Universal Textile Co Ltd v. Gintex Trading Co (A Firm)

DCCJ004317/1980

IN THE DISTRICT COURT OF HONG KONG

HOLDEN AT KOWLOON

CIVIL JURISDICTION

ACTION NO. 4317 OF 1980

______________

BETWEEN:

_______________

Coram: His. Honour Judge. Downey

Date: 19 February 1982

___________

JUDGMENT

___________

1. By a writ, issued on the 1st May 1980, the plaintiff ("the seller") seeks to recover $17,700, being the price which the defendant ("the buyer") agreed to pay for 3,000 yards of Cotton Grey Satin, purchased in February 1980. By its Defence and Counterclaim, filed on the 9th May 1980, the buyer admits its liability for this sum, but seeks to set-off against this liability, damages for breach of the implied condition as to merchantable quality in respect of other goods, namely, 50,000 yards of Cotton Grey Duck, purchased from the seller under a written contract dated the 15th May 1979. Originally, these damages were quantified at $27,543. But, the amount of the Counter-claim was increased to $83,162.05 by an Amended Defence and Counter-claim, filed on the 20th March 1981 pursuant to leave granted on the 12th March 1981. On that date, the seller was given leave to file an Amended Reply and Defence to Counterclaim within 14 days, but did not do so until the first day of the trial, when leave was given to do so out of time. At the hearing of the buyer's application for leave to amend, the seller was given an opportunity to consider its position under section 38 of the District Court Ordinance (Cap.336). In the event, the seller made no application to the Supreme Court under section 38(1) of Cap. 336. From the fact that the learned judge, who heard that application, gave directions for the further hearing of this matter in the District Court, I conclude that he did not consider that it was necessary to report the case to the Registrar, in accordance with section 38(2) of Cap.336. The only new matter raised by the amended Reply and Defence to Counterclaim was a denial of the existence of the alleged implied term as to merchantable quality. Apart from the fact that the parties indicated their agreement to the case being tried by me, I did not consider that this new issue required me to report the case to the Registrar, nor did I think that this was sufficient reason for differing from the learned judge's view that the District Court was the appropriate forum.

2. On the basis of the pleadings and the evidence adduced at the trial, I consider that there are three main issues, namely:-

The latter question gives rise to a number of other issues, which only arise if the buyer obtains favourable answers to the first and second questions I have posed. Before I attempt to answer these questions, I consider that it may be useful to set out the general background to this case and my findings on some of the disputed issues of fact.

3. The seller is a limited company, engaged in the business of weaving various kinds of cloth. It has been producing Cotton Grey Duck under the brand name of "Universal" for some 30 years. By the written contract, dated the 15th May 1979, it agreed to sell to the buyer 50,000 yards of "UNIVERSAL" Cotton Grey Duck at a price of $3.90 per yard, which was to be delivered during July/August/September 1979. In fact, deliveries were made on various dates between the 17th July 1979 and the 20th November 1979, pursuant to various delivery orders issued by the seller (see documents A-11 to A-17 in Exhibit D1). Nothing turns upon the apparent delay in delivery.

4. The buyer is a firm, engaged in trade, and its proprietor is Mr. CHOW Ho-yin. Although he had had previous dealings with the seller, dating back to September 1977, (none of which gave rise to any complaint about the quality of the goods produced by the seller), Mr. Chow frankly and readily conceded that he never made known to the seller the particu purpose for which he required the Cotton Grey Duck which he, or his film agreed to buy under the contract dated the 15th May 1979, notwithstand the fact that the buyer had, on the 11th May 1979, contracted to sell to Wai Hing Clothing Factory ("Wai Hing") 50,000 yards of "Dyed Cotton Matting ......... singed, mercerised, fast colour and soft finished" for delivery between August and November 1979, at prices ranging between $6.20 and $6.40 per yard. (See document C-1 in Exhibit D1). Nevertheless, I find as a fact that the buyer intended to fulfil its contract with Wai Hing by first subjecting the Cotton Grey Duck, which it agreed to buy from the seller, to certain further processes, which it arranged to be carried out by Perfecta Dyeing, Printing and Weaving Works Ltd. ("Perfecta"). (See documents B-1 to B-7 in Exhibit D.1.). The buyer contends that some 12,761.50 yards of the 20,000 yards, covered by Delivery Orders 79/161, 79/203 and 79/205 (documents A-13, A-14 and A-15 of Exhibit D1), which were collected and processed by Perfecta, were later found to have numerous weaving defects. They were rejected by Wai Hing in March 1980 (see document C-2 of Exhibit D.1.).

