HUNG WAI PRODUCTS LTD. v. SHUN TAT PLASTIC ELECTRONIC FACTORY LTD.

HCA 10203/1997

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 10203 OF 1997

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J U D G M E N T

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1. The claim and counterclaims in this action have their origin in the world-wide craze for "Tamagochi" (computerised "virtual pets") in 1997.

2. On 5 August that year the Defendant placed a purchase order with the Plaintiff to supply 40,000 electronic integrated circuits ("ICs") and 20,000 liquid crystal display units ("LCDs") to the Defendant which it intended to use for the manufacture of these toys.

3. The Plaintiff's initial claim is on a cheque dated 11 September 1997 drawn by the Defendant in its favour on the Nanyang Commercial Bank Ltd in the sum of $193,340.00, but countermanded by the Defendant. It is the Plaintiff's case that that cheque represented the agreed price of an initial delivery of part of the goods namely 19,000 ICs and 10,000 LCDs which the Plaintiff had agreed to supply the Defendant and had already delivered to the Defendant by 10 September and some goods for a trial production delivered earlier.

4. The Defendant does not dispute that these goods were delivered nor that $193,340 would have been the correct price for such goods. Its defence to the Plaintiff's claim on the cheque is that the Plaintiff had agreed to deliver as an initial delivery not 19,000 ICs and 10,000 LCDs but 19,000 ICs and 19,000 LCDs. And that therefore there was a total or partial failure of consideration for the cheque.

5. The Defendant's counterclaim is based on an allegation that the Plaintiff's breach of agreement to deliver a first instalment of 19,000 ICs and 19,000 LCDs had led to the cancellation of its contract with its US customer. The Defendant claims damages for its loss of profit under its alleged agreement with its customer and return of the deposit of $114,324 (representing 30% of the total order) which it had paid the Plaintiff in August 1997.

6. The Plaintiff maintains that there was no failure of consideration whether total or partial to give the Defendant a defence to its claim on the cheque. Furthermore it denies that there was any breach of agreement with the Defendant and maintains that its initial delivery was in accordance with the instructions received from the Defendant. It alleges that the Defendant breached and repudiated its agreement to buy the balance of goods under the contract between them of 5 August 1997. It claims damages for loss of profit under the agreement but is prepared to give credit for the deposit of $114,324.00 originally paid by the Defendant.

7. As I have already said there is no dispute the Defendant ordered 40,000 ICs (20,000 "chicken" model and 20,000 "dinosaur" model) and 20,000 LCDs by a purchase order dated 5 August 1997 for delivery on or before 5 September 1997 and that a deposit of 30% of the purchase price was paid by the Defendant. The balance was payable "cash on delivery". There is also no dispute that each Tamagochi would require both an IC and a LCD and that therefore the Defendant would have had to have purchased another 20,000 LCDs from another source.

The Plaintiff's evidence

8. It is the case for the Plaintiff that shortly after the placing of the order the Plaintiff had sufficient "chicken" model ICs and LCDs in stock to fulfil that part of the order that related to those items. The Defendant was then approached to take early delivery of these items. The Defendant agreed to accept delivery of 20,000 "chicken" model ICs and 20,000 LCDs but not until 30 August 1997 because of alleged "production arrangements". Later the Defendant asked that it be allowed to take delivery of 1,000 "chicken" model ICs and 1,000 LCDs for a trial production.

9. These were delivered on 21 August and the Defendant was invoiced in respect of this delivery. No payment was required from the Defendant at the time of the delivery.

10. On the same date the Plaintiff issued an invoice to the Defendant in respect of the balance of "chicken" model ICs (19,000) and LCDs (19,000) which the Defendant had ordered. This was done because the purchase price was payable cash on delivery and the invoice was sent in order to enable the Defendant to make arrangements to have the payment ready.

11. By the time this invoice was sent the Plaintiff had received sufficient "dinosaur" model ICs to satisfy the balance of the order but because of the volume of business of the time they did not have sufficient time to deal with this new stock.

