Alpha-Plus Enterprise Co. v. Star Fair Electronics Co. Ltd.

DCCJ8579/2000

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 8579 OF 2000

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J U D G M E N T

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1. Notwithstanding the modesty, in monetary terms, of the claim and of the counterclaim, $65,700 and $68,550 respectively, this action presents a number of interesting, and not entirely straightforward, issues in terms of the evidence and of the law as it relates to the remoteness of otherwise of the Defendant's counterclaim.

2. The Plaintiff firm is a sole proprietorship operated by Mr Lee Hei-lok with some assistance from his brother. Mr Lee is a wholesale supplier of electronic and electrical components. His customers are manufacturers of electrical goods who use his parts in their manufacturing and assembly processes.

3. The Defendants are a public company listed on the Hong Kong Stock Exchange. They have, I believe, two factories in China and offices in Hong Kong, employing, in all, some 5,000 people. They manufacture, amongst other things, home audio equipment, such as radio cassettes and CD players. Their clients include household brand names such as Philips and Hitachi.

4. The Defendants, although a public company, are run and managed by the founder's family. Mr Jacky Lau, who has given evidence, is one of the directors, and it was his father who started this company in Hong Kong over 30 years ago. Manufacturing then took place in Hong Kong but in common with so many companies of this sort, its factories subsequently moved over the border to Guangdong.

5. This case concerns the sale by the Plaintiff to the Defendants of 300,000 diodes at a cost of $11,700. A diode is a semi-conductor with two terminals. It is a common part on any integrated circuit board and its purpose is to allow electrical current to flow in one direction and to prevent it from moving in the reverse direction. There is a very helpful report and analysis from Dr. Vincent Lau of Hong Kong University in the pleadings section of the Trial Bundle, page 78, which describes a diode and its functions, and should the need arise, anybody wishing to see what a diode looks like can refer to Exhibit D2 which contains a box of them.

6. The Plaintiff's claim in fact also relates to three other sales of diodes, 1.5 million of them, totalling $54,000. The Defendants admit these three elements of the claim but they seek to set-off their counterclaim of $122,500 against this admitted amount, which produces a net balance of $68,550 which they contend is due to them.

7. From that brief introduction, I now turn to the evidence.

The Plaintiff's case is perfectly straightforward. The Defendants, as they had done on many occasions in the past, placed an order with him for 300,000 diodes. These came with different specifications. This particular order, which is the subject of Purchase Order No. SEJ1091 dated 15 September 1999, page 10 of the Documents Bundle ("the purchase order"), was duly delivered to the Defendants and the invoice which relates to it (see page 12) has not been settled.

8. The contentious issues in the case all relate to the counterclaim. I propose to start by relating the Defendant's case as they would wish me to accept it. Given the manner in which it has been presented, Mr Gary Yeong who appears for the Plaintiff, has submitted that much of the Defendant's evidence is either inadmissible and therefore should be disregarded, or alternatively, so evidentially remote from the facts that are sought to be proved, that I should attach little weight to it and, therefore, he says that the counterclaim must fail for want of having carried the burden of proof.

9. Additionally, there is the issue of whether the counterclaim is maintainable as a matter of law by virtue of remoteness, or put less legalistically, whether the Defendant's conduct has been so unreasonable that they should not now be entitled to succeed on the factual basis that their counterclaim is put forward.

10. The Defendants say that once the consignment of diodes got to their factory, they used part of it in the manufacture of a mini hi-fi unit on behalf of Philips. There is a photograph of this unit at page 82 of the Documents Bundle being part of Dr. Lau's report. They made 4,085 of this hi-fi model. Four diodes went into each circuit board. Once that was done, a representative sample of the production run was removed for testing by the Defendant's Quality Assurance Department. 200 units were tested and eight of them were found to be defective because smoke was coming from the diodes supplied by the Plaintiff and fitted into the circuit board. This occurred on 10 October 1999.