5. In the course of this trial, I have been obliged to listen to evidence tending to suggest that there are vast differences between the contractual description of the goods in question, and what the buyer could lawfully and reasonably expect from its contract with the seller, and other descriptions of the sale or similar goods, or similar descriptions of essentially different goods. I am prepared to recognize that the various descriptions, which have been canvassed before me, may give rise to different legal consequences affecting the quality which a reasonable buyer might expect to find in such goods. A reasonable buyer's expectations as to quality must be considered in the context of the contractual description of the goods he has agreed to buy. If the goods supplied to him are of low quality, but within the contractual description, he cannot normally complain. He has simply made a bad bargain But, when the buyer is complaining of physical defects, trifling though they may be, I do not consider that much assistance is to be obtained from a detailed consideration of the quality to be expected of the goods within the contractual description applied by the parties. A motor horn may be louder, or quieter, than the buyer expected. It may be tuned to a melodious tone which the buyer and others, do or do not like. But, if it is dented or has other defects, it would seem that the buyer can still complain that the goods are not of "merchantable quality". (Cf. Jackson v. Rotax Motor & Cycle Co., Ltd. [1910] 2 K.B. 937.).

6. Although I regard much of the evidence adduced by the seller as not really relevant to the issues I must resolve, I recognise that what the buyer could reasonably expect to obtain from its contract with the seller in this case has a bearing upon the existence and scope of the implied obligation upon which the buyer relies.

7. Irrespective of the true construction of the contract between the seller and the buyer, I consider that the first issue must be resolved in favour of the buyer. The seller clearly sells "Cotton Grey Duck" in the course of a business. (See section 16(2) of the Sale of Goods Ordinance (Cap. 26)). Nevertheless, Mr. Ho contended that one or both of the exceptions provided by section 16(2)(a) or (b) of Cap.26 apply to this case, because the seller indicated that "Cotton Grey Duck" was only good for its "ordinary use", the alleged defects were such as to be expected of such cloth and can be "visibly seen", and the buyer knew or ought to have known, from general experience and previous dealings, that such defects are likely to exist in such cloth. In my view, this argument is misconceived. The points made by Mr. Ho relate to the scope of the implied condition, and whether it has been broken, and not to the existence of the condition as a term of the contract. Indeed, I would venture to suggest that, only in the most exceptional case, could a seller bring himself within the exceptions to section 16(2) in the case of a contract for the sale of "future goods" in the sense of goods to be manufactured by the seller. Apart from the fact that I do not accept the suggestion that the buyer was told that the Cotton Grey Duck was "only good for its ordinary use" (whatever that may mean), I am satisfied that there was, in this case, an implied condition that the cloth should be of merchantable quality. A buyer may not be entitled to expect the goods to be 100 per cent perfect, unless he expressly stipulates to the contrary or can rely on some stricter condition implied by Cap. 26. But, that does not mean that he can never rely on the implied condition under section 16(2). The fact that something less than complete perfection may have to be accepted is only a guide to the question whether that implied condition has been broken.

