HIROMORI INTERNATIONAL LTD v. GOLD OCEAN ENTERPRISES LTD

HCA1015/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.1015 OF 2004

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J U D G M E N T

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1. The defendant is seeking leave to appeal out of time against the decision of Master de Souza to enter judgment against the defendant pursuant to the provisions contained in Order 14.

2. Master de Souza entered judgment against the defendant on 6 April 2005.

3. On the assumption that this leave is forthcoming I am requested to hear the substantive appeal.

4. In addition to this, the defendant is appealing against a further decision of Master de Souza namely his refusal to enter judgment for the defendant against the 1^st and 2^nd third parties.

5. The plaintiff entered into a contract for the purchase of watches having what is described as a “walkie talkie function” on 5 December 2003.

6. It was a specific term of the contract that the defendant guaranteed that the sale and use of the products would not infringe any Hong Kong or foreign patent and that in the event of any such infringement they would indemnify the plaintiff.

7. The defendant was the agent of the 1^st named third party who supplied the defendant with the watches in question.

8. The plaintiff onsold the watches to AIG.  Shortly following this AIG received a letter form a U.S. company USE alleging an infringement of their intellectual property rights.

9. In his application for an extension of time for lodging the Order 14 appeal Mr S.C. Lam for the defendant places reliance upon section 16(2) of the High Court Ordinance, Cap.4 which reads :

“16. Law and equity to be administered in High Court
(1)	The Court of Appeal and the Court of First Instance, when exercising jurisdiction in any civil cause or matter, shall continue to administer law and equity on the basis that, wherever there is any conflict or variance between the rules of equity and the rules of the common law with reference to the same matter, the rules of equity shall prevail.
(2)	The Court of Appeal and the Court of First Instance shall give the same effect as hitherto —
	(a)	to all equitable estates, titles, rights, reliefs, defences and counterclaims, and to all equitable duties and liabilities; and
	(b)	subject thereto, to all legal claims and demands and all estates, titles, rights, duties, obligations, and liabilities existing by the common law or by any custom or created by any Ordinance,
	and shall so exercise its jurisdiction in every cause or matter before it as to secure that, as far as possible, all matters in dispute between the parties are completely and finally determined, and all multiplicity of legal proceedings with respect to any of those matters is avoided.”

10. While it is undoubtedly true that in general terms the multiplicity of proceedings should be avoided there is nothing in this section to suggest a waiver of time limits for lodging an appeal.

11. Over and above this Mr Raymond Chow for the plaintiff argued that it was by no means clear that the two decisions of the master were either inconsistent or covered the same issues.

12. The question of the infringement of intellectual property rights was specifically dealt with in the contract between the plaintiff and the defendant whereas the master was satisfied that there was a triable issue on this in relation to the contract between the defendant and the 1^st named third party.  There was affidavit evidence that when the defendant bought the goods from the 1^st third party he was at least by implication aware of the likelihood that the goods were infringing articles and that it could be inferred that it was the intention of the parties that it should transfer only such title as he or a third party may have.  This was in accordance with section 14(2) of the Sale of Goods Ordinance, Cap.26, which states :

“(2)	In a contract of sale, in the case of which there appears from the contract or is to be inferred from the circumstances of the contract an intention that the seller should transfer only such title as he or a third person may have, there is —
	(a)	an implied warranty that all charges or encumbrances known to the seller and not known to the buyer have been disclosed to the buyer before the contract is made; and
	(b)	an implied warranty that neither —
		(i)	the seller; nor
		(ii)	in a case where the parties to the contract intend that the seller should transfer only such title as a third person may have, that person; nor
		(iii)	anyone claiming through or under the seller or that third person otherwise than under a charge or encumbrance disclosed or known to the buyer before the contract is made, will disturb the buyer’s quiet possession of the goods.”

13. Notwithstanding all of this I am satisfied that it is desirable that these two appeals should be heard at the same time.  I am reinforced in this view by the order made by Master J. Wong that the Order 14 applications should be heard one after the other and that it was only on account of the 1^st application not being completed within the time allotted for it that it did not prove to be possible for Master Wong’s order to be complied with.

14. The outcome of all of this is that I have come to the conclusion that the interests of justice require that I grant the defendant the indulgence it seeks that time for the hearing of its appeal against Master de Souza’s decision be extended up to the date of this hearing and I so order.

15. I will now consider the defendant’s substantive appeal to set aside the Order 14 judgment Master de Souza entered against it.

16. As is customarily the case the master did not give written reasons for his decision.  I make no criticism of this.  I imagine, however, that the decision must have been based on the plaintiff’s claim that it was apparent that the “walkie talkie” watch infringed USE’s Registered Design watch.  The design was filed on 26 March 2003 which according to section 28 of the Registered Design Ordinance, Cap.522 is the date when the initial period of registration is deemed to run.

