TECHNOLOGY INNOVATION MANUFACTURING LTD v. GOOD POWER INTERNATIONAL LTD

DCCJ 4301/2003 & DCCJ 4318/2003 

(Consolidated)

 IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 4301 OF 2003

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AND

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 4318 OF 2003

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(Consolidated pursuant to Order of Her Honour Judge C.B. Chan dated 4^th December 2003)

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JUDGMENT

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1.  The present dispute arises from the quality and functionability of certain integrated circuits supplied by Good Power International Ltd, the Defendant (“the Defendant”) (in the lead action), to Technology Innovation Manufacturing Ltd, the Plaintiff (“the Plaintiff”) (in the lead action).

2.  In gist, the Plaintiff claims that some of these integrated circuits supplied were of such a quality or specifications that were incompatible with the ones the Plaintiff had ordered and had been previously supplied with.    As a result, the Plaintiff has suffered loss and damage, in the form of additional labour and costs it has incurred to rectify the problems, compensation it has paid to its sub-purchaser, and its loss of future business.  

Background and the disputes

3.  Other than what I specifically indicated below as to the parties’ own respective case, the following are the uncontroversial or unchallenged factual matters leading to the present dispute.

4.  The Plaintiff is a Hong Kong incorporated company carrying on, amongst others, the business of developing and manufacturing steering wheels for video game consoles.

5.  The person who has the overall in-charge of the Plaintiff is one Mr Ip Wai Hung (“Mr Ip”).

6.  The Defendant is a Hong Kong company with its headquarter company and base in Taiwan.  The head company in Taiwan is known as Sun Light Application Company Limited (“Sun Light”).  The Defendant carries on the business of, amongst others, supplying integrated circuits.

7.  In about May 2002, the Plaintiff developed a new series of universal steering wheel (“the Steering Wheel”) for 3 video game consoles, namely, PlayStation 2 (“PS2”), Game Cube and Xbox.

8.  However, the Steering Wheel’s standard and default configurations are formatted to comply with the communication format of PS2.

9.  As a result, in order to ensure compliance in its working, when the Steering Wheel is connected to a console other than PS2, such as Xbox, a converter (“the Converter”) called “PS2-TO-X-BOX” is required to be connected between the Steering Wheel and the console to convert the PS2 communication format to the Xbox console’s communication format.

10.  The central or fundamental component of the Converter is an integrated circuit (“the Converter IC”).  Each Converter requires one such Converter IC.

11.  For the purpose of considering whether to place an order for the supply of integrated circuits to manufacture the Converter ICs, the Plaintiff was provided with some samples of various integrated circuits by the Defendant.  These sample integrated circuits have the model numbers of GT-5313 and GT-5313-1.  Integrated circuits model number GT-5315 come with a body marking number of CY7C65113-SC THA (“the Old Marking”).

12.  It is the Plaintiff’s case that in the course of sourcing the supply from the Defendant, its staff, one Mr Hui Tak Lung, had informed one Mr Jimmy Kwok (“Kwok”) of the Defendant that these integrated circuits would be required for the purpose (“the Purpose”) of making the Converters to be connected to the Steering Wheels, which would be on sold to the Plaintiff’s overseas customers.

13.  After being provided with the sample (“the Sample”) of integrated circuit with model number GT-5313 with the Old Marking, and having tested it, the Plaintiff decided to place purchase orders for such integrated circuits.   It is common ground that since late August 2002, the Plaintiff had started placing purchase orders with the Defendant for the provision of the Old ICs.

14.  By its fax dated 20 August 2002 addressed to Kwok, the Plaintiff confirmed to the Defendant that it was to place orders for the Old ICs.  In the fax it is stated expressly that the purchase was subject to the term (“the Express Term”), amongst others, that the integrated circuits are of the Old Marking, and that substitute is only allowed after approval by the Plaintiff’s engineering department.

15.  There is again no dispute that the manufacture of the Converter was carried out for the Plaintiff by a factory (“the PRC Factory”) in the Mainland.

16.  Insofar as the earlier batches of these Old ICs that had been delivered to the Plaintiff are concerned, it is not disputed that they all bore with the Old Marking.  It is also the Plaintiff’s case that all the Converters fitted with these Old ICs with the Old Marking functioned well and had not caused any problems when the Steering Wheels were used with the various video games consoles.

17.  However, in late December 2002, the PRC Factory discovered that about 180 pieces of integrated circuits delivered by the Defendant bore a different marking, being CY7C65113-SC CG52320M THA9928 (“the New Marking”).

18.  The PRC Factory by way of an email dated 30 December 2002 enquired with the Plaintiff whether they could proceed to manufacture the Converter ICs using the New ICs with the New Marking, which according to the initial tests conducted appeared to be problem free.

19.  It is the Plaintiff’s case that after they had received the enquiry from the PRC Factory, it through one Ms Win Chow (“Chow”) made an inquiry with Kwok as to whether the New ICs with the New Marking were any different from the Old ICs with the Old Marking. 

20.  By way of a fax dated 6 January 2003 signed by Kwok for the Defendant and addressed to Mr Ip for the Plaintiff, Kwok represented that according to the reply from Taiwan, the Old and New ICs were the same integrated circuits having the same hard and software.  The Old ICs’ functionability was the same as that approved and recognized by the Plaintiff.  He also asked the Plaintiff to use the New ICs with ease in mind.    

