Chan Yin Kwan t/a Qifeng Foods Co v. Glory Trading (HK) Ltd

DCCJ 7851/2002

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 7851 OF 2002

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BETWEEN

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Coram: Her Honour Judge H.C. Wong in Court

Dates of Hearing: 19^th - 21^st January 2005, 4^th February 2005

Date of Handing Down Judgment:  13^th April 2005

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JUDGMENT

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1.The Plaintiff claims against the Defendant for damages and loss suffered as a result of the Defendant’s supply of skinless chicken drumstick portions.

2.The Defendant denies that the agreement of purchase was for chicken drumstick portions with skin, meat and bone.  It claims that it was neither an expressed nor implied term of the agreement that drumsticks would be sold with skin.

The Plaintiff’s case

3.Qifeng Foods Company is a company incorporated in mainland China wholly owned by Miss Chan Yin Kwan (“Miss Chan”) who is a resident of mainland China.  The Plaintiff’s principal place of business was in Da Lo Tong of Panyu County of Quangdong province in the PRC.

4.Miss Chan began importing frozen meat into China since 1999.  She placed orders of frozen meat from a number of suppliers supplying imported frozen meats in Hong Kong and mainland China.  On 9^th July 2001, she placed an order for 1179 cartons (23.58 metric tons) of Tyson 0250 lower chicken drumsticks 「泰臣雞下脾0250」from the Defendant (“the first order”).  The manufacturer of the product was Tyson Foods in the U.S.A.  Upon placing of the order, the Defendant requested Tyson Foods in the USA to ship the said order to Hong Kong.  Upon arrival in Hong Kong, the merchandise ordered would be handed over to a designated transportation company authorised by the Plaintiff.  The goods would then be delivered to a designated warehouse in Panyu.

5.On 21 March 2002, the Plaintiff placed a second order for 22 metric tons (1,100 cases) of the same Tyson 0250 chicken drumsticks from the Defendant (“the second order”) at a price of $110,000.  The sale price was subsequently reduced to $107,524.  On 31 May 2002, the Plaintiff was informed by the Defendant of the arrival of the merchandise in Hong Kong, and to take delivery through an authorised transport firm to her designated warehouse in Panyu.  Upon inspection of the said merchandise in Panyu, the Plaintiff found a high percentage of the drumsticks to be without skin.

6.It is the Plaintiff’s case that skinless chicken drumsticks have no market in China for her usual customers were operators of canteens, factories and small food shops and stalls.  She had great difficulties selling to her usual customers and was forced to find new customers and sell them at a reduced price.

7.It is the Plaintiff’s case that Tyson Foods is well known in China and it had distributed leaflets of its products all over China promoting in particular its frozen chicken products.  An example of these leaflets was produced by Miss Chan on pp. 64 and 65 of the bundle which were distributed in Panyu County.  The Defendant did not challenge that they were distributed in mainland China by Tyson Foods.  As these leaflets were widely advertised in China, Miss Chan claimed that her customers knew the Tyson products well.  It was also Miss Chan’s evidence that she had purchased the same 0250 Tyson chicken lower drumstick on a number of occasions from other dealers before she placed the second order from the Defendant and she had never been sold skinless chicken drumsticks before.  She insisted that the merchandise delivered was not what she ordered.  She further claimed that the Defendant well knew the skinless chicken drumsticks were unusual and not acceptable to the Plaintiff.  She also relied on the promotion leaflet on p.64.  The description of the order of “0250” was “miscellaneous chicken drumstick” 「雞雜脾」on the invoice and “chicken leg portion”「雞腿塊」on the promotion leaflet.

8.It is the Plaintiff’s case that it was an implied term of the agreement that the chicken drumsticks ordered should be drumsticks with the skin intact.  She claimed that since it is usually accepted that chicken drumsticks have skin, it is not necessary to specify it in the order.

