UNIWAY (HONG KONG) CO LTD v. CHINA HUA YUAN CO LTD

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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JUDGMENT

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Background

1. The Plaintiff is a company engaged, inter alia in the supply of electrical components. However, significantly in the context of this action, it is engaged also in the assembly of radios and the like in its own factories.

2. The Plaintiff claims damages for breach of contract in respect of 560,000 variable capacitors purchased from the Defendant which it says were defective. Variable capacitors are a radio component concerned with the tuning in to required frequencies. The variable capacitors in question were manufactured by a factory in the People's Republic of China ("the Jiangxi Factory").

3. The matter began in November 1987 when a Miss Chan of the Plaintiff sought samples of three types or models of variable capacitor including the CBM443DF2. Such samples were supplied in December 1987, together, it is claimed by the Defendant but disputed by the Plaintiff, with a copy of the PRC Ministry of Electronic Industry Standards ("the MEI Standard"). Also a few days later, the Defendant supplied the Plaintiff with a catalogue of the Jiangxi Factory products. Subsequently Miss Chan informed the Defendant that two of the three models of variable capacitors had been tested and accepted, and on 14th January 1988, a sales contract was signed between the parties for the sale by the Defendant to the Plaintiff of 2 million CBM443DF2 variable capacitors and two million variable capacitors of one of the other two models. Delivery was to be in partial shipments and payment by cheque at 50 days sight of Defendant's shipping advice. The Plaintiff contends that prior to the 14th January 1985, the Defendant was informed that any complaints as to quality had to be made within 30 days of delivery. However that is not a point taken in the Defendant's pleaded Defence.

4. On or about 2nd March 1988, the Defendant delivered the 1st batch of 560,000 CBM443DF2 variable capacitors and invoiced the Plaintiff. The Plaintiff was in some financial difficulty and asked the Defendant to accept payment in three instalments deferred to 56, 70 and 90 days, to which the Defendant agreed. The Plaintiff handed over three cheques to cover the instalments. The first two cheques were duly met. About that time the price of variable capacitors fell. On 18th May 1988 a 2nd batch of variable capacitors arrived in Hong Kong and were invoiced to the Plaintiff for HK$570,000. The Plaintiff declined to take delivery and orally raised complaints about the quality. The Defendant unsuccessfully pressed the Plaintiff for details and an independent survey report on the complaints. On 31st May 1988, the Plaintiff made its first written complaint of inferior quality. Both the oral and written complaints were said to have come from the Plaintiff's customers to which it had sold the variable capacitors and were neither particularised nor substantiated.

5. The 90 day post dated cheque for the 3rd instalment due on 2nd June 1988 was dishonoured. On the 6th of June 1988 the Defendant wrote seeking payment of the 3rd instalment and a survey report on the alleged defects. On the 20th June the Plaintiff wrote listing the defects which subsequently formed the latter four of the five particulars pleaded in its Amended Statement of Claim. On the Plaintiff's side, the matter was being dealt with by its purchasing manager Mr. Kao Rong Li ("Mr. Kao"), who says he was not able to get the variable capacitors tested in Hong Kong, that there was simply not the equipment available and no one was prepared to undertake the testing. On the Defendant's part the matter at that stage was being dealt with by Mr. Chen Zong Ting ("Mr. Chen"), a sales department supervisor. He says that he kept pressing for details of the defects and a survey report. Ultimately the matter appears to have been resolved by the two agreeing to get together with the manufacturers of the variable capacitors at one of the Plaintiff's factories to find what was wrong.

