Geekay Export & Import Co Ltd v. Granets Electronics Ltd

HCA008997A/1982

IN THE HIGH COURT OF JUSTICE

BETWEEN

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Coram: Hon. Mantell J.

Dates of Hearing: 22nd, 23rd, 25th and 28th May, 1984.

Date of Handing Down of Judgement: 14th June, 1984.

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JUDGMENT

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1. The plaintiff is a merchant company which, amongst other things exports fancy goods. The defendant is a company making electronic gadgets including what I think might be called novelty watches. One of the defendant's lines is a battery operated, liquid crystal, display watch which will do a number of things in addition to telling the time. One of them is to sound an alarm, which in the less expensive model is a single note, and this is called a single-alarm watch, and in the more sophisticated version is a medley of tunes and it is called a melody-alarm watch. The plaintiff is a family business run in the main by two brothers, Ram and Gopal Lalchandani, who will not be offended if I refer to them simply as Ram and Gopal. The managing director of the defendant is a Mr. Lai.

2. In December 1981, as I find, the plaintiff obtained samples from the defendant of both kinds of alarm watches. In giving evidence, Ram did not think so. His recollection was that he had got a dummy watch and some photographs. He must be mistaken, in my judgment, because it appears from the documents that the plaintiff was invoiced for the real thing. Contracts were entered into with buyers in London and Manchester. Later, on 13th February 1981, so as to meet their orders from England, the plaintiff agreed to buy from the defendant a total of 7,000 watches and 6,000 batteries. The watches were of both the single and melody alarm kind. There were two contracts which reflected the onward sales to the plaintiff's purchasers. They each bear the same date, 13th February 1981. Neither is expressed to be a contract for sale by sample. The watches and batteries were delivered between 9th and 23rd March 1981. They were forwarded to England. There is no evidence that any one from the plaintiff company examined the watches before sending them out. The goods were paid for by cheque on 3rd April 1981. By about May or June 1981, the plaintiff began to receive complaints from the English buyers. It was said that a number of watches had stopped working by which I mean that they ceased to have any display. The buyers were advised by the plaintiff to change the batteries but this was said to make no difference. I do not take these exchanges as any evidence of the condition of the watches; simply of the fact that the information reached the plaintiff. I have previously ruled against an application to put in a hearsay statement from one of the English buyers. Ram spoke on the telephone to a Miss Chu of the defendant company and also to the managing director, Mr. Lai. Mr. Lai told him that there was nothing wrong with the watches: but the complaints continued to come in. In about September, Gopal went to England. He visited his customers in London and Manchester. He examined some of the unsold watches. They had no display. He experimented by putting in new batteries. When he did so, the watches began to work; but after a few days, most of them had lost their display. Gopal asked his customers to do what they could to get the watches working in time for the Christmas market but when he came back to England in December after a visit to America, he was told that it had not been possible to repair the watches and he agreed to take them back. In all, 5,244 watches of both designs were returned by the English customers to the plaintiff in Hong Kong. On 13th February 1982, the anniversary of the making of the contracts between the plaintiff and the defendant, there was a meeting in Hong Kong attended by the Lalchandani brothers, Mr. Lai and Miss Chu. There is a dispute as to what took place. Ram and Gopal say that it was agreed that the watches should be tested with new batteries over a period of a month and if, after that time, at least 98% were still not working, the defendant would take back all of them at the same price for which they had been sold. Mr. Lai says that he simply agreed to fit new batteries for which the plaintiff would he charged. Whoever's recollection is right as to what took place at the meeting, it is common ground that nothing came of it except these proceedings in which the plaintiff claims damages for breach of condition.

