CHEUNG PO YUK ALAN t/a HONG KONG PO LUNG PLASTIC FACTORY v. PROCESS PLASTIC MATERIAL CO LTD

DCCJ 3105/2016

[2021] HKDC 250

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 3105 OF 2016

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BETWEEN

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JUDGMENT

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1.  The plaintiff (“Po Lung”) claims against the defendant (“Process”) for damages resulting from alleged defective plastics raw materials supplied by the latter to the former for its manufacturing of the component parts of swimming and diving gears in 2015-2016. Process denies liability, as well as counterclaims for outstanding purchase price for the materials and contractual interest for late payment.

BACKGROUND

2.  At the material times, Po Lung carried on the business of manufacturing swimming goggles, diving masks and other swimming gears, using a variety of materials including polyvinyl chloride (“PVC”).  Process was a supplier of raw plastic materials such as PVC to Po Lung for the manufacturing of its products since 2008.

3.  By late 2015, Process had been supplying PVC (No T27-130NWF1) (“F1 Materials”) to Po Lung for the manufacturing of the component parts of its swimming gears.  Those parts included the mask and strap of the diving mask; mouthpiece and connecting piece of the snorkel; and the plastic frames around the lens, strap and nose bridge of the swimming goggles.  However, Po Lung considered that these generally transparent component parts manufactured out of the F1 Materials tended to look yellowish with the passage of time.  This formed the pretext of Po Lung approaching Process for the supply of a new material in place of the F1 Materials.

4.  In about August 2015, Process informed Po Lung that it could supply materials of a new formula which might serve Po Lung’s purpose, namely PVC (No T27-130NWF2) (“F2 Materials”).  Sample of the F2 Materials were supplied to Po Lung for test manufacturing.  Upon satisfaction with the test result, Po Lung decided to place order for the F2 Materials.

5.  On about 8 September 2015, Po Lung placed orders with Process for the F2 Materials, ie purchase orders V-8137 and V-8139.  A further order was placed for the F2 Materials on 30 September 2015, ie purchase order V-8183.  These subsequently became the 3 purchase orders in question in this action.

6.  The F2 Materials ordered by Po Lung were delivered by Process’s Mainland factory, Dongguan City Haicheng Plastic Co Ltd (“Haicheng”), directly to the Mainland manufactories of Po Lung, one of which was Shenzhen Nanyue Nanbao Plastic Company (“Nanbao”).  The F2 Materials under V-8137 and V-8139 were delivered in lots on various dates between 9 and 24 September 2015.  Nanbao used the F2 Materials to manufacture the products of Po Lung.

7.  In early October 2015, Po Lung alerted Process to the former’s discovery of semi-transparent white spots or patches on the surfaces of the component parts manufactured from the F2 Materials.  In response, the representatives of Process had visited Nanbao to understand the situation.  Notwithstanding that, Po Lung did not halt the delivery of the F2 Materials under V-8183, which was made after such visit.

8.  Since then, the parties had been engaged in correspondence regarding Po Lung’s complaint about the appearance of the component parts manufactured from the F2 Materials mentioned above.  The representatives of Process had also visited Nanbao again in October 2015.  Considering that the problem complained about was not satisfactorily addressed, Po Lung resumed ordering F1 Materials from Process to manufacture the component parts by the end of October 2015.

9.  By then, all the F2 Materials supplied under the 3 purchase orders in question had been used up in manufacturing the component parts of the swimming gears.  Nevertheless, Po Lung considered that it was entitled to reject the F2 Materials for the alleged defect.  It also considered that the parties had agreed that Po Lung did not have to pay for them.  Po Lung further withheld settlement of the payment for the other materials delivered by Process since November 2015.

10.  The meeting of the representatives of the parties by the end of April 2016 did not resolve their differences.  By letter dated 3 May 2016, Process demanded Po Lung to settle the invoiced price for the F2 Materials supplied under the 3 purchase orders in question.  It further demanded Po Lung to settle the outstanding amount under the invoices for the other materials delivered since November 2015 as well as contractual interest for all the overdue payments.  The demand was repeated by the subsequent letter dated 11 May 2016 from the solicitors for Process.

11.  In response, Po Lung settled the invoiced amount for the materials delivered since November 2015 by way of cheques delivered to Process on 12 May 2016.  However, it still refused to settle the payment for the materials delivered under the 3 purchase orders in question.  Nor did it pay the alleged contractual interest for overdue payments.  This prompted the letter from Process’ solicitors on the same day setting out their demand for the remaining balance of HK$224,910 and the alleged contractual interest.

