Texwood Ltd v. Jackson and Wendy (HK) Trading Co (A Firm)

HCA007219/1981

Assessment of damages in breach of a contract for the transfer of quota. Problems arising from lack of available market for permanent transfers and from the nature of the quota market itself.

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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BETWEEN

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Coram: The Hon. Mr. Justice Hunter.

Date: 2 March 1983

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JUDGMENT

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1. In this action the plaintiffs are claiming damages for breach of two contracts for the sale of quota. The plaintiffs are in the fortunate position of having by reason of their past trading qualified themselves for an allocation of quota in relation to the export of textile to Sweden. The defendant it would seem has not. In the restraint year 1st April 1980 to 31st March 1981 the plaintiffs were allocated out of this Swedish quota 13,448 pieces in what was then known as category VI and 106,406 pieces in what was then known as category VII. This was more than they were apparently able or desirous of using for trading purposes. So by two agreements in writing dated 19th February 1981 they agreed to transfer to the defendant, for no financial consideration, 5,700 pieces in category VP and 8,000 pieces in category VII. On the same day the plaintiffs signed transfers in the Type A form.

2. The defendant paid nothing for these transfers, but undertook in each case "to make full shipment performance" before 31st March 1981. It had only 6 weeks to do this and in the event it failed. When this time expired the defendant had failed to ship 3,800 pieces in category VI and 3,950 pieces in category VII. The terms of contracts provided for this eventuality in the following words (the numbers added are mine):

"(1) In the event that we fail to make full shipment performance against the aforesaid transferred quota on or before 31st March 1981 or other causes on our part, (2) which result in any loss of your quota entitlement for the succeeding periods and/or other losses relating thereto, (3) we agree to indemnify you against and hold you harmless from all liabilities and losses resulting therefrom and (4) further compensate you any time upon your demand by making available to you at our expense free permanent quota (i.e. Type B transfer of quota to you) for the succeeding periods in the aforesaid Category Number in such quantity as deemed sufficient by you to cover your loss."

3. These agreements were in a form in common use in the textile trade. The trade was, I was told, interested in the way in which the court might assess damages under it. The defendant however failed to appear at the trial. I have accordingly heard argument on one side only, so the case can be no way rank as a test case. This judgment represents only my half aided attempt to answer a question which I have found very far from easy.

The quota market

4. An understanding of this very peculiar market, is essential to an understanding of the case. It was created and is literally managed or ruled by the Secretary for Trade. Its statutory foundation is narrow, namely the discretion granted to the Secretary under section 3(1) of the Import and Export Ordinance (Cap. 60) to grant or refuse an export licence see Re Golden Wall Shirts Factory and The Director of Trade 1981 H.K.L.R. 144. If the Secretary exercised the residual discretion which is apparently reserved to him in some of the documents the market would collapse. But he does not. He has circumscribed the exercise of his discretion by published rules, which are the market rules. The 1980 revision of the rules contained in a booklet entitled "The Modified Textiles Export Control System" was produced in evidence. When Hong Kong has concluded, as it has had to, bilateral restraint agreements with individual countries or groups of countries, the division and disposition of quota between exporters raises delicate problems. The past performance rule described in paragraph 18 of the booklet whereby those who have "contributed to the level of export that led to the restraint" are "given priority for the limited export opportunities" is wholly understandable in the early days of quota restraint. But the justification for the maintenance of the rule years later in different and sometimes reduced quota conditions, when it has the effect of providing the pioneers gratuitously with the means of acquiring an annual income is less obvious.

5. This income derives from the transfer system described in section VII of the booklet. Two types of transfer are relevant for the purposes of this case. Type A transfer is described as: "Temporary transfer in which the transferee obtains the use of the quota for the restraint period in question ..., but the transferor retains the right to allocation in the following restraint period. That is to say the performance by the transferee is, for the purpose of quota allocation, attributed to the transferor." The absolute language, underlined, is significant. Subject only to certain penalty rules, the pioneer can sell 45% of his quota "entitlement" in the market year after year, and provided that he and his transferees take up at least 95% of the total quota he will receive 100% of his allocation the following year and can repeat the process again. Only if he or his transferees combined fail to take up 95%, will the following year's quota allocation be reduced to the actual total take up figure. By courtesy of the Secretary the pioneer can enjoy a useful income annually.

6. By contrast the Type B transfer is permanent. Having regard to the characteristics of the Type A transfer it is not surprising that I was told by the plaintiff, first that they never make Type B transfers themselves; and secondly that it is very difficult to find anyone prepared to transfer in the market in this way. The express purposes of this transfer system are set out in paragraph 40. Having regard to the evidence I have heard of very large prices now being paid for Type A transfers, prices in excess of the cost of the underlying commodity, one must beg to question whether this now provides any viable "channel for newcomers" or does more than illustrate the effect of the monopoly selling power the system bas created in the hands of quota holders.

7. The penalty system referred to above is described in paragraph 48. I was told that this was introduced to deter trading in quota as against trading in textiles. By its terms it starts to operate only after a transfer for two successive years of more than 50% of the whole quota, and it does not then result in the loss of this excess but only part thereof. On the evidence I have heard it appears simply not to operate as such deterrent.

