SMITH & ASSOCIATES FAR EAST LTD v. EZ RAM TECHNOLOGY LTD

DCCJ 1268/2019

[2023] HKDC 435

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 1268 OF 2019

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BETWEEN

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JUDGMENT

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BACKGROUND

1.  This is a sale of goods case. On 9 August 2018, parties entered into a sales agreement (“SA”) evidenced by a purchase order numbered 202104 (“PO”) whereby the plaintiff (“P”) purchased 4,000 pieces of LPDDR4 memory manufactured by Samsung Semiconductors numbered K4F6E304HB-MGCJ (“Samsung Memory”) from the Defendant (“D”) at US$15.50 each totalling US$62,000. P purchased the Samsung Memory as a sourcing agent for one of its end-customers in the United States (“Customer”).

2.  Earlier on, the Customer placed a purchase order (the “Customer’s Order”) with P’s associated company (“Smith Houston”) for 20,710 pieces of Samsung Memory on 20 July 2018. According to the Customer’s Order, the Samsung Memory are to be delivered to JSI, a consolidator engaged by the Customer to confirm quantities before onward delivery to the Customer’s manufacturer.

3.  P fully paid the purchase price on 15 August 2018 and D purportedly delivered 4,000 pieces of Samsung Memory (“Delivered Products”) the next day.

4.  On 17 August 2018, P delivered the Samsung Memory to the Customer, who subsequently used 1,100 pieces for installation onto 550 Jexton TX2 motherboards.

5.  On 11 September 2018, P received Customer’s report of failure in the installation of the Samsung Memory causing 550 motherboards totally unmerchantable. P then reported to Samsung, the manufacturer of the semiconductors, which eventually completed the investigation and issued a report dated 17 September 2018 stating that the Delivered Products were defective and non-compliant with the SA. The report suggested that those were “counterfeits”.

6.  The Customer therefore claimed against P in the sum of US$164,450 (the “Customer’s Claim”) being the cost of the Damaged Motherboards. Eventually P and the Customer were able to reach a settlement agreement of US$107,250 (“Settlement Sum”) and P paid the Customer through Smith Houston accordingly on 8 January 2019.

7.  On 28 September 2018, P informed D of the failures caused by the Delivered Products, followed by a series of text messages communication and correspondence between parties on this matter.

8.  In particular, P relies on one of its letters to D dated 22 October 2018 and countersigned by D on 29 October 2018, which P refers as D’s admission letter (“Admission Letter”), as it states that “You previously indicated that [D] would be willing to issue an RMA, refund [P] the full purchase price, and compensate the damages caused to [P’s] customer and [P]”.

9.  Subsequent to the letter before action to D dated 19 December 2018, P commenced the present action on 14 March 2019 claiming D for breach of the SA by supplying defective and/or non-conforming products causing loss and damages to P in the sum of US$152,200 (or its equivalent amount in Hong Kong dollar) including the following two heads:

(a) Settlement Sum of US$107,250 already paid by P; and

(b) the value of the remaining 2,900 units of Samsung Memory in the sum of US$44,950 that P has paid D for.

10.  According to D’s pleaded case, the gist of its defence is as follows:

(a) When JSI received the Samsung Memory from P on 24 August 2018, JSI only discovered 13 missing pieces but did not identify any defects or non-compliances.

(b) It cannot be shown that the goods delivered by P to the Customer were the Delivered Products or that they were in the same condition.

(c) It cannot be shown that the goods examined by Samsung formed part of the Delivered Products. In any case, D was not informed of the examination beforehand and was not given a chance to examine samples of the problematic products.

(d) P is not entitled to refund as P has failed to return the goods to D.

