Hbl Ltd v. Veagroup Srl

HCCL000127/1996

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL LIST NO. 127 OF 1996

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Coram: The Hon Mr Justice Stone in Court

Dates of Hearing: 25 - 29 January, 1 and 2 February 1999

Date of Handing Down Judgment: 25 March 1999

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JUDGMENT

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The Action

1. This is a case about the sale and purchase of plastic fashion watches. More specifically it is about plastic watches with deficiencies sufficient to render large numbers difficult or impossible to resell, thereby allegedly occasioning loss of profit and collateral wasted expenditure to the buyer.

2. The Plaintiff is a Hong Kong company which manufactures and exports such watches. The Defendant is an Italian importer which wished to bring into Italy its own collection of such watches, bearing specifically the designs of the "Looney Tunes" and "Dylan Dog" cartoon characters, and to market the same, via their sales agents, to retailers throughout Italy. And this case, in essence, is the story of the commercial relationship between these two companies which went sour.

3. There is no dispute about the existence of the primary contract, nor, for that matter, about a great many of the subsequent factual events. Suffice to say that the Plaintiff and the Defendant entered into negotiations between July 1992 and October 1992 which led to the sale by the Plaintiff to the Defendant of a total of 51,000 plastic sports quartz analog watches, sporting a total of six designs variously named 'Dynamite', 'Titti', 'Silouette', 'Mezzanotte', 'DYD' and 'Tentacoli'. The contract price of the watches was US$4.40 per piece (save for some 7,000 at US$5.20) and they were shipped to Italy in three tranches at the end of 1992 to fulfill a large number of retail orders the Defendant asserts were already in place for this product.

4. The Defendant says that almost immediately problems began to manifest with these watches. Primarily the problem which occurred was a tendency to breakage of the 'claws' of the watch at or about the point wherein the watch band attaches to the watch case, thereby rendering the watches unwearable and unmerchantable. So significant was the problem that the Plaintiff despatched Hong Kong technicians to Italy to change the fixed metal pins linking the band to the watch (the rigidity of which apparently generated stresses occasioning the rupture of the case itself) to the spring-loaded variety of pin. However, this interim measure proved unsuccessful, and in round figures a total of some 27,000 watches were shipped back to Hong Kong for what has been termed 'repair', but which in fact substantially involved replacement watches with the manufacture of a new case. In due course, these replacements were shipped back to Italy, but they too are said to have been deficient, primarily (albeit not solely) in terms of lack of water-resistance, which was one of the requirements for the watches as originally ordered. This additional defect, also, is further alleged to have caused a significant loss of sales on the part of the Defendant.

5. That, in overview, represent the broad factual basis of this litigation which, as may be expected, is larded with great detail and a significant amount of paper.

The Shape of the Case

6. Although the Hong Kong seller, as unpaid vendor, is formally the Plaintiff, the real claimant in this case is the Italian buyer as counterclaiming Defendant, there being no dispute that the Plaintiff has not been paid in full for the watches the subject of this sale. Accordingly, it was Mr Kerr who opened the case on behalf of the Defendant. The Plaintiff was unrepresented, the Court having given leave to its director, Mr Vijay Harilela, to conduct the case on behalf of the Plaintiff, the Defendant's former solicitors having been permitted to come off the record in the week immediately preceding the trial. In fact, this absence of representation caused Mr Harilela to seek an adjournment, an application which was refused, not least because this case had been adjourned twice before, on both occasions at the Plaintiff's behest in order for Mr Harilela to attend to urgent custody problems arising from the failure of his marriage. Be that as it may. Mr Harilela, if I may say so, proved a capable advocate, and notwithstanding the forensic difficulties he faced, in my judgment he conducted his case with courtesy and good sense.

Witnesses

7. Three witnesses were called for the Defendant, namely, Mr Francesco Celante, the managing director, and his daughter, Miss Donella Celante. The third witness, a Mr Daniel Cheung of Hong Kong Standards and Testing Centre Limited, was briefly called with regard to three sample watches tested in August 1998, but his evidence was within narrow, self-selected parameters, and failed to assist the Court in any way.

