SIMNEX INDUSTRIAL LTD v. THE CONTINUITY COMPANY LTD

HCA 2038/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CIVIL ACTION NO 2038 OF 2012

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DECISION

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1.  In this action the Plaintiff claims the contractual price for certain goods delivered to the Defendant’s customers or, more specifically one of two specific customers.

2.  The parties have had a business relationship since 2007 although the number of actual contracts have been few.  However the Terms and Conditions applied are well known to both of them and there is no issue between them on this aspect although the Plaintiff raises some odd and illogical argument about one point with which I will deal shortly and briefly.

3.  The Defendant, a Hong Kong company, is wholly owned by a company registered in the Netherlands.  Its agent in Switzerland is wholly owned by the same company.  The Plaintiff, another   Hong Kong Company, supplies toys for export and, specifically in this case, glass marbles manufactured by a Taiwanese company.

4.  In October 2011 the Defendant sought a quotation for the supply of a quantity of “Ice Age 4” marbles.

5.  On 12 December 2011 the Defendant confirmed that differing quantities would be required for three identified customers.  Eventually only two customers, to whom the marbles would be supplied directly, were specified – Mercator in Slovenia and CZ Albert in the Czech Republic.  The Defendant sent by E-mail to the Plaintiff on the    18 December 2011 an order for 12,760,000 pieces for the customer Mercator and 18,500,000 pieces for the customer CZ Albert.  The Plaintiff then sent two Order Confirmations, one for each of the quantities to the two customers.

6.  On the 21 December 2011 the Plaintiff sent two draft    Purchase Orders (one for each delivery) and the Defendant returned them signed.

7.  One of the arguments advanced by the Plaintiff is that there were two separate contracts.  Although it is not necessary for me to decide whether there were two contracts or one contract with two delivery points, I have formed the view for the purposes of this hearing that there was one contract for a supply of one quantity of one product to be delivered to two separate destructions.  One matter (amongst several) which lends support to my view is the schedule for shipping and delivery set out in paragraph 31 of the Affirmation of the Defendant’s Regional Finance Director, Mr Lam Kin Ming, which is not disputed.

8.  Three instalments of the order were shipped on the   18 April 2012, one to Mercator (2 million items) and two to       CZ Albert (each of 1 million items).  These were obviously the first         4 million items off the production line, or at least, that is the reasonable conclusion.  Then there are two instalments shipped on 16 May 2012, one to Mercator of 2 million items, and the other to CZ Albert of 4 million items. 

9.  The next three instalments go to CZ Albert and the last three to Mercator.  Shipment to both customers is completed by 3July 2012. 

10.  The goods had been subject to STR tests which they passed.  Later the customer CZ Albert began to make complaints about the quality of the goods it received.  These were received from in or about    27 June 2012.  The Defendant then arranged for the goods to be inspected by Bureau Veritas of the Czech Republic.  It carried this out on the first batch received.  The rate of defects discovered was well above the accepted rate in the GIS document.  They were regarded as not in accordance with the sample, and not reasonably fit for purpose.  There were similar results from the inspection of the fifth and sixth batch of   CZ Albert goods.

11.  Apparently even before the complaints from CZ Albert and the BV inspections, the Defendant had alerted the Plaintiff to its concern that the quality of the goods was below expectation and might be rejected by the customer, and pressed for an improvement in quality. 

12.  There is a series of E-mails dealing with this situation, most if not all dated the 20 July 2012, in which it is unequivocally clear that the Plaintiff was accepting that goods were substandard and that it would have to remedy the situation, one way or another.  Financial compensation was conceded.  Furthermore the Plaintiff shipped replacement goods – 32,000 items to CZ Albert and 80,000 to Mercator with an offer to supply a further 300,000 replacement items at its own expense.  It is not necessary for the purpose of this exercise, to consider and set out the various documents and records dealing with this.  They speak for themselves.

13.  At this stage I will revert to an aspect of the Plaintiff’s contention in relation to the Terms and Conditions which I mentioned earlier.  They provided for re-imbursement of monies paid in the event of breach on the part of the seller of the goods or, at the buyer’s option, replacement goods.  At some stage the Plaintiff sought to argue that the buyer had to accept replacement goods.  This is clearly wrong.

14.  In another attempt to suggest that there were two distinct contracts, it was argued that by reason of a number of aspects of the goods delivered to the two different customers of the Defendant, these were “separate and distinct transactions” for example:

1) Variations in the artwork.   

2) Approval of artwork on different dates.

3) Licence approval by 20th Century Fox on different dates.

4) Different shipping instructions (for the two destinations).

5) Different inspections for the two customers receiving the goods.

15.  I regret to say that this is an instance of the proverbial “scraping of the barrel” in the Plaintiff’s argument.

16.  The Defendant had promptly paid on the invoices in respect of the CZ Albert deliveries, and the earlier Mercator deliveries. The last two deliveries (and therefore invoices in respect of them) were made after the CZ Albert invoices had all being paid and some of the Mercator had been paid.  Therefore the Defendant had only these two unpaid invoices against which to attach their claimed compensation, in whatever form it was to take. There had clearly been an acceptance by the Plaintiff of the defects in the goods supplied to both of the Defendant’s customers.

17.  The defective goods had caused a claim to be brought by   CZ Albert for some form of compensation from the Defendant.  The Defendant paid them compensation by way of a discount on the price.  It also paid for the fees of the inspections.

18.  The Defendant therefore has in principle, a valid defence to the Plaintiff’s claim.  The E-mail records support the Defendant’s argument.  Its contents undermine the argument raised by the Plaintiff before me.

19.  I have had regard to the cases cited to me by both counsel.  I do not need to traverse them in detail.  The facts before me are different from those considered by the Hong Kong Court of Appeal in Karpex (HK) Ltd-v-Yasmine Printing (China) Ltd [2008] 1 HKLRD 199 CA.  There were clearly two contracts in that case and the second paragraph of the headnote highlights the distinctions readily to be drawn in the action before me.  The breach of warranty arose under the one contract (as I find it to be) in respect of the goods for both of the Defendant’s customers.  That is admitted by the Plaintiff in its E-mails.  The same terms applied to all supplies and shipments.  There was no relevant or significant difference in time.  The supplies and shipments proceeded in tandem.

20.  In my view the Defendant’s counterclaim clearly arises out of the single contract even though it may be limited to the consequences of the supply of defective goods to CZ Albert.  It is also properly pleaded as a set-off.  The other unliquidated heads of consequential loss claimed by the Defendant may give rise to difficulties of proof or quantification but both are reasonable, potential avenues of short-term or long term loss.

21.  Finally, without identifying the other cases referred to – and for immediate purposes I have borne in mind Geldof Metaalconstructie NV-v-Simon Carves Ltd [2011] 1 Lloyds Reports 517, and         Bim Kemi-v-Blackburn Chemicals Ltd [2001] 2 Lloyds Reports 93, amongst others, – even if one took the view that technically there were two contracts for supply, they are so closely connected and the counterclaim and set off so inextricably connected with the defence (and the claim itself) that it would be “manifestly unjust” or “inequitable” – these are really synonymous terms – to allow a Plaintiff, particularly one who concedes that he has supplied defective goods across the board i.e. to both end – recipients, to enforce payment regardless of the cross-claim.

22.  This summons is dismissed with costs to the Defendant to be taxed if not agreed.  There will be a certificate for Counsel.

23.  Restraint needs to be exercised in respect of the bundles of documents.  They were grossly excessive.