GLOBAL HOUSEHOLD PRODUCTS LTD v. MICO ELECTRIC (HONG KONG) LTD

HCA 1762/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1762 OF 2005

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REASONS FOR JUDGMENT

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1.  In this case the plaintiff brought action against the defendant in respect of the defendant’s failure to take delivery of 1500 17” LCD television sets and its refusal to accept the same.  For its part the defendant alleged that the goods manufactured by the plaintiff were not of merchantable quality and/or were not reasonably fit for their purpose.  In the circumstances the defendant brought a counterclaim against the plaintiff.  Prior to the trial of this action the quantum of each party’s claim had been agreed.   In respect of the plaintiff it was agreed that should it succeed in proving liability the damages would be US$170,576.91 and in respect of the defendant’s counterclaim it was agreed that should the defendant succeed on the counterclaim the quantum would be US$112,500.

2.  At the conclusion of the trial of this action judgment was given for the plaintiff in the sum of US$170,576.91 with costs.  Reasons were to be given in writing.

The history

3.  The events leading up to the claim go back to early August 2004 when 2 sample LCD televisions were provided by the plaintiff to the defendant so that the defendant could show them to their customer in the United Kingdom.  That customer transpired to be Sainsbury’s.  By the end of August Marissa Sin, the then marketing manager of the defendant, indicated to the plaintiff that the customer was interested and asked for quotes in respect of the model based on the supply in early October of 2000 pieces and also for quotes based on 5000 and 7000 pieces.  In her e-mail of 20 August she mentioned that the research and development department of the defendant had found some problems with the plaintiff’s sets.  There was some negotiation and eventually in what was referred to as the Revision 3 pro-forma invoice, the plaintiff’s quotation was accepted by the defendant for a quantity of 2100 television sets at a price of US$360 each.  That was apparently received by the plaintiff on 13 October.

4.  In September 2004 Mr George Lau, who gave evidence in this case, had joined the plaintiff as the sales manager and replaced Mr Billy Wong who had previously handled the matter.  Mr Lau was thus on the sales side and not on the technical side.  Nevertheless, on 19 October he apparently accompanied engineers from the plaintiff to visit the defendant’s premises in order to discuss technical problems that had been raised.  According to Mr Lau the plaintiff’s engineers did attempt to solve the problems and a week later on 26 October the plaintiff sent another 2 television sets as samples to the defendant.

5.  During this time there appears to have been communication between the plaintiff and the defendant in respect of technical matters.  It appears that the defendant’s technical staff were not entirely happy with various aspects and there were a significant number of areas where they asked for improvements.  It would appear that improvements and changes were made to the plaintiff’s television sets from time to time.  Nevertheless matters dragged on.  On 11 November a Miss Dion Chan, who was one of Marissa Sin’s subordinates, sent an e-mail to Mr Lau saying that Sainsbury’s had requested that the order be reduced from 2100 pieces to 1500 pieces because the lead time had been too long.  That request is perhaps understandable since Marissa Sin gave evidence that Sainsbury’s had been intending to have the product ready by October so that it could be sold for the Christmas market.  Obviously by early November it was getting late to have product manufactured, shipped and in the shops, ready to be sold for Christmas.

6.  Seemingly somewhat reluctantly, the plaintiff sent the defendant a revised pro-forma invoice with the reduced amount of 1500 sets being scheduled for delivery on 14 December 2004 and a further 600 sets scheduled for delivery on a date to be confirmed.  That pro-forma invoice was never countersigned by the defendant.  Nevertheless, the plaintiff sent the defendant an improved sample some time in mid-November 2004 and on 18 November Mr Edward Yau of the defendant sent Mr Eric Tam of the plaintiff an e-mail acknowledging the receipt of the sample on the previous day but saying that unfortunately the product seemed to be “much worse” and that some problems that had been solved previously appeared to be present again.  He mentioned 3 problems, but those do not feature as part of the complaints in this case.

7.  Things were clearly becoming more active towards the end of November and there were exchanges of e-mails concerning, apart from other things, the C E certificate which was required and the quality of the printing of the gift boxes in which the television sets would be sold.

