THE CONTINUITY CO LTD v. K T ENTERPRISE GROUP LTD

HCA 2326/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2326 OF 2008

----------------------

----------------------

----------------------

D E C I S I O N

----------------------

INTRODUCTION

1. There are 2 summonses before me.  The Plaintiff applies for summary judgment against the Defendant.  Depending on my ruling thereof, I will see how the Defendant’s application for amendment of its Defence is to be dealt with.

Background

2. On 14 November 2008, the Plaintiff commenced the present proceedings against the Defendant.

3. The Plaintiff said that on various dates in 2007 and 2008, by 31 purchase orders, it agreed to purchase and the Defendant agreed to sell about 1.5 m pieces of toy dogs (the “Toy Dogs”) at about US$2 m.  The Toy Dogs were produced paid and delivered.  However, the Finnish Customs later found that the Toy Dogs contained dangerous substance exceeding limit stated in the Finnish and EC law and regulations.  The Toy Dogs had to be recalled (the “Recall”).  The Plaintiff therefore claimed for, inter alia, repayment of purchase price, 10% royalty, transportation charges, expenses of the Recall and/or damages to be assessed.

4. The Defendant filed its Defence on 29 December 2008.  It is a holding defence of not admitting the Plaintiff’s case at all.  The Plaintiff was put to strict proof of its case.

5. As a result, the Plaintiff issued the present application for summary judgment.  On 23 March 2009, by consent, inter alia, usual directions for filing and serving of affidavit evidence were given.  The application was thereafter fixed before me for substantive argument on 8 June 2009.

6. Shortly before the substantive hearing, the Defendant took out 2 summonses to seek leave to adduce further evidence and to amend its holding defence.  Madam Registrar Au-Yeung heard these 2 applications.  She allowed the former, but adjourned the later to “8 June 2009 to be dealt with after the O.14 summons is disposed of” with costs reserved.

7. Parties then came before me on the scheduled date.  Mr. Tony Ko of Counsel acted for the Plaintiff.  Ms. Queenie Lau of Counsel represented the Defendant.  Upon hearing from them, I reserved my decision to be handed down.  I now do so.

DISCUSSION

(I)  Legal principles of Order 14 application

8. Both Counsel drew my attention to some authorities regarding application of summary judgment.  I did not consider that they were disputing the applicable principles.  To sum up them for the present purpose, the underlying policy of order 14 application is to prevent the defendant from delaying the plaintiff to obtain judgment in a case where the defendant clearly has no defence.  Facing such application, the Court asks 2 questions.

(a)   Factually, is what the defendant says believable in light of the undisputed or indisputable circumstances?  In so doing, the Court is entitled to take into account the commercial reality as well as contemporaneous documents.  However, mini-trial on affidavit evidence shall not be embarked.  Bare assertion is sufficient and the defendant must condescend upon particulars.

(b)   Legally, if what the defendant says is believable, does it amount to an arguable defence in law?

In the end, the burden lies on the defendant to show triable issue or some other reason for a trial to be held.

(II)  The Defendant’s case

9. By the 2 opposing affirmations filed, the Defendant explained that it was a trading company only.  Upon receiving purchase orders from the Plaintiff, the Defendant would pass the same to a PRC manufacturer who was required to source materials and to do samples for testing.  Mass production of the Toy Dogs was ordered after the Plaintiff had approved the samples.  In the present case, the Toy Dogs samples were sent to Specialized Technology Resources (H.K.) Ltd. (“STR”) for testing to ensure that they met all international safety regulations.  All STR reports confirmed that the Toy Dogs samples were in order.

10. In about mid-2008, the Plaintiff informed the Defendant of the problem.  Meetings were held but no conclusion was reached.  The Plaintiff mentioned about the Recall and compensation, but the Defendant believed that it should not be liable.  Further, the discussions between the parties touched only on certain models of the Toy Dogs and the Defendant had no idea of the 10% royalty costs at all.

(III)  Application: factually believable?

11. Considering the Defendant’s case as summed up in above, I cannot come to any conclusion that it is unbelievable.

(IV)  Application: legally a defence?

12. Turning to the analysis as to whether the Defendant’s case, if accepted, can amount to a valid defence, I have the following observations.

