NAM CHAR INDUSTRIAL CO LTD v. FRED KORT INTERNATIONAL LTD

HCA 5122/1997

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 5122 OF 1997

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J U D G M E N T

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Introduction

1.  The plaintiff is a Hong Kong company which makes toys.  For some years in the 1990’s it did so for the defendant, a wholly-owned subsidiary in Hong Kong of a prominent US-based maker and distributor of toys called Imperial Toy Corporation.

2.  The parties fell out when the defendant declined to take delivery of part of a consignment contracted for because it was late.  At the same time, it refused to pay the bulk of an outstanding invoice as set-off against loss suffered because its parent’s customers had rejected earlier consignments as being faulty.  Matters thus brought to a head, the plaintiff issued these proceedings in May 1997 to recover loss under various heads.  The defendant counterclaimed. 

3.  I revert to the pleadings to set these out.

Claims and Counterclaims

The 1^st Claim

4.  This is for the purchase price of 2,600 sets comprising 2 keys for toy handcuffs delivered and received in December 1995.  The plaintiff’s invoice for $1,040.00 remains unpaid.  The issue here is as to whether the keys were supplied free of charge to replace defective or lost keys in a previous consignment of handcuffs.

The 2^nd Claim

5.  This is for a consignment of 20 different samples of toys the defendant ordered and had supplied to it in January 1996.  The plaintiff’s invoice of $18,912.00 has not been paid.  The issue here is whether the samples were asked for and supplied without charge, for promotional purposes.

The 3^rd Claim

6.  This is for the sum of $315,640.57 being the balance purchase price for a consignment of 39,528 sets of talking handcuffs, supplied, delivered and invoiced in December 1996 for a total of $401,209.20.  The defendant paid only $85,568.63; the balance remains outstanding.  The issue is whether the defendant had the right of set-off to compensate for losses sustained because merchandise supplied in earlier consignments was faulty.

The 4^th Claim

7.  This concerns a product known as bank shot.  The parties in two contracts contracted for the sale and purchase of 10,080 sets and 8,520 sets respectively.  In respect of the 1^st consignment, the defendant took delivery of 3,360 units supplied and invoiced, but purported to repudiate the contract as to the remaining 6,720 units, and the 2^nd contract entirely.  In respect of this the 4^th claim, the plaintiff claims on the invoice for the 6,720 units remaining in the 1^st contract, being $208,320.00.  Not having made the product making up the merchandise intended for the 2^nd contract it makes no claim for the loss of that business.  The issue here is whether the plaintiff defaulted in failing to deliver the 6,720 sets on time thereby repudiating the 1^st contract as to the balance of goods and the 2^nd contract.

The 5^th Claim

8.  This concerns certain orders for toys which incorporate sounds and spoken words when appropriately activated.  This is achieved by the insertion of an integrated circuit (IC) which makes the sounds and which is part of a module incorporating the necessary wires and switches to activate the sound (the IC module).  The plaintiff not having the wherewithal to make the IC modules contracted to purchase the same, in minimum quantities as required by its supplier.  Because of a lead time required to make the IC modules, it became a practice between the parties for the defendant to give advance notice of a prospective order for a toy incorporating an IC module, so that the plaintiff could order the making and supply of the IC modules required to fulfil the order.  It is the plaintiff’s case that implicit in that instruction was a provision that the plaintiff would be reimbursed the cost of those IC modules that it was required to purchase which were not incorporated in any subsequent orders.  When the parties fell out and effectively there were no more orders and no realistic prospect of any for the future, the plaintiff issued invoices for those IC modules it had brought and paid for to fulfil the defendant’s orders or prospective orders.  Thus the 5^th claim is the sum total of those invoices being $901,333.40.  The issue here is whether there was any such implied obligation that the defendant reimburse the plaintiff for the cost of surplus IC modules.

9.  Those are the claims.  I come next to the counterclaims.  There used to be four; now there are two.

The 1^st Counterclaim

10.  The defendant claims that its parent Imperial Toy Corporation has for a period spanning October 1993 to June 2003 had to reimburse to its customers a total of US$226,911.02 because of defects in toys made by the plaintiff for the defendant which resulted in the rejection by its customers of those toys.  Imperial having looked to the defendant to recover such loss, the defendant counterclaims for that sum.  This amount which converts at 7.8 to HK$1,769,905.59, is pleaded to include the sum of $315,640.57 originally withheld as a set-off (see the 3^rd claim).  The issue here is whether the defendant is entitled to recover this sum or any part of it.