8. A quota holder under this scheme has therefore many options open to him, dependent upon the level of trade which he desires or is able to obtain with the country in question. By way of example a man with a quota of 100 dozen may:-

9. The astonishing features of this market thus seem to be that the value of quota increases in inverse proportion to the use made of it for its basic purpose. The true commodity user makes his trading profit. The true commodity user runs the risk of missing the best of the quota market and entering the free transfer period. The pioneer with excess quota can cash in on his inheritance to the best advantage.

The Plaintiff's dealing in the quota market

1980-1981

10. For this period the plaintiffs were initially allocated 13,448 pieces in category VI and 106,406 pieces in category VII. During this year they bought in on permanent Type 8 transfer 1,889 pieces in category VII and also were allotted 31 pieces in this category on free quota. This raised the final category VII figure to 108,326 pieces. They made a number of Type A transfers in addition to those to the defendant, namely 7 in category VI and 14 in category VII. The plaintiffs chose not to reveal to the court any information about the numbers so transferred individually all in total; the dates upon which these transfers were made; and the monetary consideration (if any).

11. In category VI the annual take up, with the exception of the defendant, was virtually complete. In category VII it was different. The plaintiffs themselves shortshipped 808 pieces: and 2 other transferees collectively shortshipped 2,570 pieces. So the total shortshipment was 808 + 2,570 + 3,950 = 7,328. In consequence the next year's quota was reduced by 3,880 (+ some unexplained increment) in the equivalent of category VI which was then re-designated VI (a), (b), (c) and (d) and VII(b): and by 7,328 in category VII then redesignated category VIII. I shall refer to these new categories as VI and VIII respectively.

1981-1982

12. The initial quotas here were 9,522 in category VI and 100,998 in category VIII. Under pressure from the court and very late in the evidence the plaintiff produced an analysis of their deals in this year which were all done by Type A transfer. This shows that between August and October 1981 the whole of the 9,522 quota in category VI was sold at prices between $50.4 and $70.8 a dozen. In category VIII 13,990 pieces were transferred free: and 18,000 were transferred in November 1981 all at $89 a dozen.

1982-1983

13. There was no evidence as to the starting quota. But in the old category VI it seems to have been the same because the analysis shows transfers in June 1982 of the whole 9,522 at pricks between $8 and $8.20 a piece. The only recorded sale in category VIII was of 2,023 pieces at $255 a dozen in October 1982. The analysis ended at this date. The vast increase in price illustrates the peculiarities and volativity of this market. At the date of trial, prices I was told stood at about $492 dozen for category VI and $180 a dozen for category VIII respectively.

14. These dealings which range from free transfer of part of the quota to cash transfers of the whole, reveal the width of transactions open to a quota holder like the plaintiff company. They also seem to me to reveal the value to the pioneers of their monopoly and the ineffectiveness of the deterrents to pure quota trading.

Breach of contract

15. I turn now to consider my numbered paragraphs in the contract.

16. But on category VIII, the old category VII, an issue arises on causation. The defendant's shortfall of 3,950 pieces was less than 5% of the whole, from which the defendant argued in its defence that no loss was attributable to it at all. Conversely the plaintiff argued that although the defendant's shortfall personally was only 3,950 pieces, he has in fact responsible for the whole quota reduction the next year of 7,328 pieces. The plaintiffs thus seek to turn the 5% margin against the defendant and argue that because the total shortfall caused by itself and its other two transferees was less than 5% then the defendant must bear responsibility for the whole.

17. I reject both views. I can see no reason for departing from the obvious fact that each of the 4 persons contributed to the quota loss in category VIII in their individual shortfall figures. This simple fact, this simple causation, was not altered by the existence of the 5% margin which in my judgment cannot be turned to the advantage of either. The plaintiff's first thoughts here were better than their second. They originally claimed redelivery of 3,950 pieces under this category, having apparently deemed that sufficient to cover their loss Under paragraph 4 they are in my judgment confined to that figure in any event.

Quantum

4.    In argument the claim was put exclusively under this paragraph and not under paragraph 3. The facts here were that demands for the transfer of 3,880 and 3,950 pieces respectively in Type B form were made in correspondence between July and September 1981. Nothing was forthcoming. It is a reasonable inference that the defendant had itself no permanent quota to transfer and could only have tried to have bought some in. When they realised that nothing would be forthcoming from the defendant the plaintiffs investigated the market. They discovered no willing sellers; and that if they could have found one the price they understood they were likely to be quoted would be higher than they were willing to spend or that they thought it made commercial sense to spend. They therefore made no serious attempt to buy in. This again illustrate the risk that a trader like defendant has to run to gain a brief 6 weeks entry into a quota market under this common form agreement. It illustrates the width of the "channel for new commers."

18. Having had no response from the defendant at all the writ was issued on 16th October claiming damages. Mr. Lee for the plaintiffs submits that the plaintiffs thereby accepted the defendant's conduct as a repudiation of the contract and that accordingly the date for the assessment of damages is October 1981. Subject only to any question of mitigation I agree.