11. Having regard to the potential safety hazard, the entire production run of 4,085, was withdrawn and the part of the circuit board which included the four diodes was re-worked using consignments of diodes presumably not supplied by the Plaintiff. The cost of doing this work came to $122,550 and the Defendants now say that this cost should be borne by the Plaintiff. That, in its essentials, is the counterclaim.

12. I should now relate the evidence that is deployed by the Defendants to prove these facts, this being a separate issue from the legal issues which I shall come to presently.

13. Their only factual witness is Mr Jacky Lau. As I have already mentioned, he is a director of the company and his visiting card shows that he is in charge of the Purchasing Department. He is based at the company's head office in Hong Kong but travels, as required, to the factory in Guangdong. It is abundantly clear that he has very little first-hand knowledge of the facts. He has spoken to members of his staff in Guangdong and Hong Kong who have had closer dealings with the facts and it would appear that even they, at best, would have had second-hand reports given to them by their subordinates.

14. He has also referred to documents generated by others in the company, which of course form part of the Defendant's business records.

15. Many of the witnesses who could have given a more first, or at least a second-hand account of the facts, are employed in Guangdong. None of them has provided a witness statement supported by a hearsay notice to excuse their personal attendance. So I take this to be an informed and conscious decision by those advising the Defendants to seek to prove their case only with Mr Lau's evidence and the documents that he has produced and referred to as the Defendant's business records.

16. Before I examine his evidence, which I have taken de bene esse, to determine how much of it is admissible, as opposed to its weight which I shall refer to later, it is necessary to first establish what it is that the Defendants must prove as a fact before they can get their counterclaim off the ground. It seems to me to be the following:-

(i) That part of the Plaintiff's consignment of diodes supplied under the Purchase Order went into the circuit boards that formed part of the assembly of this production run of 4,085 Philips hi-fi units.

(ii) That the sample of 200 that were examined came from that production run.

(iii) That eight of that sample when tested had diodes that smoked when they were being tested.

(iv) That the circuit boards of the entire production run of 4,085 were then re-worked at a cost of $122,500.

(v) That this cost has been proved and is reasonable.

(vi) That the diodes, or at least those that were examined, were indeed defective and were the cause of the smoking; and that this smoking was not for some other reason unconnected with the quality or performance of the diodes.

(vii) The defectiveness of the diodes is purportedly proved by Dr. Vincent Lau. He was presented with a quantity of diodes by a gentleman called Matthew who he said was a solicitor retained by the Defendants to represent them in this matter.

17. As I shall demonstrate in a moment, I have no difficulty in accepting Dr. Lau's technical conclusions, but the evidential issue here is whether it has been proved that the diodes that he so expertly examined came from the consignment that was supplied by the Plaintiff to the Defendants under the Purchase Order. The chain of evidence needs to be considered with care.

18. Dr. Lau is, of course, a crucial witness for the Defendants because he purports to prove that part of the consignment of diodes was defective, which therefore serves to justify the Defendant's conduct in re-working the entire production run of 4,085 and in seeking to have the Plaintiff bear the cost of that work.

19. The elements of the Defendant's case which I have described under (i) to (vii) I can take compendiously. Element (viii) relating to Dr. Lau's evidence, I propose to consider separately.

20. Firstly, it is accepted that the diodes which comprised the Purchase Order (page 10 of the Documents Bundle) were duly delivered to the Defendant's offices at Aberdeen and that the Defendants arranged for their transportation to the factory in Guangdong. It is also agreed that they were packed in small boxes, as are the diodes, in Exhibit D2. This is how diodes are packed by their manufacturers. Mr Lee accepts that the box which is Exhibit D2 is identical to the boxes of diodes that he supplied to the Defendants under the Purchase Order, but it is not accepted by Mr Yeong, on his behalf, that this box necessarily came from the consignment delivered by the Plaintiff. He relies, inter alia, on the fact that diodes are commonplace in this industry, they are produced in their millions, many times over, and this is how diodes are packed for shipment by their manufacturers.

