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HCA 2280/2015
[2022] HKCFI 106
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
ACTION NO 2280 OF 2015
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BETWEEN
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RICKEED INDUSTRIES LIMITED |
1st Plaintiff |
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GREDMANN TECHNOLOGY (SHENZHEN) CO. LTD
(格雷蒙科技 (深圳) 有限公司) |
2nd Plaintiff |
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and |
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HONG KONG TOHKOH COMPANY LIMITED |
Defendant |
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Before: Deputy High Court Judge P Fung SC in Court
Dates of Hearing: 15 - 21, 24 - 25 June and 2 July 2021
Date of Judgment: 13 January 2022
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J U D G M E N T
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THE ACTION
1. This is an action by the 1st Plaintiff (“P1”) and the 2nd Plaintiff (“P2”) (together “the Plaintiffs”) against the Defendant (“D”) for damages arising out of the sale of allegedly defective goods by D to the Plaintiffs.
2. By its Re-Amended Defence and Counterclaim, D has counterclaimed against the Plaintiffs for various relief, including substantially, damages for breach of an undertaking allegedly made by the Plaintiffs to D.
THE PARTIES
3. P1 is a company incorporated in Hong Kong. At all material times, it was carrying on the business of, inter alia, purchasing industrial materials from overseas on the instruction of P2.
4. P2 is a company incorporated on the Mainland carrying on the business of, inter alia, trading in sheet materials made of Poly (Methylmetacrylate) (PMMA).
5. The Plaintiffs are in turn owned by a company incorporated and based in Taiwan by the name of “Gredmann Taiwan Ltd” “臺灣格雷蒙股份有限公司”(“Gredmann Taiwan”).
6. D is a company incorporated in Hong Kong. At all material times, it was carrying on the business of selling acrylic sheet materials manufactured by the Mitsubishi Rayon Co Ltd (“MR”) in Japan.
7. D is also a subsidiary of its parent company incorporated in Japan by the name of Tohkoh Jushi Company Limited (“Tohkoh Japan”).
8. MR would not sell its products directly to any customer and would only sell such products through about 10 of its authorized agents. Tohkoh Japan was and is such an authorized agent.
9. The modus operandi of D and Tohkoh Japan was that when D received an order for the products of MR, it would pass such order to Tohkoh Japan which would in turn order the same from MR. It would then be arranged that MR would ship the goods from its factory or warehouse to the customers of D directly.
THE HISTORY OF THE TRANSACTIONS BETWEEN THE PARTIES
10. P1 started trading with D in December 2010. Their trading activities lasted from that time to the early part of 2014. During such period, P1 entered into various purchase contracts with D for the supply of acrylic sheets known and described as “MR 200G PMMA” (“acrylic sheets”) with various degrees of thickness with descriptions such as “0.8*1120*1320mm”, “1.0*1120*1320mm” and “1.2T*1120*1320mm”. The acrylic sheets were suitable for being used as covers for the mobile phones of Nokia, Motorola, Ericsson and similar brands, which mobile phones can be described as of the last as opposed to the present generation.
11. P has produced a table at Trial Bundle E page 23-1 setting out the basic information about the various purchase orders. There is no dispute about the basic information appearing on the face of this table as both the Plaintiffs and D have referred to it in the course of the trial. An important issue, however, arose after the end of the trial relating to the nature of the last contract between the parties. I shall deal with this later in this Judgment. In the meantime, the table is useful as a convenient summary of the purchase orders in chronological order. I annex hereto a copy of it marked as “Annexure 1”.
THE CASE OF THE PLAINTIFFS
12. The case of the Plaintiffs can be summarized as follows : -
(i) D had always known that the Plaintiffs were purchasing the acrylic sheets for resale to customers.
(ii) The acrylic sheets supplied by D under the various purchase orders had always had a history of defectiveness, sometimes in a larger quantity and sometimes in a smaller quantity.
(iii) The acrylic sheets originally supplied by D under the relevant purchase orders and the replacement acrylic sheets subsequently supplied by D by agreement (all being the subject-matter of this action and to be described below) were substantially defective.
(iv) The defects in the acrylic sheets were not attributable to any misconduct or mishandling or storage by the Plaintiffs or their sub-purchasers but were inherent defects, most probably caused by the manufacturer, MR, in the course of its manufacture, handling (including its application of the protective sheets or the quality of the protective sheets itself), storage and/or transportation of the acrylic sheets.
(v) D and/or Tohkoh Japan had on various occasions, by conduct and/or by emails and/or by the “Negotiation Document” and the “Replacement Agreement” (both to be described below), made admissions about the defective quality of the acrylic sheets.
(vi) The Replacement Agreement was signed by Ikegami on behalf of D and it was not signed under duress as alleged by D.
(vii) As a result of the said defective quality, the Plaintiffs and/or their sub-purchasers had to sell the defective acrylic sheets at a loss in the market in mitigation of damage.
(viii) Despite the fact that, in respect of some of the defective acrylic sheets, the Plaintiffs did not notify D about the defects until many months after delivery of the same to the Plaintiffs, the Plaintiffs had not by reason of that fact accepted the goods because it was reasonable for the Plaintiffs not to have discovered the defects until the acrylic sheets were sold and/or delivered to their sub-purchasers who would then remove the protective sheets for the first time.
(ix) Hence, the Plaintiffs claim against D for the loss and damage they have suffered and also for an indemnity by D against any potential claims by their sub-purchasers.
(x) D had never made it a term of any contract between D and the Plaintiffs that, since it was only acting as an agent, it would not provide any warranty as to the quality of the acrylic sheets.
(xi) Furthermore, D had never extracted any undertaking from the Plaintiffs and the Plaintiffs had never given any undertaking to D that they would not resell the acrylic sheets to any competitor of D, including a company by the name of 「深圳市金凱新瑞光電股份有限公司」(Shenzhen Golden Ken Optics Electromonic Co Ltd) (“GK”).
(xii) In any event, GK was not and is not a competitor of MR.
THE CASE OF D
13. The case of D can be summarized as follows : -
(i) D had made it clear to the Plaintiffs from the start of their trading relationship that it was acting as a general dealer only and therefore would not provide any warranties as to the quality and fitness of the acrylic sheets sold to the Plaintiffs.
(ii) D puts the Plaintiffs to strict proof of the existence and causation of the alleged defects.
(iii) Furthermore, D alleges that the defects (if any) were caused by the handling and storage process by the Plaintiffs.
(iv) In any event, the Plaintiffs had in effect accepted the acrylic sheets by the absence of any rejection within a reasonable time after delivery and would no longer be able to reject the same or claim damages.
(v) Insofar as any reliance is placed by the Plaintiffs on the Replacement Agreement, the same was entered into between the Plaintiffs of the one part and Tohkoh Japan of the other part and is, therefore, not binding on D.
(vi) Furthermore, Ikegami signed the Replacement Agreement as a result of duress exercised by the Plaintiffs and it is therefore void or voidable.
(vii) Regarding the claim for damages by the Plaintiffs, they have failed to prove their alleged loss and damage and/or have failed in their duty of mitigation.
(viii) The Plaintiffs had been in breach of their undertaking that they would not sell the acrylic sheets to a competitor of D by reselling some of the acrylic sheets to GK. Hence, D is entitled to counterclaim against the Plaintiffs for breach of such undertaking.
14. At the beginning of the trial, however, the Court was informed by Mr Wright, counsel for D, that D was no longer pursuing its counterclaim.
THE WITNESSES
15. The Plaintiffs called two witnesses, namely: -
(i) a Mr Lin Chia-Hsiang, also known as Justin Lin (“Lin”); and
(ii) a Ms Yin Meng (“Ms Yin”).
16. D also called two witnesses, namely: -
(i) a Mr Nakayama Masahito (“Nakayama”); and
(ii) a Mr Manabu Ikegami (“Ikegami”).
17. The parties had also agreed on a single joint expert, a Dr Norah Sophienaz Parsons (“Dr Parsons”). She was also called by the parties to give evidence as such single joint expert.
THE EVIDENCE
A. Lin Chia-Hsiang (Lin)
18. Lin has made 3 witness statements. The gist of his evidence is as follows : -
(i) He has been the general manager of Gredmann Taiwan since 1984. That is the headquarters and there are branch companies in Beijing, Shanghai, Guangzhou and Shenzhen. The group employs about 400 staff members and has a business turnover of about US$500 million per year.
(ii) In April 2011, Gredmann Taiwan was certified as an “authorized distributor” of acrylic sheets manufactured by MR through Tohkoh Japan for the areas of Mainland China, Hong Kong and Taiwan. After that the group started ordering the acrylic sheets from D.
(iii) As shown in Annexure 1, the first order placed by the Plaintiffs with D was GKOF 199B dated 6 December 2010 for 3,200 pieces of the acrylic sheets.
(I should note here that I have been informed by counsel that, although the purchase orders were all signed between D as the seller and P2 as the buyer, the invoices were all sent to P1; there is no issue between the parties regarding the fact that both P1 and P2 are suing as the Plaintiffs.)
(iv) Very soon after re-selling the acrylic sheets to their customers, the Plaintiffs already received complaints from such customers on the defective quality of the acrylic sheets. The defects included the following on the face of the acrylic sheets : -
(a) fogging and/or scratching;
(b) defective gum/staining residue;
(c) watermark;
(d) colour staining;
(e) dirt.
