Polyproducts Industrial Co (A Firm) v. Holiday Products (HK) Ltd

HCMP000098/1972

IN THE SUPREME COURT OF HONG KONG

(ORIGINAL JURISDICTION)

MISCELLANEOUS PROCEEDINGS NO. 98 OF 1972

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Coram: Li, J. in court.

Date of Judgment:

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JUDGMENT

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1. This is an action for the balance of purchase price for the sale of goods against which there is a counterclaim for loss of profit and expenses incurred for the breach of contract. The plaintiff company is a manufacturer of plastic goods and the defendant company is one set up as a vendor of detergent. On or about 20th September 1971 as a result of some verbal negotiation the defendant company ordered 34,000 plastic bottles with printed letters thereon and of specific design at the price of 36¢ each plus 120 cartons at $1.20 each from the plaintiff to be used as containers of detergent for sale. The defendant company provided the label and design for the bottles from which moulds were made by the plaintiff company at the expense of the defendant company for the production of the plastic bottles. By the latter part of December 1971 some of the goods were maie. Between 21st December 1971 and 18th January 1972 there had been four deliveries to the defendant company totalling 10,440 printed bottles at 32¢ each and 435 cartons at $1.20 each. Part payments for the printed bottles and cartons delivered had been made from time to time up to 8th February 1972. After 18th January 1972, however, delivery was stopped at the request of the defendant company which refused to accept further delivery. These are the common grounds between the parties according to their pleadings and the evidence before me. For these reasons the plaintiff company claim the balance of payment for 4,848 printed bottles at 36¢ each, 15,640 unprinted bottles at 16¢ each and 982 cartons at $1.20 each (all of which had been made and ready for delivery), totalling $11,170 less $3,000 paid by the defendants resulting in the sum of $8,170.80 claimed by the plaintiff company.

2. The defendant company's case is that the bottles are defective in that the bottles do not retain the lettering printed on the exterior of the bottles after they were filled with detergent. Such lettering on the exterior of the bottles will wipe off when handled. The bottles are unable to retain that lettering and that the bottles bleed. There is a further defence that the defendant company never ordered any unprinted bottles.

3. The defendant company also counterclaim for a loss of profit in the sum of $170,294, expenses incurred for this order totalling approximately $68,286, the return of money paid for complete failure of the consideration, the return of the moulds paid for by the defendant company or their equivalent value.

4. It is alleged by the defendant company that the reason why it did not refuse delivery until 18th January 1972 was because the plaintiff company constantly promised improvement and admitted that the defects were caused by insufficient torching of the bottles. The defendant company was in desperate need of the bottles and at that time it had no other source of supply.

5. As a result of the plaintiffs' breach of contract and refusal to deliver back the moulds to the defendant company the latter was unable to find bottles for marketing their detergent until some time in May 1972. As a result the defendant company had to find substitute bottles of different design to market their detergent at a reduced price after diluting the proper concentration of their detergent.

6. In reply to the defence and counterclaim the plaintiff company contend that there is no defect in any of the bottles. They further contend that the lettering on the face of the bottle came off because of defendant company's careless method of filling the bottles, causing an excessive volume of concentrated detergent to overflow on the face of the bottles. The plaintiff company further allege that the defendant company requested stoppage of delivery in January because the latter was moving its factory to another place. The plaintiff company never informed the defendant company that the lettering came off because of insufficient torching and, in any event, the defendant company made no complaint until February 1972.

7. The plaintiff company admit that they refused to return the moulds but plead that there is a custom in the trade that moulds of such nature are not returnable until the whole contract had been fulfilled. Alternatively the plaintiff company allege that the defendant company agreed the moulds should be retained by the plaintiffs as a form of deposit for the purchase price of the bottles.

8. While admitting that the defendant company did not order unprinted bottles the plaintiff company allege that such unprinted bottles were manufactured at the order of the defendant company and the plaintiff company are at all time willing, able and ready to print and deliver the said bottles.

9. Finally the plaintiff company deny that the defendant company suffered the alleged damages as set out in their counterclaim.

10. Having regard to the aforesaid it appears that the issues between the parties are as follows. (1) Whether the bottles delivered by the plaintiff company are defective as alleged by the defendant company. (2) If the answer to the first question is in the affirmative, whether such defect is one of manufacture or was caused by the mishandling of the bottles by the defendant company. (3) If it is found that the defect in the bottles is one of manufacture, whether the damages set out in the bottles is one of manufacture, whether the damages set out in the counterclaim by the defendant company are the responsibility of the plaintiff company. Pausing at this stage it is pertinent to observe that there has been no denial of the contract of sale.

11. The defence case is founded on their counterclaim. As such, the burden of proof is on the defendant company. The fact that the plaintiff company opened their case first is immaterial. Indeed, learned counsel for the plaintiff company was quite prepared to open the case.

