TECH GAIN INTERNATIONAL LTD v. LA WIN TRADING LTD

DCCJ 6361/2006

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 6361 OF 2006

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JUDGMENT

1.  In April 2006, Tech Gain (the Plaintiff) placed an order for computer hard disk drives (HDD) to be supplied by La Win (the Defendant).  Payment was made in advance of delivery.  Eventually Tech Gain sought to cancel the order and now claims for return of the payment made or alternatively damages.  La Win disputes the claim and counterclaims for Tech Gain’s refusal to take delivery.

BACKGROUND

2.  Tong used to be a subordinate of Suen.  In 1997, Tong joined his father’s company, i.e., La Win.  Since about 2002, La Win had numerous business dealings with Tech Gain.  Tech Gain carried on the business of trading in computer components and accessories.

3.  In about March 2006, Suen of Tech Gain and Tong of La Win began to discuss the sourcing of what were essentially second hand HDD for repair and resale in the Mainland.  La Win would supply these HDD.  Tech Gain would have them repaired by its counterpart in the Mainland.

4.  On 4 April 2006, Tech Gain sent a purchase order (PO) for HDD to La Win.  On 26 May 2006, La Win sent to Tech Gain a proforma invoice.  On the same day and subsequently in June 2006, Tech Gain paid La Win a total sum of RMB 840,000 for the HDD.

5.  In June 2006, a shipment of 14,000 HDD arrived.  On 23 June 2006, Suen on behalf of Tech Gain signed La Win’s delivery note for the shipment.  Eventually, Tech Gain kept only 4,700 HDD out of the shipment and signed another delivery note dated 4 July 2006 for this quantity while the remaining 9,300 HDD were returned to La Win for replacements.  The replacements arrived in November 2006.  Tech Gain informed La Win that the order was cancelled and demanded refund of the RMB 840,000 paid.  It also refused to take delivery of the shipment of the replacement HDD.

6.  I do not see real dispute regarding the above background.

DISPUTE

7.  Broadly, the major issues in dispute are:

(1)             what the terms of the order were and, in particular, the subject matter contracted for;

(2)             whether Tech Gain was entitled to cancel the order;

(3)             which was the innocent party and what the loss and damage it has suffered.

THE ORDER

The PO and the proforma invoice

8.  Tech Gain’s case is that the parties concluded their agreement by virtue of its PO dated 4 April 2006 (referring to p.53 of the bundle) allegedly sent by e-mail on the same date.  La Win’s case is that it has received altogether 3 versions of the PO, all dated 4 April 2006.  The version relied on by Tech Gain (p.53 of the bundle) was not the first one attached to Suen’s e-mail to Tong on 4 April 2006.  It was actually the last version of the PO La Win received only on 26 May 2006.

9.  According to Tong, he received the first version of the PO (referring to p.156 of the bundle), which was attached to Suen’s e-mail to him on 4 April 2006.  According to this version of the PO, the quantity ordered was 31,000 HDD at US$9.50 each.  They were described as used HDD belonging to 4 brands with specification of the quantities of various memory sizes.  It also specified that each HDD should have a bubble pack.

10.  However the terms of this PO were not quite in line with what Tong explained in his earlier e-mail to Suen.  Tong explained that by e-mail dated 2 April 2006, he informed Suen that the HDD belonged to Grade-A brands at scrap rate in the market.  It would be too time-consuming to break the bulk of HDD down into different brands, memory sizes and degrees of fault.  If he were to do that, he would have had to charge Suen at least US$15 per HDD.  He also made clear that the HDD would be packed in non-standard pallet lose box.

11.  In view of the difference, Tong sent an e-mail to Suen on the day following the receipt of the PO.  Tong made clear that, among other things, he could not control the assortment of the brands of the HDD though they mostly belonged to the 4 brands described in the PO.  The same applied to the assortment of the memory sizes though 60-70% of the bulk would be over 40G.  He also attached a photograph of the container and packing of the HDD that Tech Gain should expect to get.  A proforma invoice in similar terms would be sent to Tech Gain.

12.  Subsequently, Tech Gain again sent a PO (referring to p.157 of the bundle) to La Win.  This PO, though freshly signed, was identical to the one sent on 4 April 2006.  The facsimile journal record on the top of this fax copy of the PO clearly shows that it was faxed from Tech Gain on 23 May 2006.