17. I say this because it is unlikely that the Order 14 judgment would be entered in respect of the “Foreign Patent” referred to in clause 7 of terms and conditions appended to the plaintiff’s purchase order.

18. Reverting to the Hong Kong registered design there is authority for the proposition that Order 14 judgments can be and are entered in relation to infringements of a design where it is plain and obvious that there has been an infringement and that the defendant is unable to demonstrate that it has an arguable defence.

19. In the present case as there is no specific reference in the purchase orders to infringements of registered designs it is necessary for the plaintiff to place reliance upon the implied terms referred to in section 14(1) of the Sale of Goods Ordinance.  These are as follows :

“14. Implied undertaking as to title etc.
(1)	In every contract of sale, other than one to which subsection applies, there is —
	(a)	an implied condition on the part of the seller that in the case of the sale, he has a right to sell the goods, and in the case of an agreement to sell, he will have a right to sell the goods at the time when the property is to pass; and
	(b)	an implied warranty that the goods are free, and will remain free until the time when the property is to pass, from any charge or encumbrance not disclosed or known to the buyer before the contract is made and that the buyer will enjoy quiet possession of the goods except so far as it may be disturbed by the owner or other person entitled to the benefit of any charge or encumbrance so disclosed or known.”

20. Mr Raymund Chow for the plaintiff dealt with section 14(1) in conjunction with section 16(1) to (3) when outlining the problems which would be encountered in the event that it was established that the watches did infringe USE’s Registered Design.  In this connection he referred to the uncontested evidence that the defendant was aware of the fact that it was the plaintiff’s intention to onsell the watches.

21. Section 16(1) to (3) are as follows :

“16. Implied undertakings as to quality or fitness
(1)	This section provides for the circumstances in which, and the extent to which, there is any implied condition or warranty as to the quality or fitness for any particular purpose of goods supplied under a contract of sale. (Replaced 85 of 1994 s.4)
(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, except that there is no such condition —
	(a)	as regards defects specifically drawn to the buyer’s attention before the contract is made; or
	(b)	if the buyer examines the goods before the contract is made, as regards defects which that examination ought to reveal; or (Amended 85 of 1994 s.4)
	(c)	if the contract is a contract for sale by sample, as regards defects which would have been apparent on a reasonable examination of the sample. (Added 85 of 1994 s.4)
(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.”

22. If the watches infringe USE’s Registered Design they could not be sold free from incumbrances as the said infringement would itself constitute an encumbrance.

23. In this connection, Mr S.C. Lam for the defendant argued that it was apparent from section 48 of the Registered Design Ordinance that there was no infringement in the present case as the alleged infringement occurred before 20 February 2004, being the date when USE’s design was registered.

24. Section 48 is cast in these terms :

“48. Proceedings for infringement by registered owner
(1)	An infringement of the right in a registered design is actionable by the registered owner and in any action in respect of such an infringement all such relief, by way of damages, injunction, account of profits or otherwise shall be available to the plaintiff as is available in proceedings in respect of the infringement of other proprietary rights.
(2)	The court shall not, in respect of the same infringement, both award damages and order an account of profits.
(3)	No proceedings shall be taken in respect of an infringement of a registered design committed before the date on which the certificate of registration of the design is issued under section 25.”

25. I do not accept that section 48(3) has the effect claimed by Mr S.C. Lam.  It is apparent to me that what the section is providing for is only that no legal action can be taken in respect of infringement before the registration is effected.  Immediately after this date passes action can be instituted as clearly if there is an infringement this would continue after the registration.

26. The consequence of this is that the goods would be subject to an incumbrance which would be actionable at any time after the date of registration and that clearly would fall within the type of incumbrance contemplated by the section.

27. This situation covers Mr Chow’s second contention namely that the goods must be free from undisclosed encumbrances and that the plaintiff should be able to enjoy quiet enjoyment of the watches.

28. Mr Chow called in aid the case of Niblett Ltd v. Confectioners Materials Co. Ltd [1921] 3 KB 387.  In that case it was held where milk cartons bore labels which infringed a registered trademark the seller did not have the right to sell the goods.  This is a correct statement of the law and is applicable to the instant case.

29. The next question which has to be considered is whether there had been an obvious infringement of USE’s Registered Design. 

30. The test to be adopted in determining this was set out in some detail in the judgment of Barker J (as he then was) at page 560 of Tang Fun Kee Manufacturing Co. Ltd v. Fortuna Plastic Manufacturing [1980] HKC 555 :

“In my judgment the design was validly registered in accordance with the Act.