8. Whether the cloth was of merchantable quality is, in my view, the crucial question in this case. It is not an easy question because it is complicated by the need to have regard to various aspects of the evidence and the legal meaning of this elastic expression. I have been referred to some of the decided cases, notably Brown & Son Ltd. v. Craiks Ltd. [1970] 1 W.L.R. 752 and Taylor v. Combined Buyers Ltd. [1924] N.Z.L.R. 627, upon which Mr. Ho particularly relied. I was also referred to Kendall v. Lillico [1969] 2 A.C. 31, but I have not had the benefit of detailed submissions, based on an extensive consideration of the views expressed in these judgments on the scope of this implied condition, or the effect thereon (if any) of the recent amendment to the Sale of Goods Ordinance, in the form of the statutory definition of "merchantable quality" now to be found in section 2(5) of Cap. 26. Before I consider whether this amendment of "the code" requires me to put aside previous "encrustations of authority" (cf. Kendall v. Lillico [1969] 2 A.C. 31 at 75), I consider that it is essential that I should come to findings of facts on the basis of the evidence in this case, as to the normal or common uses of Cotton Grey Duck.

9. It is, in my view, clear that the terms of the contract for the sale of Cotton Grey Duck (document A-1 of Exhibit D.1) did not specify any particular grade, quality, or suitability for any specific purpose, or its "end-use". As I have said, the buyer never made known to the seller that it intended to re-sell the cloth, after it had been treated, for making garments. Unless such purpose, or "end-use", is one for which Cotton Grey Duck is normally or commonly bought, I conceive that the buyer's counterclaim must fail. Although the evidence on this issue has been somewhat fragmented, and not as fully or amply explored as I would have wished, I consider that the differences between the seller and the buyer, which emerge from the evidence I have heard, can be stated simply in the following manner.

10. Whereas the buyer maintains that Cotton Grey Duck is commonly used for making garments, after it has been treated in various ways, the seller contends that it is ordinarily used for lining the bottoms or under-surfaces of sofas, for making pockets and interfacings of ordinary garments, and for making "funeral" clothes, as well as canvas bags, tents and beach umbrellas. Mr. Chow disagreed with the suggestion that the cloth he purchased from the seller was normally used for covering furniture or for funeral clothes because it was too expensive for such purposes. He later testified that Cotton Grey Duck intended for such purposes could be acquired much more cheaply from China or Pakistan. (In cross-examination of Mr. Lau, Mr. Choi suggested that Cotton Grey Duck, woven in Pakistan, could be bought in Hong Kong for $1.30 to $1.40 per yard. Mr. Lau disagreed with these figures, and professed ignorance of such cloth from those sources, or its availability in Hong Kong. However, there is no other "evidence" of the similarity of such cloth, or its availability or market price in Hong Kong at the material times). Mr. Lau, on the other hand, was only prepared to concede that the Cotton Grey Duck manufactured by the seller could be used for making garments "if a customer's requirement is low". But, he did agree that "in most cases" Cotton Grey Duck would be processed (in one or all of the ways carried out by Perfecta in this case) before eventual use, and that it was commonly used for soft furnishings, such as furniture covers, curtains, cushions, and table-cloths.

11. When considering whether goods are unmerchantable, I consider that one must take account of differences of degree in the tastes, preferences, or tolerance of defects on the part of buyers and eventual consumers, whose reasonable expectations may not accord with those undertaken by the original sellers or suppliers by their immediate contracts. The legal criteria show that it is ultimately an objective one, tested by what is reasonable in all the circumstances. But, in assessing the actual evidence in any particular case, I consider that the reasonable expectations of the parties cannot totally be ignored. In this particular case, I consider that the correct and proper decision on the issue of merchantability of the goods in question may depend upon which party's evidence I accept.

12. Having given the most careful consideration to all the evidence on this issue, I prefer that of Mr. Chow. Looked at in its entirety, I consider that it more probably accords with ordinary or usual commercial realities in this area of business activity. I think that I can understand Mr. Lau's reluctance or refusal to accept that the Cotton Grey Duck, produced by the seller over some 30 years, is normally only used for making garments, when a customer's requirement is low. But his apparent stubborn refusal to acknowledge that such material is commonly bought and used for such purposes is one which I feel unable to accept in the light of his own limited concessions and the evidence of his own expert, viz. Mr. Manchester. Although some customers' requirements may be low in relative terms of quality that does not mean that they must or are generally willing to accept goods which are actually defective in other respects.