3. The claim is somewhat loosely pleaded, but it has been accepted throughout that the allegation made in the Statement of Claim was that there had been a sale by description and by sample. In other words, it is said that it was a condition of the contract that the watches should correspond with the description given and also that the watches should correspond with the sample in quality. Surprisingly, no implied undertaking under section 16 of the Sale of Goods Ordinance is pleaded. The Defence admits that this was a sale by sample and further that it was an implied condition of the contract that (a) the watches should correspond in quality with the sample and (b) that the watches should be free of any defect rendering them unmerchantable which would not be apparent on a reasonable examination of the sample. Ram's evidence has been that this was a sale by description only and that he was simply shown a dummy watch and photographs. As indicated, I think he is mistaken about that and I am satisfied that working models were supplied.  In my judgment, these were, therefore, sales by sample; but they were also sales by description in that the watches were described as having certain functions, one of which was a liquid crystal display, so I find the following terms to have been included in each contract:

The only defect relied upon is the lack of any display in a substantial number of the watches. The Defence has been that although such a defect as alleged would render the watches unmerchantable that neither the sample nor the bulk were defective or if they were, then the sample must have shown up the same defect on reasonable examination so that there was no breach of section 17(2)(c). The second limb of the Defence, however, is not available if I find that the watches had no display as under section 15(1) of the Ordinance in a case of a sale by description as well as by sample, the goods must not only correspond with the sample but also with the description. In any event, I readily infer that even if present in a substantial proportion of the bulk of the watches, the defect could not have been apparent on reasonable examination of the sample. It is not clear from the evidence what happened to the samples; whether they were retained by Ram or sent on to the English buyers. But it is inconceivable that orders would have been placed with the defendant by the plaintiff or by the eventual purchasers in the United Kingdom if the sample watches were not working.  And from the evidence not as yet considered, it is apparent that some of the watches in the main order did work up to, at least, 15th July 1982. So the questions I have to answer are these:

4. As to the question of defect, it seems to me that the plaintiff relies upon evidence coming from four sources; Gopal in his observations on the visit to England in September 1981 which evidence I have already reviewed: an agreed laboratory report based on tests carried out on 13th and 14th July 1982: Mr. So, a watch manufacturer, who handled about 500 of the watches some time after July 1982: Mr. Mirpuri, also a watch maker, who examined two of the watches in about October 1983. The laboratory test was by S.G.S. Hong Kong Limited on 13th and 14th July 1982. It was carried out on a random sample basis. The first sample was a batch of 80 out of 2,644 Nentime Brand melody alarm watches. Of the 80, 19 had faults which do not feature in this case since it cannot be said that they were present at the time of delivery, but 79 were found to be without display. When the tester fitted 20 of the watches with new batteries, 12 started to work again but 8 remained blank. Of course, it is the plaintiff's case that even those which functioned after being fitted with new batteries cannot be counted reliable in the light of Gopal's experiments in England. On the other hand, applying the ratio 1 to 80 it would seem to follow that 34 of the 2,644 watches did not have any defect at the date of the examination and it must, as I find on the evidence, be the case that they had been running on the same battery since, at latest, 13th February 1982. The second batch of watches to be looked at was 1,991 Nentime Brand single-alarm model. Again ignoring irrelevant defects, it was found that out of the 80 examined, 34 had no display and of those, 20 were fitted with new batteries. Even then, 9 had no display. The same observations obtain as with regard to the first batch examined but once again, I must conclude that applying a ratio of 46 to 80, 1,145 of the batch must have had a display for the period 13th February 1982 to 13th July 1982 and, very probably, for much longer than that. There were 219 Eurosonic Brand melody-alarm watches of which a sample of 32 was taken. Ten of the watches had no display to begin with but when fitted with new batteries, 6 began to work. On the same basis as previsouly, that must mean that of that batch 150 were without fault. The last batch to be inspected was of 390 Eurosonic Brand single-alarm watches and a random sample of 50 was taken. Of the sample, 28 did not function before new batteries were fitted and afterwards, 5 were still not working. Therefore, I conclude that 172 had been working satisfactorily since before February 1982 at the latest. Two other matters arise from the agreed report: firstly, that some of the watches showed a display at inspection which disappeared later and secondly that on the face of it the consumption rate of the watches was excessive. I have not taken account of either matter as assisting the plaintiff because as to the first, it is possible that the watches which lost their display after the inspection had been working satisfactorily from the date of contract and as to the second because it is not altogether clear from the report what was meant. Mr. Se told me that he was in business as a manufacturer of watches. Sometime in 1982, he received 10 of the watches from the contract from the plaintiff to see whether or not he could find a buyer. They were not working. He put in new batteries and they started to work but in most instances, he told me, lost their display after a few days. He put that down to what is called "high drain of battery" such as might be caused by a short and he asked me to observe that the watches are of a very slim design with no insulation between case and battery. Mr. Mirpuri is also an experienced watch manufacturer. He was given 2 watches to look at in about October 1983. His experience was the same as Mr. So's. With new batteries fitted, the watches worked for a few days and then gave out. His view also was that it was caused by high drain and he saw the only solution as being to re-design the watch cases and also to use a larger battery.