12. In the days following the issue of the invoice of 21 August the Plaintiff became increasingly concerned that the Defendant would cancel the order because the market price of the manufacture of Tamagochi products had dropped sharply. The Plaintiff received no reply to their enquiries as to when a cheque for the goods under the invoice would be available. Mr Simon Fung, who dealt with the Defendant said that that Mr Johnny Wong who handled the matter on behalf of the Defendant appeared to be making excuses for not taking delivery. This concern on the part of the Plaintiff increased after the agreed delivery date of 30 August had passed.

13. On 5 September the Plaintiff faxed a letter to the Defendant demanding it take delivery by Monday 8 September or the Plaintiff would make alternative arrangements for the goods. The Defendant replied the same day (5 September) by fax stating because of their production arrangements they wished to collect the sets of IC in two lots. They asked for "10K each for the two models" to be sent them on Tuesday 9 September. They did not refer to the delivery of LCDs.

14. Mr Liu Yim Hung sought clarification as to why the Defendant should be seeking 10,000 of each model when 1,000 "chicken" model ICs had already been supplied. On 8 September 1997 the Plaintiff received a message from the Defendant confirming that the Defendant would take delivery of "19,000" not before Wednesday 10 September but would require "half each 9,000 chicken and 10,000 dinosaur".

15. Mr Liu of the Plaintiff believing that the reference to "half each" referred to half of each item in the purchase order invoiced the Defendant by a faxed invoice dated 8 September 1997 in respect 9,000 "chicken" model ICs, 10,000 "dinosaur" model ICs and 10,000 LCDs.

16. This invoice of 8 September was followed by telephone confirmation from the Defendant that the Defendant was ready to take delivery and had prepared a cheque.

17. It is the case for the Plaintiff that following the faxing of the invoice on 8 September the Defendants raised no objection to the quantities of goods specified in that invoice.

18. Consequently on 10 September the goods specified in that invoice were delivered to the Defendant. The Defendant acknowledged receipt by chopping the invoice that accompanied the goods and gave the Plaintiff the cheque for $193,340.00 that is the subject to this action. It was dated 11 September 1997 i.e. the following day. This cheque was in payment of the invoice for the goods delivered on 10 September ($182,413.00) as well as the invoice for the earlier deliveries of 1,000 chicken ICs ($8,127.00) and 1,000 LCDs ($2,800.00).

19. Upon presentation the following day the cheque was dishonoured as payment had been countermanded by the Defendants.

20. As a result Liu Yim Fung and Simon Fung of the Plaintiff went to the Defendant's office. They saw Mr See Hung Wah and Mr Lam of the Defendant. They were simply told that as the Defendant's customer had cancelled the order the Defendant did not want the goods and they would be returned. There were no suggestion at this meeting that the Plaintiff had been at fault.

21. It was not until several days later that the Plaintiff received a memo from the Defendant dated 16 (or 18) September complaining that since the Plaintiff had only supplied 10,000 LCDs instead of the 20,000 LCDs allegedly agreed as a result their customer had cancelled its order. The memo purported to cancel the remaining order for 10,000 LCDs.

22. It was the Plaintiff's evidence that, had the Defendant required the additional 10,000 LCDs, they could have supplied them as they had a large stock. Indeed they could have supplied the 20,000 LCDs as early as 21 August.

23. As a result of the Defendant's cancellation of the order they mitigated their loss by selling the balance of 9,000 LCDs and 10,000 "dinosaur" model ICs on the market for a price of $61,420.00.

The Defendant's evidence

24. The evidence for the defence came not from Mr Johnny Wong, their salesman who had direct dealings with the Plaintiff nor from Mr Ronnie Siu, the salesman for their associated company who dealt directly with the customer in the United States but from Mr See Hung Wah, the assistant general manager of the Defendant, who claimed to have knowledge of these transactions by virtue of his position and in particular his discussions with Johnny Wong.