13. Although Mr. Manchester did not inspect the cloth in question, his reasons for disagreeing with the opinion of Mr. NG Ka-kuen, to the effect that the cloth actually delivered would only be acceptable at a reduction in price of between 50% and 60%, were based in part on the fact that Cotton Grey Duck, after appropriate processing, can be, and is commonly, used for making garments. Accordingly, I am satisfied, and find as a fact, that one of the purposes for which Cotton Grey Duck is commonly bought is for making garments. Before it can be used for that purpose, it must be treated in one or more of the ways already mentioned. At the same time, on the evidence before me, I also accept that, in its original or "loom-state", it is normally used for other purposes.

14. I think that it might be useful to express my findings as to the purposes for which Cotton Grey Duck is commonly bought and used in somewhat different terms. On the basis of my findings, I consider that they can classified into four groups, as follows:-

Purposes (i) and (ii) relate to Cotton Grey Duck in its original or loom-state; purposes (iii) and (iv), assume that it will be dyed and subjected to other processing before final use.

15. Accepting for the time being Mr. Ng's evidence as to the nature and number of the weaving defects he found in his survey, I do not think that they would render the goods unfit for purposes (i) and (ii). They would not really affect the structural strength of the cloth, or its external appearance, (except to more fastidious buyers). But, if used for purposes (iii) and (iv), I think that a reasonable buyer would regard their presence as more serious. Mr. Lau conceded that the weaving defects would be more prominent or noticeable after the cloth had been processed. In the case of purpose (iv) they would affect the amount of wastage, and the extent to which it could be avoided or "missed in layout" (to adopt Mr. Manchester's words) in the final process. If used for purpose (iii), especially in the case of curtains and furniture covers, I consider that there would be little scope for avoiding wastage, unless the only defects were those of "wrong draw" occurring close to the edge of the cloth-length. I accept that the presence of these defects would not necessarily render the processed cloth unsuitable for purpose (iii), as it might still be marketable at a price commensurate with the actual cost of its production.

16. The other aspect of the second question depends upon my findings as to the alleged defects. On this aspect, I really only have the evidence of Mr. NG Ka-kuen, the buyer's expert, who conducted a survey of the goods in April 1980. The seller's expert, Mr. Manchester, was asked to carry out a survey at the same time, but did not do so because of the impossibility of identifying the origin of the cloth. As matters then stood, that decision was perhaps understandable. But it is, in my view, unfortunate that Mr. Manchester was not later asked to examine the cloth before the trial began. Mr. Ng's survey report (Document C-6) was made available to the seller's solicitors well before the trial began. The quantity of his random selection of samples was accepted by Mr. Manchester as normal or usual in the trade. One of the samples (Exhibit D4) was in court during the hearing, and could have been examined by Mr. Manchester before he was called as a witness. But, it was not until the afternoon of the fourth day of the trial, and after Mr. Manchester had begun his evidence, that Mr. Ho applied for an adjournment to enable him to examine that sample, and, perhaps, other samples. I refused that application because I thought that it would prejudice the fair trial of the issues in this case, and, inter alia, because I considered that the seller had unreasonably refused to take advantage of the opportunities for testing the accuracy or reliability of Mr. Ng's survey long before the trial began. I think that this refusal was largely due to Mr. Lau's somewhat stubborn unwillingness to accept that cloth produced by his company might contain defects on the scale indicated in Mr. Ng's report, and an unreasonable persistence in the belief that the defective cloth had not been supplied by the seller. The latter was vaguely raised as an issue by paragraph 11 of the Amended Reply and Defence to Counterclaim, but it was abandoned by Mr. Ho during his cross-examination of Mr. Chow. The later attempt to revive it, on the third day of the trial, was, in my view, indicative of the seller's unjustified attitude of not treating the buyer's complaints with the respect they deserved, and its failure to prepare its case properly in advance of the trial. In any event, I am satisfied, on the documentary evidence, that the defective cloth did come from the seller.

