KADER INDUSTRIAL CO. LTD. v. GALCO INTERNATIONALTOYS N.V

Date of handing down of judgment: 23 August 1996

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J U D G M E N T

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Background

1. Galco International Toys NV (Galco) is a designer and distributor of toys. It is subsidiary of Lewis Galoob Toys Incorporated (Galoob), a public company incorporated in the United States of America.

2. Kader Industrial Company Limited (Kader) is a toy manufacturer. It is based in Hong Kong, but carries on much of its business of manufacturing toys in factories in the People's Republic of China. It is a subsidiary of Kader Holdings Limited, a public company in Hong Kong.

3. Since about 1986, Kader has been making toys specifically for Galco, at Galco's request and according to Galco's specifications and instructions. Until the problem that is the cause of this lengthy and expensive litigation, the business relationship between Galco and Kader was good and trouble-free.

4. In 1988, Kader began to manufacture a particular line of dolls for Galco. The dolls were called "Bouncin' Babies" (BB). These dolls were marketed, and there was no problem with them. In early 1990, Galco asked Kader to manufacture some new dolls which were to be part of this line. These new dolls were of two types; one known as "Drink 'N Wet" (DW), which simulated urination, and the other "Drink 'N Cry" (DC), which simulated weeping, both processes enabled by water being fed into the doll through the mouth by means of a plastic bottle. This water function was not a feature of other dolls in the line, but it was not novel; other dolls had been marketed with similar functions, but they were somewhat larger and of a different design.

5. Following this request to manufacture the DW and DC dolls, which was made and accepted apparently without any formal documentation, Kader and Galco went through a fairly lengthy process, which was normal in their working relationship. During this process, in outline, Kader refined some moulds supplied by Galco, devised other moulds itself according to Galco's specifications, produced samples of the parts of the dolls, submitted them to Galco for approval, obtained samples of fabric for the dolls' clothing, submitted these to Galco for approval, set up an assembly line at Kader's factory at Chung Tong in China, and finalised this assembly line with procedures supervised and approved by Galco. When all was to the satisfaction of Galco, Kader began producing the dolls and supplied these to Galco under purchase orders issued by Galco. There were 17 purchase orders dated between 5 March 1990 and 19 July 1990 in respect of about 225,000 dolls.

6. The dolls were manufactured by Kader during the period from about the middle of April 1990 to the end of July 1990. Something like 159, 400 dolls were shipped to Galoob in the United States and to distributors in Austria, the United Kingdom, Germany, Switzerland, Canada and France.

7. Galco alleges, broadly, that these dolls were infested with microbes.

8. In this judgment, I use the word "microbes" to mean "micro-organisms", the word more commonly used during the hearing.

Galco's Case

9. Galco alleges that, between March 1990 and July 1990, it entered into 17 contracts for Kader to manufacture and sell to Galco 225,080 dolls. It is said that the terms of "the Agreement" were made partly in writing, partly orally and arose partly by conduct, and it gives particulars.

The Written Terms

10. The written terms are contained in the 17 written purchase contracts. Those relied upon for present purposes are -

"2. The goods shall conform as to quantity, quality and description herein provided and be of sound materials and workmanship, be equal in all respects to samples, patterns or specifications provided, be capable of any standard of performance specified, be fit for any purposes expressed or implied and free from defects.

3. Buyer is entitled to inspect the goods during manufacture, processing, storage or at any time and Manufacturer shall provide all reasonable facilities for such inspections PROVIDED ALWAYS THAT SUCH inspections shall not relieve Manufacturer of any liability in respect of the quality or quantity of the goods whether or not any defects are latent or apparent or could be ascertained on such inspections and without prejudice to Buyer's right to reject or to claim damages at Buyer's option.

4. The goods shall be properly packed and secured in such a manner as to reach their destination in good condition under normal conditions of transport and in accordance with any rules relating to freight classification and in accordance with the instructions of Buyer shall be delivered to the place or places and in the manner as instructed by Buyer and at the lowest freight rate available. The Buyer assumes no liability for loss or damage to the goods while in transit.

7. Manufacturer warrants that the goods supplied comply in all respect with all relevant requirements of any statute, statutory, [sic] rule or order, or other instrument having the force of law which may be in force from time to time in Hong Kong and other places as may be indicated by Buyer and in particular shall meet or exceed the standards of the U.S. Consumer Products Safety Commission ..."

The Standards

11. By virtue of these purchase contracts, and for other reasons unnecessary to examine here, Galco alleges that Kader was obliged to manufacture the dolls to comply with, and conform to -

(1) The Code of Federal Regulations Title 16 (16 CFR) issued under the Federal Hazardous Substances Act (FHSA) and the Consumer Product Safety Act (CPSA) by the Consumer Product Safety Commission (CPSC); and

(2) The American Society for Testing and Materials Regulations F963-86 (ASTM);

(3) The European Standard EN71 (1988) (EN71)

(All of which are referred to as "The Standards")

12. Other Standards are referred to in the statement of claim, but they received no mention during the trial or submissions, so I take it that they are no longer relied upon.

13. Galco says that "in summary the Standards prohibit the import of:-

"(a) any toy which is contaminated by hazardous substances including, but not limited to, pathogens; opportunistic pathogens; and sensitizers. In this context, contamination means the mere presence of any hazardous substance.

(b) any toy which is a potential health hazard to children;

(c) any toy which is a potential health hazard to adults, especially susceptible humans."

Terms by Conduct

14. Galco alleges a course of dealing or business with Kader as part of which Galco instructed Kader to manufacture the dolls according to the Standards and Galco's written specifications contained in what are called shipment inspection specifications.

Terms Implied by Law

15. Galco also alleges that there were terms of the agreement implied by law. These are, apparently, alleged to be implied independently of the Sale of Goods Ordinance (Cap. 26). It is unnecessary to discuss these. They were not mentioned in closing submissions and are clearly no longer relied upon.

The Terms Implied by the Sale of Goods Ordinance

16. It is alleged by Galco that Kader was a manufacturer and seller of goods in the course of business and, so, the Sale of Goods Ordinance implied into the agreements the following conditions -

(i) The goods (i.e. the dolls) were of merchantable quality;

(ii) the dolls were fit for the purposes of use by children including children who are ill (either in hospital or at home) and by adults and by susceptible humans. At all material times the Plaintiff informed the Defendant and/or the Defendant knew or ought reasonably to have known that the dolls were to be used by children including children who were ill.

17. The Sale of Goods Ordinance was amended in 1994, but I take it as it was at the relevant time. The provisions relied upon are -

Section 16 (2) -

"Where the seller sells goods in the course of a business, there is an implied condition that the goods supplied under the contract are of merchantable quality, except there is no such condition -

(a) as regards defects specifically drawn to the buyer's attention before the contract is made; or

(b) if the buyer examines the goods before the contract is made, as regards defects which that examination ought to reveal."

Section 2(5) of the Ordinance -

"Goods of any kind are of merchantable quality within the meaning of this Ordinance if they are as fit for the purpose or purposes for which goods of that kind are commonly bought as it is reasonable to expect having regard to any description applied to them, the price (if relevant) and all the other relevant circumstances; and any reference in this Ordinance to unmerchantable goods shall be construed accordingly."

Section 16(3) -

"Where the seller sells goods in the course of a business and the buyer, expressly or by implication, makes known to the seller any particular purpose for which the goods are being bought, there is an implied condition that the goods supplied under the contract are reasonably fit for that purpose, whether or not that is a purpose for which such goods are commonly supplied, except where the circumstances show that the buyer does not rely or that it is unreasonable for him to rely, on the seller's skill and judgment."

The Alleged Breach

18. The statement of claim alleges -

"In breach of the terms (express and/or implied) of the Agreements including the terms implied by virtue of the Sale of Goods Ordinance Cap. 26 and/or in breach of the Standards the dolls -

(a) did not conform as to quality, description and/or did not conform with specifications and/or were not free from defects (breach of Clause 2 of the purchase contract).

(b) did not comply with the express written term set out in Clause 7 of the purchase contract.

(c) did not comply with the Standards prohibiting their import as set out in [the summary mentioned above].

(d) were not of merchantable quality.

(e) were not fit for their purpose including use by children, ill children, adults, susceptible humans.

(f) posed a potential health hazard to humans including susceptible humans.

(g) were defective including (but not limited to) latent and/or inherent defects not detectible [sic] by the Plaintiff on reasonable examination."

