FASTWAY TECHNOLOGY LTD v. S.H.T. ELECTRONIC TECHNOLOGY CO LTD

HCA 575/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 575 OF 2011

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JUDGMENT
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BACKGROUND

1.  At the material times, the Plaintiff was carrying on the business of developing technological products and the Defendant was a manufacturer, with its associate factory situated in Mainland China.  By this action, the Plaintiff claims against the Defendant for damages allegedly caused by the Defendant’s failure to deliver goods on time and refusal to produce the goods ordered.  The Plaintiff also sues for damages for the Defendant’s refusal to return the Plaintiff’s integrated circuit (“IC”) components stored in the Defendant’s premises.

2.  The Defendant counterclaims against the Plaintiff for unpaid purchase price.

3.  At trial, both parties were acting in person.   The Plaintiff was represented by Mr Rund, the owner of a US company Shake Awake LLC, the sole director and shareholder of the Plaintiff. The Defendant was represented by Mr Tsang, a director of the Defendant.

4.  Initially, both parties were legally represented. Before the end of pleadings, the Plaintiff chose to act in person.  At the PTR stage, the Defendant also chose to act in person.

5.  The parties’ respective cases, especially the Plaintiff’s case, were not presented satisfactorily in their witness statements, not to mention in the pleadings.  Besides, the parties’ witnesses did not focus on issues in their oral testimonies and the documentary evidence exhibited was not referred to in an organized way.

6.  At trial, only Mr Rund gave evidence for the Plaintiff and two witnesses, namely Mr Zhang and Ms Yang, both the then employees of the Defendant, gave evidence for the Defendant. However, Mr Tsang, who was the most senior staff member involved in the dealings between the Plaintiff and the Defendant, did not give evidence or file any witness statement.

7.  The parties did not set out in detail the essential facts in the witness statements.  Mr Rund’s witness statement put too much emphasis on how unreasonable he thinks the Defendant conducted the present proceedings which is, in my view, not of assistance in determining the issues in the present case.  Similarly, the Defendant’s witnesses only set out briefly the basic facts without going much into the details.

8.  After hearing the evidence of all the witnesses, I must say none of them impressed me as a wholly reliable witness and some aspects of their testimonies obviously do not sit well with the documents or email correspondences. With this observation, I resorted to dig out the facts from the contemporary email correspondences between the parties at the relevant time, that is, between February 2010 and September 2010, in order to understand better the real issues between the parties and what led to the present disputes.

THE PLAINTIFF’S CASE

9.  The subject matters of this case concern 5 purchase orders[1] issued by the Plaintiff to the Defendant for manufacturing of the Plaintiff’s products. 

10.  The first two purchase orders (P10-010 (incl.P10-017) & P10-011 dated 18 May 2010) were for production of the Plaintiff’s “Shake Awake” alarm clock (“SA3.2”) and “Triple-bel” timer (“1.12”).  

11.  For SA3.2, in gist, the Plaintiff’s complaint is that the Defendant has mistakenly ordered a wrongly designed LCD for production of the alarm clock that rendered the redevelopment of a new IC necessary, and the Defendant failed to place the order for the redevelopment in time that caused the delay in production.

12.  Regarding 1.12, the Defendant has delayed in production and refused the delivery of the goods.

13.  The remaining 3 purchase orders (P10-013, P10-014 & P10-016 dated 20 June 2010) were for the production of the Plaintiff’s other timers (model 1.7 and 1.10).  The Defendant unilaterally refused to start production notwithstanding deposits had been paid by the Plaintiff in accordance with the parties’ contract.  The Defendant unreasonably insisted on the Plaintiff’s agreement to pay for the full purchase price before delivery which is a variation of payment term of the agreement governing the general terms of the contract between the Plaintiff and the Defendant.

14.  In the Plaintiff’s case, a written agreement was signed by the parties stipulating the general terms of the business relationship between them.  The agreement was dated 3 February 2010 and titled as “Manufacturing Agreement” (“MA”).  

15.  In relation to the Plaintiff’s claim for the return of the IC components, in April 2010, a large bulk of IC components was arranged to send to the Defendant’s warehouse in Shenzhen from the Plaintiff’s previous manufacturer which are still retained by the Defendant as at today.

THE DEFENDANT’S CASE

16.  The Defendant says the Plaintiff has never signed or returned the MA and the terms in it are therefore not binding.  The Plaintiff has agreed, by Mr Rund, orally in a meeting to pay the full purchase price of the goods before delivery.  Mr Rund has also orally agreed to conduct inspections on the goods before bulk production and delivery but he has failed to do so.

17.  Concerning the products SA3.2, the delay of delivery was due to the delay in the supply of IC by the Plaintiff’s designated IC supplier and therefore it was the Plaintiff’s responsibility. 

18.  For 1.12, the delay was due to the Plaintiff’s failure to provide packing information and conduct inspections.  The Plaintiff also refused to pay the balance of the purchase price before shipment.

19.  The 3 purchase orders were cancelled because the Plaintiff did not confirm its agreement to the proposed delivery date.

20.  The Defendant admits that they are still retaining the Plaintiff’s IC components but they are retaining them as a lien for the unpaid purchase price.  The Defendant also says that a small part of the IC components were used in the production of the Plaintiff’s products and the bulk is now of not much worth in value. 

THE EVIDENCE

21.  The history of the present dispute can be gathered from the email exchanges between the parties during the relevant period.