21. Following the arrival of the diodes at the factory, Mr Yeong observes that the evidential trail goes cold. He submits that even when I attend to the detail of the Defendant's evidence, there simply is no proper evidence to show how those diodes were used by the Defendants. I am merely asked, says Mr Yeong, to assume or perhaps accept Mr Lau's word for it on the basis of what others have told him, that some of these diodes were worked into the 4,085 hi-fi units and that from the tested sample, eight units comprised "smoky" diodes.

22. Miss Cheung, on behalf of the Defendants, whilst accepting that Mr Lau had very little hands-on dealings with this matter, submits that his investigation of the problems with the sample gleaned from discussions with the company staff and the documents prepared by them, amounts to sufficient proof of these events.

23. For the admissibility of his evidence, she relies, of course, on the provisions of section 47 of the Evidence Ordinance, Cap. 8, which is in these terms:-

"(1) In civil proceedings, evidence shall not be excluded on the ground that it is hearsay unless

(a) a party against whom the evidence is to be adduced objects to the admission of the evidence, and

(b) the court is satisfied, having regard to the circumstances of the case, that the exclusion of the evidence is not prejudicial to the interests of justice

(2) The court may determine whether or not to exclude evidence on the ground that it is hearsay

(a) in the case of civil proceedings before a jury, at the beginning of the proceedings and in the absence of the jury

(b) in the case of any other civil proceedings, at the conclusion of the proceedings

(3) Nothing in this part shall affect the admissibility of evidence admissible apart from this section

(4) The provisions of section 48 to 51 shall not apply in relation to hearsay evidence admissible apart from this section, notwithstanding that it may also be admissible by virtue of this section."

24. From that, she submits that the hearsay elements, and that is most of it, of Mr Lau's evidence should be admitted and what follows is a question of the weight that should be attached to it.

25. As to weight, section 49 provides the considerations to be taken into account:-

"(1) In estimating the weight, if any, to be given to hearsay evidence in civil proceedings, the court shall regard to any circumstances from which inference can reasonably be drawn as to the reliability or otherwise of the evidence.

(2) For the purposes of subsection (1), regard may be had in particular to the following:

(a) whether it would have been reasonable and practicable for the party by whom the evidence was adduced to have produced the maker of the original statement as a witness

(b) whether the original statement was made contemporaneously with the occurrence or existence of the matter stated

(c) whether the evidence involves multiple hearsay

(d) whether any person involved had any motive to conceal or misrepresent matters

(e) whether the original statement was an edited account or was made in collaboration with another or for a particular purpose

(f) whether the circumstances in which the evidence is adduced as hearsay are such to suggest an attempt to prevent proper evaluation of its weight

(g) whether or not the evidence adduced by the party is consistent with any evidence previously adduced by the party."

26. The Defendant's case also relies on a number of business records and the proof of such records is covered by section 54(1):-

"(1) A document which is shown to form part of the records of a business or public body may be received in evidence and civil proceedings without further proof.

(2) A document shall be taken to form part of the records of a business or public body if there is produced to the court a certificate to that effect signed by an officer of the witness or a body to which the records belong.

(3) For the purposes of (2),

(a) a document purporting to be a certificate signed by an officer of the business or public body shall be deemed to have been duly given by such an officer and signed by him, and

(b) a certificate shall be treated as signed by a person if it purports to bear his signature or a facsimile of his signature

(4) In this section, "business" includes any activity regularly carried on over a period of time, whether for profit or not, by anybody, whether corporate or not, or by an individual.

"Officer" includes any person occupying a responsible position in relation to the relevant activities of the business or public body or in relation to its records.

"Public body" (not relevant here).

"Records" means records in whatever form and includes computer generated records.

(5) The court may, having regard to the circumstances of the case, direct that all or any of the provisions of this section do not apply in relation to a particular document or record or description of documents or records."

