AFEX IMPORT-XPORT GMBH v. VIDEO-TRONIC INDUSTRIAL CO LTD AND ANOTHER

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JUDGMENT

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Fuad, V.-P.:

1. This is a defendant's appeal from the decision of Kaplan, J., given in a reserved judgment on 2nd November 1990, whereby he allowed an appeal from the order of Master O'Donnell dated 6th August 1990 refusing an application made by the plaintiff for summary judgment under RSC O.14, and giving unconditional leave to defend. Kaplan, J. ordered that "judgment be entered for the plaintiff with damages and interest thereon to be assessed".

2. The plaintiff, Afex Import-Export GMBH ("Afex") is a company incorporated in Austria which imports and exports electronic and other goods. The defendant, Video-Tronic Industrial company Limited ("Video-Tronic") is a company incorporated in Hong Kong and carries on the business of trading in, and manufacturing, inter alia, electronic goods.

3. Afex issued a writ (accompanied with a statement of claim) against Video-Tronic on 6th September 1989 claiming damages for the breach of a contract concerning the supply of radio. clocks, the majority of which,. it was averred, did not correspond in quality with the samples provided. There was a further or alternative claim that the radio clocks were sold by description and that the goods contained defects which rendered them unmerchantable under the description.

4. The background of the transaction is given in an affidavit sworn by Mr. Karl Pinczolitsch, one of Afex's directors, dated 17th January 1990. He states that in January 1988, Video-Tronic sent some brochures and other documentary material to Afex. After receiving information about various items (including micro-wave ovens and general household appliances) and their prices, Afex ordered several samples of those items.

5. In May 1988, Afex were asked by a customer in Yugoslavia to obtain samples of "R20" and "R19" model radio clocks and so they asked Video-Tronic for some samples. They also discussed the quality and price of the goods. On 13th May 1988, Afex received 3 samples each of the R19 and R20 radio clocks. When these were sent to their customer in Yugoslavia, and tested there, they were found to be defective.

6. Mr. Pinczolitsch goes on to say that on 9th June 1988, he informed Video-Tronic, by telex, of this fact. The specific complaints related to the net-transformers, display and reception transmission. He asked Video-Tronic to air freight 3 further samples of both types of radio clocks as soon as possible. Video-Tronic had responded by saying that the model had been produced for the European market and had previously sold well in Yugoslavia. They asked for details of the complaints and the technical specification required by the customer.

7. The affiant goes on to say that on 26th June 1988 they received 2 further samples of the R20 radio clocks. These were inspected by their customer and found to be in good working order. As a result, Afex submitted an order to Video-Tronic on 11th July 1988 for the supply of 20,000 R20 radio clocks and 10,000 R19 radio clocks for a price totalling US$218,000. Mr. Pinczolitsch draws attention to the fact that the sales agreement, a copy of which he exhibits, specified:

8. Mr. Pinczolitsch explains that they opened a Letter of Credit in Video-Tronic's favour on 14th July 1988. This provided that payment would be made 60 days after receipt of documents. Later, at Video-Tronic's request, the terms were changed to payment on sight.

9. The affiant continues his narrative by saying that the contract had been varied, pursuant to three faxes exchanged between the parties during August 1988, to provide for the cancellation of the order for R19 model radio clocks and for the quantity of R20 radio clocks to be increased to 41,500. The total contract price was increased to US$273,750. Moreover, it was agreed that 1% spare parts would be provided by the sellers with each shipment. Video-Tronic had required them to pay US$4,000 as a fee for the cancellation of the order for the R19 radio clocks. Following the variation of the contract, the Letter of Credit was duly amended.

10. The agreement between the parties was that delivery would be made as follows : -

11,000 pieces on or before 5th September 1988;

 

11,000 pieces on or before 22nd September 1988;

 

11,000 pieces on or before 5th October 1988;

 

8,500 pieces on or before 15th October 1988.

11. Mr. Pinczolitsch then states that one of the samples supplied was, on 26th June 1988, submitted by their customer to RIZ IETA (the technical testing unit at Zagreb, Yugoslavia). The unit tested the sample. It was found to be technically in order and in accordance with Yugoslavian regulations, this being a pre-condition for the entry of the product into Yugoslavia. A copy of the testing report and translations of those parts not in English, are exhibited.

12. Mr. Pihczolitsch's affidavit then relates that the first consignment of radio clocks was shipped on 8th September 1988 and Video-Tronic delivered a certificate of quality confirming that the goods delivered were identical to the delivered samples in technical execution, design and colour. The consignment arrived in Yugoslavia on 7th October 1988 and cleared customs on 12th October. The goods were inspected by Afex's Yugoslavian customer who notified them that a considerable proportion of the consignment was defective.   Details of the defects were advised in faxes to Video-Tronic dated 13th and 14th October 1988. These are exhibited.