The 2^nd Counterclaim

11.  This derives from an expense (called a development fee) sometimes charged by the supplier of IC modules when a new product was ordered for use in toys to be made for the defendant’s market.  The defendant bore the cost of the development fee in respect of three products, known as talking Western gun ($27,090.00) talking Western handcuffs ($27,090.00) and bank shot ($31,200.00).  It is the defendant’s case that the parties agreed that if the plaintiff should, by virtue of fulfilling orders of the defendant, order from the supplier not less than 100,000 IC modules within a period of one year, then it would reimburse the defendant with the development fee.  The defendant’s case is that within a year the defendant purchased from the plaintiff more than 100,000 sets of talking Western handcuffs and bank shot.  This the 2^nd counterclaim is for reimbursement of the total development fees for these 2 products of $58,290.00.  The defence, at least as pleaded, is that the claim is time-barred.  The issue is as to whether that the defendant can establish liability; in particular, whether its claim is time-barred.

The Counterclaims Abandoned

12.  For the sake of completeness I shall refer briefly to these.  The first derives from the contracts that fell over concerning the product known as bank shot.  The defendant pleaded that the plaintiff was in breach by failing to deliver on time which amounted to repudiation.  The second stems from the fact that most of the toys are made from moulds made by the plaintiff but funded and thus owned by the defendant.  When the parties fell out the defendant called for the moulds; its pleaded case was that the plaintiff delayed before responding, which caused the defendant to suffer financial loss.  In respect of both these claims, the defendant prayed for an unspecified amount in damages.  During the course of the trial, Mr Au of counsel for the defendant told me that his client no longer wished to pursue its counterclaim under these heads, without concession as to its rights; the pleadings were amended accordingly.

The Witnesses

13.  Those called included Mr Tanny Chan who at all material times and to date is the Managing Director of the plaintiff and in charge of manufacture and Miss Ann Kong who was the defendant’s Purchasing Manager and now holds the office of Vice-President (Purchase).  These two represented their respective employers in negotiating and implementing the various contracts the parties entered into during the period there was a commercial relationship.  It was further intended that the founder of the defendant and of its parent Imperial Toy Corporation, a Mr Fred Kort, be called; he made a witness statement.  But he has since died.  In his place has been called a Mr Roger Slade: Mr Slade is also a Vice-President of the defendant, but his relationship is more short-lived.  He first came to be employed by Imperial Toy Corporation in January 2003, and then moved to Hong Kong and the employ of the defendant in January 2004.  His role has been to adopt those matters raised by his former boss going to practices undertaken by the defendant and Imperial considered to be relevant to these proceedings.

14.  A further witness for the defendant was a Miss Helen Tsang.  She was at all material times an Accounts Manager and in charge of orders intended for the US market.  Her evidence dealt with the 1^st and 2^nd contracts for the sale and purchase of bank shot and in particular the matter of time frames and cancellation of the orders.

15.  This does not represent a complete list of witnesses called; in my view the evidence of the remainder does not influence the outcome.

16.  Before dealing with matters that go to the issues, I shall set out by way of background those that are not controvertible.

Background

17.  Mr Kort founded Imperial Toy Corporation in Los Angeles in 1969, since when it has become a major player in the manufacture and supply of toys to the markets in USA and elsewhere.  The defendant, its wholly-owned subsidiary, was incorporated in Hong Kong in 1974 for the purpose of sourcing and dealing with toy makers in the region.  The defendant began to do business with the plaintiff in 1993.  By the time the parties had fallen out some three and a half years later, the defendant had placed orders to the extent of more than $19 million.

18.  The format leading from an expression of interest to a contract and then the implementing of that contract followed a set pattern.  A representative of the defendant called for and obtained from the plaintiff a quote for a particular product.  If that was acceptable the defendant submitted an order on its standard form containing standard terms and conditions.  The plaintiff signified its acceptance of these terms by signing and returning a copy. 