19. Then follow particulars. These particulars, by and large, simply recite the findings of microbes on the dolls.

The Purchase Contracts

20. The written purchase contracts state that Galco "has this day purchased from the undermentioned manufacturer, as per terms and conditions stated on the face and overleaf hereof". The face states the "buying term" as "FOB HONG KONG", mentions the number and type of dolls being bought and the price. Under "remarks", there are, in some cases, references to EN 71. The "overleaf" has printed upon it the written terms mentioned above.

The Written Specifications

21. On 30 May 1990, Galco wrote to Kader saying -

"Re: Quality Specification Distribution

Attached please find the following specification as for your reference.

Item No.	Discription [sic]	SIS
#3302-3	Bouncing Babies - Drink 'N	Wet Baby
#3302-4	Bouncing Babies - Drink 'N	SIS
		Tear Baby

Please comply to the requirement of the Specification accordingly. And sign back acknowledgement in return."

This was acknowledged by Kader by a signature dated 6 June 1990.

I should say that the reference to "Drink 'N Tear Baby" is a reference to the DC doll.

22. The purpose of these specifications is said to be "To generate a specification and establish criteria / defect classification for GALCO inspectors to perform lot release shipment inspection on produced products." Under "Applicable Documents and Standards" are recited the Standards. The specification goes on to list the equipment to be used in testing, the defect classification, a sampling plan and the various checks that must be performed.

23. These checks also, by implication, set out for Kader the specifications that the dolls and their packaging must meet.

24. In the specifications, "Contamination" is mentioned as a "defective". The specification also describes a "functional check" to be performed by the Galco inspectors with the use of water. Only "water" is specified, not distilled water. Under this specification, Galco inspectors are required to perform "In Process Checks" on the production line "regularly". Annexed there are drawings of the dolls and the bottle.

Kader's Case

25. Kader now concedes, in effect, that the Standards were incorporated into the contract. In this regard, Kader says that it is denied that the Standards are addressed at or capable of defining the level of acceptable or unacceptable micro-biological contamination in toys, or were intended to set standards governing levels of acceptable or unacceptable micro-biological contamination of toys or are relevant to Galco's pleaded causes of action.

26. Kader says that it contracted with Galco for the manufacture of the dolls "according to [Galco's] specifications and directions", that the intellectual property rights in the dolls reposed in Galco, that Galco provided the moulds or would assist Kader to manufacture moulds according to Galco's requirements and specifications, that, while Kader was preparing the manufacturing processes for the dolls, Galco's staff would be present supervising or advising Kader on Galco's manufacturing requirements and, while Kader was manufacturing the dolls, Galco's quality control inspectors would be present in order to ensure that Galco's manufacturing and quality control specifications were at all times carried out.

27. Kader admits entering contracts with Galco that were partly in writing, partly oral and partly by conduct. Kader refers to the 17 purchase contracts and written instructions, particularly an instruction to use distilled water to function test the dolls during manufacture. The dolls, it is said, were designed by Galco. Kader admits the written terms on the purchase contracts, and cites clause 5 that provides that property in the goods pass to Galco on delivery. Kader says that the contracts were on FOB terms. All shipments of dolls were passed by Galco's quality control inspectors as confirming to Galco's specifications and directions. Delivery occurred when the shipments were loaded onto vessels shortly after the inspections.

28. Kader admits that Galco made known that the dolls should be fit for use by children, but denies that Galco relied on Kader's skill and judgment, or that it would have been reasonable so to rely. At all material times, all specifications and directions for the production of the dolls and working procedures were laid down and approved by Galco which is experienced in the manufacture and sale of toys. At all material times, Galco's people inspected Kader's manufacturing methods and compliance with Galco's specifications and directions. The dolls were inspected by Galco's inspectors and passed for delivery to Galco.

29. Kader pleads that the terms capable of being implied by virtue of the Sale of Goods Ordinance were excluded or negatived by reason of the matters pleaded in relation to manufacture according to Galco's specifications and directions. This is clearly a reference to section 57 of the Ordinance, which provides-

"(1) Where any right, duty or liability would arise under a contract of sale of goods by implication of law, it may . . . be negatived or varied by express agreement, or by the course of dealing between the parties, or by usage if the usage is such as to bind both parties to the contract.

(2) An express condition or warranty does not negative a condition or warranty implied by this Ordinance unless inconsistent therewith."

30. Kader denies that the dolls were not of merchantable quality or were not reasonably fit for the purposes of sale or for use by children. It is also denied that the dolls contained faults or defects or posed potential hazard to consumers or that Kader has been in breach of the agreements or the Standards. Alternatively, Kader says that if and to the extent it has breached any terms of the contracts, any such breach occurred due to Kader's compliance with the express instructions of Galco so that Galco waived all objections to any breach or is estopped from asserting them.

The Emergence of the Microbes

31. At the end of July 1990, Woolworths, one of retailers of the dolls in the United Kingdom, reported to Mr Peter Boyle, the managing director of Rainbow Toys Limited (Rainbow), which distributed the dolls, that something described as "fluff" had been found on some of the dolls clothing. Mr Boyle saw some of these dolls. He said that there was "a sort of cobweb effect" on the clothing such as one might expect to find on clothing left in a damp and warm environment. This was found only on the DC dolls.

32. He reported this to Ms Sharon Duncan, the Director of International Sales and Marketing for Galoob, in the United States. They both suspected that what had been found was mould. She asked Boyle to send to her six samples of the dolls with the visible mould.

33. She reported the matter to Ms Karen Silfies, who was then Director of Quality Assurance for Galoob. On 31 July 1990, Ms Silfies instructed an inspection of different inventories of the dolls in Galoob's own warehouse. A sample of 132 dolls were inspected. Two of the DW dolls were found to have visible mould on the diaper. Ms Silfies saw this herself.

34. These two dolls were sent to Bio-Technics Laboratories Incorporated (BTL) for microbial examination.

35. On 3 August 1990, Ms Silfies instructed another inspection of the dolls in Galoob's warehouse. A random selection of 132 DW dolls and 132 DC dolls were inspected. Another DW doll was found with mould. Ms Silfies sent this, and a DC doll without visible mould to BTL.

36. A preliminary result of examination by BTL was that there was mould or yeast on the dolls, possibly Penicillium. At this stage, Galoob stopped shipping the dolls.

37. Boyle told Ms Duncan that Rainbow had inspected the initial shipment of DW and DC dolls when it had arrived at its warehouse in June and had not found anything, so he was concerned that the mould would grow.

38. On 13 August 1990, Ms Silfies received the results of the preliminary tests conducted by BTL. Out of ten tests performed on four dolls, two of the DW dolls revealed the presence of the microbe Candida on the clothing and the water pathway. There were also high counts of the microbes Aspergillus and Penicillium. As a result of this, all distributors were told not to distribute the DW and DC dolls. Galoob also decided to have a larger sample of the dolls tested.

39. On 14 August, 1990, there was yet another examination of 132 DW and 132 DC dolls selected at random. From this, 19 DW and 3 DC dolls were found with visible mould. These were sent to BTL. Ms Silfies also sent one of the dolls received from Rainbow to BTL.

40. On 15 August 1990, Ms Silfies instructed that 50 DW and 50 DC dolls be selected from Galoob's stock on a scientific sampling basis, without making any visual inspection and including all production dates. These dolls were also sent to BTL.

41. In all, therefore, at this stage, 127 dolls had been sent to BTL for examination.

42. On 17 August 1990, Rainbow reported that it had checked another 672 boxes of dolls, and that 436 pieces, 65%, showed visible mould. Ms Duncan was told that when the dolls had been checked ten days before, the amount of visible mould was not that high and that it "now much worse".

43. Various other distributors reported findings of mould. Siso reported that of 156 dolls inspected, 5 had visible mould. Joker reported that mould was seen on about 50% of 3600 DC dolls; none was found on DW dolls until October, when 80% of the DW dolls were found with visible mould. Ideal said that they checked 480 boxes randomly from 12,000 dolls and 10 dolls with mould were found.

Nine sample dolls were sent by Rainbow to SGS Redwood Limited, a testing laboratory in the United Kingdom, and these were found to be contaminated with microbes.