12. A lot of evidence has been adduced by both parties relating to the first issue. Some of them are not directly related to the question whether the bottles are defective. Some of these are exaggerations given by the witness for the plaintiff company, Mr. Young, and the witness for the defendant company, Mr. McDougald, presumably with a hope to strengthen their respective cases. Mr. Kenneth Young, who gives evidence for the plaintiff company, says that there is no defect in the bottles. In any event no complaint had been made until 4th February 1972 when Mr. McDougald wrote on behalf of the defendant company complaining about the lettering coming off the bottles - in Exhibit 8. In any event there had been four prior deliveries dated 21st and 31st December 1971, 3rd and 18th January 1972. Prior to any of the bottles being delivered a scotch tape test had been conducted in the presence of Mr. McDougald. After the written complaint in Exhibit 8 a submersion test was also performed together with Mr. McDougald by submerging the bottles into diluted detergent. The test was a successful one. None of the lettering came off. Mr. Young's only explanation for the lettering coming off is excessive exposure to concentrated detergent which was caused by the crude process of filling the bottles by the defendant company. Mr. Young tells of what he observed on one occasion when he visited the factory of the defendant company soon after the first delivery of the bottles in the latter part of December 1971. This has not been denied by the defence witness, Mr. McDougald. Mr. Young says that on that occasion he saw only a few workers in the defendant company's factory filling the empty bottles with detergent with a ladle. As a result a lot of concentrated detergent was spilt over both sides of the bottles. He suggested to Mr. McDougald to change this very crude method of bottling. As regards that paragraph of the letter written by Mr. McDougald in Exhibit 8B which reads as follows:

"A sample of the pigment and the printing ink used in the production of the holiday bottles has been given to ICI China Ltd. along with information concerning the polyesterlene, the detergent and the method of application. The information and items will be forwarded to their laboratory in England for test. The result of these tests should be received in ten days. Hopefully we will find out the reason for the defective printing".

Mr. Young explains that the sample pigment had nothing whatever to do with the complaint about the defect of the bottles. The test referred to was only at the request of Mr. McDougald to experiment for a new type of bottle for another contract. He produces two reports of the tests conducted by the General Superintendence Co. (H.K.) Ltd. (Exhibits 20 and 21). Exhibit 20 is the report of a test conducted on 21st February 1973. It was a test conducted on the bottles still in possession of the plaintiff company and not yet delivered, chosen at random and submerged into various forms of diluted detergent. As shown in that report none of the lettering came off. Exhibit 21 is the report of a test conducted on 30th October 1972. It is indeed only a visual inspection of the bottles already delivered and stored by the defendant company in No.2 Tai Yuen Terrace. As a result of this visual inspection Mr. Brockbank of the General Superintendence Co. (H.K.) Ltd. came to the following conclusion:

"It was noted that the majority of the plastic bottles had at some time contained concentrated detergent. The majority of the bottles found was in complete missing printing were found to be sticky on the outside showing that the detergent had spilt on the outside, indicating that a crude or unsatisfactory method of filling had been employed. We are of the opinion that the printing was adequate but not proved against concentrated detergent".

Mr. Young says that at no time had he or any of his officers ever told the defendant company or their officers that there was a defect which was due to insufficient torching. He says that in fact the torching would have been done at an early stage of the process of manufacture.

13. Mr. McDougald, the managing director of the defendant company, gives evidence that the defect in the form of lettering coming off and colour of the bottles coming off was discovered soon after the first delivery dated 21st December 1971. He admits the crude method of filling of the bottles at an early stage of the delivery and he admits that Mr. Young warned him of this crude method of filling. As a result he made some remedy to the method of filling and also instructed his staff that after filling all the bottles should be wiped clean before packing. He says that he complained to Mr. Young about the defect in the bottles before 31st December 1971. He was promised by Mr. Young of improvement. Mr. Young said that the defect was due to insufficient torching of the bottles. Indeed Mr. McDougald says that even before 31st December 1971 he had threatened cancellation of the entire contract. He accepted further delivery in January because he was in desperate need of bottles to market his detergent and also because Mr. Young had promised him improvement. He says that since early in January constant tests were made of the bottles and he was never satisfied with the results and he made constant complaints to Mr. Young. After the 18th January 1972 Mr. McDougald refused further delivery of the bottles because of the defect, not because that he was moving his factory to the Boundary Street address.

14. Further corroborative evidence about the defect is given by Mr. Bell who is a freelance broker. He says that at one time he tried to market the defendant company's product to various department stores and supermarkets. He says that he received certain complaints about the lettering coming off from one or two stores and he himself saw some of the defects from the bottles lying on the shelves of the Park'n Shop and Oceanway Supermarket when he visited these stores in January 1972. Mr. Riddle, the then manager of the Oceanway Supermarket says that he received some of the bottled detergent from the defendant company. He says that he also observed similar defects. However, he was busy at the time around Christmas and he had not had time to ask the defendant company to take the goods away before the defendant company did so. Mr. Henry Steiner of Graphic Communications Ltd. also alleges that he had seen similar defect as well as colour bleeding of the bottles. Finally the defence called witness, Mr. Lau Wan-kam, who is the senior technical officer of the Federation of Hong Kong Industries, who conducted a test on the bottles. Although the report (Exhibit 23) was signed by the Technical Director, Mr. Lau was the person who conducted the test on 28th April 1972 of the bottles chosen at random from those in the defendant company's possession. His test consisted of the application of various types of detergent, both in diluted and concentrated form, on the outside of the bottles. His conclusion in Exhibit 23 is that it showed that the adhesion of the printed matter to the sample was affected by the presence of alkali and could not stand chemical attack by alkaline substance. In his evidence, however, he says that he found that the detergent marketed by the defendant company was not alkaline based but acetic. He says that the yellow printing came off due to attack of detergent in the sample bottle or attack of alkaline substance or the bleeding of the green pigments and/or the combination of all three factors. He also gives evidence of the colour bleeding test on the bottles in accordance with the British standard methods. The conclusion of this colour bleeding test is that the green colour bleeded out possibly because of the incompatibility of the green pigments in the plastic used for the bottles. He says that both the detergent and the colour bleeding could have caused the prints to come off the bottles.