12.  The alleged outstanding amount may now be summarized as follows:-

Purchase Order	Invoice and amount		Payment	Outstanding payment	Interest (1.5% per month)
V-8137	95516	HK$563.50	Not paid (due on 29.11.2015) Customer Monthly Statement dated 30.9.2015	HK$563.50	Interest on HK$169,050.00 since 29.11.2015
	95560	HK$1,127.00		HK$1,127.00
	95587	HK$22,540.00		HK$22,540.00
	95598	HK$88,469.50		HK$88,469.50
V-8139	95570	HK$28,175.00		HK$28,175.00
	95597	HK$28,175.00		HK$28,175.00
V-8183	95672	HK$55,860.00	Not paid (due on 30.12.2015) Customer Monthly Statement dated 31.10.2015	HK$55,860.00	Interest on HK$55,860 since 30.12.2015
V-8237	95809	HK$55,370.00	Paid total of HK$386,610.00 on 12.5.2016 (due on 29.1.2016) (ie late for 104 days) Customer Monthly Statement dated 30.11.2015	N/A	Interest on HK$386,610.00 for 104 days
	95831	HK$27,440
V-8250	95826	HK$27,440.00
	95832	HK$27,685.00
	95848	HK$83,055.00
V-8266	95884	HK$49,539.00
	95902	HK$60,907.00
V-8267	95885	HK$55,174.00
V-8294	96003	HK$22,148	Paid total of HK$574,574.00 on 12.5.2016 (due on 29.2.2016) (ie late for 73 days) Customer Monthly Statement dated 31.12.2015	N/A	Interest on HK$574,574  for 73 days
V-8295	96000	HK$35,990.50
	96001	HK$19,379.50
	96002	HK$55,370.00
V-8317	96013	HK$22,025.00
	96041	HK$47,064.50
	96051	HK$41,160.00
V-8349	96058	HK$63,581
	96069	HK$47,064.50
V-8366	96096	HK$35,990.50
	96097	HK$55,370.00
	96113	HK$19,379.50
V-8377	96140	HK$44,296.00
	96150	HK$11,074.00
V-8378	96139	HK$21,952.00
V-8379	96167	HK$32,928.00
	96211	HK$77,518.00	Paid total of HK$283,808.00 on 12.5.2016 (due on 31.3.2016) (ie late for 42 days) Customer Monthly Statement dated 31.1.2016	N/A	Interest on HK$283,808 for 42 days
V-8423	96242	HK$54,390.00
V-8424	96235	HK$32,634.00
V-8472	96279	HK$32,340.00
V-8495	96309	HK$32,634.00
V-8502	96312	HK$21,756.00
	96323	HK$32,536.00
				Total: HK$224,910

13.  Through its solicitors, Po Lung responded by letter dated 19 May 2016 referring to a written confirmation in March 2016 signed by the parties, whereby Po Lung was said to be absolved from liability to pay the invoiced amount of the F2 Materials supplied under the 3 purchase orders in question on account of their defective quality.

14.  By letter dated 7 June 2016, the solicitors for Process refuted the allegation, and presented their understanding on which the alleged written confirmation was based.  As the F2 Materials had been manufactured into products and exported to Po Lung’s customers, Process also argued that there was no reason for Po Lung not to pay for them.

15.  On 27 June 2016, Po Lung commenced the present action.

16.  The above background is or could not be disputed in view of the evidence of the parties.

THE RESPECTIVE CASES OF THE PARTIES

17.  Po Lung contends that the F2 Materials supplied under the 3 purchase orders in question were not reasonably fit for its purpose, namely for the manufacturing of the transparent component parts of its products as well as not of merchantable quality.  They also allegedly did not correspond with the sample of the materials.  Apart from maintaining that it had rejected the materials, Po Lung claims damages being the extra cost incurred in rectifying part of the manufactured products and in re-manufacturing replacement component parts for part of the products.  Purchasing extra materials allegedly cost a total sum of HK$58,781.23 and extra expenses of its Mainland manufactory allegedly cost a total sum of RMB631,063.52.

18.  Apart from denying the alleged defect in the F2 Materials supplied to Po Lung, Process contends that Po Lung had accepted the materials supplied by not only failing to return them but also dealing with them in a way that was inconsistent with the ownership of Process.  Process also contends that according to the terms of the agreement between the parties, express or implied, Po Lung (i) had failed to reject the F2 Materials within time, but had accepted the same; and (ii) had agreed to pay interest surcharge for any overdue amount owed to Process.  Process puts forward a counterclaim for the invoiced amount of the F2 Materials under the 3 purchase orders in question and contractual interest for the overdue amounts, including interest on the other invoices albeit settled in May 2016 after the demand by Process’ solicitors as mentioned above.