21.  It is the Plaintiff’s case that in reliance on the Defendant’s representation (“the Representation”) through Kwok that the New ICs with the New Marking were of the same quality and function as the Old ICs and the Old Marking, it continued to place two further orders with the Defendant respectively on 21 January 2003 and 21 February 2003 to purchase respectively 28,786 and 1,841 pieces of integrated circuits. 

22.  The Defendant delivered these newly ordered integrated circuits respectively on 12 February 2003 (for 12,626 pieces), 6 March 2003 (for 16,160 pieces) and also on 6 March 2003 (for 1,841 pieces).   The Defendant also respectively issued three invoices for these three deliveries, namely invoice IV-2003-G4156 dated 12 February 2003 (“1st Invoice) for HK$138,886, invoice IV-2003-G4158 dated 6 March 2003 (“2nd Invoice”) for HK$177,760 and invoice IV-2003-G4159 dated 6 March 2003 for HK$20,251.

23.  The Plaintiff settled the 1st Invoice, but countermanded the post-dated cheques making payments for the 2nd and 3rd Invoices (totalling HK$198,011).  It is the Plaintiff’s case that they stopped payment for the 2nd and 3rd Invoices because the integrated circuits delivered and covered by these two invoices are defective.  They had caused serious communication problems in the Converters manufactured with these integrated circuits.  It is part of the Plaintiff’s case that these defective integrated circuits are all of the New ICs with the New Marking.

24.  The predominant problems (“the Problems”) experienced by the Steering Wheels using the Converters made with the New ICs with the New Marking were that the game played with these Steering Wheels would be “hanged”, which could not be re-started unless it was rebooted, or from time to time the game would be switched off by itself.  These problems usually arise a few minutes after the game was started.

25.  However, in order to meet the shipping deadlines to supply the Steering Wheels with these Converters to the Plaintiff’s sub-purchaser of in the United States, Intec Inc (“Intec”), the Plaintiff had no alternative but to seek to fix the Problems themselves by engineers with the staff working at the PRC Factory.  It is the Plaintiff’s case that they managed to miminize the Problems by installing certain additional circuits as filters in the Converters, making it longer before the Problems arose after the game was started.  It however could not entirely resolve the Problems.

26.  Eventually, Intec made complaints to the Plaintiff in relation to the Problems experienced.  It is the Plaintiff’s pleaded case that it compensated Intec by providing to Intec free of charge 3,200 pieces of the Steering Wheels of model number G5286 and 5,000 pieces of Converters (made of Converter ICs supplied by another supplier instead of the Defendant) for replacement of malfunction units.

27.  By way of the present action, the Plaintiff now claims against the Defendant for the loss and damage suffered by reason of the supply of the New ICs with the New Marking, which are defective as mentioned above.    The various heads and quantum of the Plaintiff’s pleaded damage and loss under the Amended Statement of Claim are as follows:

(1)	HK$82,106.80 as the additional cost of labour and materials incurred by the Plaintiff in rectifying the defective integrated circuits supplied by the Defendant:
	(a)	HK$66,150 as the manpower expenses incurred by 7 engineers working for 70 hours at the averaged hourly rate of HK$135.00.
	(b)	HK$15,956.80 as the additional materials and labour costs.
(2)	HK$291,200 as additional manufacturing costs of 3,200 pieces of the Steering Wheels and HK$97,050 for 5,000 pieces of Converters, which are all provided free to Intec as compensation for the defective Converters using the Defendant’s defective integrated circuits.
(3)	HK$1,179,088 as loss of profits suffered by the Plaintiff since Intec has ceased to place further orders for steering wheels with the Plaintiff in 2004 after the incident of the defective Steering Wheels using the Defendant’s defective integrated circuits.

28.  Given that the claim was commenced in the District Court, Ms Leung, counsel for the Plaintiff, submitted at the beginning of the trial that the Plaintiff was contended to limit the quantum in total up to HK$1,000,000.

29.  The Defendant does not dispute that it had supplied to the Plaintiff the New ICs with the New Marking.  However, the Defendant denies that the New ICs were defective as alleged.  It also says that they performed and function the same as that of the Old ICs with the Old Marking.

30.  The Defendant also says despite its repeated requests, the Plaintiff had refused to allow the Defendant’s representatives to go to the PRC Factory to verify and find out the cause of the Problems and to assist in solving them if they were a result of the integrated circuits supplied by the Defendant.

31.  In the circumstances, by way of its action under DCCJ 4318 of 2003, which has become the counterclaim after the action was consolidated with the Plaintiff’s claim under DCCJ 4301 of 2003, the Defendant counterclaims HK$198,011 as the outstanding price of the disputed integrated circuits already delivered to the Plaintiff.

The issues

32.  In light of the above contentions and the cause of actions pleaded by the parties, the core issues that call for determination at the trial are:

(1)	Whether the New ICs with the New Marking are defective, in that they had caused the Problems.
(2)	If so, whether in supplying the New ICs that do not bear the Old Marking, the Defendant was (a) in breach of the Express Term of the sales contract, (b) in breach of an implied term of the sales under the section 17 of the Sales of Goods Ordinance (Cap 26) (“SOGO”) for supplying the New ICs which do not correspond to the Sample, (c) in breach of an implied term of the sales under section 16 of SOGO for supplying the New ICs which are not fit for the Purpose or not of merchantable quality.
(3)	Whether the Defendant through Kwok is guilty of fraudulent misrepresentation in making the Representation.
(4)	If the answers to (2) and/or (3) above are affirmative, whether Plaintiff has suffered the various heads and quantum of loss and damage as pleaded by reason of the Defendant’s breaches or fraudulent misrepresentation.
(5)	Whether the Defendant should be entitled to the payment of the outstanding price of the integrated circuits as counterclaimed.