8. In opposition to the evidence of Mr Celante and his daughter, the Plaintiff relied on the evidence of the two officers of the Plaintiff company who were deeply involved with this transaction, that is Mr Maj Harilela and Mr Vijay Harilela, whom, I understand, are cousins, and are effectively the moving forces within the Plaintiff company.

9. All witnesses gave their evidence carefully, although as is usual in such cases I formed the impression that the perception and recollection of events was coloured by considerations both as to the merits and the commercial implications of this case. In fact, given the circumstances, surprisingly few directly contested issues of fact arose for determination by the Court, the most important of which I shall shortly address. Suffice to say, however, that whilst I accept that all witnesses did their best to assist the Court consistent with maintaining their respective positions, the witness upon whose evidence I placed the greatest reliance was that of Miss Donella Celante, whose grasp of detail was impressive. This was the more so because the approach required by the Court was to require the essence of the case on each side to be led by viva voce evidence, absent reliance upon the prepared witness statements, supplemented by reference to some of the six lever arch files of documents which were placed before the Court. It was Miss Celante's broad mastery of the detail within the documents, together with her demeanour and grasp of the sequence of events derived from assisting her father in the Defendant's frequent telephone and fax dealings with the Plaintiff over the relevant period, which convinced the Court to accept her as a witness of truth. Accordingly, although I shall deal with the major factual disputes individually, as may be necessary, and subject to particular aspects of quantum, I prefer the evidence of Miss Celante as representing the more accurate version of events, and indeed it is her version which has predominantly influenced the Court in arriving at the conclusions set out in this judgment.

Factual Disputes

10. As earlier noted, the six days of evidence required by this trial did not throw up the degree of factual conflict that might have been expected. Both sides were in agreement as to the general sequence of events in terms of the initial shipments of the goods, their attempted modification in Italy, the reshipment to Hong Kong of approximately 27,000 pieces, and the return to Italy of some 24,000 watches bearing new cases, and with a proportion of them bearing new designs. Indeed, the extensive correspondence bundle placed before the Court was the subject of detailed reference by each side during the course of the trial, and bears clear witness to the broad flow of events.

11. So that although the Plaintiff took exception to the alleged consequences of these events, in terms of the categories and extent of the losses claimed in these proceedings by the Defendant, no significant question arose within the framework of the parties' general relationship. However, in order properly to evaluate the Defendant's claims, it is necessary, I think, to make the following specific findings upon the broad issues of fact falling within the categories set out below.

12. Right to the end of this case the Plaintiff protested that the watches it had supplied were not at any stage defective, although it was accepted that at the end of 1992 and in the first half of 1993, with the visit to Italy of the Plaintiff's technicians and the reshipment of the watches to Hong Kong, that it had made every effort to satisfy the Defendant's complaints. This, the Plaintiff maintained, was a course of action which was adopted solely as a matter of commercial goodwill and in the interests of future commercial co-operation, and did not indicate the existence of any fundamental deficiency.

13. On the evidence, I cannot accept this as a serious proposition, and I unequivocally reject this contention, notwithstanding the efforts made on behalf of the Plaintiff to explain the frequent reference to 'defects' within the correspondence. The Defendant did not have occasion to reship 27,000 watches to Hong Kong absent a good reason. I further accept, on the balance of probabilities, that the Defendant's assertion that a significant proportion of the reshipped watches were discovered not to be water-resistant, and that deficiencies also variously arose in terms of glue stains on the case (due to the method of using glue to affix the glass, as opposed to a sonic seal) and in terms of defective colour registration and/or fastness on the face of the printed art-work on the watches.

14. In evidence the case was run (albeit it is fair to say that it did not, I think, figure in Mr Harilela's final submission) on the basis that such breakages on the plastic watch housing as in fact had occurred resulted from the insistence of Mr Celante of the Defendant upon a design as close to a 'Swatch' as possible without infringing the 'Swatch' intellectual property rights. I do not accept this position either. In this regard I prefer the evidence of Mr Celante and Miss Celante that, subject to the cosmetic get-up on the watches, for the use of which the Defendant had paid Warner Brothers for 'Looney Tunes' and an Italian licensor, one Sergio Bonelli, for the use of 'Dylan Dog', the Plaintiff was entirely responsible for the supply of the basic watch unit. Accordingly, and in so far as is necessary, in this regard I do not accept the contrary version of events put forward by Mr Maj Harilela.

