Lucky Machinery Engineering Part and Trading Co v. Studio D’art

1985, No. A5556

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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BETWEEN

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Coram: Master Jones in Chambers

Date of Hearing: 30^th May 1986, 17^th October 1986, 23^rd January 1987

Date of Delivery : 13^th February 1987

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ASSESSMENT OF DAMAGES

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1.  This assessment has its origins in a contract of 27^th May 1985, whereunder the defendant agreed to sell to the plaintiff 500,000 “sign pens” pursuant to sample. The defendant defaulted on delivery, the date of which was expressly of the essence, whereupon the plaintiff treated the breach as repudiation and sued for damages.

2.  On 6^th September 1985 the plaintiff issued a writ in respect of the breach in which it claimed damages of $190,000. This figure was said to represent the profit difference between the contract price of $650,000 and the price on resale of the pens to plaintiff’s customer in China for $840,000.

3.  On 24^th October 1985 the defendant consented to interlocutory judgment for the plaintiff with damages to be assessed. It is pursuant to that order that this assessment is made.

4.  The on-sale contract on which the lost profit is based was concluded on 20^th May1985 between the plaintiff and a company in Guangdong Province, known as the Tai Ping South Supply and Sales Company. The Chinese original of that contract, with a certified translation, was produced as exhibit P.2 by plaintiff’s first witness, Chiu Wo Hop. It later emerged from the evidence of plaintiff’s second witness, To Tao, that Chiu and To were proprietors of the plaintiff concern in the respective percentages of 40%and 60%.

5.  The contract between plaintiff and its Chinese customer (which I shall refer to as “the Chinese contract”) provided for the sale and purchase of “500,000 pieces of Japanese made Be-pens” at a price of $1.68 H.K. each, giving a total price of $840,000. The contract also stipulated that it was a sale by sample sealed and kept in the office of the Chinese Company. In evidence however Chiu said that the sample was only shown to the Chinese buyer and not left at its offices. The evidence of neither witness for the plaintiff was very convincing on this point, which remains unresolved but in my opinion immaterial.

6.  The contract between the present parties itself exhibited a sample which all witnesses agreed was sealed and attached to the original document. This sample was later produced by the solicitor who drew the contract, Mr. H.C. Yeung, who gave evidence for the defendant. This exhibit was marked D.4A as an attachment to the original contract, also produced by Mr. Yeung as exhibit D.4.

7.  The essence of the plaintiff’s claim is that the sample exhibit D.4A was also the model for its contract with the Chinese purchaser, and that this and the Chinese contract were well known to the defendant.

8.  The defendant by contrast maintains that its contract with the plaintiff was merely for pens of similar appearance, but that they were to be manufactured in Taiwan and not Japan. The defendant also claimed no knowledge whatsoever of the plaintiff’s Chinese contract.

9.  The present contract is silent on the place of manufacture of the pens which defendant contracted to supply. The plaintiff argued that defendant’s evidence of intended Taiwan manufacture was hence inadmissible as infringing the rule against parol evidence in variance of a written contract. The parties agreed that such evidence should be given and that a ruling on admissibility be made in the judgment

10.  The rule so-called against parol evidence has many exceptions. In an article entitiled ”collateral contracts” in (1959) C.L.J. 58, the author Wedderburn characterizes the rule in modern law as no more than a strong presumption that –

”a document which looks like a contract is to be treated as a whole contract”

11.  The writer goes on to say –

“This presumption is very strong, but it is a presumption only and it is open to either of the parties to allege that there was, in addition to what appears in the written agreement, an antecedent express stipulation not intended by the parties to be excluded but intended to continue in force with the express written agreement.”

12.  I respectfully agree with these views and turn to consider if the presumption in favour of the contract as the sole repository of the parties’ intentions is displaced by the nature of the agreement and its surrounding circumstances.

13.  Clause 1 of the contract defines the nature of the pens by way of sample; the place of manufacture is not mentioned. It is crucial to the plaintiff’s claim that the pen exhibited as D.4A be decisive of intended Japanese manufacture. It is equally vital to the defendant’s resistance to the damages claimed that Taiwan and not Japan be the intended place of origin.

14.  The sample pen is itself of Japanese manufacture, a point conceded by defendant’s principal witness and manager, Fee Zee Foo. However – and this is important – this witness went on to say that the parties intended Taiwan manufacture all along and as the plaintiff’s representatives only had with them a Japanese made pen as sample, the word “Japan” was scratched off the pen at the point where it was embossed at the base of the clip. The sample therefore governed type and appearance but not place of manufacture.

15.  The pen was produced by Mr. H.C. Yeung, who broke the sealed plastic packet in Court. There were visible scratch marks on one side of the base of the clip. Mr. Yeung himself said in evidence –

“Someone asked for the word “Japan” appearing at the edge of the cap of the sign pen to be scratched off. I saw that done without any objection from anyone. ----------.

The word “Japan” was removed at the point on the pen where there are scratch marks on the right side of the plastic base to the clip, looked at with the clip facing me. No explanation was given in my presence why this was done. I can’t remember who removed the word “Japan”.

The contract refers to 500,000 sign pens. I can’t recall anyone saying anything about where the pens were to be made.”

16.  Both witnesses for the plaintiff denied that the word “Japan” was scratched from exhibit D.4A and denied any knowledge of the scratch marks. They also denied knowledge of intended Taiwan manufacture for the pens.

17.  The evidence for each side on these points is therefore totally irreconcilable with that of the other. Whether the pens were to be made in Japan or Taiwan is crucial to the issue of damages and is a point on which the contract is silent, save for the sample. The sample itself speaks ambiguously on this point.

18.  The contract’s silence as to origin and the ambiguity of the sample makes it impossible accurately to construe the meaning of the contract on that point in the light of the circumstances of this claim.