The Defendants nevertheless say that, even so, D1 does not infringe the registered design.  Whether it does or not is a matter of fact.  I have to judge the matter solely by the eye.  In deciding whether or not there has been infringement, I must do so with the inexpert eye of a customer — I must consider solely the shape and configuration and not the object for which the article was made.  (See Hecla Foundry Co. v. Walker Hunter & Co (1889) 6 RPC 554).  I am entitled to look not only at the registered design but also at the article manufactured therefrom.  And I then can lay that side by side with the alleged infringing article and make my comparison.  I must also apply what has been called somewhat infelicitously ‘the doctrine of imperfect recollection’.  In the case Valor Heating Co. Ltd. v. Main Gas Appliances Ltd [1973] RPC 871, Whitford J said at p.878 :

In considering registered designs you must consider infringement not merely upon the basis of a side by side comparison, but also upon the basis of having had a look at the registered design, then having gone away and come back and perhaps been put in a position of deciding whether same article is the one you originally saw.

And applying all these tests, I must then answer the question, is D1 substantially different from the registered design? I must also take into account the principle that the better known the design the narrower the scope of the protection.  (See Saunders v. Wiel 1893 10 R.P.C. 29 and Deans Rag Book Co. v. Pomerantz [1948] RPC 1.)

There are undoubtedly differences between D1 and the presentations and P1.  The cross section is different — the Plaintiffs’ article being basically square whereas the Defendants’ article is roughly hexagonal.  The tops of the two articles are different — the top of P1 is flat whereas that of D1 is peaked, removable and placeable on the base.  The back of D1 is different in profile and position from that of P1.  Are these differences of such importance as to cause me to say that the two articles are substantially different?  In my judgment they are not.  Viewing the articles side by side, comparing D1 with the representations, and applying the doctrine of imperfect recollection, I consider that there has been infringement.  The general configurations of P1 and D1 are the same, the strap and the logo and the switch are all in the same position.  The question to be answered is, has the substance of the design been taken, and in my judgment it has.”

31. I have compared the allegedly infringing watch against the specifications of the Registered Design.

32. It appears to me that the only discernable difference which can be detected is that the watch depicted in the specification had a retractable antenna whereas the allegedly infringing watch does not.

33. It may of course be the case that this is a matter of significance so far as the function of the watch is concerned but this is not a matter coming within the purview of a registered design.

34. It is clear to me that the design of the watch does indeed infringe USE’s Registered Design.

35. Mr S.C. Lam raised a number of issues.

36. One of these was to contend that it was apparent from section 14 of the Sale of Goods Ordinance that undertakings being implied only amounted to a warranty in relation to the goods.

37. This would indicate that any breach of contract by a defendant would only entitle a plaintiff to a claim for damages and not for the relief which would be available if a breach of condition was established which went to the root of the contract.

38. Mr Chow’s answer to this was to refer to the English Court of Appeal case of Rubicon Computer Systems Limited v. United Paints Limited, unreported, which was heard on 12 November 1999.

39. On the third page of the transcript Mantell LJ had this to say :

“As to the second holding, however, I have no doubt that the judge was right.  He did not refer in terms to s.12(2)(b) of the Sale of Goods Act 1979 but it is clear that he had it in mind.  So far as material, s.12(2)(b) provides :

‘In a contract of sale, other than one to which subsection (3) below applies there is also an implied term that …

(b) the buyer will enjoy quiet possession of the goods except so far as it may be disturbed by the owner or other person entitled to the benefit of any charge or encumbrance so disclosed or known.’

Subsection (b) has application in the present case.  There is ample authority for the proposition that the wrongful interference with goods by the seller after property has passed to the purchaser under the contract of sale will constitute a breach of the implied term that the buyer will be permitted quiet possession of the goods : see Gatoil International Incorporated v Tradex Petroleum Limited (The ‘Rio Sun’) [1985] 1 Lloyd’s Rep 350, Empresa Exportadora De Azucar v Industria Azucarera Nacional SA (The ‘Playa Larga’ and ‘Marble Islands’) [1983] 2 Lloyd’s Rep 171, and Healing (Sales) Property Ltd v Inglis Electrix Property Ltd [1968] 121 CLR 584.  In this last mentioned case, the seller had wrongly retaken possession of goods and re-sold them to other persons.  The High Court of Australia held that the wrongful seizure of the goods by the seller amounted to a breach of the implied warranty of quiet possession provided by a statute corresponding to our Sale of Goods Act.  The Australian High Court was dealing with a breach of warranty but that makes no difference to the principle.  Chief Justice Barwick posed and answered the question as follows :

‘The first question for decision therefore is whether the seizure was in breach of the warranty that the buyer should have and enjoy quiet possession of the goods, it being common ground that the circumstances of the contract did not exclude the implication of this warranty.