25. Mr See's evidence was that following the purchase order of 5 August 1997 and payment of the deposit to the Plaintiff, their associate company, Catic Electronic Ltd had contracted to supply 38,000 manufactured Tamagochi to a US customer, Kin Image Inc of Los Angeles. Their invoice to Kin Image dated 9 August 1997 was in the sum of US$136,800.00 Mr See did not dispute that 1,000 "chicken" model ICs and 1,000 LCDs had been delivered on 21 August, to start a pilot production. He alleged however that despite the fact that the Defendant had ordered 20,000 ICs and 20,000 LCDs from the Plaintiff the Plaintiff had unilaterally sent them an invoice of 21 August in respect of 19,000 chicken ICs and 19,000 LCDs. In response Johnny Wong had replied by an alleged fax dated 22 August reminding the Plaintiff that they had ordered 40,000 ICs and 20,000 LCDs to be delivered together, but insisting if they could not be delivered together then at least 20,000 "sets" be sent by 25 August otherwise their customer might cancel its order. (It is the Plaintiff's case that this fax was never received.)

26. The Plaintiff then failed to make any delivery on 25 August or indeed on 30 August, the delivery date in the Plaintiff's invoice dated 21 August.

27. Following the fax of 5 September 1997 from the Plaintiff requesting the Defendant to take delivery on 8 September 1997 Mr See said that Johnny Wong had sent a memo of 5 September 1997. He said that the meaning of that memo was that Johnny Wong was asking for both the ICs and LCDs to be sent in two lots in sets of 10,000 on 9 September.

28. On 8 September Johnny Wong had clarified that 9,000 "chicken" and 10,000 "dinosaur" should be delivered on 10 September.

29. When the invoice was received from the Plaintiff on 8 September 1997 indicating that they would deliver 9,000 "chicken" ICs, 10,000 "dinosaur" ICs and 10,000 LCDs on 10 September, Mr See alleged that a call had been made to the Plaintiff insisting on delivery of 9,000 more LCDs as a result of which the Plaintiff had faxed them the same day an invoice for a further 9,000 LCDs.

30. Despite the sending of this further invoice the Plaintiff had failed to delivery the further 9,000 LCDs on 10 September but only the 19,000 ICs and 20,000 LCDs. Indeed the Plaintiff had merely tendered a copy of the invoice of 8 September 1997 referring to the 19,000 ICs and 10,000 LCDs as a delivery note. The cheque had then been given to them.

31. When their factory in China confirmed the following day 11 September that 9,000 LCDs were missing Johnny Wong had sent a fax complaining that "10,000 LCDs" had not been delivered. (The Plaintiffs say that they never received such a fax.)

32. It was a result of the Plaintiff' s failure to deliver the goods on time that the United States customer had cancelled its order leading the Defendant to suffer the loss alleged.

Assessment of the evidence

33. There is obviously a marked difference in the account of the Plaintiffs witnesses and that of the Defendant's witnesses as to these transactions.

34. If I accept the Plaintiff's witnesses evidence then they were facing a reluctant customer, with whose instructions they complied.

35. On Mr See's account on the other hand, the Plaintiff knowingly failed to comply with their obligations to deliver the quantities of LCDs specified by the Defendant resulting in loss if not to them directly then to their associate company, Catic Electronic Ltd.

36. The preliminary issue for this court is therefore one of assessing the credibility of the evidence I have heard.

37. In addition to Mr Liu Yim Hung a director of the Plaintiff, the Plaintiff was able to call the person who had direct dealings with the Defendant company, Mr Simon Fung. That was not the case in so far as the Defendant was concerned. Neither Johnny Wong who had direct dealings with the Plaintiff on the Defendant's behalf, nor Mr Ronnie Siu who dealt with the US customer was called. It was alleged that since leaving the Defendant company they could not be located. I did not get the impression when listening to Mr See's evidence that much effort had been expended in attempting to locate them.

38. Mr See had made an affidavit in O. 14 Proceedings that the original order was for 40,000 ICs and 40,000 LCDs, a contention that the documentation made untenable. This fact did not enhance his credibility or confidence in his familiarity with this transaction.