6. On the 25th of June 1988, following prompt arrangements made by Mr. Chen, three Jiangxi Factory engineers with testing equipment arrived in Shen Zhen. When they arrived Mr. Chen got in touch with Mr. Kao who gave him the name and address of Mr. Li Fat Yick ("Mr. Li") at the Gar Mou Factory in the Po On County of Guandong Province. Mr. Chen and the engineers went to the factory on the 29th of June. Mr. Kao did not go; he says he had visa problems. The visitors were met and attended to by Mr. Li. However Mr. Li did not produce one single variable capacitor for testing and their visit was somewhat futile. Mr. Kao says that Mr. Li was only intended to be a contact and he had not agreed that there would be any variable capacitors tested in that factory. On the following day the 30th June 1988, the Defendant faxed the Plaintiff complaining that Mr. Li was vague and not able to substantiate the complaints, and stating that the Jiangxi Factory engineers refuted each of the four complaints, giving their reasons, and finally asking the Plaintiff to send their representative to Shen Zhen with samples for testing on 1st July.

7. There was a rather more useful meeting on the 2nd July at the Plaintiff's factory in Shen Zhen. It was attended by Mr. Chen on the Defendant's behalf, the three Jiangxi Factory engineers, and Mr. Kao representing the Plaintiff. What precisely took place is disputed. I shall return to the matter, which ended with the drafting of a so called "tripartite memorandum" which was signed on behalf of the three parties. The Defendant claims that the tripartite memorandum and an annex to it record the resolution of the Plaintiff's complaints, while the Plaintiff contends that the memorandum records the necessity for fixed capacitors having had to be changed to accommodate variable capacitors that were defective. In the days that followed, the Plaintiff on the 5th and 12th of July wrote to the Defendant referring to the problem of quality and stating that despite the variable capacitors being declared to be up to the MEI Standard, there was instability, and labour time and material had been wasted and requesting that the unit price be reduced to $1.40, and also that payment be by instalments.

8. On the 13th of July 1988 the two sides had a meeting at which outstanding issues were discussed. The Defendant claims that all outstanding issues were settled. It is common ground that an agreement was signed (the 13th July Agreement). But the Plaintiff says that the Agreement was signed on its behalf only because the Defendant undertook to replace defective variable capacitors. The agreement was in the following terms:

Agreement

            A Contract No.88CS-4002 was signed between China Hua Yuan Co. Ltd. (hereinafter referred to as Party A) and Uniway (H.K.) Co. Ltd. (hereinafter referred to as Party B) on 14th January 1988. The contract included 2 items of goods, i.e. CBM-223P AM capacitors and CBM-443DF2 AM/FM Capacitors, a total of 4,000,000 pieces amounting to a sum of HK$6,930,000.00. Up to the present, Party A has packaged and sent 860,000 pieces of CBM-443DF2 capacitors and Party B has already taken delivery of 560,000 pieces. There are still 300,000 pieces remaining in Party A's warehouse. The rest of the goods i.e. 1,140,000 pieces have also been completed and are pending for loading and delivery. As for the CBM-223P AM capacitors, Party A has already delivered 338,000 pieces to Party B.

In connection with the above-mentioned matter, it is hereby agreed between both parties as follows:-

1.	Party B has already accepted 560,000 pieces of CBM-443DF2 capacitors which should amount to HK$1,064,000.00. However, Party B has only paid HK$696,165.70. Party B, not only stopped payment of the rest of the amount due to Party A i.e. HK$367,834.30, it tried to deduct from another contract no. 88CS-4003 on magnetic bars and contract no.88CS-4008 on Maylar speaker, a total amounting to HK$649,784.70. On this account, Party B must pay Party A the sum of HK$1,017,619.00 plus bank interest. Party A hereby agrees that Party B can pay by 3 instalments, i.e.
		HK$155,019.00 before 16th July HK$431,300.00 before 30th July HK$431,300.00 before 15th August
	As for the exact amount of interest, Party A will inform Party B after calculation of this by its Finance Department. This will have to be paid by Party B.
2.	Party B agrees to take delivery of the 300,000 pieces of CBM-443DF2 AM/FM capacitors which are now in Party A'S warehouse totalling to a sum of HK$570,000.00. Party B further agrees to pay the said sum of HK$570,000.00 before 30th September 1988. Moreover, Party B agrees to pay the bank interest (as from 8th July 1988) and the necessary transportation fees, removal costs and warehouse charges. Should there be any change in the quality of the products before 30th September, Party B will be liable.
3.	The production of the 1,140,000 pieces of CBM-443DF2 capacitors under contract no.88CS-4002 have already been completed by two factories and are pending loading. Party A will use its best endeavour to persuade the two factories not to despatch the goods. If Party A has difficulty in doing so, Party B is willing to go to the two factories to negotiate and undertake to be responsible for this."