27. Before I apply these provisions to Mr Lau's evidence, I propose to relate the nature of his second-hand investigation of this matter. It should be observed that some of what he says is confirmed by Mr Lee himself and to that extent, those parts of the case may present less difficulty, subject of course to the fact that Mr Lee has given direct evidence on such matters and his evidence has been tested by cross-examination.

28. Once it was discovered that eight circuit boards contained "smoky" diodes, Mr Lee was summoned to the factory at Guangdong where he had a meeting with Mr Long who was in charge of this matter at the factory and a Mr Tse who is a colleague of Mr Long. Mr Lee says that he wished to be as helpful as he could. He had no first-hand knowledge of what had happened, but the Defendants were important customers, having regard to their size, and he wished to be supportive.

29. The meeting with Mr Long produced the document at page 17 of the Documents Bundle. Of course, it is all in Chinese and notwithstanding the fact that since November last year the parties have known that the matter was to be tried by me, no translation has been provided. As the document was produced, counsel have agreed a form of translation.

30. Mr Lee has signed a portion entitled "The Solution Plan". It says;

"The supplier would replace 300,000 new goods and later supply reason for defect."

Mr Long then signed against a comment which is as follows;

"We hope Alpha-Plus (the Plaintiff) will supply reasons and improvement policy to Star Light (the Defendants)."

31. This document is of course of fundamental importance to the Defendants. They say it in fact amounts to "a confession" by the Plaintiff that these diodes were defective and that they were going to be replaced by the Plaintiff.

32. The words of the statements are self-explanatory. Notwithstanding the importance of the document and of the discussions that must have preceded it, Mr Long has not been called, nor has a statement been prepared attached to a hearsay notice.

33. Mr Lee has dealt with this meeting in his witness statement, paragraphs 14 to 16, page 28 and 29 of the Witness Statements Bundle, and also in his oral evidence.

34. Two matters need to be considered in relation to this document. Firstly, everything appears to have proceeded on the basis that the "smoky" diodes were those supplied by Mr Lee and he certainly appears to have accepted this because he subsequently supplied a further 300,000 to a company related to the Defendant's, although the precise circumstances of that consignment are also in dispute. And, secondly, there is the question of whether the signed statements taken together amount to an acceptance by Mr Lee that these diodes included some that were defective.

35. Mr Lau brings all this together in his evidence by saying, "That this is what Mr Long has told me and here is the document that proves all this"; this being the effect of his evidence rather than his precise words.

36. I rule this evidence admissible. It seems to me that in exercising the power in section 47(1)(b), I could not properly conclude that "the exclusion of the evidence is not prejudicial to the interests of justice." The document is properly admissible as a business record under section 54. Mr Lau has identified it as such and it clearly is of fundamental importance in the presentation of the Defendant's case. To exclude it would be prejudicial to the interests of justice. I will let it in.

37. What now follows is an appraisal of its weight and scope. It is convenient to perform that exercise at this stage. It is important to understand that the document is part of a series of discussions between Mr Lee and Mr Long and his colleague. On 12 October 1999, Mr Long and his colleague, Mr Tse, met with Mr Lee. Their document is the product of those discussions.

38. Clearly, the terms of the signed statements on the face of the document are compelling from the Defendant's point of view. They call for an explanation from Mr Lee. In the absence of anything from Mr Long or from Mr Tse, either on oath or in statement form, I have had to consider Mr Lee's evidence with care. He has been in the witness-box for some time and has been carefully cross-examined by Miss Cheung for the Defendants.

39. As a witness of truth, I found him to be a perfectly straightforward individual. He is an honest witness. When he was told that there was a problem, he dealt with it based on what he had been told, quickly and responsibly. He and his brother went to Guangdong to hear what had to be said by the Defendant's management there. He says this was not an acceptance by him of any liability for the product. I follow entirely his account that this was a big and important client that he was anxious to keep "on side". He was content to be co-operative to keep the business relationship on an amicable footing. That is why he was prepared to deliver a replacement consignment quickly, for which he expected payment.