19.  Typically the contract on its face recorded the product by name and designated number, the quantity, completion date, price and payment terms.  On the back were a number of conditions.  Because they have a bearing on these proceedings, I replicate below six of those terms:

“	CONDITIONS
1.	The goods supplied must be of exact standard quality and size identical to the approved samples (illegible) with the description contained in this contract, otherwise Buyers have the option of cancelling this contract and rejecting the goods.  Sellers will be held responsible for any consequences, loss and/or damage suffered by Buyers.
2.	…
3.	Any inspection of the goods by Buyers before shipment is merely a formality and shall not be deemed to be an acceptance of the goods and do not in any way free Sellers from any responsibility for which they may be held liable under this contract.
4.	Sellers agree to be held responsible for all claims arising on account of inferior quality, shape, colour, size, packing, short weight and/or other breach of contract even if such claims do not arise until sometime after the arrival of the goods at destination.  Any surveyor, analyst and/or weight, if necessary, to be appointed by Buyers or their agents and/or consignee at destination, comes forth for the arbitration at a dispute, his decision should be final and binding on all parties to this contract.
…
12.	In case of non-delivery and/or late delivery within the contract time, Sellers agree to be held responsible for any consequence arising therefrom. Sellers are responsible for late shipment/s even if Buyers have issued shipping instructions and/or effected payments/s to Sellers.
13.	In the event of any claim whatever being made against Buyers in respect of the goods covered by this contract, Sellers undertake to reimburse Buyers for the full amount involved upon Buyers’ presentation of evidence.
14.	All or part of the payment payable to Sellers under this contract may be retained or withheld by Buyers to settle any claim and/or debit note outstanding under this contract or any other contract/s entered into between Buyers and Sellers.
…”

20.  After the product had been made and was ready for delivery a representative of the defendant (and sometimes of the defendant’s customer) would carry out an inspection of selected examples.  Once the quality had been approved the plaintiff delivered the merchandise and a delivery note which was signed to acknowledge safe arrival.  That would be accompanied or followed by an invoice, which invariably was settled by cheque within a month.  The same procedure was followed whenever the parties entered into a contractual obligation and that went further than the making of toys; it included contracts for the manufacture of moulds by the plaintiff from which parts of designated toys were to be made.

21.  I come now to the evidence which goes to those matters that are disputed; perforce, the issues.

The evidence

The 1^st Claim

22.  Mr Chan said that the claim was and remains straightforward – the defendant has declined to pay for goods which it ordered and which were supplied.  He is able to recall that the order was initiated by Miss Kong over the telephone.  He was asked for a price and he gave it; she agreed and gave him the order.  There was no suggestion that this was to make up for faulty workmanship and was to be without charge.  The plaintiff’s invoice for $1,040.00 was received without comment or protest, either then or subsequently.

23.  Miss Kong’s counter to this was that there were on-going contracts for the making and supply of a product called metal handcuffs, a set of which incorporated two keys.  In late 1995 Imperial reported that a number of the sets had arrived with faulty or missing keys, the latter because the packaging was defective.  This was reported to Mr Chan of the plaintiff and he agreed to supply the keys that now form part of this claim.  There was no discussion or agreement of price and no contract.  The defendant had no intention or expectation to pay for what it contended then, as now, were replacements for faulty goods.  So when the keys were delivered in December 1995 with an invoice it did not pay the invoiced sum.  The plaintiff did not protest the non-payment or otherwise take steps.

The 2^nd Claim

24.  This derived from a letter from Miss Kong dated January 1996 in which she wrote:

“Please prepare 20 dozen each of the following completed pack samples to send up to our office on or before January 25 1996.”

Then followed the descriptions of five toys made by the plaintiff.  There was a subsequent telephone conversation between Mr Chan and Miss Kong in which he expressed difficulty in complying with the numbers asked for; it was agreed that the order be reduced and that the delivery date be extended to the end of January. 

25.  What is disputed is what thereafter was said, or not.  Mr Chan said it was agreed by the two of them that the defendant would pay for the order “at the unit price as contracted for between the plaintiff and the defendant in previous dealings for each item of goods”.  Miss Kong said that it was established practice that samples were arbitrarily asked for, particularly in January and June, being important months for trade fairs and other promotional events.  Such promotions stood to benefit maker and wholesaler alike, and the established practice was that the samples were free of charge.  Hence there was no reference in her fax to a purchase and no subsequent contract entered into.