15. This suggestion was made by the Plaintiff, which asserted that the problems with the Defendant's Italian purchasers did not result from any intrinsic deficiency in the watches, but was solely the result of a significant decline in the market for plastic fashion watches in Italy, which decline, it was said, commenced at or around the end of 1992 and carried on progressively throughout 1993.

16. I am unable to accept this contention, although in my judgment there was a germ of truth within the argument. Both Mr Celante and Miss Celante accepted that there was a tendency towards a general fall-off in the market for such plastic watches towards the latter part of 1993, but maintained that such gradual decline in demand as did occur would have had no effect whatever if the Plaintiff had done what it had been contractually obliged to do and had produced a product of merchantable quality, and had delivered it at the end of 1992 as ordered. In this connection, Miss Celante put it neatly when she commented that, had things gone to plan, the Defendant would have had the right product at the right place at the right time, and that so far as the Defendant was concerned, the watchword was 'carpe diem'. However, the best laid plans of the Defendant were effectively derailed by the events which took place, requiring the shipment of a very large number of watches (in excess of 50% of the quantity ordered) to Hong Kong for repair/replacement due to the breakage problem arising from the rigid pin which subjected the plastic watch case to undue stress during wear, so that the anticipated marketing timetable was thrown completely out of kilter. And that when the considerable market resistance to the product arising as the result of such large-scale breakages further encountered replacement watches which were again defective, albeit in terms now of lack of water-resistance, glue stains and difficulties with the colouring of the graphic designs, and that this took place against the backdrop of a market beginning to weaken anyway, the recipe for a sales disaster was complete. Indeed, the Defendant's sales figures over the relevant period clearly demonstrated a vivid decline in terms of the quantity of the goods actually sold.

17. In broad terms I accept this scenario, and I entertain no doubt that the contractual breaches of the Plaintiff resulted in losses to the Defendant which are clearly recoverable upon usual contractual principles. In fact, the principal focus of this case, it seems to me, was always likely to be that of quantum rather than the issue of primary liability. I now turn to consider the parties' respective cases.

The Plaintiff's Case

18. There is no need to dwell at any length upon the Plaintiff's claim because the sale and purchase was never in dispute as such. Mr Kerr accepted from the outset that this was a case of set-off, and that such losses as the Defendant was able to establish would be subject to diminution in terms of that part of the Plaintiff's invoice price which had remained unpaid.

19. Mr Vijay Harilela has helpfully summarised the situation thus : the Plaintiff issued three invoices on November 18, November 30 and December 7, 1992 in the respective amounts of US$45,777.60, US$143,025.20 and US$53,222.40, amounting to a total of US$242,025.20.

20. Part-payment was received from the Defendant in the sum of US$122,200.00, leaving an unpaid balance of US$119,825.20.

21. This, then, is the sum indisputably accruing due to the Plaintiff.

The Defendant's Case

22. The Defendant divided its claim into two parts under the general heads of loss of profit and wasted expenditure. I am satisfied in the circumstances of this case that it is open to the Defendant to formulate its claim in this way, and that there is no element of duplication or overlapping involved. As the editors of Chitty on Contracts, Vo1.1, 27^th Edn, at para.26-038 put it:

"Subject to the rules on causation and remoteness and to the test of acting reasonably, the plaintiff may receive as damages the reasonable costs incurred by him in mitigating the loss caused by the breach or in other ways dealing with the consequences of the breach."

Loss of profit

23. The Defendant's claim is put forward on the basis that had the watches not been defective, the Defendant would have been able to sell all the watches it had purchased from the Plaintiff, and is entitled to receive its loss of profit thereon.

24. There is a significant amount of detail in the calculations involved, and both at the outset and at the end of this trial Mr Ken grappled with the relevant figures, in addition to responding to the particular matters raised by the Court. Honed down to the basics, the picture which emerges from the evidence is thus. Mr Kerr says that the Defendant purchased 51,000 watches, of which the Defendant received orders from its customers for 48,720, the vast majority of such orders being received prior to the initial shipment from Hong Kong. In fact, because the watches were defective, the Defendant maintains that it was able actually to sell a total of 36,153 watches only, of which 33,747 were sold at the full price (and for which no claim is made in this case) and 2,406 at a significant discount. In macro terms, therefore, the overall loss of profit claimed by the Defendant comprises full loss of profit for a total of 14,847 watches and partial loss of profit for 2,406 watches.

