李雪梅前經營身美顏美容創意室 v. 黃華、陳振山經營香港第一村貿易公司 前稱第一村貿易公司

DCCJ2277/2003

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 2277 OF 2003

Coram:  Her Honour Judge C B Chan in Court

Dates of Trial:  3rd, 4th and 7th March 2005

Date of Judgment: 29th April 2005

J U D G M E N T

1.The plaintiff claimed against the defendants in the Small Claims Tribunal in the sum of $30,000.  This is a sum paid by the plaintiff to the defendants and was applied as the deposit for a sole distributorship agreement between the parties herein dated 1 August 2002.  Hereinafter I will refer to this as the “Sole Distributorship Agreement”.  By the Sole Distributorship Agreement the defendants authorised the plaintiff to distribute and sell 康美 100% natural aloe vera juice.  The Sole Distributorship Agreement is at page 9 of the bundle of documents (“BD”). 

2.Clause 1 of the Sole Distributorship Agreement states:

“1.  甲方授權乙方在香港特別行政區獨家分銷康美蘆薈原汁，在合約有效期內，甲方不得以任何形式，向該地區的第三者銷售或供貨，乙方不得越區銷售。”

3.It is the plaintiff’s case that the defendants breached clause 1 of the Sole Distributorship Agreement.  At the Small Claims Tribunal the defendants disputed the claim and filed a counterclaim that exceeded the jurisdiction of the Small Claims Tribunal.  Hence the claim and counterclaim were transferred to the District Court.  In the District Court the plaintiff filed a claim for damages arising from the defendants’ alleged breach of contract.  The claim is set out at page 32 of the bundle of documents.  I set out the items of this claim. 

(1)	Filing the claim in the Small Claims Tribunal on 3 January 2003, filing charges - $110, change of particulars on 7 March - $60, totalling $170.
(2)	Solicitors’ costs for a letter by a law firm named Kelvin Lee & Co. , solicitors - $800.  Search fee for business registration of First Village Trading Company - $140, totalling $940.
(3)	Providing training to salesmen on information about aloe vera natural juice.  Photocopying charges of teaching materials $500.
(4)	Costs of renovation works carried out to partition a storeroom and to install a split-type air-conditioner with custom-made shelves containing spotlights for display of aloe vera juice - $16,600.
(5)	Photocopying charges for documents on submission of application for Legal Aid - $30.
(6)	Printing costs of 8,000 name cards, 100 receipt books and 20,000 A4 hand bills at $9,600.
(7)	Two spray ink advertisement paintings for aloe vera natural juice 18 feet x 5 feet at $2,600.
(8)	Wages for three salesmen for the period respectively from 15 June to on or about 31 October, plus one hourly-rated hand bill distributing worker, particulars at pages 80 to 83 of the BD, totalling $50,355.
(9)	Repayment of security deposit paid, two instalments totalling $30,000.
(10)	Monthly rent of the office at Mezzanine Floor, 25 Ho Yick Street, Tai Po, at $4,500 x 4.5 months, for rent commencing from 15 June to 31 October 2002 totalling $20,250.

4.The total claim of the plaintiff amounts to $131,045.  The plaintiff also claims the cost of the litigation.  The defendants counterclaim for the third instalment of the deposit which the plaintiff had failed to pay in the sum of $20,000.  This allegedly fell due in August 2002.  The defendants also counterclaim for damages.  The basis for this counterclaim for damages is the stipulation in the last paragraph of the letter from the plaintiff’s solicitors, Messrs Kelvin Lee & Co., to the defendants dated 7 November 2002 at page 99 of the bundle of documents.

5.This states that pending the resolution of the dispute the defendants should not sell the aloe vera juice to anyone.  The defendants allege that resulting from the stipulation they suffered loss as they could not sell the aloe vera juice.  They state that according to clause 5 of the Sole Distributorship Agreement, the plaintiff had to comply with a sales quota for the first six months of the distributorship in the sum of $1 million.  As the price per bottle of aloe vera juice sold to the plaintiff was $75 the plaintiff had to sell 13,300 bottles of aloe vera juice in order to meet the sales quota of $1 million.  In the period from 1 August 2002 to the end of September 2002 the plaintiff only managed to sell 400 bottles.  The plaintiff ought to have sold a further 12,900 bottles within the first six months of the contract.