15. Having considered the evidence as a whole I accept the plaintiff's evidence to the extent that no complaint had been made by Mr. McDougald until after 24th January 1972 when he wrote Exhibit 7. Mr. McDougald could not have complained with a threatened cancellation of the contract in December 1971 otherwise he would not have filled his bottles with detergent and forwarded them to the distributors however anxious he was to market his product. Had Mr. McDougald so threatened Mr. Young of the plaintiff company would not have written in the terms as in Exhibit 5 which is dated 3rd January 1972. In this letter Mr. Young wrote:

"In starting the year of 1972 let me express my pleasure of having the privilege of doing business with you, and I sincerely hope that this will mark the beginning of a pleasant relationship which will prove profitable for both of us."

Then in the concluding paragraph Mr. Young wrote:

"Your advice that no further delivery will be made until your new filling premises are ready for operation is noted and shall act accordingly."

Further Mr. McDougald accepted delivery on 3rd January and 18th January. There is no contradiction in writing by Mr. McDougald to the last paragraph in Exhibit 5A. If the defects were discovered as early as the latter part of December 1971 Mr. McDougald would not have taken further delivery in January. Indeed he would have ordered his own test much earlier than he did. Even as late as 24th January Mr. Young wrote to Mr. McDougald in Exhibit 7A in these terms:

"Over a hundred cartons of bottles with white holiday printing and white caps are ready for delivery. Kindly let me know whether we can start sending them to your Boundary Street depot sometime this week."

Mr. McDougald did not contradict this paragraph in writing either. For this reason I further find that there is substance in Mr. Young's allegation that the small number of bottles delivered to the defendant company up to January not because the plaintiff company was inefficient or that there had been any complaint about defects in the bottles but at the request of the defendant company and the stoppage of delivery was due to the moving of the defendant company to the Boundary Street address. This is strengthened by the fact that on Mr. McDougald's admission as late as December 1971 all he employed in the factory for filling the bottles were only two girls. The plaintiff company was a going concern and there would be no difficulty in effecting production of the bottles if there was any desperate need on the part of the defendant company. Nor do I find that the delay in stopping delivery by Mr. McDougald was due to any promise by the plaintiff of improvement and of further torching the bottles. However, that does not mean that I do not find that there are defects in the bottles and that the complaints were not made before the 4th February 1972. In view of the contents of the paragraph in the letter in Exhibit 8B which I referred to earlier it is obvious that prier complaints had been made to the plaintiff company about the defects in the bottles. A sample of pigments as produced by Mr. McDougald as being the one supplied by the plaintiff company for the purposes of conducting a test. Had the test been for the purpose of manufacturing other types of bottles the sample of old pigments would not have been supplied. Another paragraph in Exhibit 8B, immediately following the paragraph I have referred, reads:

"Meanwhile we have agreed to experiment with the new pigment which is a product of the ICI Ltd. and purchased through Rainbow Plastic of Hong Kong and also a different printing ink from Coats Brothers Hong Kong Ltd. Please advise me as to how much time it will be required before the result of the first experiment will be known."

Reading these paragraphs together it appears that what the defendant company asked for was first a test on the existing bottles and an experiment for new bottles. The plaintiff company's reply in Exhibit 9 dealt with only the experiment in which he says:

"With the approaching of the Chinese New Year which gives about five days of holiday and the fact that our machines are currently busy on their other production run I am afraid that the experiment with the polyuthene green white base and a brighter yellow printing ink will have to wait."

No reply had been given about the test of the existing bottles or about the tests that were to be conducted by ICI in England. The test by ICI could only refer to the test of the bottles delivered to the defendant. Hence in the last paragraph of Exhibit 8B Mr. McDougald wrote:

"I sincerely appreciate the effort and consideration shown by you in the past two weeks in assisting me to find a solution to this problem."

I find as a fact that this problem can only mean the problem about the printing and lettering coming off the bottles. There is evidence by Mr. Riddle that the bottles of detergent were delivered around Christmas and the New Year. He was busy but they were taken back about three or four weeks later. What would be some time the latter part of January. By this time the defects would have been discovered by the defendant company.

