a fair balance between the interests of the parties.

37.  We would, however, clarify that the stay of execution does not extend to that part of the Deputy Judge’s order dismissing the defendant’s counterclaim.  The counterclaim was not pursued at trial, and although the Notice of Appeal seeks an order that the Judgment (presumably in its entirety) be set aside, the grounds of appeal do not suggest that there is any issue taken with the Deputy Judge’s dismissal of its counterclaim.

38.  As to the Deputy Judge’s costs order below (by which costs of the entire action including the counterclaim were awarded to the plaintiffs, to be taxed on the party and party basis), the modern approach is for the court to decide, as a matter of discretion, whether to grant a stay of the costs order along with the substantive parts of the order in the court below.  There is no hard and fast rule in this regard (see HKCP 2023 at [59/13/5]).  In our view, given the existence of an arguable appeal, it would be appropriate for the stay to extend to the costs order made by the Deputy Judge.  So far as the stay of the costs order is concerned, we do not think it necessary to separate the costs of the counterclaim from the costs of the main action as we think it impractical and not cost-effective to permit the possibility that the costs of the counterclaim should be dealt with separately from the costs of the main action at likely further cost and effort, particularly when such costs should be relatively minor in the overall scheme of things.  In saying this, we do not envisage that the part of the costs order dealing with the counterclaim will be varied on appeal, even if the appeal on the main action is successful, given what we have noted in [37] above.

(iv) Disposition and Costs

39.  For the foregoing reasons, in the exercise of our discretion, we grant a stay of execution of the Judgment (save in relation to the dismissal of the Counterclaim) and the Costs Order, both made by the Deputy Judge on 13 January 2022, on condition that the defendant do pay into court the sum of RMB6,500,000 within 28 days of the date of this judgment.  In the event that the payment in is not made, the stay shall automatically lapse.

40.  As to the costs of this application, the usual order where a stay is granted is for costs to be made costs in the appeal, unless there exists some other reason as to why the norm should be departed from (see HKCP 2023 at [59/13/8]). In the present case, a stay has been granted subject to a payment into court.  As neither party has been wholly successful in relation to the extent of such payment in (the plaintiffs seeking a payment in to cover the judgment sum, interest and costs, and the defendant contending for a much lower level of payment in – substantially less than the judgment sum), we think it would be appropriate to make an order nisi that the costs of this application before us should be costs in the appeal.