How the business relationship starts

22.  In late 2009, Mr Rund started communicating with the Defendant by email, exploring the possibility of engaging the Defendant as the Plaintiff’s manufacturer.  It appears that the Plaintiff was then having issues with its previous manufacturer and trying to find a new one.  After some negotiations between Mr Rund and Mr Tsang, apparently by emails and also in a meeting at a hotel in Shenzhen, the parties were interested to develop an on-going business relationship.  

23.  In or about January 2010, Mr Rund sent to the Defendant a draft written agreement for consideration.  As appeared in the email[2] exchange on 1 February, 2010, the Defendant proposed certain terms for payment and the Plaintiff revised the draft agreement accordingly.  The term of payment was revised to “30% deposit paid before production, 70% balance paid within 30 days after shipment.”  This is indeed the same term as stipulated under the MA.

24.  The Defendant signed the revised draft agreement on 23 February 2010 and two original copies of the signed agreement were sent to the Plaintiff by courier, for signature and return[3].

25.  On 2 February 2010, the Defendant, through Ms Yang (“Susan”), gave quotations to the Plaintiff for production of the Plaintiff’s timers by email[4]. The quotation has expressly excluded the price of the IC and it was stated in the email that the IC was to be provided by the Plaintiff.

26.  In between late February and early April, the parties discussed through emails the production of SA3.2 and Series 1.12.  In an email[5] dated 7 April 2010,  The Defendant gave the final quotes to the Plaintiff as below:

“Dear Richard,

Thanks for your kind email.

We are glad of the start for SA and double time timer.

We are discussing with our LCD supplier now, we are checking for the LCD sample time and truth table, and also the LCD cost, we will feedback to you and Joy asap. Please noted.

By the way, in order to clarify all details before our cooperation and processing, could you confirm for us as below:

1. Price for SA and double time 1.12:

1.12 – Unit price: USD2.65/2K, USD2.58/5K, USD2.52/10K (FOB Shenzhen) Price term: do not include IC, based on color box packing as sample;

SA – Unit price: USD3.20/2K, USD3.11/5K, USD3.05/10K (FOB Shenzhen) Price term: do not include IC, based on blister packing as sample;

2. Please advise the order quantity for first order for these two model.

3. Payment term: 30% deposit be paid before production once order confirmed, 70% balance should be paid within 30 days after shipment. (SHT may delay shipment as the same number of days that deposit payment delayed).

4. For IC of these two model, the price and payment you discussed with Joy directly, we can help you to place order and arrange payment to Fully Logic, it says the order is how much money, then you transfer how much money to our account according to the invoice from Fully Logic.

Please confirm by returned email.

Thanks with best regards.

Susan”

27.  Although no confirmation email from the Plaintiff can be found in the email records as disclosed by the parties, there is no suggestion that those terms were not agreeable by any party.  The names “Joy” and “Fully Logic” (“Fully”) were mentioned in the email.  Fully Logic was the company engaged by the Plaintiff for development of the IC and Joy was working at Fully.

28.  It is noteworthy that the payment term expressed in the email is the same as what was stipulated in the MA.

29.  Yet, in an email[6] from the Defendant to the Plaintiff on 23 April 2010, the Defendant proposed a different payment term.  Ms Yang wrote:

“Now we have problem of our floating fund, we would like to request the payment term as: 30% deposit + 30% before shipment + balance paid within 30 days after shipment.”

30.  However, the Plaintiff did not agree.  In reply to this specific request, Mr Rund made the following remark[7]:

“Susan, we have an agreement. Are you now not honoring this? This is not a good sign!”

31.  There was no mentioning on the payment terms on correspondences until the Plaintiff issued the 2 respective purchase orders, namely F10-010[8] and F10-011[9], both dated 18 May 2010.  It was printed under the column “Terms” the words “30% Deposit, Balance 30 days”.  The only reasonable interpretation of the words is that a 30% deposit is to be paid then and the remaining balance of 70% purchase price is to be paid within 30 days from shipment, which is the same payment term as in the MA.

The MA and the alleged oral agreement on payment terms

32.  It is to be noted here that, as pleaded in the Defendant’s Re-Amended Defence, on or about 17 May 2010, Mr Rund agreed in a meeting with Ms Yang that the payment term be changed to “30% deposit before placing the orders and paid 70% of the purchase price before final shipment”.  Mr Rund denied he has ever agreed to change the payment term.

33.  There was no mention of this alleged change of payment term in any email correspondences or otherwise between the parties.  Except that in the proforma invoices[10] issued by the Defendant, such payment term was stated.

34.  I am unable to accept there was such an oral agreement to alter the payment terms.  There has been many email exchanges between the parties during the relevant period and there was simply no reason for the parties not to mention at all such changes.  The reason given by the Defendant’s witnesses for insisting on such changes was that they learnt from others that the Plaintiff has a poor record of honoring payment.  In that case it would be all the more important to document such an agreement to prevent Mr Rund from not honoring his words.

35.  The Defendant had proposed the change of payment terms, which was less favorable than the final terms agreed by the Plaintiff as they alleged, because “they have problem of their floating fund”.  And that was rejected by the Plaintiff.   It would be strange that the Plaintiff would, without reason, agree to a change much disadvantage to him after a month.