13.  On 26 May 2006, Tech Gain sent to La Win the last version of the PO (referring to p.53 of the bundle).  The material terms of the PO, which differed from the previous 2 versions of the PO, were as follows:

(1)             The quantity was reduced from 31,000 to 25,000 HDD.

(2)             The unit price was reduced from US$9.50 to RMB 60.

(3)             Delivery was expected to be on or before 15 June 2006.

(4)             Deposit of RMB 400,000 should be paid on 26 May 2006.

(5)             Condition of the HDD should be as per sample or better.

14.  On the same day, La Win sent to Tech Gain its proforma invoice. According to Tong, to signify that the PO had been revised as mentioned above, he added the letter ‘R’ to the PO reference in this proforma invoice.  The proforma invoice contained, among others, the following terms:

(1)             The HDD were described as HDD (scrap item), instead of used HDD as described in the PO.

(2)             The unit price was US$7.50, which was equivalent to RMB 60 as per the PO.

(3)             The 1^st deposit of US$50,000 was payable on 26 May 2006, i.e., the day of this proforma invoice.

(4)             The 2^nd deposit of US$62,500 would be payable on 1 June 2006.

(5)             Delivery would take place in about 3 weeks upon receipt of the 1^st and the 2^nd payments.

(6)             The balance of the contract price would be payable by post-dated cheque upon receipt of the goods.

(7)             There would be no refund or return.

15.  Considering the evidence of Suen and Tong against the contemporaneous documents, I find Tong’s evidence to be more in line with the truth.  I find that Tech Gain’s allegation that the contract was already concluded on 4 April 2006 cannot stand.  In fact, even in his subsequent e-mail in October 2006, Suen stated that the parties started the deal only in May, not April.

Subject matter of sale

16.  According to Tech Gain, it was common knowledge in the computer industry that used HDD is repairable and costs about RMB 60 each.  These used HD, after repair, could be sold in the Mainland at about RMB 100 each.  On the contrary, scrap HDD is beyond repair and costs about RMB 15 each.  When Suen placed the order, it was used HDD, not scrap HDD, which Tech Gain contracted for.  With the assurance of Tong of La Win, Tech Gain placed the order.  But Tong gave evidence that when the parties began to discuss the business deal, it was Suen who used the description “垃圾” and hence La Win’s understanding and description of the HDD as scrap items thereafter.

17.  Apart from the above pleading and Suen’s statement, Tech Gain has not really adduced any evidence of the alleged common knowledge or the distinct categorisation of used as opposed to scrap HDD in the computer market.  On the contrary, the understanding on the part of Tong was specifically referred to in his e-mail to Suen on 2 April 2006 (prior to any PO) and also on 5 April 2006 (after the first version of the PO was received on 4 April 2007).

18.  Now the description of the HDD in the proforma invoice differed from that in the PO.  Further, there was no specification of quantities of various memory sizes in the proforma invoice.  Notwithstanding that, Suen said he just ignored the proforma invoice.  His explanation was that he considered the proforma invoice to be a mere quotation.  He recognised the PO only.

19.  I fail to see how the proforma invoice could be understood as La Win’s quotation in view of the sequence of documents as mentioned above.  Further, the HDD described in the proforma invoice would not have been what Tech Gain was contracting to buy, if Tech Gain’s pleaded case is accepted.  One would have expected Tech Gain to raise objection.  Suen did not do so.  One would have expected Tech Gain to bind La Win to the terms of the PO by insisting that Tong signed the PO.  Suen did not do so either; yet at the same time insisted that he recognised the PO only.

20.  It is true that La Win too did not insist that Tech Gain signed the proforma invoice.  However, as Mr Boey for La Win put it, La Win’s position was different.  Not only did Tech Gain choose not to ‘correct’ La Win, it also parted with its money to La Win for the HDD on the same day when the proforma invoice was issued.  This was effectively performance that La Win expected of Tech Gain.

21.  After the shipment arrived in June 2006, La Win issued separately 2 delivery notes which invariably described the HDD as scrap items.  Again, Suen signed the delivery notes without any objection to such description.

22.  It should be noted that unlike Tech Gain, while La Win described the HDD as scrap items, it is never its case that all of them were therefore expected to be beyond repair.  La Win only refused to warrant that all of them could be repaired.  Considering all the circumstances prevailing then, I cannot help believing that parties did not really consider that there was any misunderstanding about the subject matter at the material time.  In my view, they simply chose to describe them differently.

