SUN SOLUTION LTD v. YUEN SHUN TECHNOLOGY LTD

DCCJ 3399/2006

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 3399 OF 2006

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BETWEEN

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JUDGMENT

1.  The Plaintiff is a computer technical services company. The Defendant is an electronic products manufacturer with a factory in Cheung On in Dongguan County in Guangdong province.

2.  In October 2004, the Plaintiff, Sun Solution Limited (“Sun Solution”) agreed to supply technical solution services to the Defendant on a project by project basis to the Defendant. In the present action, Sun Solution claimed against the Defendant Yuen Shun Technology Limited (“Yuen Shun”) for outstanding remuneration for services rendered to Yuen Shun under five projects in the total sum of $259,128.27.

3.  Yuen Shun denied the Plaintiff’s claim and counterclaimed for the total sum of $752,054.50. In its defence and counterclaim, Yuen Shun claimed that Sun Solution is in breach of the technical solution agreement between the parties due to defects in the regulators designed by Sun Solution. It claimed the defects were caused by Sun Solution resulting in its Slovenian customer, Mehano’s, demand of compensation in the sum of US$22,348.00 (HK$174,314.40) and Yuen Shun’s loss of $546,250 being the price of 37,500 pieces of regulators that Mehano refused to take delivery of. Yuen Shun further counterclaimed against Sun Solution for the sum of $20,419.10 being the amount due by Sun Solution to Yuen Shun under debit notes nos. DN2005/057, DN2006/001, DN2006/015, DN2006/017 and DN2006/019.

The Plaintiff’s case

4.  Sun Solution claimed that Yuen Shun had failed to pay for services rendered and agreed remuneration under five projects, namely: 5+ laptop (the 1^st project), 3+ laptop (the 2^nd project), Typewriter (the 3^rd project), 3 Trains (the 4^th project) and Digital Control Car (DCC) (the 5^th project).

5.  Mr. Lo Chi Wah (“Mr. Lo”), the director of Sun Solution gave evidence on behalf of the Plaintiff. He claimed that under the 1^st project completed in June 2005, it was agreed between the parties that Sun Solution would be entitled to a royalty equivalent to 3% of the ex-factory price of each item sold. Yuen Shun failed to pay the two invoices issued on 6 and 12 December 2005 under invoice nos. I051202 and I051205. It claimed an outstanding sum due to Sun Solution at $53,578.15.

6.  The 2^nd project was completed in February 2006 for which Sun Solution under agreement with Yuen Shun is entitled to US$10,320.00 (equivalent to HK$80,496.00) under invoice no. 1060404 dated 20 April 2006 after deduction of the initial deposit of US$6,880.00 (equivalent to HK$53,664.00) paid to Sun Solution on or about 19 October 2005.

7.  The 3^rd project was completed in July 2005 for which Sun Solution issued an invoice no. I051205 on 12 December 2005 for an agreed royalty in the sum of $1,248.00.

8.  The 4^th project was completed in November 2005. Sun Solution claimed an outstanding design and development fee as agreed in the sum of US$692.50 (equivalent to HK$5,402.12) under invoice no. I051206 dated 20 December 2005 after deduction of part payment of the sum of US$461.80 (equivalent to HK$3,602.04) made on or about 6 August 2005.

9.  Under project 5, Yuen Shun had agreed with Sun Solution to pay for the design and development fee in the sum of US$50,600 (HK$394,680.00) by three instalments. The first instalment of 40% of US$20,240.00 (equivalent to HK$157,872.00) to be paid at the commencement of the 5^th project. The second instalment of 30% of US$15,180.00 (HK$118,404.00) to be paid upon Yuen Shun’s delivery of the proto-type. The third instalment of 30% of US$15,180.00 (HK$118,404.00) to be paid upon Yuen Shun’s approval of the final sample. Sun Solution claimed that Yuen Shun had wrongfully failed to pay the second instalment of US$15,180.00 after Yuen Shun’s delivery of the proto-type.