6.By virtue of the restraint on the defendants to sell the aloe vera juice imposed by the plaintiff, the defendants have lost the profit from the sale of 12,900 bottles of aloe vera juice which comes to $30 per bottle.  The total loss of profit is at $387,000.  This is the second item of the defendants’ counterclaim.

7.It is not in dispute that the parties signed an initial sole distributorship agreement on 14 June 2002.  However, the plaintiff requested to change some of the terms in this agreement.  The defendants through its staff, Leung Muk-choi, agreed to enter into the Sole Distributorship Agreement with the plaintiff on 1 August 2002.  The respective parties agree that they are bound by the terms of this Sole Distributorship Agreement as from 1 August 2002 which is the commencement date of this agreement.

8.The issues:

(1) Whether the defendants breached clause 1 of the Sole Distributorship Agreement.

(2) If so, whether the plaintiff is entitled to its items of claim. 

(3) Whether the defendants are entitled to its counterclaim.

The 1st Issue

9.The plaintiff gave evidence that through purchase of the aloe vera juice from the defendants’ salesman, Mr Leung Muk-choi, (hereinafter referred to as “Mr Leung”), she got to know Mr Leung and assisted him in designing the packaging of the aloe vera juice.  Eventually through the recommendation of Mr Leung she applied for and was given the sole distributorship for the aloe vera juice.  She signed the initial Sole Distributorship Agreement dated 14 June 2002.  Subsequently she sought the amendment of the terms in the initial Sole Distributorship Agreement and she signed the Sole Distributorship Agreement on 1 August 2002. 

10.Initially the defendants requested the payment of a deposit of $50,000 as a term in the initial Sole Distributorship Agreement.  However, at the time when the initial Sole Distributorship Agreement was signed on 14 June 2002 the plaintiff obtained the agreement of the defendants that this deposit should be paid by three instalments.  On 14 June 2002 she paid $10,000 being the first instalment of the deposit.  The second instalment in the sum of $20,000 was paid on 1 August 2002 at the signing of the Sole Distributorship Agreement.  According to the plaintiff the third instalment was to be paid in September 2002 but no date in September was stipulated.

11.On 19 September 2002 the plaintiff spoke to a client, Miss Lam, on the phone.  She discussed with her about the sale of aloe vera juice at the price of HK$130 a bottle.  However, Miss Lam asked the plaintiff whether she was the sole distributor of the aloe vera juice.  Miss Lam stated that the defendants stated that the defendants were the sole distributor and would sell the aloe vera juice to her at HK$110 per bottle and there was no limit of quantity that they would sell to her.  The plaintiff’s price was $130 per bottle.  Miss Lam stated that she had placed an order from the defendants for two boxes of aloe vera juice.  The plaintiff was angry and arranged to meet with Mr Leung to discuss about this.  At the meeting she asked for the refund of the $30,000 deposit paid by her.  Mr Leung stated he could not make a decision but had to discuss with his bosses.

12.Subsequently the plaintiff requested to see Mr Wong Wah of the defendants.  At the meeting with Mr Wong Wah the plaintiff requested the return of $30,000 paid by her.  However, Mr Wong Wah stated that he would be willing to settle with the plaintiff at the sum of $15,000.  He stated that the defendants had printed some promotional material for the plaintiff’s benefit and these had to be accounted for.  The plaintiff did not agree to the offer for settlement made.  She therefore filed her claim in the Small Claims Tribunal on the basis of the breach of clause 1 by the defendants. 

13.The plaintiff felt cheated by the defendants.  On 7 November 2002 she instructed solicitors Messrs Kelvin Lee & Co. to issue a letter to the defendants.  The letter is at pages 97 to 98 of the bundle of documents.  The complaints in the letter are, inter alia:

(1)	Without the knowledge and consent of our client you sold the drink to the public at a wholesale low price and dealt with retailers directly.
(2)	Although our client is the sole agent of the drink its name and details do not appear on the carton package boxes of the drink as agreed.  Instead your own name and details are printed on the boxes.  Besides the label on the bottle neck of the drink indicate our client as “分銷商” but not “總分銷商” as agreed.