33.  I will now deal with the evidence adduced by both parties in relation to the above issues and my findings thereof.

Evidence and findings

Issue 1 : Whether the New ICs with the New Marking are defective

The Witnesses

34.  The Plaintiff calls[1] Mr Ip as a factual witness and one Dr Ralph Ip Wai-Lam (“Dr Ip”) as the expert witness to prove that the New ICs with the New Marking function differently from the Old ICs with the Old Marking, which have caused the Problems experienced by the Steering Wheels using the Converters made with the New ICs.

35.  The Plaintiff relies on two expert reports respectively filed on 5 July 2005 (“the 1st Expert Report”) and 5 September 2005 (“the 2nd Expert Report”), which are both signed and endorsed by Dr Ip.

36.  The Defendant has not called any expert witness nor has it filed any expert report.  It has called one Hsing Ming Keui Ben (“Mr Hsin”) as the only factual witness.  Mr Hsin is and was the supervisor of the engineering department of Sun Light, the parent company of the Defendant in Taiwan.

The expert evidence

Dr Ip’s expertise

37.  Although the Defendant adduces no expert evidence of its own, it challenges Dr Ip’s expertise in giving expert evidence on the quality and performance of integrated circuits as he does not hold any specific qualifications in integrated circuits engineering or science, nor has he shown any specific and extensive experience in the design and manufacture of integrated circuits.

38.  Dr Ip holds a PhD degree in manufacturing engineering.  He also holds a master degree in computer integrated engineering.  Since 1993, he has been an Associate Professor of the department of manufacturing engineering of the City Univesity of Hong Kong.  He says in evidence that part of his expertise is in megatronics engineering, and the study of integration between electronics and mechanical devices and equipment.  He has regularly advised, conducted and reported on many testing on various machineries, which from time to time included carrying out tests on integrated circuits, which are an electronic device widely employed in manufacturing machineries to achieve controlling functions.  

39.  The Defendant has not been able to show anything which could rebut or challenge Dr Ip’s evidence on his expertise and experience in carrying out functionality and performance tests on integrated circuits.   The Defendant also has not shown any evidence or basis to support its suggestion that only a person with a qualification and necessary experience in integrated circuits design or manufacturing could give expert opinions on the basic information of the structures and components of an integrated circuits and to carry out functionability and performance tests on them.

40.  There is no reason I should doubt Dr Ip’s evidence on his experience and expertise.  I therefore reject the Defendant’s submissions and accept that Dr Ip has the necessary expertise to provide the 1st and 2nd Expert Reports and to give expert evidence on whether the New ICs with New Marking are different from, and function differently, from the Old ICs.

The 1st Expert Report

41.  The 1st Expert Report concerns various integrated circuits functionability tests carried out on three different samples of Converter using different integrated circuits.     One sample (sample A) is said to be made of the Old IC with the Old Marking.  One (sample B) is said to be made of the New IC with the New Marking, while the other one (sample C) is of the New IC but with modification works done by the Plaintiff.  The tests were said to have been carried out respectively with the Microsoft’s testing programme of controller and the video game known as “Sega GT 2002”.

42.  The tests effectively show that sample A worked normally without any problems.  Sample B had various electronic communication problems when used, and resulted in malfunctioning similar to the Problems.   Sample C caused less various electronic communication problems and resulted in less severe malfunctioning when compared with sample B. 

43.  In gist, the results of the 1st Expert Report are that:

(1)	Sample A which used the Old IC with the Old Marking provided a stable and effectively problem free performance.
(2)	Sample B which used the New IC with the New Marking caused various interruption problems.  These might be due to problems in the hardware, or software, or both of the New IC.  However, it is impossible to identify which was the actual cause.
(3)	Sample C is not problem free but has a better performance and less interruption problems than Sample B.

Whether the 1st Expert Report should be accepted

44.  When asked by the Court, Dr Ip confirms that:

(1)	All the tests as set out in the 1st Expert Report were carried out by at the Plaintiff’s own laboratory.  Although it was Dr Ip who had advised Mr Ip on the procedures in relation to these tests, they were in fact all carried out personally by one Mr Hui Tak Lung (“Mr Hui”), who worked for the Plaintiff and had an electronic engineering background with a higher certificate in electronic engineering from the Hong Kong Polytechnic.
(2)	Neither Dr Ip nor anyone from his own department at the City University had ever supervised or even seen any of the tests set out in the report when they were carried out by Mr Hui.
(3)	Dr Ip had all along only contacted and liaised with Mr Ip in relation to the 1st Expert Report.
(4)	The draft 1st Export Report was provided to him by Mr Ip, and after clarifying with Mr Ip some apparent less clear statements in the draft, Dr Ip signed off the finalized draft as revised by the Plaintiff without any amendments.   In his view, he believes the 1st Export Report was drafted by Mr Ip, although Mr Ip probably would have obtained the empirical information of the tests results from Mr Hui. He has formed this view because, judging from the language used in the report, he does not believe Mr Hui, who only holds a certificate level qualification, could have been able to write such a report.
(5)	He has no personal or actual knowledge whatsoever as to whether what have been set out in the 1st Expert Report are true and accurate.  For example, he has no actual or personal knowledge as to whether sample A was in fact made of the Old IC while samples B and C of the New IC.   He also has no knowledge whether those samples were in fact used to carry out the corresponding tests as set out in the report.