19.  In reply, Po Lung denies the alleged terms of the agreement between the parties.  It also contends that the term limiting its right of rejection of goods as alleged by Process is unreasonable, and therefore not enforceable, pursuant to the Control of Exemption Clauses Ordinance, Cap 71 (“CECO”) in the circumstances of the case.

THE ISSUES

20.  The parties are ad idem as to the issues in dispute, which will be discussed below under the following topics:-

(1) The alleged defect of the F2 Materials;

(2) The alleged breach of the implied terms as to quality;

(3) Rejection of the F2 Materials;

(4) Po Lung’s claim for damages; and

(5) Process’ counterclaim.

21.  Relevant to topics (3) and (5) above is also the dispute between the parties about the terms of their agreement.  Specifically, the dispute lies in whether the alleged term limiting Po Lung’s right to complain and to reject the materials supplied by Process and the alleged term providing for Po Lung’s obligation to pay interest surcharge on overdue amounts constituted part of their agreement and binding on Po Lung.

22.  Also relevant to (5) above is the dispute as to whether the parties had also agreed that Po Lung did not have to pay for the F2 Materials supplied under the 3 purchase orders in question.

WITNESSES

23.  Po Lung called the following witnesses:-

(1) Madam Chung Hiu Tai (“Chung”) was in charge of Nanbao at the material times.  She gave evidence from the Mainland via video-link.

(2) Ho Wan Yin (“Ho”) was in charge of handling the purchase orders at the material times.

(3) Cheung Sung Ching (“Louiza Cheung”) was in charge of its accounting.

24.  Process called the following witnesses:

(1) Li Yip Kei (“Li”) was its sales manager at the material time.

(2) Yip Chung Kei (Yip”) was in charge of the engineering department of Haicheng at the time.  He also gave evidence from the Mainland via video-link.

(3) Lopes Sarah Jane (“Lopes”) was its sales representative in charge of the dealings in question with Po Lung.

THE ALLEGED DEFECT OF THE F2 MATERIALS

25.  The component parts of the swimming and diving gears manufactured by Po Lung, as mentioned above, were supposed to appear to be generally transparent. The actual objects were not among the evidence before the court.  Therefore, the desired quality was only as far as what the photographs appended to the pleading and disclosed in the evidence managed to depict.  They did not show that it was supposed to be crystal transparent, if I may describe it this way.  The alleged defect took the form of semi-transparent white spots or patches appearing on their surfaces.  In their evidence, the witnesses also described such spots or patches as oily or foggy.

26.  There was no evidence of expert examination of the alleged defect. However, considering the evidence as a whole, including the oral evidence of Chung, Lopes and Yip, who had first-hand knowledge in this respect, as well as the contemporaneous documents such as the quality control reports of Nanbao and the correspondence concerning the complaint between the parties, I am prepared to find on a balance of probabilities the existence of such spots or patches appearing on the surface of the component parts manufactured from the F2 Materials at the time.  Those constituted the defect, as which I will also call them only for the convenience of this judgment (“the Defect”).  I must however stress that the evidence does not allow anything more to be said about the actual extent of the Defect.  No clear view of that could really be formed.  What is clear, though, is that there is no allegation that the entire surface of the component parts appeared whitish or foggy so that it could not even be described as generally transparent.

ALLEGED BREACH OF THE IMPLIED CONDITIONS AS TO QUALITY

27.  Whilst Po Lung’s stance of not accepting the Defect was clear, that per se does not answer the question of whether Process was in breach of the implied conditions as to quality of the F2 Materials.

28.  In terms of the express specifications of the F2 Materials, what the purchase orders of Po Lung stated was this: “透明環保料，可附合美國/歐洲條例標準 (46種測試，底味，不含TIN)”.  Essentially, these consisted of generic description of the materials and the requirement of compliance with American and European regulations and standards in terms of tests and components.  There was no other specification, be it by reference to any sample or characteristics or desired quality of any specific product to be manufactured from the materials.

29.  Conditions as to quality were also implied by law.

Merchantable quality

30.  Section 16(2) of the Sale of Goods Ordinance, Cap 26 (“SOGO”) provides that:-

“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.”