17. Accordingly, Mr. Ng's findings and conclusions could only be criticised on the basis that he reached them by an unduly rigid application of the "points system" for grading fabrics (see Exhibit D.3), and had failed to evaluate the major defects, such as "wrong draw" and "filling bar coarse", in the light of the various uses of Cotton Grey Duck. In my view, there is some substance in the first criticism, but I do not think that his assessment of the signiflcance of the particular defects in the cloth should be totally rejected. In all other respects, his methodology was not questioned and, unlike Mr. Manchester, he was able to see where these defects occurred in the samples he inspected. Some of these were pointed out to me, and Mr. Manchester, in the course of an admittedly cursory examination of Exhibit D.4, in court. Having seen their location, I felt unable to accept Mr. Manchester's suggestion that they could be avoided or "missed in lay-out", with very little loss or wastage. The "wrong draw" defects were not confined to the selvage, and those in the weft (i.e. "filling bar coarse") seemed to recur at regular intervals or spaces, about 12 to 18 inches apart, throughout the entire sample. Their presence may have left sufficient flawless cloth for cutting garments for very small children, but even if used for that purpose, I consider that there would still be substantial wastage. Accepting Mr. Ng's findings, as I do, I do not consider that the cloth was reasonably fit for making garments. Nor do I think that a reasonable buyer would regard it as acceptable for making soft furnishings, like curtains or furniture covers, where external visible appearance would be important to the saleability of the finished product, except at a substantial reduction in price.

18. There is very little evidence of the actual value of the cloth, either in its loom-state or in its processed state. It is common ground that the fact of having been dyed in various colours, would considerably reduce the purposes for which it could be used. Obviously, it could not be used for making funeral clothes. At the same time, I do not think that I can infer that it could only be re-sold at a "throw-away" price, in view of Mr. Ng's evidence that he would recommend acceptance, subject to a discount or price allowance of 50 to 60 per cent. This is a commonly accepted approach to valuing defective goods. (See Biggin & Co., Ltd. v. Permanite Ltd. [1951] 1 K.B. 422, at 439). Mr. Ng's suggested discount may be on the high side, but, in the absence of any other reliable estimate, I do not think that I can reject it as grossly excessive. In view of my finding that his evidence can be criticised on the narrow ground of too rigid application of the "points system", I consider that it would be fair and reasonable to accept his lower figure of a 50% reduction.

19. On the basis of my findings, I am satisfied that the cloth, in its processed state, was not reasonably fit for purposes (iii) and (iv), as indicated earlier in my judgment. In the same state, it might still be reasonably fit for purpose (ii) and for some of those in purpose (i), although the processing expenses would be wasted. In its loom-state it would more clearly be fit for purposes (i) and (ii). If the authorities which have been cited to me still determine the rights of the parties to the present dispute, the fact that the goods are reasonably fit for one of the purposes for which they are normally used, within the contract description, would be sufficient to dismiss the buyer's claim. But, apart from the question whether the principles expounded in those cases apply to goods which have physical defects, as distinct from mere defects in quality, I consider that section 2(5) of the Sale of Goods Ordinance has marginally enlarged the scope of a seller's obligation to deliver goods which are of merchantable quality. Whether goods are "merchantable" depends upon several factors, i.e. price, description, and other "relevant circumstances". In the context of this case, I consider that the fact that the buyer intended to subject the goods to dyeing and other processes, and to resell the finished product for making garments are "relevant circumstances" because I find as a fact that it was within the reasonable contemplation of the seller that the buyer was very likely to put the Cotton Grey Duck to such further uses. Although the contract did not oblige the seller to deliver the goods to Perfecta, or any person other than the buyer, I find as a fact that it was not uncommon for the seller to deliver Cotton Grey Duck direct to a dyeing factory. The examination, which a dyeing factory would be expected to make before processing the cloth, would be unlikely to reveal the defects which I am satisfied existed in this case, since they would not interfere with the dyeing and other processes. Furthermore, Mr. Lau conceded that the defects would be more apparent after the cloth had been subjected to further processing. Accordingly, I am satisfied that when the cloth left the seller's factory, the defects therein were not so patent or obvious as to make them reasonably discoverable by the buyer, even if he had examined them before they were dyed.