13. Video-Tronic responded immediately by requesting details and in addition stating that the quality of the first shipment and the delivery of the third shipment were two separate issues. In a further telex sent later on the same day, Video-Tronic stated that approximately 5,000 pieces of the first delivery might have some defects and that 5,000 pieces would be replaced. In relation to the second and third deliveries, Video-Tronic advised that components had been replaced and that there would be no problems. The second shipment had, by that time, been shipped from Hong Kong on 3rd October 1988 and had arrived on 4th November. As regards the third shipment, Video-Tronic said that shipment would be made on 14th October 1988. By a further telex dated 18th October, Video-Tronic advised that the third shipment had left Hong Kong on 18th October and would arrive in Yugoslavia on 11th or 12th November 1988 (It actually arrived on 16th November). In addition, Video-Tronic stated that they were attempting to ensure that the maker of the goods would be "responsible for the whole job."

14. Mr. Pinczolitsch goes on to say that by reason of the defects of the first shipment, they tried to stop the third shipment, requesting the forwarders not to issue a Bill of Lading to Video-Tronic. However, he asserts, to ensure that a Bill of Lading would be issued and thus payment under the Letter of Credit obtained, Video-Tronic had shipped by another forwarder (a related company to Afex's forwarder, named Danzas Lines). The Bill of Lading was therefore accepted by the Bank and payment under it was made by three instalments, namely : -

15. It is then said that despite confirmation from Video-Tronic that they would replace the defective units, they had failed to do so. Examination showed that the total number of units which were irrepairable amounted to 37,077 out of the total consignment of 41,500 pieces. A further 14,466 pieces had subsequently been sold at a substantially reduced. value. Video-Tronic were informed of the specific defects as advised by their. customer. On 14th November 1988, Video-Tronic advised Afex's solicitors that the original supplier of the radio clocks had agreed to send 3 engineers to Yugoslavia. It is then asserted that on 15th December 1988, SGS Austria Controll-Gesmoh carried out an inspection of 34,900 of the radio clocks comparing the same with the technical specifications and Video-Tronic's samples. The inspection concluded that Afex was entitled to reject the whole consignment due to major defects and the failure of the goods to conform with specifications and samples. A copy of the report is exhibited. I think I am right in saying that 77% of the items were found to be defective.

16. The affirmation relied upon by Video-Tronic in their attempt to show cause why summary judgment should not be given against them was made by one of their directors, Mr. Luk Yu Ming, Joe, on 19th February 1990. He pointed out that his company did not manufacture the radio clocks in question but relied on supplies from others. He stated that he was surprised when he heard from Afex, by the telex of 9th June 1988, that their customer had complained that the samples were defective, and the nature of the defects. Before forwarding the May samples to Afex, he said, he had examined them and had not observed any of the alleged defects. This was why, by his telex of 10th June 1988, he had specifically asked Afex to advise precisely what technical specifications they required and had further asked them to confirm whether there were any problems in the AM brand, FM brand, RF, output and transformer. In the past, he said, they had sold the same radio clocks to buyers in Europe and the general reaction had been very good; they had sold well in the Yugoslavian market too. The contract price of the goods was FOB US$8.8 for the R19 model and US$6.5 for R20 model. At that price they were a very good buy. In that telex, he had requested Afex to advise its exact requirements so that they could deliver new samples.

17. Mr. Luk goes on to say that by his telex of 14th June 1988, Mr. Pinczolitsch had requested them to send two samples each of the radio clocks. The telex contained no reply to his company's enquiries in their telex of 10th June; no details had been given of the alleged defects and no indication as to what were their requirements.

18. In his affirmation, Mr. Luk then states that in response to the request, they had obtained samples of the radio clocks from their supplier and on 20th June 1988, had delivered two samples of each of the models of the radio clocks to Afex together with technical specifications. Before the delivery of the June samples, he, himself, had examined them and found them to be of satisfactory quality and similar in quality to the May samples. He said that he had no knowledge of the alleged` inspection by Afex's customer of the June sample and he said "and the plaintiff is put to strict proof thereof." While he agreed with Mr. Pinczolitsch as to the placing of the order, the price and quality of the radio clocks, he disagreed that the order dated 11th July 1988 was to the effect that the quality of the goods in technical design, colour and design had to accord with the sample replacements, i.e. the samples supplied in June 1988. He further said that there was no difference at all in quality between the May and June samples. His own examination had shown that they were 'identical. He contended that it would have been inconceivable that Video-Tronic would have sent the May samples to Afex without examination. It was equally inconceivable that if the May samples had been defective, his company would have sent them to Afex; they were, after all, a potential customer.