31.  “Merchantable quality” is defined in section 2(5):-

“Goods of any kind are of merchantable quality (可商售品質) within the meaning of this Ordinance if they are—

(a) as fit for the purpose or purposes for which goods of that kind are commonly bought;

(b) of such standard of appearance and finish;

(c) as free from defects (including minor defects);

(d) as safe; and

(e) as durable, as it is reasonable to expect having regard to any description applied to them, the price (if relevant) and all the other relevant circumstances; and any reference in this Ordinance to unmerchantable goods shall be construed accordingly.”

32.  Goods are of merchantable quality where they are of such quality and in such condition that a reasonable man, acting reasonably, would after a full examination accept the goods in the circumstances of the case in performance of his offer to buy them, whether he buys for his own or to sell again: see Bristol Tramways v Fiat Motors (1910) 2 KB 831 at 841; Oracle Enterprises Ltd v The Gosho Co Ltd [1962] HKLR 702 at 725.

33.  The goods in question were PVC materials.  Whilst the F2 Materials were a formula developed by Process for Po Lung’s purpose, there is no suggestion that the materials were so unique that they could or would not be used for the manufacturing of other products in the market.  There was no evidence of an objective view of how the quality of the materials was regarded in the market. Even for the kind of products manufactured by Po Lung, there is no evidence that the quality that Po Lung rejected was representative of how the quality was reasonably expected in the market for that kind of products.  Further, the component parts manufactured from the materials came into different shapes and forms.  Po Lung did not have evidence of any objective assessment of the quality of the materials or the relevance of the specific manufacturing process of Po Lung on the performance of the materials in respect of each component part in question.  The above evidence would have been expected to take the form of sampling and comparison by a relevant expert, which is lacking.

34.  In the circumstances, I am not satisfied that Po Lung manages to discharge its burden of proving that the F2 Materials, with the Defect in the case of Po Lung’s products, were as a matter of fact of unmerchantable quality in terms of how the materials could commonly be used.

Corresponding with the sample

35.  Section 17 of SOGO provides:-

“(1) A contract of sale is a contract for sale by sample where there is a term in the contract, express or implied, to that effect.

(2) In the case of a contract for sale by sample—

(a) there is an implied condition that the bulk shall correspond with the sample in quality;

(b) there is an implied condition that the buyer shall have a reasonable opportunity of comparing the bulk with the sample;

(c) there is an implied condition that the goods shall be free from any defect, rendering them unmerchantable, which would not be apparent on reasonable examination of the sample.”

36.  As the F2 Materials were raw materials, there could never be meaningful comparison between the sample materials and the bulk delivered to Po Lung until the materials were used in manufacturing the component parts.  According to its pleading and the evidence of witnesses, Process provided sample of the F2 Materials to Po Lung in July or August 2015.  Upon confirming its satisfaction with the outcome of the test manufacturing and ageing test, Po Lung placed the first 2 of the 3 purchase orders in question on 8 September 2015.  It is in that sense that this is said to be a case of sale of goods by sample.

37.  However, it was also the evidence, and I accept to be the fact, that Po Lung had no problem with the component parts manufactured out of the first batch of 50 kg of the F2 Materials delivered on 9 September 2015.  The complaint about discovery of the Defect said to be surfacing on the component parts manufactured came about a month later.  The test products manufactured from the sample of the F2 Materials were not among the evidence before the court.  Nor was there evidence of proper comparison between such test products and the products manufactured from the bulk of the F2 Materials delivered.  The actual objects were not amongst the evidence.

38.  In the circumstances, it is difficult to say if Process had indeed supplied the bulk of the F2 Materials under the purchase orders that differed from the sample of the materials supplied to and tested by Po Lung in the previous month in terms of quality.  The evidence adduced on behalf of Po Lung does not establish that on a balance of probabilities.

Fitness for purpose

39.  The complaint about the Defect is one about the quality of the component parts of Po Lung’s products manufactured out of the F2 Materials.  That was the purpose for which the materials were purchased from Process.  In my judgment, the real question is whether the materials supplied by Process were reasonably fit for the purpose of Po Lung known to Process.

40.  Section 16(3) of SOGO provides that:-

“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.”

41.  The circumstances affecting the reasonableness of the buyer to rely on the seller’s skill in a particular respect include whether the seller is reasonably expected to realise by virtue of his information and knowledge that he was so relied on for his skill and judgment in that respect: see Jewson Ltd v Boyhan (PR of the estate of Kelly) [2003] EWCA Civ 1030; Oracle Enterprises Ltd (above) at 723.