The Condition of the Dolls as Found

here can be no doubt that many of the dolls tested by BTL and SGS Redwood were heavily contaminated by microbes of one kind or another. I accept the evidence of Dr Schlesinger, of BTL, and Dr Mosley, of SGS Redwood, who gave evidence for Galco about this. It cannot be seriously challenged that they found what they said they found. Professor Ng, who gave evidence for Kader, suggested, at one stage, that this contamination could have been caused at the laboratories, but, after he had heard the evidence of Drs Schlesinger and Mosley regarding the controls in their laboratories, he conceded that this was unlikely, and accepted, with, perhaps, a lingering reservation, which I do not accept, that the dolls were contaminated as found when the testing was done. Of course there is room for some human error in the process of testing and counting, but I accept that the findings are reasonably accurate. The fact, which I accept, that some of the dolls had visible mould on them before they were tested tells against any reasonable possibility that they were contaminated during the testing process. In the United Kingdom, ultimately 60% of the dolls had visible mould; those from the US, 25%; from France, very little; Switzerland, 80% and Austria, 1%.

44. Mr Mosley gave evidence about the tests on 9 dolls from Rainbow Toys; 5 DW, of which one had visible mould, and 4 DC, of which three had visible mould. Moderate levels of bacterial and fungal contamination was found on the clothing. Aspergillus Fumigatus was the dominant organism.

45. BTL tested 127 dolls initially. Later, they tested 12 DC, 12 DW and 12 Baby Talk dolls. Of the 127 dolls tested initially, 27 showed visible mould. The other 100 dolls were selected at random from Galoob's warehouse. These 100 dolls, according to Dr Schlesinger, did not show visible mould. These 127 dolls, and Dr Mosley's 9 dolls, were selected from a total of about 159,400 shipped at that time. So, something like .085% of the shipped dolls were tested; that is, about one in every 1172 dolls.

46. There was a variety of microbes found by the tests. Most of the microbes were not identified as to species or strain so it is not possible to be precise as to the danger they might have presented to a child using an infected doll. But one thing is perfectly clear to me; no one in his right senses, other than, perhaps, a fly-by-night street trader, would reasonably have contemplated selling the dolls from which the samples came. The nature and degree of the risk to users may have been unknown, but there is no doubt that there was a potential danger of harm to the health of the children playing with the dolls if they were susceptible to microbial infection. Quite apart from this hidden danger, the dolls were unmerchantable if only because of the mould present on them or their potential to grow mould.

The Condition of the Dolls at the Time of Delivery

47. It is easy enough to know the condition of the dolls when the mould was noticed by Woolworth's, and when they were examined by BTL and SGS, but it is necessary to determine, as a matter of fact and as far as it is possible to do so, the condition of the dolls when they were delivered by Kader to Galco, as compared with the condition in which they were eventually found.

48. I have already described the condition of the dolls when they were examined at the end of their journey and when examined by BTL and SGS. It is clear on the evidence that this condition was not static; the microbes were proliferating rapidly. This is so if only on the evidence that there was nothing to be seen when the dolls were examined by Galco's people when they were shipped, nor when the dolls destined for the United Kingdom arrived there and were examined by Rainbow.

49. All the scientific experts accept the obvious; what was found on the dolls was found at the time of testing, not at the time the dolls were sold and delivered by Kader to Galco.

50. It is also obvious that, at the time of delivery, the dolls were not free from any microbial infection whatsoever; that is, that they were not sterile. One thing that is clear from the evidence of all the experts, above all else, is that we live in a world infested by microbes invisible to the naked eye. They are on and in our bodies; they exist, and, in many circumstances, thrive, on almost everything with which we come into contact in everyday life. They invade even hospital operating theatres and intensive care wards. They can be confined or excluded only by the most extraordinary precautions found only in such places as germ warfare establishments. Otherwise, it is impossible to avoid them in normal circumstances in everyday life. That is not to say that all genera, species and strains of microbes are everywhere, but some of them are to be found in or on almost everything, and it is not possible to know which will be found where. The genera Penicillium, Aspergillus and Cladosporium are, it seems, the dominant microbes, in this part of the world anyway. Certainly, anything, such as these dolls, manufactured in ordinary factories, exposed to the atmosphere, and worked on by ordinary people wearing ordinary clothing with ordinary standards of cleanliness must have microbes upon them; this is unavoidable without the most extraordinary precautions. This is clear from the evidence of Dr Mosley, which I accept.

51. So these dolls, when they were delivered to Galco by Kader, were infected with microbes. No one can say from whence these microbes came; they may have come from the air, they may have come from the surfaces in the factory, they may have come from the workers clothing or bodies, they may already have been on the fabric making up the clothing in which the dolls were dressed, and they may have come from these sources immediately or from one source to another and then to the dolls. To some extent, they may have come onto the dolls by reason of and during the inspection and testing by Galco's people. No one knows, and it is impossible to ascertain, the extent of this infection when the dolls were delivered. It is clear that, in any given situation, sometimes microbes thrive and multiply greatly, sometimes they barely manage to survive and sometimes they die out. Different microbes enjoy different conditions. Usually, if the ambient conditions are suitable, they will grow well; if they are not, they will not.

52. There is no doubt that every other doll made anywhere, particularly in Southern China during the summer, bore upon it a population of microbes when it was delivered for distribution to users. Yet it is so that not one of the very experienced people who gave evidence before me has ever heard of such a case as this during all the years that probably millions of dolls have been made in Southern China and sold for the amusement of children throughout the world. And this is so elsewhere. Mr Aaron Locker, a United States Attorney, very experienced in this field, told me that the United States Consumer Products Safety Commission did not regard microbial contamination of toys being imported into the US as a problem sufficiently serious to justify specific prescriptive regulations regarding microbial contamination because there had been so few cases. Kader has, in the past, made very many dolls without the extreme degree of contamination found in this case. Those dolls were made in the same factory in which DW and DC were made, or factories similar to it, by the same or like people, under the same or similar conditions, and yet this problem did not arise. Nothing, the evidence reveals, but one thing, was different about these dolls that would account for the problem that did not arise in other cases. Nothing, the evidence says, but one thing, was different about the packing and transportation of these dolls. But for one thing, all were made, packed, stored and transported in much the same way.

53. That "one thing" I will deal with later.

54. As I have said, the microbial infestation on the dolls was dynamic; the number of microbes of the dolls was proliferating greatly and rapidly. What was the cause of this?

What Was the Cause, according to Galco, for the High Degree of Contamination Found?

55. The experts for Galco postulate that, for the contamination they found to be so great, the original inoculum must have been greater than in the case of other dolls when they were delivered after manufacture. But no one has been brave, or foolish, enough to make any attempt to work backwards from the contamination found to suggest the extent of the inoculum that was present weeks before when the dolls were delivered. On the evidence, it is clear that this exercise is impossible. Nevertheless, Galco, led by Dr Schlesinger, maintain that the original contamination was higher than normal, and this is because Kader failed in meeting its contractual obligations.

56. It is Galco's case, based primarily on the evidence of Dr Schlesinger, which is supported by Dr Mosley, that the original contamination of the dolls occurred at Kader's factory. Dr Schlesinger says, in his report, that the only place where the dolls were handled extensively was there, that most of the operations were manual, "performed by hands which were probably not properly scrubbed or protected by sterile gloves", that the cause of the contamination "most likely occurred because good industrial hygiene practices were lacking in the manufacturing environment" and that the distilled water was "not handled in an aseptic manner". Regarding the water, he says "Low levels of microbial counts in the water might possibly result from opening the containers and exposing the water to air, while pouring". He goes on to say "The high counts which were experienced must have resulted from the use of contaminated storage vessels which had at one time or another contained water which had been highly contaminated by contact with the worker's skin or dirty funnels or beakers which were used to contain the water for function testing". He does not believe that the contamination on the diapers or the clothing resulted from the water testing, but from the hands of the workers or contaminated work surfaces. He concludes that the source of the contamination was "almost certainly due to unacceptable industrial hygiene environment and practices which enabled the diapers to contact unsanitised surfaces and to be handled by improperly washed hands, there is no other realistic explanation". It seems that Dr Schlesinger, at the time he gave his report, was unaware that many of the dolls were handled and tested by Galco's employees.