19. Mr. Luk denied that the May samples were defective and "put [Afex] to strict proof thereof." If any of the samples were indeed defective, Afex knew this well before placing the order. Further, the lack of response to Video-Tronic's enquiries in their telex of 10th June 1988 was further evidence that Afex had accepted the alleged defects, if any, before placing the order.

20. Mr. Luk then affirmed that his company was never informed that the goods would be subject to testing by a testing unit in Yugoslavia and they did not know of the alleged necessity for. compliance with Yugoslavian laws. Once the samples had been delivered to Afex, Afex had exclusive control and knowledge of them. Video-Tropic had no means of verifying the truth of Afex's allegations about defectiveness and they were "put to strict proof thereof." As to Afex's attempt to stop the third shipment, there was never any proof from Afex to substantiate the alleged defects. His company did not accept the allegations of defects. Relying on Afex's order, Video-Tropic had entered into a contract with their supplier to supply the radio clocks and they could not repudiate the contract by refusing to accept shipment of the goods to be supplied by their supplier.

21. Mr. Luk also affirmed that it was not true that his company had shipped the goods by another forwarder, namely Danzas Lines, for improper motives. All along, Danzas lines had been the forwarder nominated by Afex and all shipments of the goods had been effected through them as the exhibited Bills of Lading demonstrated.

22. I will not review all that follows in Mr. Luk's affirmation. Much is legal argument and submission which has no place in an affirmation. In various paragraphs, once again, Mr. Lux puts Afex "to strict proof" of some of Mr. Pinczolitsch's allegations rather as if his affirmation were a pleading.

23. Also before Kaplan, J. was a Third Party Notice dated 13th October 1989 issued by Video-Tronic against their suppliers, RCR Electronics Manufacturing Limited. Pursuant to an order dated 10th November 1989, Video-Tronic served a Statement of Claim on the Third Party. By the Statement of Claim Video-Tronic aver that the radio clocks, the subject matter of Afex's action, did not correspond in quality "to the said samples and/or description ...... and the same were unmerchantable .... and the quality of the said goods were not identical with the technical execution, colour and design of the said samples." (paragraph 24 of the Statement of claim). Moreover, in paragraphs 25 and 26 there is a reference to inspections carried out by Jugoinspekt-Beograd (two specific reports are referred to) and details of many, and major, defects are given. It is common ground that these were reports commissioned by Video-Tronic and dated 7th July 1989 and 3rd November 1989.

24. Video-Tronic applied for summary judgment under O.14 against their supplier,- the Third Party, and for the . purpose of the application, Mr. Luk made an affirmation dated 14th February 1990, in which, inter alia, he affirmed that the contents of the Third Party Statement of Claim were true and correct.

25. In his judgment, the learned judge reviewed the facts in considerable detail. He noted that Counsel for Video-Tronic had objected to his having before him the Third Party Statement of Claim but not Mr. Luk's affirmation in support of Video-Tronic's application for summary judgment against the Third Party. We had itconfirmed by Mr. Chung (who represented Video-Tronic before Kaplan, J. and who appears for them today on this appeal) that this is the stand he maintains before us today - he does not submit that Mr. Luk's affirmation of 14th February 1990 was not admissible in the appeal to the Judge in Chambers.

26. Kaplan, J. noted that Video-Tronic had provided no evidence to show, nor had they averred, that the goods were other than grossly defective. In the November 1989 inspection by Jugoinspekt conducted on their own instructions, it had been 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.

27. The judge then reviewed the substance of Video-Tronic's case, as he put it, "in the face of this overwhelming and uncontradicted evidence". In respect of the argument in Mr. Luk's affirmation, repeated before him, that if the May samples were defective then the Jane samples, being identical, were also defective, (this argument was rehearsed again by Mr. Chung before us today) the judge observed that, on the admitted material before him, the May samples were irrelevant. He had not the slightest doubt that Afex's purchase order was made on the basis of the June samples. In the light of the evidence, it would be stretching credulity too far even to consider holding that Afex (or their customer) agreed to buy 41,500 radio clocks with the defects which all the evidence showed them to have had. Even allowing for the fact that this was an O.14 application, nevertheless Video-Tronic had to satisfy him "that there is a fair or reasonable probability of the Defendant having a real or bona fide defence". In his judgment no court could, or would, hold that the June samples were defective and that both Afex and their customers nevertheless placed an order for 41,'50'0 pieces of defective goods.

