CHINA FOUNDATION INTERNATIONAL LTD v. REVOACE INC

HCA 1585/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1585 OF 2010

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J U D G M E N T

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1. This is a dispute involving various sale of goods contracts made between the plaintiff and the defendant relating to the supply of barbecue gas stoves.

Background

2. The plaintiff is a supplier of various products including cookware and outdoor barbecue gas stoves.  The defendant is the sourcing agent for a company in the United States known as Blue Rhino Global Sourcing, LLC (“Blue Rhino”).  Blue Rhino supplies various products to a large-scaled retail store in North America known as Wal-Mart Stores, Inc (“Wal-Mart”).

3. The defendant had been purchasing cookware from the plaintiff for some time before 2006.  In 2006, the defendant started to place orders with the plaintiff for the supply of barbecue gas stoves.  The parties knew full well that the end-purchaser of such products would be Wal-Mart, who would place the products for sale in their retail outlets in North America.

4. Barbecue gas stove is a seasonal product with the demands mainly in the summer months.  For the products to be sold in the summer, the defendant would place orders in or around September the previous year.  The plaintiff would start to ship the products to Wal-Mart in the beginning of the year so that the products could be offered for sale in the summer months.

5. The business transactions between the plaintiff and the defendant for the supply of barbecue gas stoves only lasted for 2 seasons, namely 2006-2007 and 2007-2008 seasons.

6. The plaintiff claims that the defendant had not paid the outstanding balance of the invoices for the goods supplied in the 2006-2007 season.  The plaintiff and the defendant had an unusual method of payments.  In order to help the plaintiff to develop the production line for the barbecue gas stove which was a new product for the plaintiff, the defendant would advance various sums of money to the plaintiff in the beginning of the season.  The parties regarded these payments as loans and the plaintiff would sign loan agreements to confirm the receipt of the various advance payments.  The parties then agreed to set-off these loans against the invoices issued by the plaintiff to the defendant for the goods supplied in that particular season.

7. If one looks at the pleadings, one cannot quite understand what are the real issues relating to the unpaid invoices for the 2006-2007 season.  At the commencement of the trial, counsel for both parties confirm that I only need to resolve the following 2 factual disputes relating to the plaintiff’s claims for the unpaid invoices for the 2006-2007 season:

(1) whether the parties had made a binding compromise agreement in October 2007 (“the Compromise Agreement”), whereby the plaintiff agreed to accept responsibility for certain alleged defective goods rejected by Wal-Mart in the 2006-2007 season, and consequentially the plaintiff agreed to deduct a sum of US$430,000 from the unpaid invoices for the goods supplied in the same season; and

(2) whether the plaintiff had supplied the spare parts to the defendant under invoice no 2008CFI-117 (“the Spare Parts”) in the sum of US$864.94.

8. On the other hand, the defendant lodges a counterclaim against the plaintiff to claim damages in the sum of US$514,542.69 for the alleged defective goods supplied by the plaintiff in the 2007-2008 season.

9. Counsel for both parties confirm that these are the only issues in this action.

The Compromise Agreement

10. At the trial, Mr Chan Qi Yuan (“Mr Chan”), the owner of the plaintiff, testifies on behalf of the plaintiff’s case, whilst Mr Shen Hung Ming (“Mr Shen”), the president of the defendant, testifies on behalf of the defendant’s case.  There is also a witness statement made by Mr Cheng Min Hao who is the Assistant Vice-President of the defendant.  However, since Mr Cheng only confirms the evidence of Mr Shen without additional material, it is quite unnecessary for me to consider the witness statement of Mr Cheng.

11. It is the defence case that the Compromise Agreement was made between Mr Chan and Mr Shen on or about 22 October 2007.  In order to confirm the existence of the Compromise Agreement, Mr Chan signed a loan agreement in favour of the defendant in the sum of US$430,000, which was the agreed amount of the compensation for the alleged defective goods rejected by Wal-Mart in the 2006-2007 season.  After the making of the Compromise Agreement, the defendant requested to change the wordings in the loan agreement, and as a result Mr Chan signed another loan agreement on behalf of the plaintiff dated 24 October 2007. 