The Issues

9. The foregoing outline suffices to describe the background to the issues to which I now turn. In its statement of claim the Plaintiff states that it was an implied term or condition of the agreement:

10. The Plaintiff has not pursued a) and b), but in respect of c) states that the goods were defective in the following particulars:

                (ii) to (iv), and in relation to them, (v) also, came from the complaints of customers. However, no evidence from the customers or of the details of their complaints was adduced and in the end these particulars were neither established nor seriously pursued. It is the first particular that the Plaintiff stuck to and has attempted to establish.

11. The issues between the parties that therefore have to be addressed, as Mr. S.K. Wong for the Plaintiff realistically narrowed them at the end of the trial, are as follows:

The Withesses

12. It can readily be seen therefore, that technical matters of an esoteric nature lie at the very heart of this action. Nevertheless no expert evidence has been called by the Plaintiff, despite ample opportunity having been afforded to it.

13. It is helpful at this stage to refer briefly to the witnesses who gave evidence. The Plaintiff's 1st witness was Mr. Kwong Tat Hung (Mr. Kwong) the Plaintiff's Chairman. He was not able to give any detailed evidence of the matters in dispute apart from the 15th July Agreement which he signed. As to technical matters, he admitted he had no technical qualification and was not able to speak to those matters. The Plaintiff's 2nd witness was Mr. Kao, the Plaintiff's purchasing manager, who has already been referred to. He succeeded Miss Chan who negotiated the original agreement. While he had some knowledge of the technical matters involved in a general way, having been in the radio components purchase and sale business for some 10 years, he was not qualified to give anything in the nature of expert evidence. The Plaintiff's 3rd and final witness was Mr. Wong Yan Ming ("Mr. M. Wong")  who was in charge of the Plaintiff's production department and worked in its factory Shen Zhen. He started working for the Plaintiff in April 1988. It was not suggested that he had any technical qualifications and indeed his evidence tended to be more of a practical nature. His evidence, to which I shall return, was concerned essentially with the difficulties allegedly encountered with the variable capacitors in the production of radios on the production line. He was not directly involved in the testing of the variable capacitors by the Jiangxi Factory team on the 2nd of July.

14. The Defendant's 1st witness was Mr. Chen to whom reference has already been made. He was the supervisor of the Defendant's sales department and on the Defendant's side was the person most closely concerned with the dealings it had with the Plaintiff, at any rate so far as these proceedings are concerned.

15. The Defendant's 2nd witness Mr. To Yun Hung ("Mr. To") was the Defendant's deputy manager of its electrical appliances and building materials department. It was he who dealt with Miss Chan when the contract between the parties was first negotiated.

16. The Defendant's 3rd witness was Mr. Dong Zeng Sen, Chairman and General Manager of the Defendant company. His evidence was concerned primarily with the 13th July Agreement and also to some extent with what came to be called the "Production Report", which the Plaintiff claims was a second Annex to the tripartite memorandum.

17. The Defendant's 4th witness was Mr. Wang Sau Yu ("Mr. S. Wang"), who was one of the three engineers despatched by the Jiangxi Factory. He emerged clearly as the most authoritative and useful witness on the technical issues in this case. He was an engineer by occupation with a degree in electronic engineering and since graduating 30 years ago has been in charge of production lines which manufacture radios and components. He has personally being involved in solving problems that arise in the course of manufacturing. He joined the Jiangxi Factory in 1966 having prior to that worked in other wireless factories. In contrast to Mr. M. Wong, he was directly involved in the testing of the variable capacitors on the 2nd of July. More than that he was able to speak convincingly and knowledgably not only of the practical nature of the problems but also of the engineering and radio principles and the calculations involved. Ironically, having failed to procure expert evidence of its own, the Plaintiff was reduced to seeking to establish its case by cross-examining Mr. S. Wang and seeking to elicit from him various concessions that might establish their case.