10.  Sun Solution claimed that Yuen Shun had wrongfully refused to pay the outstanding sum under the 1^st to 4^th projects in the total sum of HK$140,724.27. Yuen Shun further failed to pay the outstanding second instalment for the 5^th project, the sum of HK$118,404.00.

11.  Mr. Lo denied there were any defects in the design of the regulator. The design of the regulator according to the agreement was completed in March 2005 and Yuen Shun had commenced production of the sample and delivered the sample for Mehano’s approval in the same month. Mehano accepted the design and the sample and placed an order for production of the regulator. By July 2005, Yuen Shun had already produced and delivered to Mehano a total of 97,000 pieces of regulators. These included 25,000 dispatched on the 9 March 2005, 60,000 on the 25 March 2005 and 12,000 on 20 July 2005. No complaint had been received from Mehano on the 97,000 pieces of regulators delivered and Yuen Shun had settled Sun Solution’s royalty for the 97,000 pieces regulators except for a final payment of $5,000.

12.  On 19 September 2005, Mehano placed an order for the said regulators under purchase order 05-040-032056 for the purchase of 37,500 pieces of regulators. On 8 November 2005, Yuen Shun delivered to Mehano under the September purchase order a total of 10,000 pieces of regulators. On 30 January 2006, Mehano complained to Yuen Shun that the 10,000 pieces of regulators delivered in November 2005 were defective.

13.  Mr. Lo claimed it was after the complaint from Mehano that he began an investigation of the regulators manufactured under the September purchase order. He discovered that instead of applying the thermister model no. H3ORL090 or E30075, Yuen Shun had replaced it with a different brand of thermister in the said production without informing Sun Solution. According to Mr. Lo, the reason for the defects found in the 10,000 regulators produced by Yuen Shun and delivered to Mehano in November 2005 was caused by the use of the wrong thermister in the regulators. Sun Solution asserted there was nothing wrong with its design and the fault lied in Yuen Shun’s substitution of a component in the September 2005 production of the regulators.

14.  Sun Solution accepted that in the Defendant’s counterclaim, the first 3 items are not disputed. These are in the sum of $1,841.08, $1,795.10 and $1,713.92, totalling $5,350.10. Sun Solution denied the remaining items in the Defendant’s counterclaim. Mr. Lo claimed that on 27 January 2006, Sun Solution had served on Yuen Shun a one month notice of termination on the room it had used at Yuen Shun’s factory premises. Further, Sun Solution had vacated the room at Yuen Shun’s factory on 27 January 2006.

The Defence’s case

15.  Yuen Shun’s director and shareholder, Mr. Sam Wong Kei Fai (Mr. Wong) gave evidence on behalf of Yuen Shun. Mr. Wong admitted that the parties had agreed Sun Solution would provide the technical solutions to Yuen Shun’s products in 2004. On 11 November 2004, they signed an agreement on children’s laptop computer ordered by Mehano. Since then, the staff of Sun Solution had met with the technicians of Mehano and conducted direct communications with Mehano’s technicians. Mr. Wong admitted that on 19 September 2005, Mehano placed a purchase order for 37,500 regulators at the price of US$80,625.00 with Yuen Shun. Mr. Wong further admitted that Yuen Shun had prior to the September purchase order delivered a total 97,000 pieces of regulators to Mehano based on the design by Sun Solution. On 24 October 2005, Mehano placed a further purchase order for 10,000 pieces of regulators at the price of US$21,000. As Yuen Shun was given a short delivery time for the September and October orders, Yuen Shun could not obtain an immediate supply of the thermister in the original ‘bom’ list according to the design of Sun Solution for the regulator. Mr. Wong alleged that Sun Solution had suggested a different brand of thermister to be used in order to meet the delivery dates for the September and October purchase orders of regulators from Mehano.

