TAURUS IMPORTGESELLSCHAFT AND ANOTHER v. WIDE LOYAL INDUSTRIES LTD

HCA2808/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2808 OF 2004

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BETWEEN

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J U D G M E N T

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BACKGROUND

1.  The plaintiff is a company incorporated in the Federal Republic of Germany and carries on business, inter alia,of sale of various products including ropelights in Germany and other European countries.

2.  The defendant is a company incorporated in Hong Kong and a manufacturer and supplier of ropelights.

3.  By Purchase Confirmation No. 103 108 dated 25 February 2003, the plaintiff agreed to purchase and the defendant agreed to supply 237,000 pieces of ropelights at a unit price of US$4.05 to the plaintiff for resale in Germany (ALDI South) (“the First Agreement”).

4.  By another Purchase Cofirmation No. 103 111 also dated 25 February 2003, the plaintiff agreed to purchase and the defendant agreed to supply 241,620 pieces of ropelights at a unit price of US$4.15 to the plaintiff for sale in Germany (ALDI North) (“the Second Agreement”).

5.  It was an express term of both the First Agreement and also the Second Agreement that they shall be construed in accordance with Hong Kong law.

6.  The defendant delivered all 478,620 pieces of ropelights to the plaintiff in Germany by having same shipped to the port of Hamburg on divers dates in July, August and September 2003. From there the ropelights were to be distributed by the plaintiff to ALDI, the plaintiff’s buyer in Germany. For the purpose of getting the ropelights into Germany, the defendant, as the manufacturer had caused to be labeled on each of the carton containing the ropelights, the CE mark, without which the ropelights could not be imported into Germany.

7.  Payment of the purchase price was duly made by the plaintiff to the defendant in the sum of US$1,926,573.

8.  Those ropelights in the Second Agreement and which were intended for ALDI North, being a chain store in Northern part of Germany, were distributed to ALDI North between 14 and 15 October 2003 and those in the First Agreement which were intended for ALDI South were to be distributed to ALDI South between 21 to 24 October 2003.

9.  On or about 21 October 2003, the German environmental authorities discovered that the ropelights supplied by the defendant contained high levels of cadmium, a substance the level of which were regulated by German Law in accordance with EC directives.

10.  As a result, on or about 23 October 2003, the Ministry of the Environment Northrhine-Westfalia declared a sale prohibition against ALDI North on the ground that the cadmium contents of the ropelights had exceeded the limit of the Chemical Act in Germany and thus directed ALDI North to withdraw marketing the ropelights and to recall all the ropelights from their shops. However, no action was required in respect of those ropelights already sold to end users.

11.  At the same time ALDI South, because of the sale prohibition imposed on ALDI North by the German authorities, also immediately on the same day stopped the sale of the ropelights in all of its stores and recalled the ropelights distributed to its stores.

PLAINTIFF’S CLAIM

12.  Against this background, the plaintiff claims against the defendant for breach of the First Agreement and the Second Agreement in that it was an express term in both the First Agreement and the Second Agreement that the ropelights had to be “CE Approved”. It is the plaintiff’s case that this is a commercial term to the effect that the ropelights in both the First Agreement and the Second Agreement had to comply with all relevant EC directives in particular those relating to the level of cadmium whereby the same were prohibited from being resold in Germany.

13.  Further or alternatively, the plaintiff also claim that the ropelights, the subject matter of the First Agreement and the Second Agreement :

(a) were not of merchantable quality;

(b) did not fit the description in the First Agreement and the Second Agreement; and

(c) were not fit for the purpose for which they were purchased.

thereby being in breach of the implied conditions under the Sale of Goods Ordinance.

DEFENCE

14.  The defence raised by the defendant as to the main claim of the plaintiff, that they were in breach of the First Agreement and the Second Agreement by failing to comply with the term that the ropelights had to to “CE Approved” are as follows :

(a) the defendant denied that the cadmium contents in the ropelights exceeded the permitted limit under German Law, and even if it did, they denied that was in breach of the First Agreement and the Second Agreement;

(b) the defendant averred that the clause in the First Agreement and the Second Agreement relating to “CE Approved” only required the product to conform with the requirements of the relevant Directives of the European Union on product safety. In this respect they had relied upon SLG Pruf and Zertifizierungs Gmbh (“SLG”) to provide the requisite international safety testing and certification in respect of the ropelights;

(c) that no duty was imposed on them by the First Agreement and the Second Agreement to ensure that the ropelights had to comply with or not contravene any relevant product standards and specifications under German Law; and

(d) the defendant denied that the First Agreement and/or the Second Agreement imposed on them any duty to ensure that the ropelights would not be prohibited from sale in Germany for contravening any German Law.

EXPERT EVIDENCE

15.  The plaintiff had adduced expert evidence from an expert in respect of German Law and also expert evidence from chemical laboratory test conducted on the ropelights delivered by the defendant pursuant to the First Agreement and the Second Agreement in respect of their cadmium content contained in the PVC components of the ropelights.