26.  Mr Chan’s response to that was that the so-called established practice was for the supply of up to a dozen samples but no more; that the defendant’s order, even as reduced, was still for very many more sets than would fall into the free sample category.  He stood by his claim that the price was as per earlier orders.  But when in cross-examination it was pointed out that in respect of at least one product there was no earlier order and that the unit price charged was in excess of that charged for a subsequent order he responded: “Most important of all when I received the fax I said I would charge for the order”.  Asked whether the price was based on a previous contract he said: “or maybe a quotation”.

27.  In the event, the order was supplied on time, accompanied by an invoice for $18,912.00.  The defendant did not pay; neither did it register any protest.  But nor did the plaintiff chase for non-payment.

The 3^rd Claim

28.  The defendant does not dispute the plaintiff’s claim under this head, save for its claim to a set-off, originally matching, now exceeding the amount withheld.  As that is pleaded as the 1^st counterclaim, I shall revert to the discussion on that that follows.

The 4^th Claim

29.  The two contracts in question, completed on the conventional forms, were the final two of many that had been entered into between the parties since early 1996.  They were dated 23 September and 1^st October 1996 respectively.  As to the first, in designated contract number 7389 A-1, delivery was scheduled to be by two consignments; the first of 3,360 units by 20 October, the balance of 6,720 by 20 December.  The 1^st consignment was delivered and received on 15 November.  The defendant paid on the invoice $104,160.00.  From here it became controvertible.  Mr Chan said in evidence that the plaintiff made the product and then awaited word from the defendant as to delivery.  But none was forthcoming.  As it was the plaintiff stood ready to supply but in the absence of instruction could not do so and was out of pocket to the extent of the invoiced price of $208,320.00.

30.  Miss Kong said that no shipment of this consignment was possible, consequent upon the plaintiff’s declining to complete the order because the defendant had withheld moneys due by its fax giving rise to the 3^rd claim.  She said the defendant was ready to make an inspection and take delivery, until receipt of the plaintiff’s solicitors’ letter before action of 12 March 1997. 

31.  Miss Tsang, the Accounts Manager, said she had personally been involved in the bank shot contract.  The consignments in question were destined for Kmart in the USA, an order having been received by the defendant from a subsidiary in Hong Kong called Kmart Far East Limited.  The first consignment was inspected jointly by inspectors representing the defendant and Kmart who approved the same.  She said prior to the scheduled date of delivery of the 2^nd consignment, she telephoned a Miss Cheng at the plaintiff’s factory to arrange an inspection.  She said Miss Cheng was the usual point of contact in respect of production.  She said she telephoned her at least three times but was unable to arrange an inspection.  In the event there was no inspection and no shipment.  By fax of 22 January 1997, Kmart cancelled its order.

32.  Mr Chan’s evidence was to deny any delay in production.  As to the so-called telephone calls and conversations with Miss Cheng, there could have been none at the designated time; Miss Cheng left the plaintiff’s employ on 31 March 1996 as he was able to demonstrate by production of the company’s tax records.  He said the truth of the matter was that the defendant did not arrange an inspection or give the plaintiff instruction on delivery, probably because the parties had fallen out.  But the plaintiff stood ready to perform.  The consignment was made and has been stored ever since in the plaintiff’s warehouse.

The 5^th Claim

33.  The background to this claim has already been spelt out earlier in the judgment.  The gravamen of it, as recounted by Mr Chan, is that the expense of committing to the purchase of IC modules in minimum quantities of up to 40,000 units, which could only be utilised in toys ordered by and made for the defendant, rendered such commitment feasible only if the defendant ordered sufficient of the toy to use up the IC modules the plaintiff purchased.  So it was, by implication, that if the orders fell short of using up the supply, the plaintiff was entitled to reimburse for the stock of IC modules it was left with.  And so it was, as he said, that before a formal order was made by the defendant for a particular toy for which an IC module was required, Miss Kong gave advance notice and authorised the purchase by the plaintiff on these implied terms.  Only then did the plaintiff purchase a quantity of IC modules.  During the course of their commercial relationship, the defendant authorized the purchase of IC modules for three products, one being that known as talking gun (or talking 6-shooter) and the other two being bank shot and talking handcuffs.  When it was apparent that there would be no more business, the plaintiff was left holding 28,770 IC modules for the talking gun, 71,387 for the talking handcuffs and 91,794 for bank shot.