57. There are several problems with this view. Dr Schlesinger, apparently, proceeds on the basis that the worker's hands should have been "scrubbed" and covered with "sterile" gloves, that the water should have been handled in an "aseptic" manner, and the work surfaces should have been "sanitised". My dictionary defines "sterile" as "free from micro-organisms", "aseptic" as "the absence of disease-causing micro-organisms in surgery" and "sanitised" as "free from germs". My reaction to this is: What are we talking about here? An operating theatre? A intensive care ward? A factory for the processing of food highly susceptible to microbial invasion? Or a factory in Southern China making ordinary toys and operating generally under conditions well know to, and accepted by, Galco? The answer is, of course, the latter; a normal factory, which, on the evidence I accept, was nothing out of the ordinary for the purpose of making dolls. Galco was content with this. If Galco wanted the dolls to be made in an environment that approached that of a hospital operating theatre or a germ warfare establishment, it should have so stipulated, and paid the appropriate price. Galco knew the conditions under which the dolls were being made; it specified them. It had taken delivery of many other dolls made under the same conditions. If it was not happy with this, it would have specified different conditions. If Galco had not been satisfied with the hygiene regime at the factory, it would have dictated a new and better regime, whatever it required, as it did after the mould was found. It did not do so. Clearly, on the evidence I accept, Galco's people, who had much opportunity to observe the way Kader worked, saw nothing at all wrong in the way Kader operated in making the dolls. The right to inspect under clause 3 of the written agreements is one that Galco exercised. During the months of May and June 1990, according to shipment inspection reports produced, Galco closely inspected and water-tested about 7,500 dolls chosen at random from lots for shipment totalling about 130,000 dolls; about 5.7%. No mould was detected on any of the dolls examined. Apart from these inspections, Galco quality control staff visited the assembly lines frequently. This was called an "in-process inspection". Galco's inspectors would take samples from the assembly lines at random, and would be able to see precisely how the manufacturing process was being conducted. It is far too late now for Galco to seek to impose obligations on Kader that were not specified by Galco, for which it did not pay and which form no part of the contract.

58. In spite of a very close superintendence by Galco at the factory of what Kader was doing, and how it was doing it, there is no evidence of any complaints by Galco during the production stage. There was no suggestion made by Galco to Kader that the workers or their clothing was dirty, there was no complaint to Kader that the factory, the work surfaces or anything coming into contact with the dolls was unsatisfactory, nothing was said to Kader about the environment being dusty, dirty or in any other way unsuitable in which to make dolls, no one said to Kader that the workers should wear gloves or overalls, there was no suggestion to Kader that the workers were not washing their hands properly, no one complained to Kader that the workers were not water testing the dolls properly or that they were using undistilled water. If Kader was not satisfied with the way Kader's people handled the water for testing, which they would have seen frequently, they would have required other procedures to be observed. They did not do so.

59. It is hardly possible, with the degree of quality control being exercised by Galco, that Kader could have departed from the instructions given by Galco or done anything else that was thought to be improper, without one of Galco's people spotting this.

60. Even after the mould was found, and, therefore, whatever Kader was doing was suspect, nothing significant was seen on the assembly lines that was open to criticism. Mr Mills-Winkler visited the factory on 2 August 1990 after telephoning, the day before, to say that he would go to the factory to "review production" of the dolls. Mr Mills-Winkler found nothing that he thought would justify stopping production. He made the sensible comment that "This is not, by any means, a closed, sterile system but I believe it is good enough. The production area, line and tables are all pretty clean".

61. So no one who actually saw what was going on at the factory during production had any complaints about the way Kader was producing the dolls. The only suggestion that something was amiss on the assembly lines originates with Dr Schlesinger. He says he believes that inadequate hygiene was the cause of a high original inoculum on the dolls. He did not, of course, visit the factory, and infers this conclusion only from what he found on the dolls.

62. There is no evidence acceptable to me that the original inoculum on the dolls was any higher than one would expect on dolls manufactured in the ordinary way. The reasoning of Dr Schlesinger and Dr Mosley that, because there was a high degree of contamination some weeks after manufacture, there must have been a high degree of contamination at the time of manufacture is not accepted by me. This is so especially in the light of the evidence that the microbes were proliferating quickly, and that the conditions were right for this to happen.

63. Galco's quality control people tested about 6% of the dolls. They examined them closely and must handled them a great deal. They performed another water test on these dolls. There is no evidence to suggest that they handled and tested these dolls any differently from the way in which Kader's people handled them. If Galco had a legitimate criticism of the way Kader handled the dolls or the water, I would have expected it to call evidence of how the Galco people did their examination and testing to show that what Kader did was wrong, and what they did was right. The water functional test Galco's people were required to perform makes no mention of ensuring that all the water is removed. If it was so that Galco's people ensured that no residual water remained in the doll after testing, and knew how to achieve this, I would have expected Galco to have called evidence to this effect. They did not do so. There is no evidence that what Galco's people did was right, and could not have led to the microbial infestation, and what Kader's people did was wrong, and did cause that infestation.

What Was the Cause, according to Kader, for the High Degree of Contamination?

64. What was the "one thing" I referred to earlier? What was peculiar about these dolls, and the way they were handled, that might account for the great proliferation of the microbes? The answer to that is these dolls were all water-tested in circumstances in which water was left in the doll, and this, with other factors, provided a good environment for the microbes to flourish. There is no evidence that any other water-function doll, except one called Lost and Found, was so tested. There is no evidence that any other doll, but this Lost and Found toy, with a water function was 100% water tested; that is, that the doll, once tested with water was not discarded, but every doll so tested was packed and sold. There was a doll called Tiny Tears that gave no problems. It was a successful toy. The evidence of Madame Li Lai-yee on 12 June 1996 was -

Q. You say that Tiny Tears operation was similar to Drink 'N Cry. This is also a doll with a mechanism installed inside the torso to hold water which, when operated, made the doll cry?

A. Yes.

Q. You say that, "We suggested to Kenner that air should be employed to functionally test each and every doll. Then Kenner randomly took samples which were tested with water."

A. Yes.

Q. And then you say, after that the samples which had been tested with water would be discarded and would not be packed and shipped. This was because one could never completely dry up the water inside the dolls?

A. That's right.

Q. With the Tiny Tears, had you tried any procedures to try and dry up the doll after water testing?

A. We did try.

Q. What did you try?

A. We put the dolls into an oven to try to dry up the doll in the oven.

Q. Yes, what happened?

A. The result was that we still could not 100 percent clear up the water.

65. The other toy called Lost and Found had a crying function. This toy was not made by Kader, but by another manufacturer for Galco. The evidence is that some of these toys were 100% water tested with distilled water, and there were no reported problems with mould. Mr Novak said that Lost and Found was 100% water tested "initially". "It was a l00% water testing for a period of time in China; then AQL testing in China; then on a temporary basis for a period of time a 100% water testing in Hong Kong; and . . . a l00% testing in Hong Kong; and then AQL - a 100% for a period of time testing in the U.S. which then became AQL."

66. AQL means "Acceptable Quality Level" It is a shorthand description of the method of testing under which samples of the product are tested and then discarded.

67. Lost and Found was a much bigger toy than the dolls with which I am concerned. It gave a lot of problems with the crying function for reasons that are not totally clear to me. In this regard, Mr Novak said -

"Q. What was your diagnosis?

A. We concluded that the filter - the product had a filter that was basically a form filter - and we concluded that there were two problems: one was that the density of the filter was such that it was not absorbing enough water; and, secondly, we concluded that the size of the filter was in fact restricting the flow of water in some of the animals."

68. Strangely, it seems that the toy operated well when tested in China, but not when it arrived in the US. This might lead one to believe that it was not the size of the filter that was restricting the flow of water, but something that developed between the time the dolls were tested in China and when they were tested in the US.

69. The material mostly covering this toy was something called "plush", which is an artificial fibre, and would not provide nutrient for microbes. Around the muzzle of the toy was a small area of tricot, which is a natural fibre. It was not of the same design as the DC and DW dolls. It was not a successful toy; it failed in its first year. Hair dryers were used to dry these dolls, but it was agreed that this was unlikely to dry the internal workings. Unlike the DC and DW dolls, it was packaged in an open package so that children could touch the toy.

70. Mr Novak, who dealt with the problems with Lost and Found said -

"Q. Of course, with the internal tubing for the water function, if there was mould contamination inside there, it would not be apparent to any consumer, correct?

A. It obviously wouldn't be apparent except for potentially a smell that might emanate from the product.

Q. And with the plush exterior, a speck of dust of the kind described by Sarah Thomas would probably not be apparent either, would it?

A. On the plush, no; if the speck of dust was around the mouth, then perhaps."

71. Because of the many differences between the Lost and Found toy and the DC and DW dolls, this evidence does not indicate that it was not the water testing and the residual water that was the cause of the proliferation of the microbes.