28. In his view, Video-Tronic were "light years away" from establishing an estoppel, nor did section 16(2) of the sale of Goods Ordinance assist them because he was wholly satisfied, on all the evidence, that these defects were not specifically drawn to Afex's attention by Video-Tronic or anybody else. He was satisfied that the evidence was all one way - to the effect that the June samples (upon which this contract was based) were not defective and thus there was no question of there being defects which an examination ought to have revealed.

29. The judge said that the real issue in relation to samples was 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 he was wholly satisfied that they did not correspond to the samples provided in June which had been inspected and approved by the Yugoslav customer, and which complied with the relevant regulations. Video-Tronic had produced no evidence to show that the June samples were defective other than Mr. Luk's assertion that the May and June samples were identical. This was such an extravagant and inherently improbable assertion that he did not feel able to accept it. The Court had to approach such submissions with reality and commercial common sense. Afex had amply demonstrated that Video-Tronic was in breach of contract and entitled to judgment with damages to be assessed.

30. The judge then turned to consider the point relating to whether the Court could look at the Third Party Statement of Claim. He said he wished to make it clear that although he concluded that it was permissible to look at it, a fortiori, where, as here, it was verified. by an affidavit placed by consent before the Court, nevertheless he felt that caution had to be shown. Video-Tronic was in the position of a middleman unfortunately caught between the plaintiff and the Third Party. They obviously wished to set up a "back to back" claim for an indemnity against the Third Party and thus inevitably had in their pleading to mirror the plaintiff's allegation against them. However, in his view, when the defendant in the Third Party proceedings pleaded an independent assertion (here on their own expert's report that the goods were defective and did not substantially comply with the sample) the position was different. In his judgment, it would be wrong to allow a deponent in O.14 proceedings to aver that the goods were not defective when they had their own expert report evidencing defects which they had pleaded in the Third Party proceedings arising out of the same goods.

31. The judge pointed out, however, that his observations were obiter because here the matter was covered by an affirmation placed before him by consent. He indicated that he would have come to the same conclusion without Jugoinspekt's report because Video-Tronic had not averred that the goods were other than defective. The 15th December 1988 report relied upon by Afex was uncontradicted by any evidence and the onus was on Video-Tronic to satisfy the Court that there was a triable issue.

32. I now refer to the Grounds of Appeal filed on behalf of Video-Tronic dated 9th November 1990. They are in the following terms:

"The learned Judge ought to have dismissed the Plaintiff's appeal in that : -

 

33. In relation to the first ground, before Mr. Chung was able to open his appeal, we indicated that we found it unsatisfactory and insufficient, and told him that without amendment, we would not allow him to argue it.

34. From the wording of ground (1) it was apparent that Video-Tronic were relying on the words in O.14, r.3(1) which say " ... or that there ought for some other reason to be a trial of that claim ....." In response to our intervention Mr. Chung reformulated the ground as follows: there was some other reason for trial in the interests of justice for if judgment were entered against the defendant, the defendant might have to pay damages in the event of his failing to establish his case against the Third Party. For my part, I will not spend any time on this submission, because if there were a sound foundation for it would mean that whenever a Third Party claim was made, summary judgment under O.14 could not be entered against the defendant. There is nothing in that ground.

35. In my view, Video-Tronic placed themselves in a very difficult position in view of the contents of the affirmation sworn by Mr. Luk on 14th February 1990 to support Video-Tronic's application for summary judgment against the Third Party. As to the Third Party Statement of Claim itself, it is not entirely clear what is being averred. Usually in a case of this kind, a defendant will plead that he disputes the plaintiff's claim on the grounds set out in his defence to the action, but that in the event of his being found liable to the plaintiff, he claims that he is entitled to an indemnity or to a contribution by the Third Party against the claim of the plaintiff on grounds which will then be set out. Be that as it may, it seems to me that Afex is fully entitled to point to what Mr. Luk said about the very same goods in that affirmation. This clearly demonstrated that there was not even a faint possibility of an arguable defence existing.

36. Since I respectfully agree with everything that the learned judge said in his judgment, it is not necessary to say any more than that this was, as the judge held, an overwhelming case for summary judgment under O.14. Mr. Chung was presented with a very difficult brief indeed. He tried valiantly to argue the appeal, but I feel bound to say that in my judgment the appeal was quite hopeless. I would therefore dismiss the appeal.

Penlington, J.A.:

37. I agree that this appeal must be dismissed.

Nazareth, J.

38. I also would dismiss this appeal.

39. [Appeal dismissed with costs on a common fund basis, to be taxed and paid forthwith.]