42.  In line with the above principles, two things should be noted about the measurement of fitness for purpose.  First, whilst fitness is measured by the standard and requirement the buyer expected, whether the seller was in breach would depend on the extent of knowledge on its part about such expected standard and requirement at the time when the seller contracted to sell the goods.  Second, the implied term imposes liability only if the goods did not even reasonably fit for the buyer’s purpose in the circumstances of the case.

43.  Prior to the orders in question, Po Lung had been using F1 Materials supplied by Process for manufacturing the swimming gears.  According to Chung, the transparent component parts manufactured from the F1 Materials tended to turn yellowish with the passage of time.  The pretext of approaching Process for a new material was to address such unwanted feature, albeit never considered as a defect.

44.  According to Lopes, Po Lung specifically requested Process for a different material to manufacture the component parts of their swimming and diving gears.  The parties met up, and Po Lung also provided her with those component parts for reference.  Lopes followed up with the matter, and Yip of Haicheng proceeded to develop the formula for the material for Po Lung’s purpose, ie the F2 Materials.  Sample of the F2 Materials was then provided to Po Lung for test manufacturing and ageing test.  It was upon Po Lung’s confirmation of satisfaction with the quality of the component parts of its products that formal purchase orders for the F2 Materials were placed.  The circumstances, I find, were such that Po Lung did rely on Process for its skill and judgment in the development and supply of a new material that would fit its purpose, namely the production of the component parts of its products so that their appearance could withstand the passage of time without yellowing as before.  Throughout the dispute, there was never any assertion about failure of the F2 Materials in meeting the above requirement.  This of course is not to say that Po Lung would have no valid cause for complaint if new defect arose out of the use of the new materials.

45.  Upon alerted to the surfacing of the Defect, Lopes visited Nanbao more than once in the same month.  She had also gone there with Yip more than once. The first of such trip was on 8 October 2015.  Some of Yip’s suggested methods to remove the Defect was attempted whilst some was rejected.  There is dispute whether Lopes and Yip, as they said, ever made clear to Chung that Process would be prepared to take back the F2 Materials if Po Lung was minded to return them.  However, the undisputed fact was that not only was there no return of the materials already delivered, but further delivery of the materials under V-8183 was not halted by Po Lung.  Manufacturing by using the F2 Material apparently continued.  This cast light on the extent and seriousness of the Defect from the point of view of Po Lung then.  Po Lung decided to resume using F1 Materials for its purpose only towards the end of October 2015.

46.  Whether or not the extent and seriousness of the Defect rendered the F2 Materials not reasonably fit for Po Lung’s purpose can be tested from two perspectives.  First, this could be an objective comparison, but, as mentioned, there is the lack of visual evidence of the actual extent and seriousness of the Defect, not to mention expert evidence, if appropriate.  Second, it could be said that Po Lung’s rejection reflected the standard and requirement that it was expected to meet for the purpose of its customers.  However, there was no evidence that Proceeds had ever been specifically informed of such standard and requirement other than the actual component parts provided to it for reference prior to the agreement between the parties.

47.  Further, Po Lung’s case is that for those assembled products that had to meet the shipment deadline, and therefore could not await re-manufacturing, the component parts with the Defect were dissembled and cleaned before repackaging for shipment to its customers.  As mentioned, Yip had visited Nanbao after Po Lung’s complaint.  The dispute as to what caused the Defect aside, cleaning was precisely one of the suggestions of Yip to address the problem.  Only that what Po Lung did was to clean the component parts after assembly and even packaging of the final products.  Most importantly, there was no suggestion or evidence that Po Lung’s customers receiving that part of the products had ever taken issue as to the quality of those products that had undergone such cleaning treatment, not to mention complaint about any resurgence of the Defect or rejection of the products.

48.  As to whether the materials supplied by Process were reasonably fit for Po Lung’s purpose, I am not satisfied that Po Lung proves its answer to the question in the negative when viewed from either of the two perspectives discussed above.

Conclusion

49.  In the circumstances, it is not proved that Process was in breach of the conditions as to quality (express or implied) on the ground of the Defect.

REJECTION OF THE F2 MATERIALS

50.  It follows from the above that Po Lung was not in a position to reject the F2 Materials on the ground of quality.  For completeness, I would discuss the two issues relating to the rejection: first, the issue of the term of the parties’ agreement concerning Po Lung’s right to reject the materials that Process raises; and second, the issue of whether Po Lung was in such a position to reject the materials.