8.  In particular, Friday 26 November appears to have been a very busy day.  There were a number of e-mails passing between the parties, ending with an e-mail to Sainsbury’s.  At about 9 a.m. on that morning of Friday 26 November Edward Yau sent Bonnie Wong of the plaintiff a document entitled standards for LCD TV Products’ Reliability Test.  He informed her that they were from their QA manager and that they represented the defendant’s expectation and asked for confirmation that the factory could comply with their requirements.  A Mr Wong Hin Fu, who at the time had been the assistant director of electronic engineering at the plaintiff but has since left, told the court that the document relates to tests which would be applied to production samples and not pre-production samples.  The document relates to testing for durability in high and low temperature as well as drop tests and impact and vibration tests.

9.  That was followed by an email from Dion Chan to Bonnie Wong, which seems to have been directed mainly to the printing of the boxes.  There appears to have been some difficulty with regard to the preparation of those boxes.  That, again, does not feature as a complaint now relevant to these proceedings, but it seems to have been a cause of delay in the final preparation of the product and it would appear to be the reason why the plaintiff offered to air freight some of the televisions.

10.  At about noon on that day Bonnie Wong replied to Dion Chan.  The e-mail referred mainly to the matters arising concerning the printing but, importantly, it also referred to the question of the letter of credit for the payment for the television sets to be manufactured.  The plaintiff had made clear that it would not start manufacture until the letter of credit was in place.  The e-mail requested a reply concerning the status of the letter of credit and an almost immediate reply came back saying that the defendant had not received a copy of the letter of credit from the customer but would keep the plaintiff posted.

11.  Very importantly for the purposes of this case, there was an e-mail from Edward Yau on Friday 26 November addressed to Eric Tam of the plaintiff in which he said:

“We have check the TV and found that the problems mentioned in the last mail are solved.

-Now the TV seems okay but we have to take a day or two to approve it internally.

……..”

12.  A second part of the e-mail was addressed to Bonnie Wong of the plaintiff’s sales department in which Mr Yau said that:

“As the TV seems stable enough and we would like to display the MiCO ltv 217 on CES show, please kindly arranged four updated samples for us.  In order to meet the schedule of sea freight, please strive to send those TV to our HK office by Monday noon.”

13.  There then follows an e-mail from Sainsbury’s in London timed at 5:14 p.m. attaching a copy of the draft letter of credit.  That would appear to have been London time and hence it would have been received in Hong Kong in the early hours of Saturday morning 27 November.  No doubt for that reason it was not until Monday 29 November shortly before 11 a.m. that Dion Chan replied to Sainsbury’s that the shipment of 1500 television sets would be made by mid December and that therefore the latest shipment date stated in the letter of credit would not work.  Sainsbury’s was asked to amend the latest shipping date to 19 December.  About two hours later Sainsbury’s agreed to do so.

14.  It is quite clear that the defendant was expecting the plaintiff to go ahead with the production of the 1500 television sets.  On that same Monday 29 November Dion Chan sent an e-mail to Bonnie Wong asking whether it would be in order to have ITS (that is Intertek) carry out the inspection of the 1500 sets on 6 December.  It is interesting to note that that e-mail was copied to a number of people including in particular Mr Zhou Guo Hong, who at the time was the technical director of the defendant and is now the general manager.  There was an interchange between the plaintiff and the defendant about the packing and items that would be enclosed with the television sets, how the sets would be loaded in containers.  The C E a certificate of conformity was obtained on 2 December.

15.  In exchanges, for example on 3 December, the plaintiff was making clear that mass production would not start until the letter of credit was received, the defendant was pressing for inspection by ITS on 13 December.  At about 8 p.m. on that day Edward Yau of the defendant appears to have sent an internal e-mail to Marissa Sin saying that there were four points pending.  None of those points relate to matters which were in issue in these proceedings.  They relate to be finalisation of details relating to the product before the 1500 sets were sent for inspection.  Again that e-mail in particular was copied to Mr Zhou.

16.  It is clear from the exchanges of e-mails that a copy of the letter of credit was received by the plaintiff on Saturday 4 December on which day there appears to have been exchanges of e-mails about the scart plug.  It would appear that the plaintiff was purchasing the scart plugs from the supplier chosen by the defendant and at 1:14 p.m. Bonnie Wong made clear to Dion Chan that the manufacturer of the plug would be sending an improved sample to the defendant on the Monday and once that had been approved by the defendant production would resume.

