EUXOS PACIFIC SA AND OTHERS v. UNIVERSAL GIFT & STATIONARY PRODUCTION CO LTD AND OTHERS

HCA1420/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.1420 OF 2003

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J U D G M E N T

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1. The plaintiffs bring this Action against the defendants for the return of some 41 moulds (“Moulds”), manufactured by the defendants for the plaintiffs, which Moulds had been paid for by the plaintiffs.  The defendants resisted the claim on the basis that the plaintiffs are not entitled to the return of the Moulds because of the terms of the oral agreement alleged to have been made between the parties.  The dispute at the Trial is over the terms of the oral agreement, there being no dispute that there was an oral agreement between the parties that the defendants would manufacture the Moulds for the plaintiffs which would pay for them at the prices agreed.

2. An understanding of the relationship of the parties and the business they transacted is necessary before the Court can embark on the determination of (at the end of the day) a fairly narrow dispute of fact.

3. All three plaintiffs are companies, engaged in the gift business.  The persons involved in the transactions are Alain de Marotte (“Alain”) of the 1^st plaintiff (“Euxos”), Joachim Alberto (“Joa”) of the 2^nd plaintiff (“China Gate”) and Jean-Claude Gonthier (“Jean-Claude”) of the 3^rd plaintiff (“Edito”).  The plaintiffs were collectively involved in the purchasing in Hong Kong from the defendants’ gift items in the form of small toys made of metal or metal alloys.  Alan, Joa and Jean-Claude all gave oral evidence at the Trial.

4. The defendants were engaged (for overseas customers such as the plaintiffs) in the business of manufacturing the moulds for these small metal toys and producing the metal toys from the moulds.  Miss Dobe Tang (“Dobe”) was the person in the defendants who was involved with the transactions in question.  Dobe also gave evidence at the Trial. 

5. In France, gift items such as metal toys are sold in newspaper kiosks, often on promotional basis as collection items sold over a period of time consisting of a number of these metal toys in a particular series, such as soldiers, footballers or military planes.  Edito (Jean-Claude’s company) was the ultimate buyer of these metal toys.  Edito bought them for retail sale in France.  Edito is part of a large group in Europe with extensive interest in publishing.  The arrangement made was that Edito bought these metal toys from Euxos (Alain’s French company) and Euxos bought them in turn in Hong Kong from the defendants.  The defendants had these moulds and metal toys produced in China.  China Gate (a Hong Kong company set up by Euxos) was used by Euxos as a fiscal vehicle for liaison, invoicing and payment.

6. The history of the relationship is somewhat involved because three different series of gift items were made by the defendants for the plaintiffs, namely the toy soldiers under the name of SAT, toy footballers under the name of ZID and toy military planes under the name of VEN or RAF.  The dispute is only over the toy military planes and, in particular, is confined to the disputed right of the plaintiffs to the return of the Moulds of the toy military planes which had been paid for by the plaintiffs.

7. The process of producing these metal toys involved firstly the manufacture of moulds followed by the production (by injection) of the actual metal toys from these moulds.  Both the price of the moulds and the price of the toys so produced had to be agreed by the buyer and the seller.  In each of these series of soldiers, footballers and planes, a price has to be agreed for the various issues in that series.  The mould for each item or grade was a one-off manufacture and therefore the price of the mould could be agreed because only one mould was produced for each item or grade.  However, for the price of the actual metal toys to be produced from the moulds, when there was no initial commitment to order any particular number of any particular item in the series, the price would depend on the quantity to be ordered and therefore it was necessary to reach an agreement with different prices for different quantity range.  Obviously the larger the order in quantity, the lower the unit cost for the sale of such actual item of metal toy.  This was the system adopted in the quotation and acceptance of the toy military plane series.

8. There is no dispute that it was orally agreed in late 1988 that the Moulds for the toy planes would be classified into Grades A, B1, B2 and C by reference to their respective dimension, weight, complexity and number of parts involved.  There is also no dispute that the price of the Moulds were agreed for Grade A at $87,500, for Grade B1 at $87,500, Grade B2 at $74,250 and Grade C at $60,750.  It is also agreed that there was no initial order for all 61 issues in the proposed series of military planes.  The common understanding was that order for the mould for each item would be made depending on the success of the series and from time to time as the series progressed.  There is further no dispute that the unit prices of the production of planes were agreed according to the various quantity ranges in relation to the various grades.   Again there was no initial order of all 61 issues in the series.  An order was placed in relation to the toy military planes, like the Moulds for the military toy planes from time to time depending on the progress of the series. 