19.  The author of Chitty, 25^th Edition, at paragraph 803, is explicit as to the Court’s duty in such circumstances –

“In order to enable a term of the contract to be interpreted or construed, the court is entitled (and indeed bound)to see what the circumstances were with reference to which the words were used,, and the object appearing from those circumstances which the person using them had in view.”

20.  The writer goes on to say that it is evidence of the factual background known to the parties, and not direct evidence of the intention of the parties, which is receivable as extrinsic evidence in the construction of the contract.

21.  It is in fact the very subject matter of the contract, on the basis of which damages if any are to be calculated, which the contract leaves unexpressed. A Taiwan manufactured pen is not the same as one, however similar, manufactured in Japan.

22.  In all the circumstances of this contract I am accordingly admitting extrinsic evidence as to the proposed origin of the pens comprehended by clause 1 of the contract in issue.

23.  In evaluating the discrepancies between the evidence for the two parties, I turn first to the scratch marks on the sample pen, exhibit D.4A. I have no hesitation in finding that I prefer the evidence of the two defence witnesses on this point. Not only is Mr. H.C. Yeung an officer of the Court and an apparently disinterested party, but he gave his evidence extremely well. I have no doubt he is telling the truth when he speaks of the origins of the scratch marks in the passage quoted earlier in this judgment.

24.  The evidence of the main witness for the defendant, Fee Zee Foo, matched that of Mr. Yeung in regard to the scratch marks. This witness was also convincing.

25.  There were several contradictions between the testimonies of the two witnesses for the plaintiff, including totally different versions as to mitigation of damages. This does not necessarily imply lack of credibility in one or both of the witnesses. The Court must allow for honest mistake or a different view-point between witnesses. I did not however find these witnesses at all impressive and their evidence does not undermine the truthful impression of the defendant’s witnesses as to the origin of the scratch marks.

26.  Accepting as I do that the scratch marks were made as Mr. Yeung described, this of itself does not mean that the parties necessarily intended the pens to be manufactured in Taiwan. However Fee Zee Foo also produced in evidence as exhibit D.3 a telex letter of credit dated 31^st May 1985, four days after the contract between the parties. This letter of credit is addressed to a Taiwan company and covers the sum of $600,000.00 for 500,000 sign pens at $1.20 each.

27.  In its context, the significance of this letter of credit is that the defendant, through Mr. Fee, must have intended to purchase the sign pens in Taiwan, whatever may have been the intention of the plaintiff in that regard.

28.  From this evident intention of the defendant there are three possible conclusions, only one of which is adverse to the defendant’s position in this case. The other two conclusions are, firstly that the Taiwan purchase was also known and intended by the plaintiff; secondly that the plaintiff was indifferent as to the origin of the pens and left it to the defendant to obtain them where he may.

29.  The conclusion adverse to the defendant was put to him by Mr. Oliver for the plaintiff; this was that the parties intended Japanese pens, but the defendant was cheating the plaintiff by supplying cheaper counterfeit Taiwan pens in their stead. This was denied by Mr. Fee.

30.  The scratched deletion of the word “Japan” on the sample pen and Mr. Fee’s explanation for it begin to fit into place when considering the letter of credit to Taiwan dated only four days later. Mr. Fee’s own greater overall credibility lends further weight to the conclusion that both parties intended the pens to be purchased in Taiwan. I find that this was their intention.

31.  Mr. Tsang for the defendant argued that the intended Taiwan purchase of pens to fulfill an on-sale contract for the supply of Japanese pens tainted the Chinese contract with illegality. That may be so, but there is before the Court a contract for the supply of pens between the parties on which the defendant has already consented to judgment with damages to be assessed. In any event, the defendant himself has disclaimed knowledge of the Chinese contract.

32.  It is arguable that the point of illegality should have been taken as a defence and that the defendant was unwise to consent to judgment.

33.  I think however that the situation is simpler than that proposed by the illegality argument. This is an assessment of damages, and despite the pleading in paragraph 3 of the Statement of Claim, the two contracts do not concern the same subject matter, In the old legal metaphor, one is for apples and the other for oranges. In other words Taiwan pens and Japanese pens are not the same thing.

34.  The plaintiff seeks to establish its quantum of damages for the breach of a contract to supply Taiwan pens by reference to an on-sale contract for Japanese pens. That it clearly cannot do.

35.  In so finding, it is unnecessary to decide whether or not the defendant knew of the on-sale contract for Japanese pens. Were this to be material I would however have difficulty in believing the plaintiff rather than the defendant on the question of knowledge of the Chinese contract.

36.  If then the Chinese contract cannot establish the plaintiff’s quantum, how else does the court assess the damages on the defendant’s admitted breach of contract.

37.  I have no evidence before me of the contemporary market price of Taiwan made pens. Such evidence as there is of mitigation of damages is directed only at establishing the price of Japanese made pens. The evidence of To Tao places this at around $1.50 a piece. It is undisputed that Taiwan pens are cheaper, in which case perhaps Mr. To could have obtained them in the market at around the defendant’s price of $1.30 or less. We simply do not know.

38.  In any event there are serious discrepancies between the evidence of the two witnesses for the plaintiff on the question of mitigation of damages. Mr. Chiu said he made no efforts to find replacement pens, whilst Mr. To said they both made considerable efforts. I am not conviced that even Mr. To’s efforts as described in evidence are adequate to a plaintiff’s duty in that regard.

39.  Finally however we return to the point that such efforts to mitigate, even if copious, are pointlessly directed at the acquisition of Japanese pens. The contract concerns Taiwan pens and on this point there is no evidence of mitigation at all. I therefore find that the plaintiff has failed to prove any damages on this assessment.

40.  Costs will be to the defendant with a certificate for counsel.