(v) The complaints were communicated by the Plaintiffs to D and there then followed correspondence by emails between the two sides in which D made admissions regarding the defects. The contents of the emails will be examined below.
(vi) As can be seen from Annexure 1, after delivery to the Plaintiffs of 3,200 pieces of acrylic sheets in December 2010 under GKOF 199B and 20,000 pieces in April 2011 under GKOF 225B, on 5 August 2011, D delivered to the Plaintiffs another lot of 14,800 pieces in exchange for the defective ones.
(vii) After that, as can be seen from Annexure 1 again, between August and November 2011, the Plaintiffs continued to place purchase orders with D under GKOF 250B, GKOF 258B, GKOF 273B, GKOF 277B and GKOF 278B. A total of 57,000 pieces of acrylic sheets were delivered to the Plaintiffs between 5 August and 10 November 2011 under those purchase orders.
(viii) On 15 December 2011, the Plaintiffs placed purchase order GKOF 283B (“the 1st PO”) for 1 lot of 24,800 pieces and another lot of 20,000 pieces of acrylic sheets. The total quantity was later reduced by agreement between the parties to 30,000 pieces. They were delivered to the Plaintiffs on 4 January 2012.
(ix) On 27 March 2012, the Plaintiffs placed another purchase order GKOF 289B (“the 2nd PO”) for 20,000 pieces of acrylic sheet. They were delivered by D to the Plaintiffs on 10 April 2012.
(x) On 19 March 2013, the Plaintiffs placed purchase order GKOF 305B for 2 lots of acrylic sheets, 1 lot of 10,000 pieces and another lot of 7,600 pieces. They were delivered by D to the Plaintiffs on 8 and 16 April 2013 respectively.
(There is an issue between the parties as to whether the 17,600 pieces delivered in April 2013 were actually replacements for defective sheets previously delivered under the 1st PO and/or the 2nd PO. I shall deal with this point later.)
(xi) Out of the said 17,600 acrylic sheets delivered by the Defendant to the Plaintiffs in April 2013, the Plaintiffs delivered 5,000 pieces to GK in May or June 2013 in exchange for 5001 defective pieces returned by GK. They were also found to be of inferior quality.
(xii) On 26 January 2014, the Plaintiffs returned 14,800 pieces of acrylic sheets to D.
19. Having set out the broad history of the dealings between the Plaintiffs and D in paragraph 18 (vi) - (xii) above, basically by reference to the information set out in Annexure 1, I shall examine in more detail below the evidence relating to the conduct and exchanges between the parties regarding the various purchase orders and the complaints about the alleged defective quality of the acrylic sheets as given or as relied on by Lin.
20. As stated above, the 3,200 pieces under purchase order GKOF 199B were delivered to the Plaintiffs on 24 December 2010.
21. On 28 December 2010, a Chris Lai of the Plaintiffs already sent an email to Nakayama to say that their customers had noticed some problems with the MR 200G sheets in that : -
(1) the sheets were yellowish in colour;
(2) the sheets would stick on the knife when being processed and were different from the standard MR 200 sheets.
Furthermore, under the FTIR infrared spectrum analysis, it was shown that the composition of the sheets were not the same as the standard MR 200 sheets. He inquired whether the production process was different.
22. I should point out at this juncture that it is common ground that the letter “G” was added to the description of “MR 200” at the request of the Plaintiffs for the purpose of denoting that the goods were ordered by “Gredmann”. It is the case of the Plaintiffs that at least some of the acrylic sheets delivered to them were with the model number of “MR 200Z” or “MR Z 200”, which were of a quality inferior to that of the standard “MR 200”. On the other hand, it is the case of D that MR would only manufacture one kind of acrylic sheets with the model number of “MR 200” (and “MR 200G”) and that there was no model number of “MR 200Z” or “MR Z 200”. I shall deal with this issue later.
23. By an email dated 5 January 2011, Nakayama replied to the Plaintiffs’ email of 28 December 2010 and said as follows : -
“Let me explain the following problems
※It will stick on the knife when processing>>>It should mean that during CNC Processing, the swarf that comes out sticks to the knife.
The specifications and base materials of MRZ200 and MR200 are the same, so the processing conditions are the same. The acrylic sheet is not an extruded sheet, but for sticky problems, please increase the speed of CNC a little bit. If you grasp the processing technique, the problem should not happen.
※It is estimated that the material is too pliable and tough or the static electricity is strong, Mitsubishi should know it clearly
It is true that MR200 has been stored in the warehouse for about 7 months, and there shall be a problem of warping of the sheet. But I think the defect rate will not be too high.
The future products will not have this problem.
In addition, the yellowish problem of the acrylic sheet is because its hardened layer is thicker than other manufacturers produces, (MR200 also has this phenomenon), but there is no problem when using it.”
[translation from the Chinese text]
[emphasis added, except for the first underlining appearing above which is in the original text]
24. As can be seen from Annexure 1, there was a delivery to the Plaintiffs of 20,000 acrylic sheets on 8 April 2011 under GKOF 225B.
25. On 30 June 2011, one Michael Chen of the Plaintiffs wrote to Nakayama by email as follows : -
“You should have arrived safely in Japan by the time you received the email! I appreciate the visit of Department Manager Ikegami, you and Vincent today, I will describe the conclusions and follow-up actions of the meeting as follows:
Shanghai Tohkoh agreed with Gredmann that Tohkoh will purchase the defective MRZ sheets (0.8/1.0mm) and replace all of them with MR200.
Emma, MR200 goods will arrive from Japan, store the MRZ temporarily in our warehouse, there is no need to return them to Japan. You are responsible for coordinating with Tohkoh on how to operate.
Gredmann agrees to work with Tohkoh to handle MRZ inventory (including the existing inventory of 10,000 PCS in Tohkoh of Japan)
Bob, you and Nakayama are responsible for updating the progress of MRZ processing once a week and summarizing it to Department Manager Ikegami and me
Gredmann promises to work with Tohkoh to deal with Tohkoh Japan’s existing inventory of 40000 PCS of MR200 and expand subsequent sales”
[translation from the Chinese text]
[emphasis added]
26. By an email dated 1 July 2011, Nakayama replied to Michael Chen as follows : -
“Good afternoon
Thank you very much for your exchange of views yesterday
Regarding the manner to resolve MR200Z that you send us, let me explain our company views
Shanghai Tohkok agreed with Gredmann that Tohkoh will purchase the defective MRZ sheets (0.8/1.0mm) and replace all of them with MR200.
Emma, MR200 goods will arrive from Japan, store the MRZ temporarily in our warehouse, there is no need to return them to Japan. You are responsible for coordinating with Tohkoh on how to operate.
▓Please understand that Shanghai Tohkoh has nothing to do with this trade, so it is very difficult to exchange goods with Shanghai Tohkoh.
We hope that
In respect of the defective goods of more than 10,000 PCS of MR200Z which were sold by our company to your company,
When you purchase MR200 next time, could we change the payment terms of approximately 10,000 PCS among them to “monthly statement, pay after 4 months”??
※With regard to the MR200 sales expansion meeting, we would like to thank you vey much for your suggestions. I will be in Mainland China on July 10-15
Our latest Japanese inventory status
1 · The inventory of MRZ200 0.8t 11,200 PCS
2 · The inventory of MRZ200 1.0t 200 PCS
------------------------------------------------------------
3 · The inventory of MR200 0.8t 39,800 PCS
4 · The inventory of MR200 1.0t 29,200 PCS ”
[translation from the Chinese text]
[emphasis added]
27. By an email dated 7 July 2011, Nakayama wrote further to Michael Chen as follows : -
“I hope that the replacement and purchase of MR200 could be carried out at the same time.
I can’t make this thing too obvious in the company. I can only replace MR200Z with MR200 first. Please understand. ”
[translation from the Chinese text]
[emphasis added]
28. I note at this stage four points which appear from the email correspondence referred to above : -
(i) It would appear that MR did produce acrylic sheets with the model number “MR 200 Z” in addition to “MR 200”.
(ii) The Plaintiffs did make a complaint about the quality of acrylic sheets, including the “MR Z 200” sheets.
(iii) Nakayama did accept that a very substantial quantity of acrylic sheets (“more than 10,000 PCS of MR 200 Z”) delivered to the Plaintiffs had quality problems. It is to be noted that up to that stage only 23,000 pieces of acrylic sheets had been delivered to the Plaintiffs so far. Thus, 10,000 out of 23,000 is quite a sizeable proportion.
(iv) Nakayama was voluntarily proposing to compensate the Plaintiffs by agreeing to better payment terms for future orders.
29. Within 1 month of the said email dated 7 July 2011, on 5 August 2011, D did in fact deliver to the Plaintiffs 14,800 pieces of acrylic sheets as replacement, as referred to in paragraph 18 (vi) above.
30. The complaints about the defective quality of the acrylic sheets had been passed by D to MR.
31. By an email dated 3 December 2011, Nakayama wrote to one Bill Chen of the Plaintiffs and enclosed a report in Japanese by MR dated November 2011. The report is entitled “Report on appearance defect of SHINKOLITE MR 200 (Reply)” (translated from Japanese) (“the MR Report”). The relevant parts of the MR Report (as translated from the Japanese text) contained the following comments : -
(i) “Regarding the samples of unperceivable scratches, it is confirmed that the scratches indicated by you can be observed under strong light. The observation results of each sample are as below.”