14.Apart from these complaints there were other complaints.  In the letter the plaintiff asked for the repayment of the deposit paid by the plaintiff in the sum of $30,000 and the return of 10 boxes of aloe vera juice ordered by the plaintiff and the refund of $9,000 in payment of these 10 boxes of aloe vera juice. 

15.The defendants’ first-hand evidence comes from the sales manager, 業務部經理Mr Leung.  He stated he started to work for the defendants in about March 2002.  He got to know the plaintiff when she telephoned him to order aloe vera meat and aloe vera juice.  The plaintiff said she had confidence in the product.  The plaintiff asked whether she could be the sole distributor of the aloe vera juice.  The plaintiff presented a proposal to the defendants.  The defendants wanted the plaintiff to place an order to the value of HK$1 million within the first six months.  The plaintiff was confident that she would be able to do so and even subsequently to increase sales by 50 per cent. 

16.On 14 June 2002 the parties signed the initial distributorship agreement.  The contract stated the plaintiff had to pay $50,000 deposit on the signing of the initial Sole Distributorship Agreement.  The plaintiff said she did not have money to pay this.  She said she asked to pay $20,000 in July and $20,000 in August.  The defendants agreed to that.  In about mid-July 2002 the plaintiff stated that there were terms that she wanted to amend in the initial Sole Distributorship Agreement.  She asked whether she could pay the second instalment of the deposit after the Sole Distributorship Agreement was signed on 1 August 2002.  The defendants agreed to this.

17.The plaintiff paid the second instalment of the deposit upon the signing of the Sole Distributorship Agreement on 1 August 2002.  Mr Leung told the plaintiff that if she wanted to sell $1 million worth of aloe vera juice in six months she had to purchase 180 boxes of aloe vera juice with 12 bottles in a box each month.  After the juice came to Hong Kong the plaintiff only ordered 30 boxes of aloe vera juice and when the boxes arrived she said that she only had room for 10 boxes.  She left the remaining boxes in the defendants’ premises.  She stated she would collect them later.

18.Mr Leung told the plaintiff that she had to sell 200 boxes a month.  He suggested to her that he could sell the aloe vera juice for her at $100 per bottle.  He would give her profit at $25 per bottle.  He stated the defendants had salesmen who sell the aloe vera meat.  The defendants’ salesmen could at the same time sell the aloe vera juice to their customers.  Mr Leung stated that pursuant to this oral agreement he sold 24 bottles for the plaintiff and gave her back $600.  The defendants set off $600 from the cost of aloe vera juice on invoices due to the defendants. 

19.On about 20 September 2002 the plaintiff telephoned Mr Leung and informed him that Hung Kei in Yuen Long telephoned her and said that the defendants sold the aloe vera juice to them, being the plaintiff’s client, at $110 per bottle.  There was an argument between the plaintiff and Mr Leung.  Subsequently they met for discussion at a restaurant.  The plaintiff at the discussion asked to speak to one of the defendants’ partners.  Mr Wong Wah subsequently met with her and in the discussion with her offered her $15,000 to settle their dispute and to discharge the parties from the Sole Distributorship Agreement.  She rejected the offer.  Mr Wong stated that the defendants had incurred printing costs for promotional material in the sum of $15,000.  Hence they wanted to deduct $15,000 from the deposit paid by the plaintiff. 

20.The first and second named defendants’ evidence related to this issue is only hearsay.  They rely on the evidence of Mr Leung as first-hand evidence. 

Finding on the evidence

21.Having heard the evidence of Mr Leung, I find it incredible for two reasons.  Mr Leung stated that the plaintiff agreed to a sale of the aloe vera juice by the defendants to the defendants’ customers at the price of $100 per bottle.  This would effectively undercut the price which the plaintiff was selling at $130 per bottle.  This would take away the business of the plaintiff the moment her customers heard that there is a source for the same aloe vera juice at $100 per bottle.  Hence I do not believe that the plaintiff would agree to the sale by Mr Leung of the aloe vera juice at a lower price to help her to distribute the aloe vera juice.