36.  I find as fact that there was no such oral agreement to change the payment terms as alleged by the Defendant.

37.  As mentioned above, it is also the Defendant’s case that the MA was not binding as is has never been signed and returned by the Plaintiff. 

38.  First of all, the purpose of the MA was to govern the general contract terms between the parties.  It does not oblige any party to place any particular order or accept any particular order.  Each order shall be treated as a separate contract between the parties and there can be different terms on any aspect provided that such terms are agreed by the parties.  The function of the MA was to provide the usual terms such that the parties are not required to negotiate each and every time when there is a new order. 

39.  Therefore, if there is a term agreed upon by the parties in respect of a particular order which is inconsistent with the terms under the MA, the newly agreed term is still valid.  The relevance of the MA is limited to this extent.

40.  Ms Yang gave evidence that she has reminded Mr Rund to return the signed MA many times but he did not respond.  Mr Zhang said the Defendant could do nothing but to ignore the MA. 

41.  I do not believe. Apart from the email informing the Plaintiff that the Defendant was to send the signed original copies to them, there is no other email sent by the Defendant asking the Plaintiff to return the signed copy. 

42.  Mr Rund had in the emails referred to the terms agreed under the MA and the Defendant had never suggested the MA being not binding, until after the disputes arose. 

43.  I find it is more probable that Mr Rund had signed and returned the MA to the Defendant.  Even if Mr Rund had not done so, I am of the view that the parties had intended that the MA was to be binding upon them, at the time when the Plaintiff received the signed MA from the Defendant, or soon thereafter.

Causes of the delay

44.  Pursuant to purchase order PO-10-010, the Defendant is to produce 12,000 units of the Plaintiff’s 1.12 timer at a price of USD2.48 each. The shipment date is 17 July 2010.  As for purchase order PO-10-011, the Defendant is to produce 10,000 units of the Plaintiff’s SA3.2 alarm clock at a price of USD3.24 each.  The shipment date is also 17 July 2010.

45.  As at 3 June 2010, the production status of 1.12 and SA 3.2 is reported by the Defendant as follows:

“Dear Richard,

The production status as below:

1. 1.12 LCD sample will be ready at June 5, we will approve before June 8, the production will be finished at July 8. SA3.2 LCD production will be ready at July 5. Please noted.

2. IC: SA3.2 IC will be ready at June 16, 1.12 use FTL stock MS-1130.

3. We agree to pre-produce for PCBs and loaded with components, we are preparing components now, we plan to start production for PCBA (as bonding welding and mounting) at July 3. We think July 17 is the earliest delivery time, because of this is the first mass production, there may be some problem and with high defects, we need time for assemble, for quality control and QC etc.

4. Plastic part: This morning, regarding payment term, you confirmed that you will sort it out with NS later, and requested us order from NS for this order. We will place order to NS tomorrow, Steven visit NS this afternoon, and we will confirm the plastic delivery with NS asap.

5. Battery: Please confirm if you need battery with Ibon logo or not for this two order (1.12 F10-010 & SA3.2 F10-011)? If not, we will use East Power Carbon battery.

6. Plastic printing: please advise the plastic case silk printing both for order 1.12 F10-010 & SA3.2 F10-011.

7. Packing: Please send us the artwork for the color box for order 1.12 F10-010 & SA3.2 F10-011. Prices for these two order are based on printed color box packing.

We are looking forward to your confirmation.

Thanks with best regards,

Susan”

46.  On 8 June 2010, Ms Yang informed Mr Rund by email[11] that there was a problem on the LCD production by the LCD supplier, the delivery date on 17 July 2010 has to be delayed.   

47.  On 15 June 2010, Ms Yang advised Mr Rund by email[12] that the updated delivery date for 1.12 and SA3.2 is 30 July 2010.  In the same email, Ms Yang also advised that the delivery date for products 1.7 and 1.10 is “70 days after order confirmed”.

48.  The new delivery dates were eventually accepted by Mr Rund.

49.  Regarding 1.7 and 1.10, Mr Rund had once requested the Defendant to explore other LCD suppliers for a shorter production time.  However, Ms Yang advised that the production time given by the present supplier (Baosheng) is already the shortest one.  By an email[13] dated 16 June 2010, Mr Rund told the Defendant to go ahead with the order.

50.  On or about 20 June 2010, the Plaintiff sent by email the purchase orders of 1.7 and 1.10 to the Defendant.  But there was no company chop bearing on it.  Mr Rund advised in the email that he will chop the purchase orders later and explained that the chop is only required to prevent his staff from issuing unauthorized purchase orders.

51.  In late June 2010, Mr Rund inspected the LCD sample for production of SA3.2 and discovered that it has a 6-digit display, which is incompatible to the IC developed by Fully which is intended for a 4-digit LCD.  In an email[14] dated 30 June 2010 to Ms Yang, Mr Rund wrote:

“Hello Susan,

It was always intended that SA would have a 4-digits LCD. We could accept the mistake of preparing a 6-digits LCD if the accuracy of seconds could be set in a user friendly way. Due to limitations in the design of the software this is not possible. If it was intended by SHT that 6-digits would be used there should have been a provision in the software for the setting of seconds. We are close to being out-of-stock on this item. Please advise best solution.

2. Please confirm delivery time tomorrow of packaging (inner/outer boxes plus 2500 ea. White boxes w/label, lenses and AG13 batteries.