[emphasis added]
(ii) There then followed a table regarding the various samples and, under the column “Reason of defect (presumption)” against each sample, there appeared the words “Caused by our manufacturing process”.
(iii) “Since all of the scratches are in convex shapes, it can be confirmed that they were caused during our manufacturing process. Upon comparison between the samples and the appearance standard of our products, all samples are qualified. In connection with the abovementioned scratch problems, we will conduct maintenance on a regular basis and repair in sequence of their damage levels. We believe the quality of products would improve gradually.
Regarding the crystal point problem indicated by you, we have observed the samples but since the protective films have been torn off, the acrylic sheets are being mixed with foreign materials and with dirt being stuck to their surface such that the defects indicated by you could not be confirmed.
We presume that the possible reason for the crystal points could be attributable to the defective gum/staining residues problems caused by the protective films, which were attached to the acrylic sheets in order to protect their surfaces.
In connection with the defective gum/staining residues problem, we are considering introducing protective films with better quality and we are currently examining it in the introductory stage.
We sincerely apologize for the inconvenience caused by this issue. We will continue to improve the quality of our products and wish to have your understanding and continued support. Thank you.”
[emphasis added]
32. As stated in paragraph 18 (viii) above, the 1st PO was placed on 15 December 2011 and delivery of 30,000 pieces to the Plaintiffs was made on 4 January 2012.
33. According to Annexure 1, on 22 December 2011, the Plaintiffs made payment to the Defendant for the goods under the 1st PO.
34. On 16 January 2012, very soon after delivery of the acrylic sheets under the 1st PO, Bill Chen of the Plaintiffs sent an email to Nakayama and referred him to complaints by their various customers. The email read as follows : -
“1. Kaneka’s film has also been sent to Hongxun (宏 訊)/ Langfang (廊坊) Foxconn Text result of Hongxun (宏 訊) was Tabot NG (surface hardness failed), Langfang (廊 坊) has yet tested it (because there was a problem with the Tabot mold at that time), Qunda (群達) (Pulling up was OK, surface hardness failed, not put on the mold).
2. In respect of the return of 5roll sd-025 by Tongda (通達) last time, they urged us tightly and expected us to take it away immediately. Gredmann Shanghai company hopes to handle the return. Please help to confirm Tohkoh’s opinion
3. MR200 0.8T’s recent arrival of goods has seen grave abnormalities. All 1200pcs currently shipped to Aojin (奧金) are NG, the causes of the abnormalities are (hard coating with water mist, uneven color after printing, cannot be wiped) when will there be time to confirm the anomaly?
4. MR200 1.2T and MR200 0.8T 400pcs each. These two abnormal acrylic sheets were returned by Xinhao (信濠). The abnormality form has been sent out before. Mitsubishi and Tohkoh have confirmed it. Our company hopes to return or replace the goods. Please help to confirm Tohkoh’s suggestion.
5. According to Tohkoh’s request, our company may not trade with Xinhao (信濠) in future. Please confirm again. I need to communicate with customers clearly. At present, our company has to deal with customer complaints and receivables with Xinhao (信濠). It will take some time, please understand.
Yours sincerely, these are for reference. Waiting for your reply.”
[translation from the Chinese text]
[emphasis added]
35. By an email also dated 16 January 2012, Nakayama replied to Bill Chen as follows : -
“2. In respect of KANEKA’s matters, meeting with Mr Wada (和田先生) and Mr Shimamoto (嶋本先生) at 14:30 pm on Friday. After the meeting, the specific measures will be advised.
3. Can we go and confirm the abnormalities after Chinese New Year? Will it be too late? Such as the week of February 5.
4. I will discuss the solution with Ikegami Department Manager. Do customers demand replacement of all the 1.2t goods?
5. I will contact Mitsubishi’s Yoshioka (吉岡) about this problem to find out his true intention. It’s possible that it’s not ok to trade just on the face of it.
Sorry for putting you in a difficult position. Thank you very much!”
[translation from the Chinese text]
36. As stated in paragraph 18 (ix) above, the 2nd PO was placed on 27 March 2012 and delivery of 20,000 pieces thereunder to the Plaintiffs was made on 10 April 2012.
37. By an email dated 12 June 2012, one Ivy Huang of the Plaintiffs wrote to Nakayama as follows : -
“Subject : GKOF 283B
Dear Nakayama,
Could you tell me whether the attached order GKOF283B of 10,000 PCS 0.8t and 20,000 PCS 1.0t delivered around December 2011 can be divided into MR200Z and MR200G? (in another word, is there any difference in quality?) Is there any difference in the labelling? The other 14800 PCS of 0.8t (which have been delivered to Hong Kong before) in this order are MR200Z, which are of inferior quality, right?”
[translation from the Chinese text]
[emphasis added]
Since the caption is a reference to the 1st PO, the last sentence in the quoted passage would appear to be a reference to 14,800 acrylic sheets delivered under the 1st PO.
38. By an email dated 13 June 2012, Nakayama replied as follows : -
“Subject : GKOF 283B
Miss Ivy,
Good morning!
There is no difference on the labels of the goods in December, the other 14800 PCS of 0.8t are indeed of slightly inferior quality.”
[translation from the Chinese text]
[emphasis added]
39. By an email dated 17 September 2012, one Louis Yang of the Plaintiffs wrote to Nakayama and complained about defects in the acrylic sheets. The email read as follows : -
“About the 0.8T MR200 s Our company delivered to Langfang Foxconn (廊坊富士康), after the protective film was removed, dirt was found on part of the surface of the acrylic sheets.
It is more obvious after the PVD sputtering process. The sample have been arranged to be sent to Miss. Quan. Please ask Mitsubishi to provide feedback on this customers’ complaint.”
[translation from the Chinese text]
40. In the meantime, between March and December 2012, there had been correspondence between the Plaintiffs and Nakayama about a price reduction as compensation. Finally, by an email dated 19 December 2012 from Nakayama to Ivy of the Plaintiffs, the former said :
“Please confirm the following contents with Mr Leo again.
On 18 December, decided in the meeting between Ikegami Department Manager of our company and Mr Chen Dongshan (陳東山) of your company, US$534,000 will be fully paid this time. The issue of payment deduction will be calculated after March 2013.”
41. By his email dated 22 January 2013, Nakayama sent to Michael Chen an email in Chinese enclosing a draft document in Japanese. The email bears the caption : -
“RE : The payment of MR 200 compensating the defective part by Mitsubishi and Tohkoh”.
[emphasis added]
The title of the said draft document enclosed therewith as translated reads :-
“Negotiation on Compensation for Defective MR 200”.
[emphasis added]
The relevant parts of the contents thereof read as follows : -
“In respect of the captioned matter, the result of discussion of Tohkoh Jushi Co., Ltd are as follows
Tohkoh Jushi agrees that upon mutual negotiation Mitsubishi Rayon, Tohkoh and Gredmann jointly bear the loss of the defective MR200 that were already delivered and in subsequent sales (including those completely unusable parts and parts that need to be compensated to the customers)
The specific details are as follows
1. In respect of the goods already returned due to customers’ complaints, price adjustment will be performed at the next batch of new purchase orders. The amount for goods that had been returned to Gredmann and of which Gredmann had made compensation to the customer will be deducted from the payment for this order.
2. For defective goods that occur in subsequent sale, the three companies must confirm the cause of the defective products (residual glue, scratch). For defects which have been determined and confirmed not to meet the quality standard of Mitsubishi, Tohkoh and Mitsubishi will be responsible for it. If it is not caused by defective incoming materials, it will be the responsibility of Gredmann.
3. For goods sold at lower price (loss arising from selling price below $26.7), Gredmann will truthfully provide the sales price and report to Tohkoh and Mitsubishi company. Tohkoh and Mitsubishi are responsible for the said loss. There will be unit price adjustment in subsequent PO to compensate for Gredmann’s loss.”
[translation from the Chinese/Japanese text]
[emphasis added]
42. By another email dated 24 January 2013, Nakayama informed Michael Chen that the terms of the said document referred to in paragraph 41 had been confirmed by Ikegami.
43. Two days later, Ikegami actually signed a document in the terms of the said draft document (“the Negotiation Document”) addressed to P2. Below his signature is the description : -
“Tohkoh Jushi Co., Ltd. Overseas Business Promotion Department Manabu Ikegami”.
44. Soon after that, on 4 February 2013, Lin wrote an email to Nakayama referring to the complaints by customers of the Plaintiffs about the serious defects in the quality of the acrylic sheets in large quantities. He also asked for a price reduction in relation to the 2nd PO.
45. By his reply email dated 5 February 2013, Nakayama suggested a meeting to be held between the two sides in Shenzhen or Taiwan.
46. The parties did eventually have a meeting in the office of P2 in Shenzhen attended by both Ikegami and Nakayama for the Defendant and Lin and other personnel of the Plaintiffs. Lin says that that meeting took place on 5 March 2013 and not in January or February 2013 as alleged by D.
47. Consequently, an undated document in Chinese (“the Replacement Agreement”) was signed between the two sides. It was drafted by a secretary of the Plaintiffs in accordance with the agreement reached between the parties at the said meeting in Shenzhen. It was faxed by the Plaintiffs to Japan and returned to the Plaintiffs by email. It was chopped with the chop of P2 and signed by Ikegami above the chopped description of : -
“MANABU IKEGAMI
OVERSEAS DEPARTMENT
GENERAL MANAGER”.
