Court allows plaintiff damages for breach of contract but reduces amount due to mitigation and lack of evidence on market value.

[*509] 1985 June 3

(LAOUTAS, S.D.J.)

IN THE DISTRICT COURT OF NICOSIA

Elxano Ltd.,

Plaintiffs,

v.

Sefecon Ltd.,

Defendants.

(Action No. 4425/83).

Contract - Illegality - Contract for the sale of goods between Cypriot nationals made in Cyprus - Price expressed in U.S. Dollars - Whether contrary to section 5 of the Currency Law, Cap. 197 - Question determined in the negative.

Damages - Sale of goods - Breach by buyer of his obligation to accept delivery - Measure of damages - The duty to mitigate the damage - Costs or expenses in the course of a reasonable effort to mitigate are recoverable.

The Currency Law. Cap. 297, section

5 - See Contract - Illegality.

Sale of Goods - See Contract - Illegality, and, also, Damages.

Chr. Mitsides, for the Plaintiffs.

E. Lemonaris, for the Defendants.

JUDGMENT

The following judgment was delivered by:-

LAOUTAS, S.D.J.:- The plaintiff company manufactures and sells shampoo. Its place of business is in Nicosia.

The defendant company also has its place of business in Nicosia and deal in imports and exports. [*510]

It is the allegation of the plaintiff company that on or about 18.9.1982 by virtue of an oral and/or written agreement between themselves and the defendant company, undertook the manufacture and delivery of 500 boxes of shampoo each containing 12 plastic bottles of 530 gr. weight - at the agreed and/or reasonable price of 3000 U.S. dollars.

The defendant company in breach of their agreement failed to take delivery of the goods when called upon by the plaintiff company to do so. As a result of that breach the plaintiff company suffered damages which amount to 3,000.- U.S. dollars, being the value of the order placed by the defendant company.

The defendant company refused the allegations of the plaintiff company and raised a preliminary objection that the transaction cannot be sustained as being illegal contrary to the provisions of the Currency Law, Cap. 197. Furthermore, they asserted that the goods ordered were not ready within the specified time and also were not of a merchantable quality. The principals on whose behalf the order was placed rejected the goods and the defendant company suffered 2,250.- U.S. dollars, which they claim by way of a counterclaim. [*511]

The director of the plaintiff company (P.W.1) testified that in September, 1982 by virtue of a requisition order (Exh. 1), the director of the defendant company placed an order for the manufacture of the quantity of the shampoo described therein. No specific type of the product was discussed. Cartoons and plastic bottles were ordered by him for the embottlement of the liquid. The product was packed and ready for delivery around the 9.10.1982. He called on the director of the defendant company to collect the goods, but his reply was that the opening of the credit from Kuwait was not ready and that he should wait a little more. The goods were intended to be exported to Kuwait. The defendant company failed to collect the goods despite his repeated requests and in July, 1983, Seferis, the director of defendant company informed him that the credit had not been ready.

In cross-examination this witness said that he had not shown samples of the shampoos to Seferis before the placing of the order. He (Seferis) had told him, however, that the goods were for a client of his from Kuwait. The negotiations preceding the placing of the order had been made between himself and Seferis. In November 1982 he delivered various types of samples to Seferis, including the AZ type, but these were not part of the order. Furthermore, [*512] he conceded that he has sold half of the

500 cartoons of shampoo. He rejected the allegation of the defendant company that the goods were not merchantable and that they did not correspond to the samples previously given.

The reason, he contended, of not having been able to dispose of the remaining goods, is that the labels affixed on the bottles were specially made to fit those goods to be exported. They had been written in English and Arabic, and would not be possible to be sold in the Cyprus market. A considerable amount of money would be needed for the replacement of the labels.

P.W.2 who is now the director of M. & M. Trading Co. Ltd., used to be employed by the defendant company. He used to share his office together with Seferis. One day in September, 1982 the director of the plaintiff company, P.W.I, was introduced to them by a certain Katsouris as the man who manufactures shampoo. A discussion ensued whereupon Seferis gave to him an order for the manufacturing of shampoos of 530 gr. in bottles of six assorted colours. No samples were given. Seferis did not ask for a sample. The goods were for export, for a client in Kuwait. The name of the customer was not disclosed to P.W.I. In three weeks’ time, P.W.1 told him that the goods were ready and asked [*513] him to tell Seferis to pay to him money. P.W.1 used to call at their office regularly. Seferis was told that the goods were ready but he kept telling P.W.1 to wait until the opening of the credit. This witness said further that he was present when the order was given and that it was written in a block. He could not tell what were its contents. He was not aware if the order was for a particular client. P.W.1, he said, called at the office of the defendant company six months after the completion of the order.