17.  Objection was raised by the plaintiff to the terms of the letter of credit because bank charges were to be deducted.  At about 4 p.m. on Monday 6 December Dion Chan informed Bonnie Wong that the reworked scart plug sample had been approved and that the terms of the letter of credit was something which the plaintiff had to accept and the final paragraph of that e-mail read:

“As per our correspondence, GBL will start production once received the L/C. Our R&D will provide us written approval once CE can be received.  I don’t think the production can be delayed due to point 1 (the extra charges in the letter of credit) as GBL has received a L/C last Saturday.  Also, I’m afraid our customer will reject the goods if we cannot ship on time.  Therefore, please confirm if we can arrange ITS inspection on December 13 (next Monday) in order to catch our schedule.”

18.  Within the hour George Lau replied to that e-mail referring to a conversation which Eric Tam of the plaintiff had had with Dion Chan and saying that he believed that the CE had been settled.  As regards the inspection he said that that would be arranged.  Thereafter Dion Chan set about arranging the ITS inspection and confirmed the details with Bonnie Wong.  On Thursday 9 December Sainsbury’s indicated that they had not seen any working sample.  That day Bonnie Wong informed the defendant that there had been a mistake in the production of the gift box which would delay matters because it would take four days to process the replacements.  Eventually, it was confirmed that the ITS inspection would take place on the following Tuesday, 14 December.  On Monday 13 December Dion Chan sent an e-mail to Bonnie Wong in which she said:

“Please kindly advise the status of the shipment sample that we need not gift box and serial number.

Also, please advise the status for the Mass Production.  If it is caught on schedule, the goods are on packing stage.  Please advise.”

19.  The sample that was referred to was apparently sent that day and the ITS inspection took place as scheduled on the following day.  Save for a couple of inconsequential comments the television sets passed the inspection test.  The report was sent to Sainsbury’s and their comment was that it was approved and their quality manager requested the defendant to issue the appropriate inspection certificate to the plaintiff.

20.  It was only thereafter that the plaintiff was informed by the technical personnel at the defendant that further inspections were necessary.  On Friday 17 December George Lau sent an e-mail to Marissa Sin and Dion Chan as follows:

“Dear Marissa,

I was informed below by my colleague in China that the re-worked goods has to go through these procedures and report could only be released on 18 Dec afternoon.  We understand that the reworked goods must be in good quality.  But we do not want to be delayed due to container release hold up.  Please kindly make sure we can draw the container for shipment tomorrow.

Moreover, according the last QC report, the goods were not accepted in碰撞實驗.  According the attached email, this test can be exempted for this shipment.  Please informed your QC in China.”

21.  There then followed exchanges of e-mail in which the plaintiff reminded the defendant of the e-mail of 26 November and Dion Chan replied saying that all that had been said was that the sample “seems OK”.  The second sentence read:

“No written approval is provided after the email he sent, so I don’t think the below email is evident enough to start production.  Anyway, it’s not time to argue this issue.”

She concluded by saying that they were waiting for the advice of their technical people.  It was not until Tuesday 21 December that the defendant indicated that it had found 3 problems with the television set.  Those 3 problems were expanded the following day to include a total of 5 matters which were said to constitute defects.  One matter which may be noted is that the defendant indicated in an e-mail of 22 December that the defendant’s quality standards referred to were stricter than the international standards.

22.  I have set out the history of the matter with particular reference to the closing stages leading up to the manufacture of the 1500 television sets.  I have done so because I consider that the history shows quite clearly that the defendant instructed the plaintiff to carry out the manufacture of the television sets according to the most recent sample which had been delivered prior to 26 November 2004.  It is true that there was no specific confirmation from the defendant’s technical staff that the sample, referred to by the parties as the “golden sample”, had been approved but the defendant was buying the television sets, it was the defendant that ordered the television sets, after the letter of credit was received it was the defendant that had instructed the plaintiff to carry out the manufacture without any further delay and it was the defendant that had arranged the inspection of those television sets.  If there were miscommunication that miscommunication was one between those in the defendant’s organisation responsible for purchasing and their colleagues responsible for technical matters.  In the face of the defendant’s earlier e-mails, Dion Chan’s e-mail quoted in the previous paragraph was simply an attempt to back track on the defendant’s own instruction to the plaintiff to proceed with mass production without any further delay.

23.  The final outcome was that although there was initially some attempt on the part of the plaintiff to take into account the matters raised by the defendant, the plaintiff was unable to discover the same problems of which the defendant complained and in respect of 2 complaints, which related to the audio system, it was said that they really stemmed from a matter of design.  It suffices to say that the defendant eventually cancelled the order on 4 January 2005.  The defendant never replied to the plaintiff’s solicitors’ letter of 23 April 2005 in which claim was made in respect of the defendant’s wrongful repudiation of the contract.