The English translation of the Replacement Agreement reads as follows : -
“Gredmann MR200 Solutions to bad inventory
(Memorandum of Understanding of the defective MR200 in Gredmann’s stock)
1. For the 21400pcs of MRZ200 in the existing inventory, Tohkoh is responsible for returning the goods and replacing them with 21400pcs of MR200. For the replacement goods, Gredmann shall provide the required quantity and time schedule within one week. For the specific return and exchange operation, it shall be discussed and determined by both parties within one week.
2. In respect of the 21400pcs of MRZ200 inventory in Gredmann’s warehouse, Tohkoh entrusts to store temporarily in Gredmann’s warehouse and that Gredmann shall sell them on behalf of Tohkoh. The exact selling price will be determined by Gredmann and Tohkoh according to the situation of the customer. The mode of transaction between Gredmann and Tohkoh regarding this specific sales of goods by agency is to be determined.
3. Tohkoh shall bear all taxes and related expenses incurred in the replacement or replenishment of defective goods during the import process, it shall reimburse Gredmann by way of cash.
4. If the MR200 project is confirmed to be terminated (i.e., both parties confirm that Gredmann stops purchasing new MR200), Tohkoh shall be responsible to compensate Gredmann by cash in relation to the available inventory owned by Gredmann at the time of termination which is subject to customer complaints of poor quality (Gredmann’s current MR200 inventory is 50528pcs, the estimated defect rate is 10%~15%).
5. After Tohkoh confirms and signs the above agreement, Gredmann shall immediately pay the outstanding payment of the remaining 20,000 PCS.”
[emphasis added]
48. On 28 March 2013, the Plaintiffs made payment to D of the price of the goods under 2nd PO.
49. According to Lin, the reason for the late payment by the Plaintiffs for the goods under the 2nd PO was that, during the relevant period, the Plaintiffs were urging D to confirm as to how it was going to deal with the complaints by the Plaintiffs’ sub-purchasers and compensation to the Plaintiffs by way of reduction in price and improved terms of payment for goods, and that D had delayed or failed to give such confirmation. In support, Lin has also referred to the email from Nakayama to Ivy Hung of the Plaintiffs dated 19 December 2012 (see paragraph 40 above) in which he said : -
“On 18 December, decided in the meeting between Ikegami Department Manage of our company and Mr Chen Dongshan (陳東山) of your company, US$534,000 will be fully paid this time. The issue of payment deduction will be calculated after March 2013.”
[translation from the Chinese text]
[emphasis added]
The Plaintiffs paid to the Defendant the sum of US$534,000 under the 2nd PO on 28 March 2013.
50. The matters set out in paragraphs 40 - 49 above would tend to have the effect of refuting the Defendant’s allegation that the Plaintiffs exercised duress on D by threatening not to pay for the goods under the 2nd PO unless D were to sign the Replacement Agreement.
51. Subsequently, there were other complaints by the customers of the Plaintiffs such as Xinhao and GK about the quality of large quantities of the acrylic sheets in April - June 2013.
52. It was fairly obvious that D admitted that a lot of the acrylic sheets had quality problems.
53. On 20 November 2013, Nakayama wrote an email to the Plaintiffs. As translated, the caption of the email reads : -
“Subject : Tohkoh’s formal answer to 21,600 PCS of the MR 200 inventory”.
The contents of the email read as follows : -
“About the captioned matter, Tohkoh formally decided on the following : -
In respect of 21,600 PCS of MR200 current inventory in Hong Kong
Due to quality problems, cannot be sold at normal price and will be returned to Japan in the short term. Return details will be discussed another time.
(After the occurrence of the quality problem, Tohkoh shipped 17,600 PCS from Japan in March 2013 to replace the above-mentioned sheets)”
[emphasis added]
54. As mentioned in paragraph 18(xii) above, on 26 January 2014, the Plaintiffs did in fact return 14,800 pieces of acrylic sheets to the Defendant.
55. The customers of the Plaintiffs continued to make complaints about the quality of the acrylic sheets. For instance, in July 2014, the Tensui Company made complaint about over 15,000 pieces of the acrylic sheets sold to it.
56. The customers’ complaints, mostly by email, had been forwarded to D and checked by the latter. D had not queried about the truth of such complaints.
57. Indeed, in the MR Report referred to in paragraph 31 above, MR had admitted that the problems in the quality of the acrylic sheets, such as the linear scratches, were caused by their manufactory process.
58. The Plaintiffs had made sure that the warehouses which they had rented all satisfied their requirements regarding temperature and humidity so as to make sure that the acrylic sheets were properly stored before their sale to their customers.
59. The Plaintiffs would not have opened the protective sheets to check about the integrity of the acrylic sheets because once the protective sheets were opened, they could not be properly put back and no customer would accept the same as new acrylic sheets. They would have to wait for complaints (if any) by their customers after the acrylic sheets had been sold to them before they knew about the defects.
60. Subject to the point about the true nature of the 17,600 acrylic sheets delivered by D to the Plaintiffs in April 2013 which I will deal with hereinbelow and the evidence regarding the loss and damage alleged to have been suffered by the Plaintiff, the above is the main evidence on liability adduced and/or relied on by the Plaintiffs.
B. Ms Yin Meng (Ms Yin)
61. Ms Yin has made 2 witness statements.
62. She joined the Plaintiffs only at the end of 2013. Thus, for the transactions and activities between the parties which took place prior to her joining the Plaintiffs, she had no personal knowledge and only got to know about them from information given by her colleagues.
63. She, however, was able to say that, pursuant to the Replacement Agreement, at the end of 2013, Nakayama went to the warehouse used by the Plaintiffs to check on the defective goods and confirmed that there were still 14,800 pieces of such in stock. Upon Nakayama’s confirmation, the Plaintiffs arranged for the said 14,800 pieces to be returned to Tohkoh Japan in January 2014.
64. The rest of her evidence mainly concerns the sale of the defective goods by the plaintiffs at prices much lower than the cost prices of them and the loss and damage suffered by the Plaintiffs. I shall deal with the same hereinbelow.
C. Nakayama Masahito (Nakayama)
65. Nakayama has made a total of 6 witness statements.
66. The gist of his evidence is as follows : -
(i) He was employed by Tohkoh Japan before 2016. He has been working in another company since 1 April 2017.
(ii) He was also a sales manager of the Defendant, a subsidiary of Tohkoh Japan, for about 10 years between 2005 and 2016 and was the key person handling the sale and purchase transactions relating to MR acrylic sheets between the Defendant and P2.
(iii) In the latter part of 2009, one Jin Yang of P2 approached him whilst he was working in the head office of Tohkoh Japan with a view to becoming an authorized distributor of MR acrylic sheets in Mainland China, Hong Kong and Taiwan. They met up in Japan and he told Jin Yang that save for the warranties provided by the manufacturer, MR, namely, that MR would only replace acrylic sheets sold with inherent defects, such as defects caused by defective design, materials and workmanship which were discovered shortly after delivery, Tohkoh Japan would not provide warranties.
(iv) In or about May 2010, he and a Mr Kamata of MR went to Gredmann Taiwan’s office in Taiwan and met with Jin Yang and his superior, Michael Chen. After some discussion, Mr Kamata agreed to certify P2 as an authorized distributor of MR acrylic sheets in Mainland China, Hong Kong and Taiwan on condition that P2 would undertake not to sell the same to any company whose business was competitive in nature with Tohkoh, such as GK, because GK had been working with a Chinese company called AJA (Qingdao) Chemical Co Ltd to sell acrylic sheets to Nokia at unreasonably low prices. Michael Chen and Jin Yang agreed to give the undertaking.
(v) They also asked P2 to supply a list of their customers on a monthly basis to which Michael Chen and Jin Yang also agreed.
(vi) It was P2 who requested for various letters to be added at the end of the model number MR 200, but irrespective of the added letters, the acrylic sheets were all of the same quality.
(vii) MR was always careful in its manufactory process, including sample testing, and was very strict with its own quality control.
(viii) As a result of the Plaintiffs’ delay in settling the prices payable for the goods supplied, the parties had a meeting in the office of P2 in Shenzhen in January or February 2013. It was only at that meeting that the Plaintiffs claimed for the first time that the goods delivered under the 1st PO and the 2nd PO were defective. It was also on that occasion that the Plaintiffs disclosed for the first time that they had sold the MR acrylic sheets to GK.
(ix) Nakayama and Ikegami suspected that the Plaintiffs and/or their customers, including GK, were trying to create an excuse for getting out of their respective contracts for the purchase of MR acrylic sheets because the demand for acrylic sheets suitable for the manufacture of the last generation mobile phones was decreasing.
(x) At the end of the said meeting, Lin presented to Ikegami a Memorandum of Understanding (“MOU”) for him to sign to acknowledge that the Defendant would replace 20,000 pieces of acrylic sheets for the Plaintiffs. At first, Ikegami refused to sign it. Then Lin threatened that, if he did not sign it, the outstanding invoices would not be settled. Under pressure, Ikegami signed the MOU (the Replacement Agreement).
(xi) In paragraph 49 of Nakayama’s 1st Witness Statement, he went on to say : -
“Shortly thereafter, in or about April 2013, Tohkoh replaced 17,600 pieces of acrylic sheets with Gredmann and Gredmann returned 14,800 pieces of acrylic sheets to Tohkoh.”