3. To avoid a repeat of the SA3.2 LCD mistake, please send drawings of 1.12 and 1.7 LCDs.

With thanks,

rr”

52.  On 1 July 2010, Ms Yang replied[15] by suggesting to re-develop the IC instead of ordering new LCDs to avoid further delay, and that the parties are to share the additional costs incurred:

“Dear Richard,

Attached please check the drawing for 1.12 LCD production. Please confirm.

For 1.7 LCD, we have not start for this model as we have not received your official purchase order with your sign & company chop. Please noted.

For 77.24 packing material, we have sent to your HK office this afternoon, you will received tomorrow, please noted.

For S3.2 LCD, We have checked with Baosheng today, they said the production (10Kpcs) nearly finished, already cutted, printed, only the liquid crystal have not filled in. Also attached please find the LCD drawing from Baosheng for this model, please check.

We would like to advise:

1. Could you advise that for future SA3.2 orders, you will make LCD 4 digits or 6 digits, if future use 6 digits then it is not sensible that make a new 4 digits LCD now.

2. We think make a new IC (6 digits and second can be set to zero when alarm or timer mode) is the better way, as make new IC only need 25- 30 days, we can arrange shipment for SA3.2 at Aug 10, but in this way, need to pay masking cost RMB10000.00, and need to order 10K IC again, the finished 10K IC can be used for future 1.12 orders.

3. If you want to have SA3.2 with 6 digits in future, you still must to re-masking again, because of the second now cannot be set to Zero.

4. We would like to suggest, that both S.H.T and FTL share the responsibility of the mistake for SA3.2 LCD together.

We are looking forward to your comments.

Best Regards,

Susan”

53.  It is noted that in this email, Ms Yang also informed Mr Rund that the Defendant has not started preparing production for 1.7 and 1.10 because the purchase order sent by the Plaintiff did not bear a company chop.  In response to this Mr Rund wrote[16]:

“1.7 - [It] is no[t] acceptable why this LCD was not ordered or why you did not mention to me that you were holding production pending a ‘chop’. I explained to you in email that the ‘chop’ was required only if a[n] employee was issuing a PO to SHT. Even so, if this is the reason you held production why did you not ask me to ‘chop’ the PO when I was in your office last week?”

54.  I share Mr Rund’s sentiment that “waiting for a chop” should not be the real reason for withholding production.  Mr Rund has expressed to the Defendant many times in emails that he needs the 1.7 timers urgently for supply to his customers in the U.S.  Mr Rund has also made clear that the chop was required only to prevent his staff from issuing unauthorized orders.  It is absurd that the Defendant would withhold production only to wait for the chop.

55.  In fact, on 9 July 2010, without waiting for the Plaintiff’s chop on the purchase orders, the Defendant acknowledged the Plaintiff’s orders for 1.7 and 1.10 and asked for payment of 30% of the purchase price as deposits.  In the same email[17], the Defendant attached the proforma invoices[18] for the orders.  The payment terms under the proforma invoice are different from the MA in that the 70% balance of purchase price shall be paid before shipment.

56.  On 12 July 2010, Mr Rund sent an email[19] to the Defendant, complained about the lack of project management on the Plaintiff’s orders:

“Dear Susan, Steven, and John,

I came to your office last week to seek a solution to the lack of project management of FTL’s production because of several unnecessary errors and oversights. It is very rare that I will send a message flagged as HIGH IMPORTANCE! so please pay attention to what has happened.

I placed orders with SHT for 1.7 and 1.10 on 20 June 2010 with delivery confirmed for 29 August 2010. I explained the urgency of these orders and advised FTL’s customers of this ship date.

As you know, SHT had made a serious error ordering the LCD for SA3.2. When I discovered this last week (or the week before, I forget) I asked SHT to also provide the drawings for 1.12, 1.7 and 1.10 to make sure errors were not repeated.

To my shock, I discovered that no effort was made to even order LCD’s for these orders. Not only that, but no drawings have even been prepared. I am now told that delivery will be delayed again because of this but ship date is still not confirmed.

It will be necessary now to airfreight these orders to my customers. Please advise how SHT will handle this necessity and what procedures will be put into place to prevent these errors from happening in the future.

Regards,

Fastway Technology Ltd.”

57.  It is apparent from the above email that at that point of time the relationship between the parties has deteriorated.  In my view, it is attributable to, on one hand, Mr Rund was desperately eager to ascertain the shipment dates of the goods ordered so as to ease his clients’ concern but, on the other hand, the Defendant was reluctant to proceed further, in particular the production of SA3.2 and 1.7 and 1.10, without having the Plaintiff first committed to bear half the responsibility of the mistake made on the production of the LCDs and to pay the 30% deposits for the new orders.

58.  In response to Mr Rund’s email[20], the Defendant reiterated that they were waiting for the Plaintiff to put their chop on the purchase orders and indicated that they will start production only after receiving the 30% deposits.

59.  In the subsequent email exchanges, Mr Rund queried why the Plaintiff has to bear any costs for the re-development of the IC and pressed on with the Defendant for confirmation of delivery dates.  

60.  On 14 July 2010, the Defendant wrote to the Plaintiff:

“This morning John inform me that your request and worrying. Also herewith I would like tell some my worrys.

For SA3.2 order, we are preparing the material and production, but have stopped prepare material for production now as the revised IC have not confirmed. We think we are not in the position to confirm the function of IC.