The terms of the agreement

51.  As mentioned, Po Lung would issue a purchase order (“Purchase Order”) to Process setting out the description of the plastic raw materials ordered, their specifications, quantities, unit price, date and place of delivery such as Nanbao in the present case.  It is common ground that the parties had touched base with each other on the order before the order was placed.  The Purchase Order also specified the payment term, which was within 60 days after the issuance of the monthly statement (“Monthly Statement”) by Success.  It is common ground that the Monthly Statement would be issued at the end of the month.  The amount payable should be discounted by 2%.

52.  Process’s factory in the Mainland, Haicheng, would deliver the materials purchased by Po Lung in lots.  Upon each delivery, Haicheng would issue a goods receipt (“the Receipt”) for the attention of Po Lung and addressed to the receiving factory such as Nanbao, which would sign the same.  The Receipt invariably contained the term that the goods were received in good order and no complaint would be entertained after 7 days.

53.  Process would also issue to Po Lung an invoice for the materials delivered (“the Invoice”).  The Invoice contained, amongst other things, the payment terms of “60 days AMS” meaning 60 days after the Monthly Statement (to be issued by Process at the end of the month), which aligned with that contained in the Purchase Order mentioned above.  Hence the due date for payment being the end of 2 months later.

54.  The Invoice also provided for the 7-day time limit for complaint about defect.  It only differed from the Receipt in that it required notice of defect to be written.  In addition, the Invoice provided that all overdue accounts are subject to interest surcharge at a rate of 1.5% per month.  Such interest surcharge provision was repeated in the Monthly Statement issued by Process to Po Lung at the end of the month.

55.  Process’ case is that the terms in the Purchase Order, the Receipt, the Invoice and the Monthly Statement were incorporated as part of the terms of the agreement by virtue of the parties’ course of dealings.  Po Lung’s case is that the terms set out in the Purchase Order and the sample of the materials sent by Success constituted the entire agreement between the parties.  As explained above, the difference is really whether the term as to the right to reject (“the Rejection Term”) and the contractual interest (“the Interest Term”) introduced by the documents from or on behalf of Proceeds were part of the terms of the agreement between the parties.

56.  Of the authorities cited by Miss Wong for Process, two principles are relevant.  First, the terms of an offer may be accepted by conduct.  For instance, an offer to buy goods can be accepted by supplying them; and an offer to sell goods made by sending them to the offeree can be accepted by using them: Chitty on Contract (33^rd ed) at §§2-026 to 2-029.  Second, where there are competing terms proposed by the parties, the agreed terms may be ascertained by the “last shot” approach.  If a contract results at all, for instance from an acceptance by conduct, it would be on the terms of the final document in the series leading to such result.  In Tekdata Interconnections Ltd v Amphenol Ltd [2009] 2 C.L.C. 866, the buyer sent a purchase order on its own terms and conditions to the seller, and the seller sent an acknowledgement on its own terms to the buyer, upon which the buyer accepted the goods.  It was held that the contract was concluded on the seller’s terms.

57.  It was however recognised that the “last shot” approach as applied in Tekdata might still be displaced by the contrary evidence of the parties’ intention viewed objectively: see Chitty (above) §2-036.  I would therefore add the obvious, namely that it is a matter of the intention of the parties, viewed objectively according to the facts of the case.

58.  In the present case, it is common ground that the course of dealings between the parties had taken the form as described above since 2008, and there was no suggestion that the Rejection Term or the Interest Term printed on the Receipt, Invoice and the Monthly Statement in respect of the orders in question in the present case ever surprised Po Lung.  The Monthly Statements for 2014 disclosed in this action contained the same printed terms prior to the orders in question in 2015.  In their evidence, Ho and Louiza Cheung of Po Lung did not dispute that.

59.  As mentioned, it is common ground that the parties had touched base in respect of a particular order before the Purchase Order for that was actually placed.  One would have expected Po Lung to object or alternatively to put on record somehow their disagreement to the Rejection Term or the Interest Term (as known from previous orders) for the avoidance of doubt.  There was no evidence of that.  Nor was there evidence of such objection when these documents concerning the 3 purchase orders in question were received by Po Lung.  Judging from how specific Po Lung was in requiring Proceeds to put in writing their absolving Po Lung of its obligation to pay for the orders in question in 2016 after the dispute had arisen, one would say it would have done so if it were so minded.