(xii) The agreement by D to replace large quantities of acrylic sheets alleged by the Plaintiffs to be of defective quality was motivated simply by D wishing to maintain a good relationship with its customers, the Plaintiffs. The replaced acrylic sheets were actually not defective or only had minor defects.
(xiii) Regarding the signing of the Replacement Agreement by Ikegami, first, Ikegami was acting only for and on behalf of Tohkoh Japan and not D. Secondly, as said above, it was signed under duress exercised by the Plaintiffs who threatened not to settle the prices payable under the 1st PO and/or the 2nd PO.
(xiv) In paragraph 7 of his 3rd Supplemental Witness Statement, he said as follows : -
“Replacement goods were supplied free of charge
6. ……………………….. The Defendant had only agreed to replace 17,600 pieces of acrylic sheets under P/O:GKOF283B and P/O:GKOF289B for the sole purpose of maintaining a good customer relationship with the Plaintiffs. The replacement goods were supplied to the Plaintiffs free of charge, while without admitting that the acrylic sheets at issue had any inherent defects attributable to the Defendant, if any, or at all. ………………………………..”
[emphasis added]
(xv) Regarding his admission about the 14,800 acrylic sheets being of “slightly inferior quality” as contained in his email dated 13 June 2012 in reply to Ivy Huang’s email to him dated 12 June 2012, under cross-examination, he said that he was actually referring to the acrylic sheets supplied to the Plaintiffs under an earlier contract and not under GKOF 283B (the 1st PO).
(xvi) In paragraph 8 of the same witness statement, he said that, as far as he was aware, there was no secondary market for the sale of defective or second class acrylic sheets.
D. Manabu Ikegami (Ikegami)
67. Ikegami has made 2 witness statements.
68. The gist of his evidence is as follows : -
(i) He is the Sales Department Director of Tohkoh Japan and is also a director of D. He has worked for Tohkoh Japan since 1989 and is in charge of and overseeing its sales of, inter alia, MR acrylic sheets.
(ii) D started trading with P2 in MR acrylic sheets in July 2010.
(iii) In or about August 2012, P2 started to delay and default in paying to D for goods and to complain about the quality of the acrylic sheets when the demand for Nokia’s traditional mobile phones had dropped drastically owing to consumers’ switch to using smart phones.
(iv) In October 2012, Nakayama reported to him that the invoices for goods issued to the Plaintiffs had been long overdue, despite D’s constant demands for payment. He decided to go to the office of P2 in Shenzhen to follow up the matter.
(v) The said meeting took place in January or February 2013. When asked for the reason as to why the Plaintiffs had not paid for the goods, Lin responded by saying that it was because part of the acrylic sheets delivered to the Plaintiffs were of a different model and also that part of them was defective in quality Lin also said that the Plaintiffs would like Tohkoh Japan to replace about 20,000 pieces of acrylic sheets, otherwise they would not settle the price for the goods.
(vi) Ikegami then suggested that D should carry out an inspection of the goods to check about the quality and to check whether the acrylic sheets in question were actually manufactured by MR.
(vii) Lin also disclosed that some of the acrylic sheets had been sold to GK and GK had complained that part of the acrylic sheets supplied by D had not been manufactured by MR and also bore a different model number.
(viii) Upon hearing that, he protested that the Plaintiffs had been in breach of their undertaking not to sell the acrylic sheets to GK.
(ix) After negotiation with Lin, he made a concession and agreed to accommodate the Plaintiffs by replacing part of the so-called “different model number acrylic sheets” for the sake of good customer relationship.
(x) Lin then produced the MOU which was the draft Replacement Agreement with the threat that, if he did not sign it, the Plaintiffs would not settle any of the invoices issued by D. Feeling under duress, he finally signed the Replacement Agreement and promised to replace about 20,000 pieces of acrylic sheets.
(xi) He signed the Replacement Agreement as well as the Negotiation Document only on behalf of Tohkoh Japan but not D.
(xii) In paragraph 22 of his Witness Statement, he said : -
“22. Subsequently, in or about April 2013, Tohkoh replaced 17,600 pieces of MR’s acrylic sheets with Gredmann, and Gredmann returned 14,800 pieces of acrylic sheets to Tohkoh (“the Returned Acrylic Sheets”).”
(xiii) In February 2017, about 4 years later, he sent 8 samples from the Returned Acrylic Sheets to MR for testing. MR confirmed that they had been manufactured by it and that they were genuinely of the MR 200 model.
E. Dr Norah Sophienaz Parsons (Dr Parsons)
69. Dr Parsons, the Single Joint Expert, has made one report dated 19 March 2018. She has a B Eng (Hons) Degree and a PhD (Eng) Degree both from Queen Mary College, University of London. Her discipline is in Biomedical Materials Science and Materials Science and Engineering. She is a chartered engineer and a consultant engineer specializing in the investigation of engineering, materials and corrosion related failures. With her academic qualifications and extensive practical experience, I have no difficulty in accepting that she is well qualified as an expert to give evidence in the present case.
70. She gave oral evidence from abroad by video link. Before she did that, the parties had submitted further questions to her by permission of the Court.
71. The instruction to Dr Parsons was for her to carry out an investigation into the cause of damage to some acrylic sheets. The gist of her evidence is as follows : -
(i) She had been given two cardboard packages each containing 10 acrylic sheets, both sourced from D. One package contained exemplar sheets and the other package was supposed to contain acrylic sheets returned by the Plaintiffs to D. She had examined all the 20 acrylic sheets. Each base acrylic sheet was protected by polyethylene protective sheets on the outside.
(ii) According to her Expert Report, in general, the 10 exemplar sheets showed minor scratch details on the outer protective layers, with no scratches on the base acrylic sheets, ie, no “through scratches”.
(iii) On the other hand, the 10 returned sheets showed more scratch details on their outer protective layers relative to their exemplar counterparts and, in some cases, there were through scratches (scratches which were present on the protective sheets which had penetrated through to the base sheet). The scratches on these sheets were up to 400mm in length. She also noted there to be white staining on the edges of the sheets, similar to those found on the exemplars.
(iv) She had repeatedly asked for the material specifications of the protective sheets in order to find out the protective effect of the same but no such information was supplied to her.
(In this regard, it is to be noted that D’s case is that it was not able to obtain such information from either Tohkoh Japan or MR. D has also made the point that the Plaintiffs would be in an equally good position to request MR to give the information and that that they should have done so.)
(v) Regarding the product quality of the acrylic sheets, in order to confirm if the products were below specification/substandard, she would need to have the material specifications of the products. Unfortunately, again, she had not been supplied with what she really wanted. Thus, she was unable to compare the analysis result of the products with the specifications.
(vi) She opined as follows : -
“4.2 [sic] Based on the available evidence, the most likely scenario to account for the scratch damage and staining on the exemplar and returned products that I examined, would be the manner in which the products were handled and stored following their manufacture. ..……..”
(vii) Finally, she concluded in the Expert Report as follows : -
“5.5 Given the extent of through-scratch damage noted and the fact that their appearance specifications were not met, I consider the returned products that I examined to be unsuitable for manufacturing the display screen of mobile telephones, which I understand to be their intended use.”
(viii) In giving oral evidence, she made the following points : -
(a) She had actually written to D’s solicitors 6 times during January to March 2018 to ask for the material specifications. D’s solicitors said that they would revert to her when they had obtained the same but they never did.
(b) She confirmed that without the material specifications, she would have difficulty determining whether the protective sheets did meet the industry criteria.
(c) She said that the integrity of the protective sheets might have been compromised and, consequently, they would not provide adequate protection to the base sheets.
(d) She also said that some of the scratches were 10 - 14cm in length.
THE NATURE OF THE 17,600 ACRYLIC SHEETS DELIVERED IN APRIL 2013
72. I now deal with the true nature of the 17,600 acrylic sheets delivered by D to the Plaintiffs on 8 and 16 April 2013 as mentioned in paragraphs 18 (x) and 60 above.
73. After the hearing had been completed, I sought clarification from the parties and called for submissions by them as to the exact nature of the said delivery of the 17,600 sheets referred to in paragraph 18 (x) above. The reason was that I came to realise the following : -
(i) In paragraph 19 of Lin’s Supplemental Witness Statement, he said the following : -
“During that period of time, there were persistent quality problems in small batches of goods and both parties also settled the matter by replacing the defective goods. After that, two batches of goods that were dated 15 December 2011 (P/O: GKOF283B) and 27 March 2012 (P/O: GKOF289B) were seriously defective. Gredmann had notified Hong Kong Tohkoh immediately and by negotiation between both parties, Hong Kong Tohkoh agreed to replace 17,600 pieces first and replaced the 17,600 pieces on 8 April 2013 (P/O: GKOF305B). However, after inspection by a third-party customer GK, to which Gredmann delivered 5,000 pieces of the replaced goods for its use, those replaced goods wee still seriously defective. Eventually, in January 2014, Gredmann arranged delivery by itself to return 14,800 pieces of acrylic sheets to Japan.”
[emphasis added]
(ii) It had all along been the case of the Plaintiffs that the said 17,600 pieces were supplied to them as replacements. At the same time however, there was reference to Purchase Order GKOF 305B in relation to the said 17,600 pieces in the quotation above as well as in Annexure 1.
(iii) That point did not seem to have been challenged by counsel for D in cross-examination or in submission.
(iv) Hence, I was not sure about the true nature of the delivery of the said 17,600 pieces.