5. Against the evidence called by the plaintiff was that of the defendant's production manager, Mr. Wong, and the defendant's managing director, Mr. Lai. Mr. Wong described exhaustive quality control tests which he said had been carried out by the defendant company under his supervision and, if observed meticulously, one would have thought must certainly have eliminated the possibility of any defective watch ever being sent out. Mr. Lai's evidence was also to the effect that the watches must have been in good working condition at the date of delivery. There was also the evidence of Tang Shin Wan, a scientist who gave me some valuable background information but not any evidence as to tests which he might have carried out. Indeed, it is a fact that the defendant has not only not carried out any tests on these watches since complaint was made but then have never sought the opportunity to do so. Mr. Tang did say, however, confirming other evidence that L.C.D. watches have, in any event, a limited life span.

6. On all the evidence, I am satisfied that a great many of these watches were defective in the sense that they either never did have a display or if they did, it was of very limited duration. I am satisfied that the fault was due to their design which in many instances caused excessive drain of the battery leading in some cases to the watches not working at all and in others to a rapid fading and eventual disappearance of the display. Doing the best I can on the basis of all the evidence I find that altogether 2,679 melody-alarm watches and 1,054 single-alarm watches were defective in the way alleged.

7. I am satisfied that that defect was such as to render the watches as a whole unmerchantable and, prima facie, to put the defendant in breach of the condition that the goods should be free from defect rendering them unmerchantable. Prima facie, the plaintiff would have been entitled to reject the goods. The second question is, therefore, has the plaintiff by accepting the goods now lost the right to reject the goods? I think so. I find that the plaintiff had a reasonable opportunity of examining the watches, had it chosen to do so, and therefore, putting together section 36(1) and section 37 of the Sale of Goods Ordinance, by accepting delivery and selling on the watches to customers in England, the plaintiff must be deemed to have accepted the watches and has, thereby, lost the right to reject them. The plaintiff's only available remedy is in damages.

8. So I now turn to the third question. What is the appropriate measure of damages in the instant case? Where goods are of unmerchantable quality, there are two distinct principles with regard to damages, the application of which, in my judgment, does not lead to any conflict. The first has statutory expression in section 55(2) and 55(3) of the Sale of Goods Ordinance and the second is the general principle at common law that the plaintiff, in this case the buyer, is bound to mitigate his loss.