20. Although I have not had the benefit of any argument on the effect of section 2(5) of Cap. 26, I consider that it is more than a cosmetic attempt to declare the previous case-law. Firstly, it seems to me that the language of the statutory provision involves a slight, but real, change of emphasis, or shift, from the question whether the goods are commercially saleable to the question whether they are reasonably fit for the purpose or purposes for which they are commonly bought. In the majority of cases, this change or shift is unlikely to produce a different result. But, in the case of goods which are commonly bought for several purposes I consider that it is no longer sufficient for the seller to show that they are reasonably fit for one of such purposes, if it is reasonable, having regard to all the relevant circumstances, to expect them to be fit for other purposes. In this partifular case, I am satisfied that it was reasonable to expect the Cotton Grey Duck to be fit for use in making garments, after being dyed and processed. The defects I have found were, in my view, substantial and rendered the cloth unsuitable for such purpose, and possibly for other normal or common uses. Accordingly, I find that the seller was in breach of the implied condition as to merchantable quality.

21. According to section 55(3) of Cap. 26, the normal or prima facie rule, or approach to, assessing damages, is to award the buyer the difference between the value of the goods as warranted and their actual value at the contractual date for delivery. The evidence as to the relevant values at the relevant dates is regrettably scanty. According to Mr. NG Ka-kuen, the market price of Cotton Grey Duck in its "loom-state" remained fairly stable throughout 1979 at around $3.90 per yard. On the basis of a 50% price allowance or deduction, because of the defects, the buyer's loss would amount to $24,884.92 (i.e. 12,761.5 yards x $1.95). In his final address, Mr. Ho seemed to suggest that I should assess the market price of "loom-state" Cotton Grey Duck, free of defects at the date of delivery, at $4.30 per yard. This was the figure at which the buyer was able to re-sell some of the cloth to Go Win Textiles Company in October 1979 (see document C-3). The buyer was able to make this re-sale as a result of the fortuitous circumstance that, subsequent to entering into the contracts in March 1979, it was mutually agreed between the buyer and Wai Hing that the latter's requirements should be reduced by some 10,000 yards. Apart from the fact that sub-sales are normally regarded as irrelevant (cf. Slater v. Hoyle & Smith Ltd. [1920] K.B. 11), especially when there is other evidence of their warranted value, I do not think that I should accept this figure as the value of the goods, as warranted. The buyer may have been able to obtain the higher price because of its ability to make immediate delivery, instead of waiting for the cloth to be manufactured by the seller. Also, it seems distinctly odd, and possibly unjust, to assess the buyer's loss on the basis of a windfall which was never contemplated by the buyer or the seller at the time when they entered into their contract. Furthermore, I suspect that Mr. Ho was really relying on this re-sale, as justifying an inference that the rest of the cloth was not defective, or not so defective that it was unmerchantable. I have already found against him on this issue.

22. If I have understood Mr. Choi's submission correctly, an alternative approach would be to take the prices at which the buyer had already agreed to re-sell the processed Cotton Grey Duck to Wai Hing. The total amount of defective cloth (i.e. 12761.5 yards) must be sub-divided, because the dyeing charges and resale prices differ according to the colour of the processed cloth. For red cloth the dyeing charge was $2.10 per yard, and the resale price was $6.20 per yard. For navy blue and royal blue, the dyeing charge was $2.20 per yard, and the resale price was $6.40 per yard. (See documents B-3, B-11 and C-1). Of the total defective yardage, 5315.5 yards were dyed red; the rest was dyed navy blue and royal blue. Applying the price allowance of 50 per cent, the diminution in value, on this basis, would result in an award of $40,305.25. (Mr. Choi's calculation of $41,581.40 is, in my respectful view, erroneous since it is based on resale prices ($6.40 and $6.60) which are higher than those stated in the contract with Wai Hing. They appear to have been taken from erroneous additional notations on an "Order/Processing Sheet" (document B-7) addressed to Perfecta!)

