MYRIAD ELECTRONICS LTD v. ENITY TECHNOLOGY LTD

HCA822/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.822 OF 2004

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J U D G M E N T

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1. The plaintiff’s claim is for the price of goods sold and delivered to the defendant under an invoice dated 10 October 2003.  The price of the goods was US$452,192.89 but credit was given for three debit notes and the final figure is US$440,862.00.  The plaintiff applied for summary judgment, but on 28 October 2004 Master Lung, having heard the summons, gave the defendant unconditional leave to defend.  The plaintiff now appeals against that order.

2. There is no dispute that the plaintiff sold the goods to the defendant who did not pay for them.  The defendant bought the goods for sale on to an electronics chain store in the USA called Circuit City Stores, Inc.  The plaintiff in fact delivered the goods direct to Circuit City.  The plaintiff’s invoice allowed for 75 days’ credit and should have been paid in December 2003.  In fact on 25 March 2004, the defendant issued to the plaintiff a document in the following terms :

“GUARANTEE

In consideration of the attached invoice numbered MY030908 for an amount owing to Myriad Electronics Limited by Enity Technology Limited (‘Enity’) in the amount of US$440,682.00 representing the balance of the original amount due of US$4562,192.89, the directors of Enity (‘Guarantors’) unconditionally guarantee the payment in full of this balance amount by close of business on April 2 2004.

For and on behalf of Enity Technology Ltd.

(sgd)

Steven Todd Krause, Director

Dated this 24^th day of March 2004.”

3. The defendant however claims set-off and counterclaims against the plaintiff which will extinguish the value of the claim.  These are :

(i)	right of set-off for faulty goods that would more than extinguish the plaintiff’s claim and a counterclaim for damages incurred as a result of the faulty goods;
(ii)	a right of set-off for poaching the defendant’s client, Circuit City and a counterclaim for poaching Circuit City in breach of a contract; and
(iii)	counterclaim for breach by the plaintiff of a separate contract for the supply of goods.

4. It is not necessary to set out the principles to be followed in Order 14 cases.  There is no doubt that the defendant bought the goods and did not pay for them.  Suffice it to say that if the defendant can set up a bona fide set-off arising out of the same subject-matter of the action which will extinguish the claim, as argued here, it will be entitled to unconditional leave to defend.

Faulty goods

5. On 6 April 2004, a Californian law firm, Klamath, wrote a letter behalf of the Mateel Environmental Justice Foundation (“Mateel”) to the president of Circuit City giving notice that the latter was in violation of the California Health & Safety Code §25249.6 (known as “Proposition 65”) because it was marketing electrical cables or “cords” which contained toxic chemicals, in particular lead.  It was said that violations had occurred every day since at least 6 April 2000 and would continue every day until reasonable warnings were given to those people exposed.

6. On 13 May, Circuit City wrote to the defendant with a copy of Klamath’s letter, requesting that the defendant, to the extent that any products supplied by it, indemnify Circuit City for any liability incurred in connection with Circuit City’s sale of such products in California, and that the defendant immediately take steps to ensure that any products supplied containing cords comply with Proposition 65, or be no longer supplied.

7. Originally the defendant’s director Mr Krause exhibited court documents relating to settlements of proceedings brought by Mateel against companies other than Century City.  On the basis of these he estimated that the defendant could be liable for over US$4.6 million.  It is not clear how.  But this matters not, for since the hearing before the Master, Mr Krause has filed a further affidavit exhibiting a complaint brought by Mateel against Circuit City in the California Supreme Court for an injunction against the latter’s “continued failures … to give clear and reasonable warnings” to those residents of California who handle “cords” and other goods containing lead and lead products, and civil penalties of US$2,500.00 per day for each individual exposed to lead and lead products by handling the goods.

8. I am not entirely clear as to how Circuit City’s claim for indemnity against the defendant is supported.  There is in the bundle a copy of a contract between Circuit City and Gamers Factory Inc. (“Gamers”) as vendor which has such a provision.  The defendant appears to be claiming, in respect of the allegation of poaching, that this Gamers, in the person of one Rodney Hillman, was contracting with it on behalf of the plaintiff.  In any event the defendant’s claim against the plaintiff is based on breach of the statutory implied warranties of merchantable quality and reasonable fitness for purpose under section 16 of the Sale of Goods Ordinance, Cap.26, and on the statutory right to abatement for breach of warranty provided for in section 55 of the same Ordinance.

9. Section 16 provides :

“	….
	(2)	Where the seller sells goods in the course of a business, there is an implied condition that the goods supplied under the contract are of merchantable quality…,
	(3)	Where the seller sells goods in the course of a business and the buyer, expressly or by implication, makes known to the seller any particular purpose for which the goods are being bought, there is an implied condition that the goods supplied under the contract are reasonably fit for that purpose, whether or not that is a purpose for which such goods are commonly supplied, except where the circumstances show that the buyer does not rely, or that it is unreasonable for him to rely, on the seller’s skill or judgment.”

10. The plaintiff sold the goods in the course of its business.  It knew that they were for sale in California; it delivered directly to Circuit City there.  So, says the defendant, there was an implied condition that they are of merchantable quality and fit for sale in California, i.e. able to comply with that state’s health and safety laws.  In fact there is exhibited to the latest affirmation a chemical test report which shows that one sample of one type of “cord” does not comply with the relevant law.

11. The plaintiff does not deny that the goods are in breach of Proposition 65 but merely denies that it was liable to make sure that the goods were fit for the purpose for which they are sold; the plaintiff’s director, Mr Wu says that the plaintiff’s duties were confined to supplying the goods according to the defendant’s instructions.