16. The defence witness, Mr Lau, has given his opinion that the printing on the bottles cannot withstand the attack of detergent or colour bleeding. The cause of attack by alkaline agent must be excluded because the defendant company's detergent is not alkaline based. Indeed, this opinion is partially supported by the finding of Mr. Brockbank of the General Superintendence Co. (H.K.) Ltd. who says that the bottles cannot stand the attack of concentrated detergent. In view of the expert evidence and the evidence before me I am of the opinion that the bottles are not fit for the purpose for which they were sold. They were sold for the purposes of containing detergent, concentrated detergent and not diluted detergent. For this reason it must be envisaged that there must be some form of exposure of the bottles to concentrated detergent. This was known to the plaintiff company. If the plaintiff company was in doubt they should have obtained a sample of the detergent from the defendant company to test on their printing and their sample bottle first. That had not been done. I further find as a fact that such defect is a latent defect of the bottles not readily visible to the naked eye on the inspection of the samples. Hence the defects were not detected and not complained of until about one month after delivery of the bottles to the defendant company. Nonetheless these are defects which renderod the bottles not fit for the purpose for which they were sold.

17. The question in the second issue is whether such defect was one of manufacture or caused by the mishandling or misuse of the defendant company. For the reasons I have said earlier the burden of proof that such defects were caused entirely by the manufacture of the plaintiff company is on the defendant company. In this connection I follow the dictum of Devlin J., as he then. was, in the case of Kemp Ltd. v. Tolland ⁽¹⁾. In that case the plaintiff company sued for the prices of peaches sold to the defendants. The defence in that case was that the peaches had been condemned by the proper authority as being unfit for human consumption. At p.685 Devlin J. said:

"In those circumstances, the burden that is put upon the defendants is necessarily rather a heavy one. Where any loss occurs, whether it is a loss resulting from a tortious act or a loss resulting from a breach of contract, the primary burden that rests upon the plaintiff in the case, or whoever has the burden, is to establish first of all what the cause of the loss was, and, having established what the cause of the loss was, to show that, under the terms of the contract, or under the relevant principle of law, the defendant is responsible for the loss so caused. That does not mean that if the plaintiff cannot establish the particular cause, it is necessarily fatal. If he can show that it must have been one of a number of causes, he may succeed, but the burden upon him becomes correspondingly greater, because he must show, if he cannot differentiate between the causes, that all those causes which might have been the cause of the loss are all matters for which the defendant is responsible."

I understand this to mean that if the defendants cannot isolate the cause then he must show that whatever the causes which might have been the cause of the loss such causes are all matters for which the plaintiff company is responsible. It is common ground that this is a sale by description and by sample and that the defendant relied on the plaintiff's skill in manufacture of the bottles that they are fit for the purpose, namely, as containers for concentrated detergent. I have found as a fact that the bottles are unfit for the purpose because the lettering comes off due to the fact that the bottles cannot stand up to the attack of concentrated detergent and because of the colour bleeding of the bottles. What then caused the colour bleeding. In this connection I accept Mr. Lau Wan-kam's evidence that such was caused by the incompatibility of the green pigments or excessive green pigments in the plastic as two of the only causes. Mr. Lau did not analyse the ink. Nor did he analyse the plastic. But in his evidence in cross-examination he said that these causes were referred to in standard textbooks of technology. The colour bleeding as such could only be due to manufacture. I further accept Mr. Lau's evidence that the lettering of the bottle come off as a result of attack by alkaline, or by detergent and colour bleeding or any combination of these three factors. He has also found that the detergent used by the defendant company is of acetic base. There leaves two causes: the attack of concentrated detergent and colour bleeding. Having decided that colour bleeding is one of the causes it leaves me to determine whether it is also due to an attack by the detergent. In this point the time element may be important. The plaintiffs' evidence is that the exposure to concentrated detergent is due to the crude method of filling the bottles used by the defendant company. This evidence was admitted by Mr. McDougald but he explained that such crude method was properly rectified after Mr. Young gave him certain suggestions. One of its remedies is to introduce a wooden board to cover the bottles from the neck down. Another remedy is to wipe the bottles clean after they had been filled. I accept Mr. McDougald's evidence that such remedies were introduced and the bottles were wiped clean before packing. No prudent wholesaler or vendor of any commodity would deliver goods in a dirty state. If such bottles were not wiped clean and dry they would spoil not only the bottles but also the cartons and the packings. I do not feel that much importance should be attached to the lack of mechanised filling in the defendant company. A witness by the plaintiff company, Mr. So, said that in his own company they use mechanised filling and even this method would sometimes cause detergent to be spilt over the sides of the bottles which would have to be cleansed. That is why I said earlier, and I repeat now, that whatever way the bottles might be filled it must be expected that, in the course of filling, concentrated detergent might come into contact with the outside of the bottles to a certain extent. Having regard to the evidence by Mr. Lau I find as a fact that the lettering on the bottles cannot stand up to attack by concentrated detergent for a reasonable length of time, namely, 24 hours. According to the opinion of Mr. Brockbank on a visual test the lettering can only stand up to the attack of diluted detergent. For these reasons I find as a fact that the lettering of the bottles come off because at one time or another they had been exposed to concentrated detergent, and also because of the colour bleeding of the bottles or because of both. I find that such defects were not caused by misuse or mishandling. In view of this the plaintiff must fail in his action and the plaintiff company's claim must be dismissed with costs.