34.  The invoices earlier referred to are to recover the cost of the plaintiff’s outlay being a total of $901,333.40.  In support of his claim, Mr Chan produced a fax dated 10 November 1995 by the defendant in the following terms:

“Attn: Mr Chan,

This is to authorize Nam Char [the plaintiff] to order 40,000 pcs each of IC’s for talking western gun and talking western handcuffs.

(Signed)
Ann Kong”

35.  He said there were on all the other occasions authorities similarly given but none apart from this were reduced to writing.

36.  Miss Kong rejected outright that there was any obligation in contract for the defendant to reimburse the plaintiff as per this claim.  She said that there was a long lead up time between ordering and the supply of IC modules; thus it was common practice to forewarn the plaintiff, usually by telephone, of a pending order.  But this was not to commit the defendant, because that had to await the parties writing a contract, and it certainly was not designed to protect the plaintiff in the event that it was caught with IC modules not used.  She said if there were to have been a commitment it would have been reduced to contractual terms; there were no such contracts.

37.  The defendant did not buy individual components from the plaintiff; it bought the finished product.  It was up to the plaintiff to make the toy and to provide the components itself.  As to the fax of 10 November 1995:  She said she sent it because Mr Chan had asked her to do so on this one occasion.  It was not intended to amount to a guarantee or otherwise a commitment by the defendant as claimed.

38.  Of note is that in cross-examination, Mr Chan was taken to one of the transactions in which a claim for reimbursement for surplus IC modules was being made.  It was pointed out to him that the supplier had charged the plaintiff $3.60 per piece less 4% whilst the plaintiff invoiced the cost at $4.60 per piece.  He was asked why, if the implied term pleaded was for reimbursement, the invoice was for an enhanced amount.  His answer was revealing; “I have to make a profit.  I am a businessman.”

The 1^st Counterclaim

39.  This claim began life as the defendant’s assertion that it had a right to set-off US$40,466.74 (arbitrarily converted at $7.80 to $315,640.57) from an invoice otherwise properly due and payable.  The claim was prepared on a document headed “Vendor Charge Back” dated 2 September 1996 and in fact faxed to the plaintiff on 13 December 1996, which stated:

“These charges are made as result of returns of the products mentioned above resulting from the poor quality and defects of the products involved for the period as of August 1994 to January 1996.”

40.  The merchandise affected was then set out as follows:

					US$
Item	8951	(metal handcuffs)	47,352 pieces		38,360.88
	8926	(elephant)	7 pieces		4.94
	8316	(lion family)	138 pieces		167.35
	8197	(talking handcuffs)	1,484 pieces		1,931.54
	7369	(talking 6-shooter)	2 pieces		2.03
					_________
					$40,466.74
					========

41.  It is apparent that of the five products complained about, the vast majority of defects emanated from the metal handcuffs.

42.  Mr Chan said that the claim for set-off was without merit.  He said the allegation made in the fax dated September 1996 but not sent until December was the first time that he and thus the plaintiff had been made aware of the so-stated rejections stemming back to unspecified dates in a period beginning more than two years prior.  He said in respect of the products referred to there was no communication, no return of product; no evidence at all to verify that there were defects.  By way of documentation that this was contrary to prior conduct by the defendant concerning unrelated claims of defect, he referred to the two occasions when this came about.

43.  The first was a claim by the defendant made for alleged faulty merchandise, being a consignment of a toy called giraffe.  The claim was made in January 1996 for an order “made in about August 1995”.  The amount of $11,085.00 was agreed and settled.  (I pause here to mention that insofar as Mr Chan gave this evidence to show that the defendant had been relatively prompt in giving notice of a defect and claim, it was demonstrated in cross-examination by reference to documents that the goods were in fact sold in August 1994, a year earlier).  The second was in about mid-1996, when the defendant returned to the plaintiff a consignment of talking handcuffs said to be faulty.  But it quickly became apparent that the plaintiff was not the maker or supplier and any claim sought was abandoned. 