12. The plaintiff does not dispute that Mr Chan had signed the 2 loan agreements.  However, Mr Chan claims that the defendant by that time still owed the plaintiff a sum of about US$851,616 for the unpaid invoices relating to the goods supplied in the 2006-2007 season.  Mr Shen told him that the defendant would only pay the outstanding invoices if Mr Chan signed the loan agreements acknowledging the responsibility for the rejected goods in the sum of US$430,000.  Further at the same time, the plaintiff’s bank pressed the plaintiff for repayment of certain bank loans. Hence, in order to ease the financial pressure facing the plaintiff,  Mr Chan was forced to sign the 2 loan agreements for the alleged Compromise Agreement.

13. Having carefully considered the evidence of the said 2 witnesses, I prefer to accept the evidence of Mr Shen on the balance of probabilities.  My reasons are as follows.

14. Firstly, it is not clear about the plaintiff’s exact case relating to the signing of the 2 loan agreements in para 3(b) of the Amended Reply.  The plaintiff alleges that the defendant only agreed to pay the balance of the purchase price of the goods in the sum of US$851,616 on the condition that the plaintiff would accept responsibility for the rejected goods in the sum of US$430,000.  In other words, the defendant used the unpaid purchase price as a hostage and the defendant was forced to sign the 2 loan agreements.  However, subsequently in the answer to the request for further and better particulars, it is stated that the defendant had made a representation to Mr Chan that the 2 loan agreements were just “temporary” and “subject to further negotiation”, and as a result Mr Chan signed the 2 loan agreements.  In my judgment, this is quite different from the plaintiff’s pleaded case in the Amended Reply. 

15. In his oral testimony, Mr Chan mentions that although the defendant did use the unpaid purchase price as a bargaining chip, he is reluctant to say that he was forced to sign the 2 loan agreements.  In fact, as shown in the previous loan agreements for the advance payments, the parties were serious to give effect to these signed loan agreements as a confirmation of certain financial arrangements made between them.  Mr Chan is an experienced businessman, and so I do not believe that he would have just signed the 2 loan agreements with the view to please the defendant but with no legal effect.

16. Secondly and more importantly, the correspondence between the parties does not support the plaintiff’s case that Mr Chan had been forced to sign the 2 loan agreements.  There is no dispute that the defendant made the payment of the outstanding purchase price in the sum of US$851,616 to the plaintiff on or before 26 October 2007.  However, the email from “Annie” of the plaintiff dated 29 October 2007 clearly indicated that the plaintiff was willing to prepare and execute a revised loan agreement in favour of defendant in the sum of US$430,000 representing the agreed sum under the Compromise Agreement.  As the plaintiff had already received the payment for the outstanding purchase price, there was no point for the plaintiff to offer any more assistance to the defendant if the plaintiff was indeed forced to execute the earlier loan agreement.  Further, the tone of the email shows that the parties were quite friendly by that time, and this is certainly inconsistent with the plaintiff’s allegation that Mr Chan had been forced to sign the 2 loan agreements.

17. The plaintiff submits that “Annie” was only a department manager and so she had no authority to make any binding agreement on behalf of the plaintiff.  However, it is not the defendant’s case that “Annie” made the Compromise Agreement on behalf of the plaintiff, rather she was only responsible for negotiating the terms of the Compromise Agreement and it was Mr Chan who finalised the Compromise Agreement itself.  Despite that “Annie” was not the person responsible for concluding the Compromise Agreement, she played an important part in negotiation of such agreement.  The fact that she had sent out a friendly email offering to provide a revised loan agreement is certainly consistent with the defendant’s case that the parties had made a genuine Compromise Agreement to settle the defendant’s claim relating to the rejected goods.