9.Miss Chan’s evidence was that Tyson grade A chicken drumsticks consisted of perfectly and uniformly cut drumsticks, while product code 0250 is a cheaper product, the cut of the drumstick being not uniform.  In her experience as a wholesaler, Tyson chicken drumsticks code 0250 always had skin.  It is also the Plaintiff’s case that the Defendant well knew the said goods would be sold for purposes of frying and therefore are expected to have skin, bone and meat attached.  It was also a warranty of quality and fitness with the agreement between the parties.

10.As the Plaintiff had paid for the goods ordered in full in late May 2002, she had no choice but accept the delivery of the goods which she inspected on 4 June 2002.  It was also her evidence that when she informed Mr. Chung Tin Ming of the Defendant the day after her inspection of the goods in Panyu, Mr. Chung admitted there was a problem and agreed to send a representative to inspect the goods and liaise with Tyson Foods Hong Kong office over the matter.

11.After the inspection by the Defendant’s representative, Miss Chan claimed the Defendant agreed to reduce the price of the goods by HK$400 per ton, the offer was subsequently increased to $650 per ton.  Miss Chan rejected the offers for being too low for she had paid $4,800 per metric ton for the 22 metric tons of chicken drumsticks to be transported and imported into mainland China.  The cost of $4,800 per ton was inclusive of transport and import duty and permit.

12.It was Miss Chan’s evidence that the transportation, import duty and permit of frozen chicken products charges fluctuated at different times of the month depending on market supply and demand.  The variation could be between $1,800 and $6,000 per ton.  She was not able to find a transportation firm to deliver the goods to Panyu after the goods arrived in Hong Kong at the end of May 2002 and she enlisted the help of the Defendant who was able to find a transport firm for her at a charge of $4,800 per metric ton.  Because of the high costs of transport and import permit, the Defendant agreed to give her an over-all reduction of $10,000 for the said order.

13.The Plaintiff eventually sold the 22 metric tons of skinless chicken drumsticks to various purchasers at a loss.  She now claims compensation from the Defendant.

The Defence Case

14.It is the Defendant’s case that the Plaintiff’s order was for miscellaneous chicken drumstick portions, but it was not specified if the drumsticks were to have skin attached.  The Defendant denied there was either an expressed or implied term in the agreement.

15.The Defendant further claimed that even if there was a breach of term in the agreement, the Plaintiff should have started to sell the chicken drumsticks as soon as possible to mitigate damages.  It further claimed that the Plaintiff had lodged her claim for $280,557.55 in September 2002, later it transpired that the Plaintiff had began to sell some of the goods since August 2002.  However, her sale records were not produced in these proceedings.

16.The Defendant claimed to be a well-established trading company in Hong Kong with a good reputation for over 20 years.  It claimed the Plaintiff had failed to prove what was Tyson’s product code ‘0250’.  The Defendant denied the advertisement pamphlet exhibited by the Plaintiff became a term of the contract between the parties.  The Defendant further denied there were any implied terms, under the said contract that the Tyson ‘0250’ must contain chicken skin.  There was, further, no proof that Tyson product ‘0250’ would consist of chicken drumsticks with skin.

Findings

17.There was no evidence adduced from Tyson Foods, the manufacturer, by either the Plaintiff or the Defendant as to what Tyson Foods product code ‘0250’ consisted of.  The Plaintiff relied on her 3 years experience in the trade, her previous transaction with the Defendant of the same product and the leaflets she collected in mainland China advertising Tyson’s chicken products.

18.Miss Chan insisted that she had ordered Tyson product ‘0250’ on many occasions from various suppliers, and the Defendant was only one of them.  That on all these previous occasions, Tyson ‘0250’ chicken lower drumsticks all had skin attached.  The goods delivered on this occasion were most unusual.  The fact that a high percentage of the chicken drumsticks delivered were without skin had been verified and supported in the 25 July 2002 report of SGS Standards Technical Services Ltd.  The Defendant does not dispute this fact.