18. The Defendant's 5th and final withess was Mr. Feng Yue, who was the Defendant's manager of the electric appliances and building materials department. He was Mr. Chen's superior and testified to the reports made to him and of the Plaintiff's refusal to pay for the 1st batch. He was also present at the meeting of 13th July when the Agreement of that date was signed.

Quality of The Capacitors

19. I turn then to the first issue which is primarily whether the variable capacitors were defective and secondly whether fixed capacitors had to be changed because of this. As I have already indicated, I do not propose to deal with particulars to (ii) to (iv) of the defects pleaded. The Plaintiff has not seriously pursued these. The Jiangxi engineers refuted the defects and the Defendant's communication of the 30th June to that effect, although received by the Plantiff, was not responded to. It is for the Plaintiff to establish those defects and it has totally failed to do so.

20. I turn then to the single remaining particular persisted in by the Plaintiffs i.e. that some capacitors were of 90-108 MC instead of 80-108 MC. As already explained this depends upon the capacitance of the variable capacitors. I have already said the Plaintiff's case is that it was not able to have that capacitance tested. There were two opportunities arranged for testing the variable capacitors.

The 29th June Visit

21. The first was the 29th June visit by the Jiangxi Factory engineers to the Plaintiff's factory. On that occasion no variable capacitors were produced for testing, and so they could not be tested. Mr. Kao sought to distance himself from that visit claiming that he supplied Mr. Li's name and the Gar Mou Factory address only as a contact, that the visit was not to be made without him and that Mr. Li was only the warehouse keeper at the Gar Mou Factory. The latter claim is belied by the evidence of Mr. Chen and Mr. Wang that Mr. Li introduced himself as manager and gave each of them business cards which were exhibited at the trial, clearly representing him to be the manager. He also detailed the Plaintiffs complaints. The Defendant's fax sent to the Plaintiff on the following day refuting particulars (ii) - (v) already referred to, was neither contested nor responded to by the Plaintiffs. Mr. Li was not called to give evidence; it is said he was unable to secure authority to travel from some of the P.R.C. Government Departments involved. No more need be said of the visit of 29th June, save that it will be seen that I reject Mr. Kao's version.

The 2nd July Meeting

22. I turn then to the meeting of the 2nd July. Mr. Kao said a carton of variable capacitors was opened and capacitors taken from it and fitted to circuit boards on the production line. Around 30% had to be replaced or required fixed capacitors to be changed. More than 10 variable capacitors were taken into the office for testing. He saw them being tested on a meter but of what sort he could not say as he was not an expert, though he could read the values. Thereafter a memorandum was drafted and he signed against the Plaintiff company's name. He agreed the variable capacitors complied with the "standard in China" (i.e. the MEI Standard). He added that after signing the memorandum it was agreed that the annex of each side should be faired and the faired copy kept in the files of all the sides. The annex was handed to him by the Defendant's side before they left. His side's annex was written by someone from the production side. He took it to Hong Kong and on the second day of his return gave it to Mr. Kwong whose secretary faxed it to the Defendant.

23. Mr. M. Wong was not present when the variable capacitors were tested by the Jiangxi Factory engineers, but supported Mr. Kao's evidence that a carton of variable capacitors was opened and tested by actual use on the production line. He added that that variable capacitors had to be changed. He added also that some of the 20 pF fixed capacitors had to be replaced by 15, 18 or 22 pF fixed capacitors. About 30% had to be replaced because the frequency was too low e.g. 108 MC and 106 MC frequencies could not be achieved. He was vague about the number of variable capacitors tested but settled on 50 as the approximate number out of which 14 defective variable capacitors were taken to the office for testing. Mr. Wong in fact testified that he encountered the 30% variable capacitor defective level when he first arrived in April 1988. It is extraordinary, therefore, that such a staggeringly high level of defective goods was not made the subject of early complaint, indeed that it was the different complaints of customers that were first raised and held the stage for so long and that subsequently the capacitors were paid for. Moreover in its pleadings the Plaintiff pleads a 20% level of defective variable capacitors.