45.  Ms Leung, upon finishing her examination in chief with Dr Ip, also confirms to the Court that Dr Ip is the brother of Mr Ip.

46.  When asked by the Court as to why he would have signed off the 1st Expert Report which he has no personal knowledge about, coupled with the fact that he has not even spoken with Mr Hui (the very person who is said to have actually carried out the tests), Dr Ip answers that he has to trust people.  When further asked as to on what basis he could trust Mr Hui or Mr Ip in coming up with the draft report, he only says one has to start from somewhere.

47.  At the same time, the only person who should have actual knowledge on the carrying out the tests, Mr Hui, is not called to give evidence and be cross examined.  There is no explanation as to why he is not called.

48.  In light of the above, in my view, there is no evidential or logical basis to support Dr Ip’s purported trust and reliance on the purported accuracy and truth of the matters stated in the report. 

49.  I simply could not therefore derive any confidence in the accuracy or correctness of the matters and results stated in the 1st Expert Report.  I do not have sufficient evidence before me to even accept that the New IC with the New Marking was in fact used as sample B in the tests to contrast them with the Old IC with the Old Marking as sample C. 

50.  In the premises, I would not attach any weight to the 1st Expert Report as evidence to support the Plaintiff’s case on the issue as to whether the New ICs are different from, and do function differently, from the Old ICs.

The 2nd Expert Report

51.  The 2nd Expert Report is effectively a report on the microscopic inspection of the some of the interior layers of samples respectively of the New and Old ICs.  The report shows that there were some different structural circuitry arrangements inside these two integrated circuits.

52.  In contrast to the 1st Expert Report, the examination of the subject matter integrated circuits as set out in the 2nd Expert Report were carried out personally by Dr Ip himself.

53.  Dr Ip also says in his oral evidence that an integrated circuit consists of a hardware component and a software component.  The hardware component is the circuitry design within a particular integrated circuits as fixed on the baseboard.  The software is the programming design “burnt” into the integrated circuit to drive and give commands as to how the integrated circuit should function.  Any changes in any of these two components would affect the manner of performance and functions of a particular integrated circuit.

54.  It is also Dr Ip’s evidence that a different marking number between two integrated circuits usually would mean that there is a difference between them in either the hardware or software or both, although it may not be necessarily so.    Although the hardware component could be examined and inspected microscopically by physically opening up the integrated circuit, without the information provided by the manufacturer, one cannot verify whether there is a different software in the two integrated circuits.  This is so because the software programme is generally a particular design developed by the manufacturer and is of commercial confidence.  The software programme cannot be “extracted” and examined after it has been burnt into the integrated circuits.

55.  For the Defendant, in relation to the question as to the relevance of the marking number of an integrated circuit, Mr Hsin gives evidence as follows.

56.  Mr Hsin says all the New ICs and Old ICs were supplied by a US manufacturer known as Cypress Semiconductors (“Cypress”).  Cypress maintains a branch company in Taiwan, and Sun Light’s staff would liaise with the staff of Cypress’ Taiwan branch office in relation to any problems concerning the Cypress’ products.

57.  At paragraph 4 of his witness statement, Mr Hsin says according to his knowledge after making enquiry with Cypress’ Taiwan branch office, the New and Old Markings are only for marketing purposes.  Cypress further confirms that the New Marking is the marketing reference for another customer and the New IC has the same “physical chip body” as that of the Old IC. 

58.  The Defendant relies on a memo dated 29 April 2004 (“the Memo”) said to have been issued by Cypress’ Taiwan branch company confirming the above.

59.  Mr Ip (acting then in person for the Plaintiff when the trial resumed in August 2007) submits that the Memo is suspicious as (a) it does not bear the proper name of Cypress’ Taiwan branch company as set out in Cypress’ official webpage, (b) Cypress logo appearing on it is again different from that appearing at Cypress’ official webpage, and (c) the Memo does not even have an address or contact information of Cypress’ Taiwan branch office.

60.  Mr Ip even put to Mr Hsin in cross examination that the Memo was fabricated, which was denied by Mr Hsin.

61.  The allegation of fabricating a document to assist a defence is a serious one.  I do not think I could conclude that the Memo was a fabricated or fake document simply based on the suggestions that the name of the company and the logo appearing on it seems to be different from those appearing on Cypress webpage.  This is particularly so as the copy of Cypress’ webpage provided to the Court by the Plaintiff is one downloaded in April 2006, some 2 years after the Memo.   There is no evidence before me to suggest that Cypress logo or the name of its Taiwan branch office had not changed between 2004 and 2006.

62.  It is also important to note that, Ms Leung at the hearing on 9 August 2006 (when she was still appearing for the Plaintiff) confirmed to the Court that the Plaintiff was not disputing the authenticity of the Memo.

63.  I therefore do not accept the Defendant’s submissions that the Memo is a fabricated document.

64.  On the other hand, even taking the Memo at its face value, it does not support the Defendant’s case that the hardware or the software of the New ICs is the same as that of the Old ICs.