40. In the absence of anything of real evidential weight to set alongside this account, which could easily have been supplied by Mr Long, I accept Mr Lee's explanation for the document and the nature of his discussions, which accord with good sense, to explain why he signed the statement on the document.

41. I also accept his explanation that in signing as he did, he is not to be taken as having admitted that the diodes that he supplied were defective. I know not, but it may be that had the Defendants troubled to call Mr Long to deal with what seems to me were vital discussions, my view of these facts may have been different. Nevertheless, I can only try these issues on the evidence that is placed before the court.

42. Miss Cheung has explained the difficulty in calling a witness from the Mainland, but I am bound to say that in my experience, witnesses are commonly called from there and the court will accommodate their availability and fix trial dates accordingly.

43. I have already observed that the meeting of 12 October with Messrs Long and Tse appear to have proceeded on the basis that the diodes which were under discussion and which are the subject of the documents on page 17 were those that were part of the 300,000 sent by the Plaintiff. Given that assumption at the time, is it now right for me to simply treat this fact as proved by default, as it were, particularly where Mr Lee did not then call that assumption into question? Now at the trial, Mr Yeong asks, "Where is the evidence that this is actually the case?" Mr Lau says the staff told him that these came from the Plaintiff's diodes.

44. The law of evidence in civil cases is deliberately generous in such circumstances by providing for the admissibility of hearsay relatively easily. I, of course, propose to admit Mr Lau's evidence on this to the extent that he was told that the Plaintiff's diodes were the ones used in the 4,085 units. I now need to assess the weight of that assertion.

45. Mr Lee is not able to gainsay that, nevertheless this is an essential plank in the Defendant's evidence if they are to go all the way and prove their counterclaim. Section 49 is crucial in this regard. May I say that had Mr Long been called, and he could have been called, I have no doubt that much, if not all of this difficulty would have fallen away and this judgment would have been a shorter one!

46. Section 49(1) requires me to have regard to any circumstances from which any inference can reasonably be drawn as to the reliability or otherwise of the evidence. Subsection (2) provides matters to which particular regard is to be paid. Given the importance of this issue, I propose to consider each factor in the subsection. As I have previously recited the subsection, I do not propose to set out the criteria again. Suffice it to say that my comments refer to the individual sub-paragraph in the subsection.

(a) It would have been both reasonable and practicable to at least have called Mr Long from whom much of this information has come.

(b) The statements, in the sense of the production of of the hi-fi units allegedly containing the Plaintiff's diodes and the allegation that they smoked, were made contemporaneously with the existence of a fact sought to be proved. This favours the Defendant's case.

(c) The evidence does involve multiple hearsay. It comes from Mr Lau via Mr Long, who must have gleaned this from subordinates of his. This of course militates against its accuracy and reliability.

(d) It is difficult to tell, on this paucity of direct evidence, whether any person involved had any motive to conceal or misrepresent matters. Mr Yeong has suggested that perhaps production mistakes have been committed and now an attempt has been made to deflect attention away from such a mistake and towards the Plaintiff's diodes, who has difficulty to contradict the case.

I am unable to come to a view on this either way and so I propose to leave this consideration out of account.

(e) The statement, or rather statements, that the diodes used came from the Plaintiff and that they smoked is clearly a collaborative effort. Information must have come from a number of the staff at the factory, collated by Mr Long, perhaps with Mr Tse's assistance, and then passed on to Mr Lau.

This chain of information does have the effect of lessening the reliability of the evidence. It should be remembered that diodes are very commonplace, albeit they do come with different specifications. I have heard no evidence as to how they were handled in the factory and then applied to this production process. Mr Long would have been eminently qualified to provide this evidence, evidence at least of a system which I could evaluate. There is nothing of this type here.