Please contact and confirm with Joy, Johnson told me yesterday Joy’s engineer said they also not clear about your requirements, they also has doubts. Our delivery is depend on the delivery of IC and plus our production time. I understand your worrying but production is production we will do our best to avoid any mistake. Also I would like ask your confirmation of share the masking cost for 10K new IC.

For 1.12, we are preparing to start the production soon. Still we are wait many information that also worrys me that our production can not produce whole quantity and may produce some quantity and stop wait for information and packing, and make some quantity stop again that will cause the increasing of production cost.

For 1.7 and 1.10, We feel there are so many problem happened in 1.12-SA3.2 orders. My people are under very big pressure. I would like suggest you to move the order to other vendor and we can concentrate on 1.12 and 3.2 and finish it successfully, and in this period we can fix the problem between us. That may be good for both of you and us and also good for customer.

Thanks with best regards.

Steven”

61.  At this point, the Defendant has stopped preparing the production of SA3.2, awaiting for the issue of who should bear the additional costs for the new IC to be resolved.  For 1.7 and 1.10, notwithstanding purchase orders were issued and proforma invoice was sent (on 9 July 2010), the Defendant suggested the Plaintiff to engage a different manufacturer.

62.  Mr Rund replied[21] on the same day, reminded the Defendant of the Plaintiff’s commitment to its clients to deliver, and asked the Defendant to take the responsibility and start the productions.

63.  On 15 July 2010, the Defendant replied:

“Dear Richard,

For SA3.2, we do not want to make the problem so complicated, and do not want to discuss who should take the responsibility.

We will pay the masking cost for revised IC, But we need you promise that you will use out the finished 10K SA/double:time IC for future 1.12 orders, and send us a letter of guarantee. Please confirm.

For SA3.2, we have stopped prepare material for production, our delivery time is depend on the delivery of revised IC, we need 10 days at least for production, please contact and confirm with Joy for IC directly.

For 1.7 & 1.10, we are sorry, as really our team are under very big pressure, and we are afraid if will make mistake again as many information are not clear even shipment is coming. Please move the order to other vendor and we will concentrate on 1.12 and 3.2. We think that may be good for both of us.

Thanks with best regards.

Steven”

64.  The Defendant has in this email agreed to pay the masking cost for the new IC but subject to the Plaintiff’s guarantee to use up the mistaken IC for 1.12 before using the Plaintiff’s stock. Again, the Defendant asked the Plaintiff to move the orders for 1.7 and 1.10 to someone else.

65.  Mr Rund replied[22] informing the Defendant that the technical details of the new IC for SA3.2 has been confirmed with Joy.  He also told the Defendant that he has no time to find another manufacturer for 1.7 and 1.10.  By another email[23], Mr Rund indicated his intention to use up the existing stock of IC for 1.12 before using the mistaken ones.

66.  In reply, the Defendant insisted on having the Plaintiff’s guarantee to use up the mistaken IC first before paying the masking cost for the new IC. Meanwhile, the Defendant asked the Plaintiff to withhold payment of deposits for the 1.7 and 1.10 orders.

67.  On 18 July 2010, Mr Rund informed the Defendant that he has paid the 30% deposits for the 1.7 and 1.10 orders.  In the email, Mr Rund reminded the Defendant the parties’ obligations under the MA.

68.  On 19 July 2010, the Defendant acknowledged the payment by email and gave a delivery time of 15 October 2010. They also requested that the 70% balance be paid before delivery “as the economic situation is not good now, many of their suppliers request cash before delivery”.

69.  Meanwhile, the Defendant asked for packing details for 1.12 and Mr Rund duly provided the same.

70.  On 20 July 2010, the Defendant informed[24] the Plaintiff that they are further checking the delivery time for 1.7 and 1.10 and asked the Plaintiff to confirm paying the 70% balance before delivery.

71.  Mr Rund replied[25] the next day that the change of payment term is not acceptable and reminded the Defendant they have a written contract.

72.  On 21 July 2010, the Defendant sent 2 emails to the Plaintiff as follows:

“Dear Richard,

As our proforma invoice indicated, we already requested that 70% balance should be paid before shipment. In fact, as we told you, the economic situation is not good now, many of suppliers request cash before delivery, they also change the payment term with us, we have pressure and we have no way, please noted.

From July.14 we told you, for 1.7 and 1.0, We feel there are so many problem happened in 1.12 and SA3.2 orders. Our people are under very big pressure. And we suggested you to move the order to other vendor. On July.15, we sent email to you and ask you hold on the payment for 1.7 and 1.10 deposit, we really afraid we will make mistake again.

We have not start for 1.7 and 1.10 production, we will return you the deposit, please advise your bank information.

Thanks and regards.

Steven

Dear Richard,

For 1.12 delivery, as Susan talked with you in recently email, and she prepared an excel form that show 1.12 order details to you, the delivery time we always say is July 30.2010.

We have to tell you two questions now we have:

1. LCD delay, Today Baosheng told us the LCD will be delivered at End of July, not as original plan July.23, please noted.

2. As you confirmed with Susan for the plastic case imprint at last meeting at July.8 and July. 9, then we requested NS to make plastic sample for each logo, the samples was not ok first time and we requested them make again, but their progress seems a little slow, till now, we have not received OK samples for your approval, please noted.

Now we estimate the 1.12 delivery time will be around Aug.10.2010, please noted.