25. This, however, is predicated upon the sale of the full total of 51,000 watches (33,747 + 2,406 + 14,847), which is the basis on which Mr Kerr submits that in the circumstances the Court may safely work; although the Defendant is able to produce evidence of actual orders for some 48,720 watches (42,297 invoices issued plus 6,423 cancellations), in fact there is no doubt, he says, that had it been in the position to do so, the Defendant could have sold probably double the 51,000 it actually purchased, given the receptiveness of the Italian market to this product at the date of such purchase from the Plaintiff.

26. Whilst in the circumstances it probably does not greatly matter, I am unwilling to accept this latter submission at face value, given evidence (on both sides) that the market for extravagantly decorated plastic 'fashion' watches of this nature diminished during 1993 and into 1994. In any event, the Defendant only asks the Court to proceed on the basis of a projected sale of 51,000 such watches, and no doubt the "we could have sold double" submission was to bolster the claim for the profit loss on the 2,280 watches for which the Defendant, on its own case, had not actually received orders (51,000 - 48,720).

27. Be that as it may. The difficulty as I see it of working on the basis of the full 51,000 figure is that, on the Defendant's own case, there are presently reposing in the Defendant's warehouse a total of 2,651 watches remaining in their original cases in as delivered condition (2,633 with the 'Dylan Dog' motif and 18 with the 'Looney Tunes' motif). In this regard, the Defendant contends that although these watches have not been removed from their plastic cases, they were and are unsellable. It is said that they are now unsellable because the relevant licences have expired (and in any event the batteries are now flat) and they were said to be unsellable at the time because the market for these watches had dissolved as the inevitable result of adverse publicity and the word in the trade generated by the original breakages suffered, and latterly by reason primarily of the water-resistance defects which began to manifest in the summer of 1993 as these watches generally were subjected to exposure to the Italian sea.

28. However, whilst the argument has been persuasively mounted, I am disinclined to accept it. No evidence has been led with regard to the deficiencies of these particular watches (for example, as to their water-resistancy and colour register/fastness), and in the circumstances I decline simply to assume that all these unopened watches must necessarily also have been deficient and unsellable.

29. In the circumstances, in my judgment the fairest course to adopt in quantum terms, the Court having accepted the Defendant's case on liability, is to use as the basis for the calculations not the figure of 51,000, but the alternative figure justified by the hard evidence, that is 48,720, which represents the definite orders received by the Defendant, of which only some 33,747 were successfully filled (in terms, at least, of the Defendant receiving full sale price therefor absent any complaint).

30. If this be correct, it seems to me that the Defendant's loss of profit claim should fairly be put as a claim for loss of profit on a total of 14,973 watches (48,720 - 33,747), of which 2,406 were sold at a partial loss of profit.

31. This then brings me to the question of the loss of profit per unit. As to this, the evidence is that the Italian Lira differential between the purchase price of the watches from the Plaintiff and their on-sale by the Defendant to the retailer is Lira 29,960. This figure was attacked by the Plaintiff as being (I think) excessive and unjustified, but the fact remains that, rightly or wrongly, there appears to be an extraordinary mark-up between the original selling price, the wholesale price and the eventual retail sale price to the customer on the street, and I am satisfied on the evidence that it was this profit margin that was achievable by the Defendant with this range of watches. Prima facie the loss, therefore, was Lira 29,960 per item, save for the 2,406 watches which were able to be offloaded by the Defendant to a buyer at a bulk discount (via the good offices of Warner Brothers) at a reduced profit of Lira 19,200 each, a figure which I again accept.