24. The version given by Messrs Chen and Wang for the Defendant was very different. In summary they said that in the presence of Mr. Kao 3 cartons of unused variable capacitors were opened and 300 of them selected at random were taken to the office and tested by the 3 Jiangxi Factory engineers with a capacitance meter. With the agreement of Mr. Kao, only the capacitance of the variable capacitors was tested, nothing else, and this was done by reference to the MEI Standard. All the variable capacitors passed. Then Mr. Kao prevailed upon them to visit the Plaintiff's production line which was very close. With reluctance they agreed. The visit took only about 3 minutes and did not involve anything in particular. Then they returned and Mr. Kao presented them with 14 variable capacitors claimed to have been rejected on the production line and asked for their maximum and minimum capacitance to be tested. Only 9 could be tested because the remainder had substantial damage that prevented testing. All the 9 also passed. Then the parties drafted a memorandum to record what had been done and Mr. Leung, one of the 3 engineers, recorded the results of the tests on the 9 variable capacitors, which results were appended to the tripartite memorandum as its annexe. All 3 parties then signed the memorandum.

The Tripartite Memorandum

25. The tripartite memorandum and the annexe are in the following terms:

Memorandum of a meeting of three parties

26. It can be seen that no mention is made of the variable capacitors that Mr. Wong said had to be changed; also that the memorandum clearly discloses two lots of tests as claimed by the Defendant's witnesses, as opposed to the one set testisfied to by Mr. Kao and Mr. Wong.

27. For the Defendant it is contended that the first 2 sentences record the compliance of the variable capacitors tested with the MEI Standard and for the Plaintiff that third and fourth sentence record that some of the fixed capacitors had to be changed to accommodate the variable capacitors. In fact the latter element of the Plaintiff's contention (i.e. that the change was necessary to accommodate the variable capacitors) is not spelled out. Mr. Chen says he reluctantly agreed to the third and fourth sentences because Mr. Kao pressed for them and he ultimately agreed because the fixed capacitors were not purchased from the Defendant company which had nothing to do with them. Mr. Wang says he agreed because of the several matters to which he testified to on technical matters concerning capacitors, some of which will be detailed later. Having carefully considered the evidence, the circumstances and the submissions it seems to me that Mr. Chen's and Mr. Wang's evidence and explanations cannot be rejected and are to be preferred. Likewise the explanation given by them as to the visit to the production line, which Mr. S.K. Wong particularly attacked, although rather less convincing, cannot in my view warrant the rejection of their version of those events.

The Production Report

28. It is convenient at this point to turn to what came to be called "the production report" which the Plaintiff produced at the trial claiming it to be a second annex to the tripartite memorandum. Its terms are revealing and I make no apology for reproducing it in full:

                "(Letter head not translated)

Production (Test) Report of Variable Capacitor

Appendix 2

Description	:	Film Dielectric Variable Capacitor CBM 443DF2
Result	:	in the assembly line, 30% (thereof) is unsteady and Variable Capacitor has to be replaced.

Being sub-standard in the (following) four ways:-

1.	Effective Rotation and (capacitor swing).
2.	"Q" Characteristics.
3.	Trimmer capacitance swing insufficient.
4.	(Max.) capacity point.

Anaylsis in production line:

1.    Effective Rotation and capacitor swing.

Production Result:

The dial calibration during production is not up to the customer's requirement, + 0.7 M.C., the standard normally required.

Solution:

Must have the variable capacitors, replaced re-alignment/re-adjustment must be made before it can be effective.

2.    "Q" characteristics:

Production Result:

Such capacitors affect the frequency range sensitivity, making it uneven, + 3 db is what normally required by customers.