For 1.12 carton packing quantity, I ask susan to sort out for each customer and prepare a excel document to you for your final confirmation.

Thanks with regards.

Steven”

73.  In the first email, the Defendant drew to Mr Rund’s attention that the payment term printed on the proforma invoice for 1.7 and 1.10 is to pay the 70% balance before delivery. The Defendant reiterated its reluctance to receive the order for 1.7 and 1.10 and indicated that they are to return the deposits to the Plaintiff.

74.  Regarding the second email, the Defendant informed the Plaintiff of the probable delay of delivery for 1.12 and SA3.2.  “NS” was the outsourced supplier of plastic casings.  A new delivery date of 10 August 2010 was given for 1.12.

75.  On 28 July 2010, Mr Rund replied to the emails, stressed again that his customers are desperately in need of the 1.7 and 1.10 timers.  In reply to the second email, Mr Rund said that Boasheng is a vendor for the Defendant to manage and the shipment of 1.12 is required to leave in the end of July. 

76.  On 29 July 2010, the Defendant wrote[26]:

“Dear Richard,

For 1.7 & 1.10, as we sent email to you on July 21, we told you our situation and thoughts, but we do not receive your reply, we thought you may cancel the order for 1.7 & 1.10, we have not started for anything, please noted.

For 1.12, LCD will deliver to us at July 31, as our production schedule, the production will be finished at Aug 10 2010, now we only worry about the plastic parts, NS will send us samples tomorrow, we will take photos to you for approval once we got them. And NS told us, every Monday, Wednesday, Friday, their factory run out of power, please noted.

For SA3.2, we will confirm with Joy asap.

Thanks with best regards.

Steven”

77.  For 1.12, due to the late delivery of the LCDs the Defendant gave a new delivery date of 10 August 2010, as oppose to the original date of 30 July 2010.  Besides, there is also a possible delay on the production of the plastic casings.

78.  Having received this email from the Defendant, Mr Rund sent 4 emails[27] to the Defendant in a single day, all in bold letters, asking the Defendant to confirm whether they will produce 1.7 and 1.10 and to confirm the shipment date of SA3.2.

79.  On 30 July 2010, the Defendant asked[28] Mr Rund to confirm whether he will accept paying 70% balance before delivery and delivery date on 20 October 2010 for 1.7 and 1.10.  Meanwhile, the Defendant also asked for inspection instructions for 1.12[29].

80.  In reply[30], Mr Rund reminded the Defendant the terms in the MA and expressed that the delivery date of 1.7 and 1.10 should be 29 August 2010.  Obviously, Mr Rund has counted 70 days from the date of the purchase orders to work out the delivery date.

81.  On 2 August 2010, the Defendant sent 3 emails[31] to the Plaintiff concerning 1.12, SA3.2 and 1.7 (and 1.10) respectively. 

82.  In relation to 1.12, the Defendant confirmed that the goods shall be available for inspection on 10 August 2010.  In the mean time, the Defendant asked for shipping instructions from the Plaintiff.

83.  Regarding SA3.2, the Defendant complained that Joy (Fully) requested them to pay not only for the masking cost now, but also for the balance of the price of the mistaken IC, together with 30% deposits for the price of the new IC.  The Defendant said this would be unfair to them.

84.  For 1.7 and 1.10, the Defendant explained again they need cash to pay for the materials and therefore they need to change the payment term.  The Defendant also said that the Plaintiff’s products are complicated and the instructions given are not clear.  They do not want similar mistakes on the SA3.2 LCD to happen again and do not want to process too many models of the Plaintiff at the same time.  As regard the delivery date, the Defendant reiterates that the purchase orders of the Plaintiff do not bear any company chop and therefore the delivery date should not be 29 August 2010.  In the end, the Defendant insisted on the payment of 70% balance before delivery and 20 October 2010 as the delivery date.

85.  In reply[32], Mr Rund said Fully is the Defendant’s vendor and the Defendant is obligated to pay for the IC as required. 

86.  On 4 August 2010, the Defendant confirmed[33] the delivery date of SA3.2 as 25 September 2010.

87.  On 6 August 2010, the Defendant informed the Plaintiff that the inspection for 1.12 has to be postponed to 16 August 2010 due to the delay on the part of NS for production of the plastic parts. 

88.  On 9 August 2010, the Defendant advised[34] again that the soonest date of delivery for SA3.2 is 25 September 2010 and asked the Plaintiff for acceptance.  The Defendant stated that they will not start production without the Plaintiff’s acceptance of the new delivery date.  The Defendant also indicated that they are looking for another IC supplier.

89.  In relation thereto, Mr Rund replied[35]:

“Delivery of 25 Sept is unacceptably late but you offer no acceptable alternative for FTL and its customers.

Delivery of 1.12 is delayed again. This is unacceptable.

Goods must now be sent by airfreight. What do you believe is SHT’s obligation to compensate FTL for late delivery?

IC – SHT has not sent correspondence from Joy’s company, as required.

SHT does not have the right to source this component from any other source.”

And in another email:

“SA3.2 delivery. Delivery is needlessly late, and without justification. Delivery date was confirmed 3 days ago. FTL has no choice in this matter. SHT received and accepted FTL’s deposit, confirmed delivery and has repeatedly failed to ship on time.”

