AFEX IMPORT-EXPORT GNBH v. VIDEO-TRONIC INDUSTRIAL CO LTD

1989, No. A5013

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

____________

__________

JUDGMENT

__________

1. This is an appeal from the decision of Duster O'Donnell dated 6th August 1990 whereby he dismissed the Plaintiff's application for summary judgment. The Plaintiff entered into a contract with the Defendant on or about the 11th July 1988 for the purchase of a large quantity of "R19" and "R20" radio clocks. The contract is contained in or evidenced by the Plaintiff's Purchase Order of the same date. The contract was varied by consent in mid-August 1988 to increase the number of "R20" radios to 41,500 and to cancel the "R19" radios.

2. On the evidence it is overwhelmingly clear that a large proportion of the radios delivered were defective. There were many major defects. The experts reports are all one way. The Plaintiff issued a writ on 6th September 1989. The Defendant instituted third party proceedings on 13th October 1989 and the Defendant served a third party Statement of Claim on 24th November 1989. The Plaintiff's claim as pleaded comes to something in the region of HK$1.6 million.

3. The parties have placed before me a bundle containing two affidavits from the Plaintiff and one affirmation from the Defendant in this action together with two affirmations (one from each side) in the third party proceedings. I have ignored an affidavit going solely to quantum because it eras agreed, after a little prompting, that if the Plaintiff succeeded on liability damages would have to be assessed. By consent I granted the Plaintiffs leave to amend their Order 14 summons dated 22nd January 1990 by adding the words "alternatively judgment be entered for the Plaintiff on liability with damages to be assessed".

4. At the beginning of the hearing, Mr. Chung for the Defendants took objection to me being referred to the Defendant's third party Statement of Claire. Mr. Chua had intimated that he was going to rely upon it in order to show that the defence in the action is manifestly inconsistent with the third party Statement of Claim. I should add that at page 108 of the bundle,; Mr. Yu, a Director of the Defendants, confirms that the contents of the third party Statement of Claim are true and correct.

5. I heard argument on this objection and then decided to look at the third party Statement of Claim de bene esse and indicated that I would rule on this objection in this judgment. I will return to this point after I have summarised the facts so that the point in issue will be clearer.

6. The story starts in June 1988 when the. Defendants (a Hong Kong Company) sent brochures to the Plaintiffs (an Austrian Company) of various products that they had for sale. The Plaintiffs ordered several samples of products from the Defendants.

7. In May 1988 the Plaintiffs received a request from a customer in Yugoslavia to obtain samples of R20 and R19 radio clocks. The Plaintiffs requested the Defendants to provide samples and there followed discussions on quality and price. At page 76 of the bundle is a fax from the Plaintiff to the Defendant and at the end it states "price goes before quality". Despite submissions on this phrase by Mr. Chung I do not take it to mean that the Defendants were given a licence to deliver goods which were manifestly defective. Clearly in all cases there is a balance between quality and price out there must be a standard below which any purchaser will refuse to go so far as quality is concerned. The subsequent facts of this transaction make this point abundantly clear.

8. On or about 13th May 1988, the Plaintiff received three samples each of R19 and R20 radio clocks from the Defendant. These were submitted to the Yugoslav customer but were found to be defective.

9. On or about 9th June 1988, the Plaintiffs informed the Defendants that the samples were defective. The Plaintiffs requested air freight of three further samples of these radio clocks as soon as possible. (See bundle page 12).

10. On 10th June 1988, the Defendant requested details of the complaints (page 13).

11. On 26th June 1988, two further samples of R20 were received by the Plaintiff. These were inspected by the Yugoslav customer and found to be in good working order.

12. As a result of the satisfactory nature of the June samples, the Plaintiffs submitted order 1001/88 to the Defendants on or about the 11th July 1988 for the supply of 20,000 R20 and 10,000 R19 radio clocks. The sale agreement is at page 14 and specifically states;

"Quality. Technical design, colour and design of sample replacements as specification."

13. A Letter of Credit was opened in the Defendant's favour. The contract was subsequently varied so as to cancel the order for the R19 to be replaced with an order for 41,500 R20 radio clocks.