(a)   As pointed out by Mr. Ko, the fact that the Defendant was not the manufacturer of the Toy Dogs cannot be a defence at all.  The contracting parties under the subject purchase orders are the Plaintiff and the Defendant.  If the Toy Dogs did contain the dangerous substance as claimed, the Defendant would be held liable to the Plaintiff in contract.  The question as to whether the former can further hold the manufacturer liable will have to be disputed elsewhere.

(b)   The STR Reports were prepared for the Toy Dogs samples only.  The Finnish Customs Lab Report and the Interek Report on the other hand were done for the Toy Dogs, i.e. the Toy Dogs produced sold and delivered under the subject purchase orders.  Whether the Toy Dogs contained the dangerous substance exceeding limit is the issue to be decided in the proceedings, the quality of the Toy Dogs samples will simply be irrelevant at all.  Put it this way, even if the Toy Dogs samples were fine, the Toy Dogs delivered subsequently could still be defective.

(c)   At the hearing, when I discussed (b) with Ms. Lau, she told me that she would be advising her client to conduct test on the Toy Dogs.  Probably, it is something that the Defendant should have done months ago if it is seriously disputing the Plaintiff’s claim.  Other than reiterating the procedures between the Defendant and the manufacturer, I have not seen any reply from the Defendant to the Plaintiff’s 7 e-mails in July 2008:

(i)  18 July 2008

“As a recap of our meeting today.

EU countries, including Finland, ban the presence of phthalate (DEHP) on toys.

Basset Hounds produced by KT Enterprise (Dongguan Tianyu) was earlier confirmed by the Finland Consumer Agency that the PU noses consist of forbidden phthalate (as high as 16% DEHP).  Report and the translation was earlier sent to you.  The other 2 styles produced by KT Enterprise, Bulldog and Pug, were subsequently tested and the result confirmed that they consist of forbidden phthalate as well.  Once we received the official report, we will sent to you for reference.

KT had supplied us over 1.4 million pcs of The Dog and among those, 370,000 pcs of Basset Hounds, Bulldog and Pug were shipped to Finland.  Finland Consumer Agency will request us for full recall on all these 3 items supplier by KT Enterprise.  The recall will involve compensation to our client, recall announcement to be made in Finland, collection of stock in all stores, warehouse and consumers, replace free unit to consumer and arranging the destroy of all units, etc.  As mentioned during meeting, we expect KT to compensate TCC on 362,724 pcs of product cost + handling charge and all the related delivery cost for recall to Finland.  I understand that you will have internal discussion on this.

Our management will be meeting with the Finland Consumer Agency and lawyer in Finland next Tuesday.  After the meeting, we would have a better picture as to what impact it would be on other EU countries.  We will keep you updated on any news that we received next week.”

(ii)    22 July 2008

“Please see attached a testing report to show you that more samples on Bulldog and Pug from KT have been tested and were proved to violate the EU requirement on Phthalates.”

(iii)  25 July 2008

“Following our meeting on 18^th Jul and my subsequent emails, please confirm your agreement on compensating TCC due to the failure on Phthalate on The Dog that was supplied to TCC for programmes in EU, including Finland.”

(iv) 28 July 2008 (2:41 p.m.)

“I tried to reach your mobile for several times today but no one answer the phone.  Please call me or send me email to confirm the agreement of KT compensating TCC as KT had supplied TCC with The Dog consist of Phthalate which were banned by EU countries.”

(v)   28 July 2008 (4:58 p.m.)

“As advised you during our meeting on 18^th Jul, Finland authority is asking our immediate action to handle the issue of recalling KT’s product in the market due to failing of Phthalate test which is in violation of EU safety standard.  Our programme in Finland is being stopped and we are collecting all the stocks from stores and our client’s warehouse.  After all the stocks are collected, we will make arrangement on destroying the dogs.  Therefore, please confirm the requested compensation of 362,724 pcs of product cost + handling charge + all the related delivery cost to TCC.  At the same time, please issue a letter in authorizing TCC to destroy the 370,000 pcs of The Dog (Basset Hound, Bulldog and Pug).  We have been told that this must be handled immediately so as to avoid the possibility of escalation to a full scale of recall in all EU countries and notification made to the Chinese custom of the incidence.”

(vi) 30 July 2008 (10:54 a.m.)