18. I now consider the third issue which relates to the defendant company's counterclaim which I have mentioned earlier.

19. At the close of the evidence a fair number of authorities were cited to me by learned counsel for both parties including Horne v. Midland Railway Co. ⁽²⁾, Simon v. Pawson and Leafs, Ltd. ⁽³⁾, Victoria Laundry Ltd. v. Newman Industries Ltd. ⁽⁴⁾, Czarnikow Ltd. v. Koufos ⁽⁵⁾, Vacwell Engineering Co., Ltd. v. B.D.H. Chemicals Ltd. ⁽⁶⁾, Cullinane v. British "Rema" Manufacturing Co. Ltd. ⁽⁷⁾, Payzu, Ltd. v. Saunders ⁽⁸⁾, Les Affreteurs Reunis Societe Anonyme v. Leopold Walford (London) Ltd. ⁽⁹⁾ and London Export Corporation Ltd. v. Jubilee Coffee Roasting Co. Ltd. ⁽¹⁰⁾.

20. Having considered them all I have come to the conclusion that the recovery of damages from breach of contract are subjected to two rules. First is the rule that in a claim for breach of contract one cannot combine the loss of profit and the loss of capital. Second is the rule in Hadley v. Baxendale ⁽¹¹⁾ as applied in the Victoria Laundry case and considered by the Czarnikow case. In Cullinane's case the Court of Appeal held that where a person obtained a machine which was mechanically in accordance with the order given but was unable to perform a particular function which it was warranted to perform he might adopt one of two courses. He might either recover the capital cost incurred less anything obtained by disposing of the material that he got or made his claim on the basis of the profit he had lost because the machine fell short of its warranted performance. At p.1261 Evershed, M.R., said this:

"It seems to me, as a matter of principle, that the claim for damages, as pleaded, was not sustainable, in so far as the plaintiff sought to recover both the whole of his original capital loss and also the whole of the profit which he would have made. That, I think, as a proposition is self-evident, because a claim for loss of profits could only be founded on the footing that the capital expenditure had been incurred. As I have said, however, there was a deduction in respect of depreciation at ten per cent., and if the life of the plant is taken at ten years, it follows that during the period of ten years in which profits must be assumed to have been earned, the whole of the capital cost would have been written off".

Later he went on to say:

"As a matter of principle again, it seems to me that a person who has obtained a machine such as the plaintiff here obtained, which was mechanically in exact accordance with the order given, but was unable to perform a particular function which it was warranted to perform, may adopt one of two courses. He may, when he discovered its incapacity and that it is not what he wanted and is useless to him, claim to recover the capital cost he has incurred less anything he can obtain by disposing of the material that he got. A claim of that kind puts the plaintiff in the same position as though he had never made the contract at all. He is, in other words, back where he started, and, if it were shown that the profit-earning capacity was, in fact, very small, the plaintiff would probably elect so to base his claim. Alternatively, he may, where the warranty in question relates to performance, make his claim on the basis of the profit he has lost, because the machine as delivered fell short in its performance of that which it was warranted to do. If he chooses to base his claim on that footing, depreciation has nothing whatever to do with it."

The rule of Hadley v. Baxendale ⁽¹¹⁾ as repeated in the judgment of Asquith, L.J. (as he then was) in the Victoria Laundry ⁽⁴⁾ case in which the learned Lord Justice said in p.537:

"Three of the authorities call for more detailed examination. First comes Hadley v. Baxendale 9 Exch. 341 itself. Familiar though it is, we should first recall the memorable sentence in which the main principles laid down in this case are enshrined: 'Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered as either arising naturally, i.e. according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it'."

21. In the Czarnikow ⁽⁵⁾ case it was held that the sole rule as to the measure of damages for any kind of breach of any kind of contract was that the aggrieved party was entitled to recover such part of the damage actually caused by the breach as the defaulting party should reasonably have contemplated would flow from the breach. Lord Reid in his judgment at p.388 considered the case of Victoria Laundry Ltd. ⁽⁴⁾. He said:

"But then it has been said that the liability of defendants has been further extended by Victoria Laundry (Windsor) Ltd. v. Newman Industries Ltd. [1949] 2 K.B. 528. I do not think so. The plaintiffs bought a large boiler from the defendants and the defendants were aware of the general nature of the plaintiffs' business and of the plaintiffs' intention to put the boiler into use as soon as possible. Delivery of the boiler was delayed in breach of contract and the plaintiffs claimed as damages loss of profit caused by the delay. A large part of the profits claimed would have resulted from some specially lucrative contracts which the plaintiffs could have completed if they had had the boiler: that was rightly disallowed because the defendants had no knowledge of these contracts. But Asquith L.J. then said ([1949] 2 K.B. 528, 543):

'It does not, however, follow that the plaintiffs are precluded from recovering some general (and perhaps conjectural) sum for loss of business in respect of dyeing contracts to be reasonably expected, any more than in respect of laundering contracts to be reasonably expected.'

Later he said (p.390):

"I certainly could not understand any court deciding that, on the information available to the carrier in that case, the stoppage of the carrier in that case, the stoppage of the mill was neither a serious possibility nor a real danger. If those tests are to prevail in future then let us cease to pay lip service to the rule in Hadley v. Baxendale 9 Ex. 341. But in my judgment to adopt these tests would extend liability for breach of contract beyond what is reasonable or desirable. From the limited knowledge which I have of commercial affairs I would not expect such an extension to be welcomed by the business community and from the legal point of view I can find little or nothing to recommend it."