18. Mr Cheung, counsel for the plaintiff, seeks to argue that the Compromise Agreement was not a binding agreement because there was no evidence by that time to substantiate that the goods rejected by Wal-Mart were of unmerchantable quality or did not correspond to the specifications in the contracts.

19. I cannot agree with such submission.  Although the defendant accepts that there was no term in the contracts between the plaintiff and the defendant which made the plaintiff automatically liable for the goods rejected by Wal-Mart and that the defendant was still required to prove that the rejected goods were in fact defective, there might be a lot of reasons as to why the plaintiff would have agreed to the Compromise Agreement without such substantive proof offered by the defendant.  There is no dispute that Wal-Mart had deducted a sum of over US$500,000 as compensation for the rejected goods from the purchase price payable to Blue Rhino and Blue Rhino did the same to the defendant.  Facing with such a loss, it made considerable business sense for the defendant to ask the plaintiff to bear some if not all of the compensation.  For the 2006-2007 season, the business transactions between the plaintiff and the defendant amounted to about US$15 million, and so the compensation represented only a small part of the total business transactions. In order to maintain a good business relationship between the parties, it was not surprising that the plaintiff, even without the substantive proof relating to the defects of the rejected goods, would have agreed to absorb part of the losses suffered by the defendant for the rejected goods by agreeing to deduct a sum of US$430,000 from the unpaid purchase price.  Hence, I see no merit in the plaintiff’s argument.

20. For the above reasons, I find on the balance probabilities that the parties had made a valid Compromise Agreement to settle the defendant’s claim for the compensation for the goods rejected by Wal-Mart in the 2006-2007 season.

The claim relating to the Spare Parts

21. In the pleading, the defendant pleaded that it had neither ordered nor received the Spare Parts from the plaintiff.  However at the commencement of the trial, I am given to understand that the only issue between the parties is whether the plaintiff had supplied the Spare Parts to the defendant, and as the result whether the defendant had actually ordered the Spare Parts has not been canvassed in the evidence at the trial.  In any event, it does not make a great difference in the determination of this relatively small claim.

22. In my judgment, the plaintiff has simply failed to discharge the burden of proving the ordering of the Spare Parts by the defendant or the delivery of the same to the defendant.  In para 30 of the witness statement of Mr Shen, he has specifically confirmed that the defendant had not ordered nor received the Spare Parts from the plaintiff.  However, Mr Chan has not dealt with such complaint anywhere in his original witness statement or his supplemental witness statement.  Although the plaintiff does produce the invoice and the packing list to substantiate the claim for the unpaid Spare Parts, the court has no idea as to how the defendant had placed the order for the Spare Parts from the plaintiff and how the plaintiff had delivered the Spare Parts to the defendant.  At the very least, I would expect the plaintiff to provide more evidence about the ordering process and the shipping process, so that the court can be certain that the information contained in the invoice and the packing list is correct.  In the absence of such evidence, I find that the plaintiff has failed to discharge the burden of proving the claim for the Spare Parts.

The counterclaim

23. I then turn to the counterclaim.  Mr Tang, counsel for the defendant, accepts that the plaintiff is not automatically liable to pay damages to the defendant for the goods rejected by Wal-Mart.  The defendant is still required to prove that those goods rejected by Wal-Mart were in fact defective, either that they were not of merchantable quality or that they did not correspond to the specifications in the contracts between the plaintiff and the defendant.

