MYRIAD ELECTRONICS LTD v. ENITY TECHNOLOGY LTD

cacv 132/2005

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 132 of 2005

(on appeal from hca NO. 822 of 2004)

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J U D G M E N T

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Hon Stock JA:

Introduction

1.  This is the defendant’s appeal from a decision of Deputy Judge Muttrie on 22 March 2005 whereby he gave the defendant leave to defend the plaintiff’s action but on condition that the defendant pay into court within 21 days the sum of US$438,972.  The defendant contends that it should have unconditional leave to defend.

2.  The plaintiff is a company incorporated in Hong Kong and supplies electronic products; and the defendant, also a company incorporated in Hong Kong, is a dealer in such products.  By a writ endorsed with a Statement of Claim dated 7 April 2004, the plaintiff seeks against the defendant the balance of a sum payable in respect of goods sold and delivered, and referred to in an invoice dated 10 October 2003, in the sum of US$440,682.  It is common ground between the parties that that sum is payable, but the basis upon which the defendant seeks leave to defend is in respect of a set-off which it says it has against the plaintiff.

The suggested set-off

3.  In an affirmation dated 14 May 2004, the Chief Financial Officer of the defendant, Mr Krause, asserted that one of its main customers is an American company, Circuit City Stores Inc. (‘Circuit City’), a company that places orders with the defendant for electronic products which then will be mirrored by orders placed by the defendant with the plaintiff.  In that affirmation, there were two suggested causes of action against the plaintiff:

(1)	that there had been an oral agreement that the plaintiff would not directly contact any of the defendant’s clients or entice them from the defendant, but that, in breach of that agreement, the plaintiff had attempted to entice Circuit City which had thereupon placed orders to the tune of US$1 million with the plaintiff, causing the defendant “dramatic loss”; and
(2)	that in January 2004, Circuit City had placed an order with the defendant for 3,000 electronic products which the defendant had then ordered from the plaintiff, but the defendant failed to supply the goods, so that Circuit City cancelled the order, thereby causing loss to the defendant in the sum of US$1,890.

4.  In his second affirmation in these proceedings, dated 14 June 2004, Mr Krause refers, in support of the enticement, or poaching, claim to a document which shows that a company called Gamers Factory (‘Gamers’) has been supplying Circuit City with games accessory products of the type said to be covered by the oral agreement, and Mr Krause asserts that Gamers is “an affiliate or related party to the plaintiff”.  That affiliation is said to be constituted by cooperation between the plaintiff and Gamers to sell the products to Circuit City so that the plaintiff, it is put, thereby breached the oral agreement through Gamers.

5.  Mr Krause then raises an additional matter.  The product which the plaintiff manufactures and which the defendant distributes is a games accessory which goes under the brand name “Liquid Video”, the registered trademark of which is said by him to be owned by the defendant.  Exhibited to the affirmation is a letter dated 13 May 2004 from Circuit City to the defendant, stating that Circuit City has received a notice, dated 6 April 2004, from an environmental law enforcement agent in the United States, a company called Klamath, that certain cords sold publicly by Circuit City with one of the games accessories harbours toxic chemicals which, under a Californian health and safety code referred to as Proposition 65, may not be sold without clear writtenlabelled warnings to residents of California who might buy such products.  By the letter of 13 May, Circuit City required an indemnity in respect of such liability that Circuit City might suffer as a result of the sale of such products in California as were unlabelled.  Exhibited to the same affirmation is also a copy of a proposed consent judgment in California arising in respect of the same problem, but in relation to different parties.  Mr Krause then says that “due to the possible claims against the defendant under the game accessory products manufactured by the plaintiff by Klamath and the possible counterclaim under the order for 3,000 electronic goods the defendant has counterclaims against the plaintiff in the estimated amount of US$4,654,900 which exceeds the claim made by the plaintiff.”

6.  On 28 October 2004, the Master gave unconditional leave to defend.

7.  On 23 November 2004, proceedings were issued in California against Circuit City seeking an injunction as well as damages.  The cause of action is the failure to provide clear and reasonable warnings about the lead content of the products sold by Circuit City in California, and damages in the sum of US$2,500 in respect of each individual exposed to lead and lead compounds from use of the products.  The defendant says that it had no reason to know that the products would contain an excessive level of lead, nor any knowledge of the Proposition 65 requirements, and that it relied on the plaintiff’s expertise in manufacturing these products.