16.  After Yuen Shun dispatched 10,000 pieces of regulators to Mehano in November 2005, Sun Solution submitted to Yuen Shun an invoice for the royalty of 10,000 pieces of regulators at HK$10,000. In or about December 2005, Mehano informed Yuen Shun that the 10,000 pieces of regulators delivered by Yuen Shun in November 2005 had a quality problem. Yuen Shun formally received a letter of demand from Mehano on 2 February 2006 for the sum of US$22,348.28 as compensation for the 10,000 pieces of defective regulators. Mehano further refused to take delivery of the remaining 37,500 pieces of regulators. As these 37,500 pieces of regulators had already been partially manufactured, Yuen Shun claimed it had incurred a loss of US80,625.00. Hence, Yuen Shun claimed against Sun Solution for the said loss.

17.  Yuen Shun further claimed against Sun Solution under debit note DN2006/019 four telephone sets used by Sun Solution’s staff in its factory in China and under debit note DN2006/022 rental for the period of February to March 2006 at Yuen Shun’s factory in China at HK$1,000. Yuen Shun further claimed for the return of the development fee for the humidifier of $10,000 and consultancy fee of $5,000 paid to Sun Solution for it alleged that it had received a complaint from a customer (志美有限公司) due to Sun Solution’s failure to provide a satisfactory safety design. On 15 February 2006, Yuen Shun issued a debit note to Sun Solution for the return of the $15,000 development fee of the humidifier and consultancy fee. At the trial, the Defence withdrew its claim for the return of the said $15,000 development fee on the humidifier.

The Issues

18.  The issues raised in this case are:

(a)  Is the Defendant liable to the Plaintiff for the payment of $253,778.19 for services rendered under the five projects?

(b)  Is Sun Solution liable to compensate the loss incurred by Yuen Shun due to Mehano’s rejection of the 37,500 pieces of regulators?

(c)  Is Sun Solution liable to pay Yuen Shun for the four telephone sets and the rental for the use of the office at Yuen Shun’s factory for the month of March 2006?

Analysis

19.  According to paragraph 2 of the Defence and Counterclaim, Yuen Shun put Sun Solution to strict proof of the claim for the service fees on the 5 projects. The Defence and Counterclaim concentrated on the 37,500 pieces of regulators the delivery of which had been rejected by Yuen Shun’s customer, Mehano, at the end of December 2005 and January 2006. Yuen Shun claimed the 10,000 pieces of regulators delivered to Mehano in December 2005 were defective and not acceptable. The defects of the regulators were, namely (i) the temperature and current protection of the regulators was not satisfactory; (ii) the ‘cut-off’ occurred too late leading to overheating of the regulators; and (iii) the regulators are not safe to use due to the overheating. Yuen Shun claimed that the defects in the regulators were caused by Sun Solution in breach of the technical solution agreement namely,

(i)  it failed to supply technical solution services that would satisfy Mehano’s requirement of the regulators; and

(ii)  the technical solution services supplied was not fit for its purpose.

20.  In Yuen Shun’s counterclaim against Sun Solution, there were six debit notes in the total sum of $21,490.10. Sun Solution admitted the first three debit notes, namely DN2005/057 of 1 December 2005 in sum of $1,841.08, DN2006/001 of 5 January 2006 in the amount of $1,795.10 and DN2006/015 of 11 February 2006 in sum of $1,713.92 making a total of $5,350.10. Sun Solution denied it is liable to pay the other three debit notes.

21.  The Defence claimed that its counterclaim of $730,564.40 together with the six debit notes of $21,490.10 should be applied in the set-off of the Plaintiff’s claim of $259,128.27 under paragraph 12 of the Defence and Counterclaim.

22.  It is Mr. Lo’s evidence that he came to know Mr. Ronny Chan in or about 1999 through the introduction of a mutual friend. After Mr. Chan became the general manager of Yuen Shun, Mr. Chan invited Mr. Lo and the companies owned by Mr. Lo to work with Yuen Shun. At the time, Yuen Shun was one of many electronic toy factories in China and wanted to turn into an original design manufacturer for the overseas market. To achieve this, Yuen Shun has to work in partnership with a software company to develop its own original designs for the production of computerized toys. Mr. Lo admitted he had agreed in 2004 to set up such a relationship with Yuen Shun because he was persuaded by Mr. Chan to co-operate with Yuen Shun.