72. What the experience of Galco in relation to Lost and Found, along with other experience, did do was to lead Galco into the firm belief that, if distilled water was used to test the dolls, there would not be any problem with "mould or anything else". Mr Victor Wong of Galco had experience of another toy. This led him to believe that, whereas using boiled water to test could lead to mould problems, using distilled water would not. The Kader people also believed that, if distilled water was used, there would be no mould problem.

73. So, the fact that the residual water in the dolls was the cause of the great proliferation of the microbes is supported by the fact that the employees of both Galco and Kader, experts in the area of making toys, were concerned about mould being caused by water used to test the dolls. Galco believed that if distilled water was used this problem would disappear. Kader's people believed the same thing.

Was the Water-Testing the Cause of the High Contamination Found?

74. I have already mentioned some evidence that points in this direction. When one adds to this the effect of the expert micro-biological evidence, the case that this was the cause is overwhelming. On the whole of the evidence, I have no doubt that, given the right conditions, microbes have the capacity to proliferate to an alarming degree in a matter of days. I have also no doubt that the residual water left in the dolls provided the factor without which the dolls would have arrived at their destinations, been sold with no more than a normal population of microbes, and no complaint would have been made.

75. The experts called by Kader, Professor Ng and Dr Vrijmoed, not surprisingly, support this hypothesis. But Drs Schlesinger and Mosley, the experts called by Galco, also give evidence to a like effect.

76. Dr Schlesinger, Galco's main expert, accepted that it was inevitable that there would residual water left in the doll after water-testing, and he accepted, albeit, at some stages, reluctantly, that this residual water was the prime cause of the explosion of growth of the microbes inevitably on the dolls. His evidence was on 25 April 1996 was -

Q. How do you suggest a hair dryer could remove moisture from inside the reservoir? It just couldn't do it, could it?

A. The main method of eliminating the water from the inside would be by activating the arm, and of course the Plastisol surfaces, they are not highly wettable. So it should be possible by blowing air into the orifices, both orifices, to achieve some measure of dryness.

Q. No doubt it helps. But you are not suggesting it would be possible to zero dry these with an hair dryer?

A. Absolutely not.

Q. And there would remain water, to some extent?

A. Yes.

Q. And that water would be capable of providing water, moisture, together with the humidity around, to permit in a warm climate growth?

A. Yes, of course. That's what happened.

77. Apparently, Dr Schlesinger did not know, until he was told in court, that Kader had made other dolls for Galco without any problem. When he was told of this, he had difficulty in maintaining his original thesis that contamination from workers' hands had been the cause of the contamination.

Q. I suggest to you that if it was a source of contamination from workers' hands unconnected with the waterworks inside these dolls, you would have expected to have had similar contamination due to the humidity, as you say, in the two or three previous years during which other models of these dolls had been made by Kader in this factory on this assembly, wouldn't you?

A. I'm sorry, I --

Q. Are you aware that Kader had made other models of these dolls for some two, three years before they did these Bouncin' Babies? Did you know that?

A. No, I did not.

Q. Well, we've heard evidence that that is so, and that the difference between these dolls and the previous models, which had other features like being able to crawl and so on, was the waterworks introduced inside these dolls. Did you know that?

A. Well, you're telling - you're giving me that information now.

Q. If it was workers' hands and humidity that caused these things, you would have expected the identical problem to have arisen in the previous two or three years that similar items without the waterworks were being made, if that was the cause?

A. If I recall from all of the readings, we all agree that the existence of moisture resulting from the testing exacerbated the circumstance and probably was additionally responsible for the findings.

Q. How do you explain that it hadn't happened with previous dolls, the same except for the waterworks?

A. They may have been - I can't explain that. I have no explanation.

78. There was much other evidence from Dr Schlesinger on this point. In particular, I refer to his evidence at pages 976 to 979, 1007 to 1009, 1011 to 1013, 1016 to 1019, 1034,1043 to 1044 of the transcript. Dr Mosley said much the same thing. At pages 1144 and 1145 of the transcript he said -

"I think it is incorrect to safely ignore any degree of contamination. Unfortunately, if you have one potential pathogen, then that could easily multiply, given the right circumstances, and increase very rapidly to a very high number of that particular pathogen so there is potential there for significant growth of the organisms that may be present."

79. Other relevant passages in Dr Mosley's evidence appear at pages 1186 to 1189, 1136,1206 to 1208 of the transcript.

80. There is really no need to go into this evidence in any further detail. It is not seriously arguable that the residual water in the dolls did not provide the factor that made the ambient conditions satisfactory for the rapid proliferation of the microbes. Mr Mills-Owen recognises this. It seems that he has undertaken a similar analysis of the evidence, and has come to a similar conclusion. In his closing written submissions, Mr Mills-Owen said -

"151 dolls (not including sterilised dolls) were tested by BTL. Of these 96 did not have a high microbial count on any item. The average cfu/mL [colony forming units per millilitre] of the water pathway was 43 bacteria and 32 fungi. Of the 55 dolls that had at least one item exceeding 5x10 3 [5000] the average cfu/mL of water pathway samples was 15087 bacteria and 64404 fungi.

Thus the majority of dolls had no evidence of water pathway contamination and no high microbial presence. The dolls with high contamination also generally had significant water pathway contamination, the implication being that the failure to remove residual water was linked to doll contamination.

The principal cause of the unacceptable mould spoilage of the dolls was the inconsistent removal of water from the water pathways. Despite Kaders knowledge of the requirement to treat water used in toys and the simple drying and desiccation procedures available the dolls were not manufactured to avoid the risk of contamination and infection which was evident in the countries of sale."

81. I agree with this summary of the evidence and the conclusion reached as to the cause of the problem. I have reached the same destination by a more tortuous route. Mr Mills-Owen's conclusion commencing with the word "Despite" contains essentially one of the questions I have to answer.

Other Evidence as Cause of the Proliferation

82. In spite of Mr Mills-Owen's recognition of the cause of the problem, it is necessary to examine some other evidence that may be said to tell against this conclusion.

83. It was not only shipped dolls that were tested. Other dolls obtained directly from Kader's factory were also examined.

84. Mr Mills-Winkler says that, on 16 August 1990, Karyn Silfies asked him to obtain 24 DC, 24 DW and 24 Baby Talk dolls from the Chung Tong factory for testing. He received them from Kader on 21 August and he arranged for them to be sent to BTL directly by courier on 22 August. Estela Solano-Gomez says that these dolls were received on 29 August. Johnny Shek says that, on 16 August, he spoke to David Fan on the telephone and Fan said "he would provide 24 pieces each (without packaging) of" the three dolls.

85. Twelve of the 24 DW dolls were tested; the testing commencing on 3 September. The report reveals that the diaper, the extra diaper and the water pathway of all these dolls were heavily contaminated; perhaps more so than the dolls tested that already been shipped by Kader. The bacterial cultures from these dolls were submitted to the Microbiology Reference Library for identification. Microbes identified were Klebsiella Oxytoca and Pseudomonas Putida.

86. Twelve of the DC dolls were also tested. Here, the shirt, pants and water pathway of at least nine of these dolls were heavily contaminated. This time the fungal cultures were isolated and the following microbes were identified - Cladosporium, Alternaria, Aspergillus, Candida, Rhizopus and Penicillium.

87. This evidence carries the matter no further. In effect, these dolls were no different from those that had been shipped in the ordinary course. It is no surprise that the microbes on these dolls also proliferated.

88. Twelve of the Baby Talk dolls were also tested. Baby Talk dolls were from another line of dolls being manufactured by Kader for Galco in another part of the factory. They did not have any water function.

89. The bib, the jumper, the blouse and the booties were examined. Only three of these dolls were heavily contaminated. The following microbes were identified from fungal cultures - Rhizopus, Alternaria, Aspergillus, Paecilomyces, Cladosporium and Gliocladadium. Four of the microbes were the same as those found on the DC dolls.

90. On the face of it, it is strange that a few of the Baby Talk dolls were so heavily contaminated. These dolls had been on the market for some years, highly successfully, without any problems being reported. If other Baby Talk dolls sold over the years had been contaminated in this way, one would have expected visible mould to develop as with the DW and DC dolls, and for this to have been a cause for complaint.

91. Mr Lou Novak, who was senior vice-president of Galoob, gave evidence about this as follows -

Q. I gather that you, Mr Goldman and Mr Radin were quite keen that Baby Talk should not be affected by these difficulties which had arisen as at the 5th of September.