9. There is no dispute that the projected series of the toy planes was to be some 61 in numbers and were to be promoted on a bi-weekly basis.  The toy military plane series however was never completed by the defendants and the plaintiffs.  Dispute arose around mid-2000 between Alain and Joa on the one hand and Dobe on the other hand, leading Dobe declaring to the plaintiffs that the defendants would not work with Euxos and China Gate and that either future orders for the remaining issues in the toy military planes would have to be placed directly by Edito or through another agent appointed by Edito.  This new position was not acceptable to any of the three plaintiffs.  At that time only 41 Moulds for the toy military planes had been ordered and manufactured.  The plaintiffs and the defendants agreed to terminate their relationship.  The plaintiffs asked for the handing over of the 41 Moulds which had been paid for by the plaintiffs and therefore were property of the plaintiffs.  The defendants at first agreed to the return of these Moulds but subsequently a few months later said they could not get them from the Chinese sub-contractor factory, Lee Hing.

10. The ground now advanced as justification for the refusal of the defendants to return the 41 Moulds was not put forward or even referred to in the contemporaneous correspondence or in the letters exchanged before proceedings or even in the initial pleadings of the defendants.  By a late amendment in 2004, the defendants for the first time raised the amended defence set out in paragraph 8(b), (c) and (d) of the Re-Amended Defence and Counterclaim.

11. Two separate defences were pleaded.  Firstly, it was alleged that there was an agreement that in return for the defendants agreeing to charge a lesser price for the design and manufacture of the moulds for the series, the defendants would be contracted to supply all the 61 issues of the series and that the plaintiffs would order from the defendants all 61 issues of the series at the unit prices agreed depending on the quantities of each issue to be ordered (paragraphs 8(b) and (c)).  For easy of reference I will call this “the All Issues Term”.

12. Secondly, it was alleged that the Moulds would only be deliverable back to the plaintiffs by the defendants upon the defendants having received and executed orders on all 61 issues of the series and that the property in all the Moulds would only pass to the plaintiffs upon completion of the whole project, namely the ordering and production of all 61 issues of the series (paragraph 8(d)).  For ease of reference I will call this “the Mould Term”.

13. The refusal of the defendants to return the 41 Moulds to the plaintiffs caused the plaintiffs to turn to others to complete the series.  Furthermore the possession of the 41 Moulds had led to other competing toy military planes being marketed in France by rivals of the Edito using the Moulds of the plaintiffs.   The claim therefore of the plaintiffs in this action is not simply for the return of the 41 Moulds or failing which the price of the Moulds paid by the plaintiffs in the sum of some $3,039,295.  The plaintiffs are also seeking account of profit of the conversion or wrongful use of the Moulds or alternatively an inquiry as to damages. 

14. At the Trial and especially towards the end of the evidence of the parties, it was agreed that there is only one critical issue for resolution (at least on liability), and that is the existence of the All Issues Term and of the Mould Term.  It cannot be disputed that the plaintiffs having paid for the 41 Moulds are prima facie the owners of the 41 Moulds and are entitled to the possession of the 41 Moulds.  The burden is on the defendants to show how that prima facie right was displaced contractually by agreement. 

15. As indicated earlier, the three witnesses of the plaintiffs and Dobe of the defendants gave evidence at the Trial.  I have no do doubt that much better evidence was given by the witnesses for the plaintiffs than by Dobe.  I am particularly impressed by Alain and Jean-Claude as witnesses and if there was any conflict between their evidence and that of Dobe I far more prefer the evidence of Alain and Jean-Claude.  Dobe gave poor evidence and she had to admit repeatedly that she made mistakes.  I got the impression that she is neither very bright nor very truthful.  I find as a fact that reliable evidence was given by Alain, Jean-Claude and Joa, and that the evidence given by Dobe is to be rejected.  

16. The reliability of the plaintiffs’ case as opposed to the unreliability of the defendants’ case is however strongly reinforced by the following considerations.

17. First and foremost obstacle against the defendants’ case is the fact that there was no initial order for the manufacture of all 61 Moulds and for the production of an agreed quantity for each of the 61 issues.  In the absence of such initial orders (both for Moulds and for actual toys), it was obvious that the plaintiffs retained the right to decide how to proceed with the series, albeit the plan was for 61 issues in the series.  The military plane was a very much untried area for the plaintiffs and the success of the series could not be guaranteed.  In my view, it was obvious in such situation that the plaintiffs with good commercial sense had retained the right to order such Moulds and order such issues in such quantities as the plaintiffs saw fit.  For me, the All Issues Term was simply non-sensical, both for Editos as well as for Euxos.  No agent such as Euxos would commit to open ended obligation to order all 61 issues of unknown quantity when the end buyer Edito would not commit to it.  The evidence of Alain and Jean-Claude on this is crucial and I accept their evidence.  The absence of any obligation to order any agreed quantity by itself renders both the alleged All Issues Term uncertain as well as unlikely to have been agreed.  Further, the absence of any defined obligation of the extent of reduction in future quotations point to the uncommercial term being relied upon.  I do not believe the plaintiffs as sensible businessmen would agree to the open ended promise of reduced prices.