“Following my phone conservation yesterday with Mr. Hong, whom is the representative of your side to handle the matter, I understand that KT also feel that the destruction of the dogs produced by KT is unavoidable due to the violation of EU standard on Phthalates content.  Therefore, please issue a letter authorizing TCC to destroy the 370,000 pcs of The Dog (Basset Hound, Bulldog and Pug).

As we have stressed a lot of time, the issue must be handled and settled right away to avoid escalation of a larger scale of issue.  We need to indicate to Finalnd’s authority and to our client that KT will also take responsibility on this issue and hence we need your confirmation of compensation to TCC on 362,724 pcs of product cost + handling charge of 10% + all the related delivery cost of shipping these 362,724 pcs of product from China to TCC warehouse in Europe.  I have reflected the handling charge % here and hence I trust that there would not be any more doubt from your side on the compensation.

During our phone conversation yesterday morning, you advised me that you will sent me email feedback yesterday afternoon.  Since I did not receive your email of yesterday, please send us your reply today.  Your immediate action and reply is needed.”

(vii)   30 July 2008 (6:56 p.m.)

“I would like to get clarification from your side on whom we should contact at KT in reviewing the issue.

During our earlier meeting with you both in my office, Mr. Hong had committed that he is our point of contact at KT.  However, based on my phone conversation with him just now, it seems that he would rather like us to contact Mr. Li directly to deal with this case from now on.  If that’s the decision, please confirm me on this by your return.

No matter either Mr. Li or Mr. Hong would be the point of contact, it is crucial that you provide us your feedback and arrangement on settling the issue by your return email immediately.”

(d) With the above contemporaneous documents, one can see the difficulties of Ms. Lau.  The problem, the Recall and the “destroy” were drawn to the attention of the Defendant. However, it did not do anything.  Up till now, the Defendant’s case has never rested on any test report done or to be done on the Toy Dogs.

(e)  Ms. Lau had a difficult case to run because her hands were tied down by the “passive” attitude of the Defendant.  With respect, as appeared in the holding Defence now before me as well as the opposing affirmations, the Defendant does not have a positive case to run. It simply put the Plaintiff to prove its case.  Hence, facing an Order 14 application, Ms. Lau can only try her best to find “problems” within the Plaintiff’s case so that this Court will not grant it the summary judgment.

(f)   To these, Ms. Lau has able to do so in certain areas.

(i)    The Finnish Customs Laboratory and Intertek Test Reports produced by the Plaintiff contained only results of certain models of the Toy Dogs: Basset Hounds, Bull Dog and Pug Dog.

(ii)   The Recall Notice produced also touched on the said 3 models of Toy Dogs, but not the remaining ones: Dalmatian, American Cocker Spaniel and Papillion.

(iii)  The Plaintiff claims, inter alia, 10% royalty costs.  It is not mentioned or not apparent from the above Plaintiff’s emails.  In the Statement of Claim herein, it only appears in the prayer.  In the reply evidence of the Plaintiff, only an amendment to the licence agreement was produced.

CONCLUSION

13. In the circumstances, I will make the following orders.

(a)   Final Judgment is entered in favour of the Plaintiff against the Defendant for repayment of purchase price for 3 models of Toy Dogs: Basset Hound, Bull Dog and Pug Dog.

(b)   Interlocutory Judgment is also entered in favor of the Plaintiff against the Defendant for damages to be assessed for the Recall of the said 3 models of Toy Dogs.

(c)   Unconditional leave is granted to the Defendant to defend for the claim of purchase price and damages in relation to the remaining 3 models of the Toy Dogs: Dalmatian, American Cocker Spaniel and Papillion.  The Defendant will also have leave to amend file and serve its Defence within 14 days as per the draft exhibited to its summons filed on 20 May 2009, subject to the deletion of all reference to the Toy Dogs of Basset Hound, Pug Dog and Bull Dog.

14. As to costs, there is an order nisi that the Plaintiff will have 60% of its costs of the application, including all costs reserved and certificate for counsel for hearing on 8 June 2009, as well as 60% of its costs of the proceedings up to the date hereof to be summarily assessed by me, 1 hour reserved, failing agreement by the parties within 21 days.  As to the remaining 40% costs of the application and proceedings, it will be in the cause.

15. Further, there is also an order nisi that the Plaintiff will have costs of and occasioned by the Defendant’s summons and amendment, including costs reserved, to be summarily assessed by me in the same way and together with the costs mentioned in paragraph 14 hereof.