39. I found the Plaintiff's witnesses to be open and frank. Mr Simon Fung's recollection of this transaction was not as detailed as that of Mr Liu Yim Hung. That is understandable in view of the fact that Mr Fung was a freelance salesman whereas Mr Liu is a director of the Plaintiff company. Mr Liu struck me as a particularly impressive witness. I had no hesitation in accepting his evidence that he wanted to make as early delivery as possible to the Defendant and had therefore sought and obtained the Defendant's consent to such early delivery. He had sought their agreement to accepting 20,000 "chicken" model ICs and 20,000 LCDs as soon as he had the necessary stock. At the Defendant's request he had delivered 1,000 "chicken" model ICs and 1,000 LCDs for a trial production on 21 August and the Defendants had agreed to accept the remaining 19,000 chicken ICs and 19,000 LCDs on 30 August.

40. I find that he acted entirely reasonably when he received the Defendant's somewhat ambiguous memos of the 5 September and 8 September 1997. Neither memo made any express reference to delivery of LCDs. His decision to send half the total order of 20,000 LCDs on 10 September was in my view reasonable. I believe his evidence that he had received no complaint from the Defendant company about the Plaintiff's invoice of 8 September between the time the Plaintiff had faxed it to them and the time of delivery on 10 September. I accepted his evidence that the faxed invoice relating to 9,000 LCDs apparently sent to the Defendant later on 8 September was not in response to a request from the Defendant for that quantity of LCDs. I noted that that invoice did not bear a delivery date. I accepted his explanation of the circumstances in which a clerk in the accounts department might have sent that invoice. Moreover, I accept that he had ensured that a cheque drawn by the Defendant would be available for what he was intending to have delivered on 10 September. He was entitled to assume bearing in mind that he had received no objection from the Plaintiffs to his invoice of 8 September and the fact that he had received an assurance that a cheque would be available in payment of that invoice that he was delivering what the Defendant wanted.

41. I also believed his evidence that the Plaintiff had ample stock of LCDs available on 10 September if the Defendant had made a request for a further delivery. His evidence that the Plaintiff had adequate supply of LCDs is reinforced by the fact that the Plaintiff invoiced the Defendant in respect of 19,000 LCDs on 21 August and indeed sent a fax on 5 September insisting that the Defendant take delivery on 8 September. I do not believe he would have done this if there had been a possibility that the Plaintiff would not have sufficient stocks to satisfy the order. Moreover the invoices from the Plaintiff's supplier, Cityroy Industrial Company support this evidence.

42. I did not find Mr See a convincing witness. His evidence provided no convincing explanation as to why if the Defendant was pressing for delivery, it should have been necessary for the Plaintiff to send its fax of 5 September insisting that the Defendant take delivery of the goods under invoice no. 970855P. If as the Defendant suggests it wanted equal numbers of ICs and LCDs, why should matters have reached a stage when the Plaintiff was insisting they take delivery of exactly that?

43. Furthermore, I was not convinced by Mr See's explanation as to why if he believed that the Plaintiff was going to deliver 19,000 LCDs on 10 September, the Plaintiff should have been given a cheque in a sum which reflected a payment for 10,000 LCDs. His explanation is that it was simply a case of the accounts department drawing a cheque on the basis of the receipted invoice. I think it most improbable that the accounts department would draw a cheque in a sum of that magnitude without confirmation from those dealing with the transaction in the company that the goods supplied were in accordance with the contract. I accepted the evidence of Mr Liu that the Defendant would have been contacted before delivery was effected in order to ensure that a cheque in the appropriate sum was available.

44. I believed Mr Liu's evidence that he had never received the memos allegedly sent by the Defendant on 22 August and 11 September. They are curious documents. The first memo ignores the fact that 1,000 "chicken" model ICs and 1,000 LCDs had been delivered to the Defendant the previous day at their request. This inter alia belies the statement in that memo that "our request is for 40,000 ICs and 20,000 LCD displays to come together". The number of goods referred to in the second memo do not correspond to the deficiencies they now allege. The contents suggest that both memos were written by someone unfamiliar with the state of affairs existing between the Plaintiff and the Defendant at the time they were purportedly sent. Bearing in mind that the Plaintiff in its letter of 5 September insisting that the Defendant take delivery by 8 September had alleged that the Defendant had failed to reply to the Plaintiff about the date of delivery, I find it strange that the Defendant would not have referred to their memo of 22 August when they replied in their memo of 5 September if the memo of 22 August had in fact been sent. I view these documents with considerable suspicion.