60.  The real contention of Po Lung in this respect is that notwithstanding the existence of the Rejection Term and the Interest Term printed on those documents from Process, the parties had never acted on them as terms between them or, as Po Lung pleaded it, Process had waived these terms throughout their course of dealings as a matter of fact.  The evidence of Ho suggested that. Lopes, who testified on behalf of Process which introduced these terms, clearly suggested that that was the case on the basis of the established customer relationship with Po Lung.  That was also corroborated by the documentary evidence of the actual late settlement of the amounts of the previous orders as explained by Louiza Cheung.  As to this, I do not think that it works for Process to argue, as Miss Wong does, that what happened in the past did not prevent the right to enforce now.  The issue is whether there was in fact such a term on which the parties agreed to act.

61.  As to the contention that the Rejection Term and the Interest Term were implied into the parties’ agreement, it could not be said that such terms were necessitated by business efficacy so that the agreement would fail the parties’ true intention without them.  Further, this was in reality contradicted by how the parties conducted in their actual dealings as mentioned above.

62.  Objectively viewed, the circumstances of this case were such that the Rejection Term and the Interest Term, being the only terms that differed from the terms contended by Po Lung, were not treated by the parties as part of the terms of the agreement.

Right to reject

63.  Section 37 of the SOGO provides that:

“(1) Subject to (2), the buyer is deemed to have accepted the goods-

(a) when he intimates to the seller that he has accepted them; or

(b) when the goods have been delivered to him and he does any act in relation to them which is inconsistent with the ownership of the seller.

(2) Where goods are delivered to the buyer, and he has not previously examined them, he is not deemed to have accepted them under subsection (1) until he has had a reasonable opportunity of examining them for the purpose-

(a) of ascertaining whether they are in conformity with the contract; and

(b) in the case of sale by sample, of comparing the bulk with the sample.

…”

See also: Halsbury’s Laws of Hong Kong (Vol 355) at §355.182.

64.  As mentioned, Po Lung had admittedly used up all the F2 Materials supplied under the 3 POs in question for manufacturing into its products.  This happened even to the materials delivered under the last of the 3 purchase orders in question after Po Lung’s first complaint about the Defect.  Whilst it might in principle have been entitled to reject the materials by notice instead of actually returning them, it was in fact not in a position to do so when the materials had already been used up in its manufacturing.

65.  It follows that whether or not the Rejection Term was a term of the agreement between the parties, there is no real question of rejection of the materials as such.  It also follows that there is no need to consider the reasonableness of Process’ reliance on the Rejection Term.  In any event, it is doubtful if Po Lung may take advantage of such provisions of the CECO when it dealt with Process in the course of their businesses instead of a scenario of consumer dealings.

PO LUNG’S CLAIM

66.  It follows from the above findings that Po Lung does not have basis for its claim for damages against Process for breach of warranty as to quality.

67.  Further, the claim for damages is problematic.  Po Lung is claiming for the cost of purchasing extra raw materials and extra payment to the manufactory.  Those expenses were incurred for the following purpose:-

(1) For products with urgent shipment schedule, the products had to be shipped.  For those products already packed, Po Lung’s manufactory had to assign factory workers to disassemble all the original packaging, clean the semi-transparent white patches on each product, re-do anti-fog coating on those treated products, re-order packaging materials and re-pack the treated products.  For those products not yet packed, the manufactory had to assign worker to clean the semi-transparent white patches on each products and re-do anti-fog coating on them before packing.

(2) For products without tight shipment schedule so that there was time for re-manufacturing, those defective parts of the products would be stripped out of the products and scrapped, and replacement parts were manufactured for re-assembling the products.  Fully packed products would have to be unpacked first as mentioned in (1) above.

(3) All these rectification works gave rise to extra utilities such as electricity, rental, meals and special allowance for workers.

68.  The problem in Po Lung’s claim for the above extra expenses lies in the fact that Po Lung in fact did not pay for the materials supplied under the 3 POs in question.  If Process is made to compensate Po Lung for such expenses, Po Lung would have earned a windfall to the extent of the cost of the F2 Materials that it had used for fulfilling its contracts with its customers for its products but without payment.  Po Lung should have only been entitled to damages for its loss and damage being the actual extra expenses that it was made to pay as a result of the defective materials (which it had paid for). Credit must be given to the amount that Po Lung would have been liable to pay to Process for such materials.  In view of the finding on liability against Po Lung in its claim, I need go no further in discussing this respect.

THE COUNTERCLAIM

The invoiced amount for the 3 POs in question

69.  In any given case, that the buyer is not in a position to reject or return the goods to the seller prima facie connotes the liability to pay the seller for them.  The right of the buyer would be to claim for damages for breach of warranty of quality.