19.The issue therefore is whether it was an implied term and /or warranty of the agreement between the parties that the said goods should have skin, should be of merchantable quality and should be fit for its purpose namely for resale in mainland China as frying chicken drumstick portions.

20.The contract of sale between the parties can qualify as a contract of sale by description, namely product code ‘0250’ and the description chicken drumstick portions 「雞腿塊」, or 「雞下腿」.  As there was no evidence of definition of the Tyson product code ‘0250’ or the term 「雞腿塊」 from the manufacturer Tyson Food Products, the Court has before it only the evidence of the Plaintiff’s and the Defendant’s witnesses, it is bound and limited to the evidence adduced on the contract and the common interpretation of the term 「雞腿塊」.

21.S.15 of the Sale of Goods Ordinance Cap. 26 states that :-

“15.  Sale by description
	(1)	Where there is a contract for the sale of goods by description, there is an implied condition that the goods shall correspond with the description; and if the sale is by sample, as well as by description, it is not sufficient that the bulk of the goods corresponds with the sample if the goods do not also correspond with the description.
	(2)	A sale of goods shall not be prevented from being a sale by description by reason only that, being exposed for sale or hire, they are selected by the buyer.”

22.Under s.15, the goods sold must correspond with the description.  Unfortunately, the description given under this contract failed to specify whether the goods should come with skin attached.  On the other hand, neither did it specify that the goods should have meat or bone attached.  Does it then mean the buyer should accept a delivery of chicken drumstick portions that had no meat on the bone of the chicken drumstick?  This brings in s.16 of the Ordinance.

23.s.16 of the Ordinance provides that :

“16.  Implied undertakings as to quality or fitness
	(1)	This section provides for the circumstances in which, and the extent to which, there is any implied condition or warranty as to the quality or fitness for any particular purpose of goods supplied under a contract of sale.
	(2)	Where the seller sells goods in the course of a business, there is an implied condition that the goods supplied under the contract are of merchantable quality, except that there is no such condition –
		(a)	as regards defects specifically drawn to the buyer’s attention before the contract is made; or
		(b)	if the buyer examines the goods before the contract is made, as regards defects which that examination ought to reveal; or
		(c)	if the contract is a contract for sale by sample, as regards defects which would have been apparent on a reasonable examination of the sample.
	(3)	Where the seller sells goods in the course of a business and the buyer, expressly or by implication, makes known to the seller any particular purpose for which the goods are being bought, there is an implied condition that the goods supplied under the contract are reasonably fit for the purpose, whether or not that is a purpose for which such goods are commonly supplied, except where the circumstances show that the buyer does not rely, or that it is unreasonable for him to rely, on the seller’s skill or judgment.
	(8)	Except as provided by this section and section 17, and subject to the provisions of any other enactment, there is no implied condition or warranty as to the quality or fitness for any particular purpose of goods supplied under a contract of sale.”

24.It is the Plaintiff’s case that it was within the Defendant’s knowledge that the purpose of her purchase of the goods was for resale in mainland China to small restaurants and food stalls as frying chicken drumsticks.  Consequently, the goods delivered to the Plaintiff being without skin could not be sold to her usual customers and had to be sold at a cheaper price to different customers and at a different market.  This, the Defendant disagreed with.  According to the Defendant, grade B chicken drumsticks are wrong-cut chicken drumsticks that failed to make the quality of grade A.  Therefore, skinless chicken drumstick portions belonged to this category as with those bits and pieces with or without bones and so on.

