XCHRX SOLARBRITE ELECTRONICS LTD. v. SHUI HING WATCH COMPANY LTD.

1995, No. A7697

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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JUDGMENT

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The Plaintiff's Claim

1. The plaintiff sold and delivered to the defendant certain electronic parts for use in the manufacturing of watches. The plaintiff issued three invoices to the defendant. The first invoice was dated 20 August 1994 and related to the following parts -

2. The second invoice was dated 10 September 1994. The details are -

3. The third invoice was dated 5 November 1994. The particulars are -

4. It is not clear from the pleadings or the evidence whether these related to separate contracts or one contract with the goods being supplied at different times, although the defendant does speak, in its defence, of placing "orders".

The Defence and Counterclaim

5. In its defence, the defendant says that -

1. it bought these parts specifically to enable it to fulfil a contract to supply 357,500 stop watches to a buyer in Japan;

2. it was an implied term of "the Defendant's Order" that the parts would be of "merchantable quality and/or fit for the purpose for which they were required", but the defendant found "that some of the said Parts were defective and were not fit for use for the manufacture of stop watches";

3. from "about August/September 1994 to about November 1994" the defendant "repeatedly" told the plaintiff about the defects and demanded replacement, but the plaintiff did not replace them;

4. as a result, the defendant was unable to fulfil its contract with its buyer;

5. the defendant "has caused a thorough check on the said Defective Parts" and these are still in the possession of the defendant.

6. The alleged defective parts are particularised -

7. In its counterclaim, the defendant claims that, in order to mitigate its loss, it had to cause the buyer to come to Hong Kong to collect the watches, sub-contract part of the agreement to others, and to supply some incomplete watches. The defendant says it was able to deliver only 310,000 watches under its agreement. The defendant pleads damages amounting to HK$402,587.50.

This Matter

8. The plaintiff applied for summary judgment, but failed; the defendant being given unconditional leave to defend. The plaintiff now appeals against that decision.

The Evidence

9. In opposition to the application for summary judgment, the defendant filed an affirmation by Mr Chiu Kwok Chi (Mr Chiu), a director of the defendant, dated 20 September 1995. In this, he says that what he says is of his own knowledge, or gleaned from the defendant's documents. He confirms the contents of the defence. He says that the fact that the defendant had a buyer for the watches was notified to the plaintiff in September to November 1994, when the defendant demanded that the defective goods be replaced. The plaintiff did not respond to these demands. The plaintiff claimed interest on the money overdue in terms of the invoices. In its statement of claim, the plaintiff alleged that the defendant had defaulted in payment of this interest since 1 June 1995. Mr Chiu says this is not true; that the defendant paid interest up to 31 June 1995. In this connection, Mr Chiu says "The payment of interest was made as a gesture of good businessman and in the light of the long course of dealing with the Plaintiff which had been mostly uneventful." Regarding the demands made on the plaintiff, Mr Chiu says "Through myself and Miss Cissy Wong of the Defendant, the Defendant repeatedly complained and demanded the Plaintiff to replace the said defective parts from about September to November 1994."

10. In response, Mr Fong Ngai Chin (Mr Fong), on behalf of the plaintiff, in an affirmation dated 12 October 1995, says that, on 14 June 1995, Miss Lau of the defendant agreed that the defendant would open a letter of credit for HK$257,805.07 in settlement of the second invoice. The plaintiff wrote to the defendant on the same day confirming this agreement, and asking for post-dated cheques for the other two invoices. On 21 June 1995, the plaintiff received a copy of an application for a letter of credit, but only for the sum of HK$76,786.79, covering only the first and third invoices. This application bears the defendant's chop, a signature of Mr Chiu, and the direction to refer queries to Miss Wong. The finance company to which the application was addressed told the plaintiff that the application had not been received. The plaintiff's solicitors issued a letter of demand on 6 July 1995. On 18 July 1995, Mr Chiu wrote to the defendant pleading financial problems, and asking if the plaintiff "would agree to our company paying the debts owed to you by 12 monthly instalments". There is not one word in this letter about defective goods or demands for replacements. Mr Fong agrees that the defendant did pay the interest for June 1995.

11. In an affirmation dated 14 December 1995 filed on behalf of the defendant, Miss Cissy Wong says she made complaints about the defective goods from about the end of August 1994 through November 1994. She told the defendant that, because of the defective parts, the defendant was unable to meet its contract and would sustain heavy losses. She was assured that the parts would be replaced, but this was not done. She says that, after November 1994, she "did not chase up the Plaintiff for the replacement of the defective parts because the need for replacement was no longer urgent, and I was busy on other matters. Further I did not report to Mr Chiu Kwok Chi or his wife Ms Lau about the position of the defective parts.".