23.  The 1^st project Sun Solution did for Yuen Shun was the 5+ laptop computer for children and Mr. Lo had signed a written agreement on behalf of Sun Solution Limited and Mr. Ronny Chan (陳偉龍) signed on behalf of Yuen Shun Technology Limited. The date of the design agreement was 11 November 2004 (page 127 of the Bundle). Subsequent design agreements were made orally, no further written agreements were signed between the parties.

24.  In each and everyone of Sun Solution’s design agreements with Yuen Shun, Sun Solution was given a design and development fee plus a royalty of 3% of the ex-factory price of each product sold. The design fee would be paid in three stages, the first stage of 50% of the fee would be paid as deposit upon reaching an agreement. The stage 2 30% would be paid upon delivery of the sample for demonstration and the third stage of the remaining 20% upon confirmation of the customer’s acceptance of the production sample.

25.  Mr. Lo claimed that in 2005, he would receive by email attachments, the goods and payment summary of the Mehano products manufactured by Yuen Shun designed by Sun Solution to enable Sun Solution to invoice Yuen Shun for the 3% royalty of each product sold by Yuen Shun for which payment had been settled by its customers. Mr. Lo claimed that the documents at p.151 to 152 were samples of the goods and payment summaries from Mehano that he received from the accounts staff at Yuen Shun each month. At the trial, Yuen Shun admitted pages 151 to 152 could well have come from the Defendant but they were not meant for the public eye. The Defendant asked the court not to place any weight on the contents of these two documents.

26.  On this particular issue, I accept Sun Solution did receive this type of documents from the accounts department of Yuen Shun on a regular basis, they were given to Sun Solution for invoices to be issued to Yuen Shun for the 3% royalty fee. Without the information that Yuen Shun had received from Mehano payments for the goods sold, Sun Solution would not be able to invoice Yuen Shun the exact royalty fee payable. I find the pages 151-152 documents supported Sun Solution’s claim.

27.  Sun Solution claimed that Yuen Shun is liable to pay the fees under the design and development agreements between the parties. Mr. Lo’s explanation of the documents at pages 166 to 167 addressed to Mehano from AE Yuen Shun Technology Limited demanding payments for development fee of the 3+ flower laptop and the DCC was he had been tricked by Ronny Chan to sign these two letters. He claimed Chan had told him that Yuen Shun was not able to obtain these payments from Mehano and requested Mr. Lo’s assistance if he wanted to get paid. Mr. Lo claimed that Mehano had always regarded Yuen Shun to have its own computer software design team, that was why Mr. Lo was allowed to communicate with the technicians and staff at Mehano directly. In turn, the Mehano staff had also been sending emails to Yuen Shun with copies to Mr. Lo.

28.  Mr. Lo claimed that the said demand letters to Mehano in the joint names of AE Yuen Shun Technology Limited and Systems Art Technology Limited were unsuccessful because Mehano had informed Mr. Lo that he should go after Yuen Shun for payment of the development fees. According to Mr. Lo, since Yuen Shun and Mehano did not reach any agreement on the payment of design fees directly by Mehano to Sun Solution or Systems Art Technology Limited (a company wholly owned by Systems Art Holding Limited, the majority shareholder of Sun Solution) he had to rely on and go after Yuen Shun under the original agreement with Yuen Shun for the payment of the design fees. Eventually, he did complete the design and development of the 3+ laptop and the DCC for which he had been paid the first stage deposit of 50% of the fees (the 2^nd and 5^th projects) on 19 October 2005. He claimed he had also dispatched the samples for the two projects to Mehano directly by Fedex on 3 May and 9 May 2006. He produced a Fedex checking summary (on page 250 of the Bundle) in support. Mr. Lo admitted he completed the project in spite of the dispute relating to the balance of the development fees. He further claimed Sun Solution had always sent samples directly to Mehano and the technical data to Yuen Shun.

29.  So far as the 2^nd and 3^rd projects are concerned, the Defence produced the cost analysis on the 2^nd and 3^rd projects stating the job numbers, the customers and the products. These two documents also set out the development fees and the payment terms and the subcontractor to these two projects, namely, Systems Art, as well as the net profit Yuen Shun would receive because Yuen Shun did not pay all of the development fees it received from Mehano to its subcontractor, Systems Art (pages 143 to 144 of the Bundle). These two documents were prepared by Yuen Shun’s staff Ms. Venice Wong and approved by Mr. Ronny Chan, they were both dated 17 October 2005.