25.I find this argument to be contradicted by the descriptions and pictures on the leaflets produced by the Plaintiff exhibited in the bundle on pp. 64 and 65.  The descriptions in Chinese of Tyson chicken products on p.64 are as follows:

“雞腿塊，翅塊，

快熟琵琶腿

泰臣雞腿塊，翅塊，亦是經過同樣之高科技和品質控制而生產的。只因機器切割位置不符，故特價發售。這些產品均價廉質優，經濟實惠，是普通消費力市場所推崇之“珍品”。

and the description on p.65 is as follows:-

“鳳爪，翅尖，雞尾

雞頸，鳳爪竿

泰臣開發產品之宗旨，一向以顧客及市場為中心。為應市場之需求，積極發展中國人所喜好之各類雞副產品。泰臣以先進之設備和技術，在多個工廠加工生產極為適合中國人口味之食品 – 鳳爪，翅尖等。致力發展中國市場，泰臣不斷努力改良產品及服務質素，從成立香港辦事處、招聘經驗豐富之職員，以至印制中、英文產品標簽等，都証明泰臣對開發產品及亞洲市場之嚴謹及關懷之態度。”

26.It is obvious that they were promotion leaflets from the manufacturer Tyson Food Products.  The reference to 「雞腿塊」referred to chicken drumstick portions being wrongly cut by machine.  There was no reference on the p.64 leaflet that the chicken drumstick portions and wing portions were bits and pieces of rejects.

27.The Defendant’s witness Mr. Chung Tin Ming pointed out in Court that the ‘0250’ chicken drumstick portion technically also included parts of the chicken leg shown on the plate in p.65.  I find that explanation unconvincing, it cannot be an accurate inclusion of 「雞腿塊」, for p.65 made references to this part as the ‘chicken feet stem’ 「鳳爪竿」.  These were described as a by-product manufactured for the Chinese market.  P.65 were obvious products different and separated from those described in p.64.  Clearly, the manufacturer had no intention to disguise chicken feet as chicken drumstick by referring to them as category B chicken drumstick portions.  This showed either the ignorance of Mr. Chung of the product his employer was selling or simply that he was not being truthful in his evidence in Court.

28.As the Defendant admitted to have been in the business of supplying Tyson products for many years and Mr. Chung had been the Defendant’s sale co-ordinator for 6 years, Mr. Chung should know Tyson products well.  His evidence that sometimes ‘chicken feet stems’ 「鳳爪竿」 on the plate in p.65 would also be thrown in as grade B product because Americans are “absent-minded” is totally unconvincing.  His evidence is also inconsistent with the Defendant’s subsequent conduct such as sending a representative to inspect the goods at the Plaintiff’s warehouse in Panyu after the Plaintiff complained to Mr. Chung the day after the inspection and negotiating with the Plaintiff.

29.Mr. Siu, counsel for the Defendant, referred me to paragraph 11-017 on p.480 of Benjamin on Sale of Goods 6^th edition:

“11-017

Indications of purpose.  Again, a stipulation that goods are suitable for a specific purpose will usually be held not to be part of the description, for otherwise there would be no need for section 14(3) of the Sale of Goods Act.  But the general purpose for which goods are to be used may sometimes be an element in their description; thus it has been suggested that goods described as oysters which were not fit for human consumption might not conform with their description, and it is submitted that goods described by such terms as “baby food”, “cough mixture”, “cold cure” would not conform with description if they proved totally unsuitable to the purposes indicated by those words.”

He submitted that there is no implied term in the agreement that Tyson product ‘0250’ must contain chicken skin.  He relied on the well-known requirements for implying a term in a written contract of Lord Simon in the Privy Council case of BP Refinery (Westernpoint) Pty Ltd. v. Shire of Hastings (1978) 52 ALJR 20 at p.26 “….for a term to be implied, the following conditions (which may overlap) must be satisfied : (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that “it goes without saying”; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract.”

30.Lord Simon’s test has been adopted by the Hong Kong Court of Final Appeal in the case of Kensland Realty Ltd. v. Whale View Investment Ltd. & anor. [2002] 1 HKLRD 87 at p.106. 