23.  Mr Chak for Tech Gain indeed sought to argue, though only during his closing submissions, that it only matters that the subject matter was second hand HDD purchased for the purpose of repair and resale in the Mainland for profit, irrespective of whether it was described as used or scrap.  This was more likely than not the reality, though not quite how Tech Gain pleaded its case.

Sample and warranty of quality

24.  Tech Gain’s case is that the HDD supplied by La Win, being used HDD, should be repairable to become saleable in the Mainland.  According to Suen, Tong assured him that the HDD would be of such quality.  La Win has supplied 4 samples of the HDD to him.  La Win even undertook “隻換隻”, i.e., to replace each defective one with a proper one.

25.  According to Tong, Suen suggested that he had a team of technicians in the Mainland to repair the HDD.  However, if any of them could not be repaired, the chips and the metal parts could still be dismantled and sold.  Tong thought that such business was risky because all would have to depend on the skill of those technicians.  Tong himself had not dealt with second hand HDD before.  He managed to source such HDD but he has never supplied any of them as samples to Tech Gain for the deal.  He also never warranted their successful repair or undertook to replace each unit that could not be repaired.

26.  It is true that Tech Gain’s PO provided that the condition of the HDD should be “as per sample or better”.  But there is no pleaded case that this was a sale by sample or how the shipment of HDD allegedly failed to correspond with the sample.  The allegation about and reference to sample are in my judgment irrelevant.

27.  The HDD were supposed to come in an assortment of brands and memory sizes while the brands stated in PO were merely the major brands.  Further, the quality in question is that the HDD could be repaired.  I wonder how a sample (as per the PO) or even 4 samples according to Suen in court would be representative of such quality of the bulk to be shipped.  The alleged samples were not produced during trial.  Instead, Suen produced 4 photographs of the alleged samples.  However they only depict HDD belonging to two of the major brands mentioned in the PO.  I am not satisfied that Tech Gain’s allegation about sample is in fact substantiated.

28.  The alleged undertaking by La Win to change every defective HDD was unusual; especially when ‘defect’ in this context means whether the HDD could be successfully repaired by the technicians of Tech Gain’s counterpart in the Mainland.  La Win had no experience and no control over such repair whatsoever.  This was also inconsistent with the stance of La Win reflected by its documents.  In his e-mail prior to the PO in April 2006, Tong already explained to Suen that he could not specify, among other things, the degree of fault of the HDD.  In its proforma invoice, La Win also stated that there would be no refund or return.  I find it to be unlikely that Tong would on the other hand warrant that every HDD could be successfully repaired or to undertake to replace every one that could not be so repaired.

29.  Having said that, I find that the question whether there was any warranty of such quality or undertaking to replace every HDD, which could not be repaired, turned out to be immaterial.  The fact was that eventually Tech Gain accepted part and La Win agreed to replace part of the shipment.

CANCELLING THE ORDER

30.  On 23 June 2006, Suen and Tong went to the container depot where the container of HDD was.  Suen signed La Win’s delivery note of the same date acknowledging receipt of the 14,000 HDD in good condition.  Contrary to what the delivery note suggested, Suen complained that the contents of the container consisted of many articles extraneous to HDD, even rubbish.  He took some photographs then which were also produced.  But they do not really depict the alleged state of the interior or contents of the container.  In court, Suen explained that he was asked to sign the delivery note as a pre-condition to opening the container.  I do not find such explanation from a businessman like Suen to be particularly appealing.

31.  Having said that, I find that Tech Gain might not have a reasonable opportunity to actually examine the contents of the container on 23 June 2006.  In other words, the delivery note, though signed, might not conclusively evidence Tech Gain’s acceptance of the condition of the shipment by Tech Gain.  Mr Boey for La Win fairly accepted that.  However, whatever the quality of the shipment was, the fact was that La Win did agree with Tech Gain to take back a major part of these HDD and to replace them.  By signing another delivery note from La Win on 4 July 2006, Tech Gain acknowledged receipt of 4,700 HDD with the remaining 9,300 HDD pending replacement by La Win.

32.  Suen and Tong had different versions of why La Win agreed to take back and to replace the 9,300 HDD.  Essentially, Tong explained that Suen indicated that the HDD were not of the quality in terms of their memory sizes as he had expected.  Tong acceded to Suen’s request to replace them by HDD with higher memory sizes.  On the contrary, Suen said that this happened upon Tong’s acknowledgement of the poor quality of the HDD.  Pertaining to such case of Tech Gain, Mr Chak for Tech Gain once demanded La Win to account for the whereabouts of the 9,300 HDD with a view to an examination of their quality by adjusters.  Perhaps except for credibility, the quality of the 9,300 HDD returned to La Win is no longer relevant to Tech Gain’s claim in the present action.  Tech Gain did not seek to cancel the order because of the quality of the returned HDD.