65.  First, the Memo only says that the “physical chip body” of the New IC is the same as the Old IC.  Physical chip body appears to me to be a reference more to the physical make out and the base board of the integrated circuits but not the circuitry hardware.  Secondly, it is not even suggested in the Memo that the software of the two integrated circuits are the same.  Thirdly, Cypress never states expressly in the Memo that the function and performance of the New ICs and the Old ICs are identical or the same.  Given that the Memo was obtained in 2004 apparently specifically to deal with the Plaintiff’s allegations in its claim, one would have thought that if the two integrated circuits were indeed the same functionally, Cypress would and ought to have expressly stated that in the Memo.

66.  Insofar as Mr Hsin’s own evidence is concerned, as it is his evidence under cross examination that he obtained his knowledge by making inquiries with Cypress’ agent (but not Cypress’ Taiwan branch company as he initially said) in Taiwan, it cannot go anywhere further than or beyond what the Memo can say as I observed above.

67.  It is also pertinent to note that, although it would have apparently been within the Defendant’s ability to conduct its own tests on the Old and New ICs to show that (a) they have the same hardware and software, and (b) they have the same performance and functionability, the Defendant has not provided any such expert evidence.

68.  In the circumstances, I do not accept Mr Hsin’s evidence but prefer and accept the conclusions in the 2nd Expert Report and Dr Ip’s evidence.

69.  I therefore find that on a balance of probabilities, the different marking number on the New ICs and the Old ICs signifies a change in the hardware and/or software within them.

Whether the New IC caused the Problems

70.  Mr Ip gives evidence as to the events leading to the discovery of the Problems and the dispute.  His evidence substantially confirms the Plaintiff’s case as set out above in paragraphs 4 to 27, much of which is not in material controversy between the parties.

71.  He further says that the Plaintiff itself carried out some initial tests of the New ICs and found that they caused the Problems. 

72.  The Defendant does not mount any challenge in the evidence that there existed the Problems as experienced by the Steering Wheels as said by the Plaintiff.  The main contention is that the New ICs did not cause these problems.  

73.  In this respect, the material difference in the evidence as given by Mr Hsin can be summarized as follows.

74.  Mr Hsin says the 180 pieces of the New ICs with the New Marking were delivered to the Plaintiff through the PRC Factory in late December 2002 for testing purpose, as the Defendant informed the Plaintiff in advance that there would be these integrated circuits with the new marking to be supplied by Cypress. 

75.  The Defendant only continued to supply the Plaintiff the New ICs with the New Marking after the Plaintiff having this opportunity to test them and to confirm their purchase by placing new orders.

76.  In around March 2003, when he heard about that the Plaintiff was experiencing problems with the Converters apparently using the Defendant’s integrated circuits, Mr Hsin repeatedly tried to contact Mr Ip to arrange the Defendant’s representative to visit the PRC Factory to find out if it is the problems with the integrated circuits, and if so, to offer assistance to rectify them.  However, Mr Ip and the Plaintiff had been avoiding him and refused to provide the PRC Factory’s address and to allow the Defendant’s representative to assist in verifying and solving the problems said to have been experienced by the Plaintiff.

77.  Mr Ip in evidence denies these allegations.  He says the Defendant only insisted on saying that the New ICs and the Old ICs were the same and there was no problem with them.   He also only met with Mr Hsin to discuss about potential settlement of the disputes.

78.  In relation to the above material allegations of the Defendant, I do not accept Mr Hsin’s evidence as they are substantially contradicted by contemporaneous documents.

79.  In the PRC Factory’s email dated 30 December 2002, it was stated clearly that it “discovered” 180 pieces of integrated circuits bearing a different making number  “mixed” within the batch of the Old ICs delivered by the Defendant.  It further asked for instructions from the Plaintiff as to whether it should still proceed to use these 180 pieces of integrated circuits for manufacturing purposes.   

80.  This contemporaneous document shows that it was a “surprise” to the PRC Factory and the Plaintiff to find the 180 pieces of New ICs.  It is therefore unlikely to be the case that the Plaintiff had been informed in advance of the delivery of these New ICs for testing purposes.  The email also shows that these New ICs were not delivered separately from the Old ICs, which should have been the case if they were delivered specifically for testing purposes as suggested by Mr Hsin.  

81.  I therefore reject Mr Hsin’s above evidence.

82.  On the other hand, although I do not attach any weight to the 1st Expert Report, the Plaintiff’s case that the Steering Wheels produced by the Plaintiff since March 2003 had experienced the Problems is supported by the following undisputed evidence or contemporaneous documents:

(1)	The New ICs were only delivered to the Plaintiff in early 2003.
(2)	There had been no complaint of any problems experienced by the Converters made with the integrated circuits delivered before early 2003.
(3)	The Plaintiff through Mr Ip had written to the Defendant respectively on 1 April 2003, 24 April 2003 and 2 May 2003 complaining about the Problems experienced by the Converters.  It reserved its right to claim against the Defendant.
(4)	The email from Intec dated 11 June 2003 to Plaintiff complaining (a) about the high return rate of the Steering Wheels in May, and (b) that there had been significant “disconnecting” problems experienced with the use of these Steering Wheels especially when played with the video game “Sega GT-2002”.

83.  By reason of the above, I find that on balance it is more likely than not that there existed the Problems experienced by the use of some of the Steering Wheels as said by the Plaintiff. 

84.  The question is, are the New ICs the cause of the Problems?

85.  It was put to Mr Ip under cross examination that since it is perhaps the Plaintiff’s choice of integrated circuits of the model number GT-5313 instead of GT-5313-1 which had caused the problems with Sega GT-2002, as the two might not be compatible, and the Plaintiff could not have foreseen it as the Plaintiff was only able to test the Steering Wheel with this game later in 2003.

