FULL GRAND ENTERPRISE LTD v. TAI SUN PLASTIC NOVELTIES LTD

HCA 372/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 372 OF 2003

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JUDGMENT

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1. The plaintiff company is a sales representative for manufacturers of electronic components, particularly in Taiwan. It does not manufacture components itself, but acts as a representative of the manufacturer. An associate company has the capability of designing electronic opponents, which, if the acceptable to the purchaser are manufactured according to the purchaser's requirements.

2. The defendant is a manufacturer and distributor of children's toys. Like the plaintiff, it does not manufacture the toys itself, but designs the toys, arranges manufacturers, presumably usually in the Mainland, and then distributes toys to its buyers.

3. During the year 2000 the defendant developed an electronic toy robot. An integrated circuit (IC) was designed by the plaintiff's associate company and the defendant. In late 2000 Mr Sam Lo, of the defendant, attended a toy fair in the USA. When he returned to Hong Kong at the beginning of 2001 Mr Patrick Lee, a sales engineer from the plaintiff company, contacted him enquiring whether he had obtained any orders from the toy fair that would require the supply of electronic components. Also required for the toy robot was a liquid crystal display (LCD), which the plaintiff also offered to supply. The LCDs are made in the Mainland.

4. The ICs are made by substantial companies in Taiwan. To make an IC a component called a wafer are formed into several layers called a wafer bank. Once at that basic level, from which they can be used in a variety of ways, the unique program required by the customer is incorporated thereby finishing the integrated circuit. In the usual way of devices such as this, the greater the number purchased by the buyer the cheaper price will be. As with the IC, the LCD was to be custom made to the defendant's requirements.

5. Two important facts that must be borne in mind are that it takes approximately two weeks to produce the wafer, and a further 30 days to produce the IC. Once the IC reaches this stage, it cannot be used for any other purpose.

6. In early 2001 Patrick Lee met with Sam Lo to discuss the matter. There was negotiation over the quantities and price, and at Patrick Lee's request, on 23 February 2001, the defendant submitted to a "projection" predicting a delivery schedule of 600,000 pieces between 31 March 2001 and 30 August 2001. The "projection" was specifically marked, in two places, with the words "Remark: this is not an official P.O.". It was common ground that the abbreviation "P.O." meant "Purchase order". Patrick Lee discussed the matter with his superiors as a result of which the quotation was sent by fax from the plaintiff to the defendant on 7 March 2001.

7. On 14 March 2001 the defendant buyer submitted a Purchase Order for the purchase of 600,000 ICs. Endorsed upon the Purchase Order was the following sentence:

"Remarks: Our company shall issue an ORDER NOTE within one-week for each delivery date, quantity as per the ORDER NOTE. Should buyers wish to cancel the ORDER notice to be given to sellers 45 days beforehand."

When the Patrick Lee received that order he discussed it with his superior. Because it was a very large order he was instructed to request the defendant to break the order down over three months, with 200,000 ICs in each order, to give a more even distribution of orders. Patrick Lee discussed this with Sam Lo, who agreed. As a result, a new Purchase Order, dated 15 March 2001 was issued, one for 200,000 pieces of ICs, the other for 200,000 pieces of LCDs. The delivery dates and quantities were named as in the first Purchase Order. In place of the "Remarks" portion of the Purchase Order were the following words:

"Revised #1 item: Should buyers wish to cancel the ORDER change the delivery date or change the quantity to be delivered, notice should be given to sellers 45 days before DELIVER DATE below."

8. It was common ground between the parties that at times wafers are in short supply, and that at that time either the price will increase or the shortage will result in delays in production. In order to ensure steady production it was necessary to reserve wafers in advance. It was Patrick Lee's evidence that the placing of the purchase order would have the effect of reserving wafers. Patrick Lee's evidence was that, in his view the defendant had agreed to commit itself to 600,000 pieces and that by placing the order on 14 March 2001 had committed itself to 600,000 pieces.

9. Sam Lo, for the defendant, gave evidence that there was an oral agreement between himself and Patrick Lee that the Purchase Order would not be binding, but would serve to reserve the wafers, and that it was only upon the issue of an order note, that there would be a binding arrangement between the parties. It is this difference between the parties which forms the central issue in the case.

10. On the 19 April 2001 an Order Note was issued for 200,000 ICs. The only significant difference between that, and the Purchase Order of 15 March 2001, is that 50,000 pieces to be delivered on 25 May 2001 are deferred to 25 June 2001. In all other respects the documents are identical. It will be noted that the new delivery date is more than 45 days ahead of the date of the variation.

11. On 20 April 2001 being new Purchase Order was issued by the defendant. This increased the total number of pieces to be purchased to 406,500 with delivery on various dates between 24 April 2001 and 25 September 2001. Sam Lo acknowledged that the quantity of 406,500 was arrived at after careful and deliberate discussion amongst staff of the defendant. This time, in the place of the "Remarks", were the following words:

"Revised #2 item Quantity increased from 200,000 pieces to 406,500 pieces."

An identical new Purchase Order was issued by the defendant for the LCDs.