22. The case of Vacwell Engineering Co. Ltd. ⁽⁶⁾ is an action on breach of contract for sale of goods, breach of implied term as to fitness of purpose by the sale of chemical without warning. However, when it comes to assessment for the quantum of damages, the learned trial judge seemed to assess damages on the basis of breach of duty in the nature of negligence which is a tort. Thus, he seemed to apply the foreseeability test on the question of remoteness of damage. It is a case where the defendants supplied a chemical contained in glass ampoules to the plaintiffs and failed to warn the plaintiffs that if such chemical should come into contact with water a minor explosion would result. In the course of its use such chemical was allowed to be in contact with water by accident, as a result, a much greater explosion occurred than expected, and the plaintiffs suffered much heavier damage than could be expected from a minor explosion. It was held that an explosion of a minor kind was reasonably foresecable as a result of the defendants' breach of contract, and although an explosion of the magnitude which in fact occurred was not reasonably foreseeable, it was the direct result of the defendants' breach of contract in supplying boron tribromide without an adequate warning label that the defendants were negligent and in breach of their duty to take reasonable care to ascertain the major industrial hazards of chemicals marketed by them and to give warning of such hazards to their customers: the explosion and the type of damage being foreseeable, it was irrelevant that the magnitude of the former and the extent of the latter were not. In his judgment, Rees J., at p.945, said:

Later he said (p.946):

"Here it was a foreseeable consequence of the supply of boron tribromide without a warning - and a fortiori with an irrelevant warning about harmful vapour - that in the ordinary course of industrial use it could come into contact with water and cause a violent reaction and possibly an explosion. It would also be foreseeable that some damage to property would or might result. In my judgment the explosion and the type of damage being foreseeable, it matters not in the law that the magnitude of the former and the extent of the latter were not."

23. The basis upon which the defendant company found their claim for their loss of profit is this: Had the plaintiff company been able to deliver properly manufactured bottles they would be able to sell at least 400 cases of detergent in the month of January at $5.50 per bottle. As each case contained 24 bottles the selling price was $132 per case. They would be able to sell another 600 cases in the month of February 1972, 800 cases in March 1972, 800 cases in April 1972, and between 1st May and 22nd May another 558 cases. The $132 would be reduced by a 42% commission to the distributers and by the cost of $22.80 per case for detergent and perfume. The selling price of $132 minus the 42% of $55.44 and the cost of the bottles, etc. of $22.80 per case, would give a profit of $53.76 per case. The defendant company also claim for the loss of expenses incurred. The expenses incurred include the sum total of $33,897 paid to the Far East Marketing, Ltd. and the Far East Advertising, Ltd. for the marketing research and advertisement relating to the sale of the detergent, plus the sum of $2,454 due to the Far East Advertising, Ltd.; another sum of $18,149 paid to the Graphic Communication, Ltd. for the design and the logo for the bottles to be ordered from the plaintiff company; legal fees of $627 and loss on the sale of furniture of $13,159 making a total of some $68,286. The defendant company also claim for the return of the moulds or $6,000 in lieu. Finally the defendant company claim repayment of the amount paid by the defendant to the plaintiff of $2,330 referred to as being payment made wholly without consideration.

24. Evidence in support of the claim for the loss of profit and expenses incurred is to be found in that of Mr. McDougald, Managing Director of the defendant company. He says that before he embarked upon the project which is a new project he engaged the Far East Marketing, Ltd. to do some marketing research for him. Such research was done on three basic factors. The first one was that there was a firm by the name of B.C.I. which sold detergents at the price of $12.50 per bottle and the sale had been successful. Secondly, in Hong Kong there were at the time three leading companies in the same business selling their detergents at $1.80 per bottle. The leading firm sold about 25,000 cases of detergent each month. Thirdly, on this basis and on a conservative estimate it was reckoned at least the defendant company could have sold 800 cases of their detergent per month. The reason for this estimate was that the defendant company was selling at less than half the price of the B.C.I. and he was selling the detergent as a multi-purpose detergent in contrast to the detergents vended by the other leading detergent companies but similar to these sold by the B.C.I. He says that before the bottles were delivered to him he had already orders for 1,000 cases from various leading department stores and supermarkets. He turned these orders to his distributors. Although no date of delivery for the bottles was agreed upon, however, he understood by November that the plaintiff company was ready and able to deliver at least 400 cases to him in the month of December. As a result he wrote to various department stores and supermarkets to scale down the rate of delivery. At the same time all the advertisement for the sale of the product was geared to the sale in January that the product will be sold in the market. When he found that there were defects in the bottles he could not market the product any more. He asked for the return of the moulds in February, 1972 so that he could appoint somebody else to make the bottles of the same design for him, but the plaintiff company refused. In the end the defendant company had to obtain bottles of different design and colour from another source in order to market their detergent. Such bottles were not available until the 22nd May 1972. Because of this the benefit of the marketing research was completely wasted, the advertising gear for the sale in January of the original product in the original bottles were also wasted. He had to dilute the original detergent to a much weaker strength to fill up the bottles ordered in substitute and sold them at the rate of $1.50 per bottle as from 22nd May 1972. By that time the defendant company had spent a lot of money, and was not in a sound financial state. Legal fees in the sum of $627 was paid to effect a guarantee for the defendant company's bank overdraft. In the and the defendant had to close down its main office at Old Bailey Street, and sold its furniture at a loss of $13,159. He had three distributors, each with 10 selling outlets. Mr. Bell was one.