8.  As to the failure to supply the 3,000 items, this is admitted by the plaintiff who says that it is entitled to have done so because of the defendant’s failure to pay the sum due under the invoice.

9.  In answer to the Proposition 65 claim, the plaintiff says that its duties were confined to supplying goods in accordance with the defendant’s instructions, which it did; that the requirements of California law were not drawn to its attention, still less made a condition of sale; and that, further, there is no formulation of the basis upon which the plaintiff would be liable for a Proposition 65 breach.

The judgment below

10.  In his judgment dated 22 March 2005, Deputy Judge Muttrie said:

(1)	in relation to the Proposition 65 claim, that there was no suggestion that there was anything wrong with the goods themselves, as components of electronic games; and that the only complaint was that the requirement for labelling in California had not been met. There was no suggestion that, with such properlabelling, the goods could not there be lawfully sold.  It was in the circumstances, he said, difficult to see how a claim based upon an implied condition of merchantable quality, or upon fitness for purpose, could succeed.  There was no evidence that thelabelling requirement had been drawn to the plaintiff’s attention, nor any suggestion that the plaintiff was somehow relied upon by the defendant as to compliance with provisions of Californian law.  This aspect of the proposed counterclaim could not, therefore, in his judgment, provide a basis for granting leave;
(2)	in respect of the contract for the supply of 3,000 items and the loss of profit therefrom, that this was not disputed, and that the defendant should therefore have leave to defend in respect of that claim for US$1,890; and
(3)	that the claim based on an alleged poaching of clients was ‘shadowy in the extreme’.  There was no evidence from any of the persons who were said directly to have been party to the oral agreement; it was a claim brought merely on the basis that Gamers was ‘an affiliate or related party to the plaintiff’.

11.  In those circumstances, the judge gave the defendant leave to defend conditional upon paying into court within 21 days the sum of US$438,972, being the balance between the amount claimed and the loss of profit admittedly due to the defendant.

The strength of the defendant’s claims

12.  There are two points upon appeal made by Mr Maurellet for the defendant.  He first says that the judge was wrong in finding that the defence was shadowy, and in this regard he concentrates upon the Proposition 65 aspect of the case.  I note that this is not the aspect of the case that the judge referred to as shadowy.  The shadowy set-off in respect of which conditional leave was granted was the allegation of poaching.  But be that as it may, the argument is that by reason of section 16(3) of the Sale of Goods Ordinance, Cap. 26 there was an implied condition that the goods supplied were reasonably fit for the particular purpose which had been made known by the defendant to the plaintiff, namely, the sale of these goods in the United States including, therefore, California.  It is, he asserts, arguable that in the circumstances of this case the defendant reasonably relied on the plaintiff’s skills, aware that the plaintiff had previously supplied goods to Circuit City, and that the goods were not in the event suitable for sale in California.

13.  The burden of showing that there is an arguable defence is on the defendant.  There is no evidence that the defendant made known to the plaintiff that the goods were destined for ultimate sale in California as opposed to other States within the Union, or indeed as opposed to other countries; and it is the fact that Circuit City had outlets throughout the United States and the correspondence shows its headquarters to be in Virginia and, furthermore, Circuit City no doubt engaged in international sales.  But in any event, the gravamen of the claim against Circuit City is not a suggestion that the goods sold did not perform the function for which they were manufactured, but rather that there ought to have been, but was not, appended to the goods a warning label.  There is no evidence that by reason of the lead content in the goods, their sale was prohibited elsewhere in the United States, or that elsewhere the specific lead content of these particular goods required notification to buyers.  What is at issue, therefore, are specific requirements in law of a particular foreign jurisdiction, and there is no basis, in my judgment, upon which it could be implied that the defendant, a sophisticated buying agent for a large company in the United States, relied upon the plaintiff’s skill and judgment as to the law of California; or that the implied term as to merchantable quality arising from the provisions of section 16(2) of the Sale of Goods Ordinance extended so as to constitute an undertaking by the plaintiff that the goods would be saleable in California without the taking of such precautionary steps as might be required by law there; for example the attachment of warning labels: see Sumner, Permain and Co. Ltd v J G Webb and Co. Ltd (1921) 27 Com Cas 105; Teheran-Europe Co. Ltd v S T Belton (Tractors) Ltd [1968] 2 QB 545.  I see no basis upon which we could properly interfere with the judge’s conclusion as to the strength of this claim as presently put.  At very best for the defendant, this claim, too, is shadowy.

