(III) Case illustration
  
A) Scenarios in Hong Kong
Scenario 1
Company A advertised a conference table for sale for $50,000 in a local daily newspaper. They received one telephone call in response to the advertisement, and the manager of Company A arranged to meet the caller, the representative of Company B, at the showroom of Company A. Having inspected the conference table, the representative of Company B said that Company B would buy it but that they would need time to arrange the payment. Before leaving the showroom, the manager of Company A and the representative shook hands and exchanged business cards. Three days later, the representative of Company B telephoned the manager of Company A to say that he would deliver the cash to Company A the next day. The manager of Company A said nothing in response. Can the manager of Company A refuse to sell the conference table to Company B when the representative of Company B arrives at the showroom of Company A with the $50,000?
Answer
In contract law, an advertisement is only an invitation to treat (an invitation requesting the other party to make an offer, see the relevant question and answer) unless there is other evidence to the contrary. Therefore, the advertisement of Company A was not an offer, and no contract can be invoked at this stage.
The gesture of Company B's representative that was made at the showroom probably did not constitute an offer to buy the table, as there was still some doubt as to when or whether payment could be arranged. The second telephone call from the representative of Company B constituted an offer, but the silence of the manager of Company A cannot be construed as an acceptance of that offer. As Company A has not made a valid acceptance, no contract has been created. The manager of Company A can thus refuse to sell the conference table to Company B.
Scenario 2
The manager of Company A, a printing company, ordered a new colour printing machine from Company B to be delivered on 1 November. The machine was not delivered on time, but because there is a low demand for printing services between November and February, the manager of Company A did not contact Company B about the matter until 20 February of the next year, when he sent a fax to Company B enquiring about delivery of the machine. He was told by return fax that the machine would be delivered the following week. However, the machine was not delivered for another three months. Since the time when the manager of Company A enquired about the delivery of the machine, Company A has only been able to fulfil 50% of the printing jobs that it could have handled had they had the machine.
Can Company A purchase the printing machine from another manufacturer and sue Company B for damages (compensation)? Would the basis for the calculation of the damages be different if Company A had also lost a profitable printing order because they were not able to meet the deadline for delivering the work without the new machine?
Answer
Time of delivery is vital to the performance of a sale of goods contract. Company A is entitled to damages if it can show that the late delivery caused actual business loss. If Company A has to pay a higher price for a new printing machine from another manufacturer to meet its printing deadlines, then it can also claim for the additional purchase price (provided that Company A has exercised reasonable effort to obtain the best offer in the market).
However, Company A may not be entitled to claim for the loss of profits from the profitable order, as the order had not been converted into a formal contract and it is difficult for Company A to justify the loss.
Scenario 3
Mr. A and his brother Mr. B were partners in a garment manufacturing company business for many years. On the advice of their accountant, they formed a limited company (A & B Ltd) and invited Mr. B’s son to join them in the business. It was agreed that Mr. A and Mr. B would each hold 40% of the shares and that B’s son would hold the remaining 20%. Recently, Mr. A and Mr. B have been unable to agree on the design, quality of fabric or colour of their products, and consequently have neglected the business. They have failed to pay their suppliers and are unable to fulfil their contracted orders. Mr. B’s son always agrees with his father. As a result, Mr. A now refuses to communicate with either of them. Are there any grounds on which A & B Ltd can be wound up by the court?
Answer
A & B Ltd can be wound up by the court on any of the following grounds under section 177(1) of the Companies Ordinance :
- After the three owners have arranged to pay all of the outstanding amounts to their suppliers, they (as the members (shareholders) of A&B Ltd) pass a special resolution agreeing to have the company wound up.
- The business of A&B Ltd has been suspended for a whole year.
- The debts that A&B Ltd owe to its suppliers exceed $10,000 and a statutory demand has been served on the company.
- The court is of the opinion that it would be just and equitable for A&B Ltd to be wound up, as there is a breakdown of mutual trust and confidence among the three persons who are the shareholders and directors of A&B Ltd that prevents the proper management of the company.
For more information about the winding-up of a limited company, please go to the Bankruptcy and Winding-up topic.
B) Scenarios in Mainland China
Scenario 1
Company A signed a contract with Company B on the following terms:
- Company B agreed to deliver 100 tons of wool on or before the specified delivery date.
- Company A agreed to pay Company B a deposit of 15% of the purchase price upon signing the contract, and to pay the balance by bank telegraphic transfer upon delivery and presentation of the VAT invoice by Company B.