32. On this basis, therefore, the figures are as follows:-

33. However, the situation is not quite as straightforward as might appear, because as Mr Kerr fairly accepts, in a loss of profit claim a deduction must be made to make allowance for what in a proportion of cases were expenses not incurred by the Defendant which would otherwise have been incurred in order to achieve the full on-sale price charged to its retail purchasers, such expenses in this case comprising the categories of saved delivery costs, royalty payments and sales commissions. In this connection, in his helpful written closing submission, Mr Kerr has produced recalculations based upon the evidence which, after taking into account those elements within the sale price which were so saved, has produced a profit margin for these watches which remained undelivered at Lira 22,131.06 per item, and for watches which were actually delivered to the Defendant's Italian buyers of Lira 25,379.34. I accept these calculations as representing the Defendant's best effort to isolate the loss of profit per watch as it is possible to achieve in the convoluted and complicated circumstances of this case. The only adjustment which then requires to be made, I think, in terms of the calculations proffered to the Court, is to take account of the fact that, for reasons earlier given, for loss of profit purposes the Court has elected to work on the total figure of 48,720 rather than the full contractual figure of 51,000, so that the figure of 8,703 undelivered watches should ex hypothesi be reduced to 6,423 (8,703 - 2,280) with the number of watches in fact delivered remaining at 6,144.

34. The full loss of profit award, therefore, is as follows :

35. Turning now to the partial loss of profit claim, Mr Kerr suggests that the per item loss can be calculated by taking the difference between the proposed sale price (34,800) and the price achieved (19,200). With respect, I do not think that this is correct. I accept that, at this price, there was a revenue diminution of Lira 15,600 per watch, but in my view that figure does not represent the true loss of profit in each case. In the circumstances this should be the difference between the loss of profit on a delivered watch sold at full price (Lira 25,379.34) less the price shortfall (Lira 15,600), which rounded up amounts to Lira 9,800 per watch. The calculation is thus as follows (giving credit as Mr Kerr did, for 10% royalties):

36. In total, therefore, in my judgment the established loss of profit claim is thus Lira 298,078,463 + Lira 21,220,920, which amounts to Lira 319,299,383.

Wasted Expenditure

37. This is the second limb of the Defendant's counterclaim, and I have heard a considerable amount of evidence and have been taken to a significant number of documents under the various heads by Miss Celante, whose grasp of this area in particular was extensive. Subject to the specific qualifications I make hereafter, I accept her evidence, notwithstanding the spirited challenges made thereto by Mr Vijay Harilela in cross-examination. I take each of the pleaded heads of claim in turn.

38. The amount here claimed is Lira 5,199,000, which goes to the costs in fact borne by the Defendant of transporting the defective watches back to Hong Kong.

39. I accept Miss Celante's evidence in this regard, together with the documentary material to which she made reference. I am satisfied that as she said (and as is reflected in the correspondence) that the Plaintiff accepted that, in principle at least, the replacement of the watches should be without cost to the Defendant. Given that the Plaintiff paid for the freight for the return of the watches from Hong Kong to Italy, the Defendant claims reimbursement in terms of the outward leg, so to speak.

40. In the circumstances, there can be no real doubt as to this element of the claim, and I do not think (and so find) that there was any agreement in Italy other than that the Plaintiff would be responsible for these charges.

41. I award this head of claim to the Defendant in full.

42. These costs were paid by the Defendant in the sum of Lira 952,000, and this is a sum which sensibly was conceded by Mr Harilela at the outset. Accordingly, there is no dispute in this regard, and this sum must be awarded to the Defendant.

43. This head of claim covers the expenditure in paying for the defective watches to be shipped from the retailer back to the Defendant's office and, upon due replacement, reshipment back to the same customer. Miss Celante gave detailed evidence as to this expenditure, which was not challenged in principle, although Mr Harilela did make the point that these transport expenses were very much on the high side, to which Miss Celante countered to the effect that transport costs in Italy were high, and in any event if her customers chose a more expensive method of remitting the defective watches then this was something which necessarily was out of the Defendant's control.

44. I have reflected on the position, and in my judgment, the Plaintiff should not be held liable for the entire sum claimed. In the circumstances, I consider 70% thereof to be fair and reasonable, which amounts to Lira 12,950,000.00.

