KADER INDUSTRIAL CO. LTD. v. GALCO INTERNATIONAL TOYS N.V.

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

1991, No. A250

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INTERLOCUTORY JUDGMENT

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1. Mr Griffiths, who represents Kader Industrial Company Limited (Kader), has produced to me and to Mr Mills-Owen, who appears for Galco International Toys N.V (Galco), two witness statements. These statements are by Mr Kenneth Ting, the Chairman and Managing Director of Kader, and Mr Tsang Kin Ping Kenneth, an executive director of Kader, whose statement adds nothing to that of Mr Ting other than corroboration.

2. On 24 November 1993, Master Cannon ordered that, in these actions - "Witness statements be exchanged within 56 days before the trial date, and such statements do stand as evidence in chief of the witnesses".

3. On 7 November 1994, Keith J. made an order that "Unless the Defendant [that is, Kader] by 4:30 p.m. on Friday, the 11th day of November 1994 exchange witness statements with the Plaintiff pursuant to the Order of Master Cannon dated 24th November 1993, the Defendant be barred from adducing such evidence at the trial of this action without leave of the Court . . .".

4. The statements by Mr Ting and Mr Tsang were not exchanged under these directions.

5. The relevant rules provide -

"2A. (2) At any stage in any cause or matter, the Court may, if it thinks fit for the purpose of disposing fairly and expeditiously of the cause or matter and saving costs, direct any party to serve on the other parties, on such terms as the Court shall think just, written statements of the oral evidence which the party intends to lead on any issues of fact to be decided at the trial.(7) Where a party fails to comply with a direction given under paragraph (2) he shall not be entitled to adduce evidence to which such direction related without the leave of the Court."

6. Mr Griffiths made some attempt to argue that he did not need leave to adduce the evidence contained in these statements because, as I understood him, they dealt with matters in response to evidence in statements to be adduced by Galco and related to amendments to the defence allowed by me. I do not accept this. In my view, the evidence contained in these statements, the statements not having been exchanged under the directions given, cannot be adduced without leave. This being the case, I suggested to Mr Griffiths that, if I were to give leave, I could do so only if there was good reason for the statements not being exchanged, and that this good reason should be disclosed on affidavit. Following this an affidavit by Kader's solicitor was filed seeking to explain why these statements were not exchanged. In response to this Galco's solicitor has filed an affidavit, and another affidavit has been filed by an assistant solicitor employed by Kader's solicitors.

7. The facts disclosed in the statements that Kader wishes to adduce in evidence fall into three main categories -

a) the abilities, experience and reliability of Kader;

b) the framework of the contracts with Galco; that it was on an OEM (Original Equipment Manufacturer) basis; and

c) conversations between Mr Ting and Mr Mark Goldman of Galco, particularly in relation an agreement by Galco to reimburse Kader for certain costs.

8. Mr Mills-Owen opposes the application to allow the evidence contained in the statements to be adduced. Indeed, he goes further than merely opposing the application. He says that Mr Ting's statement makes it clear that Kader is intent, not only on moving the goalposts, but also hiding the ball. It contradicts, he says, the whole basis on which I allowed the amendments to the defence. Galco, he says, will now appeal against my decision to allow the amendments. That is a matter for him. I do not know why he told me this at this stage. If it was meant to influence me in deciding this application, it will not. If it was not, I do not know why he said it.

9. The most important evidence contained in the statement of Mr Ting is that relating to the framework of the contracts. It is convenient, before going any further, to set out here a distillation of Kader's allegations in the re-amended defence relating to this aspect of the matter -

Paragraph 3A of the re-amended defence - The parties "... contracted with each other ... for the manufacture of toys ... on an O.E.M. ... basis, that is according to [Galco's] specifications and directions." " ... [Galco] would assist [Kader] to manufacture moulds according to the requirements and specifications of [Galco]. ... [Galco's] staff would be present in [Kader's] factory or factories supervising or advising [Kader's] staff upon [Galco's] manufacturing requirements. ... [Galco's] quality control inspectors would be present in order to ensure that [Kader's] manufacturing and quality control specifications were at all times carried out."

Paragraph 3B - "Prior to the receipt of specific orders for the manufacture and sale of the dolls ... the processes described in paragraph 3A above were also followed in respect of these toys."

Paragraph 4(1) a) and b) and (2) - refers to the contracts being contained in, in part, written instructions and memoranda, the processes described in paragraphs 3A and 3B, amended designs, oral instructions and variations by specifications and directions. Here, and only here, is there an allegation of a specific instruction; to use distilled water for function testing.

Paragraph 5(3) - "All the shipments of dolls ... were passed by [Galco's] quality control inspectors as conforming with [Galco's] specifications and directions."

Paragraph 9. - Tests on the dolls were conducted "which tests were nominated and specified by [Galco] and which did not include bacteriological tests. Such tests were carried out to the satisfaction of [Galco] which accepted and approved the results of the same."