Ten days before the specified delivery date, Company A sent a letter to Company B saying that it could not pay the balance of the purchase price in full in accordance with the contract, and proposing to pay another 15% of the purchase price upon delivery (which with the deposit would make 30% of the total amount) and then the balance in two instalments within 30 days of delivery.
Company B did not agree with the proposed changes to the payment terms and delivered 30% of the wool before the specified delivery date. Company A refused to accept the partial delivery, but Company B insisted that it would deliver the quantity of wool for which Company A could afford to pay and that Company A would have to present a bank draft before Company B would arrange for the delivery of the rest of the wool. Because of such dispute, Company B took back the delivered wool from Company A.
Ten days after the specified delivery date, Company A sent another letter to Company B stating that they could pay 50% of the purchase price and that Company B should deliver 50% of the wool and present the VAT invoice. Company B replied in writing on the same day that it would agree to deliver 50% of the wool if Company A paid the purchase price on a pro-rata basis in accordance with the payment terms of the contract, and that if Company A failed to take delivery and pay the purchase price in accordance with the said payment terms, then Company B would cancel the contract. Company A presented a guarantee that was issued by the representative office of the intermediary company for the parties. The guarantee stated that the guarantor would give Company B bills for 39.5% of the purchase price that would be negotiable at a bank after 75 days upon presentation of the VAT invoice for 50% of the wool, and that if Company B could not obtain payment from the bank, then the guarantor would pay Company B the stated amount. Company A also stated that if Company B did not present the VAT invoice, then a draft for the amount of 1% of the purchase price would be retained by the guarantor. Company B refused to deliver the wool because Company A did not accept the payment terms of the contract.
Can Company A sue Company B for breach of contract and request Company B to refund the deposit and pay compensation equivalent to the deposit that was paid by Company A in accordance with the PRC Contract Law?
Answer
The contract is valid and legally binding. Because no subsequent agreement to vary the payment terms was agreed, both parties are obliged to fulfil their obligations in accordance with the original terms of the contract. The first letter of Company A constitutes an anticipatory breach (Company A gave notification before the specified payment date that it would not pay), and thus Company B has the right to suspend delivery of the wool.
The last two letters that were exchanged by the parties constitute a variation of the contract regarding the amount of wool to be delivered. In that case, Company B was in breach of the contract (with varied terms) by refusing to deliver the wool after receiving the guarantee that demonstrated the ability of Company A to pay. As both parties are in breach of the contract, Company A is entitled to a refund of the deposit from Company B but not to damages (compensation) for breach of contract.
Scenario 2
Mr. A bought a brand XYZ car for his personal use from his own funds from a car dealer for RMB55,200. The car dealer issued two invoices (neither of which carried the chop of the car trading market management department of the relevant local administration of industry and commerce), a quality inspection certificate and a temporary car registration licence.
Driving the car home, Mr. A found some serious problems with it. He telephoned the car dealer the next day. On the following day, Mr. A drove the car to the appointed service centre of brand XYZ for inspection and repair. Two days later the service centre reported that the car was not manufactured by the XYZ automobile company.
Mr. A asked the car dealer to take back the car, refund the amount that he had paid, reimburse him for the inspection and repair fee of RMB928 and pay damages of RMB55,200 in accordance with the PRC Consumer Rights Protection Law《中华人民共和国消费者权益保护法》. Can the car dealer take the car back after refunding the amount that was paid by Mr. A and reimbursing the inspection and repair fee, and also to treat the rights and obligations of both parties in respect of the sale and purchase of the car as settled given that Mr. A has not suffered any loss?
Answer
A car is now considered to be a consumable good in Mainland China, and thus Mr. A falls into the category of consumer. This means that the PRC Consumer Rights Protection Law applies to this case, which overrides the relevant stipulation in the PRC Civil Code《中华人民共和国民法通则》and its various judicial interpretations by the Supreme People’s Court that relate to damages from the fraudulent supply of goods or services. The PRC Consumer Rights Protection Law states that if fraud has been committed in the provision of a product or service by the seller, then the seller must pay compensation that is equivalent to the price of the product or service upon the request of the consumer. Therefore, the car dealer must refund Mr. A the price of the car and further pay RMB 55,200 in compensation.
Mr. A is also entitled to be reimbursed for any other reasonable expenses that he incurred in the process of making his claim (including any legal costs and travelling expenses).
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