The wife of P.W.1 is the secretary of the plaintiff company. She referred to the requisition (Exh.1) and that she helped her husband in the manufacture of the goods (shampoo). The shampoos would have been placed in plastic bottles and cartoons which they ordered and cost them £360.- When the order was ready her husband asked Seferis to take delivery of the goods but he failed to do so. Half of them were sold at $5. - U.S. dollars per one dozen. Efforts have been made for the disposal of the remaining but they were fruitless. The reason being that the shampoo was placed in specially made bottles which are being used for export only. Furthermore, the labels affixed on the bottles were printed in the English and Arabic languages.[*514]

In cross-examination she agreed that the bottles used were similar with the old model which “Sunsilk” used to have. The product, she said, is placed in different bottles to comply with the order and in accordance with the wishes of the clients. Similar bottles had been ordered before for their products. Since 1982 the company had not made any exports.

The only witness for the defendant company was its director Costas Seferis. The company, he said, is dealing with exports only. Early in September, 1982 he had a client from Kuwait who was interested to buy 500 dozen bottles of shampoo of 500 grams each. On the same day Katsouris (P.W.2) called at his office; told him of the order. He promised to send somebody who manufactures this product. The following day P.W.I appeared in his office, introduced himself, and was asked to bring a few samples. This he did forthwith. The samples were taken to his client who accepted them and signed an invoice for the manufacture of 500 dozen bottles. The client left and promised to have a credit account open as soon as he would arrive in Kuwait. The requisition was accordingly placed with the plaintiff company through P.W.1. Xanthos. The order was completed around the 10 - 15.10.1982 and Xanthos called at his office. He informed him that the credit account was not open. Thereafter, he communicated with his client [*515] who told him that he would come to Cyprus. In the beginning of November 1982 he, in fact, came to Cyprus, and brought cash money which Seferis deposited in the Bank. This client wanted to visit the place of business of the defendant company. Xanthos (P.W.1) called at his office and accompanied them to his factory. The witness did not introduce this person as being the client who had placed the order, because he wanted to safeguard his dealings with him. There Xanthos gave to them one cartoon being part of the order. They left with his client. The client took out 3 bottles. The next day they met but the client rejected the order because, as he alleged, did not correspond with the sample he was given and that it was not merchantable. This he conveyed to Xanthos when the latter called at his office.

In cross-examination he rejected the contention that P.W.2 was present when the requisition order was given. He alleged that the samples were given to him by Xanthos one week before the placing of the order. He agreed that Xanthos informed him that the order was ready but the reason he did not take delivery was that he was expecting an advance from his client. Xanthos was told that the goods were for export and that he would be paid after their exportation. This, he said, is the course he follows. The money is paid after [*516] the exportation is effected and not on the completion of the order.

I have examined the evidence before me very carefully and I have also had the opportunity to watch the demeanour of the witnesses and the way they answered questions put to them.

I prefer the evidence of the director of the plaintiff company and his witnesses.

The evidence of the director of the defendant company is self-conflicting and unconvincing. A cloud of mystery veils his version. The manner in which he had conducted himself respecting his prospective client has been a very peculiar one. He did not disclose his name and he was very evasive as to the reason for not doing so. It was a business secret he said. This I find very unconvincing and odd. It would have been more proper and businesslike when, as he has alleged, he and the client visited the factory of the plaintiff company, to introduce to its director, Xanthos, the client. I cannot give an explanation and is beyond my comprehension the so mysterious attitude of the director of the defendant company Seferis. Furthermore, I find as baseless his allegation that his supposed client had tested the shampoo and found it unsuitable for use and not in accordance with the samples Seferis alleged to have given to him. [*517]

He was not, however, in a position to substantiate his allegations. Would it not have been more convincing if Seferis and his client had taken the shampoo to the defendant company and there and then make a test in order to see whether it was fit for the purpose for which it was purchased? On top of that I believe what the client told Seferis is hearsay evidence once he himself, as he has conceded, had not tested the shampoo.

I find the true facts to be the following:

The director of the defendant company, Seferis, had placed an order with the plaintiff company for the manufacture of 500 cartoons of 12 plastic bottles of AZ shampoo, which order is fully described in the requisition dated 18.9.1982 (Exh.1). It was agreed that the payment would have been made in U.S. dollars. The order was to the value of 3,000.- U.S. dollars. The delivery would have been effected between the 15 - 20.10.1982. The goods were due to be exported to Kuwait. On completion of the order the director of the defendant company, having been repeatedly informed by the director of the plaintiff company Xanthos, failed to collect the shampoos.

The liquid had to be placed in specially made plastic bottles and cartoons with labels attached, in English and Arabic. [*518]

The defendant company was not acting as an agent of a foreign purchaser; the goods were intended for export. Seferis was acting as principal.

