NEW HALL LTD AND ANOTHER v. YIU WING SAU t/a METALAR INDUSTRIAL CO

DCCJ 9524/2001

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 9524 OF 2001

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JUDGMENT

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1. The Plaintiffs claim against the Defendant for goods sold and delivered in January 1999, and for a further payment by cheque for goods sold of $123,206.90 dishonoured by the Defendant.

2. The 1st and 2nd Plaintiffs are companies incorporated in Hong Kong in the business of manufacturing watches and watch accessories. The Defendant is a trader in watches and watch accessories. The Defendant had been ordering watchcases, straps and boxes from the 2nd Plaintiff since 1996.

3. In his defence, the Defendant claims that the Plaintiffs' action fails for illegality because their goods infringed the trademarks 'G-Shock' and 'illuminator' owned by the Japanese watch company Casio Computer Co. Ltd. (Casio Keisanki Kabushiki Kaisha) (hereinafter known as "the owner"). Further, the Defendant claims that the Plaintiffs had not been authorised by the owner to affix such marks on their goods. The Defendant further counterclaims for defective goods delivered before January 1999.

4. At the hearing, Mr. Sher, counsel for the Plaintiffs, concedes that part of the goods bore the trademark of "G-Shock". He submitted that should the Plaintiffs be found to have a duty to apply to the owner for authorisation to use the trade marks, the Plaintiffs shall forego the recovery of the part of their goods supplied bearing such trade marks, and seek to recover only those parts that did not bear such trade marks. And, should it be found it is not the Plaintiffs' duty to obtain the consent of the owner, then, the Plaintiffs should recover all of the sums claimed. On the other hand, should it be found that all transactions between the Plaintiffs and the Defendant were illegal due to infringement of trade marks of all of the goods, Mr. Sher suggests both the Plaintiffs' claim and Defendant's counterclaim should be dismissed.

The Plaintiff's Case

5. The two Plaintiffs' director and shareholder Mr. Chan King Tong (PW1) gave evidence on the Plaintiffs' behalf. The Defendant had been a long-term customer of the Plaintiffs from 1996 to February 1999, monthly settlement of payments would be made for goods ordered and delivered to the Defendant at the end of each month. The 1st Plaintiff claims for payment under invoice nos. NH0008 and NH0019 for goods manufactured by the 1st Plaintiff at their factory Zhang Muk Tou Shi Xi Cheng Feng Plastic and Metal Ware Factory. These goods were delivered to the Defendant on 9th, 10th and 11th January 1999 at a purchase price of $52,920.

6. Further orders were placed by the Defendant and the 2nd Plaintiff delivered to the Defendant on 7th January and 2nd February 1999. These were orders under invoice numbers 004283, 004285, 004293, 004294, 004302, 004303, 004310, 004369, 004327, 004370, 004371, 004372, 004327 and 004352 for the total price of $71,187.20.

7. It is the evidence of PW1 Mr. Chan that no complaints as to the quality of these goods had ever been made by the Defendant at the time.

8. The 2nd Plaintiff further claims balance of payment for goods sold and delivered to the Defendant in December 1998 of $123,206.90. The Defendant delivered a cheque to the Plaintiff for the said sum of $123,206.90 dated 20 May 1999, but the cheque was dishonoured upon presentation for payment.

9. PW1 Mr. Chan denied the Plaintiffs' goods bore any trademark other than those requested and directed by the Defendant. PW1 further denied the goods delivered to the Defendant were of inferior quality or defective in any way. He denied any of the goods delivered by the 2nd Plaintiff in December 1998 had been returned to the 2nd Plaintiff.

The Defence's Case

10. The Defendant Mr. Yiu Wing San (DW1) gave evidence at the hearing. It is his evidence that he had been asked by one of his customers to supply plastic digital watches with the trade mark of 'G-Shock' (hereinafter called "the said model"), and he found the 2nd Plaintiff was able to supply such watch cases under model no. 3397. All orders were placed by the Defendant's staff Miss Yeung Ling with the 2nd Plaintiff to be delivered to the Defendant at their Shenzhen office. Miss Yeung who is based at the Shenzhen office would obtain further processing work to be performed at another factory in Mainland China before delivery to customers.

11. On 31 December 1998, a shipment of Defendant's finished watches upon being imported to Hong Kong had been seized by the Customs and Excise Department for trademark infringements.

12. The Defendant in his witness statement claimed that he had since the seizure instructed his staff Miss Yeung Ling to stop all business with the 2nd Plaintiff. He claimed he had no idea that the 2nd Plaintiff had then used the 1st Plaintiff and delivered the said model watchcases to his firm. He further alleged in his witness statement that Miss Yeung had not discovered the difference in the invoices issued by the 1st and 2nd Plaintiff.