44.  Of the set-off the subject of this claim, Mr Chan said shortly after the receipt of the fax and with it the prospect that the defendant was not going to pay its dues, he called on the offices of the defendant and spoke to the founder Mr Kort who was on one of his regular visits to Hong Kong, demanding an explanation.  He asked why, if the complaints were genuine, they had not been raised before.  Mr Kort responded: “Do you not believe me?”  Mr Chan’s reply was: “Of course I do not, without evidence of defective goods”.  He said they should have been returned so that he could verify that they were defective and a refund was justifiable.  Mr Kort responded that all had been discarded.  Mr Chan thereupon disagreed that the plaintiff was liable to meet any reimbursement because there was no evidence and no proof.  He was asked to leave.  And so the meeting ended in acrimony. 

45.  Thereafter as disclosed in the pleading the defendant claimed further rejections and an enhanced refund or reimbursement due from the plaintiff.  By the time the counterclaim was first pleaded the total claimed under this head had more than doubled to US$97,920.59.  The handcuffs made up the majority, up from US$38,360.88 to US$87,095.88.  Curiously, the number of defective pieces had reduced from 47,352 to 35,406.

46.  Prior to trial the counterclaim was amended again.  By now it had become US$226,911.02.  The rejected handcuffs had risen to 51,381, and the compensation sought for that product was now US$154,783.36.

47.  Mr Chan said there were no proper grounds to justify rejection of any of the merchandise that the plaintiff had supplied because, as was usual practice, prior to shipment they had been inspected by QCs on the defendant’s staff or appointed by it and had been cleared.  That was tantamount to the defendant accepting the consignment as being as per contract and of appropriate quality.

48.  Miss Kong said on this point that the quality inspection carried out prior to shipment was perforce a random one to ensure that the entire consignment was not obviously defective as to warrant cancelling the shipment then and there.  But it did not free the maker/supplier from liability if it was later found that particular sets in the consignment were not up to the mark.  In this respect she referred to conditions 3 and 4 of the standard terms, which I have reproduced earlier.

49.  As for the particular set-off; she said that over a period the items in question, in the main sets of metal handcuffs, had been rejected by customers of Imperial Toy Corporation, to whom the defendant had sold them.  Imperial having reimbursed its customers looked to and received like reimbursement from its subsidiary the defendant; the defendant was entitled to claim back from the plaintiff; by virtue of clauses 13 and 14, there was no time frame by which this claim should be made.

50.  She accepted that Imperial and thus the defendant is obliged to rely on computer records compiled from defective reports and vendor charge back forms.  She conceded that these reports did not relate to specific contracts of supply, nor did they spell out the grounds for rejection, and the nature of the defect complained of.

51.  Miss Kong was asked to explain the marked difference in compensation per defective unit as between the set-off referred to in the fax of September 1996 and the amounts claimed in the counterclaim.  She responded that the original figure represented the cost of the products ex-factory, a figure that the defendant would have been prepared to accept to preserve goodwill with the plaintiff.  The much higher figure now claimed represents the actual compensation paid to the aggrieved customers and thus the actual loss, pursued once it became apparent that the parties’ commercial relationship was over.  She conceded that the defective goods which came to be returned to Imperial were not brought to the attention of the plaintiff or any of its officers; that it was the boss, Mr Kort, who arbitrarily decided how much was to be refunded, without reference to the plaintiff, which had no say in the decision to make a refund or the level of such refund.  She confirmed that when for the first time Mr Chan learnt of the defendant’s decision to set-off compensation against an invoice due the offending merchandise had been destroyed.  She confirmed that at no time was the plaintiff presented with a breakdown of the amount of compensation paid out and now sought to be recovered.