31.I find Lord Simon’s test has been complied with in the Plaintiff’s case.  That the sale of chicken drumsticks described as 「雞腿塊」 or 「雞下脾」though no specific references to skin, meat or bone were made, the usual understanding of such a description should be drumsticks with skin attached is both reasonable and equitable for it is a logical conclusion that the chicken drumsticks must come with skin attached similar to the understanding that the drumsticks should come with meat attached.  Otherwise, it would be rendered meaningless.  In fact, it should be specified that skin or bone had been removed if the product was to be skinless or boneless.  It also gives business efficacy to the contract, for skinless drumsticks would be difficult to sell in the mainland China market; this is something within the Defendant’s knowledge.  It is an obvious assumption for the buyer and there are no terms in the contract to contradict this assumption.

32.As to the acceptability test, paragraph 11-033 of Benjamin on Sale of Goods has this to say:

“11-033

Two types of test.  The attempts to formulate test can be divided into two groups: those that based themselves more generally on the notion that the goods must be acceptable to a reasonable buyer, and those that concentrated more specifically on the notion of fitness for purpose, and thus ran close to the provisions of (what is now) section 14(3).”

33.The merchantable quality test according to Benjamin on Sale of Goods paragraph 11-038 is:

“11-038

Fitness for purpose: test of Lord Wright.  In Cammell Laird & Co. Ltd. v. Manganese Bronze and Brass Ltd, Lord Wright said: “What subsection (2) now means by ‘merchantable quality’ is that the goods in the form in which they were tendered were of no use for any purpose for which such goods would normally be used and hence were not saleable under that description.”

34.I agree with Miss Gwilt’s submission that the test is whether the chicken drumsticks could be used as frying chicken drumsticks to be sold in the mainland China market.  It is a market well known to the Defendant as a major supplier of Tyson products for 20 years. 

35.I find the Plaintiff to be an honest and pragmatic business- woman.  She gave her evidence in a straightforward and direct manner.  I am satisfied she was telling the truth.  I find on the evidence before me and based on the Ordinance there was an implied warranty and undertaking as to quality and fitness. I find the Defendant to have breached the warranty for quality and fitness for purpose.

36.Under s.36 of the Sale of Goods Ordinance Cap. 26, the Plaintiff has the right to be given reasonable time to inspect the goods.

“	36.  Buyer’s right of examining goods
	(2)	Unless otherwise agreed, when the seller tenders delivery of goods to the buyer, he is bound, on request, to afford the buyer a reasonable opportunity of examining the goods for the purpose of ascertaining whether they are in conformity with the contract.
	37.  Acceptance of goods
	(2)	Where goods are delivered to the buyer, and he has not previously examined them, he is not deemed to have accepted them under subsection (1) until he has had a reasonable opportunity of examining them for the purpose –
		(a)	of ascertaining whether they are in conformity with the contract; and
		(b)	in the case of a contract for sale by sample, of comparing the bulk with the sample.
	(3)	The buyer who deals as consumer cannot lose his right to rely on subsection (2) by agreement, waiver or otherwise.
	(4)	The buyer is also deemed to have accepted the goods when after the lapse of a reasonable time he retains the goods without intimating to the seller that he has rejected them.”

37.The evidence showed that the Plaintiff had paid for the goods soon after their delivery; she did not return the goods to Hong Kong.  The reason is probably because she had paid a great deal of money to obtain the import permit and had them delivered to China, she would have lost the permit and transport fees had she returned the rejected goods to Hong Kong.

38.In any event, under s.38 of the Ordinance, she is not bound to return the rejected goods.  And, as she had already paid for them, she obvious decided to negotiate with the Defendant on the loss suffered by her.  When she failed to obtain a satisfactory resolution with the Defendant, she decided to mitigate her loss by selling them.  I find her actions to be reasonable and she had acted within s.55 of the Sale of Goods Ordinance.