(f) Contemplates a deliberate attempt to hide evidence to prevent proper evaluation of its weight.

Nothing of this sort applies here. If I may say so, it is really a question of insufficient thought having been given to proof of the case.

(g) Is the evidence consistent with evidence previously adduced by the Defendants?

There is no previous evidence that has been adduced on this issue, but I should observe that the Defendant's case has been consistent as to the use of the Plaintiff's diodes as has the allegation that eight of them "smoked". This would therefore favour their case.

47. Going through the exercise required by section 49:

Has the evidence of Mr Lau, together with the documents referred to by him, passed the test of showing, on a balance of probabilities, that these diodes came from the Plaintiff's consignment and that they were used in the hi-fi units, that they "smoked" and that the cause of this smoking was a defect in the diodes? There is of course a temptation to say that all of this must be so, in what is a perfectly ordinary commercial transaction. But where the point has been taken, it needs to be properly addressed.

48. What struck me early on in the course of the evidence was how far removed from the shop floor transactions Mr Lau was. He is a director based in Hong Kong. I have heard nothing to speak of about the factory's workings at that time or at all. All I know is that diodes are in very common use and ordered in vast quantities.

49. I have looked at the evidence which bears on these issues in the round. I have looked at all of it in accordance with section 49 and in balancing the factors that favour the Defendants against those that bear against them, I have come to the conclusion that the burden has not been carried by the Defendants. They simply have not done enough to show that this particular consignment went into the production of this hi-fi unit. This is a substantial factory employing thousands. I need to know more than just a bare assertion and thereafter an assumption that these were the diodes.

50. What is particularly unfortunate is that that evidence would have been available and could have been marshalled to show a system of receipt of the components, their subsequent requisition from the store and their use in the hi-fi units. None of this is there and I am not prepared, nor can I make what would amount to assumptions, even against the background of the generous provisions of section 47 and section 49 of the Ordinance.

51. That failure in the chain of proof, I am afraid is sufficient to derail the counterclaim and, of itself, is sufficient to have it dismissed, but I fear that there are further reasons. These also relate to the evidence, and there has to be some, to show that the diodes examined by Dr. Lau came from the Plaintiff's consignment. He says that it came from Matthew, the Defendant's solicitor, who presented him with a quantity for examination.

52. I fear the evidential trail on this is even more threadbare. I appreciate that this situation is far removed from the strict requirements of a criminal trial where strict proof is needed. One assumes, and I use the word advisedly, that Matthew obtained the sample from the Defendants. This difficulty was raised during Dr. Lau's evidence, so Miss Cheung was alerted to the fact that an issue was there to be dealt with. Matthew was in fact in court instructing her. He could easily have been called to describe how he had been provided with the sample and by whom and perhaps one might have been in the position to work backwards through some, inevitably hearsay, but admissible evidence. Sadly, none is there.

53. I am not prepared to make a leap of faith and say that the trail back from the sample examined by Dr. Lau to the consignment delivered by the Plaintiff to the Defendants is a clear one. It simply is not, for the reasons that I have given in the previous section of my judgment, and now additionally by virtue of the failure by the Defendants to at least call Matthew to deal with this leg of the evidential journey.

54. Taken in isolation, I am perfectly content to accept Dr. Lau's evidence and his conclusions as to the diodes that he examined, but his evidence stands very much in a vacuum for the reasons that I have given.

55. For the sake of completeness on the evidence, I wish to deal with two other aspects which do not have the effect of salvaging the counterclaim. Firstly, there is the question of the alternative consignment of 300,000 diodes. Mr Lee says that he was asked to deliver these to the Defendant's associated company, Dumpreis. This instruction had been given to him by Miss Chan, an employee of both companies. When the Plaintiff was not paid, he sought to wind-up Dumpreis and payment was eventually forthcoming.