24.  Although Mr Lee, who appeared on behalf of the plaintiff, attempted to explore what had transpired between the defendant and Sainsbury’s, apart from the fact that Sainsbury’s never made any claim against the defendant, nothing of relevance emerged.  It can only be supposed that because Sainsbury’s had intended the television sets to be sold for the Christmas market and since that had been missed, Sainsbury’s was content simply to have the letter of credit lapse.

25.  It is right to say, however, that Mr Chan, who appeared on behalf of the defendant, placed little emphasis on the part of the defendant that the plaintiff should not have commenced manufacture.  He submitted that the real issue was whether the television sets were of merchantable quality and/or fit for the purpose.  In this regard section 16 of the Sale of Goods Ordinance, Cap. 26 is relevant.  Subsections (2) and (3) read:

“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

(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.

(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.”

26.  The defendant’s case in this respect failed.  I do not consider that the matters which the defendant relied upon constitute defects which rendered the television sets not of merchantable quality nor would they cause the television sets to be not reasonably fit for the purpose, namely use as television sets with inputs for other devices such as computers and DVD players.  This is so for 2 reasons.  The first is that the matters relied upon when taken either separately or together would not in themselves lead to a conclusion in the defendant’s favour.  The second matter is that the evidence was that the plaintiff was able to sell the television sets which were not taken by the defendant.  They were sold on different occasions.  By far the greater part of the sales were in batches of significant quantities and, importantly, there were repeat sales after sufficient time had elapsed that if the television sets were indeed not of merchantable quality the repeat sales would not have been made.  Finally, in so far as is known, there was never any complaint about the quality of the television sets.

27.  Turning to the specific complaints the first was that the “On Screen Display” was abnormal because when the television was switched to computer mode (i.e. that in which the television would be when connected to a computer), there were said to be different sizes of the interface menu which came up on the screen when there was no signal.  Mr Zhou, who at the relevant time was the technical director of the defendant but is now its general manager, said in his witness statement that the problem did not emerge every time that the television was switched to computer mode, but he maintained that it did happen.  The plaintiff, for its part, maintained that its engineers had been unable to replicate that fault.

28.  Mr Chan in argument repeated the defendant’s position that the phenomenon that his client experienced from time to time would be something which would cause customers to consider that there was a fault with the television.  In my view, even if there were differences in size of the user interface and menu from time to time, that would have been a very minor matter since it is only alleged to have occurred when there was no signal from a computer.  It has not been suggested that there would have been any difficulty in connecting a computer to the television or that any function did not work.  I do not consider that this matter, on its own could be considered to have rendered the television sets not of merchantable quality and it could not, on any footing, have meant that the television sets were not fit for their purpose.

29.  The next matter of complaint was that it was said that if the scart plug of a DVD player were removed and a scart plug of another DVD player were inserted and the process repeated for a number of times there would be no audio output.  A number of matters are relevant here.  In the first place Mr Zhou said in evidence in chief that the defendant had come across this problem accidentaly, it was discovered during repeated testing.  It can therefore be concluded that this was clearly not a standard test which the parties would have expected to be applied to the television sets.  In the second place, the defendant was again not able to replicate this fault.  In the third place I do not consider that the defendant has shown that plugging and unplugging 2 separate DVD players via their scart plugs whilst the television is in operation and, presumably, the DVD players were also in operation is a fair or proper mode of operating the television sets.  Although there was no evidence, it might be expected that the proper mode of operating electronic products would be that they are switched off before connecting or disconnecting peripheral connections.  The sort of operation which the defendant conducted, whereby this plugging and unplugging was done repeatedly, was something which could reasonably be expected to cause problems in the operation of the television set.  Moreover, it is not suggested that the lack of audio output was something which lasted after the television set had been switched off and on again.  No doubt when the television set was switched off any electrical charge caused by the plugging and unplugging of the scart plugs would dissipate.  Again, I do not consider that this matter constituted the television sets not of merchantable quality nor not fit for that purpose.

30.  There were then two complaints that relate to the audio output.  It was said that there was “poor nonlinearity rating” and “poor audio distortion plus noise rating”.  In the end these complaints were said to arise from the same cause namely the fact that the maximum audio input to a television was 2 volts rms whereas the power supply voltage of the plaintiff’s television sets was 5 volts.  A signal of 2 volts rms would have a peak to peak voltage of 5.656 volts and thus exceed 5 volts.  It was said that because the plaintiff’s television sets used Micronas xxxx chipsets any input signal falling outside the range of 5 volts would be blocked by the chipset.

