KADER INDUSTRIAL CO. LTD. v. GALCO INTERNATIONAL TOYS N.V.

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

(ACTION No. 250/1991)

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(Action consolidated)

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J U D G M E N T

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Findlay, J.:

Background

1. Mr Lou Novak is giving evidence for Galco during this trial. Two points have arisen regarding his evidence in respect of which I am asked to make rulings.

The "Lost and Found" Evidence

2. The first point relates to evidence given by Mr Novak de bene esse concerning his experience in the use of distilled water for the purpose of testing the water functions of toys. In his written statement exchanged in October 1994 and standing as evidence in chief, Mr Novak said - "In my experience the use of distilled water for testing the functions of and for use in toys has proven to be quite safe and has caused no contamination problem". This is all he says. No detail of the experience mentioned is given. During his oral evidence, Mr Novak was asked to give details of this experience. I received this evidence de bene esse subject to hearing Mr Griffiths subsequently. The experience related to a product called "Lost and Found". This toy was designed to produce "tears" from the eyes produced by water introduced into the toy. Mr Novak said that no contamination problems were reported in respect of this product of which 160,000 to 170,000 pieces were sold.

3. Mr Griffiths argues that this evidence should not be allowed. He points to Order 38, rule 2A. Paragraph (5) of this rule says that a "party may not without the consent of the other parties or the leave of the court lead evidence from that witness the substance of which is not included in the statement served, except in relation to new matters which have arisen in the course of the trial". Mr Griffiths says that Galco has made no discovery regarding the "Lost and Found" product. He wishes to see the specifications for the toy, to know how the mechanism works, and to see samples of the product. Until he does, he is not able, he says, to deal with this evidence.

4. This is not the first time we have heard about the previous experience of Galco in using distilled water to test toys. On 20 March 1996, Mr Lam Shu-wan gave evidence (page 9 of the transcript), without objection, that there had been previous products manufactured for Galco where distilled water had been used for functional testing. He was asked in examination-in-chief if this had given rise to problems. He said - "There has been no information that there was any problem." Mr Griffiths cross-examined Mr Lam about this evidence. Mr Lam said -"Our company has a similar product and it was labelled Lost and Found and so far we have not received any feedback that there was any problem to it". Mr Griffiths cross-examined Mr Lam further to establish that the witness's "state of mind was that if distilled water was used there would be no contamination problem by mould or anything else". Later, Mr Griffiths put to the witness - "And that your attitude of mind, as you agreed this morning, was that distilled water was quite safe", and the witness answered, "It was not my attitude of mind, it was in fact the previous products that we have that on testing we have certain requirements set down by QA and in fact the standard of the quality was not something set down by myself". Mr Griffiths then suggested to the witness that "there was a discussion about the water testing, that you in your own mind were satisfied that distilled water was safe". This suggestion was put to the witness again later in his evidence. This evidence regarding Galco's experience with the use of distilled water was not objected to, was not challenged and, in fact, was adopted by Mr Griffiths as the reason why Mr Lam believed that using distilled water was quite safe.

5. There is no dispute that Kader used water to function test the dolls. There is no dispute that Galco told Kader to use distilled water to perform this testing. There is a dispute as to whether or not Kader used distilled water. It is not disputed that Galco told Kader to use distilled water because Galco believed it was safe to do so. I believe Kader disputes whether or not it was, in fact, safe to use distilled water. So, the only danger to Kader's case from this evidence is that it may go towards showing that distilled water was, in fact, safe to use. It does go towards showing that it was safe to use in the "Lost and Found" product, but, of course, that was a very different product. The evidence is that it was so different that it gave a great deal of trouble with its "crying" function, which was not the case with the products with which I am concerned. The only value in discovery in this respect will be to show that it was a different product, which we already know. Discovery may also, of course, incidentally, go to credit, but there must be an end to exploration for this reason.