25. Mr. Bell also gives evidence in support of the defendant company. He says that he has no less than 10 outlets for the sale of the detergent. On Mr. Bell's estimate he expects to sell at least one case a day in each outlet, thereby making a total of 300 cases per month. However, he only delivered one or two cases to each of the six or seven outlets.

26. Mr. Riddle who gives evidence for the defendant company says that he agreed to put the detergent on sale in the supermarket he was in charge at the time. He reckoned that such detergent would sell at the price of $5.50 per bottle with the aggressive advertisement that was undertaken by the defendant company.

27. From such evidence three points are quite apparent and I find them as facts. The first point is that the estimated sales are entirely speculative. The second point is that the advertising and marketing expenses incurred was solely incurred for promoting the sale of the detergent. And thirdly, the legal fees involved and the selling out of the properties of the defendant company was entirely due to the impecunious condition of the defendant company. The defendant company is a newly established company starting a new business on a new venture. There is no previous business record upon which to found its estimate of sale except a marketing research by comparison with one of the leading detergent vendors. Apart from this Mr. McDougald's optimism and confidence is founded on the fact that the B.C.I. used to sell a multi-purpose detergent at the rate of $12.50 a bottle and was doing good business. However, in his own words the B.C.I. product was a complete fraud which was discovered by him. In calculating his profits Mr. McDougald only gave allowance for the cost of the detergent, the bottles, the packing and the discount he would give to his distributors. He has completely ignored the factor of staff salary, office rental and expenses in advertisement in the promotion of sale of such product without which or any of which the product will never be on any firm footing in the market. After all there is evidence that the detergent business is a very competitive business. When all these expenses are taken into consideration (and such expenses are all recurring expenses) I am of the opinion that the profit per case of his detergent is nothing near the figure of $55.76 per case. In this connection I have also to observe that he was proposing to sell his detergent at $5.50 per bottle, $3.70 more than the price of an average bottle of detergent of slightly weaker strength. The success and failure of this business venture depends also how gullible the consumers are in paying more, much more, for a bottle of slightly stronger detergent. I cannot accept Mr. McDougald's evidence that in the month of November 1971 he had obtained orders for a thousand cases of the defendant company's detergent. There is not one scintilla of documentary evidence in support of this contention. Had the defendant company any firm offer of such Mr. McDougald would not have kept the date of delivery and the rate of delivery open and left it to the discretion of the plaintiff company. He would certainly have not employed only two girls in his make-shift factory in Tai Wor Ping to will up the bottles delivered to the defendant company in December 1971. Despite the optimism and confidence of Mr. Bell who said that he expected to sell a case a day in each of his ten outlets he had so far delivered one or two cases to his selling outlets. Mr. Bell's evidence is one of opinion rather than a statement of fact. The highest one can put it is that Mr. McDougald might have contacted sufficient number of shops and stores who might be willing to put his detergent on a market on a consignment basis. The success in vending up to 800 cases per month of the defendant company's detergent can only be described as a fervent hope on the part of Mr. McDougald.

28. Apart from the aforesaid there is also one very significant point relating to the claim for the loss of profit. It will be observed that the defendant company only ordered 34,000 bottles from the plaintiff company making a total of 1,416? cases of 24 bottles each. But the defendant company claimed for the lost profit on the basis that the plaintiff company would deliver 3,168 cases in all. This is a grossly exaggerated claim and goes far beyond the contractual relationship between the parties. When I consider the defendant company's claim for the loss of profit I have not lost sight of the decision in the case of Victoria Laundry Ltd. v. Newman Industries Ltd. ⁽⁴⁾ in which it was held that in a claim for damages for loss of profit in a breach of contract a conjectural loss might be taken into consideration. But that case is founded on very different facts. That was a case where a laundryman sued for loss of profit for the delay in the delivery of a boiler which he required and ordered to be delivered at a certain date in order to expand his business. It was held that as a result of the delay in delivery of the boiler the laundryman would not be able to expand his business in time and some loss of profit must be within the contemplation of the parties. Accordingly loss of profit was allowed as an item of damages. In that case the laundryman had an existing boiler. The boiler that was ordered was an additional one to expand his business. Thus whatever loss of profit for being deprived the use of the additional boiler could be estimated on the basis of his previous earnings with a single boiler. It also happened at a time immediately after the European War and laundry services were in great demand. In the present case there is no existing business on the part of the defendant company to form the basis of any estimate except speculation and hope. There is evidence that detergent vending is a keenly competitive business in Hong Kong. The marginal profit is low. In view of the aforesaid I find that there is no sufficient evidence to substantiate the defendant company's claim for loss of profits.Failing this the defendant company can only recover capital expenses connecting thereto which are within the contemplation of the parties at the time of the contract.