12. Mr Chiu made another affirmation on 14 December 1995. This time, Mr Chiu says he instructed Miss Wong to complain and follow up. She continued to make oral complaints until November 1994. He says "In the initial stage I also made oral complaint to Mr Wong Kam Ho about the defective parts over the telephone. However I myself did not follow up the matter. I was aware that the market for the parts was turbulent . . . and the Plaintiff had much difficulty, if not to say impossible, to replace the defective parts, in time. I was too busy to follow up if the Plaintiff replaced the defective parts afterwards. When I received the debit notes for overdue interest, I felt obliged, as a good businessman, to comply. After litigation commenced, I was advised by my legal advisers to recall in detail what happened. Then I realised that the Defendant had a valid defence and a substantial counterclaim." He refers to his letter of 18 July 1995, in which he asks for time to pay, and makes no mention of the defective parts, and deals with it by saying "The financial problem of the Defendant as set out in my letter . . . would have been totally irrelevant to the subject dealing." Regarding the letter of credit, Mr Chiu says that his wife, Ms Lau, also did not know what was going on. She was not told by the plaintiff that it had failed to replace the defective parts, so she agreed to the opening of the letter of credit. He says she later found out that "the L/C facilities available were insufficient for $257,805.07. She applied to the bank to open an L/C to settle the Plaintiff's other invoices totalling $76,786.79."

13. The defendant paid interest on the sums claimed by the plaintiff. The payments were made from October 1994 to June 1995. The total sum paid was $53,974.54.

14. The defendant has not, at any stage, specified the nature of the defects in the parts supplied.

Assessment of the Defendant's Case

15. In summary, the defendant's case is that, very shortly after the goods were supplied, it was discovered that some of them were defective. This caused the defendant a great deal of trouble in relation to its contract to supply the watches to its customer, and, in the result, suffered damages far exceeding the amount of the plaintiff's claim. The question for me to decide is, in the light of the probabilities, the conduct of the defendant at the time, and the contemporaneous documents, whether this is believable.

16. The first difficulty that the defendant has is that, at no relevant stage, did it put pen to paper in order to complain about the alleged defective parts; nor has it, even now, made any attempt to particularise the nature of the defects alleged. It is not the situation that there was no correspondence between the parties. The plaintiff wrote several letters of demand to the defendant, and the only response from the defendant is a plea for time to pay.

17. Then there is the matter of the defendant paying interest on the amount claimed by the plaintiff. The defendant says that the plaintiff caused it grave difficulties in relation to its contract, and caused it to suffer substantial loss, but, while complaining about this, and demanding replacement parts, it meekly pays the heavy interest demanded by the plaintiff. It is not credible that any businessman would, in these circumstances, pay interest, while, at the same time, complain that the plaintiff had breached its contract. Mr Chiu's explanation that he did this "as a gesture of a good businessman" is not acceptable. A "good businessman" does not pay interest on money that is not payable.

18. We then have Mr Chiu's letter of 18 July 1995. This was written at a stage when he knew, on his own story, that the defendant had suffered damages because of the plaintiff's alleged breach in a sum exceeding the plaintiff's claim. It was also written after the defendant had received a formal letter of demand from the plaintiff's solicitors, which, one would expect, would have concentrated Mr Chiu's mind on the matter. Yet he says not one word about the defence and counterclaim that the defendant now raises. He says "the delay in paying your company the price of the electronic parts" is due to the defendant's financial problems. His explanation that it was only after seeking legal advice that he realised that the defendant had a defence and counterclaim is incredible. No businessman could possibly believe that he was obliged to pay for defective goods. And to say that "The financial problem of the Defendant as set out in my letter . . . would have been totally irrelevant to the subject dealing" is waffle resorted to because Mr Chiu simply cannot explain why he should have written such a letter when, on his own version, the defendant did not owe any money to the plaintiff.

19. No believable explanation is given by the defendant for its conduct in relation to the letter of credit. The plaintiff secures an agreement with the defendant that it will provide a letter of credit and post-dated cheques. It writes confirming this. The letter is sent to Miss Lau, with a copy to Miss Cissy Wong. On the next day, the defendant completes an application for a letter of credit, and Mr Chiu signs this. The application is for the wrong amount, and the plaintiff learns that the defendant has not applied for the letter in any event. So the plaintiff writes to the defendant, for the attention of Mr Chiu and Miss Lau, with a copy to Miss Cissy Wong, complaining about this. The defendant makes no response. If the defendant believed that it had a legitimate complaint about the supply of defective goods, it is quite impossible to believe that this could have happened. Mr Chiu purported explanation; that Miss Lau, his wife, did not know what was going on, does not go anywhere towards explaining the matter in the light of the circumstances I have outlined.

20. I stress that this is not a case of a defendant simply raising a defence late in the day. The situation here is that, not only is the defence late, but it is totally inconsistent with the defendant's conduct and the contemporaneous documents. The defendant has behaved throughout this matter, until after the plaintiff commenced proceedings, in a manner that is consistent only with the fact that it owed the money to the plaintiff, and that it well knew that this was so.

21. In the result, in my judgment, the defendant has not advanced any credible defence to the plaintiff's claim.

The Interest

22. Miss Cheung suggested, somewhat half-heartedly, that the defendant should not have to pay the interest claimed because, although not extortionate, it was "extravagant". She was unable to tell me why interest, if agreed, is not recoverable because it is "extravagant", and I do not know of any reason. Quite apart from the course of dealing between the parties, which, in my view, establishes that the defendant is liable for this interest, the plaintiff demanded the interest, and the defendant paid it. It would only have done so if it agreed to pay it.

The Result

23. The plaintiff's appeal succeeds. Final judgment is entered for the plaintiff in the sum of $341,283.69, together with interest at the judgment rate on the sum of 334,591.86 from 1 August 1995 to date of payment, with costs, including the costs before the Master and of this appeal. I grant a certificate for counsel.

JK FINDLAY

Judge of the High Court