33.  The basis for cancelling the order was stated in the letter from Tech Gain’s previous solicitors dated 15 November 2006: First, La Win had failed to deliver the goods on or before 15 June 2006 according to Tech Gain’s PO.  Secondly, the goods delivered on 4 July 2006, which meant the 4,700 HDD, did not accord with the sample mentioned in the PO.

34.  The real issues are therefore the quality of the 4,700 HDD accepted and the time of delivery of the 9,300 replacement HDD.  The parties’ e-mail correspondence since September 2006 contains the contemporaneous record of their stance regarding these two issues.

The parties’ correspondence

35.  According to the delivery note dated 4 July 2006, the replacement HDD were supposed to be delivered in mid-September.  This did not happen.  In October, Suen was still chasing for such delivery.  Suen explained in court that he happened to come to know La Win’s supplier and discovered what was stated in his subsequent e-mail dated 18 October 2006 to Tong.

36.  In this e-mail, Suen stated that he came to know the cost of the HDD supplied by La Win and the soon arrival of the shipment of replacements from the supplier.  Suen expressed disappointment about Tong.  The reason was that he came to know that La Win has added about HK$40 to the unit cost of the HDD, which was HK$15-18, when selling the HDD to Tech Gain.  He described this as a “crazy profit”.  Suen suggested that La Win was expected to sell to Tech Gain at not more than HK$20 per HDD.  At the price La Win charged Tech Gain, the HDD should be of better quality.  Suen requested La Win to adjust the price immediately when La Win could still have a reasonable profit.

37.  In his e-mail dated 25 October 2006, while Suen suggested that he wanted to cancel the remaining order (referring to the shipment of the replacement HDD), he at the same time repeated his complaint about the big profit margin La Win was making from the sale to Tech Gain.  He effectively kept the contract alive but expected La Win to adjust the price.  To this, Tong replied by e-mail on 27 October 2006.

38.  It was not until his e-mails on 27 October 2006 and eventually on 6 November 2006 might Suen be considered as unequivocally cancelling the order.  Tech Gain repeated this by letter dated 9 November 2006, though the letter somehow suggested that Tech Gain was cancelling the order only that day.

The 4,700 HDD

39.  It was alleged that these 4,700 HDD did not correspond with the so-called sample.  As mentioned above, I reject this part of Tech Gain’s case, both as a matter of relevance and fact.

40.  In the parties’ e-mail correspondence, Suen never made any specific complaint about these 4,700 HDD, whether as pleaded or as alleged in its previous solicitors’ letter.  Suen never complained that the HDD supplied by La Win were not the kind that Tech Gain contracted for.  Though he mentioned about the 10% yield of the HDD, Suen was not seeking to reject any of the HDD accepted, but to consistently complain about an effectively bad deal.  He was still expecting the shipment of the replacement HDD though at a reduced price.

Time for delivery of the replacements

41.  The delivery date of 15 June 2006 came from the PO.  According to the proforma invoice, delivery would take place in 3 weeks after the 1^st and the 2^nd payments by Tech Gain by 1 June 2006.  Whether it was 15 June or 3 weeks after 1 June, Tech Gain has in fact waived them when it actually accepted the 4,700 HDD in July 2006 and agreed to wait for the replacements in mid-September 2006.

42.  The 9,300 replacement HDD were not delivered by mid-September 2006 as per La Win’s delivery note dated 4 July 2006.  However, by still chasing for such delivery as recorded in Suen’s e-mails in October 2006, the expected delivery date of mid-September 2006 has again been waived.

43.  Following Suen’s e-mail dated 9 October 2006, Tong in his e-mail dated 10 October 2006 informed Suen that the replacement HDD would be shipped at the end of that week and should arrive at the end of October or during the first week of November 2006.  Even prior to that, Suen suggested in his e-mail dated 18 October 2006 that he came to know from the supplier that the replacement HDD would arrive soon.  Indeed the replacement HDD arrived and on 6 November 2006, La Win faxed to Tech Gain the documents for collecting delivery of the goods.  As mentioned above, Suen in his e-mail on the very same day chose to cancel the order on the basis of alleged late delivery.