74. The Plaintiffs sent in their Supplemental Submission dated 18 November 2021. It was pointed out to me by the Plaintiffs that they were in fact replacements for defective acrylic sheets supplied by the Defendant to the Plaintiffs under the 1st PO and the 2nd PO and were actually not goods delivered under a contract of sale and that they were delivered to the Plaintiffs free of charge. In support of this point, the Plaintiffs have drawn my attention to the following : -
(i) In paragraph 11 of the Re-Amended Defence and Counterclaim, the Defendant pleaded as follows :
“……the replacement of 17,600 pieces of acrylic sheets was only to accommodate the Plaintiffs as a matter of good gesture without admitting liability.”
(ii) In paragraph 20 of the Defendant’s Opening Submission, it is said :
“20. D subsequently shipped a further 17,600 acrylic sheets to Ps and Ps returned 14,800 sheets to D. These sheets were exchanged by D in the hope that the established customer relationship with Ps could be maintained [C/191, §45].”
(iii) In paragraph 23 of the Defendant’s Closing Submission, it is said :
“23. It appears to be common ground that in early April 2014 D subsequently shipped to Ps a further 17,600 acrylic sheets (“the Replacement Sheets”) [E1/23]. Nakayama subsequently visited the warehouse used by Ps in order to conduct an inventory check.”
(I assume that the reference to the year “2014” is actually a typographical error for “2013”.)
(iv) In the Witness Statement of Nakayama, he said in paragraph 49 as follows :
“49. Shortly thereafter, in or about April 2013, Tohkoh replaced 17,600 pieces of MR’s acrylic sheets with Gredmann and Gredmann returned 14,800 pieces of acrylic sheets to Tohkoh.”
(v) In the 4th Supplemental Witness Statement of Nakayama, he said in paragraph 11 (f) as follows :
“The free replacement of the 17,600 pieces of acrylic sheets was only made as a matter of good gesture without admitting liability.”
(vi) In the 5th Supplemental Witness Statement of Nakayama, he said in paragraph 5 as follows :
“5. ……. The Defendant nevertheless, gratuitously and in good faith, offered to replace 17,600 pieces of the acrylic sheets for free. As a result thereof, the Defendant incurred a total of Japanese Yen 1,000,000, being courier fees, transportation fees and travelling expenses, in sending a total of 17,600 pieces of replacement acrylic sheets to the Plaintiffs.”
(vii) In the Witness Statement of Ikegami, he said in paragraph 22 as follows :
“22. Subsequently, in or about April 2013, Tohkoh replaced 17,600 pieces of MR’s acrylic sheets with Gredmann, and Gredmann returned 14,800 pieces of acrylic sheets to Tohkoh (the “Returned Acrylic Sheets”).”
(viii) In an email in Chinese dated 20 November 2013 sent by Nakayama to Leo Quyanag Wei of the Plaintiffs, he said as follows (as translated) :
“In respect of 21,600 PCS of MR200 current inventory in Hong Kong
Due to quality problems, cannot be sold at normal price
and will be returned to Japan in the short term. Return details will be discussed another time.
(After the occurrence of the quality problem, Tohkoh shipped 17,600 PCS from Japan in March 2013 to replace the above-mentioned sheets)”
75. The Plaintiffs submit that, in the circumstances set out in paragraph 74 above, it is clear that the 17,600 acrylic sheets delivered by D to the Plaintiffs were replacements for the defective acrylic sheets previously supplied, despite the fact that they were supposed to have been delivered under GKOF 305B. They further submit that even if there was supposed to be payment for the 17,600 acrylic sheets under GKOF 305B, the inference can be drawn that such payment was refunded or somehow credited back to the Plaintiffs.
76. In response, in the letter dated 18 November 2021 from D’s solicitors to the Court, D submitted that the Plaintiffs’ evidence was deficient in that they had not produced the primary documents to show the actual dates of payment and the amounts paid for the goods. I am afraid that there are some points made in that letter which I do not quite understand. In one paragraph, the letter says : -
“There was clear evidence at the trial from the Defendant’s witnesses that the Plaintiff did not make payment for the goods shipped under either the 1st Purchase Order or the 2nd Purchase Order.”
Later in that letter, it is said : -
“It is therefore clear that the invoices in respect of both the 1st Purchase Order and the 2nd Purchase Order were outstanding in early 2013.
On the Plaintiffs’ own case, they did not make payment of the invoice in respect of the goods shipped under the 2nd Purchase Order until 28 March 2013, almost a full year after the goods were delivered.
As the Plaintiffs have not placed before the Court the documentary evidence to establish the date on which the goods shipped under the 1st Purchase Order was actually made, the Court cannot come to a clear conclusion as to this date.
It is however clear beyond any doubt that payment was not made in respect of goods shipped under the 1st Purchase Order until long after they were delivered.
The Plaintiffs have clearly not paid for both the goods shipped under the 1st Purchase Order and the goods shipped under GKOF305B. The most probable explanation appears to be that the Plaintiffs only paid for the 17,600 acrylic sheets on 16 January 2014. On this basis, the payment did not relate to the goods originally delivered but to the replacement goods.
As a consequence of the delivery of the replacement sheets to the Plaintiff and the re-delivery of the returned sheets to the Defendant, the Plaintiffs in fact received a total of 52,800 acrylic sheets. The Plaintiffs’ claim relates solely to these 52,800 sheets. The Plaintiffs’ pleaded claim does not concern the returned sheets.
The Plaintiff is bound by its pleadings. There is no evidence whatsoever that the acrylic sheets which form the subject matter of the Plaintiffs’ pleaded claim were in any was defective.”
77. First, I am not clear as to whether D is saying that the Plaintiffs have not made payment of the price of the goods shipped under the 1st PO and/or the 2nd PO and/or GKOF 305B. This is particularly so in light of D’s Counterclaim which claims in the prayer the following relief : -
“(e) Settlement by the 1st and 2nd Plaintiffs of any and all outstanding invoices relating to the AS Contracts (including but not limited to the 1st and 2nd POs) which remains unpaid to date;”.
In this regard, I have of course not forgotten that counsel for D indicated at the beginning of the trial that D was no longer pursuing its Counterclaim.
78. Secondly, I am not clear as to how the dates of payment for any goods would have any bearing on the question whether certain consignment is defective or not.
79. In any event, in the letter dated 19 November 2021 from the Plaintiffs’ solicitors to the Court, the Plaintiffs responded as follows : -
(i) Counsel for D did not cross-examine the Plaintiffs’ witnesses on the date of payment for the goods under the 1st PO. D is now estopped from denying that such payment was made on 22 December 2011 as shown in Annexure 1.
(ii) It is D’s pleaded case that that the Plaintiffs only paid for the goods under the 1st PO and the 2nd PO later and not that they did not pay for such goods at all. In any case, D has expressly abandoned its Counterclaim.
(iii) Insofar as D now attempts to suggest that the 17,600 acrylic sheets delivered in April 2013 were not free replacements, such attempt is wholly contradictory to D’s pleaded case, submissions and the admissions made by it as set out in paragraph 74 above.
80. In further response to the Plaintiffs, D’s solicitors sent a letter dated 25 November 2021 and made, inter alia, the following points : -
(i) The Plaintiffs’ pleaded case is that the defective goods were those delivered under the 1st PO and the 2nd PO and not those under the Replacement Agreement.
(ii) The Plaintiffs had not adduced admissible evidence to establish the relevance of the Replacement Agreement.
(iii) The Plaintiffs had failed to establish their pleaded case that the goods delivered to the Plaintiffs were already damaged before the risk is the good had passed to them. They had also not established that it was the goods under the 1st PO and the 2nd PO were defective, or that it was the 21,400 pieces out of those two orders which were to be returned and replaced.
(iv) In the chronology appearing on page 4 of the Plaintiffs’ Closing Submissions dated 30 June 2021, the date of payment of the goods shipped under the 1st PO was stated to be “22 December 2012”. This was inconsistent with Annexure wherein it was stated that the said date of payment was “22 December 2011”.
(v) “It is clear from the chart at E1-23-1 that the Plaintiffs did indeed pay for the 17,600 acrylic sheets delivered pursuant to Purchase Order GKOF305B: the chart expressly states that the sums of US$267,000 and US$202,920 were paid on 16 January 2014.
The Plaintiffs’ payment for the goods is inconsistent with their suggestion that the so-called Replacement Agreement constitutes an admission of liability.
The Defendant notes that the chart at E1-23-1 also records that on 26 January 2014, 14,800 acrylic sheets described as “returned goods” were delivered and that a payment of US$395,160.00 was made. The inference is to be drawn that these acrylic sheets were delivered by the Plaintiffs to the Defendant and that the refund of US$395,160.00 was made.
The contents of the chart at E1-23-1 therefore demonstrate that the Plaintiffs’ attempts to rely on the so-called Replacement Agreement are fundamentally flawed.
The so-called Replacement Agreement was signed by Mr Ikegami because it was the only practical way of obtaining payment of the long outstanding invoices which the Plaintiffs had failed to pay. The Defendant was not a party to the Replacement Agreement which was made with a different company, Tohkoh Jushi Co. Ltd.
Following the making of the Replacement Agreement, on the basis of their own document, namely the chart at E1-23-1, the Plaintiffs paid a total sum of US$469,920 to the Defendant. The Plaintiffs would not have been expected to have made such a significant payment for further acrylic sheets if the goods previously supplied had been defective.
The so-called Replacement Agreement therefore provides no assistance to the Plaintiffs.”