ISSUES

11.  Mr Lung for P has streamlined parties’ Agreed Statement of Issues In Dispute filed on 14 September 2021 which I take the liberty to adopt and reproduce them herein:

(a) Issue 1a: Whether the Samsung Memory delivered to the Customer were (i) the Delivered Products and (ii) in same condition as they were delivered to P on 16.08.2018;

(b) Issue 1b: Whether the Samsung Memory delivered to Samsung for investigation were (i) the Delivered Products and (ii) in same condition as they were delivered to P on 16.08.2018;

(c) Issue 2: If the answers to Issues 1a and 1b are yes, whether D has acted in breach of the express and/or implied terms of the Sales Agreement;

(d) Issue 3: If the answer to Issue 2 is yes, whether P is entitled to loss and/ or damages as a result of D’s breach of the Sales Agreement;

(e) Issue 4: Whether it is reasonable for P to dispose of the goods (or retain the same for disposal pending resolution of this Action) on the basis of the allegation of non-conformity and breach of specification and, consequently, whether it is reasonable for P to claim refund of the goods under such circumstances.

12.  In addition to the agreed statement of issues in dispute, Mrs Daley for D has taken other issues in her closing submissions and in particular various challenges to the Samsung Report are raised, including but not limited to:

(a) Authenticity issue – unsigned report of an unidentified maker;

(b) Admissibility issue – inadmissible report because of its expert evidence nature and want of leave to adduce expert evidence;

(c) Accuracy / relevance / reliability issue – no viva voce evidence from the maker coupled with unknown methodology of the examination / test conducted;

(d) Credibility issue – it is hearsay evidence bearing no weight; and

(e) Redaction issue – redactions amount to non-production of materials and adverse inference should be drawn.

13.  Apart from the challenges to the Samsung Report, Mrs Daley also takes issue with the following:

(a) failure to mitigate by P;

(b) the countersigning of D’s Admission Letter was “under pressure” amounts to a vitiating factor to its contents.

14.  Mr Lung submitted that unpleaded contentions should be disregarded with which I totally agree. “It is the pleadings that will define the issues in a trial and dictate the course of proceedings both before and at trial. Where witnesses are involved, it will be the pleaded issues that define the scope of the evidence, and not the other way round. In other words, it will not be acceptable for unpleaded issues to be raised out of the evidence which is to be or has been adduced[1] ”.

15.  According to the Defence, D only denies that the Samsung Memory delivered to P are not genuine, defective, nonconforming, not fit for the intended purpose, unmerchantable, and not corresponding with the description, but D has never denied in its pleadings that the Samsung Memory examined by Samsung have the alleged problems. In short, the main thrust of D’s contention is that the Samsung Memory examined are not from the Delivered Products but they are purchased elsewhere. No dispute of the findings of the Samsung Report has ever been pleaded by D.

16.  Besides, no notice to dispute authenticity under O.27 r.4 of the Rules of the District Court (Cap.336H) (“RDC”) has ever been served. It is therefore not open for D to challenge the authenticity of the Samsung Report at the closing submission stage and thus D is deemed to have admitted its authenticity.

17.  Regarding the nature of the evidence contained in the Samsung Report, P submits that the factual findings of the report are being relied on, so it is not adduced as expert evidence but as factual evidence. Mr Lung also submits that the mere fact that factual evidence is given by someone with expertise in a particular discipline does not transform that evidence into expert or opinion evidence and citing Koninklijke Philips Electronics NV v Wealth Full Technology[2] in support of his submission. I agree with the above submissions.

18.  The hearsay notice for the JSI Report and the Samsung Report was issued on 26 May 2021. It is the duty of the court to consider at the case management stage whether directions are required in relation to hearsay evidence[3]. D all along has not raised any formal hearsay objection until its closing submissions which deprives P’s opportunity to call the maker of the report to give evidence to deal with the hearsay objection.

19.  For the above reasons, D is not allowed to challenge authenticity and admissibility of the Samsung Report and such matters are not issues at trial.

20.  It is trite that mitigation of damages must be specifically pleaded with supporting particulars. D submits that such matter has been pleaded in paragraph 10 of the Defence. It is an averment that D asked P to return the defective goods for a full refund but P refused and demanded for a refund without return of goods. Obviously, it does not satisfy the requirement of giving particulars of facts on which D relies in mitigation of the amount of damages according to O.18 r.12(1)(c) RDC. Thus this is not a triable issue.