16.  It should be noted that such expert evidence only came from the plaintiff. No such expert evidence was adduced by the defendant to rebut the expert evidence from the plaintiff.

(A) German Law expert

17.  This evidence came from Dr Harald Bramigk (“Dr Bramigk”), Attorney-at-law (Germany) and a partner of the German Law firm of Rodl & Partner. His expertise as an expert on German Law and European regulations was not challenged by the defendant. His evidence can be summarized as follows :

(1) Council Directive76/769/EEC on provisions of Member States of the European Community relating to restriction on marketing and use of dangerous substances classified as carcinogenic, mutagenic or toxic came into force on 27 July 1976.

(2) Under Council Directive 76/769/EEC it was stipulated that cadmium may not be used to give colour to finished products manufactured from the substances and preparation listed (which included PVC) and in any case, whatever their use or intended final purpose, finished product or components of products manufactured from the substances or preparations listed coloured with cadmium may not be placed on the market if their cadmium contents exceed 0.01% by mass of the plastic material.

(3) Council Directive 91/338/EEC amending Council Directive 76/769/EEC which incorporated regulations as to the use of cadmium and its compounds, came into force on 18 June 1991 and is still in force, not having been repealed.

(4) Under Council Directive 91/388/EEC it is stipulated that products pigmented with cadmium or components of such products manufactured from, inter alia, PVC, must not be placed on the market if their concentration of cadmium exceed 0.01% by weight of the plastic.

(5) Both Council Directive 76/769/EEC and 91/338/EEC have been incorporated into German Federal Law amongst others by the “Chem Verbots V” which came into force on 1 November 1993. “Chem Verbots V” translated means ‘Directive on the prohibition and restriction of bringing into circulation dangerous substances, preparations and products’.

(6) Up to 1 June 2003, that version of Chem Verbots V published in June 1996 was in force in Germany. As from 1 June 2003 an update version of Chem Verbots V came into force and is still in force (at the time of this trial). However, the provisions regarding the prohibition of cadmium in both versions have remained identical.

(7) The CE marking is a European “passport” for the respective products into the European Community. CE marking is mandatory under German Law which have implemented European standards into its national law. The CE marking affixed to products is understood as a declaration by the person responsible for such affixing and to Germany’s responsible authorities that the product conforms to all applicable Community and thus also national provisions and that the appropriate conformity assessment procedures have been completed.

(B) Chemical laboratory testing

18.  Three test reports were produced by the plaintiff from Bureau Veritas Hong Kong Limited engaged by the plaintiff to conduct chemical laboratory test on the PVC components in respect of the ropelights delivered by the defendant.

19.  All three reports were dated 5 August 2005 and all the tests were conducted between 1 and 5 August 2005.

20.  The three reports relate to the ropelights tested in Carton No. 1447, Carton No. 406, and Carton No. 239 respectively. It is not disputed that these Cartons were part of the ropelights delivered by the defendant pursuant to the First Agreement and the Second Agreement, but returned to the plaintiff by ALDI after the sale prohibition.

21.  All the tests were conducted on the basis that pursuant to Council Directive 91/338/EEC, the permitted cadmium content in the PVC component of the ropelight would be no more than 100mg/kg.

22.  In the first test report relating to Carton No. 1447, the cadmium content in the :

(a) black PVC plastic connection between cable and lamp tube;

(b) transparent PVC plastic lamp tube inner;

(c) translucent blue PVC plastic lamp tube;

(d) translucent PVC plastic end tip, and

(e) white PVC plastic sticker with black printing.

were found to have cadmium content between 4 and 6 times more than the permitted level.

23.  In each of the second and third reports relating to Carton No. 406 and Carton No. 239 respectively, the cadmium content in the :

(a) black PVC plastic connection between cable and lamp tube;

(b) transparent PVC plastic lamp tube;

(c) translucent PVC plastic end tip; and

(d) white PVC plastic sticker with black printing.

were found to have cadmium content between 4 and 6 times more than the permitted level.

24.  In all three reports, the cadmium contents in the :

(a) black PVC plastic plug;

(b) black PVC plastic cable jacket with white word print;

(c) brown PVC plastic wire jacket; and

(d) light blue PVC plastic wire jacket.

were all found to be within the permitted level.

SALE PROHIBITION

25.  In so far as the evidence relating to the sale prohibition imposed by the German authorities in respect of the ropelights on ALDI North goes, the plaintiff relies on documentary evidence. Such documentary evidence relied on by the plaintiff are contained in items 17 to 35 (inclusive), 38, 40, 44, 45 and 46 of the Bundle of Documents used at trial. Most of these documents are in German, but all of them accompanied by English translations.

26.  The documents include a number of reports of test results carried out on the cadmium contents of the ropelights. These reports were commissioned by the Department of Environment of the State of Northrhine-Westfalia (item 17), as well as those conducted by the Bavarian State Office for Labour Protection, Working Medicine, and Safety Technology (items 24, 25 and 26). There is also a test report from LGA which was commissioned by ALDI (item 23) and one further report by SGS commissioned by the plaintiff (item 28).