22.I accept the evidence of the plaintiff that there was no oral agreement as alleged by the defendants to vary clause 1 of the Sole Distributorship Agreement.  Further, as stated by the plaintiff clause 1 of the Sole Distributorship Agreement categorically stated that the defendants could not by any means sell the aloe vera juice to any third party within the HKSAR.  Hence the defendants would not have been so foolish to act on any oral variation of this term without such variation being put in writing and duly signed by the respective parties.  I find therefore that the defendants had breached clause 1 of the Sole Distributorship Agreement. 

The 2nd Issue

23.I am satisfied that the Sole Distributorship Agreement has been discharged by the breach which is a fundamental breach in that the plaintiff does not have to comply with the Sole Distributorship Agreement.  The sale to the third party without the plaintiff’s consent within the Hong Kong SAR at a price lower than the price sold by the plaintiff must be a breach of a fundamental term of the Sole Distributorship Agreement.  In relation to damages that could be recovered by the plaintiff, the plaintiff should be able to recover all loss suffered by her arising from the breach.

24.I therefore consider the items of claim of the plaintiff referred to above.  Items (1), (2) and (5) of the plaintiff’s claim relates to costs expended as a result of the defendants’ breach of contract, namely costs of the litigation.  The plaintiff is entitled to the filing fee paid to the Small  Claims Tribunal stated in item (1) of the claim but not the fee for amendment of claim, and also items (2) and (5).  Items (3), (4), (6) and (7) relate to capital expenditure in relation to the business.  The plaintiff’s claim in respect of these is that the plaintiff has by virtue of the defendants’ breach of contract suffered loss in that the capital expenditure is wasted.  As a result of the breach, the plaintiff is not able to continue the business.  In relation to the claim that these capital expenditures are entirely wasted, I find that is not the case as the plaintiff has been in business for two months,  from 1 August 2002 under the Sole Distributorship Agreement, if not earlier under the initial Sole Distributorship Agreement.

25.Further, it is not certain whether the plaintiff could have reached the quota of sales stated in clause 5 of the Sole Distributorship Agreement.  If the sales quota is not met within six months from 1 August 2002 the defendants could terminate the Sole Distributorship Agreement.  Owing to these factors, I shall therefore apportion 70 per cent of these items as being losses suffered by the plaintiff. 

26.Items (8) and (10) relate to the running costs of the business in order to earn the profit for the months the business was in operation in the Sole Distributorship Agreement.  They were not losses suffered by the plaintiff arising from the defendants’ breach.  I do not grant these items of expenditure.

27.The plaintiff claims for the refund of the deposit paid in item (9) of the items of damages.  The plaintiff had to pay the deposit in order to enter into the Sole Distributorship Agreement.  To a certain extent it could be stated that it is a capital expenditure for the business under the  Sole Distributorship Agreement.  The plaintiff has lost the chance of continuing the business arising from the defendants’ breach.  However, the plaintiff has operated the business for two months.  Further, it is not clear if the plaintiff would have in the first six months of the business ordered aloe vera juice to the value of $1 million.  If she fails to do so the defendants has a right to forfeit this deposit.  However, the plaintiff has lost the chance to operate the business to meet this quota. 

28.Weighing all these factors I am of the view that $15,000 of the deposit should be returned to the plaintiff.  I therefore assess damages to the plaintiff as follows:

(1) Filing fee for the Small Claims Tribunal: $110.

(2) Solicitors fee for letter to the defendants and business registration search conducted (page 71-72 of the bundle of documents): $940.

(3) 70 per cent printing of training material (page 73 of bundle  of documents): $350.

(4) 70 per cent partition of storeroom and decoration charges (page 74 of bundle of documents): $11,200.

(5) Photocopying charges for documents for Legal Aid application: $30.

(6) 70 per cent printing costs for name cards, invoices, leaflets (page 76 of bundle of documents): $6,720.

(7) 70 per cent aloe vera advertisement 18 feet x 5 feet hanging display (page 79 of bundle of documents): $1,820.

(8) Return of deposit paid: $15,000.

29.These total $36,170.  The profit made by the plaintiff from the business should not be deducted from the total damages.  I therefore award total damages to the plaintiff at $36,170.