23. I must confess that I find this approach, superficially at least, more attractive than those considered earlier, because, in my view, it comes closer to the basic object of damages for breach of contract, viz. to put the buyer, so far as money can do it, in the same situation as if the contract had been performed. I do so in this particular case because, on the evidence before me, I am satisfied that it was within the reasonable contemplation of the seller, at the time of the contract, that the buyer was buying with a view to re-sale, and that such resale would be carried out after the loom-state cloth had been dyed and subjected to the other processes, which were carried out in this case. Furthermore, in the light of Mr. Lau's concession or admission that it was quite common for the seller to deliver goods direct to a dyeing factory (although it was not bound to do so by its contract with the buyer) - a practice which, I think, is fairly standard in the context of the textile trade in Hong Kong - I do not think that the buyer can be criticised for failing to detect the defects in the goods before they were subjected to the dyeing and other processes carried out by Perfecta. In any event, in view of Mr. Lau's evidence that the defects in question would be more apparent after the cloth had been processed, I consider that the defects would not have been patent, obvious, or reasonably discoverable, if the buyer had examined the goods before they were delivered to Perfecta. The fact that the buyer may have waived its rights of reasonable examination of the goods, and its right to reject the same, does not prevent the buyer from claiming damages from the seller for breach of warranty. Nor do I consider that it affects or alters the basis on which the buyer's loss resulting from such breach should be quantified.

24. Nevertheless, I do not consider that this alternative approach offers a really satisfactory solution to the complex problem of quantifying the damages to which the buyer is entitled in this case. In the first place, it ties the assessment to the value of goods substantially different from those which the seller specifically agreed to sell to the buyer. The fact that I have concluded that, despite the narrow contractual description of the goods, the seller was in breach of the implied condition as to merchantability, does not mean that the loss occasioned thereby should be assessed in complete disregard of the feature of the contract between the seller and the buyer. The scope or extent of a seller's liability for breach of warranty or condition is not necessarily or obviously co-extensive with the amount which the innocent party can properly recover in the form of damages. If it were, there would be no justification for awarding nominal damages in one case, and substantial damages in another case, although the nature of the breach is the same in both cases. Secondly, although it may be reasonable to have regard to what the buyer intends to do to, or with, the goods in order to arrive at their value to him, I do not think that the price agreed with his buyer can be relied on as indicating the value of goods, which are to be subjected to some further processing. Furthermore, in a case like the present, the re-sale price of the ultimate product is likely to be based on delivery at a date or dates several weeks or months after the contractual date for delivery of the original goods, and other irrelevant considerations.

25. Having regard to my findings as to what was within the reasonable contemplation of the parties at the time of the contract, I do not think that the normal or prima facie rule for assessing damages for breach of warranty is appropriate to this case. On the basis of those findings, it was within the reasonable contemplation of the seller that the expenses of dyeing and processing the cloth would be rendered futile or wasted, wholly or in part, if the loom-state cloth was defective, and that the profit which the buyer ex-pected to get on re-sale of the finished product would, or was likely to, be lost, as indeed it was. In these circumstances, it seems to me that it would be appropriate to assess the damages to which the buyer is entitled by reference to its wasted expenditure ("reliance losses") and its loss of profit ("expectation loss").

26. The net profit which the buyer expected to receive from its contract with Wai Hing was 20 cents per yard in respect of red-coloured cloth, and 30 cents per yard in respect of blue-coloured cloth. "On the basis of the respective quantities of defective cloth, referred to earlier, I quantify the buyer's loss of profit at $3,296.90. (Mr. Choi's suggested figure of $5,849.20 is also based on the same erroneous figures mentioned earlier). In order to achieve or expect that net profit, the buyer had to spend $49,769.85 on purchasing the Cotton Grey Duck and $27,543.75 on having it dyed and processed. (Although Mr. Chow testified that these dyeing charges had not been paid to Perfecta, I accept the evidence of Mr. TSUI Chi-keung, the manager of Perfecta, that their bill was paid by the buyer. I attribute this discrepancy to faulty recollection on the part of Mr. Chow.) Accepting, as I do, Mr. Ng's recommendation of a discount or price allowance of 50 per cent, the buyer's reliance loss, in the form of capital expenditure wasted or rendered futile by the seller's breach, would, in my view, come to $38,656.80. (In view of the evidence that the mere fact of the cloth having been dyed in certain colours restricts the use or value of the defective cloth, it may be that more than half of the processing expenses should be treated as wasted or rendered futile as a result of the seller's breach. But, in the absence of more precise evidence of the value of the processed cloth left in the buyer's hands, I do not think that I should assess this aspect of the buyer's "reliance loss" at a higher figure). I consider that the buyer is entitled to recover both of these items of loss. Accordingly, I would assess the damages on the Counterclaim at $41,953.70.

