NETWORK TECHNOLOGY LTD v. RCG (HONG KONG) LTD

 HCSA3/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

SMALL CLIAMS TRIBUNAL APPEAL NO. 3 OF 2010

(ON APPEAL FROM SMALL CLAIMS TRIBUNAL

CLAIM NO.18012 OF 2008)

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BETWEEN

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DECISION

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1.  This is the defendant’s application for leave to appeal against the award of the Adjudicator made on 16 December 2009, whereby the defendant was ordered to pay the claimant $32,000 together with interest and costs.

The claim

2.  The claimant’s claim against the defendant is for the sum of $32,000, being the unpaid balance of tooling costs (also referred to as the mould costs in the proceedings in the Small Claims Tribunal).

3.  The claimant’s case is that on about 7 February 2007, the defendant placed an order with the claimant for the supply of 40,000 pieces of watch-like plastic tags (“the Tags”). The order was placed after the claimant had provided a quotation and sample Tags to the defendant. The goods were for supply to the defendant’s customer in Malaysia and for use in a water park.

4.  The agreement between the claimant and the defendant was that the claimant was only responsible for the production of the Tags. The design of the Tags and decision on the materials to be used were the responsibility of the defendant. In addition, the claimant was requested to produce the plastic moulds for the production of the Tags. The total purchase price of the Tags is $288,000 and the tooling costs is $80,000. The defendant had settled the purchase price in full and paid a 60% deposit for the tooling costs (i.e. $48,000).

5.  The Tags were delivered to the defendant by two batches. The first batch of 10,000 pieces was delivered in mid-February 2007 and the remaining 30,000 pieces were delivered in April 2007. The evidence at the trial did not show when and how these Tags were in turn delivered to the end customer in Malaysia.

6.  On 2 April 2007, the claimant issued to the defendant an invoice no. NTI20070402 for the 40% balance of the tooling costs. The defendant did not pay. On 17 April 2008, the claimant commenced proceedings in the Tribunal to claim the unpaid balance of the tooling costs.

The defence

7.  In the statement of defence, the defendant says the claimant proceeded to produce and make delivery of the Tags before the goods had been confirmed to be suitable for the purpose, that the sample tags had not been pre-approved by the defendant and that the Tags were defective and not suitable for use in water park. The defendant further claims that the Tags were not usable and were still kept in its warehouse so that they could be exchanged for usable tags. The defendant also suggests that its staff had colluded with the claimant’s staff and had signed the acceptance letter without authority. It appears that the defendant did not further develop this last point of collusion at the trial.

Proceedings in the Small Claims Tribunal

8.  Although the claim was filed in April 2007, the trial did not take place until December 2009. In paragraphs 2 to 4 of the written Reasons for Decision handed down on 19 February 2009, the Adjudicator gave an account of the history of the proceedings. It shows that the delay was primarily due to the defendant’s requests to prepare and procure evidence and reports relating to the quality and defects of the Tags and also to obtain evidence and statements from witnesses.

9.  At the trial, the claimant had called three witnesses, two of whom were the defendant’s former employees and were responsible for handling the transaction in question. The defendant called one witness, who admittedly was not thoroughly familiar with the dealings in question. The parties had adduced testing reports of SGS and the defendant had also produced a testing report from Malaysia. None of the makers of the reports were called.

The decision

10.  The Adjudicator accepted the evidence of the claimant witnesses. She found that under the parties’ agreement, the claimant was only required to produce the working moulds and the Tags based on the design and using materials specified by the defendant and that the claimant proceeded to produce the first batch of goods after receiving confirmation and instruction from the defendant. She also found that after the first batch of goods was delivered, the defendant had complained about problems of water leaking into the plastic case and discolouring of the Tags. Consequently, the claimant proposed and the defendant agreed to carry out ultrasonic sealing to resolve the issue of water leakage. The claimant’s suggestion to apply an extra protective layer to tackle the problem of discolouring was however not taken up by the defendant due to costing consideration.