21.  Another unpleaded point raised by D is the alleged countersignature of the Admission Letter being appended “under pressure”. This again could not be accepted as an issue for the trial.

22.  Therefore, only the issues defined by the pleadings and the agreed issues in dispute as summarised by P’s counsel are to be considered. The unpleaded contentions are to be disregarded as discussed above.

DELIVERY OF GOODS FROM THE PLAINTIFF TO THE CUSTOMER

The Invoice

23.  On 9 August 2018, P issued the PO and D issued an invoice to P the same day showing the following descriptions of the goods:

(a) Reference to the PO number: “202104”;

(b) Same description in typed words: “K4FE304HB-MGCJ”;

(c) Handwritten words “2000 × 2 D/C: 1804”.

The Packing List

24.  It is undisputed that delivery of the purchased goods to P’s address in Kowloon Bay was on 16 August 2018 and the details were recorded in D’s packing list:

(a) Description of goods: “Samsung LPDDR4 3733Mbps 512*32 P/NO: K4FE304HB-MGCJ” and “D/C:1804”;

(b) Text stating “PO#202104” matching PO;

(c) D’s chop and P’s chop stating “Goods temporarily received on 16 Aug 2018”.

The Receiving Report

25.  On 16 August 2018, P received the Delivered Products and it was recorded in its receiving report as follows:

(a) Date: 15 August 2018 (US Central Standard Time in P’s system, equivalent to 16 August 2018 Hong Kong time);

(b) Vendor : “EZ RAM TECHNOLOGY LTD”;

(c) Quantity: “Ordered: 4000 – Glv.Received:4000”;

(d) Part# : “K4F6E304HB-MGCJ”;

(e) MFG: “SAMSUNG SEMICONDUCTOR”;

(f) Package Type: “F/S Reel”;

(g) Package Breakdown: “2000 × 2 F/S BOXES”;

(h) 5 photos at the bottom showing 2 cardboard boxes with black plastic straps wrapping each box, and two of the photos displaying the box labels;

(i) the box labels photos showing:

(i) part number: “K4FE304HB-MGCJ”;

(ii) lot numbers “GFBW69YECH02000180403” / “GFBW69YECA02000180401”;

(the above box label information is matching the same as recorded in the report);

(j) a table below the pictures showing:

(i) quantity: “2000”; &

(ii) date code: “1804”.

26.  It is the P’s case that the Delivered Products were stored safely in P’s warehouse before delivery to JSI the next day on 17 August 2018. Allegedly, P adheres to the highest industry standard for its handling, warehousing and shipping process and security measures which include CCTV and access card authorisation. It is not in dispute that there were no reports of security incidents in relation to the Delivered Products on the day of P’s receipt or the delivery to JSI on the next day (ie. 16 to 17 August 2018).

The JSI Report

27.  On 17 August 2018, P delivered the Delivered Products to JSI , the Customer’s designated consolidator and freight forwarder. JSI’s duty is to consolidate, count goods and record any discrepancies in shipping documents and receipts, but JSI did not open the packaging to determine whether the Delivered Products were genuine or conforming to its contractual specifications.

28.  According to the JSI Report, 13 pieces were found missing in one of the reel boxes after counting (ie 1987 pieces were found instead of 2000 pieces as shown on the inner label and the MBB label). The issue here is whether the goods counted and reported by JSI came from the Delivered Products. The salient features of the goods referred in the JSI Report are as follows:

(a) Description of the “PRODUCT”: “161-0251-600 / R1804KR” with matching week code of the goods recorded in the Receiving Report;

(b) the pictures of non-conformity showing the same appearance, label and lot number as one of the boxes in the Receiving Report with matching the lot number beginning with the letter “G” and the week code;

(c) the wheel packaging containing the Delivered Products remained unopened during the counting process;

(d) the photo captioned “Physical qty 1987 pcs” showing the packaged wheels were put through a machine labelled “Parts Counter” to count physical quantity;

(e) the photo captioned “Chips marking” showing the markings on the Delivered Products visible through the transparent part of the packaged wheel.

