FUTIC ELECTRONICS LTD. v. KORRIGAN MARKETING LTD.

HCA 15314/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 15314 OF 1999

_______________

_______________

J U D G M E N T

_______________

1. This is an action commenced by Writ of Summons issued by the Plaintiff against the Defendant on 24 September 1999. The Plaintiff's claim is for damages arising out of a purchase contract entered into by the parties in August 1998 wherein, inter alia, the Plaintiff agreed to manufacture and supply to the Defendant 9,250 television sets for the sum of US$211,669.00.

2. The television sets were manufactured by the Plaintiff prior to the date stipulated in the purchase order but the Defendant declined to inspect them and either to take delivery of them or to arrange for their shipment.

3. The Plaintiff claims the contract price together with a fee of HK$100,000.00 for storage of the television sets between September 1999 and the trial date.

4. In its defence to the claim the Defendant's case is that the television sets were of unmerchantable quality in that (and only in that) their receiving frequencies in FM mode, VHF band and UHF band exceeded limits which were to come into effect in June 1999 which limits would make the television sets unimportable into the United States of America after that date.

5. Further it is the Defendant's case that the Plaintiff was fully aware that the Defendant intended to sell the television sets, at a profit, to a customer in the United States; that it, as the manufacturer, knew of the proposed new frequency limits to be imposed in June 1999 and failed to manufacture the television sets in accordance with those limits.

Matters not in dispute

6. The Defendant company is a substantial company concerned in the manufacture of, and trading in, electronic products and, in particular, television sets. It is a subsidiary of Star Light Electronics Company which is a publicly listed company in Hong Kong.

7. The Defendant company designed and developed a portable television set (Model TV 8391). It found that production of this set was unprofitable and in 1996 it 'sub contracted' the production to the Plaintiff, providing to the Plaintiff for that purpose, the casting moulds of the television set. The arrangement was that when the Defendant company received purchase orders in respect of the television sets it would notify the Plaintiff and the Plaintiff would manufacture the number required and, after inspection by the Defendant, those television sets would be shipped to its customers.

8. On 29 January 1997 the Defendant placed an order (Contract Number 1) with the Plaintiff for the production/manufacture of 1,200 of these television sets (Model TV 8391) for the sum of US$33,600.00 and stipulating a delivery date of 'before 20 March 1997'. Those television sets were duly manufactured and shipped as per the Defendant's instructions, and the agreed contract sum was paid to the Plaintiff.

9. On 31 July 1998 the Defendant placed a further order with the Plaintiff (Contract Number 2) for the production of 7,400 television sets (Model TV 8391) stipulating a delivery date of 'before August 15 1998'. Those television sets were duly manufactured by the Plaintiff and the Defendant arranged for their shipment after the usual inspection. The agreed price of US$170,200.00 was duly paid by the Defendant to the Plaintiff.

10. On 24 August 1998 the Defendant placed a further purchase order with the Plaintiff for 7,500 television sets (Model TV 8391) for delivery 'before 10 September 1998' at a price of US$169,349.00.

11. On 28 August 1998 that order was revised to increase the number of television sets to 9,500 at a price of US$211,669.00. This revised order was duly completed as instructed and the Defendant was notified and invited to inspect the goods prior to delivery from the Plaintiff's factory on the Mainland. The Defendant declined to inspect the television sets or to arrange for their delivery or shipment.

12. Those television sets have remained at the Mainland factory of the Plaintiff since September 1998 until the present time.

13. All of these television sets, which were of identical design, complied with the rules then in force issued by the United States Federal Communications Commission (the 'FCC'). Indeed the Defendant had obtained 'FCC' approval for its television design/specification under the Rules applicable up until June 1999.

14. Some years prior to 1999 the 'FCC' had notified an intention to change its rules as from 23 June 1999, the effect of which change was principally to reduce the limits of receiving frequencies on receivers, including television sets. Manufacturers and other parties in Hong Kong interested in the production of, and trade in, television sets were made aware of this proposed change and were reminded of it by their various specialist agents.

15. A transitional provision of this proposed change to the FCC Rules reads as follows:-

"Receivers subject to the regulations .... that are manufactured or imported on or after June 23rd 1999 shall comply with the regulations ...."

Matters in dispute

16. During the course of this trial I heard evidence from 2 witnesses; Mr Chow a director of the Plaintiff company and Mr Cheung the general manager of the Defendant company.

17. I did not have the benefit of any evidence from a Mr Lau who was apparently the managing director of Starlight Electronics Co. Ltd and who gave instructions to Mr Cheung and who (according to Mr Cheung) was the person who determined that the goods manufactured by the Plaintiff (in accordance with the revised purchase order dated 28 August 1998) were not to be inspected delivered or shipped. Nor was there in evidence before me any document whatsoever concerning a contract or agreement between the Defendant and the supposed purchaser in the United States, or concerning any a reason put forward by such purchaser for his/its reluctance to accept the television sets the subject of that order.