9. Section 55 sub-sections (2) and (3) provides:

Here, both parties to the contract knew that the goods were destined for a foreign market and there was bound to be a substantial delay before the plaintiff would be able to recover and resell them. Both parties knew that the value of the watches would diminish with the passing of time. In my judgment, the loss directly and naturally resulting in the ordinary course of events is not the difference in value at the date of delivery which, prima facie,  might have been the position had the watches remained in the possession of the plaintiff but the difference in value between the watches as sold to the buyers in England and the value of the watches in the condition they were in at the earliest date by which the plaintiff could be reasonably expected to recover possession and offer them for resale. In my judgment, that was after 13th February 1982 when negotiations between the plaintiff and the defendant broke down, and it is with reference to that date that damages fall to be assessed. Nor is any different result arrived at, as I find, by applying the general rule that the plaintiff is bound to mitigate its loss. For exactly the same reason, I would find that the plaintiff was under a duty to resell the watches at the best price available as soon as it became aware that no other satisfactory solution was to be found. So how much were the watches worth immediately after 13th February 1982? According to Mr. So, there was a market for the watch straps at HK$2 each. Mr. Mirpuri told me that the watches which were defective could have been made to work by altering the design. That would have involve some enlargement of the case and possibly the use of more powerful batteries. He thought that at the time he looked at the watches in late 1983, the cost of the watch would be about HK$5 and once adapted they might be worth HK$18 each Mr. Lai told me that after repairs, on the assumption that some were necessary, the melody-alarm watches would have been worth US$7.50 in February 1982 and the single-alarm watches US$6. He told me that the cost for repairing the melody-alarm would have been US$1.50 and the single-alarm US$1. Of course, any estimate based upon selling the watches with all faults or repairing them and selling thereafter presupposes that there was an available market for such watches in February 1982. There has been no evidence before me that there was and although I am conscious of the fact that lack of evidence in itself does not relieve the court of an obligation to assess the market value of the defective goods, nevertheless, if as I find there was no available market and remains none, it is impossible to give the defective goods any market value at all. Certainly, I am quite satisfied that there is none for the watches so long as they do not work and I do not hold that there was any duty upon the plaintiff to undertake the cost and risk of repairing the watches without first ascertaining the existence of a market. Consequently, so far as the defective watches are concerned, I do not think that it can be said that there was any failure to mitigate and applying section 55(2) of the ordinance, I conclude that the damage suffered by the plaintiff in respect of those watches which I find to have been defective in February 1982 is the whole of their loss of profit; that is to say the difference between the buying price from the defendant and the selling on price to the United Kingdom customers. But there remained in the plaintiff's possession from February onwards a quantity of watches which I have found were not defective. I find on the evidence before me and on a balance of probabilities that there was a market for those watches. The only evidence I have as to the value of the watches at the relevant time comes from Mr. Lai which was as I have indicated that the melody-alarm watches were worth US$7.50 and the single-alarm watches US$6. In my judgment, the plaintiff was under a duty to get  the best price he could for them. Therefore, with regard to those watches which were not defective in 1982, by which I mean those which still had a display when examined in July 1982, the plaintiff is not entitled to recover more than the difference between the on-sale price and US$7.50 in the one case and US$6 in the other. In other words, the plaintiff's claim falls to be reduced by the value of those watches. On my findings there were 184 melody-alarm watches in total which at US$7.50 each were worth US$1,380 and 1,327 of the single-alarm watches at US$6 each were worth US$7,902 making a total of US $9,282. On the evidence before me, the straps from the defective watches could have been sold at HK$2 which equalled US$1,283 at 13th February 1982. From the loss of profit claimed, therefore, there must be deducted US$11,565 giving an entitlement to US$33,220.83. I also hold that the plaintiff is entitled to recover the surveyor's charges of HK$4,891.40 and the cost of bringing the watches to Hong Kong from England of HK$4,407.35. In all, therefore, the plaintiff is entitled to judgment in the sum of US$38,220.83 and the sum of HK$9,298.75. Since I am handing down judgment, I believe, there should be liberty to apply in relation to my arithmetic.

10. There is one further matter which is the subject of a set off and counterclaim. It is said quite rightly that the proper conversion rate in the ordinary way from Hong Kong to U.S. dollars would be that prevailing at the time of delivery. Ram told me, however, that there was an agreement between himself and Miss Chu made on 3rd April that the rate current at that date should be the one used. He recorded the fact in his ledger and he told me that he showed Miss Chu his calculations. That evidence is uncontradicted. The express agreement replaces the ordinary rule and counterclaim must stand dismissed.

11. I make an order nisi for costs in the plaintiff's favour on both the claim and counterclaim.

Representation:

Petrus Chan (Edward C. T. Wong & Co.) for Plaintiff.

Nicholas Pirie (Wong, Hui & Souza) for Defendant.