29.  In light of the above, it is highly unlikely for JSI to mix up the Delivered Products with other products. As JSI did not open the wheel packaging of the Delivered Products, I am satisfied that the Delivered Products were delivered to JSI and onward delivered to the Customer in the same conditions as they were delivered by D to P on 16 August 2018.

CHAIN OF EVIDENCE RE EXAMINATION OF THE GOODS

The Samsung Report

30.  In gist, the factual findings of the Samsung Report are as follows:

(a) The following features of the tested products were found to be different from genuine Samsung products:

(i) top marking;

(ii) marking fonts,

(iii) label and reel design, and

(iv) thickness;

(b) The LOT ID and Week Code of the tested products had been deliberately modified;

(c) the tested products were traced to products carrying the number K4F6E304HB-MGCH and not the ones numbered K4F6E304HB-MGCJ as described in the Purchase Order;

(d) Samsung had no record of the LOT IDs and Week Codes identified on the labels.

Whether the tested products were the Delivered Products

31.  The following identifying markers confirm the tested products were the Delivered Products:

(a) The production information of the tested products: “K4F6E304HB-MGCJ(2GB LP4 200F)” matching the part number of the Delivered Products;

(b) The “W/C” of the tested product: “WW1804” matching week code of the Delivered Products;

(c) The label on the packaging of the tested products showing the “G” lot numbers matching the same of the Delivered Products.

32.  I accept P’s submissions that the D’s challenge of the tested products not being the Delivered Products is based on an incorrect premise and I thus reject D’s contention. The distinctive feature of the “G” Lot Numbers is overwhelming evidence in support of the tested products were indeed the Delivered Products.

BREACH OF THE SALES AGREEMENT

33.  The SA evidenced by PO contains the following express terms:

“Quality:

1. All parts must be genuine, by original equipment manufacturer, and, unless otherwise noted above, be New and Unused, which shall be defined as, not limited to, parts that are not remarked, pulled, refurbished, or have surface blemishes, scratches, cracks, unoriginal markings on the body of the part, dual labels …

…

Packaging and Shipping:

3. Labels/packaging must be from original manufacturer in original condition without any cross outs, remarkings or strikethroughs.

…

General:

6. … Smith reserves the right to return defective or nonconforming parts without prejudice to Smith’s right to recover costs and damages arising from Seller’s delivery of defective or non-conforming parts.”

34.  Having considered the legal principles set out in the English authority Harlingdon and Leinster Enterprises Ltd v Christopher Hull Fine Art Ltd[4], I am satisfied that the sale of goods in the present case is “sale of goods by description”, pursuant to s.15(1) Sale of Goods Ordinance (Cap. 26) (“SOGO”).

35.  Accordingly, the SA contains an implied term that the Samsung Memory to be supplied by D should conform with the descriptions set out in the PO:

(a) manufactured by Samsung; and

(b) part number “K4F6E304HB-MGCJ” being the “identity” of the goods sold.

36.  The findings of the Samsung Report clearly show that the tested products do not correspond with the description. Irrespective of Mrs Daley’s unsuccessful attacks of the report on some unpleaded grounds[5], the test results have never been challenged by D’s pleaded case. Therefore, I attach full weight in the findings of the Samsung Report.

37.  Although only 9 pieces of the Delivered Products were tested by Samsung, it is reasonable to infer in the circumstances that the rest of the Delivered Products would have the same non-conformity problem and breach of specification, since they came from the same source with the same aforesaid distinctive feature: Atico International (HK) Ltd v Sparko (Far East) Ltd[6].

38.  Besides, D’s breach is corroborated by the Admission Letter signed by Daphne of D which is relied on by P as a piece of contemporaneous document. It is stated that D would be willing to “refund [P] the full purchase price”. and D’s admission of its liability: “You have previously indicated that EZ RAM would be willing to issue an RMA, refund Smith the full purchase price, and compensate the damages caused to our customer and Smith”.