The plaintiff company managed to sell half of the quantity, i.e. 250 cartoons at 5 U.S. dollars per dozen. The remaining are still unsold and in the possession of the plaintiff company.

On the above facts the Court is invited to tackle a number of questions which naturally spring from these facts.

I shall start with the first contention of the learned counsel for the defendant company that the contract between the litigants (Exh. 1) is illegal as it offends and is contrary to the provisions of s.5 of the Currency Law, Cap. 197. This is so, he submitted, because the consideration of the contract is in U. S. dollars which is not the currency of the Republic. Furthermore, U.S. dollars are not a legal tender as envisaged in sections 2 and 3 of the Exchange Control Law, Cap. 199.

Section 5 of Cap. 197 provides:-

“Every contract, sale, payment, bill, note, instrument and security for money, and every transaction, dealing, matter, and thing whatever relating to money or involving the payment, or the liability to pay, any money, [*519] shall, in the absence of express agreement to the contrary, be held to be made, executed, entered into, done and had in the Colony according to the coins or currency notes which are current and legal tender in the Colony by virtue of this Law”.

Two basic considerations should be satisfied if the contract is to be valid and enforceable. The consideration or object should be lawful (s.10, Cap. 149).

According to the provisions of s.23 the consideration and object of an agreement is lawful, unless -

“(a) It is forbidden by law; or

(b) is of such a nature that, if permitted, it would defeat the provisions of any law, or

(c) is fraudulent; or

(d) involves or implies injury to the person or property of another; or

(e) the Court regards it as immoral, or opposed to public policy.

In each of these cases, the consideration or object of an agreement is said to be unlawful. Every agreement of which the object or consideration is un1awfu 1 is void”.[*520]

I do not propose to discuss the issue of illegality at length. This subject has been tackled in a number of authorities both in Cyprus and in England. (See Mavromoustaki v.Iacovos Yeroudes, as executor of the will of the deceased Spyros Michaelides (1965)

1 C.L.R. 176; A. Iosifakis and Others v. Ghani (1967) 1 C.L.R. 190; Kanari s v. Tossoun (1970) 1 J.S.C. 17; Bowmakers Ltd. v. Barnett Instruments Ltd. (1944) 2 ALL E.R. 579; Anderson Ltd. v. Daniel (1924) 1 K.B. 138; St. John Shipping Corp. v. Joseph Bank Ltd. (1957) 1 Q.B. 267; Fielding Piatt Ltd. v. Najjar (1969) 2 ALL E.R.

150 etc.).

I shall refer only to an extract from the case of St. John Shipping Corp. (supra), where, if I may say so with the utmost respect, Devlin J. summarized in a brilliant and concise manner the principles pertaining to the issue of illegality -

“There are two general principles. The first is that a contract which is entered into with the object of committing an illegal act is unenforceable. The application of this principle depends upon proof of the intent at the time the contract was made to break the law; if the intent is mutual the contract is not enforceable at all, and, if unilateral, it is unenforceable at the suit of the party who is proved to have it. This principle [*521] is not involved here. Whether or not the overloading was deliberate when it was done, there is no proof that it was contemplated when the contract of carriage was made. The second principle is that the Court will not enforce a contract which is expressly or impliedly prohibited by statute. If the contract is of this class it does not matter what the intent of the parties is: if the statute prohibits the contract, it is unenforceable whether the parties meant to break the law or not. A significant distinction between the two classes is this. In the former class you have only to look and see what acts the statute prohibits; it does not matter whether or not it prohibits a contract; if a contract is deliberately made to do a prohibited act, that contract will be uneforceab1e. In the latter class, you have to consider not what acts the statute prohibits, but what contracts it prohibits; but you are not concerned at all with the intent of the parties; if the parties enter into a prohibited contract, that contract is uneforceab1e”.

It is an undisputed fact that the contract entered into by the litigant companies was one for the sale of goods. The parties to the contract are Cypriot firms with their place of business in Cyprus. [*522] The payment would have been made in U.S. dollars, which is not the currency of Cyprus. The goods were intended to be exported to Kuwait. Had one of the parties to the contract been an alien, there would have been a straight positive answer to the question of whether this Court would have power to give judgment in a foreign currency. This has been established by fairly recent English decisions on the subject (See Miliangos v. George Frank (Textiles) Ltd. (1975) 3 ALL E.R. 801; Jean Krant Ag. v. Albany Fabrics Ltd. (1977) 2 ALL E.R. 116; Oceanska Plovidba v. Castle Investment Co. Inc. (1973) 3 ALL E.R. 498; Schorsch Meier GmbH v. Hennin (1975) 1 ALL E.R. 152).