6. I am not sure that it can be said that the substance of the evidence was not included in the statement served. What Galco wish to prove was contained there. What was said was, of course, subject to being tested, and, if Mr Bleach had let the matter rest there, and Mr Griffiths had wished to challenge it, I would have been surprised if Mr Griffiths had also left the evidence as it was in the statement. If he did not accept this evidence of Mr Novak's experience, he would have been bound to challenge it, and he could hardly have done so without going into detail. If Mr Griffiths was to maintain a consistent line, he would, presumably, have cross-examined Mr Novak in much the same way as he cross-examined Mr Lam.

7. In any event, in the exercise of my discretion, I give leave for this evidence to be adduced, and I give that leave without ordering further discovery regarding the product "Lost and Found". This discovery is not, in my view, necessary for the purpose of disposing of the action fairly or for saving costs.

Mr Novak's Supplemental Statement

8. Galco has filed and served a supplemental statement by Mr Novak, the purpose of which is stated to be "to deal with [Kader's further pleadings and a statement by one of Kader's witnesses]." He comments that Kader's defence "is now based on their interpretation of what is known as an Original Equipment Manufacturing arrangement and the effect this has on the contracting parties". The statement proceeds to comment; setting out "the general principles which apply by reference to these documents". Mr Griffiths says that virtually the whole of this statement is inadmissible. Mr Bleach concedes that some nine passages are inadmissible, amounting to a relatively small portion of the statement.

9. By and large, Mr Novak comments on Kader's case regarding the rights and obligations of the parties in their contractual relationship. For this reason, it is important to see what this case is. Kader's case, as extracted from its re-amended defence and further particulars, is as follows -

"The Plaintiff (a distributor of toys) and the Defendant (a manufacturer inter alia of toys) had contracted with each other since about 1986 for the manufacture by the Defendant of toys for the Plaintiff on an O.E.M. (Original Equipment Manufacturing) basis, that is according to the Plaintiff's specifications and directions. The trademark, copyright, patent rights and common law rights in those toys, in the designs for their manufacture, in many of the moulds required for their manufacture and in the manufacturing "know-how" possessed by the Plaintiff, all reposed in the Plaintiff. The Plaintiff would provide the moulds for those toys or would assist the Defendant to manufacture such moulds according to the requirements and specifications of the Plaintiff. Whilst the Defendant was preparing the manufacturing processes required for the manufacture of the Plaintiff s toys the Plaintiff s staff would be present in the Defendant's factory or factories supervising or advising the Defendant's staff upon the Plaintiff's manufacturing requirements. Whilst the Defendant was manufacturing the toys for the Plaintiff the Plaintiff's quality control inspectors would be present in order to ensure that the Plaintiff's manufacturing and quality control specifications were at all times carried out."

In early 1990 the Plaintiff requested the Defendant to manufacture its "Bouncin' Babies : Drink 'N Wet" dolls and its "Bouncin' Babies : Drink'' Cry" dolls ... Prior to the receipt of specific orders for the manufacture and sale of the dolls by the Defendant the processes described in [the paragraph] above were also followed in respect of these toys.

It is admitted that the Plaintiff made it known that the goods should be fit for use by children but it is denied that the Plaintiff relied on the Defendant's skill and judgment and it is further denied that it would have been reasonable for the Plaintiff so to rely. The dolls were designed by the Plaintiff and were manufactured by the Defendant to that design on an O.E.M. (Original Equipment Manufacturing) basis. At all material times all specifications and directions for the production of the dolls and working procedures for their manufacture and testing were laid down and approved by the Plaintiff which is experienced in the manufacture and sale of toys. At all material times employees or representatives of the Plaintiff inspected the Defendant's manufacturing methods and compliance with the Plaintiff's specifications and directions. The dolls in question were inspected by the Plaintiff's inspectors and passed for delivery to the Plaintiff.

The Defendant pleads the background or course of dealing between the parties prior to the contracts between the parties for the manufacture and sale of the Drink 'N Wet and Drink 'N Cry dolls... The Re-Amended Defence the Defendant pleads that the contracts for the manufacture and sale of the dolls was undertaken upon an O.E.M. basis. That averment is sufficiently pleaded therein.