Solution:

Must have the said variable capacitors replaced and carry out re-alignment/re-adjustment.

3.    Trimmer capacitance swing unstable.

 

Production Result:

Portion of frequency range coverage too narrow or too wide (normal 87.5 - 108.5 M.C.) abnormal especially at upper end of the range.

Solution:

Must change the (oscillation circuit) CX capacity at about 15PF-22PF to accord, (as shown in the diagram hereunder), or with the said frequency have the variable capacitor replaced.

4.	Max capacity point, (if the capacitor angle is 100%, 180o rotation (would have tolerance) of 97% (+2 % / -1 %)

Production Result:

The lower end should be 87.5 M.C. It is 0.5 M.C. or more, can narrower not be adjusted to 87.5 M.C.

Solution:

Change the (oscillation circuit) capacitor CX (as shown in the above diagram) or change the variable capacitor.

 

Conclusion

The CX in the circuit (as shown in the above diagram) can normally, match ceramic capacitor, with capacity of 20PF, may achieve the best effect. Testing point is 87.5 M.C. - 108.5 M.C. But 30% of the variable capacitors cannot match with 20PF ceramic capacitor therefore it is needed to change from time to time, the (CX) ceramic capacitors in order to match with the unstable capacity of the variable capacitors. Such production method of the variable capacitor by changing the capacity will seriously affect the quantity and quality of the products in the production line. However, the above method of changing the CX ceramic capacitors cannot completely solve the problem, the variable capacitors must be replaced in order to overcome the difficulty in production. At last, we believe that the said variable capacitors do not fit the specifications given to us by customers and unsuitable for production in the production line."

30. For Defendant it is claimed that the production report has been fabricated very late in the proceedings for the purpose of the trial. The alleged signatory, Mr. Lam Ng Wai, said to be a supervisor employed by the Plaintiff has not appeared to give evidence. No evidence of such a person and why he cannot be called has been adduced by the Plaintiff. Nor is there any evidence that he was present at the tests carried out on the 2nd July. None of the witnesses mentioned him. The Plaintiff's legal advisers do not appear to have been told that the production report was a second annex to the tripartite memorandum. It is listed in the Plaintiff's list of documents as "Chinese Production Report issued by the Shenzhen City Household Industrial Co. Ltd together with its English translation". No evidence has been adduced as to this company nor was it mentioned at the trial.

31. As to the "Ka Chong Electric Factory of Shenzhen", whose chop appears on the production report, the Plaintiff's witnesses accepted that the factory's representatives did not attend the meeting and were not a party to nor did they sign the tripartite memorandum. There is no mention or reference in the tripartite memorandum to a second annex or appendix. The allegations in the production report are inconsistent with the tripartite memorandum, and in any case are not easily intelligible. The Plaintiff did not call any witnesses to explain those allegations and, indeed, only Mr. Wang was able to explain what they might have meant. Significantly those allegations do not appear in the pleadings or in previous correspondence.

32. Altogether, there are very real grounds for grave suspicion about the provenance of the production report and that it must have been fabricated for this action. I do not, however, make such a finding, but I do reject the suggestion that it was agreed that each side would produce it's own annex to the tripartite memorandum and I also reject the production report as a second appendix or annex to the tripartite memorandum. Far from lending any support to the Plaintiff's case, it reinforces all the reservations and doubts I have about the related evidence relied upon and presented by the Plaintiff.

33. I accordingly reject the Plaintiff's version of the 2nd July meeting and accept the Defendant's version.

The Technical Evidence

34. However, the matter does not end there. As I have said, Mr. S. Wang's evidence on technical matters was the only evidence available to me in the nature of expert evidence. That evidence was unchallenged. Inter alia, Mr. Wang testified that:

35. As I have said, Mr. M. Wong's evidence on technical matters was on a very different level. He said that the variable capacitors were defective, that the fixed capacitors therefore had to be changed to produce the required frequencies and that even so some of the variable capacitors had to be altogether replaced. But he did not claim that defects had been established by any tests; accordingly it could have been the capacitance of fixed capacitors or the stray capacitance from other components that caused the claimed problems, which it must be remembered were not established. Furthermore, although production reports that might have shown the foregoing were kept upon an almost daily basis, none was produced by the Defendant. Mr. Wong also said that every fixed capacitor was tested before it was used, and that simply replacing some of the variable capacitors without anything more enabled the required range of frequencies to be received. Against all the other evidence and my inability to accept Mr. Wong's evidence as reliable, I do not believe the latter statement.