14.  As to the poaching claim, it is not now suggested that the judge was wrong in the assessment he made, so we need not address this aspect further, save to say that, in my judgment, the judge’s assessment of that aspect of the claim was clearly correct.

Inability to meet the condition

15.  The second limb of the appeal asserts that the judge, in ordering conditional leave to defend, failed to consider the means or the ability of the defendant to meet the payment condition.  In an affidavit dated 27 May 2005, in support of an application by the defendant to stay execution of the order of the judge pending determination of this appeal, Mr Krause said that he had been advised that if a court were considering granting conditional leave, it should indicate its intention to do so in order to give the defendant an opportunity to file evidence as to means which, he said: “… was not the case here”.  In his skeleton argument, Mr Maurellet also says that: “The learned Deputy Judge appears not to have indicated at the hearing that he was minded to grant conditional leave and in particular that he did not invite submissions from the defendant as to its ability to comply with such a condition”. 

16.  I am not persuaded by these assertions.  It is plain from a transcript which we have of the hearing before the judge on 11 March 2005, that the judge made it perfectly plain that he was considering granting leave but on condition that the sum claimed by the plaintiff be paid into court.  Mr Krause was in court at the time.  The transcript specifically shows the judge asking whether any of the persons in court were “representative of the defendant”, and that counsel for the defendant said: “Yes, my Lord.  Mr Krause is in court”.  In arguing against the suggested condition before the judge, there was no hint that the defendant would not be in a position to pay.  In the circumstances, having intimated what he was minded to do and having heard argument as to why he should not do it – in the body of which argument there was no suggestion of any inability to pay, nor any request for time to consider the suggestion of a conditional leave, nor any request to file evidence when the client was present in court and could have been expected at once to indicate to those acting for him his concern (if he had any), and in the absence of any request to file evidence as to means – it was not, in my judgment, incumbent upon the judge to do more.

17.  The defendant now seeks to place before us evidence as to the company’s means in support of its suggested inability to meet the condition.  Given the history which I have related as to what happened before the judge, the opportunity of the defendant there to raise the question and its failure to avail itself of that opportunity, it is, in the absence of special grounds, not open to the defendant now to adduce that evidence; and there are no special grounds. 

18.  However I will say, although it is not necessary to do so, that we have in any event read the affidavit which asserts an inability to meet the condition, the burden of showing which is on the defendant, and I am satisfied that the defendant has not discharged that burden.  There are significant sums shown to be owing to the defendant, including sums from a holding company, with no explanation as to when the sums are due, what demands have been made for them, and why they are not forthcoming.  Furthermore, as to the possibility of obtaining financial assistance from financial institutions or related or associated companies, all that Mr Krause has been able to say is that: “The defendant’s main problem, at the moment, is simply one of cash flow which we are working actively to sort out.  Indeed I am currently in negotiations with a financial group with a view to moving this forward.  Obviously problems, such as the claim by Circuit City in this action, and the plaintiff’s actions, are not helping and the recent progress in respect of new financing measures has somewhat been endangered by the judgment and the garnishee order, but I am actively trying to overcome these setbacks, and am confident that, given time, I can.  Nevertheless, raising funds necessary to make the payment in was, and still is impossible.” 

19.  It is difficult to envisage a less specific description of attempts to raise financial assistance.  The description that is given, with phrases such as “we are working actively to sort it out” and “actively trying to overcome these setbacks”; with no identification of the financial group referred to; not one detail of the negotiations; no evidence specifying when and how the plaintiff’s actions “are not helping”; no particulars of the “recent progress” – is a description that bears every hallmark of obfuscation and deliberate vagueness.  It does not in my judgment begin to satisfy the onus upon the defendant.

20.  In these circumstances, I would dismiss the appeal.

Hon Tang JA:

21.  I agree.  I only wish to express my appreciation for the written submissions prepared by counsel which have been a great help to me. 

Hon Stock JA:

22.  It follows that the appeal is dismissed.  The costs of the appeal, including the Respondent’s notice, are to the plaintiff.