14. One of the June samples was submitted by the Plaintiffs Yugoslav customer to a technical testing unit in Zargreb which tested and approved the sample, this being a requirement for the importation into Yugoslavia. The sample was found to be in order.

15. The first shipment of 11,000 radio clocks took place on 8th September 1988 and the Defendants provided a certificate of quality dated that day. It provided:

"We hereby confirming (sic) that goods delivered "R20" are identical with delivered samples in technical execution design and colour."

16. On the evidence before me, I am suite satisfied (and there is nothing to the contrary) that the reference in this document to "delivered samples" was a reference to the sample delivered in June and not those delivered in May. The certificate cannot possibly refer to the May samples which had been rejected.

17. The first shipment cleared customs on 12th October 1988 and was inspected by the Yugoslav buyer. They advised that a large proportion of the 11,000 radio clocks were defective. The Defendants were immediately informed (pages 37 and 38). On 14th October (page 39) the Defendants asked for more detail. On the same day, the Defendants telexed the Plaintiffs and stated:

 

"Hv reviewed the quality control in the production schedule of the whole job and found little mistakes as follows."

18. They then referred to about 5,000 pieces having a problem with an intergrated circuit but they stated that this had been corrected for the second and third shipments. They asked for the 5,000 to be returned.

19. The second shipment had in fact been shipped on 22nd September and arrived on 4th November. The Defendants added that the third shipment would be made on 14th October.   In fact it arrived on 16th November.

20. The Plaintiffs attempted unsuccessfully to stop the third shipment.

21. The Plaintiffs contend that the Defendants did not replace the defective units and the Defendants have not contended that they did. The Plaintiffs contend that 37,077 out of 41,500 were irreparable. 14,466 pieces were sold at a substantially reduced price.

22. The Plaintiff's purchaser provided a report dated October 26th 1988 (page 42) showing substantial defects.

23. On 15th December 1988, S.G.S. Austria carried out an inspection of 34,900 pieces and they compared the same with the technical specification and the Defendant's samples. This report starts at page 44 of the bundle and concludes that 77% of these items were defective and that major defects had been found. The scope of the report (para. 2.1) shows that "random final visual inspection by comparsion with delivered samples" was carried out.

24. The Defendants themselves instructed their own experts, Jugoinspekt-Beograd, in July and November 1989. Not only is the finding of defects pleaded in paragraph 25 of the third party Statement of Claim (at which Mr. Chung submits I should not look), but it is referred to in the Defendant's affirmation in support of an Order 14 application against the third party which is contained in the bundle and to which no objection was taken by Mr. Chung. (see paras. 12 and 13 on pages 110 and 111 and pages 147 to 154 of the bundle) The Defendant has provided no evidence to show, nor do they aver, that the goods are other than grossly defective. In fact in the November inspection by Jugoinspekt they found that out of 315 pieces inspected only 41 were identical to the test samples, 200 contained major defects, 74 were found to contain minor defects and 118 were found to contain more than one defect. The percentage defect was 87% and there were 142.27 defects per 100 pieces.

25. In the face of this overwhelming and uncontradicted evidence what does the Defendant say. Firstly, he says that after sending the May samples he received the telex from the Plaintiff stating that they were satisfactory (page 81). The Plaintiffs say that they sent this telex after a cursory visual inspection of the samples but on 9th June they indicated defects which had' been discovered after a thorough examination and testing by their customer. The Plaintiffs placed this order dated 11th July 1988 which the Defendants admit in their defence and they also admit that it was an express term of the contract that "the quality of the goods would be according to the technical design, colour and design of the sample".

26. The Defendants then contend that they were surprised to learn that the Plaintiff's customer found the May samples to be defective because their Mr. Yu states that he examined the same and did not find any of the alleged defects. Nevertheless he obtained further samples from the third party and on or about 20th June 1988 he sent two samples of each with their technical specification to the Plaintiffs. He then added this:

 

"Prior to the delivery of the June samples, I had examined the same and found the same to be of satisfactory quality and they were similar in quality to the Hay samples."