A. That's correct.

Q. The reason for that was that you had substantial orders on hand for Baby Talk which you wanted to fulfil.

A. The answer to that is 'yes', but the reason really is a little more extensive than that.

If you look at Baby Talk, Baby Talk was a product that had been selling - it was in its third year with a lot of potential to continue for many years.

We were concerned that a production interruption would interrupt the question of season and potentially kill the product.

As it turns out, as we speak today, Baby Talk is still well and alive and selling in Europe.

Q. So, for those reasons, you were keen that the production of Baby Talk for the fulfilling of the orders should not be disrupted ...

A. Yes.

Q. ...unless it was necessary.

A. I don't understand 'unless it was necessary'.

What do you mean?

Q. Baby Talk didn't involve water.

A. That's correct.

Q. No.

On some tests undertaken on Baby Talk, I think you mentioned - you knew that.

A. Yes, I do.

Q. And I think if you look at the document - do you have Volume 20 there?

A. Yes, I do.

Q. I think you will find it at page 245.

(Witness locates document.)

[This is a memo by Eric Chan to Fred Mills-Winkler dated 27 September 1990 setting out a summary of test results by SGS in Hong Kong on samples of clothing from the Baby Talk dolls. The results show comparatively low mould and bacterial counts (mostly in the tens and hundreds), which, according to Dr Mosley, would be usual on a finished product.]

Q. Have you seen that document before?

A. Can't say that I have seen this exact document, no.

Q. But I take it from what you have already told us that either Mr Mills-Winkler or Mr Radin or Mr Shek would have let you know of the basic substance of the document at the time.

A. That is correct.

Q. Because, had there been a problem with Baby Talk, this would have increased the dimensions of the present disputes quite considerably, would it not?

A. Had there been a contamination problem?

Q. Yes.

A. Yes, of course.

Q. And is it correct to say that because the tests revealed such relatively minor counts of mould that it was considered safe to proceed to sell the Baby Talk Dolls that had been manufactured and tested.

A. My recollection was that we still felt that unless we conducted extensive testing of Baby Talk, that the only way we could proceed with production was in fact to sterilize everything that was in the working process for Baby Talk so that I think it's - my recollection was that we did not conclude that the test results on the fabric of Baby Talk did in fact indicate that there was no problem.

We felt that we had to do something with all the working process which in fact we did.

Now, as I recall - as I recall, Baby Talk was produced in a different building -- it's in the same complex but was produced in a different building - and so we felt that there was -- the product was isolated from the factors that were included in the Drink 'N Wet and Drink 'N Cry product.

Q. So, in some way, you felt that it was safe to proceed to market it - the Baby Talk.

In fact, you asked Kader to manufacture more.

A. We did, but only after we had sterilized all the product in Japan - all the working process and insisted that Kader implement the same hygiene procedures in Building 2 which was where Baby Talk was manufactured.

92. So, we have the situation that a few Baby Talk dolls, which, apparently, were sent to BTL at the same time as DW and DC dolls 'without packaging', were found to have heavy contamination, Baby Talk dolls' clothing tested in Hong Kong that did not have anything like the same degree of contamination, and a history of some years of production of Baby Talk dolls without any significant degree of contamination. That leads me to the conclusion, certainly without other evidence to the contrary, that it is likely that the Baby Talk dolls sent to BTL were contaminated by some contact with the DW and DC dolls that were good breeding grounds for microbes.

Conclusion of the Cause of the Proliferation

93. In my view, all the acceptable evidence is that the DW and DC dolls were in the condition in which they were found because of the presence of the residual water in the dolls.

The Essential Issue

94. On this finding, the essential issue is whether it is so or not that, as Mr Mills-Owen put it -

"Despite Kaders knowledge of the requirement to treat water used in toys and the simple drying and desiccation procedures available the dolls were not manufactured to avoid the risk of contamination and infection which was evident in the countries of sale."

95. Was Kader in breach of its contractual obligations by failing to treat the distilled water used on Galco' specific instructions and failing to adopt other measures to get rid off or neutralise the water?

96. Before it is possible to answer this question, it is necessary to define Kader's contractual obligations.

The Contractual Relationship

97. In general terms, Galco allege that Kader breached the agreements by delivering defective dolls. Whether or not goods supplied under a contract are defective is not, of course, an absolute. In the ordinary course, if I agree to purchase an apple, without more, and the vendor delivers to me a rotten apple, it might well be said that the apple is defective. But if I specify that what I want is a rotten apple, because, perhaps, I wish to study the microbes on it, then the rotten apple delivered to me is not defective. Indeed, it might be argued that a sound apple delivered to me under this agreement would be defective. When one says that goods are defective, one means that they are not in accordance with the contract; the purchaser bargained for one thing, and what was delivered to him was another. Accordingly, before I can decide whether or not the dolls delivered in this case are in accordance with the agreement, I have to decide just what it is that Kader agreed to do under that agreement.

98. Clearly, the situation before me is a lot more complicated that the ordinary case of a purchaser buying a ready-made product off the shelf. Here, Galco designed the dolls, and all the intellectual property in them were Galco's. Galco knew precisely the product it wanted from Kader. Kader agreed to make the dolls according to Galco's specifications and directions. It is common cause that Galco had the right to give instructions to Kader as to how the dolls were to be made. I say that is common cause, although Galco seeks to say that there is a difference between telling Kader what to do and telling Kader how to do it. Galco seem to be saying that it had the right to do the former but not the latter. If there is a difference of kind here, rather than degree, in the circumstances of this case, it is not obvious to me, and, in any event, it is quite clear from the evidence that Galco did not rest content with telling Kader what to do, and leaving it to Kader to decide how to perform the instruction. Galco gave directions to Kader, not only as to what to do, but also how to do it; Galco's people even went to the factory and gave instructions to individual workers on the assembly line to ensure that Galco's requirements were being met. Galco required that each doll be function tested with distilled water. There was no question that Galco had the right to give these very specific instructions, and that Kader had the obligation to accept them.

99. On the other hand, it is not the case, as some evidence from Kader would have me believe, that Kader was no more than a conduit pipe for these instructions. Kader was expected to, and did, give consideration to what they were instructed to do, discussed problems with Galco's engineers and offered advice and possible solutions. Clearly, Kader had an obligation to give advice when asked for it, and when it would seem to reasonably expert manufacturer in this situation that it was needed. But, the evidence I accept is, when all was said and done, Galco decided what was to be done and how it was to be done, and Kader was obliged to do as it was told.

100. Mr Mills-Owen submits that liability under a contract is strict. It is, of course, so that, once it is ascertained just what it was that a party has undertaken to do, that party cannot avoid his liability by pleading that his failure to meet what he has undertaken was not due to any neglect or lack of expertise. But when a court is seeking to determine the nature of the bargain between the parties, it may consider whether or not it is likely that a party has undertaken to guard against something that a reasonable person in the position of that party would not have undertaken because the knowledge and expertise required to avoid that something is beyond the knowledge and expertise of a reasonable person in that position.

101. It seems to me that Kader's primary obligation under this contract was to follow Galco's specifications and instructions in making the dolls; not blindly, but applying its own expertise and giving the appropriate advice when necessary. That is my conclusion on the relationship between the parties on all the evidence. In reaching this conclusion, I have looked at all the evidence to see what bargain was struck between the parties.

102. I apprehend this primary obligation to be the main purpose of the contract. Kader cannot have another obligation that is inconsistent with this main purpose or primary obligation. Any inconsistent obligation founded on a standard printed term, or a term implied by law, cannot stand with this primary obligation.

103. Galco argue that Kader has not pleaded the "main purpose" point, and it is, therefore, not open to it. This is not so. It may be that the defence does not use the words "main purpose" but it clearly alleges that the contract was to be executed according to Galco's "specifications and directions", that Galco would supervise Kader on Galco's manufacturing requirements, that, while Kader was manufacturing, Galco's staff would be present to ensure that Galco's manufacturing and quality control specifications were carried out and that any breach was due to Kader's compliance with Galco's express instructions.

104. If it is so that the dolls were defective, unmerchantable or not fit for their purpose, or were not in conformity with the Standards, and they were in this condition because Kader did what Galco required it to do in terms of the contract, and it did this properly, after proper consideration, and rendering such advice as it was obliged to give as an expert manufacturer, Kader cannot be liable. It cannot be that Kader is in breach of contract by doing what it was required to do under the contract. What was done by Kader cannot be, at one and the same time, compliance with the contract and a breach.