19. Next Mr. Lee submitted that damages ought to be measured by the market price for permanent type B transfer at that date. There is undoubtedly a market for Type A transfers. The plaintiffs dealt extensively in this as I have indicated above, and a braking company in this field produced its analysis of deals handled by it between April 1981 and April 1982. But this company handled no Type B transfers during that period at all, and all its representative was able to say was that on earlier occasions, if a willing seller had been found to transfer on this basis, he was normally prepared to accept between 2 and 3 times the then A transfer market rate.

20. The law relies on market value as the prima facie measure of damages in many cases of non-delivery of property, see McGregor on Damages paragraph 24. The reason is obvious. Given an existing martket the loser can be fully recompensed by buying in more goods at a price constrained by market forces. But the rule does not start to operate unless this is physically possible: unless willing sellers exist: unless in the words of the Sales of Goods ordinance the market is "available". On the evidence before me this is simply not true of  Type B sellers.

21. I therefore reject Mr. Lee's submission for two reasons. The first is that there is in fact and in law no true market. The second is that the plaintiffs themselves expressly declined trying to buy at anything like the prices I was asked to adopt as against the defendant. I likewise reject the plaintiffs two variants on this. The first was the pleaded computation which took an alleged permanent market price for category VI in May 1981 and in category VIII in April 1982 for no better reason than that these months were the peaks in the brokers analysis. Mr. Lee's alternative proposition that I should take in the very high date of trial figures quoted above, is in my judgment no more meritorious or well founded in law.

22. A court which cannot adopt a market approach has in my view to do two things. First it has to discover what the plaintiffs' actual loss was: and then consider whether such loss directly and naturally resulted in the ordinary cause of events from the defendant's breach. The first step here is particularly important when three clear choices at least were open leading to widely different results. The first was actual user in trade with Sweden. The second was retention perhaps for such use until such time that a free transfer market might arrive this seems to have been the defendant's experience with plaintiff. The third was cash transfer at a convenient moment after quota had been made available to them.

23. Save for emphasising their unwillingness to buy in, the plaintiff did not start to explain how they would or might have used this quota had it been forthcoming from the defendant. They said nothing about their trading commitments or potential commitments to Sweden in October 1981 or beyond. It would have been easy to show whether or not they had any need or likelihood of a need to use this quota for actual trading so that possible courses one and two could have been considered and/or rejected. The actual trading figures in 1981 and 1982 which they eventually revealed may suggest that if they had possessed this quota they would have tried to sell it but this is not a necessary inference particularly without the whole year's figures in both years in question.

24. I have therefore had very carefully to consider what inference (if any) I can draw against an absent defendant and in favour of a silent plaintiff who in this topsy turvey market has failed clearly to allege or prove that had they had this quota they would have followed a course which would have led to identifiable and calculable financial loss. It is clearly open to conclude that having left the court in a state of uncertainty the plaintiffs have failed to prove any loss or to discharge the onus upon them. But this I think would be too harsh a view one necessary inference can be drawn, and that is that the plaintiffs lost the opportunity of having this quota available for disposition if actual trading commitments permitted. They lost the opportunity of choosing: of assessing their overall commitments and possibly of putting the quota on the market.

25. In October/November 1981 the plaintiffs in fact sold quota in category VI on A transfer at $50.4 a dozen and in category VIII at $89 a dozen. The broker's analysis shows these to be fairly representative figures. Mr. Lee's third alternative submission was that I should take some such figures as these, and apply a multiple of 5 or 10 on the basis that the plaintiff could have repeated this process yearly up to 1997. A temporary transfer assessment thus greatly exceeded the permanent transfer assessment where I was invited to apply a multiple of 2.5. In no circumstances would I have been prepared to have assumed that degree of permanence or certainty in this peculiar market. Had I been in Mr. Lee's favour and had I been assessing damages upon the basis that I was satisfied by the evidence on the balance of probabilities that such transfers would have been made, I do not think I would have applied a multiplier of more than 1.5.

26. But that is not what I am doing. Having been left in a state of uncertainty I have to value a chance - and a chance which might or might not have been profitable. What Vaughan Williams L.J. called the "doctrine of averages" in Chaplin v. Hicks 1911 2 K.B. 786, 792 does not help. I can see no rational way of preferring one percentage figure to another percentage figure of some hypothetical whole. Rather as a substitute for the jury I must in Fletcher Moulton L.J.'s words in the same case at page 796: "Do (my) best to estimate.....   and "give what (I) think to be an adequate solatium under all the circumstances". When performed by a judge alone this process is second cousin to the adoption of a convention figure such as was done in not wholly different circumstances in Benham v. Cambling 1941 A.C. 157. In the curiously fluctuating circumstances of this case I think that a reasonable juror would calculate his solatium by reference to a modest flat rate for both species of quota. This I would assess at $20 a dozen. My assessment of damages therefore in respect of the 3,880 shortfall in relation to category VI is $6,466 and in relation to the 3,950 shortfall in respect of category VIII $6,583. There will accordingly be judgment for the plaintiffs in the total sum of $13,049.

Representation:

Mr. Sammy Lee (Messrs. Deacons) for the Plaintiff.

Defendant absent.