Paragraph 14 - "The dolls were designed by [Galco] and were manufactured by [Kader] to that design on an O.E.M. ... basis. At all material times all specifications and directions for the production of the dolls and working procedures for their manufacture and testing were laid down and approved by [Galco] which is experienced in the manufacture and sale of toys. ... [Galco] inspected [Kader's] manufacturing methods and compliance with [Galco's] specifications and directions. The dolls ... were inspected by [Galco's] inspectors and passed for delivery to [Galco].

Paragraph 15 - Any implied terms under the Sale of Goods Ordinance "were excluded or negatived ... by reason of the matters pleaded" in paragraphs 3A to 4 and 14.

Paragraph 19 (c) "... any breach occurred due to [Kader's] compliance with the express instructions of [Galco] ..."

Paragraph 20 (2) - "The manufacturing processes for the manufacture of the dolls were adopted by [Kader] on the instructions of [Galco]."

10. Some of these allegations were in the original defence, but their prominence and strength comes from the amendments I allowed.

11. When arguing for the amendments to the defence, Mr Griffiths assured me that the only relevance of the allegation that the parties "contracted with each other ... for the manufacture of toys ... on an O.E.M. ... basis, that is according to [Galco's] specifications and directions", which Mr Griffiths calls the contractual framework, is to explain why Galco was able to give an instruction to use distilled water and why Kader was bound to carry out this instruction, and it was on the basis of this assurance that I allowed the amendments to be made. This assurance was repeated when Mr Mills-Owen protested that the further particulars supplied by Kader might be read as alleging something more than this. Further, Mr Griffiths said that it was not part of Kader's case that Kader would be relying on the absence of a particular specification or direction, such as, to take the example I put to Mr Griffiths, that Galco had not instructed Kader to ensure that Kader's employees washed their hands before working with the dolls.

12. With the emergence of the statement by Mr Ting, Mr Mills-Owen says that his unease with how the situation was left following the amendments to the defence has been justified. The statement, he says, contains facts that if adduced in evidence would go towards showing that Kader's case goes beyond what it was understood to be on the basis of the assurance given by Mr Griffiths. Mr Ting seems to assert, Mr Mills-Owen argues, that, when a contract is on an OEM basis, the responsibilities of the manufacturer are different and less onerous that they would be otherwise. This, I believe, is so. Otherwise, there would seem to be no reason why Mr Ting should say such things as "All this work is done with the full knowledge of the customer as they approve every step of the manufacturing process, from choice of materials, down to the packaging required", "The ultimate decision of the product's design, choice of materials, colours, functional specifications, quality assessment methods, and safety standards all rest with the customer", "The laboratories are familiar with the relevant regulations and standards for toy safety as may be stipulated or specified by our customers. . . . Once a model has met the stipulated requirements future batches are deemed acceptable by the customer" and "No products made by Kader for Galco left our Zhong Tang plant without first having been inspected and approved by Galco's Quality Control Staff." These facts, if adduced in evidence, go towards showing that, if Kader did as it was told to by Galco, Kader had no liability, and it also had no liability because the dolls were inspected, approved and accepted by Galco. This is not the case on Kader's pleadings as understood by me on the basis of Mr Griffiths' assurance.

13. Mr Mills-Owen was also worried by Mr Griffiths' assertion that the legal effects of the plea that the contracts were on an OEM basis - that is, the dolls were to be manufactured according to Galco's specifications and directions - were not apposite to the submissions he was making. Mr Mills-Owen is right to be concerned. The alleged legal effect of this plea is most relevant. In a pleading, a party may not assert facts and then leave them in the air. The other party is entitled to know what effect it is said that these alleged facts have on the legal relationship between the parties.

14. The assurance by Mr Griffiths that the only relevance of the OEM basis of the contract was in relation to the use of distilled water is, it seems to me, being whittled away. For example, Mr Griffiths now seems to be saying that his assurance does not apply to paragraph 15 of the re-amended defence. This paragraph says that the implied terms under the Sale of Goods Ordinance (Cap. 26) were excluded or negatived by reason of the fact that the contracts were on an OEM basis. This paragraph was, contrary to Mr Griffiths recollection, barely mentioned during the arguments on whether the amendments should be allowed. I was certainly left with the impression, as I conveyed in my judgment, that the assurance given by Mr Griffiths related as much to this plea as to any other; that is, that the only relevance of the OEM basis in this context as elsewhere was the instruction to use distilled water in testing the dolls, and this is so especially having regard to the fact that paragraph 15 refers expressly to the paragraph in which this specific instruction is pleaded.