36. Finally Counsel for the Plaintiff, Mr. S.K. Wong pointed to Mr. Wang's evidence that even a variation within the tolerance permitted by the MEI Standard would affect the range of frequencies that could be received, and submitted that the variable capacitors were therefore defective. It must first be noted that this evidence, which could so easily have been suppressed by Mr. Wang, who could not have been unaware of the use to which counsel for the Plaintiff would seek to put it, confirms his credibility and honesty. That said, Mr. Wang was nevertheless resolute in his insistence that the variable capacitors were not defective. He gave his reasons. It was standard procedure for alignment of capacitance to be effected by the replacement of fixed capacitors rather than the far more expensive variable capacitors. Replacement of fixed capacitors (not that this was actually established on the probabilities) does not prove that the variable capacitors were defective. Since fixed capacitors were more likely to suffer from deviation, the likelihood must be that the fixed capacitors were defective. The capacitance of the fixed capacitors and the stray capacitance of other components was not tested. The Plaintiff's did not produce any evidence of the design, specifications or requirements of the radios to which the variable capacitors were to be fitted; nor was there any evidence that the Defendant was informed of even the sort of radios that were contemplated. Therefore quite apart from whether the MEI Standard applied to the contract, the Plaintiff's reliance upon Mr. Wong's evidence (which I do not accept) that mere replacement of variable capacitors achieved the desired frequency range, as conclusive proof that the variable capacitors were defective, would not in any event have availed the Plaintiff.

Applicability of the MEI Standard

37. Both Mr. Chen and Mr. To testified that Miss Chan was given a copy of the MEI Standard before she entered into the 14th January 1988 contract. Counsel for the Plaintiff, Mr. S.K. Wong strongly contested that evidence pointing out that no reference to the Standard is made in the contract; and that neither was the Standard disclosed by the Defendant prior to the trial, although it was crucial. On the other hand, it is difficult to believe the Plaintiff would, notwithstanding its somewhat unbusinesslike operations, have ordered such a large quantity of the particular type of goods without careful consideration of the specification of the goods it had tested and selected, including the applicable tolerances.

38. Mr. Chen and Mr. To were not shaken in cross-examination and I can see no good reason for rejecting their evidence, particularly in the absence of contradiction by Miss Chan. Moreover, as I have said, I find their evidence preferrable to that of Mr. Kao and Mr. Wong. As to the absence of reference to "DF2" as opposed to "DF" in the MEI Standard, I accept Mr. Wang's evidence that DF2 is only a variant of the DF model and within the relevant DF specifications, notwithstanding the express reference to DF2 and the absence of tolerances in the Jiangxi Factory catalogue. In regard to the latter, I accept the evidence that the specification in the catalogue was in the nature of a summary. In my judgment, the MEI Standard formed part of the specification of the relevant goods in the 14th January contract.

The 13th July Agreement

39. The Defendant contends that the 13th July Agreement reflects the settlement of all outstanding disputes on quality and records the Plaintiff's agreement or undertaking -

On the face of that written agreement, the Defendant's contention certainly seems to be right. Oh the other hand, for the Plaintiff it is contended that it was only because of an oral agreement by the Defendant to replace defective variable capacitors that it entered into the written agreement of the 13th July.