56. The Defendant's case is that this order is quite unrelated to the consignment which is the subject of this action. Attention is drawn to the fact that Dumpreis placed the order and not the Defendant. This was dealt with by Miss Chan, who has not been called. Mr Lee, who I have found completely trustworthy, of course accepts the order came from Dumpreis, but he assumed that was due to an internal arrangement between the two associates, which he did not question. All he knew was that a new consignment was required urgently and he complied with the instruction. I am disposed to accept his first-hand account of the circumstances in which the order was placed by Miss Chan.

57. The final issue concerns two meetings held at the Defendant's offices between Mr Lau and Mr Lee in late October and early November 1999. The Defendants had by then re-worked the hi-fi units and presented the Plaintiff with an invoice for $122,500, being the cost of this work.

58. Mr Lau says the Plaintiff had effectively accepted responsibility for this mishap and the meeting was to negotiate how this was to be paid and how to preserve the business relationship.

59. The Plaintiff said he could not afford to pay all of this and so, trying to be reasonable, Mr Lau subsequently produced two cheaper demands (pages 58 and 60 of the Witness Statements Bundle), this in a spirit of commercial good sense and with an eye on their future goodwill.

60. Mr Lee's account differs substantially. He has said that he considered the Defendants valued clients, but he rejected the suggestions that he had admitted liability for this. The extent of the goodwill was to replace any defective goods ($11,700 worth). He had made no admissions as to the original consignment and that is why he refused to pay even the greatly reduced debit note for $72,000, a considerable reduction from the original one of $122,500.

61. My view of this is that Mr Lau has misunderstood what Mr Lee was saying about this. I prefer Mr Lee's account of these meetings. He made no admissions, but to show willing, he was prepared to replace the 300,000 diodes with another delivery.

62. As I have already observed, these two issues cannot salvage the Defendant's position. For the reasons that I have already given, the Defendants have failed to carry the burden, on the evidence that they have chosen to call in the trial, of showing that the diodes that went into the hi-fi units came from the Plaintiff's consignment and that the diodes that were delivered by the Plaintiff were in any way defective, because they have also failed to demonstrate that what was delivered to Dr. Lau for his consideration came from that consignment.

63. Accordingly, the counterclaim must stand dismissed. There must be judgment on the claim - the 4 deliveries which relate to the claim being admitted by the Defendants, the first three admitted in any event and the fourth, which was the subject of the counterclaim, not having been shown to be defective.

64. Judgment to the Plaintiff in the sum of $65,700, together with interest thereon, I will say at half the judgment rate from the date of the writ until today and at the judgment rate from today until payment.

65. Costs of the action will be to the Plaintiff.

66. That, of course, is sufficient to dispose of, and has disposed of, the action, but in the event of an appeal, it might be helpful if I express my view on the legal issues that I have been addressed on. If, on an appeal, I were shown to have been in error on my view of the evidence, the court may be assisted in knowing how I would have been disposed to rule on the law which may therefore obviate the need for a re-trial, either by me or by another judge, of these issues.

67. This part of the judgment therefore assumes that I would have found the material facts in the Defendant's favour and that the counterclaim had succeeded, save for one matter which Mr Yeong, for the Plaintiff, has raised as an additional defence to the counterclaim which concerns the Defendant's standard Terms and Conditions of contract. These are set out at page 11 of the Witness Statement Bundle, Clause 2(2) is to this effect:

"Every assignment must pass the test of our Quality Assurance Department. The property of the goods shall not pass to us unless and until the goods have passed these tests and in the meantime, the goods shall remain at your risk in all respects."

What Mr Yeong seeks to get from this is that there is a requirement on the Defendants to test these diodes before use, by making them part of a finished product. Here, they have used them in a manufacturing process and it is therefore too late to complain about them.

68. Miss Cheung's submission is to the effect that this clause cannot be read as imposing on the Defendants the obligation to test the goods before they use them. Firstly, this clause does not say that, and when read with all the other obligations and duties set out in the Terms and Conditions of contract, the obligation is, in fact, very much the other way (see instruction No. 3 on the front page of the Purchase Order which is to the effect that the seller assumes full responsibility for quality and timely delivery). By accepting the order, the seller agrees to promptly refund the buyer at landed cost for any defective items.