As with the contracts pleaded in ... the Re-Amended Defence each of the contracts was made partly in writing, partly orally and partly by conduct. Each contract was initiated by the delivery by Galco International Toys N.V. ... to Kader Industrial Company Limited ... of a written purchase order in Galco's printed form (which is entitled 'purchase contract'). The best particulars of the purchase orders which Kader is now able to provide (the purchase orders for 1987 and before have been destroyed) are provided in Schedule 1 hereto. The identity of Galco's representative who authorised each document is contained in each document. Those purchase orders identify the nature and quantities of the goods ordered, the unit price and the shipment requirements. They do not contain Galco's specifications for the manufacture of the toys concerned and in particular:

(i) the design of the toys (which would be according to the trademark, copyright, patent rights and common law rights in the toys to be manufactured ... - the ownership of which reposed in Galco);

(ii) the dimensions of the toys and their component parts;

(iii) the materials (and colours thereof) to be used in the manufacture of the toys;

(iv) the moulds to be used in the manufacture of the toys;

(v) the manufacturing and testing techniques to be used by Kader in manufacturing the toys; and

(vi) the packaging of the manufactured toys.

Those specifications were stipulated by Galco in written form (as hereafter particularised) and orally by Galco's employees in attendance at Kader's factories in China, where the toys were manufactured. The best particulars of the written specifications and directions stipulated by Galco from 1986 which can now be given are contained in Schedules 2 to 18 hereto. The identities of Galco's representatives who wrote the documents are contained in the documents which are identified by Schedule. Save to the extent that the said written specifications and directions reflect oral specifications and directions, Kader is not now able to identify and particularise the oral specifications and directions stipulated by Galco from 1986 onwards.

The stipulation of specifications and directions by conduct is to be inferred from the systematic repeated process from 1986 onwards of Galco stipulating to Kader the manner in which Kader was to manufacture the toys ordered by Galco (in respect of which Galco owned and retained the intellectual property rights) and Kader's compliance with those stipulations.

The basis of manufacturing described in [the first paragraph above] of the Re-Amended Defence ... above is known in the toy industry (and in industry generally in Hong Kong) in Hong Kong and elsewhere as Original Equipment Manufacturing or O.E.M.

The reference to the O. E. M. basis of manufacturing [in the first paragraph above] of Kader's Re-Amended Defence is descriptive of the nature of the contracts entered into by the parties from 1986 - 1990. It is not alleged that the parties necessarily expressly used that expression or adopted it as part of their contracts - although if or had they done so it would accurately describe the nature of the contracts between them."

10. There is no dispute between the parties that an O.E.M. basis of manufacturing does not carry with it a built-in set of rights and obligations. Indeed, Mr Novak says this clearly in paragraph 4 of his supplemental statement. Both parties are agreed that the rights and obligations of the parties depends on the specific contract or contracts entered into between them. In other words, to identify those rights and obligations one must decide what the parties actually agreed in one way or another, not what is generally understood in the industry to be the usual agreement concluded under an O.E.M. basis of manufacturing. It follows that, in this case, there is no question of ascertaining any custom of the industry or ascertaining what might have been agreed, usually or specifically, in other agreements entered into by Galco with other vendors under an O.E.M. basis of manufacturing. It also follows that Mr Novak cannot speak of his understanding of what might have been usual in other contracts on an O.E.M. basis, or what Galco might have expected to be the case in a contract under an O.E.M. basis. He can speak only of what he knows about the contracts with which I am concerned in this case.

11. Mr Novak joined Galco's parent company in January 1989, and he has been a director of Galco for about four years. He has a great deal of experience in the toy industry. His responsibilities, as far as relevant here, included vendor selection. He was involved in the selection of Kader to produce the two products with which I am concerned. He does not say, however, that he had any direct involvement with or any direct knowledge of the contracts entered into with Kader. Accordingly, on the evidence adduced so far from Mr Novak, he knows nothing about the negotiations towards or the formation of any of the relevant contracts between Galco and Kader.

12. In the light of what I have said above, I will now examine Mr Novak's supplemental statement.

Paragraph 2

13. The only statement of substance here is a statement of what Mr Novak sees Kader's defence to be. I do not need to hear this from any witness.