40. Messrs Chen, Dong and To gave detailed evidence of how consensus was reached on the Plaintiff's quality complaints and the Plaintiff given accommodation oh payment. Their evidence was not shaken in cross-examination and again, I can see no good reason to reject it. It was not free from question in certain respects, but overall was clearly preferrable to that of the Plaintiff's witnesses. Mr. S.K. Wong criticizes the absence of reference to the consensus claimed by the Defendant's witnesses that the variable capacitors were without defects. However, I accept the explanation of the Defendant's witnesses that the 13th July Agreement was concerned with payment, and not complaints about quality which had already been settled.

41. It is true that during the intervening period the letters that have already been described were sent by the Plaintiff to the Defendant on 5th & 12th July 1988. I do not think their importance warrants their text being set out or dissected here. It is sufficient in my view to say that while it is necessary to consider them in that respect, which I have carefully done, they do not render unsafe or improbable the conclusion that the agreement of the 13th July was made upon the basis that the Plaintiff's complaints about quality were resolved.

42. But what I find most telling is the absence of any reference in the 13th July Agreement to the oral agreement or any undertaking to replace defective variable capacitors. On the contrary, the Plaintiff is recorded as obliged to pay for the first batch, in effect to pay for the second batch, and to accept responsiblity for the third batch. I find it impossible to conceive of a Hong Kong businessman entering such onerous contractual obligations however anxious to preserve relations, without mentioning the reciprocal bargain alleged.

43. Subsequently the Plaintiff was pressed for payment and not always in polite terms. Yet not once did it refer to the alleged agreement to replace defective variable capacitors or any failure to do so, although 20 - 30% defective units would have amounted to an enormous proportion and total both in quantity and monetary value.

44. I accept the Defendant's version of the events relating to the 13th July Agreement. I reject the Plaintiff's claim that it only entered into the Agreement because the Defendant promised to replace defective variable capacitors.

Conclusion

45. Finally, I feel bound to say, that a lack of purpose or conviction seems to have crippled the Plaintiff's claim from the outset. This is fully reflected in the paucity and superficiality of the evidence of not only the alleged defective quality of the variable capacitors, but likewise of the damages claimed.

46. Reverting to the issues, I have no hesitation in finding that the Plaintiff has utterly failed in establishing that the variable capacitors were defective. The onus of proving that the variable capacitors were defective lies squarely upon the Plaintiff; it has not even begun to discharge that burden. On the contrary, the evidence indicates that the variable capacitors were not defective.

47. Likewise in my finding, the Plaintiff has failed to prove that it had to replace fixed capacitors, a fortiori replace them to accommodate defective variable capacitors.

48. Finally I find that the Plaintiff and Defendant did enter into a written agreement on the 13th July which is binding on the parties and in my judgment it affords the Defendant an effective defence to the Plaintiff's claim.

49. For all the foregoing reasons, I dismiss the Plaintiff's claim. Having heard the provisional submissions made on the matter, I can see no reason why the Defendant should not have the costs of defending the action. Accordingly, as indicated to counsel at the end of their submissions, I make an order nisi, which will become absolute in three weeks if no application to vary it is made before then, that the costs of the action be to the Defendant upon a common fund basis.

50. Before I leave the matter I must mention the 2nd batch which the Plaintiff accepted and paid for in pursuance of the 13th July Agreement. The 300,000 variable capacitors of which it consisted, according to the Plaintiff continue to languish in its warehouse. The Defendant is not unnaturally concerned that even if successful in this action, it may be confronted with another on the 2nd batch. Accordingly in reliance upon Yau Tung Investment Co. Ltd v. Dao Hang Bank and Another (1975) AC 581, Mr. Fung has invited me to indicate that it would be an abuse of the process of the court to raise by such a further action issues in regard to which the doctrine of res judicata must apply in the wider sense referred to in that case.

51. However, even if it were permissible to do that under Yat Tung Investment, and I am not persuaded that it is, I do not think I am in a position to anticipate fully the issues that might be raised. Moreover I think the proper, appropriate and certainly the safe course is to raise such a matter when it actually arises i.e. when the apprehended abuse arises, at any rate in the context of the circumstances that confront me. I must therefore decline Mr. Fung's invitation.