11.  The Adjudicator rejected the defendant’s contention that it had requested to return the Tags. She found as a fact that the defendant had accepted the delivery of the goods and had not raised any complaint after the delivery of the second batch until almost a year later when the claimant pressed for payment of the balance of the tooling costs. The Adjudicator noted that the defendant had in an email dated 1 April 2008 said the Tags bend easily and water leaked into the Tags. She however found the email ambiguous as to whether the water leakage problem was due to the bending of the Tags or some other reasons. If water leaked into the Tags because the material used was such that the Tags bend easily, this would be a design and material defect and the claimant could not be held liable.

12.  The Adjudicator had considered and analysed the testing reports adduced by the parties. For reasons she had given, she did not accept the findings in the reports were able to support the defence case that the second batch of goods had defects that were the result of poor workmanship or faults in the manufacturing of the Tags. She therefore attached no weight to them.

13.  The Adjudicator was of the view that since the defendant was responsible for the design and the materials for the Tags; it was not open to the defendant to rely on defect or problem that was associated with the design or quality of the materials used as a reason for refusing to pay. She further considered that the defendant could not rely on discolouring of the Tags as a reason for refusing to pay because it had instructed the claimant to proceed with the production and delivery of the remaining goods after having knowledge of the problem and having refused the improvement measure proposed by the claimant. On the evidence, the Adjudicator held that the defendant had failed to prove that the second batch of goods were defective or had problem of water leakage and/or that such problem was due to defects for which the claimant is responsible. The Adjudicator concluded that the defendant has no defence to the claim and awarded the claimant the amount claimed with interest and costs.

The application for leave to appeal

14.  Section 28(1) of the Small Claims Tribunal Ordinance, Cap. 338 provides that leave to appeal may be granted where the proposed ground of appeal involves a question of law alone or is on the ground that the claim was outside the jurisdiction of the tribunal. The threshold onus of an applicant is to show that the intended appeal has arguable grounds for appeal.

15.  In the Application for Leave to Appeal, the defendant has raised five grounds of appeal. They are:

(1)  The Adjudicator had asked the wrong question in law by focusing on whether the defendant had previously asked to return the second batch of the Tags when the defendant had adduced evidence of defects in the goods and given that the limitation period for making a claim is six years.

(2)  The Adjudicator had failed to consider, whether the Tags were of merchantable quality and/or fit for the purpose for which they were purchased, pursuant to sections 16(2) and (3) of the Sales of Goods Ordinance, Cap. 26.

(3)  The Adjudicator had failed to give direction for the production of expert reports to determine whether the goods delivered had a water leakage problem and the cause of the problem.  Instead, the Adjudicator wrongly directed for the production of expert reports on the specifications of the goods only.

(4)  In the premises, the Adjudicator had failed to consider whether the defendant has a valid defence and/or counterclaim that would entitle the defendant to set-off the claim.

(5)  The defendant has made a counterclaim amounting to at least Malaysian Ringgit 120,000 (equivalent to approximately HK$279,360), which ought to be tried together with the claim.  As such, the dispute is beyond the jurisdiction of the tribunal.

Reasons for decision

16.  Before dealing with the proposed grounds of appeal, it is necessary to make a general point. Although legal representation is not allowed in the Small Claims Tribunal, the Adjudicator has no role and cannot act as the parties’ legal advisers or advocates. While proceedings in the tribunal are informal and there is no requirement for pleadings, it is not the function of the Adjudicator to carry out investigations and to advise the parties what case to run. The conduct of the claim and the defence is a matter for the litigants, irrespective of whether they are legally represented. The Adjudicator can only give directions for the preparations of the trial and decide the dispute on the basis of the materials and arguments that the parties have chosen to put before him. If the parties, after being afforded a reasonable opportunity to do so, have chosen to or failed to advance a full case or to adduce the relevant evidence, this cannot be regarded as the Adjudicator’s error.