30.  The aforesaid two documents perhaps explained why Yuen Shun was reluctant in allowing Mr. Lo to contact Mehano directly demanding payments of the development fees for two of their products.

31.  As to the 4^th project, the documents on pages 137 to 139 also showed Yuen Shun did subcontract the 3 trains software design work to Systems Art (a shareholder of Sun Solution). Mr. Lo claimed that he had designed the 3 trains and sent the design to the factory designated by the Defendant, Technicomp, for production. Mr. Lo further claimed that he discovered on Mehano’s website that the ‘3 trains’ are now available for sale.

32.  As to the 3^rd project, the typewriter, Mr. Lo relied on pages 151 to 152 of the bundle where the Defendant had recorded payments to Sun Solution under its invoices IO51204, IO51202 and IO51205. Page 155-1 showed the sum of $9,360.00 had been billed by Sun Solution as 20% profit on the typewriter royalty for 6,000 pieces sold and delivered on 1 October 2005. On page 155-2, is the invoice IO51203 for the 50% balance for the 3+ laptop mechanical design fee at US$1,038.50 from Sun Solution to Yuen Shun.

33.  Mr. Lo further claimed that he had sent over as an attachment to an email all the technical information to Mr. Bill Birchard, the engineer employed by Yuen Shun, on the 3+ and 5+ laptops requested by Yuen Shun in 29 March 2006 (pages 203 to 205 of the Bundle).

34.  After hearing the evidence and reading the documents in support of the Plaintiff’s claim for the five projects, I am satisfied Sun Solution did indeed develop the five projects which included (i) the 5+ laptop (the 1^st project) in which Yuen Shun failed to pay the outstanding royalty fee at HK$53,578.50; (ii) the 3+ laptop (the 2^nd project) with an outstanding development fee in the sum of $80,496.00; (iii) under the 3^rd project, the typewriter with the outstanding royalty fee of HK$1,248.00; (iv) the 4^th project of 3 trains, the outstanding development fee for the 3 trains in the sum of US$692.58 (equivalent to HK$5,401.12); and (v) the 5^th project of DCC where Yuen Shun was under agreement to pay for the design and development fee in the total sum of US$50,600.00 (equivalent to HK$394,680.00) in three stages and Yuen Shun had failed to pay the second stage fee of US$15,180.00 (equivalent to HK$118,404.00). The total comes to $259,128.27 less the three debit notes from Yuen Shun admitted by Sun Solution of $5,350.10. The remaining sum of $253,778.17 is therefore payable by Yuen Shun to Sun Solution.

(b)  Is Sun Solution liable to compensate the loss Yuen Shun incurred due to Mehano’s rejection of the 37,500 pieces of regulators?

35.  The Defence counterclaimed for damages suffered due to the defective regulators delivered to Mehano by Yuen Shun in November 2005 received by Mehano in December 2005. The Defence produced a quality non-compliance report prepared by Mehano on 30 January 2006, a copy of the translation of the report appears on page 253 of the Bundle (a copy of the original language report appears at p.254).

36.  The burden is on the Defence to prove its counterclaim against Sun Solution. The quality non-compliance report of 30 January 2006 stated under the heading “quality non-compliance”:

“The regulators have been ordered without previously confirmed samples (see the receipt report for the first samples dated 3 June 2005).  The shipment does not have the conformity declaration attached, nor the declaration about complying with standards [illegible] is non-compliant (BY …FOR), the regulators are not marked with the lot no. or production date (e.g. TTLL or W[illegible])  The marking is inappropriate: the following should stated in the documents: MEHANO name, code, ID.

In the control report no. 3/06 from 27 January 2006, it is stated that the regulators are non-compliant with the MEHANO requirements [illegible] protection (thermister) at DC output cuts off only at load 750 to 800 mA.”