29. I now come to consider the defendant company's claim for expenses. Having regard to the evidence of Mr. McDougald, Mr. Steiner, and the corroborative evidence in Exhibits 1 and 2, the fact that the defendant company had spent money for the design and the label for the bottles to be manufactured by the plaintiff company must be within the contemplation of the parties in this contract. In any event the bottles are of a new design and with a new logo. It is reasonable to expect that the parties knew at the time of the contract that money has been spent on that item. However, I find that the huge expenditure involved in the marketing research as well as advertisement need not be within the contemplation of the plaintiff company. Such research and advertisement are to promote the sale of detergent not necessarily the bottles. There is no evidence to suggest that the plaintiff company knew of the intensive marketing research and the aggressive advertisement. Further, the expenditure in legal fees in arranging a guarantee for an overdraft, and the loss on the sale of furniture by the defendant company are entirely due to the impecunious condition of the defendant company which cannot be within the contemplation or knowledge of the plaintiff company.

30. As regards the defendant company's claim for the moulds. I find that the plaintiff company cannot justify their retention by custom of the trade. Nor do I find the cases of Leopold Walford ⁽⁹⁾ in 1919 and London Export Corporation Ltd. ⁽¹⁰⁾ in 1958 relevant. There has been no written contract and there is nothing inconsistent with the custom of the trade. Yet I do not find that there is any substance in the contention that the plaintiff company can rely on a custom, if any, which is clearly unreasonable. If such a custom exists it purports to force the defendant company to accept a breach of contract by buying all the defective goods in order to recover the moulds. Similarly I cannot accept the argument by Mr. Wei, learned counsel for the plaintiff company, that one way of mitigating the loss on the part of the defendant company was to pay for the contract in full so as to regain the moulds and then sue for damages. I find in the circumstances that it was reasonable for the defendant company to reject the defective bottles and demand for the return of the moulds. Nor do I accept the evidence of Mr. Kenneth Young for the plaintiff company to the effect that the defendant company agreed to the moulds being used as security for the down payment of the bottles to be supplied by the plaintiff company. This is evident because in Exhibit 4 dated 11th December 1971 the defendant company wrote in these words:

"This letter will verify the conversation we had on December 10. I agree to pay the balance of $2,000 for the moulds which your company is preparing, also I agree to make a down payment of $2,000 for the initial order of 34,000 bottles and 1,400 cardboard cartons. The balance will be paid within 30 days."

Then in Exhibit 5A, B and C the plaintiff company gave an account clearly giving receipt for the payment of $6,000 for the moulds plus whatever bottles that had been then delivered, giving the defendant company a credit balance of $303.92. There is no mention whatever of using the moulds as the deposit for the down payment of bottles to be delivered subsequently.

31. In view of the facts as I find as proved and applying the principle relating to damages in a breach of contract I find as follows.

32. By the 3rd January 1972 the defendant company had already paid to the plaintiff company $8,264 - Exhibit 5A. On the 18th January 1972 the defendant company paid another $1,000 in cash making a total of $9,264. With the exception of $230 which were paid for 20 oz. bottles (Exhibit 6B) and for changing the wordings (Exhibit 7C) the balance of 9,034 was capital expenditure paid by the defendant company to the plaintiff company for a consideration which completely failed by virtue of the breach of contract on the part of the plaintiff company. The defendant company is entitled to recover this sum in lieu of loss of profit. The defendant company is further entitled to the sum of $12,000 which was paid for the design of the bottles and the logo as capital expenditure plus the sum of $1,680.75 paid or payable to the Graphic Communications Ltd. in connection with the Kleenall bottles. I arrive at this sum from Exhibit 39 after striking off all items of charges not connected with the design for the bottles viz., $120 in invoice No.2121, $50.50 in invoice No.2026, $50.25 in invoice No.2122, $90.00 in invoice No.2123, $1,120.00 in invoice No.2025 and $250.00 in invoice No.2027.

33. As to the moulds, the plaintiff company must return them to the defendant company as claimed or in lieu thereof the sum of $6,000. In addition the defendant company is entitled to recover the difference in cost for the substituted bottles it had to obtain from other source if it is more than 36 ¢ per bottle to the extent of 34,000 bottles. There is no evidence as to any difference in cost. But any difference is the direct result of the plaintiff company retaining the moulds and such result is foreseeable.

34. In short the plaintiff company's claim is dismissed with costs. The defendant company's counterclaim is allowed to the extent of $22,714.75. Return of the moulds or $6,000 in lieu. The difference in cost for up to 34,000 bottles if it is beyond 36¢ each to be proved before the Registrar.

Representation:

Mr. R. Wei (Wat & Fu) for plaintiff.

Mr. F. Eddis (Wilkinson & Crist) for defendant

(1) [1956] 2 Lloyd's list Law Reports 68.

(2) [1873] L.R. 8 C.P. 131

(3) 1932 All E.R. 72

(4) [1949] 2 K.B. 528

(5) [1969] 1 A.C. 350

(6) [1969] 3 W.L.R. 927

(7) [1953] 2 All E.R. 157

(8) [1919] 2 K.B. 581

(9) 1919 A.C. 801

(10) [1958] 1 W.L.R. 661

(11) (1854) 9 Exch. 341