17.  I turn to the proposed grounds of appeal. The first four grounds are related and can be taken together. They all concern whether the Adjudicator errs as a matter of law to hold that the defendant had no defence to the claim. The gist of the defence is that the Tags were defective. As such, and as the Adjudicator rightly held, the burden is on the defendant to make good its case. The defendant has to prove that the Tags, especially the second batch, are defective and that the defects are not caused by the design of the Tags or due to the materials used, but are the result of defective workmanship or problems in the manufacture of them, for which the claimant should be held responsible.

18.  It is clear from the oral and written reasons given by the Adjudicator that she was fully aware of the relevant issues, namely, (i) whether the Tags suffer from any defect; (ii) if so, what are the defects and the cause of them; and (iii) whether the claimant can be held liable for the defects under the terms of the contract between the parties.

19.  The Adjudicator had made a factual finding that the defendant had accepted all the goods and had not requested to return them. This is necessitated by the defendant’s contention that it had requested to return the goods, but had refrained from doing so as a result of the claimant’s request. The claimant denied this and further said that the defendant was alleging defects as a tactic to avoid payment. The claimant witnesses who were the defendant’s former employees also testified that there was no request to return the goods to the claimant. Clearly, the issue of whether the defendant had raised any complaint about the quality of the goods after the delivery of the second batch is directly relevant to the veracity of the defendant’s assertion that the goods were defective and whether this is the genuine reason for not paying the balance of the tooling costs. The Adjudicator cannot be said to have considered a wrong or irrelevant question.

20.  The Adjudicator had not overlooked the question of whether the Tags were defective as claimed by the defendant. She had carefully and meticulously analysed the contents and findings in the testing reports produced by the parties before concluding that the defendant had failed to prove its case. There is no warrant for saying that the Adjudicator had failed to consider the proper question of the quality of the goods delivered by the claimant.

21.  In respect of the complaint that the Adjudicator had failed to give the proper direction for expert evidence, this is not borne out by the materials before this court. Firstly, there is no evidence to show that the Adjudicator had directed the parties to restrict the expert evidence to the specifications of the goods. There is also nothing to show that the Adjudicator had disallowed the parties from adducing expert evidence relating to other aspects of the quality of the goods. Secondly, the parties, especially the defendant, had been granted very generous time to adduce evidence to show that the goods are indeed defective as alleged. Thirdly, the statement of defence referred to the Tags bend easily and are not waterproof. The defendant therefore knows what defects it is alleging and it will be up to it to adduce the relevant evidence in support of its assertion. Fourthly, the defendant had indeed adduced report prepared in Malaysia that dealt with the question of leaking of water.

22.  In my view, the first four proposed grounds of appeal are not reasonably arguable.

23.  In respect of the last ground that concerns the jurisdiction of the Adjudicator to try the case, it is not maintainable at all. The defendant had never indicated in the Tribunal that it wished to make a counterclaim. In making a counterclaim, the defendant would be obliged to properly formulate its case, including setting out the items of loss and amounts involved so as to satisfy the Tribunal that it is a genuine claim that ought to be transferred to either the District Court or Court of First Instance, where the amount counterclaimed exceeds the monetary jurisdiction of the Tribunal.

24.  The letter dated 14 May 2008, on which the defendant rests this ground of appeal, was written to the claimant and not to the Tribunal. In it, the defendant merely stated it reserved all its rights. The defendant had not even made an overt claim for damages against the claimant. In any case, even if it has a valid claim, the defendant must still raise it in the tribunal. This is because a party is entitled not to pursue its legal rights, so that even if it has a counterclaim against the other party to the proceedings, it can elect to waive it. The mere inclusion of the letter of 14 May 2008 in the evidence for the trial cannot amount to putting up a counterclaim. Still less can it be said that the Adjudicator acted without jurisdiction in trying the claim because the amount of loss stated in the letter is in excess of the jurisdictional limit of the Tribunal.

Conclusion

25.  For the reasons indicated above, the application for leave to appeal is refused.