18. There is even greater objection to the alleged Mould Term.  The Mould Term as pleaded is of course dependent on the All Issues Term.  The Mould Term does not have a separate independent existence.  But it is to be pointed out that the All Issues Term can exist without the Mould Term.  The parties have to specifically address their minds to the movement of the property of the Moulds in order for them to agree on the alleged Mould Term.  No contemporaneous document suggests the Mould Term having been discussed or considered let alone agreed.  A prime example where one would expect to find some evidence of this Mould Term would be in the orders and invoices for the Moulds.  In my view, the All Issues Term was created to give support to the alleged Mould Term. 

19. The case of the defendants on the Mould Term was in fact more hopeless if one examines the contemporaneous documents.  The agreement of the defendants even in late 2000 to the return of the Moulds could not possibly be consistent with the existence of the Mould Term.  I do not accept the explanation of Dobe on this.  The contemporaneous correspondence suggests that the defendants acknowledged the right of the plaintiffs to the return of the 41 Moulds (see for examples (1) : the email in October 2000 from Dobe to Bichon, at page C346d “The Mould for ... RAF already… you can recover it”; and (2) : the email on 11 December 2000 from Dobe to Bichon, at page C366a : “… if you want to take back all the tooling mould of the SAT, RAF and ZID, there are not a problem and surely are acceptable request.  But not everyone thinking the same.”).

20. Further there was no reference in the contemporaneous correspondence of the All Issues Term let alone the Mould Term (see C373, 376, 382, 388a-h, 400 and 404).  I cannot accept that courteousness as suggested by Dobe was an acceptable explanation for its absence.  There was no reference because the Terms did not exist.

21. Furthermore, it is to be observed that even when lawyers were involved on both sides, there was no suggestion of such an important matter.  In fact if that had been the case, the parties wronged would be the defendants and surely the defendants would be protesting to the plaintiffs’ lawyers for the plaintiffs’ breach of the All Issues Term.

22. Even after the issue of the writ, the defendants did not plead the alleged All Issues Term or the alleged Mould Term.  It is simply inconceivable that such defences could be missed.  

23. I have not overlooked the many points advanced by Mr Pang both in his written submissions as well in his oral argument, including the points such as the mould prices of the other two series or the reference to the whole project in quotations such as at pages 38a and 90a.  But in my view, none of these considerations, even when taken altogether, can persuade me the existence of the Mould Term.  In my view, the case of the defendants on the Mould Term is simply untenable.

24. Just to complete the picture of the unsustainability of the defence, one needs to only ask about the foundation of the case of the defendants, namely the defendants agreed to reduce the quotations in exchange for the alleged All Issues Term and alleged Mould Term.  It was the evidence of Dobe that all prices for Mould and unit prices of the produced issues were agreed under the original quotations, and that it was as result of the oral agreement containing the alleged All Issues Term and Mould Term that subsequent revised lower quotations were submitted by her to the plaintiffs and from the Chinese sub-contractors to her.  When asked for the production of these earlier quotations Dobe was unable to produce them.  The case of Dobe of downward reduction of prices under numerous quotations pursuant to the oral agreement was never put to the plaintiffs’ witnesses.  How in these circumstances, is it possible for the Court to believe that whatever reduction in prices was only due to the alleged oral agreement and not as consequence of the general negotiating of traders to bargain down initial asking prices.  In any event, the final prices paid for the Moulds as reflected in the invoices were higher than the so-called reduced quotation prices.

25. There was at the Trial much dispute as to the reason for the breakdown of the relationship.  This does not seem to me to be very significant in respect of the issue to be decided.  What is however of significance is what was done with the Moulds after the break.

26. There is uncontradicted evidence from the plaintiffs that the Moulds were used by the competitors of the plaintiffs to produce rival toy planes sold in Paris in 2004 and that Dobe manned the Fabrri Collection stand in 2004.  The unchallenged expert evidence of the plaintiffs support the case of the plaintiffs that the Moulds of the plaintiffs were misused to the disadvantage of the plaintiffs.  This aspect is for me important as it explained the reason for the refusal to hand over the 41 Moulds.  In my view, the orders sought by the plaintiffs for relief in addition to the return of the 41 Moulds are obviously justified. 

27. In the circumstances, I have no doubt that the Re-Amended Defence and Counterclaim must be dismissed.  The plaintiffs are entitled to :

(1) A declaration that the defendants have been holding the Moulds on trust for the plaintiffs.

(2) An order for the delivery up of the 41 Moulds to the plaintiffs within 14 days.

(3) Upon the failure of the defendants in delivering up the 41 Moulds to the plaintiffs, the defendants do pay to the plaintiffs the sum of $3,039,295 together with interests thereon at 2% above prime from the date of the writ until payment.

(4) An inquiry as to damages for detinue or conversion.

(5) An account of profits or alternatively an inquiry as to damages for breach of trust.

(6) Costs of the action be paid by the defendants to the plaintiffs.