90.  On 11 August 2010, the Defendant wrote[36] to the Plaintiff, saying that the Plaintiff has confirmed the delivery date of 25 September 2010 for SA3.2.  In reply to this, Mr Rund asked[37] the Defendant to confirm they have ordered the IC from Fully.

91.  On 12 August 2010[38], the Defendant confirmed again inspection on 1.12 can be made on 16 August but part of the orders (P10-017) is not included.  In reply, Mr Rund asked why P10-017 is not included and mentioned about 4,000 pieces of 1.12 must be shipped by air.

92.  On 16 August 2010[39], the Defendant expressed that as the contract is on FOB basis, they will not be responsible for any airfreight charges.

93.  On 23 August 2010, a meeting was held between the parties at the Defendant’s premises to discuss the way forward.  After the meeting, Mr Rund wrote[40]:

“---------------------------------------

Location: SHT/Hui Cui office.

In attendance:

Richard Rund

Steven Zhang

SA3.2 – SHT confirms it has not ordered IC necessary to complete order of SA3.2 even though SHT confirmed to FTL this component has been ordered., originally scheduled for shipment on 17 July and delayed several times. SHT ceased production and will not honor purchase orders received from FTL and confirmed by SHT.

1.12 – SHT refuses to allow for shipment of goods already made and for which shipping instructions were requested. Goods on Packing List were not complete, as advised.

Order given 18 May 2010. Shipment confirmed for 17 July 2010. Deposit for plastic parts not given to Ngai Shing until end-July. SHT cannot produce receipt for deposit.

SHT refuses to ship goods as contracted and refuses to honor terms and conditions of the Manufacturing Agreement entered into with FTL.

FTL requested solution to continuing problems with delivery. SHT only replied that FTL should accept another delay in shipment.

SHT refused to pay airfreight necessary due to delay of shipment.”

94.  And the Defendant wrote[41]:

“Re: Meeting on 23 August 2010

Dear Richard,

SA3.2 – You did not confirmed as we requested at August 18, order delay is due to IC factory’s mistake.

1.12 – We did not refuse shipment. We have informed you to come for goods inspection, we asked you when you will come for inspection, but you did not reply us.

Yesterday we inform you, you can go to our factory for inspection. We have sent you inspection procedure in Chinese two weeks ago, and we promised you we will translate into English when you come for inspection, yesterday afternoon, we already sent you English version.

Payment: As per our proforma invoice dated on May-18-2010, #100518-105, you paid deposit to us, the balance should be paid before shipment.

Steven”

95.  On 5 September 2010, Mr Rund sent an email[42] to the Defendant giving notice to the Defendant to cancel all the purchase orders.

DISCUSSION

Series 1.12

96.  As can be seen from the notes prepared by Mr Rund after the 23 August meeting, the Plaintiff accused the Defendant of refusing to allow shipment.  On the other hand, the Defendant said they did not refuse shipment and it was the Plaintiff who refused to go for inspections. 

97.  At that point of time, the Defendant has no complaint against the Plaintiff for giving late instructions on packing details.

98.  As per the purchase order, the original scheduled delivery date is 17 July 2010.  By consent, the delivery date has been postponed to 30 July 2010.  The delivery date was further postponed due to the delay on the part of NS in supplying the plastic parts. The date of inspection on 16 August 2010 was subsequently confirmed.

99.  It is the Defendant’s case that the Plaintiff is obliged to conduct inspection before shipment as agreed orally in a meeting.  In Mr Zhang’s evidence[43], he said Mr Rund sent him emails on 20 August 2010 and 28 August 2010 requesting that the 1.12 timers be shipped immediately but without indicating when the inspection would take place.

100.  However, there is nowhere in the MA obliging the Plaintiff to conduct inspection before shipment.  There is no mention of such an obligation, allegedly agreed orally, anywhere in the email correspondences between the parties.  Similar to the Defendant’s allegation of an oral agreement as to payment terms, I am unable to accept that there was an oral agreement between the parties that the Plaintiff must conduct an inspection of the goods before shipment.  The Defendant has no right to insist on an inspection by the Plaintiff before shipment.

101.  I note that the on the proforma invoices sent by the Defendant to the Plaintiff the payment terms stated was consistent with the Defedant’s alleged terms.  However, in consideration of the parties’ conduct and the email correspondences, I view that the terms stated therein do not reflect the intention of the parties and shall have no effect whatsoever.  Nowhere in the parties’ correspondences had the Defendant ever drawn to the attention of Mr Rund these terms.

102.  In the evidence of Ms Yang[44], Mr Rund has confirmed all the revised packing details of 1.12 on 11 August 2010.  Any delay of shipment thereafter cannot be attributable to the alleged late provision of packing information on the part of the Plaintiff. 

103.  As I found under paragraph 36 above in this judgment, the payment term under the MA has not been changed by any subsequent agreement.  The Defendant has no right to demand the Plaintiff payment of the 70% balance of purchase price before shipment.

104.  I find the Defendant in breach of contract by refusing to deliver the 1.12 timers as requested by the Plaintiff.

SA3.2

105.  In the email of the Defendant after the 23 August meeting, the Defendant accused the Plaintiff of not confirming the new delivery date of 25 September 2010.  The Defendant also blamed Fully for the delay.

106.  In my view, the Defendant should bear the responsibility of the mistake made by the LCD supplier to have produced a 6-digit, rather than a 4-digit LCD.  As can be seen from the email correspondences between the parties, it has been all along their understandings.