These decisions were cited with approval in the case of J.Y.A. Lamaignere v. Selene Shipping (1982) 1 C.L.R. 227, where Pikis J. said at p. 234:

“The decision in Miliangos is a species of judge-made law in response to the problems of our times, such as inflation and great fluctuations in the rate of exchange between various currencies. The internationalisation of trade and the use of more than one currencies, as a basis for exchange, were, on surmise, the basic reasons behind the recent evolution of the law”.[*523]

The case in hand does not come under this category and it is distinguishable from the decisions cited above. The reason being that both parties are Cypriot nationals. It can be observed that there is no precedent on this matter and this is the first time, as far as I can tell, that this subject is raised.

After I have given the matter serious consideration and guided by the above cited decisions, regard being had to the particular facts of this case, coupled with the wording of s.5 of Cap. 197, I have reached the. Conclusion that the transaction is not illegal within the well established principles.

The transaction between the parties does not infringe the provisions of s.5, but on the contrary it falls within this section, because there is evidence which stands uncontradicted, that there has been an agreement for the payment in U.S. dollars something which is clearly covered by s.5. The law is not static. It has to be developed to match the evolution of a changing society. To-day trading is carried out in various currencies and primarily in U.S. dollars. I see no fault in the transaction of the litigants, provided, of course, that the dollars must be converted into Cyprus pounds. I shall revert to this issue later in my judgment. [*524]

From the evidence before me and the finding of facts it is abundantly clear that the defendant company is defaulting to accept the goods and have been breach of the contract. The goods, according to the evidence of the director of the plaintiff company which I have accepted, were ready for delivery before the date stipulated in the requisition. Despite his repeated efforts the defendant company failed to collect them because, as alleged by its directors, the letter of credit was not forthcoming.

Consequence of the breach:

If a contract is discharged by a breach, the party in default is liable to pay damages to the innocent party. The measure of damages is interrelated with the availability of a market. The normal measure is the contract price less the market price at the contractual time for acceptance. (See Barrow v. Arnaud (1846) 8 Q.B. 595). this proposition avails itself provided the goods can be sold. And this measure represents the amount the seller must obtain to put himself in the position he would have been in had the contract been carried out.

The case in hand presents some difficulties on the question of the assessment of the damages, as half of the goods ordered have not been sold. Respecting the 250 dozens the problem is easy to solve as that quantity has been sold at 5 U.S. [*525] dollars per dozen which is one U.S. dollar less than the contract price, which means that the seller, plaintiff company, suffered 250 U.S. dollars loss. The remaining quantity i.e. 250 dozens have not been disposed of by the plaintiff company on the allegation that the Cyprus market is not available due to the shape of the bottles and the labels which are written in foreign languages. There is no evidence to assist the Court to arrive at the proper assessment as nothing has been adduced regarding the market value of similar goods. Furthermore, I am in agreement with the submission of Mr. Lemonaris that these goods must have some value. None of the witnesses, however, has assessed that value. It would have been absurd and unreasonable if the Court had granted the full price of the contract as damages. There has not been any allegation on the part of the plaintiff company that the unsold goods are unmerchantable and a waste nor that after the lapse of time unfit for use. On the contrary, there is evidence that it is possible to sell them abroad. In fact, the 250 dozens were sold abroad. The plaintiff company could have replaced the bottles and claim any costs incurred from the defendant company. It has been alleged that this process would have been very costly. This is an allegation in abstracto. Had this been adopted it would have been of great assistance [*526] to the Court. Be that as it may, I have decided, in the absence of any positive evidence and on the assumption that a big quantity has been sold abroad, to assess the damage at one U.S. dollar per dozen, i.e. 250 U.S. dollars in all.

Before concluding I shall make a brief reference to the issue of mitigation of damages. It has been established by authorities that the plaintiff is debarred from claiming any damage if he fails to take all reasonable steps to mitigate the loss consequent on the breach. The plaintiff, however, is not under any obligation to do anything other than in the ordinary course of business. But the plaintiff is under no duty to take risks with his money in attempting to mitigate. If the plaintiff incurs loss or expense by taking reasonable steps to mitigate the loss resulting from the breach he may recover this further loss or expense from the defendant. The onus of proof is on the defendant who must show that the plaintiff ought, as a reasonable man, to have taken certain steps to mitigate his loss. (See Roper v. Johnson (1873) Reported in the Empire Digest; Pilkington v. Wood (1953) C.L. 770).

From the evidence I am satisfied that the plaintiff company has taken reasonable steps to mitigate the damage. In fact, they have achieved this task by selling half of the products even after the lapse of considerable time.[*527]

Having examined the counterclaim in conjunction with my above findings, I am not satisfied that it can be sustained and therefore is dismissed without costs.

In the result, there will be judgment in favour of the plaintiff company for 500 U.S. dollars to be converted in the equivalent Cyprus pounds.

The costs which are against the defendant company to be assessed by the Registrar on the above scale.

Order as above.