81. After consideration of the matters set out in paragraphs 72 - 80 above as well as the email dated 20 November 2013 from Nakayama to the Plaintiffs referred to in paragraph 53 above, I have come to the conclusion that the said 17,600 pieces of acrylic sheets delivered by D to the Plaintiffs in April 2013 were actually replacements for the defective goods delivered under the 1st PO and/or the 2nd PO.
MY FINDINGS IN RELATION TO THE QUESTION OF LIABILITY
82. First, I find as a fact that there was no agreement between the Plaintiffs and D and/or any undertaking by the Plaintiffs to the effect that: -
(i) D would give no warranty for the quality of the goods to be sold to the Plaintiffs;
(ii) the Plaintiffs could not re-sell the acrylic sheets to competitors of D, including, in particular, GK.
I take the view that if there had been such agreement or undertaking, the same would have been recorded in writing between the Plaintiffs and the Defendant. Furthermore, if there had been such an agreement or undertaking and the Plaintiffs had committed a breach thereof, the same would have been raised D in the correspondence between the parties much earlier on and not only just after the commencement of the litigation. I therefore do not accept the evidence of Ikegami and Nakayama in this regard.
83. Secondly, in any event, I fail to see how GK could be a competitor of D in light of the fact that it was purchasing goods as a sub-purchaser from the Plaintiffs who themselves had to buy the goods from D. GK must have paid a price for the goods higher than that paid by the Plaintiffs to D and GK would naturally sell the same goods at an even higher price to the purchasers from itself. In those circumstances, GK would only be an indirect purchaser from D and not its competitor.
84. Thirdly, on the basis of the course of conduct between the parties from the commencement of their trading relationship and all the admissions made on behalf of D, mostly by Nakayama, including all the emails referred to above, in particular, those set out in paragraphs 23, 34, 37 and 53 above, and the contents of the MR Report sent by Nakayama to the Plaintiffs on 3 December 2011 as referred to in paragraph 31 above, I find that it has been proved by the Plaintiffs that the acrylic sheets sold by D to the Plaintiffs during their trading relationship had always had substantial quality problems.
85. Fourthly, on the basis of the matters referred to in paragraphs 82 and 83 above and on the basis of the draft of the Negotiation Document sent by Nakayama to Michael Chen on 22 January 2013 as referred to in paragraph 41 above, the forwarding to the Plaintiffs of the actual Negotiation Document signed by Ikegami two days later as referred to in paragraph 43 above, the signing of the Replacement Agreement by Ikegami as referred to in paragraph 47 above and the delivery of the 17,600 replacement acrylic sheets in April 2013, I find that the majority of the acrylic sheets delivered under the 1st PO and the 2nd PO were defective.
86. The quality problems are to an extent confirmed by the Report of Dr Parsons as referred to above. With the limited information and materials supplied to her, she was able to come to conclude and consider “the returned products that I examined to be unsuitable for manufacturing the display screen of mobile telephones, which I understand to be their intended use.”
87. Having found that the goods under the 1st PO and the 2nd PO were defective, I do not think it really matters whether they were actually “MR 200 G” models or “MR 200 Z” models.
88. I do not accept the allegation by Ikegami that he signed the Replacement Agreement only for and on behalf of Tohkoh Japan. I find as a fact that he signed it and made the admissions contained therein for and on behalf of D. Quite clearly, at all material times, both Nakayama and Ikegami were acting with the Plaintiffs as the representatives of D. There was no contractual relationship or direct dealing between the Plaintiffs and Tohkoh Japan.
89. I also do not accept the allegation by Ikegami and Nakayama that the Replacement Agreement was signed by Ikegami under duress in the sense that the Plaintiffs threatened not to pay for the goods under the 1st PO and/or the 2nd PO. Whether a threat of such nature can ever constitute a proper defence of duress in the law of contract is questionable. In any event, the simplest remedy for an unpaid seller is just to sue for the price. There is no credible evidence adduced by them that it would be fruitless for D to sue the Plaintiffs in a Mainland court. Furthermore, I do not accept their allegation that D agreed to replace large quantities of the acrylic sheets for the Plaintiffs only because it wanted to retain a good relationship with its customer.
90. I further do not accept Nakayama’s evidence that, in his email dated 13 June 2012 to Ivy Huang as referred to in paragraph 37 above, he was referring to 14,800 acrylic sheets under an earlier contract which were defective. Quite obviously, he was referring to 14,800 acrylic sheets under the 1st PO. His evidence on this point is simply disingenuous.
91. Again, I do not find that D has proved that the defects had been caused as a result of the mishandling or improper storage by the Plaintiffs. According to both Lin and Ms Yin, the Plaintiffs would as soon as the goods arrived in Hong Kong cause them to be transported to the relevant warehouses without opening the packages. They would make sure that the warehouses they used had proper humidity and temperature contract. Then if a customer were to buy some of the goods, the Plaintiffs would cause the same to be delivered to the customers. In all probability, this would be the natural procedure to be followed. Furthermore the evidence is that in the course of the dealings between the Plaintiffs and D, whenever there were complaints about quality, Nakayama would go to the warehouses to check the goods. If he had thought that there were mishandling by the Plaintiffs or if the warehouses in question were not up to standard, surely he would have raised such complaints in correspondence. The fact is that there was no such complaint.
92. Against what is said in paragraph 91 above, on the other hand, there have been admissions by Nakayama which show that there were problems in the storage and the protective sheets used by MR. See, eg the email from Nakayama dated 5 January 2011 referred to in paragraph 23 in which he said: -
“it is true that MR 200 has been stored in the warehouse for about 7 months, and there shall be a problem of warping of the sheet.”
In the email from Nakayama dated 3 December 2011 referred to in paragraph 31 above, he also said: -
“In connection with the defective gum/staining residues problem, we are considering introducing protective films with better quality and we are currently examining it in the introductory stage.”
93. I now deal with D’s defence that the Plaintiffs were too late in complaining about the defective quality of the goods. It is clear that D knew that the Plaintiffs had bought the goods from it for the purpose of resale to customers. It must also be well understood by D that, on receiving the goods, the Plaintiffs would not remove the protective sheets in order to check the quality of the acrylic sheets because, once the protective sheets had been removed or tampered with, their customers would not accept the acrylic sheets as being new. Thus, it would be natural for the Plaintiffs to learn about any defect in the quality of the goods only after the goods had been sold to the Plaintiffs’ customers and after they had been told by such customers about the defects.
94. In the case of Truk (UK) Ltd v Tokmakidis GmbH [2000] 2 All E R (Comm) 594, the court held that, in a case where a purchaser had purchased goods for the purpose of resale, that was an important factor to be taken into account in the court’s determination of the reasonable period for rejection in the context of section 35 (4) of the Sale of Goods Act 1979. In such circumstances, it would often be the case that a particular defect could or would only be discovered by the sub-purchaser when a resale took place. The court said at page 605 D-F as follows : -
“Where goods such as machines of one kind or another are sold for the purposes of resale, and they turn out to be defective, it often happens – I would suggest more often than not – that the defect is discovered only when the sub-buyer comes to use the goods. He then rejects them and causes the buyer in turn to reject them. That is an everyday event in both consumer and non-consumer transactions. Section 35 refers to it in sub-s (6)(b), where it is provided that acceptance shall not be deemed to have occurred merely by reason of delivery under a sub-sale. This leads to the conclusion that, where goods are sold for resale, a reasonable time in which to intimate rejection should usually be the time actually taken to resell the goods together with an additional period in which they can be inspected and tried out by the sub-purchaser. As an example, consider the position of a trader who has bought for stock an item of electrical equipment which may be sold in a week or in several months. Certainly it would usually be right in such cases at least to take account of the period likely to be required for resale. In the present case I have to decide whether the period should last at least until the date for payment – which is the earlier of the date of resale or six months from delivery. I am satisfied that in the circumstances it should. That reflects the reasonable interests of both the buyers and the sellers, and takes account of the terms of the contract itself. So I conclude that a reasonable time in which to intimate rejection had not passed when December 1996 came and Tokmakidis questioned compliance with the Iveco guidelines and refused to pay.”
95. In my judgment, the same reasoning applies in the present case. Moreover, it appears that the Plaintiffs had in fact been informing and complaining to D about the defects in the goods very soon after they had been notified by their customers. I therefore find that the Plaintiffs were not too late in rejecting or complaining about the goods vis-à-vis D. Indeed, it is to be noted that the Plaintiffs in the present case were not seeking to reject the goods. They only claim damages for breach of warranty and/or condition. In Halsbury’s Laws of Hong Kong (2nd ed) Vol 45, it is said at paragraph [355.272] on page 690 as follows : -
“[355.272] Buyer’s remedies on breach Where there is a breach of warranty by the seller, or where the buyer elects or is compelled to treat any breach of a condition on the part of the seller as a breach of warranty, the buyer is not by reason only of such breach of warranty entitled to reject the goods; but he may set up against the seller the breach of warranty in diminution or extinction of the price, or maintain an action against the seller for damages for the breach of warranty.”
[emphasis added]
96. I do not think that the argument by D that the risks in the goods had already passed to the Plaintiffs on the basis of the shipping documents has any relevance at all. There is no evidence or suggestion by D that the defects were caused by something which occurred whilst the goods were in transit.