86.  I note that the Defendant has not adduced any positive evidence to show that it is likely that it was the incompatibility of the game Sega GT-2002 that had caused the problems.

87.  Further, the Defendant’s proposition is contradicted by Intec’s email dated 11 June 2003, which shows that the Steering Wheels produced before early 2003 had experienced no problems even when playing with the Sega GT-2002 game.  It is stated in the email as follows:

“	…We found that there is a ‘disconnect’ problem in Sega GT 2002 of X Box.  I am [sic] wonder that the game ahs been launched since last September.  Why does problem happen now?  There must be something wrong of the recent production.  Please comment.”

88.  In light of the above, I do not accept that the evidence shows that the Problems were caused by the Plaintiff’s own choice of the specific model integrated circuit coupled with its incompatibility with a newly released video game.

89.  In light of the evidence I accepted above, and given that the only identified change in the manufacture of the Steering Wheel between end of 2002 and early 2003 is the use of the New ICs instead of the Old ICs for the making of the Converters ICs, I find that the Plaintiff has shown by objective evidence that the Problems are more likely than not caused by the New ICs, which as I found earlier, are likely to have a different hardware or software from the Old ICs.

90.  I emphasize above that it is the objective evidence that has proved the Plaintiff’s case on this issue, because I do not find Mr Ip a credible witness and thus I do not attach any weight to his evidence.  I come to this view for the following reasons:

(1)	First, Mr Ip gives inconsistent evidence as to when he first received the software of the game Sega GT- 2002 for testing purposes.  Under evidence in chief he says he only received it in around May 2003.  However, when pressed under cross-examination, he changed his evidence to say that it was early 2003.
(2)	Then, despite the Court’s usual warning and direction to a witness that he should not talk to or discuss with anyone about his evidence while he was still in the witness box, Mr Ip saw fit to consult allegedly a staff of the Plaintiff during a lunch break when he was still giving evidence, to purportedly clarify this part of his inconsistent evidence.
(3)	When I asked him why he did it despite of the direction and warning, Mr Ip even sought to argue that he was not in breach of the direction as he was not “discussing” the evidence with someone else; he only asked questions and obtained answers from that other person.  To me, Mr Ip’s purported explanation is without merits and is purely technical in order to defend his fault.
(4)	I regard Mr Ip in blatant and serious disregard and breach of the court’s direction given to him as a witness.
(5)	It is thus clear to me that Mr Ip is prepared and willing to change his evidence as well as to breach any court directions in order to assist the Plaintiff’s case.
(6)	Mr Ip is also generally evasive in answering questions.

Issue 2 : Whether the Defendant was in breach

91.  Given the uncontroversial part of the evidence and my findings above, I also conclude that:

(1)	The sale of integrated circuits between the Plaintiff and the Defendant is one by sample.  The sample is one of the Old IC with the Old Marking.
(2)	Insofar as necessary, I also find that the Defendant through Kwok knew that the Plaintiff purchased the integrated circuits for the purpose of manufacturing the Converters, which were for subsale purposes.
(3)	It is a term of the sales contract as expressly provided that the integrated circuits to be supplied by the Defendant should bear the Old Marking.
(4)	It is also an implied term of the sales that the integrated circuits to be supplied should correspond with the Sample, or that it should be fit for the Purpose or of merchantable quality.
(5)	Given that the New ICs with the New Marking are different from the Old ICs with the Old Marking, which as I find above had caused the Problems, the Defendant was in breach of these express and implied terms of the sales contract.
(6)	Subject to the Plaintiff proving the quantum, the Defendant is therefore prima facie thus liable to the Plaintiff for its loss suffered as a result of the manufacture of the Converters using the New ICs.

Issue 3 : Did the Defendant make any fraudulent representation as alleged

92.  It is the Plaintiff’s alternative case that the Representation is factually incorrect and the Plaintiff through Kwok made it fraudulently, in the sense that Kwok knew or that the Representation was factually incorrect when he made it or that he was reckless in not caring whether it was correct or not when making it.

93.  However, there is no evidence to show why Kwok in making the Representation should know that it was incorrect. In his reply fax, he said he obtained an answer from Taiwan based on which he made the Representation.

94.  There is no evidence to show with whom in Taiwan he obtained this answer.  It is equally possible that he obtained the answer from someone in Cypress’ Taiwan office, in which case there is nothing to show why he should not believe in it, or why he ought to have known that it was wrong.

95.  In the circumstances, I am not satisfied that on the evidence before me, the Plaintiff has proved that Kwok had acting on behalf of the Defendant made a fraudulent misrepresentation by way of the Representation.

96.  I therefore reject this alternative basis of the claim.

Issue 4 : Quantum

Additional labour and costs

97.  It is the Plaintiff’s case that its engineers had done some works on the Converter ICs to minimize the problems.  The Defendant did not challenge this in evidence.   I therefore hold that they did.

98.  In support of the quantum claimed under this head, Mr Ip exhibited a table to his witness statement which sets out the respective actual number of hours of each of seven named engineers, including Mr Hui and Mr Ip themselves, purportedly working on the modification of the Converters made of the New ICs to minimize the Problems it caused.    The Plaintiff also provided a payroll record of the monthly salary of these engineers to work out their average hourly rate.

99.  The Plaintiff says from this information, each of the seven engineers had on average worked for 70 hours at the averaged hourly rate of HK$135.00. 