13. In his evidence in court, Mr. Yiu, however, admitted under cross examination that he had continued to order the said model watch cases from the Plaintiffs after the said seizure by the Customs & Excise Department and had only casually mentioned the seizure to PW1 Mr. Chan at the time. He claimed, in spite of the seizure, he could sell these watches in Mainland China, as there was still a market demand for them in China. He believed so long as they were delivered in China and not imported into Hong Kong he could carry on trading in the said model.

14. At the resumed hearing on 28 May 2003 after the adjournment to enable the Defendant to amend his defence and counterclaim on 17 September 2002, the Defendant filed a supplemental witness statement without leave of Court. Upon the agreement of the parties at the resumed hearing, the Defendant gave further evidence limited to the further trademark of "illuminator" on the watchcases.

15. It was Mr. Yiu's evidence at the resumed hearing that all the watchcases produced by the Plaintiffs bore the trademarks of 'G-Shock' and 'illuminator', both marks are owned by Casio. Further, even though the mark 'G-Shock' was not on some of the watchcases, Mr. Yiu claimed that the trade mark 'illuminator' would still appear in all watch cases supplied to him by the two Plaintiffs.

16. Mr. Sit, the Defendant's counsel, submitted that since all the watch cases and watch boxes were affixed with marks not authorised by their owners, the purchase contracts between the Plaintiffs and the Defendant were illegal and therefore unenforceable.

17. Mr. Sit further submitted that even if the Court should find the contracts enforceable, the goods were defective and no payment should be made.

The Law on illegality

18. Mr. Sit referred to Chitty on Contract, 28th edition, volume 1, paragraph 17-007:

"How illegality may affect a contract. Illegality may affect a contract in a number of ways but it is traditional to distinguish between (1) illegality as to formation and (2) illegality as to performance. Broadly speaking the first refers to the situation where the contract itself is illegal at the time it is formed, whereas the latter involves a contract which on its face is legal but which is performed in a manner which is illegal. In this latter situation it is possible for either both or only one of the parties to intend illegal performance. Where a contract is illegal as formed, or it is intended that it should be performed in a legally prohibited manner, the courts will not enforce the contract, or provide any other remedies arising out of the contract. The "ex turpi causa defence," as was stated by Kerr L.J. in Euro-diam Ltd v. Bathurst,³³ "rests on a principle of public policy that the courts will not assist a plaintiff who has been guilty of illegal (or immoral) conduct of which the courts should take notice. It applies if in all the circumstances it would be an affront to public conscience to grant the plaintiff the relief which he seeks because the court would thereby appear to assist or encourage the plaintiff in his illegal conduct or to encourage others in similar acts". As will be seen later, illegal contracts are not devoid of legal effect,³⁴ but the ex turpi causa maxim entails that no action on the contract can be maintained."

19. Para. 17-008 - 17-009 of Chitty has this to say:

"17-008 Illegality as to formation. Contracts may be illegal when entered into because they cannot be performed in accordance with their terms without the commission of an illegal act. Thus the contract may involve a breach of the criminal law, statutory or otherwise, or alternatively it may be a statutory requirement that the parties to the transaction possess a licence and where they do not the contract will be illegal as formed.

17-009 Illegality as to performance. The illegality may arise because both or one of the parties may intend to perform the contract in an illegal manner. The court will deny its assistance where both or one of the parties intended to perform the contract in an illegal manner or to effect some illegal purpose. In this situation it is customary to distinguish between the situation where the legally objectionable features were known to both parties and the situation where they are known only to one."

20. The English Court in Coral Leisure Group Ltd. v. Barnett [1981] 1C.R. 503 held that the fact a party commits some illegality may not render the contract void. Para. 17-011 on p. 841 of Chitty states further that:-

"The fact that a party has in the course of performing a contract committed an unlawful or immoral act will not by itself prevent him from further enforcing that contract unless the contract was entered into with the purpose of doing that unlawful or immoral act or the contract itself (as opposed to the mode of ...... performance) is prohibited by law.

Thus in St. John Shipping Corporation v. Joseph Rank Ltd. the carrier was able to enforce its claim for freight even though it had illegally overloaded its vessel. However, the plaintiff company would not have been entitled to recover freight had it intended from the beginning to perform the contract in an illegal manner."

21. Mr. Sit further referred to S. 7 (1) of the Trade Description Ordinance Cap. 363

"S. 7 (1) Subject to the provisions of this Ordinance, any person who:-

(a) in the course of any trade or business:-

(i) applies a false trade description to any goods; or

(ii) supplies or offers to supply any goods to which a false trade description is applied; or

(b) has in his possession for sale or for any purpose of trade or manufacture any goods to which a false trade description is applied, commits an offence ......"

22. Mr. Sit further submitted that the contracts to supply watch cases between the Plaintiffs and Defendant were illegal as to formation since they could not be performed in accordance with their terms without the commission of an illegal act (see Chitty on Contract 28th ed. vol. 1 para. 17-008).