24. Apparently, all the alleged defective goods returned by

25. Obviously, these documents are not enough to substantiate the defendant’s counterclaim. 

26. Firstly, there is no one to verify the truthfulness of the contents in such documents.  Although the defendant can adduce such documents as hearsay evidence, there must be, at the very least, someone to verify the truthfulness of the contents contained in such summary. Both witnesses of the defendant have not made any attempt to verify the truthfulness of the contents, and so I do not accept that the contents in these reports were true.  Secondly, all these reports only contain some general complaints made by the customers of Wal-Mart about the quality of the products.  Without an opportunity of investigating these complaints, the court would not be able to assess whether the goods complained of were in fact of unmerchantable quality or that they did not correspond with the specifications in the contracts. Furthermore, the evidence of the present case shows that the plaintiff only supplied the parts for the barbecue gas stoves to the defendant, and it still required Blue Rhino or Wal-Mart to assemble the end-products after the parts had been shipped to North America.  In such circumstances, it was possible that the defects complained of were actually caused by the subsequent assembly works. In addition, some of the complaints in the Reported Incident Summary were related to the valves of the barbecue gas stoves.  According to the evidence at the trial, some of the valves for the gas stoves shipped to Wal-Mart were actually ordered by the defendant itself.  In such circumstances, there is no reason to hold the plaintiff liable for the defects of the valves which were not supplied by them.  Hence, the defendant has simply failed to discharge the burden of proving that the goods rejected by Wal-Mart were defective.

27. In a desperate attempt to salvage the counterclaim, Mr Tang urges the court to draw an inference that the goods rejected by Wal-Mart were not of merchantable quality or did not correspond with the specifications in the contracts.  In support of the drawing of such inference, the defendant seeks to rely on some of the photographs taken in an inspection of the goods in the plaintiff’s factory on or about 24 April 2007 and certain alleged admissions made by the plaintiff.

28. In my judgment, it is clear that the defendant cannot rely on the photographs to substantiate the counterclaim.  These photographs only show some of the defects spotted by the defendant prior to the shipment.  It is clear that these alleged defective goods had not been shipped to Wal-Mart.  In such circumstances, the court cannot rely on these photographs to draw an inference that the goods shipped to Wal-Mart also contained the same defects.  In fact, the plaintiff confirms that after the spotting of such defects, the plaintiff had improved the production line, and as a result the goods shipped to Wal-Mart should not have contained such defects.

29. Further, Mr Tang’s submission based on the alleged admissions is totally misconceived.  As I understand it, Mr Tang’s argument is that by the making of the Compromise Agreement, the plaintiff admitted that certain goods shipped in the 2006-2007 season were defective.  As a result, he asks the court to draw an inference that the goods shipped in the 2007-2008 season also contained the same or similar defects.  Further, Mr Chan admitted in para 13 of his supplemental witness statement that the goods supplied by the plaintiff to the defendant were subject to a “1% tolerance”, and so Mr Tang submits that at least 1% of the products supplied by the plaintiff must be defective.

30. It is regrettable that Mr Tang has the courage to advance such unmeritorious argument to the court.  Firstly, even assuming that some of the goods supplied by the plaintiff in 2006-2007 season were defective, how can the court draw an inference that the goods supplied in the following season must have contained the same or similar defects?  Secondly, as clearly indicated by Mr Chan in his testimony, the “1% tolerance” refers to the buyer’s right to reject the goods.  If the defective goods were less than 1% of the total shipment, then the defendant was not entitled to reject the whole lot of goods.  However, that does not mean that 1% of the goods supplied by the plaintiff must be defective.  Thirdly, Mr Tang keeps on reminding me that these were admissions made by the plaintiff.  Even if these were admissions, what is the weight to be attached to such admissions? The plaintiff did not have the opportunity of examining the goods rejected by Wal-Mart, and so these admissions, if they were indeed admissions at all, simply carry no weight for the court to determine as to whether the goods supplied by the plaintiff were in fact defective.  In my judgment, the counterclaim is simply a hopeless claim.

31. Based on the aforesaid analysis, since the parties had made a valid Compromise Agreement and the plaintiff has failed to discharge the burden of proving the claim for the supply of the Spare Parts, there is no outstanding purchase price for the goods supplied in the 2006-2007 season.  I therefore dismiss the plaintiff’s claim.  The defendant’s counterclaim is also unmeritorious and so I dismiss the counterclaim as well.

32. I now listen to the parties’ submissions on the issue of costs.