100.  This would make a total of 490 man-hours of engineering work, which is not insignificant.

101.  However, there is no empirical evidence (such as log book) to show that each of these seven engineers had in fact spent the specific hours set out in the table to work on the modifications.   It is difficult to see how the Plaintiff on one hand is able to set out the specific hours of works relevant to each of these seven engineers in the table, but on the other hand fail to provide the underlying empirical evidence or records to support the same.  None of these engineers other than Mr Ip has been called to give evidence.  The evidence is thus nothing but a bare assertion by Mr Ip.

102.  Without the empirical evidence and coupled with my view that Mr Ip is not a credible witness, I am therefore not satisfied that the Plaintiff has proved that it has incurred a total additional labour cost in the equivalent sum of HK$66,150.

103.  The Plaintiff relies on a quotation issued by the PRC Factory dated 9 April 2003 to show that the cost of the additional materials required to install additional circuits in the Converters using the New ICs.  The quotation was apparently accepted and signed by Mr Ip on 24 April 2003.  However, there is no evidence oral or otherwise that the Plaintiff has in fact paid the sum to the PRC Factory.  

104.  I am therefore also not satisfied that the Plaintiff has proved that it has suffered loss in the sum of HK$15,956.80 under this head.

105.  For the above reasons, I do not accept that the Plaintiff has proved the quantum as claimed under this head of loss.  I will however award nominal damages to the Plaintiff.

Compensation paid to Intec in the equivalent sum of HK$388,350

106.  In the Amended Statement Claim, it is the Plaintiff’s case that it has provided to Intec free of charge 3,200 pieces of the Steering Wheels (that is, model number GT 5285) and 5,000 pieces of converters to compensate Intec’s loss suffered as a result of the provision of the defective Steering Wheels. 

107.  At paragraph 35 of Mr Ip’s witness statement, he confirms the above claim and says that the unit cost of production for the Steering Wheel is HK$91.00 while the unit production cost for the Converter is HK$19.41.  There is however no empirical evidence to support these unit costs.

108.  The claim that the Plaintiff had provided to Intec free of charge 3,200 pieces of the Steering Wheels and 5,000 pieces of replacement Converters is prima facie supported by Mr Ip’s email dated 12 June 2003 sent to Mr Saied of Intec.  In this email, Mr Ip said that the Plaintiff “shall ship 3,200 pieces of steering wheel together with next order free of charge.  On the other hand, we shall produce 5,000 pieces new adapter (Weltrend’s IC) in 4 weeks for replacement.”

109.  On the other hand, the Plaintiff’s own credit note dated 31 July 2003 relied on by the Plaintiff to support this head of the claim shows that 3,200 pieces of steering wheel model number GT 5286 instead of the Steering Wheel were provided to Intec.  This is thus inconsistent with the Plaintiff’s pleaded case and Mr Ip’s evidence in his witness statement.

110.  At the hearing on 8 August 2007, Mr Ip (acting for the Plaintiff) submitted that the Plaintiff’s pleaded case is incorrect and it was a mistake.  The Plaintiff in fact provided 3,200 pieces of steering wheel of model number GT 5286 (“GT 5286”) to Intec instead of the Steering Wheels.  Then by way of its supplemental written closing submissions dated 15 August 2007, the Plaintiff submits that the unit cost for the production of GT 5286 is HK$148.02 instead of HK$91.00.  As such, the actual loss suffered by the Plaintiff under this should be HK$473,664 instead of HK$291,200 as pleaded and set out in Mr Ip’s witness statement.

111.  In the supplemental closing submissions, the Plaintiff also submits that the unit cost for the production of the Converter should be HK$13.26 instead of HK$19.41 as stated in Mr Ip’s witness statement and as pleaded.    The quantum of loss under this head should thus be HK$71,300 instead of HK$97,050 as originally claimed. 

112.  The total quantum of the loss suffered under this head is thus HK$544,964 instead of the originally pleaded claim of HK$388,350.

113.  The Plaintiff’s latest calculations of these unit costs are based on the table of bills of materials (“BOM”) provided through Mr Ip’s 2nd supplemental witness statement dated 30 August 2006.

114.  The Defendant submits that the calculations set out in the BOM are simply unreliable and should not be accepted because (a) most of the items are not supported by any underlying documentation, and (b) there are various inconsistencies of the calculations and the submissions made by the Plaintiff as set out in the Defendant’s written closing submission (at pages 6 to 7) and supplemental closing submissions (at paragraphs 1-3).

115.  I accept the Defendant’s submissions that the BOM is unreliable and that the Plaintiff’s calculations of unit costs of production is unsatisfactory and unreliable.  It is also demonstrated by the fact that even in the Plaintiff’s own case, it has changed three times as to what the unit production cost of the Steering Wheel should be:

(1)	In Mr Ip’s witness statement at paragraph 35, the unit cost is said to be HK$91.00.
(2)	At paragraph 8 of Mr Ip’s 2nd supplemental witness statement, the unit cost is said to be HK$83.276 based on calculation derived from the BOM exhibited thereto.
(3)	Then in the Plaintiff’s written supplemental closing submissions, the unit cost is further changed to HK$85.20 basing apparently also on the BOM.

116.  There is no explanation as to why there are these changes to the calculations.

117.  Similarly, there are no explanations as to why (a) the calculation of the unit cost of the Converter is changed from HK$19.41 (as set out at paragraph 35 of Mr Ip’s witness statement) to HK$14.26 as set out at paragraph 3 of the Plaintiff’s supplemental closing submission (which in turn is said to have been based on the BOM), and (b) a mistake could have been made in the pleading and Mr Ip’s witness statement relation to which model of the steering wheel was provided to Intec free of charge.