45. The claim under this head was for the costs incurred in meeting the Defendant's customers' in-store delivery dates necessitated by what was said to be late shipment on behalf of the Plaintiff. Mr Harilela protested about the lack of notice to the Plaintiff as to these expenses, suggesting that if proper notice had been given, the Plaintiff could have made appropriate arrangements. I think that there is something in this point. After considering the evidence, I am not satisfied that the Defendant has made out its case whereby the Plaintiff should bear these costs within the usual contractual principles for such recovery, and I disallow this element of the claim.

46. Under this head the Defendant claims principally for the duty levied by Italian Customs upon the reimported watches, together with the freight costs of transport from the Customs authorities to the Defendant's warehouse.

47. In my view these reimport charges raise distinct problems, not least because the amount so claimed is proportionately very considerably higher than any other head of claim under the "wasted expenditure" head, and further because the reimposition of custom charges on watches which already have been the subject of one entry tax appears to have been justified by the authorities (although the evidence on the point is less than satisfactory) because it appears that the reimported watches were regarded as 'new' in the sense of having new artwork and a different physical get-up. In this regard, Miss Celante justified the ordering of new designs by suggesting that this was necessary because the market for the existing designs had been severely damaged, and that her best efforts to prevent the double imposition of import tax had failed in the face of intransigent officialdom. I have no doubt that the Italian Customs are a formidable body, and I am prepared to accept that Miss Celante did indeed make attempts to minimise these charges, but after reviewing the evidence I am not inclined in the circumstances to allow any more than a reasonable proportion of this head of claim. Doing the best that I can on the evidence, after reflecting on the position I think that the just result here is to grant the Defendant 60% of the sum claimed, which amounts to Lira 33,008,140.

Summary

48. In my judgment, therefore, the Plaintiff is liable to pay the Defendant the following :-

Currency Conversion

49. This case exemplifies the practical difficulties which arise when dealing with cross-claims in different currencies and involving set-off considerations. Mr Kerr asks for judgment in his client's favour in Italian Lira or in the Hong Kong dollar equivalent thereof, and subject to issues of liability the parties have usefully agreed cross-rates at Lira 1699: US$1 and HK$7.749: US$1, thereby removing any argument that may otherwise have arisen. Mr Kerr also suggests, upon the authority of Sheen J. (as he then was) in The "Transoceanica Francesca" and "Nicos V" [1987] 2 L1.L.R.155, that the smaller claim should be converted into the currency of the larger, and thereafter a balance struck. On reflection, however, this does not seem to me to be appropriate in this case, given that in any event a set-off balance is ultimately to be rendered in Hong Kong dollars, which sum will itself attract interest (in which latter context I decline to accept to adopt Mr Kerr's submissions either as to rate or period).

50. On this basis, therefore, the Defendant's counterclaim, which I have adjudged in the sum of Lira 371,408,523, amounts to US$218,604.19, which after deduction of the Plaintiff's claim of US$119,825.20 produces a net figure of US$98,778.99 which sum in my judgment is the principal sum to which the Defendant is entitled as a result of this trial.

51. As to interest, in the circumstances I decline to commence from the date of the writ itself. I note that the Defendant's Counterclaim was first filed on 21^st December 1994, and in the circumstances I have decided to award interest for a period of four years three months, at the rate of 8% per annum. This then produces, in terms of interest, a figure of US$7,902.31 per annum, which in turn produces a total figure of US$33,584.81 ($31,609.24 + $1,975.57).

52. This therefore produces an overall judgment sum in favour of the Defendant of US$132,363.80 ($98,778.99 + $33,584.81), which at the agreed conversion rate produces a judgment sum of HK$1,025,687.08.

Order

53. It follows from the foregoing that there is to be judgment in favour of the Defendant against the Plaintiff in the sum of HK$1,025,687.08, together with interest thereon at the judgment rate from time to time prevailing from the date of judgment herein until payment.

54. In the circumstances of this case, it is difficult to see that there is scope for any argument as to costs other than to make the usual order that costs should follow the event, but to allay any doubts I make a costs order nisi that (save where otherwise ordered during the course of this action) the Plaintiff is to pay the Defendant the costs of this action, to be taxed if not agreed.

55. I thank the parties for their assistance.

Representation:

Mr Vijay Harilela, Director of the Plaintiff, for the Plaintiff

Mr John Kerr, inst'd by M/s Barlow, Lyde & Gilbert, for the Defendant