37.  The report clearly stated the 10,000 pieces of regulators failed to comply with “previously confirmed sample”. In addition, this shipment did not have the conformity declaration attached because the regulators were not mark with the lot number or production date and the marking on the regulators were inappropriate because it did not state the: “Mehano name, code and ID”. A further non-compliance is the requirement of the thermister “DC output cut-off temperature”. Consequently, Mehano’s rejection of this lot of shipment was not solely due to the cut-off temperature failed to comply with the sample confirmed by Mehano on 3 June 2005. The evidence of Mr. Sam Wong in Court disclosed that Mehano had required Yuen Shun to comply with the ICTI regulation for shipments received for sale in the year 2006. That requirement, Mr. Wong admitted, was not in the original agreement for production of the regulators. Therefore, it is clear, from the Mehano report of 30 January 2006, even if the thermister matched the standard in the original sample, Yuen Shun would have to comply with the ICTI requirement for the European Union countries before Mehano would accept the delivery of the 37,500 pieces of regulators.

38.  According to the report compiled by Sun Solution on the cause of the problem in the regulators prepared in response to Yuen Shun’s request in the letter dated 25 February 2006, the root cause of the problem was the use of the thermister ‘RF30075’ in the regulators. The replacement with the thermister ‘RF30075’ was not known to Mr. Lo of Sun Solution nor were the regulators fitted with the ‘RF30075’ thermister tested by Sun Solution before production of the 10,000 pieces shipped in November 2005 to Mehano. In the same report, Sun Solution stated that the two earlier models of regulators inserted with RF-RL090 and marking H30RL090 had been submitted to and approved by Mehano. Those were the models tested by Sun Solution. According to Mr. Lo, these were samples sent by Sun Solution to Mehano with the specifications set out in Sun Solution’s ‘bom’ list.

39.  Mr. Wong further admitted, because Yuen Shun refused to sign a letter drafted by Mehano making a false claim that the regulators complied with the EU regulations, the remaining 27,500 pieces regulators were not shipped to Mehano. So far as the 10,000 pieces shipped in November 2005 are concerned, they were disposed of by Mehano and sold outside the EU countries.

40.  Based on the aforesaid evidence, I found the Defence had failed to prove its loss over the 37,500 pieces of regulators was actually or genuinely incurred. Neither did the Defence successfully show that the loss was due to any fault of design on the part of Sun Solution. I therefore dismiss the Defence’s counterclaim against Sun Solution.

c. Is Sun Solution liable to pay Yuen Shun for the four telephone sets and rental for the use of the office at Yuen Shun’s Factory in the month of March 2006?

41.  I find Mr. Wong’s evidence highly unreliable. On his own admission, Mr. Ronny Chan was the staff in-charge at the Hong Kong office while Mr. Wong remained in the factory in China looking after the Defendant’s production arm most of the time. Mr. Chan was also put in-charge of all of Mehano products and all communications with Mehano and Sun Solution. Consequently, Mr. Wong had little knowledge of what went on at the time with the five projects and the regulators. He was unable to answer a lot of the questions at cross-examination claiming he had to go back to the office to check or check with this brother. As to the claim of the four telephone sets and the rental for the month of March, sometime after Sun Solution had given notice to quit the office at Yuen Shun’s factory in China in January 2006, the debit notes were issued. Mr. Wong had little knowledge of these items claiming they were issued by the office in China months after Sun Solution vacated the factory premises in China.

42.  I am not satisfied that Yuen Shun had successfully proved that Sun Solution is liable to pay for these items. The Defence’s counterclaim is dismissed with the exception of the 3 admitted set-off items of $5,350.10.

Conclusion

43.  For reasons aforesaid, I give judgment to the Plaintiff in the sum of $253,778.17.

Interests

44.  On the Plaintiff’s claim against the Defendant, the Defendant shall pay interests at half judgement rate from the date of writ to the date of judgment and thereafter at judgment rate until full payment.

Costs

45.  Costs follow the event. The Defendant shall pay the Plaintiff’s costs, to be taxed if not agreed, with certificate for counsel.