31.  There was no dispute on the part of the plaintiff that the defendant’s observations in relation to the distortion, which would be caused by the choice of components referred to in the previous paragraph, were correct.  Nevertheless Mr Zhou, himself, said when giving evidence in chief that 10% was the minimum standard.  The fact that a product is made to a minimum standard does not seem to me to make it not of merchantable quality nor does it make it not fit for its purpose.  The fact cannot be ignored that this defect, on the assumption that it be a defect, had existed in all the samples provided to the defendant and yet it was not until after manufacture had taken place and, indeed, after shipment should have taken place, that any complaint or comment in this regard was made.  Underlying Mr Zhou’s complaint in this respect seemed to be that the plaintiff’s technical staff did not come to the defendant’s premises after 22 December when they said they would.

32.  The television sets would obviously not be high end products but I doubt that anybody looking at the television set that was in court, with its screen no larger than a modest personal computer screen, would expect it to be a high end product.

33.  I would note in respect of these two complaints that it was suggested by Mr Chan when cross-examining the plaintiff’s witness that the problem of sound distortion could have been solved if an 8 volt power supply had been used.  That suggestion had never been made before, so far as I can determine, either in the correspondence or in any of the pleadings or in the evidence.  It was not a suggestion that was thereafter pursued and it would be surprising if changing the power supply by increasing it to 8 volts would not have affected the operation of the television set and its components in a substantial number of other ways.

34.  The final complaint was referred to as green interference which appeared on the screen when the channels were switched.  It was said that when the television was switched from one channel to another green interference lasting approximately 1-2 seconds would appear on the screen.  The defendant’s case was that the interference did not happen every time when the television was switched on but that it happened when the channels were switched.  It was said that the green interference appeared as horizontal bars of about 2-3 cm and covered about ¹/₆ to ¹/₃ of the screen.  In his witness statement Mr Zhou stated that:

“Normally this would occur when one switched from one to another channel for about 30 times.”

35.  If by that Mr Zhou meant that one had to change channels 30 times in order to generate the green bars, then the fact that something like that might happen in those circumstances would be hardly surprisingly.  But, even if the green bars occurred after operating the television in a more normal and less potentially destructive way, in my view, even taken at its highest, this would not cause the television set to be not of merchantable quality or not fit for its purpose.  When switching channels on any television there always seems to be a period when there is no picture.  It is not suggested that the green bars persisted once the channel had been changed.  The fact that it was unusual for there to be green bars when channels were in the process of being switched as opposed to the screen going blank and either having a black screen or else a white screen, would not, it seems to me, render the television set not of merchantable quality nor would it make it not fit for its purpose.

36.  Mr Chan argued that a consumer who saw the green bars when the channels were being changed might consider that there was something defective with the television set and seek to return it.  I do not consider that that is a sufficient possibility given the nature of the matter complained of.  It is simply an idiosyncrasy of the television set which does not affect its operation.

37.  My conclusions with regard to the question of whether the television sets were of merchantable quality and were reasonably fit for the purpose are confirmed by what happened in practice.  The plaintiff was able to sell most of the television sets over the course of the following year.  In particular there was one customer, seemingly a United Kingdom customer, that purchased 100 of the sets in February 2005 and a further 100 sets in April of that year at the same price that the defendant had contracted to purchase the television sets.  That same customer then apparently returned in November 2005 and purchased another 200 sets but by then the price had dropped.  That is not altogether surprising since it is a phenomenon that electronic components, in particular chips, become cheaper and outdated quite rapidly.  There was another customer which took 89 sets in May 2005 having obtained samples in February and March and, apparently, took a further sample in September 2005.  The last major customer took 200 sets in December 2005 and was apparently sufficiently satisfied to take a further 641 sets in January 2006.  In my view the sales which the plaintiff was able to effect following the refusal of the defendant to take delivery demonstrate that the television sets were of merchantable quality and were fit for the purpose.  Quite apart from the fact that Mr Lau, in giving evidence said that he was not aware of any complaint which had been made following the sale of the television sets, if there had been any question of the television sets not being of merchantable quality or not fit for the purpose it would have been unlikely that the repeat sales, which were demonstrated, could ever have taken place.

38.  In my view the defence raised by the defendant was doomed to failure.