52.  Mr Slade gave evidence concerning procedures undertaken in Imperial Toy Corporation when customers reject goods purchased for inferior quality.  Of course he arrived at Imperial well after the history of events between the parties before me had concluded.  But he said the system had been in place for some time and he understood this included the relevant period.  He said the offending product was identifiable and could be traced back to its source; by this means the products in question could be seen to have come from the plaintiff.  He said when a product was returned it would be examined by quality control officers whose decision it was to determine whether the rejection for want of quality was warranted.  If found to be so, the customer would be credited and the goods received back and destroyed.  If the defendant had supplied the consignment it would in turn reimburse Imperial and be expected to seek its own recourse from the supplier.  He said that the supplier, in this particular case the plaintiff, would not be invited to participate in the decision to accept the rejection and give a refund.  He said normal practice was that the supplier would, following the rejection, be sent or handed a sample for discussion.  But he conceded that there is no evidence the plaintiff was sent a sample for comment or as proof of inferior quality.  He professed to being satisfied that Imperial’s computer programming was foolproof such as properly to be able to identify the source of faulty products.  However, the documentation establishing the source of a rejected item, called a defective product form, is kept for no more than five years, so that none has survived to verify the source of the rejected products.  (It is pertinent to note that Mr Kort, deceased, stated in his witness statement that the defendant dealt not only with the plaintiff but another supplier as well during the period in question.  Of course he could not give evidence; but that was adopted by Mr Slade in his, and confirmed by Miss Kong in hers.)

The 2^nd Counterclaim

53.  It was Miss Kong who gave evidence about this, a claim for a refund of development fees paid by the defendant.  She produced the plaintiff’s invoice no. 7031 dated 21 November 1995 for each of the development fees payable for development of chips to be used in the talking Western gun and talking Western handcuffs for $27,090.00 each.  In respect of each commodity are recorded the words: “The development fee for IC chip of $27,090.00 we will refund after the quantity up to 100,000 pcs (within one year).”  And she produced evidence that invoice 7031 was settled on 25 November 1995.  She also produced the plaintiff’s invoice no. 7197 dated 13 February 1996 for the development fee of bank shot for $31,200.00.  Recorded on the invoice, above the signature Mak Leung (employed by the defendant as its Technical Director) are the words “Refund for order quantity of more than 100,000 pieces.”  That invoice was paid on 16 February 1996.  She said these addendums to the invoices were expressions of confirmation of an agreement between the parties that if orders matched or exceeded 100,000 within the space of a year, the development fee for that particular product would be refunded by the plaintiff to the defendant.  In respect of both of the products Western handcuffs and bank shot, this total was matched or exceeded; yet there has been no such refund of the total thus due of $58,290.00 or any part of it.

54.  There was no evidence from the plaintiff to refute these allegations.

Findings of Fact and Law

The 1^st Claim

55.  The difficulty the plaintiff faces in establishing this is that there is no order presented by the defendant purchaser and signed by the plaintiff vendor to signify a contract between them, and no particular reason why on this occasion that standard procedure was missing.  Mr Chan said in support of his case that the defendant took no steps to protest when it received the invoice to pay.  But this was neutralized by there being no sign of the plaintiff chasing an unpaid bill.  And the order being for sets of keys, part only of a toy bought and paid for by the defendant in the past, gives credence to the defendant’s account that the supply of the keys was in response to its request to make good a faulty product.  I am unable to find that the plaintiff has made out this claim.

The 2^nd Claim

56.  Once again the plaintiff has a problem because there is no written contract and thus a departure from the normal procedure.  Of course there would have been nothing to prevent the parties from contracting, for an agreed consideration, for the making of samples.  But the fact that the products were designated samples, and that samples often are regarded as promotional and are made for nothing, are two factors lending support to the proposition that no payment was contemplated.  Mr Chan’s effort to show there was agreement to a unit price was less than convincing when he was tackled about this in cross-examination, as already referred to earlier in this judgment.  Again there was no protest about the invoice, but nor was there a follow-up for non-payment.  I am unable to find myself satisfied that this claim has been made out.

The 3^rd Claim

57.  This stands or falls on the outcome of the defendant’s 1^st counterclaim, to be dealt with hereafter.

The 4^th Claim

58.  The outcome of these requires resolution of the disputes of fact as to whether the defendant refused or otherwise declined to inspect and give instructions on delivery.  Of course the parties were in the process of falling out; there was a sum of more than $300,000.00 that the defendant without forewarning said it had the right to withhold.  But this had no bearing on the parties’ contractual obligations.  The plaintiff may well have had an inclination to withhold delivery.  But did it do so? 

59.  I am satisfied on the evidence that Miss Tsang’s so-called contact at the plaintiff, a Miss Cheng, had in fact left the plaintiff’s employ several months prior to the events she claims to have discussed with her.  On this and other matters I have to discount her account as being unreliable.