105. Galco argue that the main object of the contract was not as stated above, but was for "Kader to manufacture dolls suitable for children". This might have been the case if Galco had said "Manufacture dolls suitable for children" and let Kader get on with it, but that is not the case. What Galco said to Kader, in effect, was "Manufacture these dolls in the way in which we tell you to make them. You may have your say, and you must give us advice, but what we say goes. After you have had your say and rendered your advice, you will do as you are told."

106. Galco seeks to argue that the fact that the dolls were mouldy, or liable to become mouldy, at the point of sale is itself a breach of Kader's obligations because it is the law that the seller's obligation is to deliver sound goods, and not only at the point of delivery; the obligation is that they should be in such a state as to remain sound for a reasonable time to allow for their normal disposal. This is undoubtedly so in most cases. However, if that state of the goods is not due to any breach of a contractual obligation by the seller, but is caused by some instruction by the purchaser that the seller was contractually bound to accept, the seller is not liable.

107. I think Mr Bleach put the position correctly. In written closing submissions, he said -

(a) The dolls were designed by Galco - this in fact has never been disputed.

(b) The dolls were manufactured according to the Plaintiff's specifications and directions - this also has never been disputed.

(c) That the Plaintiff was in a position to and had given instructions in respect of the manufacture of the dolls - again this has never been disputed.

(d) That the "final say so" was that of Galco - this has never been disputed.

108. At the same time, as Mr Bleach says, the relationship between Galco and Kader was such that Kader was obliged to -

(a) exercise independent judgment;

(b) give advice, warnings and bring to bear independently its manufacturing and engineering expertise;

(c) take all necessary steps particularly in the mass production stage to ensure a "proper" product and this included taking all reasonable steps to minimise or exclude the danger of any problem that might flow from any specification, instruction and direction given by Galco.

109. Thus, Mr Bleach argues, "while the final decision on any particular aspect was indeed that of Galco, that decision would be taken in the light of and in the context of Kader's expertise as a manufacturer and the advice warnings and assistance given by Kader's engineers (of the lack of them).".

110. I agree with this summary by Mr Bleach of the contractual relationship between the parties, and its salient, relevant features. In particular, I agree that it was Kader's obligation to take all reasonable steps to minimise or exclude the danger of any problem that might flow from any specification, instruction or direction given by Galco. Clearly, Kader was under an obligation to give advice when asked for it. But it was also under an obligation to give advice when it would seem to a reasonable manufacturer in Kader's position that the advice was needed.

111. Of course, what it was reasonable to do for Kader to do depends on all the circumstances. In particular, whether or not advice would seem to a reasonable expert manufacturer to be needed, or whether or not other reasonable steps should be taken, depends on the relative expertise of the parties.

The Relative Expertise of Galco and Kader

112. Clearly, if a manufacturer holds itself out as merely providing the labour and facilities to assemble toys, without any special expertise in the toy business, and sells the toys it makes to a customer who has all the expertise and who gives instructions as to how the toys are to be made, one would expect very little advice to be needed from the manufacturer. It would be reasonable to such a manufacturer to depend entirely on the assumption that the customer knows what he is doing when he specifies what he wants. At the other extreme, if the manufacturer is the expert, and the customer inexperienced in the field, one would expect the manufacturer to give much advice, and the dependency would be the other way.

113. It has been suggested in this case that Galco had no expertise in the area of manufacturing toys. This is simply not true. Although Galco changed its mind about alleging that it was a manufacturer of children's toys in its statement of claim, there is no doubt that it had, at the relevant time, through its employees, considerable expertise in this area. Mr Mills-Winkler, who was Vice-President of Engineering for Galco in Hong Kong at the relevant time, who impressed me as a no-nonsense, very competent man, had a great deal of hands-on experience in the business of manufacturing children's toys. He started in the toy manufacturing business in 1969, and worked for a long time for Mattel, one of the biggest toy manufacturers in the US. He has had a lot of experience of making toys in the Far East. Karen Silfies, who was Vice-President of Quality Assurance and very much involved in this matter from the beginning, had a lot of experience in the area of quality control and product design in the toy manufacturing business. And a number of other people employed by Galco, of varying seniority, had many years of experience in the business of making toys. And this experience was not only with Galco and Galoob, but also with other well known toy companies. I have no doubt that, taken together, the experience and knowledge of Galco's people was such that there was very little they did not know about making toys.

114. I believe that Kader was equally knowledgeable, but, even it were not, it held itself out as an expert in the area of toy manufacturing, and is contractually bound to exercise the skill, knowledge and expertise that such a manufacturer would reasonably possess.

115. As I judge the situation here, we have two parties of equal standing in the area of expertise in the business of manufacturing toys. This is not a case of a layman in the business contracting with an expert, and relying entirely on that expert's skill, knowledge and experience. Galco knew just it what it wanted Kader to do in manufacturing the dolls, it knew how it wanted Kader to do it, and it had the expertise to make informed decisions. It had the right to give Kader directions on the matters of detail, and did so. Kader, I believe, had the right to think that Galco knew what it was doing when it gave instructions, and was under a contractual obligation to warn Galco that the use of water, even distilled water, to test the dolls might lead to mould problems only if a reasonably skilled and expert manufacturer would have been aware of the danger.

Precautions when Using Distilled Water

116. I do not think the matter of treating the water or using drying and desiccation procedures arises for consideration. Both parties believed that using distilled water was safe. If Kader should have known that this was not safe, it is liable because it should have advised Galco of this. If it is not liable because no reasonable expert manufacturer in its position would have known that it was not safe, it cannot be liable for failing to advise steps to avoid a problem it was not obliged to know existed.

Avoidance of the Residue of Distilled Water

117. It is also so, in my view, that it is not necessary to consider separately the matter of a residue of water being left in the dolls. The fact that both parties were concerned that water could cause a problem with mould means, of course, that they both realised that, after testing, there would be water left in the dolls to cause that problem. If it was thought that, after testing, there would be no water left in the dolls, the matter would not arise. So, in my view, much the same argument as is mentioned in the last paragraph applies to this aspect of the matter: Kader can be liable only if it should have known, and so advised Galco, that the use of distilled water would give rise to the danger of mould. If Kader is not to be held liable on this basis, it cannot be held liable for not knowing about the danger of leaving a residue of distilled water in the dolls.

Warning as to the Use of Distilled Water

118. The belief held by both Galco and Kader that the use of distilled water would not give rise to any mould problems was, we now know, wrong. In the ordinary course, sealed bottled distilled water contains very few microbes, but, once the distilled water is exposed to the environment and used normally, as in this case, it becomes readily contaminated with microbes. It was inevitable that the dolls, being made in an ordinary factory, under ordinary conditions, and not in a place such a germ-warfare establishment, would have upon them a population of microbes. It is also the case that, once water was introduced into the equation, the conditions for the growth and propagation were suitable, and it was inevitable that the population of microbes upon the dolls would flourish more than if water had been absent.

119. Is it the case that Kader should have known that distilled water would cause a problem, as ordinary water would, and should have advised Galco to reconsider its instruction to water test all the dolls using distilled water? I do not believe so. I have held that the parties were equally knowledgeable in the business of making toys. Galco's people made it quite clear to Kader's people that it was their belief that, if distilled water was used, there would be no mould problem. I do not believe that a reasonably expert toy manufacturer could be expected to know that this was not the case, and tell Galco that its belief was unfounded. I do not think that Galco had any right to expect Kader to know more about the micro-biology of using distilled water to test the dolls than they did. Mr Victor Wong said he had experience of this kind of thing, and relied on that. There is no evidence at all that that he was uncertain about the instruction, and was seeking Kader's advice.

Mr Mills-Winkler, who, as I have said, had much hands-on experience of manufacturing toys, probably more than anyone else who gave evidence, did not realise that the water-testing with distilled water and the residual distilled water was the cause of the problem, and, therefore, should have been avoided. And this, of course, was when there was good reason to suspect that something in the manufacturing process was causing the mould. And Ms Silfies needed to be told by the micro-biologists, BTL, that "The problem develops when there is a proper moist environment for [the microbes] to grow in, like the one we have with several drops of water remaining or seeping from the dolls". If these two people, both very experienced in the toy industry, even when they knew there was a problem and were looking for its source, did not pick out the distilled water and the residual water as the cause of the trouble, how can it be reasonably suggested that Kader's people, without these advantages, should have realised that the use of distilled water would result in the proliferation of microbes?