27.  It is unnecessary to go into the details of these reports suffice it to say that in all of the reports, the results of the test showed that some of the PVC components in the ropelights had cadmium contents in excess of the permitted level under the EC Directives and German Law. Such excess ranged from between two times to four times more than the permitted level.

28.  The sales prohibition proper was contained in a letter from District Goslar of the District Council addressed to ALDI and dated 23 October 2003.

29.  A statement by ALDI dated 23 October 2003 to all its chain stores recalling and withdrawing the ropelights from being sold in its stores as a result of the sale prohibition imposed on those goods by the State Environmental Office Duisburg (item 19).

30.  The rest of the documentary evidence included correspondence between the plaintiff’s German Lawyers, Esche Schumann Commichau, with the State Environment Office Duisburg and also correspondence between the Ministry for the Protection of Environment and Nature, Agricultur and Consumer Protection of the State of North Rhine-Westfalia with the Secretary of State, Environment Ministry of Lower Saxony.

31.  In those correspondences, the plaintiff’s German Lawyers put forward a case in an attempt to argue for the lifting of the sales prohibition, but which was ultimately not acceded to by the German authorities.

32.  On the other hand, the defendant had adduced some evidence to suggest that there was no sales prohibition, but that the ropelights had been sold out.

33.  That evidence came from Mr Ko Yu Chow (“Mr Ko”), the director of the defendant. His evidence was that in late November 2003, he went to Germany and was there with his son. Through the hotel, they had engaged a hire car with a chauffeur who could speak English. They asked to be taken to some 10 ALDI chain stores by that chauffeur. His son communicated with the chauffeur in English. The chauffeur was asked to enquire from the shop attendants whether ropelights were available for sale. The reply coming back from the various shop attendants (through the chauffeur) in all the ALDI stores was that ropelights had been sold out very early. When asked by defence counsel while giving evidence in chief what steps were taken to ensure that the ropelights they were asking for were the ropelights produced by the defendant, Mr Ko’s answer was that he merely asked for ropelights, and that if the shops had it, the shop attendant would say ‘Yes’ and if the shop did not have it the attendant would say ‘No’.

FINDINGS ON THE PRELIMINARY ISSUES

34.  In the absence of any evidence from the defendant challenging the expert evidence adduced by the plaintiff, I have no hesitation in accepting totally the expert evidence adduced by the plaintiff, both the expert on German Law as well as the chemical laboratory test results.

35.  On the expert evidence adduced, I am able to make specifically the following findings :

(a) The cadmium content of some of the PVC components used in the ropelights produced by the defendant, being the subject matter of the First Agreement and the Second Agreement, exceed 0.01 % by the weight of the plastic.

(b) That Council Directives 76/769/EEC and Council Directive 91/338/EEC have been incorporated into German Federal law by the “Chem Verbots V” since 1 November 1993 whereby any plastic component of any product is prohibited from being put of the market for sale if the cadmium content exceed 0.01% by the weight of the plastic.

(c) The CE marking is a declaration to the German authorities by the person affixing the CE mark that the product so affixed with the CE mark conforms to all applicable Community and German national provisions and that the appropriate conformity assessment procedures have been completed.

36.  As for the sale prohibition, I have no hesitation in finding that there was a sale prohibition imposed on the ropelights produced by the defendant sold and delivered to the plaintiff under the First Agreement and the Second Agreement, and which in turn were resold by the plaintiff to ALDI, based on the documentary evidence adduced by the plaintiff relating to the sale prohibition imposed by the German authorities.

37.  The evidence from Mr Ko, even if true, falls far short of proving that such a sale prohibition relating to ropelights produced by the defendant did not take place for the following reasons :

(a) No steps were taken when enquiring about the ropelights being for sale to ensure such enquiries related to the ropelights produced by the defendant.

(b) Nothing in the evidence of Mr Ko to even remotely suggest that the ALDI chain stores which he visited had not also sold other ropelights not produced by the defendant.

(c) Therefore the answers coming back from the shop attendants may well have referred to other ropelights not those of the defendant having been sold out.

38.  Even if the ropelights referred to by Mr Koin this part of his evidence could be understood to refer to those ropelights produced by the defendant and sold to the plaintiff under the First Agreement and the Second Agreement, little or no weight could be given to the answers from the various shop attendants, which incidentally is second hand hearsay, for the simple reason that a shop attendant would likely give the “excuse” that the ropelights are sold out and therefore no longer available for sale than to go into a detailed explanation of a sale prohibition by the Government authorities since the effect on the potential customer would be the same as the ropelights were not available for sale.

39.  For the above reasons, I cannot see that the evidence from Mr Ko can even remotely dent, not to mention upset, the fully documented evidence from the plaintiff that a sale prohibition was imposed on the ropelights in question.