69. I am satisfied there is no condition precedent created by these terms that a pre-production test must be carried out on the diodes before a claim can be entertained against the Plaintiff as seller. In such circumstances, I would have found that the counterclaim would have succeeded, subject to the next question which concerns the extent to which the Defendants should be permitted to claim the entire cost of re-working 4,085 circuit boards.

70. Miss Cheung starts with Clause 5 of the Terms and Conditions:

"You shall indemnify us from all actions, costs, claims, demands, expenses and liabilities whatsoever in respect of..... or in respect of any loss or destruction or of damage to property not attributable to any act or neglect of ourselves or of any persons for whom we are responsible, but which shall have occurred in connection with any work executed by you against this order or shall be alleged to be attributable to some defect in the goods."

71. Miss Cheung submits that what occurred here falls full square within circumstances contemplated in this clause.

72. Reliance is also placed by her on paragraph 17/057 of the current edition of Benjamin and the case of Pinnock Brothers v Lewis and Peak Limited [1923] 1 KB 69. That is authority for the proposition that to ask or expect a buyer to test the capacity of a component is unreasonable. The buyer is entitled to rely on the seller's express warranty as to merchantability and fitness for purpose.

73. She submits that the diodes, being used in their millions in factories like the defendant's, usually present no problem. This is the first time that such a thing has happened in both the experience of Mr Lee and of Mr Lau. Diodes are, of course, very basic components. So much is clear from looking at one and also from the evidence of Dr. Lau. Diodes can be tested vigorously, as he did with special equipment, but it seems to me that having regard to the passage in Benjamin that I have referred to, and having regard to the characteristics of a diode and its history of high reliability, I am disposed to find that there was no obligation on the Defendants to carry out even sample pre-production tests.

74. This then brings me to the issue of remoteness. It is plain that it must have been in the contemplation of the parties, and therefore of the Plaintiff as seller, that these diodes would be used by the Defendants as part of one of the products that they were to assemble or manufacture. Had they been able to show that the diodes were defective in eight out of the sample of 200 that were examined, the question then becomes whether it was reasonable for them to abandon the entire 4,085 hi-fi units as manufactured, and to re-do those parts of the circuit boards that contained the diodes.

75. This is really a question of fact and degree. The burning or smoking of the diode clearly posed a fire and safety risk. They were bound to treat it with the utmost seriousness. How should they have addressed it?

76. One way would perhaps have been to test a further 200 units, which would have been just under 10 per cent of the entire production run, to see whether any more had defective or smoky diodes. If all of the further 200 passed without mishap, could they take the risk of merely repairing the eight defective circuit boards and send the 4,085, as repaired, to Philips?

77. It also needs to be remembered that the remedial works were never likely to cost a huge amount of money. The components are cheap, about 30 cents for each diode and some solder. The main expense is the labour cost.

78. Taking all these factors into account, I am satisfied that the Defendants, from their point of view, and when viewed objectively as responsible manufacturers, adopted the correct course. That being so, and having regard to the fact that the Defendants were under no duty, as I have found, to examine even a sample before production, and that the Plaintiff knew that the diodes were to be used as a component in a finished product and that the remedial action taken by the Defendants was entirely reasonable in all the circumstances, I would have obliged the Plaintiff to reimburse the Defendant the cost of these works and given judgment on the counterclaim.

79. It also needs to be remembered that the Plaintiff would have had a right of recourse against the manufacturers of the diodes in respect of most, if not all, of his liability against these Defendants. But all of this is, of course, entirely hypothetical where, on my finding, the Defendants have failed as a matter of evidence.

(Submission)

80. I think this matter is of sufficient difficulty to say that certificate for counsel is justified, so there will also be certificate for counsel.