70.  In the present case, Po Lung contends that it was the agreement between the parties that it did not have to do so.  The alleged agreement was said to be evidenced by the written confirmation issued by Process in March 2016 which was signed by the parties.  The confirmation referred to the 3 purchase orders in question, and contained the following content:-

“以下是有問題貨款，請貴公司提供以下貨款人工及有關費用資料，

另現貨倉尚餘多少以下有問題的貨。此貨款貴司不用付款。

本公司追究權力會追究原材料供應商。

貴司只需付其餘沒有問題的貨款。”

71.  Essentially, Process indeed represented that Po Lung did not have to pay for the F2 Materials under the 3 purchase orders in question, but had to settle the other outstanding balances.  The basis was that Process had the right of recourse against the original materials supplier.  At the same time, Process requested for information about the remaining stock of the F2 Materials as well as the extra labour and other expenses claimed by Po Lung.

72.  In her evidence, Lopes explained that she did come to an agreement with Po Lung on behalf of Process along the above terms.  However, as made clear to Shirley Cheung (“Shirley Cheung”), the person in charge of the transaction on behalf of Po Lung and with whom she had been liaising with, this was premised on the understanding that Po Lung still kept unused stock of the F2 Materials, and that Po Lung would return those unused stock together with the rejected component parts manufactured from the materials to Process.  She made clear to Shirley Cheung that Process would not be in a position to seek recourse from the original supplier of the materials without such return of the materials. Further, both the materials and the component parts with the Defect could be scrapped at a value to mitigate Process’ loss when filing its claim against the original supplier of the materials.  This in my judgment makes sense in the ordinary course of events.

73.  However, the undisputed fact was that contrary to its stance that the written confirmation in March 2016 constituted a binding agreement, Po Lung did not settle the other outstanding amounts owed to Process.  Nor did it supply any information about the unused stock of the F2 Materials to Process.  Reaching no conclusion upon further liaison on the telephone with Shirley Cheung about that, a meeting was therefore fixed to be held at Po Lung’s office on 24 April 2016.

74.  Lopes and Li, Process’ sales manager, attended the meeting on 24 April 2016 with Shirley Cheung and another Mr Cheung of Po Lung.  In their evidence, Lopes and Li gave their account of what were discussed during the meeting, including the stance of Process behind the written confirmation signed in the previous month mentioned above.  The meeting yielded no conclusion, save that Lopes and Li reckoned from the meeting that Po Lung had in fact used up all the F2 Materials in manufacturing its products for export to its customers.  Nor would any part of the rejected component parts manufactured from the F2 Materials returned to Process for scrap.  The premises for their stance reflected by the written confirmation mentioned being lacking, they saw no reason why Po Lung should not pay for the materials supplied under the 3 purchase orders in question.  Hence the letter from Process to Po Lung dated 3 May 2016 mentioned in the background.  Process repeated the demand in that letter through its solicitors on 11 May 2016 after Po Lung’s letter dated 5 May 2016 suggesting that it would leave the matter to its solicitors.

75.  The evidence of Li and Lopes summarized above was not rebutted by contrary evidence, as neither the Mr Cheung nor Shirley Cheung was called by Po Lung as witnesses.  Shirley Cheung, according to Ho, was then her superior at Po Lung at the material time.  No explanation was given for not calling them to testify against the evidence from Process in this respect.  The basis for adverse inference appears: see Ip Man Shan Henry v Ching Hing Construction Co Ltd [2003] 1 HKC 256 at §155.  That aside, I in any event find Li and Lopes to be honest in their evidence, and find what they said to be the facts. In particular, I believe that the readiness of Li and Lopes to accept responsibilities throughout the liaison with Po Lung was premised on maintaining customer relationship, instead of unequivocal admission of defect or liability.

76.  Po Lung relies on the written confirmation as the basis of the alleged agreement with Process whereby Po Lung was absolved from the liability to pay for the F2 Materials and without return of the materials.  Considering the circumstances surrounding that, I find that the confirmation per se falls short of constituting a binding agreement at the time to the effect as alleged.

Interest surcharge

77.  As I find that the Interest Term was not part of the agreed term of the course of dealings between the parties, the basis for this part of the counterclaim is lacking.

ORDER

78.  The claim is dismissed.  Judgment is entered on the counterclaim in the sum of HK$224,910 against Po Lung with interest at 1% p.a. above HSBC prime rate from the date of writ to today and at the judgment rate thereafter until full payment.  Following this event, I make a nisi order that Process shall have its costs of this action, including any costs reserved, to be taxed if not agreed and, for the avoidance of doubt, with certificate for counsel.