The 3rd Issue

30.The letter from the plaintiff’s solicitors, Messrs Kelvin Lee & Co., dated 7 November 2002 referred to aforesaid contained a stipulation referred to in the counterclaim at paragraph 2 of page 54 of the BD.  The defendants state that as a result of the stipulation from the plaintiff’s solicitor that they should not sell aloe vera juice until this matter is resolved, they could not sell the aloe vera juice.  The Sole Distributorship Agreement stipulated that should the plaintiff fail to sell aloe vera juice to the value of $1 million within six months the defendants could forfeit the deposit of $50,000 and terminate the Sole Distributorship Agreement.  The plaintiff had ceased the sale of the aloe vera juice after two months of the commencement of the Sole Distributorship Agreement.  The defendants allege that they could not sell the aloe vera juice purchased by the defendants in the market.  They therefore claim damages for loss calculated in the manner referred to aforesaid.

31.The first point that has to be decided is whether the plaintiff is liable for damages to the defendants.  The reason for the dispute between the parties leading to the ceasing of sales by the plaintiff of the aloe vera juice is the defendants’ breach of clause 1 of the Sole Distributorship Agreement.  The breach is a breach of a fundamental term.  In my view, the plaintiff is not liable for damages to the defendants which arises out of the defendants’ own breach of the Sole Distributorship Agreement.  As regards whether the plaintiff should be liable for the stipulation in the plaintiff’s solicitor’s letter that the defendants should not sell the aloe vera juice until the defendants have resolved the dispute between the parties, the defendants should have obtained their own legal advice on their legal position under the circumstances rather than relying on the assertion in the letter from the plaintiff’s solicitor.

32.As regards the calculation of damages claimed, the basis for calculating the damages is based on the defendants’ interpretation of clause 5 of the Sole Distributorship Agreement.  Clause 5 of the Sole Distributorship Agreement states:

“5.  乙方在該合約簽訂日起，先付保證金五萬元正，六個月內，進貨量不能低於該港幣一百萬元正，否則甲方有權沒收保證金及終止合約。”

33.Clause 5 states that within six months from 1 August 2002 the aloe vera juice ordered should not be less than the value of $1 million, failing which the defendants could forfeit the deposit and terminate the agreement.  In clause 5 there is an imposition of a quota of sales which the plaintiff should reach within the six month period, failing which the plaintiff would suffer the penalty stipulated.  The penalties stipulated are the forfeiture of the deposit and the termination of the Sole Distributorship Agreement.  Clause 5 does not contain an agreement by the plaintiff that she guarantees or undertakes sales of not less $1 million within the first six months of the contract.

34.In view of the aforesaid, as there is no agreement between the parties that the plaintiff guarantees sales of not less than $1 million within the first six months, the plaintiff is not liable to the defendants for damages should the sales within this period fail to reach its quota.  Had the defendants agreed to the offer for settlement made by the plaintiff at the earliest opportunity at the discussions between the plaintiff and Mr Wong Wah referred to aforesaid at $30,000, the matter would have been resolved and the defendants would have been free to sell the aloe vera juice freely.  The damages awarded to the plaintiff herein to be paid by the defendants exceed the sum of $30,000.

35.In my view, the plaintiff is not liable on the counterclaim for damages.  Secondly, the computation of damages as claimed by the defendants is not sustainable on the basis of clause 5 of the Sole Distributorship Agreement.  In view of the discharge of the Sole Distributorship Agreement upon the defendants’ breach, the plaintiff is not liable for payment for the third instalment.  There is no clear evidence on the defendants’ part as to the date in September on which the third instalment is due because the plaintiff stated that there was no stipulated date in September for payment of the 3rd instalment.  I do not find the evidence of Mr Leung as credible and the evidence from the defendants on the payment date of the 3rd instalment is derived from Mr Leung.  The defendants’ evidence related to this is not reliable.

36.I therefore find that the defendants have not proved the items of their counterclaim.  I give judgment for the plaintiff against the defendants in the sum of $36,170 together with interest thereon at judgment rate from date of filing of claim in the Small Claims Tribunal on 13 January 2003 to the date of judgment and thereafter at judgment rate until payment. 

37.Counterclaim is dismissed.  Costs of the claim and counterclaim be to the plaintiff to be taxed if not agreed. 

Representation:

Plaintiff, in person, present.

Defendants, in person, present.