MAIN DISPUTE

40.  The main and real dispute between the parties in this case are :

(a) Whether the defendant was in breach of an express/implied term in the First Agreement and the Second Agreement that the ropelights supplied thereunder were not “CE Approved”.

(b) Whether the defendant was in breach of implied term under section 15 of the Sales of Goods Ordinance (“SGO”) in that the ropelights supplied did not correspond with the description of “CE Approved”.

(c) Whether the defendant was in breach of an implied term under section 16 SGO that the ropelights supplied were not of merchantable quality.

(d) Whether the ropelights supplied were fit for the purpose for which they were purchased.

41.  Before dealing with each of the above issues, a further preliminary issue between the parties is whether the sales under the First Agreement and the Second Agreement were sales by description (as submitted by the plaintiff) or whether they were sales by sample (as submitted by the defendant).

42.  Looking at the wording of the First Agreement and the Second Agreement, it is clear that both were sales by sample as well as by description. The description are all the bullet points under the Article “ROPELIGHT” on the first page of each of the First Agreement and the Second Agreement. One such description is the term “TUV/GS & CE Approved, IP44”.

43.  Accordingly, under section 15(1) SGO, where it is a sale by sample as well as by description, the bulk of the goods not only have to correspond with the sample, but must also correspond with the description.

44.  In this case, the relevant part of that term upon which the entire dispute turns are the words “CE Approved” and it is this term which was instrumental to cause the defendant to affix the “CE” mark to the cartons of the ropelights which were shipped by them to the port of Hamburg for the plaintiff to take delivery of.

MEANING OF “CE APPROVED”

45.  The main difference between the parties is that the plaintiff’s case is premised on the basis that the term “CE Approved” means that the manufacturer (in this case the defendant) had to comply with “all relevant EC Directives” in so far as the ropelights are concerned in that not only would the defendant need to comply with the directives in relation to that product (ropelights in this case) but also to the general directives as regards the material used in the components for the ropelight, such as the cadmium level not being in excess of what is permitted under Council Directives 76/769/EEC and 91/338/EEC both of which have been incorporated into German Federal Law.

46.  On the other hand, the defendant’s case is that the term “CE Approved” simply means that they had to conform only with the directives relevant to ropelights, being the Low Voltage Directive (73/23/ECC) and also the EMC Directive (89/336/EEC) in respect of which certificate of conformity have already been obtained by their associate company Wide Loyal Lighting Co. Ltd in respect of the ropelights delivered to the plaintiff.

47.  The plaintiff’s evidence comes from its legal expert in German Law, as well as from the guidelines and literature produced.

48.  Dr Bramigk agreed that the term “CE Approved” is not a legal term and cannot be found as a term in either CE Directives or German Law. He accepted that it may well be a mercantile trade term.

49.  His evidence therefore relates to the affixing of the CE mark rather than to the meaning of “CE Approved”.

50.  Dr Bramigk explains that the CE mark can only be affixed to products when such product has complied with all relevant CE Directives, both those directives with which the product (as a product) is relevant as well as the more general directives regulating the substance used in the component parts of the product.

51.  Dr Bramigk also explains that while testing houses will be able to see the product as a finished product so that they will know what are the relevant EC directives such a finished product will have to comply with, the testing house will not, unless told by the manufacturer, know what substances had been used for its various component parts. In the present case therefore, unless the testing house was told about the use of cadmium in the PVC by the defendant (or by Wide Loyal Lighting Co. Ltd) as the manufacturer, they would not carry out any test on the cadmium content. However that will still be the responsibility of the manufacturer since in all likelihood it will only be the manufacturer who will be in a position to know what substance had been used in the manufacture of that product.

52.  In this respect, the plaintiff also rely on the Guidelines explaining the “CE” mark downloaded from the EU website referred to by Dr Bramigk.

53.  Chapter 7 under the heading “CE marking” and under the sub-heading at 7.1 “Principles of CE marking” it is stated :

“The CE marking symbolizes the conformity of the product with the applicable Community requirements imposed on the manufacturer.

The CE marking affixed to products is a declaration by the person responsible that:

The product conforms to all applicable Community provisions, and

The appropriate conformity assessment procedures have been completed.”

54.  Under sub-heading 7.2 “Products to be CE marked” it is stated :

“Where products are subject to several directives, which all provide for the affixing of the CE marking, the marking indicates that the products are presumed to conform to the provisions of all these directives.”

55.  Dr Bramigk also referred to the Official Journal of the European Communities in which it is stated under the heading of General Guidelines as follows :

“B. The principal guidelines for the affixing and use of the CE marking are the following:

(a) The CE marking symbolizes conformity to all the obligations incumbent on manufacturers for the product by virtue of the Community directives providing for its affixing. Thus, such conformity is not limited to the essential requirements relating to safety, public health, consumer protection, etc., as certain directives may impose specific obligations not necessarily forming part of the essential requirements.

(b) The CE marking affixed to industrial products symbolizes the fact that the natural or legal person having affixed or been responsible for the affixing of the said marking has verified that the product conforms to all the Community total harmonization provisions which apply to it and has been the subject of the appropriate conformity evaluation procedures.

(c) Where the industrial products are subject to other directives concerning other aspects and which also provide for the affixing of the CE marking, the latter must indicate that the products are also presumed to conform to the provisions of those other directives.”

56.  A further piece of evidence which supports the plaintiff’s contention in this respect is the certificate from SLG Pruf und Zertifizierungs GmbH (“SLG”) produced by the defendant in relation to the ropelight manufactured by Wide Loyal Lighting Co. Ltd. That certificate, while stating that the ropelight tested meets the essential safety requirements of the Low Voltage Directive (72/23/EEC) and the EMC Directive (89/336/EEC) being the electro-magnetic directive, went on to qualify it by stating :

“Observing all relevant CE-Directives and providing the Manufacturer’s CE-Declaration of Conformity the CE-Mark can be labeled.”

57.  On the other hand, the evidence relied on by the defendant comes from its witness, Tina Liu Su Heng (“Tina Liu”), the assistant general manager of the defendant.

58.  The evidence of Tina Liu relevant to this part of the case was that the defendant commenced its business of supplying ropelights in 1993 and has since developed itself into becoming one of the major suppliers of ropelights in Hong Kong.

59.  The first time the defendant supplied ropelights to the plaintiff was in February 2002 and between that time and the First Agreement, the plaintiff had made a number of purchases of ropelights from the defendant. On each of the earlier occasions, it was on similar terms and specifications as the First Agreement and the Second Agreement. The ropelights in all the previous orders had been manufactured in the same way as those in the First Agreement and the Second Agreement and had been accepted by the plaintiff and paid for. In particular, the plaintiff had never complained about the cadmium content of the earlier ropelights manufactured and delivered to the plaintiff by the defendant.

60.  As for the term “TUV/GS and CE-approved, IP44”, this was understood by the defendant in relation to the mercantile trade custom as meaning :

(i) TUV – Technical Inspection Association founded in Germany to help regulate and supervise safety standard in electrical devices and to provide certification services.

(ii) GS – GS marking (Gepruefte Sichereit) is a recognized standard that guarantees the conformity to the German Device Safety Act (GSG) of products.

(iii) CE – CE marking is a recognized standard marking to indicate the conformity to the requirements under the relevant Directives of the European Union on product safety.

(iv) IP44 – this is the international standard on the level of water resistance of the products.

61.  She also gave evidence that at the time the First Agreement and the Second Agreement was entered into, the defendant knew that the ropelights were to be imported into Germany for marketing by the plaintiff’s customer in Germany.

62.  There was also evidence from her that when the defendant received the First Agreement and the Second Agreement from the plaintiff in terms of the Purchase Confirmations on which were stated the terms “TUV/GS and CE-approved, IP44”, the defendant had no difficulty understanding that term and did not have to revert back to the plaintiff or Mr John Seebohm (“Mr Seebohm”) for clarification as to that term or any part of it including the words “CE-Approved”.

63.  Her complaint was that the plaintiff had never informed the defendant that the ropelights had to comply with standards and specifications under German Law (as opposed to Community Directives).

64.  She also gave evidence that the finished product of the ropeligts were inspected by Jumbo (Asia) Industrial Group Limited (“Jumbo”), the buying agent of the plaintiff in Hong Kong, as well as by TUV before shipment was made and there was no complaint from either of them.

65.  In so far as the ropelights delivered to the plaintiff were concerned, the defendant and/or its associate company had obtained the GS certificates as well as the CE certificates from SLG and was therefore entitled to label the GS and the CE markings on the ropelights as required by the plaintiff.

DECISION ON THE MAIN DISPUTE

66.  The starting point in coming to a decision as to the term “CE-Approved” is that it is common ground in this case that this term is a mercantile term or trade term and not a legal term used either in the European Community Directives or even in German Law.

67.  On the other hand, all the evidence adduced by the plaintiff from its legal expert on German Law and from the literature relied on relates to the affixing of the “CE-marking”. As such it is not evidence which directly explain the meaning of the term “CE-Approved”.

68.  However, the nexus between the two is bridged due to the understanding by both parties that the defendant’s obligation under the First Agreement and the Second Agreement to affixing the CE mark on the ropelights delivered by the defendant arose because of the term “CE Approved” in both the First Agreement and the Second Agreement. The CE mark was affixed by the defendant as the manufacturer of the ropelights because they also knew from the contents of the First Agreement as well the Second Agreement that the ropelights had to be imported into Germany for resale there by the plaintiff.

69.  In this connection, I also take note of the evidence given by Mr Seebohm that when he was first introduced to the defendant by Wilson Lo of Jumbo who acted as the buying agent of the plaintiff, the defendant had held itself out as an international supplier of ropelights and also displayed the various certification it had including CE certification thereby putting forth the impression that the defendant was well knowledgeable as to the different requirements and/or standards required in different countries as to the importation of such goods. It was also the evidence of Mr Seebohm that this was an aspect which has impressed him about the defendant and which had caused him to engage the defendant as the supplier of ropelights for the plaintiff.

70.  Given the findings made on the expert evidence of Dr Bramigk, and given the defendant’s understanding that under the First Agreement and the Second Agreement, they were obliged to affix the CE mark to the ropelights delivered and which they knew to be for marketing by the plaintiff’s customer in Germany, there can be little doubt that the term “CE-Approved” as used in the First Agreement and the Second Agreement obliged the defendant to ensure that all the relevant Council Directives of the European Community had to be complied with. That means not only those directives relevant to the product as ropelights, but also the more general directives which prohibited the cadmium contents exceeding a certain level.

71.  Dr Bramigk referred to the CE mark as “a passport into Europe” for the products involved. Without full compliance with all the relevant directives, it is difficult to see how it can be “a passport into Europe” for the products involved.

72.  So too was the understanding of the defendant that the CE mark was necessary for the ropelights to be able to be imported into Germany for resale there.

73.  The effect of the CE mark has also been considered by the Court of Appeal in England in the case of Roche Products Ltd and others v Kent Pharmaceuticals Ltd [2006] EWCA Civ. 1775 and in paragraph 24 of his judgment Neuberger LJ said :

“In the absence of clear evidence to the contrary, it seems to me that one must assume that the CE mark, originating as it does from EU regulatory authorities, convey what those authorities intend, and make it known, that it is to convey. Thus, absent cogent evidence to the contrary, it should be assumed to signify that the goods so marked comply with the requirements of the regulatory authorities, and that, so far as those authorities (not trademark proprietors) are concerned, the products in question may be marketed in the EU.”

74.  For the reasons given, I come to the conclusion that the plaintiff’s submission as to the effect and the meaning of the term “CE Approved” is the preferred one and that the defendant’s submission on this aspect of the case must be rejected.

75.  Accordingly, and on the facts found above, there can be no question but that the defendant was in breach of the term “CE Approved” in that the ropelights delivered by the defendant did not correspond with the description of being “CE Approved”.

76.  Firstly, it is no answer for the defendant to say that they rely on the certification by SLG since that certification only related to the Low Voltage Directive and the EMG Directive but did not cover the cadmium content of the PVC used in the ropelights which was also required by Council Directive 76/769/EEC and Council Directive 91/338/EEC.

77.  The point submitted by the defendant that under the First Agreement and the Second Agreement, there was nothing which obliged the defendant to comply with German Law is neither here nor there since I have found on the evidence of Dr Bramigk that those Council Directives relevant to prohibiting the level of cadmium that can be used (specifically in PVC in this case) had been incorporated into German Law under the “Chem Verbots V” as of 1 November 1993.

78.  Neither would the point raised by the defendant that the sample supplied to the plaintiff of the ropelights had been approved by them before delivery avail the defendant, since the defendant had never made known to the plaintiff that cadmium had been used in some of the PVC components of the ropelights delivered by them until the German authorities, alerted by a competitor of the defendant, conducted tests on the cadmium contents of the PVC used in these ropelights when it was already being marketed by ALDI North. Therefore the presence of the cadmium used in some of the PVC for these ropelights was an inherent defect for which an examination of the ropelights as a finished product would not have been discernable.

79.  Moreover, since this was a sale by description as well as by sample, even if the goods did correspond with the sample, there is still the obligation upon the defendant to see to it that the goods also corresponded with the description. As already held above, the ropelights in this case did not correspond with the description that they had to be “CE Approved”.

80.  Finally, the fact that all the ropelights being the subject of the previous orders placed by the plaintiff with the defendant for ropelights, previous to the First Agreement and the Second Agreement, also had cadmium contents in the PVC used and which were of a similar level to the present ropelights cannot avail the defendant either simply because those previous orders managed to escape detection by the German authorities that the CE mark to the earlier ropelights were not properly or validly applied to those goods.

81.  It may well be that the failure of the defendant to comply with the term “CE Approved” in respect of the ropelights in question came about for one of two reasons. Either the defendant was not aware of the requirement or the permitted level of cadmium if it had to be used as laid down by Council Directive 76/769/EEC and Council Directive 91/338/EEC both of which were incorporated into German Federal Law, or it may be due to the fact that the defendant knew of such requirement but chose to turn a blind eye to it.

82.  Neither of those reasons would afford a defence to the defendant for even if it was due to the ignorance of the defendant as to such requirement governing the cadmium content, once the defendant had accepted the First Agreement and the Second Agreement both of which contained the term “CE Approved”, its ignorance as to the full extent as to the requirements necessary to make the ropelights “CE Approved” can be no answer to the plaintiff’s claim.