12. On 27 April 2001 Order Notes were issued by the defendant to the plaintiff in relation to the ICs and LCDs. In each case a delivery of 60,000 pieces due on 10 June 2001, as required by the purchase order of 20 April 2001, was varied, to provide for 25,000 pieces on 15 June 2001, and is 35,000 pieces on 30 July 2001. That is 45 days ahead.

13. On the 24 April 2001 the plaintiff delivered to the defendant 50,000 PCs each of the ICs and the LCDs. On 27 June 2001 a further 25,000 of each item were delivered to the defendant, and on 11 August 2001 a further 35,000 pieces of each item were delivered to the defendant. No further Order Notes were issued by the defendant to the plaintiff. Realising that the defendant was not taking delivery of ICs or LCDs that had been produced, the plaintiff stopped production. At that time 222,153 IC pieces had been completed to the defendant's custom-made requirements. The defendant had taken delivery of 110,000 IC pieces, leaving 112,153 pieces that could not be sold to anyone else.

14. The defendant took delivery of 110,000 LCDs. When production was stopped by the plaintiff, the defendant not taking delivery of goods produced, there were a further 125,000 pieces built but not uplifted. The balance of the order amounted to a further 171,500 pieces. The plaintiff was able to negotiate with the Chinese manufacturers in relation to those pieces which the defendant did not take. Following lengthy negotiations, the plaintiff was able to obtain a 60% discount on the price of the LCDs thereby suffering a loss of HK$141,250 instead of HK$287,500.

15. The plaintiff claims a loss in respect of the ICs built but not accepted, at the contract price of US$1.05 each, a total of US$233,260.65, and the profit factor in the 74,347 not built, of US$0.15 each, a total of US$11,152.05. As to the LCDs, the plaintiff claims a loss in respect of 125,000 pieces built but not accepted, after adjustment with the manufacturer, of HK$141,250, and the profit factor in the 171,500 not built of HK$0.35 each, a total of HK$60,025. Total damages claimed therefore are US$244,412.70 and HK$201,275. There was no challenge, either in the evidence or in submissions, to the steps taken by the plaintiff by way of mitigation, or the manner in which these calculations were undertaken.

16. It is clear that it was the intention of the parties to treat the Purchase Orders as binding contracts. That is made plain by the endorsement on the projection delivered on 23 February 2001. The liability of the defendant depends upon an interpretation of the paragraph inserted in the "remarks" section of the Purchase Order issued on 14 March 2001, for that Purchase Order forms the basis of the contract between the parties. That paragraph is set out at paragraph 6 above.

17. It is clear that oral evidence may not be adduced to add to, vary or contradict a written document. That is not to say the evidence of the circumstances surrounding the making of the contract is inadmissible. It is admissible to prove the circumstances in which the contract was made. However oral evidence may not be admitted to which would have the effect of varying or contradicting plain written terms. That may be seen from the speech of Lord Hoffman in Investors Compensation Scheme Ltd v West Bromwich Building Society [1989] 1 All ER 98 at 114-5. The primary principle to be applied in the construction of a contract was described thus:

"Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract."

This background has been referred to as the "matrix of fact". Declarations of subjective intent by those negotiating a contract are clearly inadmissible.

18. The most significant factors in the matrix of fact surrounding the making of this contract are the fact that the time required to produce an IC is approximately 45 days. While within two weeks from the commencement of production the wafer bank is produced, which at that stage is reusable in other production, once production of the IC proper starts a further 30 days is required and, once produced, no other use can be made of the IC. It is plainly for this reason that the contract required 45 days notice before cancellation.

19. It is common ground that no notice of cancellation was ever given. There were two significant variations of the contract but it will be noted that both were delivered 45 days ahead of the delivery date thereby ensuring that ICs were not made that would not be required.

20. The case for the defendant is that unless a delivery note was issued is the purchase order did not constitute a binding contract. The purchase order required that a delivery note be issued within one week of each delivery date. It is immediately abundantly plain the fact that the very particular IC required by the defendant could not be produced in one week. It is plain that neither party would have contemplated that the plaintiff ought to proceed to manufacture items which would not be able to be resold elsewhere upon the chance that a delivery order would be issued for the purchase of the date is.

21. The inherent improbability in the argument for the defendant was best demonstrated when, recognising the limitation of the requirement for 45 days for production, Mr Sam Lo asserted in evidence that what the clause really meant was that the order note would be issued one week before the 45 day period required for production. Quite to the contrary, the clause plainly only requires an order note seven days before delivery.

22. I am satisfied that the requirement for an order note was merely to specify items such as the place of delivery, and that the issue of the purchase order constituted a binding contract.

23. I am satisfied that the plaintiff has taken proper steps to mitigate its loss. As I have noted in paragraph 15 there is no dispute as to the calculation of damages, should liability be found. There will be judgment for the plaintiff in sum of US$244,412.70 and HK$201,275. Those sums will bear interest at judgment rate from the date of the issue of the writ until payment.

24. The plaintiff will have its costs to be taxed on a party and party basis unless agreed.