97. Regarding the allegation by D that the reason for the purchasers from the Plaintiffs and, in turn, the Plaintiffs themselves, wanting to reject the goods as a result of the decline in the market for the acrylic sheets in question because of the decrease in popularity of mobile phones such as Nokia, Ericsson and Motorola, Lin said that the market only dropped a bit. There is no evidence adduced by D that the drop was so sudden and severe that the Plaintiffs and their sub-purchasers would be motivated to try to get out of orders already placed for the acrylic sheets.
98. Furthermore, if the allegation referred to in paragraph 97 above were true, it would mean that the Plaintiffs and their customers were actually conspiring to cheat D. Such a defence had never been raised in the correspondence between D and the Plaintiffs. I find that D has not made out such a case.
99. Regarding the point made by D as referred to in paragraph 80 (iv) above, I believe that the date “22 December 2012” stated on page 4 of the Plaintiffs’ Closing Submissions dated 30 June 2021 must be a typographical error for “22 December 2011” which also caused that date to be inserted in the wrong place in the chronology because it was pointed out by the Plaintiffs that the source of that date was “E1/23”, ie, the chart annexed hereto as Annexure 1 which makes it clear that the date of payment for the goods under the 1st PO was “22 December 2011”. Thus, there is nothing in that point. In any event, in light of all the evidence set out above, I do not think that the question as to whether payment for the goods under the 1st PO was made on 22 December 2011 or 22 December 2012 would affect my findings in the case.
100. In view of my finding in paragraph 81 above, I find that the 17,600 replacement acrylic sheets were also goods supplied the Plaintiffs by D under the 1st PO and the 2nd PO.
101. In the above circumstances, I find that D has breached its obligations under the 1st PO and the 2nd PO by supplying defective goods to the Plaintiffs which were not of merchantable quality or suitable for the purpose of the Plaintiffs in breach of the conditions implied under section 16 (2) and (3) of the Sale of Goods Ordinance Cap 26. D should be liable to the Plaintiffs in damages.
102. In prayer (2) in the Amended Statement of Claim, the Plaintiffs claim : -
“(2) A declaration that the Defendant is to indemnify the 1st and/or 2nd Plaintiffs from the claim of 金凱 [GK] against the 1st and/or 2nd Plaintiffs.”
The supply of goods by the Plaintiffs to GK took place in 2013. There is no evidence that GK has actually lodged any claim or serious claim against the Plaintiffs. I will therefore not make any declaration of indemnity as claimed by the Plaintiffs.
103. I shall deal with the question of damages below.
QUANTUM OF DAMAGES
104. As pointed out above, the Plaintiffs’ claim is not rejection of the goods in question but damages in breach of warranty and/or condition. They do not appear to be claiming for loss of profits on resale of the goods which they would have made had the goods not been defective. They only claim the difference between the price of the goods paid by them to D and the prices of the defective goods sold by them to sub-purchasers.
105. In the Amended Statement of Claim, the Plaintiffs claim damages under 3 heads: -
(i) “Loss arising from the sale of 26,336 pieces of MR 2000 0.8T Acrylic Sheets (P/O : GKOF 283B & GKOF 289B) at a lower unit price in the sum of RMB3,417,958.51”;
(ii) “Loss arising from the sale of 16,265 pieces of MR 200 1.0T Acrylic Sheets (PO : GKOF 283B) at a lower unit price in the sum of RMB1,607,068.06”;
(iii) “Tax in the sum of RMB225,568.75 for delivery 5,000 pieces of MR200 Acrylic Sheets to 金凱”.
106. I take the view that item (iii) in paragraph 105 above is too remote and should not be borne by D.
107. The evidence on the quantum of damages is basically given by Ms Yin in her Supplemental Witness Statement. The relevant parts of her Supplemental Witness Statement read as follows : -
“3. From 013 to 2016, Gredmann sold the defective acrylic sheets MRZ200 at lower prices successively. The sales volume was:
i. 26,336 pieces of MRZ2000.8T; and
ii. 16,265 pieces of MRZ200 1.0T.
4. In respect of the losses arising from selling the 26,336 pieces of MRZ200 0.8T at lower prices by Gredmann, please refer to the following chart:
| Losses arising from selling MRZ200 0.8T at lower prices |
| |
Name of Sub-purchaser |
Quantity |
Losses (RMB) |
Exhibit |
| 1 |
深圳市富諾包裝制品有限公司 |
1,600 |
$216,930.34 |
“YM-1” |
| 2 |
深圳市海楓茂光學科技有限公司 |
15,700 |
$2,376,492.05 |
“YM-2” |
| 3 |
深圳市雷克斯科技有限公司 |
20 |
$2,626.16 |
“YM-3” |
| 4 |
深圳市信濠精密組件有限公司 |
1,200 |
$27,655.02 |
“YM-4” |
| 5 |
上海偉技貿易有限公司 |
7,816 |
$794,254.94 |
“YM-5” |
| |
Total: |
26,336 |
$3,417,958.51 |
|
The relevant documents are annexed to this Supplemental Witness Statement as exhibits “YM-1”, “YM-2”, “YM-3”, “M-4” and “YM-5”.
5. Taking “YM-1” as an example, the chart on page 1 listed the information in respect of Gredmann’s sales of MRZ200 0.8T to 深圳市富諾包裝制品有限公司at lower prices form August 2016 to December 2016. The rows of the chart show the delivery date of each order and the columns show the sales quantity, unit price, loss per piece, total losses, and the reference number of the relevant supporting document. For example, the first row is related to the first purchase order. The delivery date was 5 August 2016, quantity was 100 pieces, unit price was RMB47.01, loss per piece was RMB135.58 (the purchase price of RMB182.59, as mentioned in the above paragraph 2, minus the unit price of RMB47.01). The supporting documents of this order are marked as “1” that I have marked the relevant purchase order, delivery note and tax receipt as “1-1”, “1-2”, “1-3” and “1-4” for convenience sake. The second row of the chart is related to the second purchase order and the supporting documents are marked as “2”, which involving “2-1”, “2-2” and “2-3” that are respectively the purchase order, delivery note and tax receipt. The third row is related to the third purchase order and the supporting documents are marked as “3”, and so forth. I have adopted the same system in :YM-2”, “YM-3”, “YM-4” and “YM-5”.
6. Losses suffered by Gredmann as a result of selling the 16,265 pieces of MRZ200 1.0T at lower prices are as follows:
| Losses arising from selling the MRZ200 1.0T at lower prices |
| |
Name of Sub-purchaser |
Quantity |
Losses (RMB) |
Exhibit |
| 1 |
深圳市尊寶精密光學有限公司 |
400 |
$59,360.79 |
“YM-6” |
| 2 |
深圳市旭成光電有限公司 |
995 |
$139,155.68 |
“YM-7” |
| 3 |
深圳現代富博科技有限公司 |
100 |
$13,130.79 |
“YM-8” |
| 4 |
深圳市富諾包裝制品有限公司 |
800 |
$108,465.16 |
“YM-9” |
| 5 |
深圳市雷克斯科技有限公司 |
3,198 |
$474,589.49 |
“YM-10” |
| 6 |
上海偉技貿易有限公司 |
3,057 |
$182,701.38 |
“YM-11” |
| 7 |
深圳市友強光學科技有限公司 |
1,195 |
$165,844.63 |
“YM-12” |
| 8 |
深圳市泰源興科技有限公司 |
3,520 |
$415,195.42 |
“YM-13” |
| 9 |
深圳市信濠精密組件有限公司 |
3,000 |
$48,624.72 |
“YM-14” |
| |
Total: |
16,265 |
$1,607,068.06 |
|
The relevant documents are annexed to this Supplemental Witness Statement as exhibits “YM-6”, “YM-7”, “YM-8”, “YM-9”, “YM-10”, “YM-11”, “YM-12”, “YM-13” and “YM-14”. ”
The detailed supporting documents exhibits “YM-1” to “YM-14” have been included in the Hearing Bundles E1/93 to E2/287.
108. D did not appear to have seriously challenged the documentary evidence referred to in paragraph 107 above or the figures therein, whether by adducing counter-evidence or in cross-examination, except in a sort general denial manner. Furthermore, D had not adduced any evidence to support its contention that the Plaintiffs had failed in their duty of mitigation, for instance, by suggesting that the goods sold at a lower prices should have fetched higher prices.
109. In the above circumstances, I find that the Plaintiffs have proved the loss and damage which they have suffered.
110. Regarding the quantum under item (ii) set out in paragraph 105 above, Lin in paragraph 26 (i) of his Supplemental Witness Statement says that the figure “RMB1,607,068.06” should be reduced to “RMB1,604,310.36”. I have noted it.
CONCLUSION
111. I give judgement as follows : -
(i) There be judgment in favour of the Plaintiffs on their claim against D in the sum of RMB5,022,268.87 with interest thereon at the rate of 1% above the HSBC Best Lending Rate from time to time from the date of the Writ until the date of Judgment.
(ii) The Counterclaim is dismissed.
(iii) There be a costs order nisi that the costs of the action and of the Counterclaim be paid by D to the Plaintiffs, the same to be taxed on a party and party basis, if not agreed.
| |
(Patrick Fung SC) |
| |
Deputy High Court Judge |
Ms Queenie W S Ng and Mr Kev L H Wan, instructed by Cheung & Co, for the 1st and 2nd Plaintiffs
Mr Colin Wright and Ms Jacqueline K K Chan, instructed by Robert Lee Law Offices, for the Defendant
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