44.  There is no evidence that prior to its purported cancellation of the order on 6 November 2006, Tech Gain has ever refused to accept the proposed delivery of the replacement HDD during the first week of November 2006 as informed by La Win.  Despite constantly chasing for delivery in October 2006, there is no evidence of Tech Gain having ever made a time for delivery of the essence with the effect that La Win’s failure to meet that deadline would have entitled Tech Gain to treat the contract as repudiated.

45.  In my judgment, Tech Gain’s purported cancellation of the order was in the circumstances wrongful.  While La Win was willing to perform and was indeed performing, it was Tech Gain’s purported cancellation of the order and its refusal to take delivery of the replacement HDD that amounted to breach instead.

OTHER SUGGESTIONS

46.  Parties also had dispute as to how La Win came to deliver only 14,000 HDD, which was short of the quantity ordered.  Again, perhaps except for general credibility, this is in my view not relevant.  The fact was that Suen did sign La Win’s delivery notes for the quantity of 14,000 HDD.  There is never any issue of short delivery in the present case.

47.  Mr Chak for Tech Gain questioned about the lack of evidence of La Win’s specifications to the supplier of the HDD wanted.  He suggested that Tong failed to exercise a reasonable care and skill in the course of sourcing the HDD.  This led to the supply of the wrong type of HDD to Tech Gain.  To begin with, this was not Tech Gain’s case that it has ever provided such specifications of the HDD to La Win so that La Win was supposed to source the HDD corresponding to such specifications.  There is also no pleaded case by Tech Gain of breach of contractual or tortuous duty of care on the part of La Win in sourcing the HDD.

48.  Lastly, during his submission, Mr Chak also suggested that Tech Gain has somehow been tricked into the deal.  Again I fail to see any pleaded basis for that suggestion and claim.

LOSS AND DAMAGE

49.  Even assuming that Tech Gain has rightfully cancelled the order, its claim would still have been problematic.

50.  Despite the reference to the payment made by Tech Gain as deposit, that was clearly payment of (substantial) part of the price under the contract, rather than a sum put up to secure the due performance of the contract, as a deposit properly means.

51.  Tech Gain is claiming for the return of the entire amount of the payment on the basis of total failure of consideration.  The basis, as pleaded, is that apart from cancelling the order, the 4,700 HDD accepted turned out to be neither repairable nor re-saleable at all.  Nevertheless, these 4,700 HDD were indeed never returned to La Win.  In court, Suen said that these 4,700 HDD had been sold as scrap at RMB 30,000 – 40,000.  However, in his closing submission, Mr Chak for Tech Gain suggested that only 10% of the 4,700 HDD could be repaired and these repaired HDD were sold in the Mainland for HK$30,000 – 40,000 while the rest were sold as scrap.  I find it difficult to accept either of these late assertions of Suen in the absence of relevant documentary evidence.

COUNTERCLAIM

52.  Since these goods have already been paid for, La Win would have no alternative but to store them for Tech Gain.  No suggestion or authority has been brought to my attention to the effect that it was unreasonable for La Win to do so.  Though not mentioned by the parties, this was also envisaged under section 39 of the Sale of Goods Ordinance, Cap.26.  Mitigation of loss is not and could not be an issue either.

53.  I accept Tong’s evidence and the documents in relation to such storage.  Up to mid-January 2008, the amount of warehouse charges have accumulated to HK$25,600 and is accruing at the monthly rate of HK$1,200.  The amount should now be HK$30,400.

CONCLUSION

54.  Considering all the evidence, including those analysed above, I dismiss Tech Gain’s claim and enter judgment on the counterclaim in the sum of HK$30,400.  Damages thereafter shall accrue at the rate of HK$1,200 per month until the goods in question were taken delivery of or otherwise disposed of by the parties.  Considering the circumstances of this case, I award interest on the sum of HK$30,400 at half judgment rate for the period between the date of writ and today.  Interest on the sum and the damages accruing thereafter will carry interest at the judgment rate until payment.

COSTS

55.  The trial of this case was supposed to commence on 18 December 2007.  It had to be adjourned on that day due to sick leave of Mr Boey for La Win.  The question of costs of the adjournment was reserved.  I see no reason why Tech Gain should not be awarded the costs of the adjournment.  I therefore make a nisi order that Tech Gain shall have the costs of the adjournment on 18 December 2007; subject to that, La Win shall have the costs of this action, including any costs reserved.  Costs shall be taxed, if not agreed.  I certify the engagement of counsel.  Unless an appointment is made within 14 days to argue costs, this costs order shall become absolute.

Representation: