LAND & MARINE WORKS LTD v. CREATA (HK) LTD

HCA 14824/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 14824 OF 1999

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J U D G M E N T

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Introduction

1. This is a sale of goods claim.

2. The Defendant is a company incorporated in Hong Kong, carrying on business of exporting toys to McDonald's restaurants in different parts of the world. In early 1998, the Plaintiff contracted with McDonald's to sell certain Mickey Mouse toys for distribution in McDonald's European restaurants. The toy comprised four individual parts, each of which was to be made by a different factory or supplier. The Plaintiff was the supplier which had the contract for the production of the Mickey Mouse head. The original purchase order dated 10 September 1998 was for 3,936,800 pieces of Mickey Mouse head. That purchase order was subsequently replaced by another purchase order dated 26 November 1998, which provided for the production of 5,218,375 pieces of Mickey Mouse head. (The quantity was subsequently reduced slightly to 5,218,250.)

3. It is common ground that the contracted quantity (as reduced) was eventually delivered to the Defendant. Partial payment has been made, leaving an outstanding balance of purchase price in the sum of US$134,237.85, being the total amount under 13 invoices.

4. The Defendant does not dispute the outstanding amount of purchase price as such. But it alleges that the Plaintiff has been late in making delivery of the goods, which was sold on "FOB Hong Kong" terms. The Defendant says that the delay resulted in additional airfreight and shipment charges. Moreover, because of the delay, the Plaintiff is not entitled to the payment of bonus calculated at the rate of US$0.02 per piece of goods which would only be payable if there was no delay. The Defendant says that bonus has been wrongly included in the outstanding invoices, and it has been wrongly paid under the earlier invoices that also included (wrongly) the bonus. The Defendant also says that for the purpose of the project, it has advanced a sum of HK$400,000 to the Plaintiff to enable the latter to buy virgin ABS plastic material for the production. The Defendant therefore seeks repayment of the money after completion of the order. The Defendant also says that in relation to another project (the Lion King project), it has advanced a sum of HK$116,000 to the Plaintiff in order to enable the Plaintiff to pay its own supplier (Nga Lik). The Defendant therefore seeks repayment of that sum also. Furthermore, the Defendant says that because of the Plaintiff's delay in producing the Mickey Mouse heads, it has with the full agreement and cooperation of the Plaintiff (and its sub-contractor - Nga Lik) engaged several other so-called "helping factories" for the production of some of the Mickey heads in question, so as to minimize the delay and the resulting loss. The Defendant says that it has paid these helping factories a total of HK$629,393.13 and US$54,701.51 under a guarantee that the Defendant has given the helping factories regarding payment of the price. The Defendant therefore seeks reimbursement from the Plaintiff.

5. The Defendant thus seeks to set off the above sums and payments against the Plaintiff's claim, and claims payment of the balance by way of a counterclaim from the Plaintiff.

6. At the trial, Mr Carman Chan, a director of the Plaintiff gave evidence in support of the Plaintiff's claim. On the Defendant's side, the Defendant's CEO and General Manager, Mr Trevor Roy, together with the Defendant's then Operations Director (now a Vice-President Operations), Miss Daisy Lam, gave evidence. Apart from their oral evidence, there is rather full documentary evidence relating to the project. To a significant extent, the documentary evidence is useful in resolving the factual disputes between the witnesses.

7. It is more convenient to deal with the evidence - oral and written, and set out my findings and holdings, by reference to the specific issues between the parties. That does not mean, however, that I have considered the evidence of the witnesses, or the documentary evidence, in a fragmented fashion, or that my findings are reached on a "sequential" manner. I have considered the entirety of the evidence before reaching my findings in relation to all issues together. But for the sake of orderly presentation in this judgment, I find it convenient to deal with the evidence, findings and legal holdings by reference to individual issues.

Delay in delivery

8. The first major issue between the parties is whether the Plaintiff has been late in delivering the goods. Under the original purchase order, the Plaintiff had to make delivery according to a delivery schedule. That schedule, although never produced at trial, set out the so-called "latest on board shipping dates" (or "LOBS dates") set by McDonald's as the deadlines for respective shipments of goods.

9. With the increase in size of the order and the replacement of the original purchase order with the second one in November, a new delivery schedule was sent by the Defendant to the Plaintiff on 11 November 1998 (B6). It represented the latest LOBS dates set by McDonald's, which the Defendant - and thus the Plaintiff - had to comply with. According to the schedule, shipment was to begin on 1 January 1999 and the last shipment was scheduled to take place on 6 March 1999.

10. Initially, things looked normal. The shipping schedule dated 17 December 1998 for the non-Germany/Austria markets issued by the Defendant followed more or less the LOBS dates set under the delivery schedule. According to Mr Roy's evidence, the shipping schedule prepared by the Defendant was based on the (then) production schedule of the Plaintiff's supplier. However, according to the evidence called by the Defendant, the Plaintiff informed the Defendant in early 1999 that it was unable to comply with the shipping schedule. That led to the Defendant putting together a so-called "rescue schedule" to meet the crisis. As mentioned above, helping factories were enlisted to share the production workload of Nga Lik, the Plaintiff's sub-contractor. Extra moulds were ordered so as to increase productivity. Eventually, most of the goods were delivered to Europe by air and some by a combination of sea and air, thus the additional freight charges in question.

11. Mr Carman Chan, giving evidence on behalf of the Plaintiff, however denied that the Plaintiff was late at all. It was his evidence and the case of his company that the Defendant had been changing and revising the delivery dates all the time since the signing of the purchase order. This was, he claimed, evidenced by the various sets of shipping schedule that the Defendant had given to the Plaintiff. He claimed that the Plaintiff tried its best to accommodate the changes imposed upon it by the Defendant, and managed to deliver all the goods on time - by that he meant in accordance with the shipping schedules. He denied there was any delay at all.

12. The Defendant's witnesses were at pains in evidence to point out that the Plaintiff and Mr Chan had confused the delivery schedule (containing the LOBS dates set by McDonald's), which could not be changed without the consent of McDonald's, and the shipping schedules. In relation to the shipping schedules, they were produced by the Defendant in accordance with the production schedules of Nga Lik (and subsequently Nga Lik together with all the helping factories). The shipping schedules did not represent any change in the delivery schedule. They were simply a reflection of the real situation - there was no point in arranging shipment when the goods were not ready for delivery. There was, according to the Defendant's witnesses, never ever any change or revision of the LOBS dates set out in the delivery schedule, which alone governed the contractual time for making delivery of goods under the purchase order.

13. Having heard the factual witnesses and having considered the contemporaneous documentary evidence, I have no doubt whatsoever that the Plaintiff was late in the production of the goods in question. Nowhere is this clearer than in the Plaintiff's own letter dated 20 January 1999 (B25-26). In that letter, the Plaintiff frankly admitted to the Defendant that it was not capable of completing the whole project by the original target date (i.e. 8 March 1999 - as per the shipment schedule of the Defendant on 17 December 1998 - B17; the postponement from 6 March to 8 March in the Defendant's shipment schedule was due to the Defendant's inability to book shipping space on 6 March - no blame was attached by the Defendant to the Plaintiff for that). The letter of the Plaintiff asked for an "extension of time". According to the letter,

"The sole reason is that the moulding machines cannot produce the requested quantity on time, in particular for the shipment of 1,344,000 pcs on 5th Feb 1999 and thereafter."

14. The letter enclosed a revised shipping schedule prepared by the Plaintiff for the Defendant's consideration and approval, and said that according to the revised schedule, the delay would only be 20 days. The Plaintiff also urged the Defendant in the letter not to deduct the US$0.02 per piece bonus for punctual delivery.

15. As mentioned above, in response to the situation, the Defendant put together a rescue schedule, which has been well documented and evidenced: see, for example, the Defendant's letter dated 6 February 1999 (B44-46); the Plaintiff's fax on 13 February 1999 (B57-59); the Defendant's fax dated 13 February 1999 headed "Mickey head rescue plan" (B60) and its enclosures (B61-65) detailing what each helping factory was supposed to do; and the Plaintiff's fax dated 2 March 1999 (B90-91).

16. On this issue of whether the Plaintiff has been late, I have no difficulty whatsoever in finding on the totality of the evidence before me - particularly the oral evidence of the Defendant's witnesses and the documentary evidence, that the Plaintiff has been late. I totally agree with the Defendant that the Plaintiff and Mr Chan have confused the revised shipping schedules which were prepared by the Defendant to cater for the actual situation with the contractual delivery schedule which was never revised or changed. What has happened is that the Plaintiff was late, and instead of choosing to exercise its contractual right to terminate the purchase order, the Defendant, as it was entitled so to do, elected to continue with the contract, and (with the cooperation of the Plaintiff and Nga Lik) took mitigation steps to "rescue" the situation. Whether in the course of doing so, the Defendant has waived its right to claim damages for loss arising from the Plaintiff's wrongful breach (delay) is one matter. But whether the Defendant has by its very act of not accepting the Plaintiff's wrongful repudiation of the purchase order agreed to revise or postpone the delivery schedule is quite another matter. I will deal with the first matter in due course in this judgment. But so far as the second matter is concerned, as I said, I am quite certain on the evidence that there was no such revision or postponement of the contractual delivery schedule. In other words, the Plaintiff was late in producing (and thus delivering) the goods. On the documentary evidence before me, this is clear beyond argument.

17. I do not accept the Plaintiff's using the change of ports of destination as an excuse for its delay. As can be seen very clearly from the Plaintiff's own letter dated 20 January 1999 (B25) asking for an extension of time, the Plaintiff's failure to follow the delivery schedule had nothing to do with any change in the ports of destination.

Bonus - contract

18. All this brings me immediately to several further issues. First, the bonus.

19. According to Mr Carman Chan, the so-called bonus was in fact not a bonus at all. Rather it was an agreed compensation for a change in size of the Mickey head during the pre-production stage that was required by the Defendant. By then, according to Mr Chan, the unit price had already been agreed by the top management of the Defendant. Those responsible for negotiating (including Miss Daisy Lam) therefore agreed to disguise the compensation as a bonus in the purchase order. Therefore there was no question of the Defendant not paying the bonus under the pretext that the goods were late.

20. To some extent, Mr Chan's version of facts is evidenced by the documents: see for instance, the Plaintiff's letter dated 20 January 1999 (B26) ("Both of us understand that this two cents are solely for the compensation of our low price but just disguise as a bonus for accounting purpose"); and the Plaintiff's letter dated 5 March 1999 (B101-102) (paragraph 9).

21. The Defendant's witnesses denied that that was the case at all. They said that it was, as the purchase order provided, a bonus payable if the Plaintiff was punctual in making delivery of the goods. According to the witnesses of the Defendant, they had concern after signing the first purchase order about the Plaintiff's production capability, and of their own initiative, they offered the bonus to the Plaintiff so as to encourage punctual delivery. Another measure adopted by the Defendant was to assign other projects that had been earmarked for the Plaintiff to other factories, so as to lessen the Plaintiff's production workload.

22. Having considered the oral evidence as well as the documentary evidence, I cannot exclude the possibility that the genesis of the bonus was somehow related to a change in the size of the Mickey Mouse head. However, on the evidence, it is quite clear that that notwithstanding, even Mr Chan agreed that payment of the so-called bonus (as per his case) was conditional upon punctual delivery of the goods.

23. This has been made abundantly clear by the Plaintiff's own letter dated 24 November 1998, written prior to the signing of the second purchase order, which, amongst other things, asked the Defendant not to refuse payment of the bonus if the Plaintiff should be one or two days' late in making delivery as per the delivery schedule: see paragraph 7 of the letter (B10-11).

24. In those circumstances, I find as a fact that payment of the bonus was tied to punctual delivery of the goods as per the purchase order. To that extent, I reject the Plaintiff's story on bonus.

Bonus - subsequent agreement

25. But this is not the end of the matter in relation to the bonus. The Plaintiff argued at trial that by a subsequent agreement made on 8 February 1999, the Defendant had through Mr Roy orally promised the Plaintiff through Mr Chan that the bonus would be paid notwithstanding the question of delay that had already surfaced by that time. The Plaintiff strongly relied on a fax dated 5 March 1999 (B103-104) sent by the Defendant to the Plaintiff in which the Defendant agreed or apparently agreed to pay the bonus notwithstanding the delay in delivery ("We are paying ... two cents more - in an agreement that you were unable to fulfil, i.e., to be early - indeed, I think you are late" (B104)).

26. Mr Roy explained in evidence that the fax was in fact dictated by him to his secretary while inside a taxi on his way to the airport. The fax was typed out by his secretary and sent over to the Defendant's Head Office Accountant in Australia (Ms Claire Hase) who in her name sent the fax to the Plaintiff. Mr Roy said that he had no chance to review the draft before it was sent. He said that the fax must be read in its context; it was written in response to Mr Chan's request for further financial assistance to finish the project. He was merely saying in the fax that the Plaintiff was not the only one under financial difficulty, the Defendant was also shouldering a heavy financial burden in the project, and that included the Defendant's paying the bonus to the Plaintiff in the meantime (so as to assist the Plaintiff's cashflow) prior to finalisation of the accounts after completion of the project. What he wrote was true - the Defendant was indeed paying the bonus at the time, which was subject to future squaring of the accounts. Moreover, Mr Roy explained in evidence that while the project and delivery was on going, it was really difficult to determine which container or shipment was late and which was not.

Disputed documents

27. There is also in evidence a fax dated 6 March 1999 sent or allegedly sent by Mr Roy himself to Mr Chan (and copied to Claire Hase), in which the bonus payment was touched on. According to the fax, issues such as the bonus payment "will be evaluated/considered in reference to the terms and conditions of the Purchase Order(s) accepted by [the Plaintiff]" (B111).

28. Mr Chan denied ever receiving the fax. He also denied receiving three other documents (i.e. B162, 165 and 261). It is convenient at this juncture to deal with these disputed documents. They are documents produced and relied on by the Defendant as contemporaneous evidence of what agreement had been made or had not been made by the parties at the time. The originals of the documents have not been produced at trial by the Defendant. Nor have the fax copies of these documents received by Claire Hase in Australia been produced. Such copies would bear the relevant fax headers, evidencing the coping (by fax) of the documents by Mr Roy to Claire Hase at the time. Mr Roy said in evidence that he had not asked the Australian office to dig up the fax copies, despite the fact that Mr Chan had been challenging those documents for quite some time.

29. These documents, particularly the fax dated 6 March 1999 (B111) and a subsequent fax dated 7 April 1999 (B165) - both allegedly copied to Claire Hase by fax by Mr Roy personally, do not really sit well with the rest of the (undisputed) correspondence between the parties. For one, there was never any direct response to the documents under dispute from the Plaintiff or Mr Chan, who was, as has been demonstrated by the correspondence, very good at corresponding with the Defendant and setting out his case and suggestions in writing. Secondly, the two faxes that I have singled out for mention do not sit comfortably at all with the two very substantial payments made by Claire Hase on 8 April and 5 May 1999 for the respective sums of US$265,204.09 and US$342,182.40 (B169 and 198) - leaving only the last 13 invoices of the Plaintiff outstanding - the subject matter of the present action. In the two faxes, Mr Roy denied that there was any "gentlemen's agreement" (alleged by Mr Chan in his letter dated 5 March 1999 - B102), insisted that everything (including bonus) had to be dealt with in accordance with the contractual terms, alleged that the Plaintiff actually owed the Defendant almost US$375,000, and thus refused to make further payment of the invoices of the Plaintiff. Yet two very substantial payments were made by Claire Hase in April and May, despite the fact that supposedly Claire Hase had been copied the two faxes by Mr Roy personally.

30. Apart from the above, I have also considered the conflicting evidence given by Mr Roy and Mr Chan respectively. The burden of proving that the faxes in question were written contemporaneously lies with the Defendant. On the totality of the evidence before me, I am not satisfied that the burden has been discharged. In those circumstances, in terms of the evidence, particularly the documentary evidence, I would simply disregard the fax dated 6 March 1999 (B111) and the fax dated 7 April 1999 (B165-166). As for the other two documents under dispute, I do not think the fax dated 1 April 1999 (B162) is really material, whereas I tend to accept the fax dated 24 June 1999 (B261-262) which ties in well with paragraph 10 in the Defendant's earlier fax dated 23 June 1999 (B259-260) as having been written and sent by Mr Roy contemporaneously.

Bonus - conclusion

31. Returning to the question of bonus, an undeniable objective fact is that it had been consistently paid by the Defendant under the Plaintiff's numerous invoices, with the exception of the last 13 invoices which were not paid at all. Having so disregarded the two disputed faxes in question, on the correspondence, the first time the Defendant asked for a refund of the bonus was under its fax dated 23 June 1999 (B259-260, para. 8).

32. Having considered the evidence as a whole, I find as a fact that Mr Roy did promise Mr Chan that despite the Plaintiff's delay in production of the goods, the bonus would still be payable. That is not difficult to understand. At the time, although the Plaintiff was late, the Defendant, as has been indeed admitted by Mr Roy, could not afford to terminate the contract with the Plaintiff, given the tight schedule and strong bargaining power of McDonald's. It had no choice but to keep the Plaintiff in the job. What it did was to enlist the helping factories to increase production. Under those circumstances, it is not surprising at all that Mr Roy would, as a matter of commercial reality, agree to paying the bonus despite the Plaintiff's delay and despite the Defendant's contractual right under the purchase order regarding payment of bonus.

33. Given the agreement and promise, I think the Plaintiff is right in saying that the Defendant has waived delay as a ground for not paying the bonus, and cannot use that as a defence to the Plaintiff's claim for bonus. Put another way, the Defendant is estopped from alleging delay in relation to the Plaintiff's claim for bonus. In this regard, Mr Coleman, representing the Defendant, did not advance any legal argument in response to the Plaintiff's case based on the oral agreement, wavier or estoppel. All arguments were focused on the facts.

34. In short, in my judgment, the Plaintiff is entitled to payment of the bonus under the 13 outstanding invoices. The Defendant is not entitled to any refund of bonus that has been paid under the previous invoices.

Damages for the Defendant's loss

35. I now turn to the Defendant's loss arising from the delay. In my judgment, the Defendant's non-acceptance of the Plaintiff's wrongful repudiation of the purchase order did not by itself amount to a waiver of its right to claim damages for the loss it suffered by reason of the Plaintiff's breach of contract, save in the case of specific agreements on individual items, which will be dealt with below. See Chitty on Contracts (29th ed.) vol. 1 para. 22-046; Motor Oil Hellas (Corinth) Refineries SA v. Shipping Corporation of India [1990] 1 Lloyd's Rep 391, 397-399; Benjamin's Sale of Goods (6th ed.) para. 12-034 et seq.; Sale of Goods Ordinance (Cap. 26) ss. 13 & 55. In the absence of specific agreements or unequivocal acts which will be dealt with later on, in my judgment (based on the evidence), all that the Defendant did was to waive its right to terminate the contract; it never waived its right to damages.

36. I first turn to the additional airfreight charges and shipment charges.

Air and air/sea freight

37. As a matter of general principle, the Plaintiff's liability for the freight charges cannot be disputed. There is no question of the Plaintiff not knowing generally that the goods ordered by the Defendant was for sale in McDonald's restaurants in Europe as part of a promotional campaign: see for example the project name set out clearly in the purchase order (B12).

38. However, the situation is similar to the question of bonus. According to Mr Chan, Mr Roy had in a meeting held on 8 February 1999 promised the Plaintiff that the Plaintiff would not be "contra-charged" with the charges. This formed part of the so-called "gentlemen's agreement", which was quite clearly set out in the Plaintiff's letter dated 5 March 1999 (B102). I have already decided above that Mr Roy's "response" to this alleged "gentlemen's agreement", i.e. the disputed fax dated 6 March 1999 (B111), which denied the "gentlemen's agreement", should be disregarded.

39. The Plaintiff also relied on the Defendant's fax dated 5 March 1999 (i.e. the one dictated by Mr Roy in a taxi - B103-104) in support of its case ("We are paying ... the air freight and air/sea freight cost (which is twice the cost of the price you sell to us)").

40. In the subsequent correspondence, Mr Chan continued to make reference to the "gentlemen's agreement" (B235), which was not contradicted by the Defendant in correspondence (ignoring the fax dated 6 March 1999). Moreover, the Defendant in its correspondence referred to making payment to the Plaintiff, without mentioning any deduction of the air freight charges or air/ship freight charges: see for instance, the fax dated 1 April 1999 (B161)("I [i.e. Mr Roy] will authorize Claire to make a final payment to you"); the Defendant's fax dated 21 April 1999 (B238) ("Creata will immediately expedite payment on receipt of the above documentation [regarding the costs of the helping factories]"); and the Defendant's fax dated 3 May 1999 (B239-240) which said that after setting off, the Defendant owed and would pay to the Plaintiff a total of US$331,094.18. As mentioned above, two very substantial payments were made by Claire Hase in April and May. Mr Roy in evidence could only say that the "system" in the Australian office was not stopped by him and it automatically generated those payments. I have great difficulties in accepting such an explanation, particularly when Claire Hase was, according to the documents, in charge of these payments, and she was supposed to have received Mr Roy's two faxes in question.

41. Claire Hase has, according to Mr Roy, recently left the Defendant. In any event, she was not called to give evidence at trial - I do not know whether she is in Australia or not. The reference to the airfreight charges etc. did not appear in the Defendant's correspondence until late June 1999 (B260, paragraph 9).

42. On the totality of the evidence, I have no difficulty in finding that like the bonus, the air freight and air/sea freight charges had been waived by Mr Roy on behalf of the Defendant during the crisis, in order to keep the Plaintiff (and Nga Lik) in the team of production factories, so as to meet McDonald's requirement for timely delivery. Having done so, I do not think that the Defendant can go back on its own words and make claims on the charges. The Defendant is estopped from doing so. Again no legal argument against this conclusion has been advanced on behalf of the Defendant. All arguments were focused on the facts.

Helping factories' costs

43. I now turn to the costs of the helping factories. The only pleaded defence of the Plaintiff regarding the costs of the helping factories is really that the Plaintiff was not late in producing the goods, it did not require the assistance of the helping factories, which was solely the idea of the Defendant, there was no contractual relationship between the Plaintiff and the helping factories for the payment of the helping factories' costs in producing the goods, and thus the Plaintiff is not liable for the payment of the same. The Plaintiff also puts the Defendant to proof of the claimed amount.

44. Based on what I have already found in relation to the Plaintiff's delay in producing the goods, I have no difficulty in finding, on the evidence before me, that the retaining of the helping factories by the Defendant was done with the full knowledge and agreement of the Plaintiff as part of the rescue schedule; furthermore, it was also a reasonable step taken by the Defendant in mitigation of its loss in the light of the Plaintiff's wrongful breach in producing the goods late.

45. Thus analysed, whether the Plaintiff actually agreed to the retaining of these helping factories, and whether the Plaintiff had any contractual relationships with them, are really neither here nor there. The Defendant is in substance seeking to recover the expenses and costs that it has incurred in reasonable mitigation of its loss, following the Plaintiff's breach of contract. In any event, it is patently clear from the contemporaneous documents that the Plaintiff has agreed that part of its production workload be shared by these helping factories pursuant to the rescue schedule.

46. In the correspondence, there was some mention (as part of the so-called gentlemen's agreement) that the Plaintiff would only be responsible for the costs of the helping factories at the same rates that it paid Nga Lik (B102). It is also clear from the subsequent correspondence that one of the sticking issues that prevented the parties from resolving the matter amicably amongst themselves was the amount that should be paid to these helping factories for their work in producing the goods.

47. However, this (i.e. the relevant part of the "gentlemen's agreement") has not been pleaded as an alternative defence of the Plaintiff. Mr Yeung, counsel for the Plaintiff, specifically told the Court in final submission that the Plaintiff was not running such an alternative case, i.e. that if the Plaintiff is liable for the factories' costs, its liability is capped by reference to the rates that the Plaintiff paid Nga Lik.

48. In those circumstances, I need not say anything further in relation to this part of the so-called gentlemen's agreement. But what the correspondence did say is more than sufficient to dispose of any suggestion that the Defendant had, by not terminating the purchase order on account of the Plaintiff's delay, also waived its right to claim the helping factories' costs. No such defence has been pleaded or run. In any event, the same, if run would be bound to fail.

49. For the above reasons, I have no doubt whatsoever that the Plaintiff should be held responsible for payment of the costs of the helping factories. As regards quantum, I have heard oral evidence from the Defendant's witnesses, and I have considered the documentary evidence. I am satisfied that the sums claimed have been reasonably incurred and paid by the Defendant, in reasonable mitigation of the Defendant's loss. In other words, the Plaintiff is liable to pay the Defendant the sum of HK$629,393.13 and US$54,701.51 in respect of the helping factories' costs.

The sum of HK$400,000

50. I now turn to the sum of HK$400,000. There can be no dispute that it represented half of the purchase price of the virgin plastic material bought for the production of the goods. The purchase order did not specify whether "virgin" or "regrind" ABS plastic material should be used. But it stipulated for the passing of the quality check of the Defendant. According to the Defendant's evidence, quality problems arose after commencement of production, and it was eventually concluded that the problem was probably due to the use of regrind material. On 28 January 1999, the Plaintiff decided to switch to virgin ABS material (B31A).

51. According to Mr Roy's evidence, the Plaintiff subsequently asked the Defendant for an advance equivalent to half of the estimated purchase price of the virgin ABS material in the sum of HK$400,000, so as to ease the Plaintiff's cashflow problem and not to cause any further delay to the production. He agreed and the money was so advanced.

52. Mr Chan's evidence was that the money was not advanced by the Defendant to the Plaintiff. It was paid pursuant to an oral agreement reached on 8 February 1999 as part of the gentlemen's agreement, whereby the Plaintiff and the Defendant would each shoulder 50% of the virgin ABS material (that was not contractually required to be used under the purchase order). Mr Chan relied on his own fax dated 5 March 1999 (B102) and the Defendant's fax dated 5 March 1999 (B103-104) in support of his story.

53. On the other hand, Mr Roy said that the bank transfer instructions of the payment clearly said that the payment was an advance (B54).

54. Having listened carefully to the evidence and examined the contemporaneous documents, I find that there was indeed an agreement between Mr Chan and Mr Roy to share equally the estimated cost of the virgin ABS material. In particular, in the Defendant's fax dated 5 March 1999 (B103-104), not only did Mr Roy repeatedly say that the Plaintiff had already "funded" 50% of the extra cost of the virgin material (i.e. $400,000), he also said towards the end of the fax that the Defendant was paying "another one cent for virgin material" (B104). If the sum of $400,000 were merely an advance, it would have been an extremely strange thing to do for Mr Roy to convert the money advanced into a sort of additional unit price per piece of goods (i.e. an additional one cent per piece). There would be no logic for so doing and so saying in the fax, for an additional one cent per piece would only make sense if the money were to form part of the price or an additional price for the goods. It would not make sense if it were a mere advancement of money, to be repaid after the completion of production. Moreover, the additional one-cent per piece was said towards the end of the fax, immediately after the reference to the bonus of two cents. By mentioning the deposit, the bonus and the additional one cent per piece (i.e. the sum of $400,000) in one breath, Mr Roy was clearly treating the sum of $400,000 as part of the price that the Defendant was paying or had paid for the goods under the project, just like the deposit and the bonus. Here I have not forgotten the so-called cashflow context in which both Mr Roy and Mr Coleman asked me to bear in mind in reading the fax of 5 March. I wish to say that I have borne that specifically and carefully in mind. But having read the correspondence as a whole, and having borne in mind the oral evidence, I have no difficulty in finding that Mr Roy did agree to bear half of the estimated virgin material cost. The Defendant's attempt to claim it back must fail.

The sum of HK$116,000

55. Lastly, the sum of HK$116,000. Both sides agreed that this payment was made by the Defendant to the Plaintiff, and the sum had been transmitted to Nga Lik. The Defendant said that it was paid to help the Plaintiff to discharge the relevant custom payment arising from a separate project known as Lion King.

56. Mr Chan on behalf of the Plaintiff said that the Plaintiff was indeed involved in the project, but there were other factories also involved in the project. The payment related to these other factories' contracts and the Plaintiff merely acted as a conduit price. The payment did not relate to the Plaintiff's involvement in the Lion King project.

57. There is, by comparison, relatively little evidence (oral or documentary) on this item of claim. Miss Daisy Lam did not give any evidence on it at all. Nor did Mr Roy really deal with the matter in his examination-in-chief. The matter was touched on during cross-examination.

58. As far as documentary evidence is concerned, there are only very few documents touching on the matter. The relatively lack of documentary reference in the correspondence between the Plaintiff and the Defendant tends to support the Plaintiff's story that it merely played a conduit-pipe role in the matter.

59. Having considered the evidence as a whole, I prefer the Plaintiff's case.

Outcome

60. In conclusion, the Plaintiff succeeds in its claim for the outstanding prices under the last 13 invoices in the total sum of US$134,237.85, whereas the Defendant succeeds in relation to the helping factories' costs that it has paid in the total sums of HK$629,393.13 and US$54,701.51. The Defendant fails in relation to all other items of counterclaim.

61. The matters were interwoven, and arose out of the same transaction. There should be a set-off. Converting the HK dollars to US dollars (at the official conversion rate), the Defendant's claim regarding the helping factories' costs amounts to US$135,392.94 in total. After setting off the respective sums, there is a net balance of US$1,155.09 in favour of the Defendant.

62. I therefore give judgment in favour of the Defendant against the Plaintiff for the net sum of US$1,155.09, together with interest at 1% over the prime rate from the date of the counterclaim (1 December 1999) to the date of judgment, and thereafter at the judgment rate until full payment.

63. As for costs, given that the net amount in favour of the Defendant is, relatively speaking, extremely small, and given that the Defendant has failed on a number of distinct items of counterclaim, despite the net judgment in its favour, a fair and reasonable costs order would be for each party to bear its own costs of the action (including the counterclaim). I therefore make a costs order nisi to that effect. The same shall become absolute unless either party should apply to vary it within 14 days after this judgment is handed down.