60.  In the circumstances, I accept Mr Chan’s account; that the plaintiff was in a position to supply and would have done so on appropriate instruction; that the defendant was in breach and the plaintiff is entitled to recover its loss as claimed.

The 5^th Claim

61.  The plaintiff’s claim under this head requires me to be satisfied there was an implied term of contract requiring the defendant to reimburse the plaintiff the cost of IC modules purchased by the plaintiff but not, in the event, used because of insufficient orders placed.  The difficulty the plaintiff has is the absence of anything formal; in particular, a contract between the parties to this effect.  As a general rule the parties did not transact without terms being expressed and there were no express terms in this claim.  The plaintiff’s best point is the fax of 10 November 1995 whose contents I have reproduced in full.  Even if Miss Kong’s explanation is rejected, the words fall well short of stating or implying that the defendant would pick up the cost of IC modules not after all utilized.  And if reimbursement was an implied term, why did the plaintiff charge more?  Mr Chan’s explanation that it was entitled to a profit gives the game away.  The plaintiff was looking to recover the cost of a component which because of the falling out with the defendant, it was stuck with. This claim has not been made out and fails.

The 1^st Counterclaim

62.  I begin by stating that although there was a pre-shipment examination of samples of goods ready to depart these shores for delivery, that did not bar the defendant from exercising its rights in the event that goods consigned were found to be defective; see clause 3 of the standard conditions.  So, what of the claims now being made?

63.  The defendant makes them in reliance on clause 13 of the standard conditions of contract with a right to set-off under clause 14; I reproduce these clauses again:

“	13.	In the event of any claim whatever being made against Buyers in respect of the goods covered by this contract, Sellers undertake to reimburse Buyers for the full amount involved upon Buyers’ presentation of evidence.
	14.	All or part of the payment payable to Sellers under this contract may be retained or withheld by Buyers to settle any claim and/or debit note outstanding under this contract or any other contract/s entered into between Buyers and Sellers.”

64.  I regard the expression “upon buyers presentation of evidence” as presupposing that the evidence to be supplied must be adequate to satisfy the necessary burden of proof, otherwise it would amount to a meaningless expression.  In respect of the claims the defendant has made that merchandise in question was defective the following is apparent from the evidence:

(a)	The merchandise was not identified as being part of a specific contract with the plaintiff;
(b)	apart from internal controls that might have satisfied Imperial and the defendant there was nothing to show that the source of the goods were the plaintiff;
(c)	there was nothing to show or prove the nature of the defect, whether there was a defect, whether the defect was in the manufacture and whether the plaintiff was responsible for it;
(d)	there was nothing to explain what it was that the customer was reimbursed for in any given case or why;
(e)	the plaintiff was given no opportunity to inspect the goods that were rejected or any reasonable cross-section or indeed even so much as one example of them.  When the defendant was asked to supply them the response was that Imperial had destroyed them;
(f)	the plaintiff had no notice of a claim apart from the Vendor Charge Back dated 2 September 1996 (delivered December 1996).  No further notice was ever proffered, before or since.

65.  It seems to me and I so find that the defendant has singularly failed to establish that the merchandise it now seeks to be reimbursed for was defective or that the fault was with the plaintiff, or that the amount now claimed for represents a sum total of what it is properly entitled to.  This claim has not been made out and fails.

The 2^nd Counterclaim

66.  The plaintiff raised no evidence to dispute the defendant’s claim founded in contract.  The defence as pleaded, that the claim is time-barred, was not pursued by counsel in his closing submissions or otherwise.  I find this counterclaim has been made out.

Judgment

67.  There will be judgment in favour of the plaintiff in the sum of $465,670.57 being the sum total of the 3^rd ad 4^th claims less the 2^nd counterclaim.  Such other claims and counterclaims as have been made are dismissed. 

68.  I come now to costs.  The plaintiff has succeeded in part as to its claims and has defended successfully a substantial counterclaim.  The defendant has failed in its substantial counterclaim but defended successfully a claim of significant amount.  So, nisi at first instance, I order that 50% of the plaintiff’s costs including any reserved shall be met by the defendant taxed if not agreed.