27. This statement is the oasis of an argument in Mr. Yu's affirmation, repeated to me, that if the May samples were defective then the June samples, being identical, were also defective.  Mr. Yu however denies the nay samples were defective. If they were defective he goes on to say that the Plaintiffs accepted such defects and are caught by section 16(2) of the Sale of Goods Ordinance or are estopped from now complaining.

28. In my judgment, on the admitted material before me, the May samples are irrelvant. I have not the slightest doubt that the Plaintiff's purchase order was made on the basis of June samples. In the light of the evidence, it would be stretching credulity too far to even consider holding that the Plaintiffs (or their customers) agreed to buy 41,500 radio clocks having the defects which all the evidence shows them to have had. Even allowing for the fact that this is an Order 14 application nevertheless the Defendant has to satisfy me "that there is a fair or reasonable probability of the Defendant having a real or bona fide defence". In my judgment no court could, nor would, hold that the June samples were defective and that both the Plaintiffs and their customers nevertheless placed an order for 41,500 pieces of defective goods. In my judgment, the Defendants are light years away from getting near to establishing an estoppel nor does section 16(2) of the Sale of Goods Ordinance assist the Defendants because I am wholly satisifed, on all the evidence, that these defects were not specifically drawn to the Plaintiffs attention whether by the Defendants or anybody else. I am satisfied that the evidence is all one way to the effect. that the June samples upon which this contract was based, were not defective and thus there is no question of there being defects which an examination ought to have revealed.

29. The Plaintiff pleads, in paragraph 6 of the Statement of Claim, a sale by sample. Thus the bulk has to correspond in quality with the sample and the goods should be free from any defect rendering them unmerchantable which would not be apparent on a reasonable examination of the sample. Further or alternatively the Plaintiffs plead a sale by description with the condition that the goods should correspond with the description and should be merchantable under that description.

30. The real issue in relation to samples is not whether the goods were defective generally but whether they corresponded in quality to the sample. The goods were clearly defective in major respects. On all the evidence I am wholly satisfied that they did not correspond to the samples provided in June. These were inspected and approved by the Yugoslav customer and complied with relevant regulations. The Defendant has produced no evidence to show that the June samples were defective other than it's assertion that the May and June samples were identical. This is such an extravagant and inherently improbable assertion that I do not feel able to accept it. ' The court has to approach these submissions with reality and commercial common sense.

31. In my judgment the Plaintiffs have amply demonstrated that the Defendants are in breach of contract and entitled to judgment with damages to be assessed.

32. I now turn to consider the point relating to whether I am entitled to look at the third party Statement of Claim. I wish to make it clear that although I conclude that it is permissible to look at the third party Statement of Claim, a fortiori, as here, when it is verified by an affidavit placed by consent before the court nevertheless caution must be shown. The Defendant here is a middleman unfortunately caught between the Plaintiff and the third party. He obviously wishes to set up a back to back claim for an idemnity against the third party and thus inevitably has in his pleading to mirror the Plaintiff's allegation against him. However, when the Defendant in the third party proceedings pleads an independent assertion such as here where he pleads his own experts report which concludes that the goods were defective and did not substantially comply with the sample, I think the position is different. It would be wrong to allow a deponent in Order 14 proceedings to aver that the goods were not defective when they had their own expert report evidencing defects which they have pleaded in the third party proceedings arising out of the same goods.

33. My observations are actually obiter because here the matter was covered in an affirmation which was by consent placed before me. I would have cone to the same conclusion without Jugoinspekt's report because the Defendant had not averred that the goods were other than defective. The S.G.S. report is uncontradicted by any evidence and the onus is on the Defendant to satisfy me that there is a triable issue.

34. I sympathize with the Defendant's position which is all too frequent for the middleman. He can only proceed with his third party proceedings with haste in order to seek an idemnity against the third party. He has already taken out an Order 14 summons against the third party and upon which the Master was not asked to rule.

35. Accordingly, I allow this appeal and order judgment to be entered for the Plaintiffs with damages to be assessed in the normal way.

36. I propose to make an order nisi for costs in favour of the Plaintiffs.