27. In reaching my conclusion that the buyer's damages should be assessed at $41,953.70, I have not overlooked the case of Cullinane v. British "Rema" Manufacturing Co., Ltd. [1954] 1 Q.B. 292. Apart from thinking that it may be distinguishable on its facts, I do not think that it prevents a party to a contract combining his "reliance" and "expectation" losses in his claim for damages for breach of contract, so long as there is no element of overlapping or double recovery. That decision is not binding on me. Insofar as it suggests that the innocent party must elect between claiming reliance loss or expectation loss, and cannot claim both, it has been questioned. (Cf. Benjamin's Sale of Goods (2nd Edition: 1981) para. 1425; Treitel: The Law of Contract (5th Edition: 1979) p.695; McGregor on Damages (14th Edition: 1980) paras.44-46). There are other authorities which seem to support a combined claim, so long as double recovery is avoided. See Molling & Co. v. Dean & Son Ltd. (1901) 18 T.L.R. 217; Millar's Machinery Co., Ltd. v. David Way &SSon (1935) 40 Com.Cas. 204; Foaminol Laboratories v. British Artid Plastics [1941] 2 All.E.R. 393, and the highly persuasive authority of the High Court of Australia in T.C. Industrial Plant Pty. v. Robert's Queensland Pty. Ltd. [1964] A.L.R. 1083. Unfortunately, I have not had the benefit of any argument on these cases or many other aspects of this complex issue.

28. Paragraphs 7 to 10 of the Amended Reply and Defence to Counterclaim allege, in somewhat inaccurate and inelegant language, various acts amounting to waiver and/or estopped on the part of the buyer. Apart from the fact that Mr. Ho did not really deal with these matters in his final address, there is absolutely no evidence which comes anyway near to supporting such allegations. On the contrary, there is evidence, which I accept, that, in or about December 1979 or at some time before the Chinese New Year, the buyer did complain of certain weaving defects in other cloth supplied by the seller, but accepted the seller's then assurance that future deliveries would be in accordance with the contract. The buyer has not made those complaints the subject of this or any other litigation. The buyer's complaint about the cloth the subject of its present Counterclaim was made shortly after the delivery of the Cotton Grey Satin, but I am unable to agree with the suggestion that the buyer put forward, in bad faith, unfounded complaints about the Cotton Grey Duck in order to avoid, evade or delay its liability to pay for the Cotton Grey Satin. That liability was admitted by the Defence filed on the 9th May 1980 and in the letter from its solicitors dated the 16th April 1980.

29. Having already found that the defects could not reasonably have been discovered at the time when the Cotton Grey Duck was delivered to Perfecta, it is unnecessary for me to determine precisely when and where they were eventually discovered. Such a finding would have been necessary if the buyer had sought to recover, as part of its damages, compensation paid or payable to Wai Hing for breach of the sub-contract. But, in case this should go further, and for the sake of completeness, I am satisfied that the buyer first discovered the defects after the cloth had been dyed, but before it was delivered to Wai Hing. I am also satisfied that such discovery took place at Perfecta's factory.

30. I will now hear counsel on the form in which judgment should be given, and on costs.

Representation:

Mr. Kenneth Ho, counsel instructed by Messrs. Deacons for the Plaintiff.

Mr. Benjamin Choi of Messrs. Rowdget Young & Co. for the Defendant.

ORDER

31. Judgment for the Defendant in the sum of $24,253.70.

32. Plaintiff to have costs on the Upper Scale up to the 9th May 1980. Defendant to have costs on the Counterclaim on the Upper Scale.