15. And there was not much comfort for Mr Mills-Owen in what Mr Griffiths had to say elsewhere in argument about paragraph 15. He said that if Galco had asked for further particulars about paragraph 15, they would have been given, and it would have been told that the implied terms were negatived by the fact that Galco said how the manufacturing was to be done. In fact, of course, Galco did ask about the relevance of the manufacture on an OEM basis to the obligations of Kader under the Sale of Goods Ordinance in clear terms and Kader deliberately avoided giving these particulars. When Mr Mills-Owen protested about this and other failures to give particulars, I was able to placate him only on the basis of a repetition of the same assurance given by Mr Griffiths, amplified by a confirmation by Mr Griffiths of my understanding that Kader was not seeking to say that it relied on any direction or instruction given or not given by Galco other than the one relating the use of water in testing the dolls.

16. The result of all this is that I do not now know on what basis Kader is going to put its case, and, if I do not know, nor does Galco. I tried to get this trial to proceed on the basis of Mr Griffiths assurance that the only relevant instruction given by Galco to Kader was to use distilled water in testing the dolls; that this would be the only basis upon which the ordinary obligations of a manufacturer and seller might be altered. It is now not clear that this is the situation; that Kader may be seeking to say that those normal obligations are changed by other factors that are not specifically pleaded. I do not, of course, mean to imply that Mr Griffiths has sought in any way to mislead me or Mr Mills-Owen, but there is certainly some misunderstanding. This may be my fault; perhaps I should have insisted that the position be stated clearly in the pleadings so that there would be no such misunderstanding. But this is not a reason why I should not now see to it that there is no misunderstanding. I do not believe that we can proceed, or I can expect Galco to proceed, until it is quite clear on what basis Kader is putting its case. Spelling this out, Kader must say clearly and specifically, without room for any misunderstanding, precisely what it is, if anything, that it is said Galco agreed, or did or did not do, so that the obligations of the manufacturer and seller of goods are not the usual obligations of a manufacturer and seller of goods. For example, if Kader wishes to say that it is not liable as a manufacturer and seller of goods for defects in those goods because those defects arose from something Galco told it to do, or did not tell it to do when it should have done so, Kader must set up the contractual basis for that plea, including when, where and by whom it was agreed, and precisely what it is that Galco told it to do or failed to tell it to do.

17. Mr Griffiths has said repeatedly, in effect, that the fact that the production of the dolls was to be according to Galco's specifications and directions is not in issue between the parties. It is true that Galco does allege in its statement of claim that it gave specifications regarding the manufacture of the dolls, but this cannot be taken to mean that where Kader alleges that the contracts were on an OEM basis and implies that, because of this, Kader's normal obligations as a manufacturer and seller were somehow changed, that the parties are ad idem on this. Clearly, they are not. In fact, where Galco pleads that, as part of the course of business Galco instructed Kader to manufacture the dolls according to Galco's written specifications, Kader says it makes no admission regarding this.

18. When Galco sought particulars of the various allegations in the defence relating to specifications, directions, etc. , the typical response by Kader was to say, apart from the inappropriate remark that the request was "oppressive and/or flippant", whatever that might mean, that they are too numerous to particularise and they, other than in relation to water testing, are not relevant. I tolerated this response in relation to the amendments I allowed on the assurances of Mr Griffiths and for the sake of getting on with the trial. Now, I am not longer prepared to do so. The response is unacceptable. If Kader relies on the various specifications and directions, however they are expressed, it is no answer to say that they are too numerous to particularise, and, if they are relied upon, they cannot be irrelevant. And if it does not rely upon them, it must say so clearly. It cannot be right for Kader to say that relies on a "contractual framework ... whereby the parties agreed that [Galco's] specifications and directions were to be adopted and implemented by [Kader] in the manufacture of the dolls" and, in effect, that this "contractual framework" somehow effects what would be Kader's normal obligations as a manufacturer and seller, but to say to Galco and the court that it is not going to tell us what those specifications and directions are. If it so that Kader wishes to allege that, if the dolls were defective, it was because they were tested with distilled water, that Galco told them to test the dolls with distilled water and that is what it did, and that is the only specification, direction, instruction, etc. that is said to have any effect on what would otherwise be the usual obligations of the manufacturer and seller of goods, it must say so in clear terms. Or, if it alleges that the so-called contractual framework has some other consequence on the legal relationship between the parties, this must be stated. Kader must not leave Galco or me wondering whether there is some other effect of OEM terms that has not been stated clearly and specifically.

19. So, what is to happen now? In the present state of Kader's pleadings, I cannot give leave at this time for the evidence of Mr Ting and Mr Tsang to be adduced. This can be properly considered only when we know precisely what it is that Kader, on its pleadings, is seeking to establish. That can be done only by Kader answering properly Galco's request for further and better particulars to the re-amended defence. I hope I have made it reasonably clear in what way I regard the answers given as defective, but I will hear counsel on what specific directions should be given. I will also hear counsel on the time-frame within which those particulars should be furnished and generally on what is to happen in relation to the trial. There is also the question of costs upon which I should hear counsel.