83.  For completeness sake, I turn now to deal with the subsidiary points as to firstly, whether the ropelights were of merchantable quality and secondly, whether they were fit for the purpose for which they were purchased.

84.  In so far as merchantable quality goes, “merchantable quality” is defined in section 2(5) of SGO as follows :

“(5) Goods of any kind are of merchantable quality within the meaning of this Ordinance if they are —

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

(b) of such standard of appearance and finish;

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

(d) as safe; and

(e) as durable,

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

85.  Given that definition and the fact that the ropelights had to be “CE Approved” in the First Agreement and the Second Agreement, it must follow that the ropelights delivered by the defendant were not of merchantable quality under both the First Agreement and the Second Agreement since they were not marketable in Germany.

86.  In this respect, the defendant sought to rely on the decision of the English Court of Appeal in the case of Sumner Permain and Co. v Webb and Co. [1922] 1 KB 55.

87.  In that case, the defendant, being the manufacturer sold to the plaintiff tonic water under the description of “Webb’s Indian Tonic”. The defendant knew that the tonic water was purchased by the plaintiff for shipment to Argentina. The tonic water contained salicylic acid which was prohibited in Argentina. The plaintiff did not know that the tonic water contained salicylic acid and the defendant did not know that such was prohibited by the law of Argentina. The court held that the defendant was not in breach of the implied condition that the goods should be of “merchantable quality” since the goods sold answered to the description under which it was sold.

88.  That decision in the Sumner Permain case cannot assist the present defendant since in the present case, the term “CE Approved” made it incumbent upon the defendant to ensure that the ropelights can lawfully be imported and marketable in Germany, but no similar term was contained in the contract in the Sumner Permain case.

89.  As for the implied condition of being not fit for the purpose for which these ropelights were purchased, it must follow that the defendant was in breach of that implied condition since they well knew that the ropelights were sold to the plaintiff for resale to the plaintiff’s customer in Germany but that the ropelights manufactured by the defendant could not properly be used for that purpose due to the fact that they could not be properly marketed in Germany due to its level of the cadmium content.

SETTLEMENT AGREEMENT

90.  After the problem arose with the ropelights and a sales prohibition was imposed by the German authorities, the plaintiff by letter dated 23 October 2003 informed the defendant that the plaintiff held the defendant fully responsible for all costs and consequences arising from its non-fulfilment of the contractual requirements and reserved the right to return the goods to the defendant against compensation for them by the defendant.

91.  Thereafter they embarked upon negotiations in an attempt to settle the matter.

92.  By email dated 18 November at 7:46 p.m. from Tina Liu (on behalf of the defendant) to Mr Seebohm of the plaintiff, Tina Liu stated that the defendant had complied with everything in the sales order and had done nothing wrong. In the last paragraph of that email, it is stated :

“Our final decision is, an amount of US$250,000 can be transferred to you without any condition for solving your problem to show our sincerity in this business with you. It is the final and best way that we can help you, no more further thing we can do. We shall not further negotiate on this matter. Please kindly consider and give us an answer.”

93.  This was followed up by a further email from Tina Liu to Mr Seebohm dated 19 November at 11:09 a.m. the relevant part of which reads :

“I don’t need any more proposal from you and neither will I give you any alternative. Our bottom line is to offer you an amount of US$250,000 net. Furthermore, you have to confirm the acknowledgement to this contribution fund from Wide Loyal as being our sincerity to help you in solving this disastrous situation.”

94.  That email went on to reiterate again that the defendant did not make any mistake over the whole case.

95.  The reply from Mr Seebohm was by email dated 19 November at 6:19 p.m. to Tina Liu as follows :

“I have been forwarded this message, which I don’t understand.

The moment this was written we already talked on the phone, that after tough discussions with the bank, which will make me privately cover the big gap between the HK$3.5 mio requested by the bank and the HK$2.0 mio offered by you, we confirmed the settlement of this case, however it is called by confirming the HK$2 mio to be remitted by you / Mr. Ko within the next days, but lastest on Tuesday 25.11, which would be confirmed by you by email today, while the agreement is drafted and signed tomorrow.

In this respect I don’t understand this mail.

Pls confirm the agreement briefly by mail today, so that we can pass it on to the bank to calm them down.”

96.  Before there was any confirmation made by Tina Liu as requested for in the email cited above, Mr Seebohm sent another email also dated 19 November at 7:11 pmto Tina Liu as follows :

“to speed up things, enclose please find the drafted agreement which I think is acceptable this way.

Pls let me have the short email confirmation in advance, so that I can pass it on to the bank.

Best regards

John.”

97.  Together with that email, the plaintiff also sent along a draft agreement the wording of which was to the effect that “the defendant will compensate [the plaintiff] the amount of HK$2,000,000 as settlement of the fact that the ropelights supplied against the above mentioned contracts contained Cadmium in a percentage that exceeds the limit of 100 mg per kilogram of PVC. Due to this Cadmium-contents the goods are not allowed to be sold in Germany by governmental order.”

