WINIMARK TOYS MANUFACTURING LTD v. KIDDIE PRODUCTS CO LTD

HCA3925/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.3925 OF 2002

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REASONS FOR DECISION

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Introduction

1. The plaintiff is a manufacturer of toy components. A manufacture of toys, the defendant had been a customer of the plaintiff since 2001. On 17 October 2002, the plaintiff commenced the present proceedings, claiming against the defendant for HK$1,696,371.64 being the balance of the price of toy components sold and delivered to the defendant. By a summons dated 20 December 2002, the plaintiff applied for summary judgment. On 17 February 2003, the master gave leave to defend on the condition of payment into court of HK$780,000 within 21 days. Pursuant to the master's order, the defendant made the payment on 10 March 2003. On the following day, the defendant filed the defence and counterclaim. The plaintiff filed its reply and defence to counterclaim on 17 March 2003.

2. Neither party was satisfied with the master's order and they both appealed. The plaintiff sought judgment whereas the defendant asked for unconditional leave to defend. At the conclusion of the hearing on 17 April 2003, I allowed the plaintiff's appeal, dismissed the defendant's cross-appeal and entered judgment for the plaintiff on the sum claimed with interest at the judgment rate from the date of order to full payment. I also ordered that the plaintiff shall have the costs of the appeal and the costs of the application before the master, to be taxed if not agreed.

3. These are the reasons of my decision.

Claims

4. The facts leading to the plaintiff's claim are either not disputed or beyond any reasonable dispute. They are summarized below.

5. Pursuant to various orders placed by the defendant, the plaintiff had delivered components to the defendant. Particulars of the transactions are set out below :

6. On 25 September 2002, the defendant made a partial payment of HK$300,000, leaving a balance of HK$1,696,371.64.

7. Initially, the defendant took the point that it had already paid the purchase order no.KP002285. Mr Focus Chan Chi Wing, a director of the plaintiff, explained in paragraph 2 of his affirmation filed on 13 January 2003 that the inclusion of the said purchase order in the relevant invoice was a typographical error. At the hearing before me, no further issue arose from this point. In both the affirmation of its general manager, Ms Wong Ye Lee, dated 5 December 2002 and the defence and counterclaim, the defendant took the point that the components delivered by the plaintiff described in paragraph 3 above was defective. But in his oral submissions before me, Mr Chan, counsel for the defendant, effectively abandoned this line of defence. The defendant now admitted that the sum claimed by the plaintiff was outstanding. The only defence that it sought to reply on was equitable set off, which purportedly arose in this way.

Defence of Set-off

8. The defendant complained that as at 26 August 2002, the plaintiff failed to :

(1) deliver the balance of the components pursuant to purchase order no.KP002741 and KP002820; and

(2) deliver any of the components under three other separate purchase orders.

9. According to Ms Wong, on or about 12 August 2002, Ms Bonnie Yip, production coordinator of the defendant's buyer, Lauender, told her that the production line of the plaintiff's factory in the Mainland was contaminated by certain chemical substance known as DINA on about 16 July 2002. As a result, production of the toy components stopped, resulting in the subsequent failure to deliver as aforesaid. Because of the plaintiff's breach, the defendant's toy products that required those components remained unfinished. The defendant was unable to sell the same to Lauender and had thereby suffered loss of profits in the sum of HK$2,125,233.10.

10. The plaintiff admitted that it did not make delivery of the components as aforesaid. However, it was because of the defendant's failure to pay for the components previously supplied, which formed the subject matter of the claims in these proceedings, that the plaintiff decided to withhold delivery.

11. The plaintiff has also adduced evidence (including that of Ms Bonnie Yip and Mr Patrick Wong, a director of Lauender) to, inter alia :

(1) explain how the presence of DINA came about on or about 16 July 2002;

(2) confirm that the merchantable quality of the final toy products delivered to Lauender was not affected;

(3) confirm that Lauender and the ultimate buyer Mattel Inc. had accepted the final toy products; and to

(4) show that the plaintiff continued to supply toy components to the defendant from 16 July 2002 and 9 August 2002; demonstrating that the defendant's allegation that the plaintiff had stopped production because of the so-called contamination problem was untrue.

The defendant has not answered by way of evidence any of these points.

12. The law relating to the defence of equitable set-off is well settled. For such a defence to apply, it must be established, first that the counterclaim is at least closely connected with the same transaction as that giving rise to the claim, and second that the relationship between the respective claims is such that it would be manifestly unjust to allow one to be enforced without regard to the other : Esso Petroleum & Milton [1997] 1 WLR 938.

13. In my view, the defence of equitable set-off is not available to the defendant. Mr Chan submitted that each of the five purchase orders constituted five different contracts of sale. But of these five orders/contracts, only two were related to the subject matters of the plaintiff's claims, that is, purchase orders no.KP002741 and KP002820. Components previously delivered under these two purchase orders as part delivery had not been unpaid for. This the defendant did not dispute. Under section 44 of the Sales of Goods Ordinance, Cap.26, the plaintiff as an unpaid seller, is entitled to withhold delivery of the balance of the components under these two purchase orders. Whether or not the plaintiff's non-delivery was due to the so-called contamination problem contaminated is immaterial. Accordingly, even taking its case at its highest in this respect, the defendant cannot complain that the plaintiff was in breach of the two orders / contracts by failing to complete delivery. The other three purchase orders are not related to the present claims at all. I am not persuaded that they are somehow closely connected with the purchase orders giving rise to the present claims. Nor am I satisfied that the relationship between the respective claims is such that it would be manifestly unjust to allow the plaintiff's claim for the balance of price to be enforced without the due regard to the defendant's claim for the alleged loss of profits arising from the unrelated orders / contracts. Mr Chan had been unable to cite any authority to support his proposition that the payment presently due to the plaintiff has been required to await the resolution of a cross-claim for such losses. In fact, the weight of the authorities is to the contrary : see Esso Petroleum & Milton [1997] 1 WLR 938, per Simon Brown LJ at p.951E-F.

Conclusion

14. For the above reasons, I made the order as set out in paragraph 1 above.