39.  D argues that the undertaking on damages in D’s Admission Letter was dependent on proof of Delivered Products being defective and P’s return of the Delivered Products to D. However, such requirement was not stated in the letter. In any event the D’s witness conceded that Daphne’s signature in the Admission Letter was to confirm what had already been agreed between the parties and the superior of Daphne thought that they should be responsible for it. Therefore, I attach full weight to this letter as a proof of D’s admission of liability.

40.  In the circumstances, I find that D has acted in breach of the express terms and conditions as per clause 1 & 3 of the SA and the implied term as to correspondence with description pursuant to s.15(1) of SOGO.

DAMAGES

41.  P claims 2 heads of losses totalling US$152,200:

(a) settlement sum of US$107,250; and

(b) contract price for the remaining 2,900 Samsung Memory in the sum of US$44,950.

Settlement Sum

42.  It is P’s case that Smith Houston is P’s agent. As Smith Houston has reached a settlement agreement with the Customer and paid the Settlement Sum, P is obliged to repay Smith Houston. In fact, Settlement Sum has been booked to P’s account.

43.  It is not in dispute that D knew at the time of the SA that the Delivered Products would be sold onward to P’s end customer because of the long history of past dealings with P. The main issue here is whether the Settlement Sum is reasonable in the circumstances.

44.  P’s legal team was involved in negotiation with the Customer and succeed in reducing the initial claim of US$164,450 by 35% to US$107,250. Further, P emailed to D on 27 November 2018 explaining why P considered the settlement deal as reasonable, because it would be more expensive to rework the damaged motherboards.

45.  Having considered all the circumstances and the authorities[7] cited by P’s counsel, I find that the Settlement Sum is reasonable and thus recoverable.

Damages for the remaining 2,900 Samsung Memory

46.  P is suing for the contract price of US$44,950 including the claim of 13 missing units pursuant to s.53 SOGO for non-delivery and 2,887 delivered products pursuant to s.55 SOGO for breach of warranty.

47.  D argues that P has failed to:

(a) mitigate its loss;

(b) prove the untested products are defective; and

(c) return the defective goods to D.

48.  As I have stated in the above, D has failed to plead mitigation of loss. D is debarred from raising this issue at trial. In any event, P is only required to act reasonably. P has proposed the following 4 options to D:

(a) to provide an address to P for sending samples to D for verification;

(b) to procure a test centre trusted by D to conduct testing;

(c) to arrange for inspection of samples by D at P’s warehouse; or

(d) to bring in D’s supplier to discuss with P and its legal advisor.

49.  However, none of the above options were accepted by D. As the goods are found to be of counterfeit nature, any cross-border transportation of them may lead to P’s contravention of the relevant Hong Kong or US criminal law. Therefore, it is reasonable for P to dispose of the unused goods without returning them to D.

50.  Regarding the challenge of the sample size of test conducted by Samsung, I agree with P that notwithstanding the small sample size for testing, it is reasonable in the circumstances to infer that the untested goods are also non-conforming, as they come from the same source (Atico International (HK) Ltd at §39).

51.  Having regard to the counterfeit nature of the Delivered Products, I am satisfied that there would be no resale value and thus P has suffered loss of the contract price. I accept the measure of damages would be the original contract price and allow such sum claimed under this head.

CONCLUSION

52.  For the reasons aforesaid, I enter judgment in favour of P for the sum of US$152,200, or its Hong Kong dollar equivalent at the date of payment, with interest at HSBC prime rate plus 1% from the date of the writ up to the date of judgment and thereafter at judgment rate until full payment judgment.

53.  Costs should follow the event. I thus make an order nisi that costs of the whole action (including any reserved costs) be to P to be taxed if not agreed with counsel certificate for Mr Lung.

54.  Lastly, I thank counsel for their assistance rendered to this court.