118.  For these reasons, although I am satisfied that the Plaintiff has proved that it has provided free of charge 3,200 pieces of GT 5286 and 5,000 pieces of the Converters to Intec as compensation, it has not proved to my satisfaction the quantum of the loss. 

119.  I therefore will only allow nominal damages under these heads.

Loss of future business

120.  By way of leave granted by me, the claim for loss of profit as a result of loss of future business was only added by way of the Amended Statement of Claim at the first day of the trial.

121.   It is Mr Ip’s evidence that before the incident concerning the defective Converters made of the defective New ICs, it had enjoyed a good business relationship with Intec.  However, after the incident and since March 2004, Intec had not placed any new orders with the Plaintiff for the Steering Wheels or GT 5286.  Given in 2004, Intec had continued to market steering wheels sourced from other suppliers, the Plaintiff submits that the reason for it not to place orders with the Plaintiff must have been due to its loss of confidence in the Plaintiff’s products caused by the defective New ICs incident.

122.  Based on the volume of Steering Wheels and GT 5286 ordered by Intec for the year 2003, Mr Ip says at paragraph 14 of his supplemental witness statement, and the Plaintiff submits in its written closing submissions, that it has thereby suffered a loss of profit in the sum of HK$1,179,088.90.   This calculation is based on the suggestion that the Plaintiff derives 15% profit from the sales price.

123.  However, I am not satisfied with the evidence before me that the Plaintiff has lost its business with Intec because of the defective New ICs incident.   The allegation that Intec has lost confidence in the Plaintiff’s products is speculative.

124.  First, there is no direct or clear evidence (such as any letter or email from Intec) to show that Intec has lost confidence in the Plaintiff’s products.  Other than raising the observation of the Problems as first noted, the email from Intec dated 6 June 2003 does not suggest any loss of confidence in the Plaintiff’s products.    It is not even the Plaintiff’s own evidence that Intec’s representative had told any of its representative that it did not want to purchase further steering wheels from the Plaintiff because it had lost its confidence in the Plaintiff’s products.

125.  Second, it is the Plaintiff’s own evidence that Intec had sourced the steering wheels it marketed in 2004 from other suppliers.  There is no evidence to show that the marketed price of these newly sourced steering wheels as compared with the marketed price of the Steering Wheels or GT 5286 is either lower or higher.   It is thus equally possible that Intec had opted for a new supplier who could provide the steering wheels at a lower price than that of the Plaintiff, but not because of its loss of confidence in the Plaintiff’s products.

126.  For these reasons, the Plaintiff has not proved to my satisfaction that the defective New ICs incident has caused it the loss of future business with Intec as claimed.

127.  I will therefore disallow this head of the claim.

Issue 5 : The Defendant’s counterclaim

128.  Ms Leung for the Plaintiff accepts in her opening that the Plaintiff would have to pay the Defendant HK$198,011 as the outstanding price for the integrated circuits even if it succeeds its claim for breach of contract, since the Plaintiff had in fact made use of these integrated circuits.

129.  Mr Ip at paragraph 34 of his witness statement also gives credit to this sum of HK$198,011 to set off against the loss suffered by the Plaintiff by reason of the Defendant’s breaches.

130.  In the premises, and subject to my finding above that the Defendant should be prima facie liable for the Plaintiff’s loss and damage, I also hold that the Plaintiff should pay the Defendant HK$198,011 as the outstanding price of the integrated circuits supplied.

Conclusion

131.  For the above reasons, I hold that:

(1)	There is judgment against the Defendant for nominal damages of HK$1,000.
(2)	There is judgment against the Plaintiff for the sum of HK$198,011.  The Plaintiff shall also pay interest to the Defendant on this sum at the rate of 1% above the prime rate as from time to time quoted by the Hong Kong and Shanghai Bank from 22 July 2003 until the date of judgment and thereafter at judgment date until payment.

Costs

132.  Costs is a matter of discretion for the Court.   It should however be exercised judicially and to address the justice between the parties on costs.

133.  Where a plaintiff is successful on the issue of liability but recovers only nominal damages, the usual order for costs is in the defendant’s favour.  However, where the defendant raises a discrete issue which is successfully traversed by the plaintiff, the court may make a special order requiring the defendant to pay the costs of trying the issue. See:  Hong Kong Civil Procedure 2007, para 62/3/4.

134.  In the present case, the core contention between the parties is the issue as to whether the New ICs were defective.  A substantial part of the hearing and evidence was spent almost entirely on this issue, on which the Plaintiff is successful.   In the premises, although the Plaintiff only recovers nominal damages (for not having adduced sufficient evidence to prove quantum), I do not think it is just that it should pay the Defendant’s costs of the action and the counterclaim.

135.  Further, the Defendant’s counterclaimed sum is not seriously contended or disputed both in the evidence or at trial.  Minimal time was spent on this issue.

136.  In my view, in the all the circumstances, it is just and fair to order that the Plaintiff should be entitled to 1/2 of the costs of the actions. 

137.  I therefore make an order nisi that the Defendant shall pay to the Plaintiff 1/2 of the costs of the consolidated actions to be taxed if not agreed.  I also give the Plaintiff certificate for counsel.  This costs order will be made absolute 14 days after this judgment unless any of the parties makes an application to vary it before then.