18. The evidence of Mr Chow was to this effect:- It was the agreed practice between the parties that, when a purchase order was completed, the Defendant would give to the Plaintiff instructions regarding inspection and shipping. When the revised purchase order dated 28 August was completed the Defendant was notified but, despite repeated requests made between September 1998 and June 1999 that it do so, the Defendant declined to arrange for an inspection and failed to give to the Plaintiff any notification whatsoever concerning delivery or shipment. No reason was given to the Plaintiff for this and, because there was no other ready market for the completed order, the Plaintiff had no alternative but to keep the televisions in store and to commence these proceedings. Mr Chow told me, in some detail, in his evidence why it was that he was unable to mitigate his loss in respect of the television sets, each of which bore the logo 'Starlight' which it was not (he said) practicable to remove and which (if not removed) might well lead to copyright difficulties.

19. He said that at no time did the Defendant, or any body on behalf of the Defendant, suggest that the Plaintiff should take steps to dispose of the order, albeit that he was told more than once that the Defendant was itself attempting to find another buyer.

20. I was also told by Mr Chow that it was not until the Defendant filed its defence in this action - in November 1999 - that he first learned of the allegation that the goods were not of merchantable quality because they did not comply with the new FCC rules which came into effect in June of that year. He was, so he told me, up until that time completely at a loss to understand why the Defendant and its customer had declined to accept the goods.

21. In the course of his evidence Mr Chow pointed to the fact that the Defendant was at all times well aware of the configurations, specifications and design of TV 8391 because it had designed developed and manufactured the same itself; that it had inspected and accepted the television sets manufactured by the Plaintiff in respect of previous orders placed in January 1997 and in July 1998 and that the Defendant itself had caused TV 8391 to be tested and in such test was shown to be FCC compliant in 1998 i.e. it complied with the rules existing at that time.

22. In his evidence on behalf of the Defendant Mr Cheung told me that, albeit that his company had indeed inspected, taken delivery of, and paid for the television sets ordered in July 1998, 4 of a sample batch of about 200 were found to have major defects. Two suffered from UHF noise; one had its tuning knob wrongly assembled, and the speakers on one vibrated. The test which revealed those defects was carried out on or about 15 August 1998.

23. Mr Cheung went on to say - if I understood him correctly - that it was the defect concerning the UHF noise which alerted the Defendant (in the person of Mr Lau) to the question of possible noncompliance with the new FCC rule due to come into force in June of the following year, and that it was because of that concern that the Defendant feared that its customer in the United States might decline to take delivery and pay for the August order placed with and completed by the Plaintiff. Mr Cheung also told me that it was because of that concern that the Defendant declined to inspect and to arrange for the shipping of the order, albeit that he had made no mention of this whatsoever by way of explanation to the Plaintiff.

24. In his evidence concerning those matters Mr Chow says that, if what Mr Cheung says is indeed true, why (given that the inspection of the completed July order was completed on the 15 August) would the Defendant then place a further order on 24 August for 7,400 television sets and increase that order on 28 August to 9,250 television sets?

25. In seeking to answer that question Mr Cheung says that the result of the inspection of the sample batch of the July order was not brought to his attention until the end of August, albeit that his colleagues may well have been aware of it before the placing of the order on the 24 August. And he adds that the reason why the order was increased on the 28 August was simply to make use of empty container space.

26. As to precisely when the inspection report was brought to his attention, Mr Cheung's oral evidence before me directly contradicted the content of paragraph 10 of his witness statement dated 1 June 2000 in which he stated that it was on or about the 19 August.

27. Another matter in dispute (apart from the relevance of the FCC rules and their transitional provisions, and apart from the steps which the Plaintiff might have taken to mitigate its loss) is whether responsibility for compliance with the FCC rules lay with the Plaintiff as manufacturer or with the Defendant as designer and 'placer of the order'.

Conclusion

28. The revised purchase order dated 28 August 1998 issued to the Plaintiff by the Defendant specified 9,250 television sets of type TV 8391. It stated that those items were to be sold by the Defendant to Starlight Marketing Development Limited (of which company the Defendant was a subsidiary) and that delivery was to be "before 10 September 1998".

29. I am satisfied on the evidence before me that the description of the television sets as it appears on the purchase order would at the very least suggest to somebody with knowledge of these matters that the order was possibly destined for the United States market. The reason for that is the reference to "M system. UL approved. English manual".

30. In so far as it may be relevant, I have no doubt that Mr Chow of the Plaintiff would have appreciated that that was so, albeit that he undoubtedly considered that the ultimate destination of those television sets was no concern of his.

31. I am also quite satisfied - and this is not a matter in dispute - that those television sets at the time of the placing of the purchase order and at the time of its completion were FCC compliant. Indeed the Defendant had obtained confirmation of that fact and Mr Cheung had advised Mr Chow accordingly.

32. There is no dispute that the FCC rules were going to be changed in June 1999 with the effect that receivers manufactured or imported into the United States after that date would be required to have reduced frequency limits.

33. The receivers (or television sets) the subject of the purchase order of 28 August 1998 were manufactured by the Plaintiff and were ready for inspection and collection by the Defendant before 10 September in accordance with the order. They would thus only fail to meet the new FCC rules in the event that they were not manufactured or not imported into the United States before June of the following year.