Paragraph 3

14. Again, there is an interpretation of the pleadings. I do not need this to assist me.

Paragraph 4

15. The first statement here is one on which the parties agree; that the relationship of the parties depends on the contract between them, but I do not need Mr Novak's assistance on this. The second statement relates to the relationship between a manufacturer and a customer and a sub-contractor relationship. I am not dealing with any kind of sub-contractor relationship. It may be that Kader bought in materials in order to perform its contract, but that is not a sub-contract. So the second statement is irrelevant.

Paragraphs 5, 19, 34, 35 and 36

16. The substance of these paragraphs is Mr Novak saying that, under their contractual relationship, Galco tells Kader what it wants, but does not tell Kader how to achieve that end. Mr Novak does not say how he knows that the contractual relationship provides this. He did not, apparently, have anything to do with making the relevant contracts with Kader. So he cannot speak from direct knowledge of this. If he is speaking from his knowledge of what Galco has contracted with other vendors, this is irrelevant. If he is speaking as to what is usual in or the custom of the industry, this is outwith the scope of the pleadings. What Mr Novak says about Galco's lack of manufacturing expertise is admissible. He would know this.

Paragraph 6

17. This paragraph comments on a sub-contractor relationship. Any such relationship is not relevant to the matter I have to try.

Paragraphs 7 and 8

18. Mr Griffiths did not comment specifically on these paragraphs. The substance of them is that Galco does not have any manufacturing expertise. Mr Novak would know this.

Paragraph 9

19. Here, Mr Novak speaks of the expertise of witnesses who have given evidence. They are the best people to speak of their expertise.

Paragraphs 10 and 11

20. In this paragraph, Mr Novak speaks of what "would" or did happen at various stages. I have heard nothing that tells me that Mr Novak knows anything directly about this.

Paragraphs 12, 15 and 24

21. Mr Novak seeks to interpret the nature of a fax communication. He is not in a position to do this.

Paragraphs 13 and 14

22. Here, Mr Novak speaks of what Galco would have done if it had thought there might be a contamination problem. Mr Novak would know this, and he may speak of it, although I am not sure it has any great value.

Paragraph 16

23. Mr Griffiths does not mention this paragraph specifically. It mentions a practice about which Mr Novak would know.

Paragraph 17

24. This seems to be aimed at showing that Galco would not have approved worker instruction sheets because it had no expertise in the area. That does not say they were not approved, but goes to the probabilities. He may say this.

Paragraph 18

25. This paragraph is about what Kader and Galco would have done about entering into the contract. This is either something that Mr Novak does not know or is argument.

Paragraphs 20 and 21

26. These paragraphs purport to draw a conclusion from documents. This is not admissible. Mr Novak can speak, again, about Galco's expertise.

Paragraph 22

27. In substance, Mr Novak seeks to speak about whether directions were given and who devised the manufacturing process. So far, it does not appear that Mr Novak knows about this.

Paragraph 23

28. Here, there is a statement about what tests were performed and a comment, neither of which is admissible.

Paragraph 25

29. In essence, this says that Galco would not allow an unsafe process. Mr Novak can say this, for what it is worth.

Paragraphs 26, 27, 28, 29 and 30

30. Mr Novak again purports to drawn conclusions from documents. I can do this as well as he can.

Paragraphs 31 and 32

31. Mr Griffiths makes no comment on these.

Paragraph 37

32. This paragraph consists almost entirely of argument as to what Mr Novak would have expected Kader to do if it had been aware that there was a risk of contamination. It is not admissible.

Paragraph 38

33. Mr Novak speaks again about the obligations of the parties under the contract. On what I have heard so far, he can know nothing of this.

34. The supplementary statement by Mr Novak consists very largely of inadmissible material. I rule that it not stand as evidence in chief. Galco is at liberty to lead the additional admissible evidence from Mr Novak, some of which may be that contained in his statement which I have excluded at this stage, if this can be shown by further evidence to be admissible. I am thinking of material that appears to be hearsay, but may not be such if it can be shown that Mr Novak has direct knowledge of the matter concerned.