Findings

23. According to the law, the contract to supply watchcases between the Plaintiffs and Defendant would infringe the law if performed in Hong Kong if neither the Plaintiffs nor the Defendant had the authorisation of the trademark owners. However, there is no evidence before me which market these goods were intended or that the Plaintiffs were informed which market these goods were intended for and whether they would be imported into Hong Kong. The Defendant's own evidence revealed that the Plaintiff would have the watchcases and straps manufactured in Mainland China delivered to the Defendant's Shenzhen office and in this case to Defendant's brother's factory for further processing under the instructions of the Defendant's Shenzhen staff Miss Yeung. The purchase orders and invoices exhibited revealed that the Defendant's orders came from Miss Yeung who was based in Shenzhen. The Defendant further admitted he shared an office with his brother's factory in Shenzhen, that Miss Yeung would arrange to have the watch body supplied by another company to be assembled and fitted into the cases in Mainland China. Although there were some disputes as to whether the straps were already attached to the cases when delivered to the Defendant, it is not disputed that watchcases were sent to the processing factory in China for finishing before they were sold to Defendant's customers. There were further disputes as to whether the marks were printed onto some of the cases and straps before delivery to the Defendant's office in Shenzhen, this issue is of no importance if the parties' contracts were to be performed in mainland China unless it is shown there has been infringement of the law in the P.R.C.

24. When questioned as to why he placed further orders for the said model watch cases from the Plaintiffs after shipment of his watches had been confiscated at the customs check point between Hong Kong and Shenzhen on 31 December 1998, the Defendant's answer was he continued to order the Plaintiff's watch cases because the G-Shock watches were very popular and his customers had continued to order them. In any event, he said he could sell them in China and other places without infringing the law in Hong Kong.

25. It is undisputed that though the Plaintiffs have offices in Hong Kong, their manufacturing arm was in Mainland China. Both parties understood that the Plaintiffs would supply watchcases and accessories from their factories in China to be delivered to the Defendant's office or the processing factories for finishing work in China. It is obvious that the contracts were to be performed in Mainland China.

26. There was no evidence adduced at the hearing as to whether the Plaintiffs had any knowledge where the Defendant's finished products were intended. Whether they were for sale in China, in Hong Kong or elsewhere.

27. No doubt it would be an offence to import these watches into Hong Kong. There is, however, no evidence before me whether manufacturing these watches or selling these watches in China is an offence under the P.R.C. law.

28. According to para. 17-014 of Chitty on Contract:-

"Whether an agreement to fight is illegal depends upon whether the infliction of the injury is of such a nature, or is inflicted under such circumstances, that its infliction is injurious to the public, which is a question of fact. Similarly, a contract, even if made abroad, is illegal if its purpose is the infringement of the laws of England. But mere knowledge that goods sold abroad may possibly be smuggled into England will not disentitle the seller to sue for their price."

29. By the same analogy, I do not agree with Mr. Sit that the contracts to supply watch parts by the Plaintiffs were illegal in formation. The Defendant had failed to prove the contracts to be executed in China infringed the law in the P.R.C. In the circumstances, failing evidence on PRC law on trade marks, that the selling and affixing of such marks on the watch cases infringes the PRC law, I am not in a position to say that the Plaintiff should be deprived of the payment for goods sold to Defendant in mainland China on the ground of illegality because it infringes the law in Hong Kong.

30. As Mr. Sher conceded in Court that the Plaintiffs are seeking only the recovery of payment for goods supplied that do not bear the G-Shock mark, the Plaintiffs will only recover the reduced claim.

Defective goods

31. The Defendant claims that the cheque payment of $123,206.90 was countermanded because the Plaintiffs had failed to repair or replace defective goods. The only evidence in support of such a claim came from the oral evidence of DW1 Mr. Yiu; no evidence on the details of the defectiveness of the goods had been supplied by DW1 except that these were accumulated watchcases and accessories over many months previous to December 1998. The Defence had originally intended to call the Defendant's Shenzhen office staff Miss Yeung to prove the defectiveness and the quantity of the goods; it is unfortunate that she was not called to give evidence at the trial. The Defence made vague references to notes written by Miss Yeung in April and May 1999 and on 19 September 2002 (prepared during the adjournment of the trial) contained in a 'non-agreed bundle of Defendant's documents' filed after the adjournment in September 2002. These have not been produced at the trial at all. As Miss Yeung was not called as a witness at the hearing, the Plaintiffs were not given an opportunity to cross-examine her; her witness statement, the notes and documents prepared by her are inadmissible. I find the Defendant had failed to prove the goods supplied were defective on a balance of probability. I therefore dismiss the Defendant's counterclaim.

Conclusion

32. The 1st Plaintiff's claim is dismissed upon the concession of Mr. Sher. I award to the 2nd Plaintiff $68,247.20 and $57,350.90, in total $125,598.10 with interests from date of writ to date of judgment at half judgment rate and thereafter at judgment rate until full payment.

33. Order nisi - Costs of 2nd Plaintiff be borne by the Defendant to be taxed if not agreed with certificate for Counsel.