34. They were manufactured but they were not imported into the United States before then simply because the Defendant refused to inspect them and either take delivery or arrange for their shipment.

35. It is not at all clear to me on the evidence why that was so, and it is not for me to speculate. However what I am sure about is that I do not accept Mr Cheung's apparently speculative suggestion that the customer/retailer in the United States might be unable to dispose of the television sets prior to June 1999 and that, in that event, the FCC rules might some how operate to their disadvantage. Nor do I accept for one moment that part of Mr Cheung's evidence in which he sought to justify what in effect was a cancellation of the purchase order (after it had been completed by the Plaintiff) by pointing to a tiny number of defects to 2 television sets (out of a sample of some 200) manufactured as part of a previous order placed with the Plaintiff, and suggesting that they might have some relevance to the new FCC rules.

36. In my view that evidence was a recent invention or a fabrication designed to justify the unjustifiable at the very considerable expense of the Plaintiff.

37. Whilst I am inclined to agree with the contention of Mr Chow of the Plaintiff that the identity or nationality of the ultimate purchaser or customer was of no concern to him (and that the Plaintiff simply manufactured what it was asked to manufacture), whether it was or not is wholly immaterial, because the Defendant knew precisely what it was that was being manufactured in accordance with its order; and it (in the person certainly of Mr Lau if not in the person of Mr Cheung who appeared to me to display a considerable ignorance of these matters) was alive to the FCC's transitional provisions and their effect, and if the Defendant had wished the television sets to comply with the new rules (which were to come into force many months later) then it was under an obligation to inform the Plaintiff at the time when it placed the order, and not after the order had been completed. Apart from anything else that would seem to me to be a matter of common sense quite apart from commercial prudence.

38. There is no doubt at all in my mind, on the evidence before me, that the very first mention by the Defendant to the Plaintiff of the new FCC provisions and their suggested potential effect upon the completed purchase order, was in its Defence in this action. Prior to that date it was never envisaged by the Defendant that the goods ordered from the Plaintiff would have to comply with the new rules and, that being so, I am left in no doubt whatsoever that the Defendant has sought to advance that argument merely as a belated ploy to justify its refusal to accept the order and to justify its refusal to pay for it. Inter alia, I accept Mr Chow's evidence that Mr Cheung did not tell him, at any time, of the ultimate destination of the television sets, and that after the Defendant declined to inspect those sets the only explanation offered by Mr Cheung to him was that the Defendant was awaiting a response or instructions from its customer.

39. I also accept, on the evidence of Mr Chow, that at no time did Mr Cheung mention any potential difficulties with the new FCC rules, or any other problem concerning the goods. There is no doubt in my mind that after the Defendant failed to complete its part of the bargain - and despite the Plaintiffs understandable anxiety concerning delivery and payment expressed in frequent telephone and facsimile calls - it simply ignored the Plaintiff and its predicament. It did not communicate with the Plaintiff in any way beyond telling Mr Chow that it was awaiting word from its (the Defendant's) customer and then, when the Plaintiff sought to minimise its losses by sending to the Defendant an offer of a reduction in the per item cost, the Defendant ignored that communication without the courtesy of a reply. In my view that was both rude and unacceptable and, perhaps more to the point, misled the Plaintiff into believing that sooner or later the Defendant would honour its obligations.

40. I also accept the evidence of Mr Chow concerning the impracticability of the Plaintiff mitigating its loss. It had been required to manufacture a product both designed by the Defendant and bearing its logo. I accept that Mr Chow had indeed made enquiries among his customers to see if they would take these television sets for sale and that he was told that they would not, given that they bore the brand name 'Starlight'; and that whilst they might take them if the logo was removed, the goods would then be regarded as second grade or repaired goods with a value of about 50% of the manufacturing cost.

41. Finally I accept Mr Chow's evidence that Mr Cheung at no time told him that the goods in question would or might be sold in 1999. As Mr Chow said in his evidence you simply do not keep a batch of such goods for a year without selling them.

42. On all of the evidence before me I am quite satisfied that the Plaintiff's claim, with the exception of that relative to storage, must succeed.

43. That part of the claim relative to storage cannot be quantified or, if it can, it has not been quantified in evidence before me - see Tate & Lyle Food and Distribution Ltd. and Another v. Greater London Council and Another [1982] 1 WLR 149.

44. Whilst Mr Ho has sought to persuade me that whilst the 'FCC argument' may have been an after thought on the part of the Defendant it is nevertheless a reliable ground for the Defendant's refusal to perform the contract, I find myself unable to accept that contention in the present case for the simple reason that that ground did not justify the refusal to perform and I am satisfied that that ground did not exist at the time of refusal. (see Benjamin's Sale of Goods 5th Edition at para 19.138).

45. It follows from all that I have said that judgment will be entered for the Plaintiff in the sum of US$211,669.00 together with interest at 1% above prime rate from 10 September 1998 until judgment and thereafter at judgment rate.

46. I make no order in respect of the claim for storage of the goods.

47. The Plaintiff must make the goods available to the Defendant for collection within a period of 3 months from the date of this judgment.

48. I make a costs order nisi in favour of the Plaintiff such costs to be taxed if they cannot be agreed.