12. In Mateel’s complaint against Circuit City, it is clear that the cause of action relied on is Circuit City’s failure to “provide a clear and reasonable warning” to persons who may handle the goods of their right to be informed about exposures to chemicals that cause cancer, birth defects and reproductive harm.

13. There is no suggestion that there is anything wrong with the goods themselves, as components of electronic games.  There is no suggestion that they do not work properly.  In other words there is nothing wrong with their quality.  If the goods are not reasonably fit for sale in California, it is not because they do not work, or even because they contain toxic chemicals; the California law does not appear to prohibit the sale of such products so long as a clear and reasonable warning is given.  The only defect therefore is the lack of such warning.  There would have been nothing wrong with the goods at all, if someone had thought to stick a warning label on them.

14. There is no implied condition of fitness for purpose where the circumstances show that the buyer does not rely, or that it is unreasonable for him to rely, on the seller’s skill or judgment.  The plaintiff is a maker of electronic games and no doubt has expertise in that field on which the defendant could rely.  However, the requirement for labelling is a particular provision of California law.  There is nothing to suggest that the plaintiff has any expertise or even knowledge in this field.  I do not see how it could be reasonable for the defendant to rely on the plaintiff’s skill or judgment as to provisions of California law.  If it wanted warning labels, it seems to me that it was for the defendant to order them.  In my view therefore the statutory implied warranty has no application here.  So there appears to be no basis for the defendant to pass on to the plaintiff any liability which it may have to Circuit City.

Poaching clients

15. Mr Krause says in his 1^st affidavit that during negotiations to establish a commercial relationship between the parties, in July 2003 it was orally agreed between Rodney Hillman of the plaintiff and Larry Sloven of the defendant that the plaintiff would not contact the defendant’s clients directly and would not poach clients away from the defendant.  Mr Sloven told him that in about early May 2004 the plaintiff directly contacted Circuit City and urged it to place orders direct.  A buyer told Mr Sloven that orders for US$1 million were placed directly.  This caused “dramatic loss” to the defendant.

16. To his 2^nd affidavit Mr Krause exhibited various documents which he says indicate that the plaintiff and the defendant were to co-operate on the supply of products to Circuit City.  There are also documents which show that Gamers attempted to supply Circuit City with games accessory products in direct competition with the defendant.  Gamers is said to be “an affiliate or related party to the plaintiff”.  There is some further mention of this relationship in his 3^rd affidavit.

17. There is no evidence from Mr Hillman or Mr Sloven.  Mr Wu, the plaintiff’s director gave evidence in his affirmation of dealings between Gamers, which he says was the plaintiff’s exclusive business partner for the supply by the plaintiff of electronic goods made in Asia, the defendant and Circuit City.  Rodney Hillman was the chief financial officer of Gamers, but held no position in the plaintiff and was never authorised to represent it.

18. Mr Wu’s evidence was quite lengthy, and supported by various rather inconclusive copy e-mails and other documents, I do not propose to set it out here because this is not a trial on affidavits.  However, so far as the alleged agreement goes, Mr Wu denies, and this is based on what Mr Hillman told him, that there was ever any agreement that the plaintiff would deal only with the defendant and not approach its clients.  He says that there were some discussions between Gamers and the defendant in 2003 about a programme for the supply of products to Circuit City but the plan was never finalised.  The defendant was only one of Circuit City’s purchasing agents; it was not the sole purchasing agent.  It had to bid for sales to Circuit City against other sellers and agents.  It is apparently not denied that the plaintiff sold goods direct to Circuit City.

19. There was a suggestion by Mr Krause in his 3^rd affidavit that before the Master the plaintiff’s counsel had admitted that the plaintiff had breached the agreement alleged by him, and supplied products directly to Circuit City.  In the course of the hearing, we listened to the recording of the relevant part of the proceedings before the Master but it did not appear that any admission had been made, and counsel abandoned this point.

20. It is argued for the plaintiff that the “guarantee” of payment given by the defendant would not exclude equitable set-off.  There was no consideration for the guarantee (although I would have thought that the consideration as in most cases of agreement to accept delayed payment could be said to be forbearance to sue).  In any event, to succeed on set-off or counterclaim the defendant would have to prove the agreement on which it relies.  Its evidence of that is shadowy in the extreme.

Separate contract

21. The defendant claims that it placed a further order on 13 February 2004 for goods which the plaintiff failed to deliver on 15 April 2004.  This resulted in a loss of profit of $US1,890.00.  The plaintiff does not deny this but says that it was reasonable for it not to continue to supply goods until the outstanding sum was settled.

22. It is of course right that if the order was accepted so that a new contract came into being the plaintiff would be obliged to supply the goods in terms of the new contract.  There is no evidence to deny the existence of such new contract.  The defendant should have leave to defend in respect of this claim.

Conclusion

23. I do not see that the defendant will in any event be able to pass on liability to the plaintiff for any indebtedness which Circuit City may be able to establish, on the basis of faulty goods.  So far as the poaching claim is concerned the defendant’s claim is shadowy, being based entirely on hearsay evidence and lacking in any real specification of the details of the oral agreement relied on.  On that basis, the defendant should be allowed to defend conditionally on paying into court what it owes the plaintiff.  However, allowance must be made for the claim for breach of the separate contract.

24. The appeal is accordingly allowed to the extent that the defendant’s leave to defend is made conditional on paying into court the sum of US$438,972.00 within 21 days from the date of the order to be made herein.  If payment is made, the timetable given in the Master’s directions will run from the date of payment in.  The costs here and below will be in the cause.