98.  This met with the objection of the defendant that :

(a) The money offered by the defendant was not compensation and the defendant cannot accept the term “compensation”.

(b) The plaintiff had to send to the defendant a written acknowledgement for the gracious contribution rendered by Mr. Ko to relieve the plaintiff from its financial crisis.

(c) The amount offered was US$250,000 maximum.

99.  Those objections by the defendant were contained in an email dated 20 November from Tina Liu to Mr Seebohm. In the same email, the defendant further requested 6 items of documents as being supportive information for its offer of US$250,000.

100.  Thereafter some of the documents requested by the defendant was sent to them by the plaintiff between 20 and 24 November.

101.  On 24 November a draft Deed of Settlement was prepared by the defendant’s solicitors and sent to the plaintiff.

102.  The plaintiff returned the draft Deed of Settlement to the defendant with certain amendments made to it.

103.  The amendments made by the plaintiff to the draft Deed of Settlement were not acceptable to the defendant which the defendant duly informed the plaintiff thereof in an email dated 26 November from Amy Lam of the defendant to Mr John. Ultimately that Deed of Settlement was never executed.

104.  There was some further exchanges of email on the subject between the parties but nothing of much significance took place.

105.  On this evidence it is the contention of the plaintiff that there was a concluded settlement agreement between the parties on 18 November 2003.

106.  On the other hand, the defendant submits that no concluded agreement was ever reached between them by way of settlement.

107.  Looking at the entirety of the evidence on this issue, I am of the view that the parties had at no point reached a stage where they were fully at idem. Accordingly I find that there was no concluded agreement on settlement reached between them.

DAMAGES

108.  The plaintiff claims for 600,772.89 Euro dollars in the manner as particularized in paragraph 13 of the Re-Amended Statement of Claim.

109.  That claim is subdivided into Loss of Revenue (402,483.98 Euro dollars) and Items 2 to 7 being various expenses incurred by the plaintiff in the matter.

110.  In so far as the loss of revenue is concerned, that claim is made on the basis that under the First Agreement and the Second Agreement, the plaintiff would have sold totally 477,858 pieces of the ropelights to ALDI North and ALDI South at 4.75 Euro dollars per piece, such that the plaintiff ought to have received 2,269,825,50 Euro dollars from ALDI if all went well.

111.  The evidence from Mr Seebohm was that when the sale prohibition was imposed, ALDI North had sold off 223,989 pieces of the ropelights to end users and that these were not required by the German authorities to be recalled. These were therefore actually sold to ALDI at the same price of 4.75 Euro dollars per piece giving 1,063,947.70 Euro dollars.

112.  Secondly, soon after the sale prohibition, the plaintiff, by way of mitigation of its loss, was able to sell of 78,574 pieces of the returned ropelights to countries with less stringent control and which generated 230,158.02 Euro dollars in the process.

113.  Thirdly, in the following two years, namely 2004 and 2005, the plaintiff was plaintiff was able to sell off a further 155,124 pieces of the returned ropelights for a further 573,235.80 Euro dollars.

114.  Mr Seebohm also gave evidence that some 20,104 pieces of the returned ropelights which had been damaged in the course of being returned and therefore not saleable, were given away in two lots for free so as to obviate further expenses being incurred for their destruction.

115.  I have no difficulty accepting that evidence from Mr Seebohm since all that he attested to as to the return of the ropelights and the resale have been well documented and those documents have been produced in evidence.

116.  Accordingly, I find the plaintiff to have proven on balance its loss of revenue in the amount claimed by it.

117.  As for items 2 to 7 of the expenses claimed by the plaintiff, they too are documented and such documents have been produced in evidence.

118.  The only problem which I have with this part of the claim relates to item 3 under the heading “Costs of collecting, delivering and transporting the returned ropelight”. Under that item the claim was stated to be 75,879.11 Euro dollars.

119.  The evidence from Mr Seebohm is contained in paragraph 10 of his Supplemental Witness Statement in which it is stated that that item of claim is supported by the documents in item 68 of the Supplemental List of Documents of the Plaintiff, which is also item 68 of bundle 3 of the Documents Bundle used in the trial. The documents are a bundle of copy invoices issued by Spedition Mickeleit in German accompanied by English translations.

120.  However, that bundle of invoices from Spedition Mickeleit only support a total amount of 33,889.89 Euro dollars and not the claimed amount of 75,879.11 Euro dollars.

121.  Therefore even accepting all the documentary evidence produced by the plaintiff in support of its claim for damages, there will need to be deducted an amount of 41,989.22 Euro dollars from the total amount claimed by the plaintiff.

122.  Accordingly, damage is assessed at 558,783.67 Euro dollars.

CONCLUSION

123.  For the reasons given above, there will be judgment for the plaintiff in the sum of 558,783.67 Euro dollars.

COST

124.  There will be a cost order nisi that the defendant pays the plaintiff its costs of this action, to be taxed if not agreed.