For the respondent it was argued that the warranty in question does not cover a tortious seizure of goods from a buyer by a seller … Such a seizure is a wrongful exertion by the seller a claim to goods of which possession has been given and in respect of which the seller has warranted that the buyer shall enjoy quiet possession.’

So it is immaterial that the buyer has an alternative remedy in tort.

Accordingly, in my view the judge was right to hold that the admittedly wrongful interference with the computer after delivery and installation was a breach of the implied term under s.12(2)(b).  Before the court today, Mr Roberts, who appears on behalf of the appellant, has conceded that the interference with the computer in this case did amount to a breach of that implied term.

As to the second question and ground of appeal, the judge reminded himself that, for a breach of contract to be repudiatory, it must go to the root of the contract or frustrate the commercial purpose of the venture.  For that proposition he relied upon Chitty on Contracts, 27 Edition at paragraphs 24-035.  He then adopted the test stated by Diplock LJ (as he then was) in Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26, [1962] 1 All ER 474, at page 66 of the former report :

‘Does the occurrence of the event deprive the party who has further undertakings to perform, of substantially the whole benefit which it was the intention of the parties as expressed in the contract that he should obtain as the consideration for performing those undertakings?’

The judge went on to refer to certain dicta of Lord Upjohn in the case of Suisse Atlantique Societe D’ Armement Maritime SA v NV Rotterdamsche : Kolen Centrale [1967] 1 AC 361, [1966] 2 All ER 61, at page 429 of the former report, to the effect that a fundamental breach amounting to repudiatory conduct is the more readily inferred if it is deliberate.  He mentioned the fact that the appellants had failed to disclose of some several weeks what it was they had done, and that they had never thereafter offered to remove the lock on any basis which he found to be acceptable.  With regard to the submission which was before him, as it is before us, that the lock was readily bypassed, he reviewed the evidence, and in particular the fact that Mr Sleet had sworn an affidavit in August 1989 that the lock would continue to operate until the balance of the price had been paid.  He held at page 19 of the transcript :

‘I find therefore that the plaintiffs effectively repudiated the contract of sale by allowing the time lock to operate 6^th June 1989, and their repudiation was accepted by the defendants’ solicitors in their letter dated 8^th June 1989.  The acceptance of repudiation was repeated by Mrs Dores in her affidavit dated 26^th September 1989.’”

40. I have no doubt that this is an accurate statement of the law and that it is applicable to the instant case.  The fact that the plaintiff’s quiet enjoyment of the goods is impaired consequential upon the goods infringing USE’s intellectual property rights undoubtedly goes to the root of the contract between the parties thus entitling the plaintiff to the relief it seeks.

41. One of the other matters raised by Mr S.C. Lam was the suggestion that the plaintiff was aware of the alleged infringement of USE’s rights when the contract with AIG was entered into.  He endeavoured to establish this contention by reference to the date appended at the conclusion of the written terms.

42. This however is contrary to the affidavit evidence which has not been challenged.

43. None of the matters which have been raised by Mr S.C. Lam in his submissions to the court persuade me that his client has an arguable defence to the plaintiff’s claim in respect of the infringement of USE’s Registered Design and, this being the case, I am satisfied that the master was correct when he ordered that judgment should be entered against the defendant.

44. This then leaves the defendant’s appeal against the decision to grant leave to the 1^st and 2^nd third parties to defend the third party proceedings.

45. Mr S.C. Lam informed me that he did not wish to pursue an appeal against the decision to permit the 2^nd named third party to defend the proceedings.

46. So far as the 1^st named third party is concerned there is one important distinction in the situation prevailing between the plaintiff and the defendant on the one part and between the defendant and the 1^st named third party of the other part.

47. That is the existence of the affirmation evidence to the effect that when the defendant entered into the cooperation agreement with the 1^st named third party the defendant was fully aware of the existence of similar types of watch which may well be infringing watches.

48. This being the case, section 14(2) of the Sale of Goods Ordinance would apply to the contractual relationship namely that it was only the intention of the parties that the defendant would transfer whatever title it could.

49. Once I come to the conclusion that judgment should not be entered against the 1^st named third party it is preferable that I should not comment at any length upon the issues which will be ventilated at the trial.

50. In my opinion, the master was right to order that leave be granted to the 1^st named third party to defend these proceedings.

51. Both appeals are dismissed.

52. I make an order nisi that the plaintiff and the third parties are to have their costs.