45. I view the correspondence allegedly between Catic Electronic Ltd and Kin Image with equal suspicion. Kin Image's order was for 38,000 manufactured Tamagochi but Catic's memo of 23 August 1997 refers to them insisting on 40,000 "ICs". Even if Ronnie Siu may have temporary forgotten the number of goods ordered, one would not expect him also to forget what it was that Kin Image had ordered. Still less would one expect Kin Image itself in its memo of 23 August to be mistaken as to the quantity of its order.

46. The correspondence allegedly between Ronnie Siu of Catic Electronic Ltd and Kin Image dated 11 September 1997 gives rise to still greater suspicion which due to the absence of Mr Siu cannot be dissipated.

47. It must be borne in mind that it was Mr See's evidence that the Defendant's cheque to the Plaintiff was not countermanded until 11 September and it was a result of the cancellation of the contract by Kin Image as a result of the Defendant's breach. It would also appear from Mr See's evidence that the Hong Kong office did not receive confirmation of the Plaintiff's alleged short delivery until Mr See received the telephone call from their factory in China on 11 September. Even Mr See was forced to concede that the memo dated 11 September from Kin Image in Los Angeles purporting to cancel the contract would not have been received by the Defendant until 12 September due to the time difference. That memo therefore cannot account for the countermanding of the Defendant's cheque on the 11th. Mr Lee was therefore forced to postulate a possible earlier telephone call between Ronnie Siu and Kin Image to which Kin Image's memo of 11 September makes no reference. In addition to this, there is the factor of the curious reference numbers on the correspondence to which Miss Lee has referred me.

48. I find myself unable to find on balance of probabilities that it was the cancellation of an alleged contract with Kin Shing with which Kin Image that led to the countermanding of the Defendant's cheque.

49. In the light of my above findings I am satisfied that the Plaintiff was not in breach of its contractual obligations to the Defendant. I am satisfied that in drawing the cheque for $193,340.00 to cover the invoice of 8 September, the Defendant was aware of what was being delivered and accepted such delivery.

50. I find that there was no failure of consideration for the Defendant's cheque which is the subject to the Plaintiff's claim.

51. I accordingly give judgment for the Plaintiff on this claim in the sum of $193,340.00.

52. I find that the Defendant's counterclaim based on alleged breach of contract by the Plaintiff fails. I dismiss the Defendant's counterclaim.

53. In so far as the Plaintiff's counterclaim is concerned I am satisfied that the actions of the Defendant in i) countermanding the cheque on 11 September; ii) informing Mr Liu and Simon Fung that their client had cancelled the contract and that therefore they did not require the Plaintiff's goods; and iii) sending their letter of 16 September (or 18) September amounted to a wrongful repudiation of their contract with the Defendant for the supply of 40,000 ICs and 20,000 LCDs.

54. The contract price for the goods not yet delivered was $187,740.00 ($381,080.00 - $193,340.00). The Defendant has not disputed that if the Plaintiff was obliged to mitigate its loss it did so reasonably by selling the remaining 9,000 LCDs and 10,000 dinosaur model ICs for $61,420.00 resulting in a loss of profit of $126,320.00. Giving credit for the Plaintiff for its deposit of $114,324.00, I give judgment for the Plaintiff on its counterclaim in the sum of $11,996.00.

55. I order that the Defendant pay interest on the sum of $193,340.00 at the rate of 12% per annum from 11 September 1997 until today and thereafter at judgment rate until payment. I order that the Defendant pay interest on the sum of $11,996.00 at 12% from 26 September 1997 until today and thereafter at judgment rate until payment.

56. I make the following order nisi as to costs that unless either party applies to be heard on the question for costs within 14 days from today, the Defendant do pay the Plaintiff's costs of this action to be taxed if not agreed.