107.  Mr Zhang in his evidence said that there was an inherent defect in the IC that rendered the re-design of the IC necessary in any event.  However, the re-design or redevelopment of the IC was a suggestion from the Defendant as a solution to the problem created by the wrong LCDs.  This is evidenced by email correspondences. 

108.  I find that the redevelopment of a new IC was resulted from the wrong production of the LCDs. Owing to their reluctance to pay for the costs requested by Fully, the Defendant has delayed in confirming the order for the redevelopment of the new IC that caused the delay in the production of SA3.2.

109.  As evidenced by the emails correspondences and skype communications between the Plaintiff and Fully and as what was stated in Mr Rund’s notes on the 23 August meeting, the Defendant has never confirmed the order for the new IC with Fully.  Even if the Plaintiff accepted the 25 September 2010 as the delivery date, the Defendant could not realistically finish production in time.

110.  The Defendant was in breach of contract and liable to the Plaintiff for damages.

1.7 and 1.10 (PO 10-013, 014 and 016)

111.  The main issue for consideration regarding these purchase orders is whether any contract between the parties has ever been concluded.  If there is no contract concluded, the Defendant shall not be in breach in not producing 1.7 and 1.10.  As I mentioned above, the MA governs the general terms of the parties’ contracts, it does not oblige the Defendant to accept every purchase orders placed by the Plaintiff.   

112.  The purchase orders of 1.7 and 1.10 were issued on 20 June 2010.  Although the orders do not bear the Plaintiff’s company chop, the Plaintiff has made it sufficiently clear that it is not required as the orders were made by Mr Rund himself.  In any event, Mr Rund had indicated that he will affix the company chop later.  The purchase orders shall not be invalidated by the fact that they do not bear a company chop. 

113.  At the time the Defendant received the purchase orders, Mr Rund had already indicated agreement to the Defendant’s proposed delivery date, and told the Defendant to go ahead with production.  There was no mention of any alteration on specific terms and therefore the general terms under the MA shall be applicable. 

114.  As mentioned under paragraph 55 hereinabove, the Defendant had on 9 July 2010 acknowledged receipt of the purchase orders, apparently after the Plaintiff’s complaint on the Defendant’s unreasonable insistence on a company chop.

115.  However, the invoice for the orders was attached to the email and what is material is that the payment terms on the invoices are different from the general terms under the MA.  But what is equally important to note is that the Defendant did not mention these terms in the email itself, similar to the situation for the invoices of 1.12 and SA3.2.

116.  In my view, at that point of time contracts had been concluded in respect of the purchase orders for 1.7 and 1.10.  Similar to my finding on the effect of the payment terms stated on the invoices for 1.12 and SA3.2, they do not represent the intentions of the parties and shall be ignored.

117.  As the contracts have been concluded the Defendant cannot go back and seek to alter or impose other terms.  The delivery date shall be, at the latest, 70 days after payment of 30% deposits and the balance shall be paid within 30 days after delivery, pursuant to the payment terms under the MA.

118.  The clear indication on the part of the Defendant to return the deposits to the Plaintiff was a repudiatory breach of the contracts and the Plaintiff had accepted it by its email on 3 September 2010.    

Detained goods

119.  There is no unpaid purchase price owed by the Plaintiff to the Defendant and there can be no lien on the goods exercisable by the Defendant.  The Defendant has been in conversion or wrongful detention of the Plaintiff’s IC components by refusing to return the same upon the Plaintiff’s request.

DAMAGES

120.  With my findings above, the Defendant is liable to pay damages to the Plaintiff for breach of contract and conversion of the Plaintiff’s goods.

121.  The Defendant is to repay all deposits paid by the Plaintiff in respect of the subject 5 purchase orders.

122.  The Defendant has all along been aware of the fact that the goods ordered were for resale to other distributors in the U.S. for profits.  It is within the real contemplation of the Defendant that its breach will lead to loss of profits in respect of the 5 purchase orders placed by the Plaintiff.

123.  There is however insufficient information in the Plaintiff’s evidence regarding the assessment of the loss of profits of the purchase orders to enable me to assess this head of damages.

124.  The Plaintiff also mentioned about the damage to his business following the Defendant’s breach of contract.  I am not convinced that the fall of the Plaintiff’s business was a direct result of the Defendant’s breach and in any event, this is too remote for the Defendant to be liable for compensation.

125.  I accept Mr Rund’s evidence that the IC components worth much more in 2010 than the present days as electronic components tend to become outdated rapidly with time.  In the circumstances it would be unfair to the Plaintiff if the Defendant is required only to return the IC components.

126.  Mr Rund has compiled a valuation list[45]for the goods and I accept it as the value of the goods at the relevant time.  The total value of the goods amount to HK$2,009,882.

COUNTERCLAIM

127.  In view of my above findings, the counterclaims shall be dismissed.

ORDER

128.  The Defendant is to refund to the Plaintiff all the deposits in the sum of US$25,918.50 or its Hong Kong Dollar equivalent at the exchange rate as at today and interest therein.

129.  The Defendant is to pay to the Plaintiff HK$2,009,882 as damages for conversion of the Plaintiff’s goods and interest therein.

130.  Interest of the above sums be calculated at 4 % per annum from the date of the writ of summons until judgment and thereafter at 8 % per annum until payment.

131.  An order nisi that costs of these proceedings be to the Plaintiff to be tax if not agreed.