39.s.55 provides that:

“55.  Remedies for breach of warranty
	(1)	Where there is a breach of warranty by the seller, or where the buyer elects, or is compelled, to treat any breach of a condition on the part of the seller as a breach of warranty, the buyer is not, by reason only of such breach of warranty, entitled to reject the goods; but he may –
		(a)	set up against the seller the breach of warranty in diminution or extinction of the price; or
		(b)	maintain an action against the seller for damages for the breach of warranty.
	(2)	The measure of damages for breach of warranty is the estimated loss directly and naturally resulting, in the ordinary course of events, from the breach of warranty.
	(3)	In the case of breach of warranty of quality, such loss is prima facie the different between the value of the goods at the time of delivery to the buyer and the value they would have had if they had answered to the warranty.
	(4)	The fact that the buyer has set up the breach of warranty in diminution or extinction of the price does not prevent him from maintaining an action for the same breach of warranty if he has suffered further damage.”

40.The Plaintiff is therefore entitled to recover the loss and damage suffered including the difference between the actual value of the goods at the time of delivery to the buyer and the value they would have had if they had honoured the warranty of quality and fitness for purpose.

Quantum of damages

41.The Plaintiff’s evidence on the value of the said goods was that she had tried to sell the goods as best she could.  Not only did she fail to sell them at a profit, even at a reduced rate of RMB¥7,000 and ¥6,500 per metric ton, they could not be sold.  It was her evidence that the price of chicken drumsticks fluctuated in mainland China and she had been anxious to mitigate her loss.  She produced a letter from one of her customers on p.69 of the bundle that skinned chicken drumsticks have a very limited market in China.

42.I am satisfied the Plaintiff had shown that chicken drumsticks without skin have a limited market, therefore, the Plaintiff found it difficult to sell the said goods.  It is further reasonable for the Plaintiff to obtain an inspection report in July after negotiations with the Defendant failed and that she had tried her best to sell the goods in the open market at the best price she could get at the time.

43.There was no evidence from the Defendant to contradict the Plaintiff’s evidence on the sale price of skinless chicken drumsticks in Panyu over a period of 9 months between August 2002 and May 2003.  I am satisfied that she had tried to get rid of these goods at an open market price for the skinless drumsticks, and that she had mitigated her loss by RMB¥109,832.

44.The Defendant claimed that the Plaintiff had failed to prove she had sold these skinless chicken drumsticks at the prices she claimed they were sold as no receipts have been produced.  On the other hand, it claimed the Plaintiff had sold them at a profit for she sold them at RMB¥109,832 which was equal to HK$103,615.09 at an exchange rate of HK$1 to ¥1.06.  She had paid the Defendant HK$101,200 for them.

45.It is well known to the Defendant that the Plaintiff had to pay for the import duty permit and transportation charges at $4,800 per metric ton.  The Plaintiff’s loss was due to the Defendant’s delivery of the chicken drumsticks ordered was without skin attached, and it was the direct cause of the Plaintiff’s failure in selling the goods at the optimum time.  As a result, the Plaintiff’s loss is consequential to the Defendant’s breach of warranty of quality and fitness.

46.I am satisfied the Plaintiff suffered the following losses:

Storage fee from 31/5/02 – 8/12/02	¥12,671.00
(at HK$1 = RMB¥1.06)	($11,953.77)
Transportation and custom duties	¥105,315.00
	($99,353.70)
Inspection Report fee	¥3,000.00
	($2,830.00)
	¥120,986.00
	($114,137.72)

47.The Plaintiff claims that she would have made a profit had the Defendant delivered chicken drumsticks with skin attached which are of the same quality as the first order.  As she failed to quantify the profits she would have made, I shall make no award of such loss.  On the other hand, the Defendant claimed that the Plaintiff did make a small profit on the resale of $2,415.09.  I shall take this small profit into account and make a deduction accordingly $114,137.72 - $2,415.09 = $111,722.63.

48.The Plaintiff is entitled to recover the judgment sum of HK$111,722.63 with interests from the date of writ to the date of judgment at half judgment rate and thereafter at full judgment rate.

49.Costs nisi – Costs to follow the event.  Costs shall be borne by the Defendant to be taxed if not agreed with certificate for counsel.