120. In my view, Kader, having given the instruction to use the distilled water, are responsible themselves for the consequences. Kader is not liable because no reasonably expert manufacturer in its position would have challenged the decision by Galco to use distilled water to test the product.

Was Kader Warned about the Use of Water?

121. I accept that both Mr Chau and Mr Li, for Kader, and Mr Wong and Mr Lam, for Galco, were conscious that, in some situations, using water to function test the dolls could lead to problems with mould. It was not seriously challenged that Messrs Chau and Li had experience of water causing mould in another product, and I accept that this is the case. If this is so, what possible reason could there be for them not to mention it to Galco? On this basis, I believe that it is probable that they did so. Mr Victor Wong says that Kader's people did suggest to him that air, instead of water, should be used to test the function. The dolls were designed to use water. The obvious medium to use to test a water function would be water. It is, to my mind, extremely improbable that the suggestion by Kader that air should be used would have been raised in a vacuum. And if it was, the natural reaction of Mr Victor Wong to such a suggestion would have been: Why? Why use air, when the doll is designed to use water? He says he does not remember if he did ask these questions. I believe it probable that the question, in one form or another, was asked, and answered, or that it did not need to be asked because he had already been told why it was being suggested that air should be used.

122. Accordingly, I find that it is probable that Kader's people did warn Galco generally about the water testing, although, when it was clear that distilled water was to be used, they, like Galco's employees, thought this would avoid moulding, and did not persist in the warning.

What Water was Used?

123. It has been suggested by Galco that it may be that Kader was not, in fact, using distilled water to test the dolls, or re-used distilled water after it had become contaminated. There is no acceptable evidence that the Kader workers did not use the distilled water, and did not use it properly. There is clear evidence, if only from Galco's own Mr Mills-Winkler, that there was an ample supply of distilled water available, and, by all appearances, it was being used. Kader's workers were seen by other Galco employees to be using distilled water. There is no evidence either that Kader was not using the distilled water properly. Kader was not operating this factory secretly, away from the prying eyes of Galco. All procedures were done openly, under the eyes of Galco's own people. It is most unlikely that Kader's people would have risked adopting improper procedures when this could easily have been spotted and exposed by Galco's quality control staff.

124. Galco's case is that there is evidence that the water being used by Kader was contaminated.

125. An 18 litre Watson's water container was obtained from Kader. This was received by Galco on 22 August and sent to BTL. On 29 August, Karyn Silfies reported that the sample "was of no use since it was hugely contaminated". She instructed that further samples be taken.

126. Estela Solano-Gomez says the container was received on 24 August and testing commenced on the same date. She says "Although, the condition of the sample was not adquate (sic), it did provide information of the mishandling of the water container being used for the test". This water was tested and found to be contaminated. A bacterial culture found Pseudomonas Cepacia was the predominant microbe.

127. I do not know why the condition of the sample was not thought to be adequate, or why it was thought that "information of the mishandling of the water container being used for the test" was of any value, but it is clear that there is no evidence that the taking of this sample was such as to give the testing any value scientifically. It also has no value because there was no control. If one is testing a container of Watson's distilled water taken from Kader's factory for the purpose of ascertaining if it is contaminated with microbes to a degree out of the ordinary - and this seems to have been the purpose - one must compare this sample with another sample taken at the same time, in the same way, and similar in all respects apart from the source. It should have been compared with a sample from another similar container obtained at the same time and treated in the same way obtained from another source.

128. Other water being used by Kader was tested.

129. Mr Fred Mills-Winkler says "After the problems with the previous water sample sent to the U.S. on the 23rd August, I gave Johnny Shek specific instructions for Galco staff to personally take the further water samples. They were to obtain a total of 12 samples; two each from six sealed 18 litre distilled water containers. They were instructed to buy 12 bottles of Watsons distilled water in Hong Kong; empty those bottles of water and sterilize them with alcohol and seal the bottles once more. They were then to take those sterilized bottles to Kader's factory at Chung Tong. They were then to collect in those sterilized bottles, samples of distilled water from 6 of the sealed 18 litre water containers at Kader's factory and bring them back to Hong Kong for couriering to Bio-Technics." He says that, on 1 September, "I sent six of the water samples collected on 30th August which had been delivered to me by Eric Chan together with six control samples of Watson's water (bought in Hong Kong) direct to Bio-Technics in Los Angeles for testing . . ." He kept the other six samples. Johnny Shek says that Winkler instructed him to obtain the samples, suggesting using containers "which had been sterilised with alcohol". Shek instructed Eric Chan to go to the factory to collect the samples. Estela Solano-Gomez says that these samples were received on 7 September. These samples were tested, commencing on 7 September. The samples tested were said to be "Six (6) samples unlabelled broken seal bottles of water (500mL)" and the "controls" were said to be "Six (6) samples sealed plastic bottles labelled as "Watson's Pure Distilled" water". Three of these samples fairly high counts of microbes, and again Pseudomonas Cepacia was identified from the bacterial culture as the predominant organism.

130. There is no admissible evidence of how the samples were taken from Kader's factory, but, even if it were to be accepted that they were taken as Mr Mills-Winkler has instructed, it is clear from expert evidence that the alcohol would not have completely sterilised the bottles.

131. On 17 April 1996, Dr Schlesinger told me -

Q. In relation to these particular findings, I understand that you would like to say something about the reference to what you had been informed, that they'd been sterilised in alcohol?

A. Yes. Sterilising in alcohol would not really effectively sterilise - it would not remove any spores and would not be an effective method of sterilisation. I'm surprised that they were instructed to do that. It might remove vegetative forms, but it certainly would not remove spore formers, moulds and fungi and bacterial spore formers, so that is not an effective way to sterilise a bottle for sample. But I think there was some question as to whether the bottle was actually washed with alcohol or not, and I'm - I'm not certain what the final determination has been, whether the bottle was actually washed with alcohol or rinsed with alcohol or not.

132. In any event, for this testing to have any scientific validity, it would have been necessary for there to have been adequate controls. Again, the controls should have been treated in a similar way, but from a different source. In other words, what should have been done was to take similar bottles, treat them with alcohol in the same way, with one set filled with water from 18 litre containers at Kader's factory and the other set filled with water from 18 litre containers obtained, perhaps, directly from Watsons, with both sets handled in the same way and exposed to the same conditions for the same length of time. Putting this in another way, there is no evidence that water from a source other than Kader's factory, and treated in the same way, would not have revealed the same microbial infestation.

133. In the light of this, and the fact that the alcohol would not have completely sterilised the bottles used in any event, and in the absence of any admissible evidence of how the samples were taken, the evidence of these findings has little real value.

Compliance with the Standards

134. There remains the complaint of non-conformity with the Standards on the basis that the dolls had no more than a normal population of microbes; that is, a population of microbes that one would expect to find on a product manufactured under normal conditions. Can it be said that, although Kader is not responsible for the condition of the dolls that rendered them defective, unmerchantable and unfit, it is nevertheless liable because it delivered dolls that were probably infected with a normal and usual population of microbes when it undertook to deliver dolls that were in conformity with the Standards? In other words, do the Standards require that products be totally free from any microbes at all that may be pathogens, opportunistic pathogens or sensitizers? The Standards that have to be considered are 16 CFR, the ASTM and EN71.

16 CFR

135. As far as the Law of the United States is concerned, Mr Aaron Locker, a US attorney, who gave evidence for Galco, said the relevant "Standards" are 16 CFR, The Federal Hazardous Substances Act (FHSA), the Consumer Products Safety Act (CPSA) and a voluntary code issued by the American Society for Testing Materials (ASTM), but it was clear from his evidence, eventually, that the CPSA has no relevance to the issues before me, that the relevant provisions of the FHSA are incorporated in 16 CFR and that the ASTM says, in effect, only that there must be compliance with 16 CFR.

The argument for Galco is the dolls were a "banned hazardous substance", which is defined in 16 CFR as -

"Any toy, or other article intended for use by children, which is a hazardous substance, or which bears or contains a hazardous substance in such manner as to be susceptible of access by a child to whom such toy or other article is entrusted "

136. The term "hazardous substance" is defined, as far as relevant to this action, as -

"Any substance or mixture of substances which is toxic a strong sensitizer if such substance or mixture of substances may cause substantial illness during or as proximate result of any customary or reasonably foreseeable handling or use, including reasonably foreseeable ingestion by children."

137. To be a "strong sensitizer" within this definition, it is necessary that the substance should be so designated. There has been no such designation here, so I am left with deciding whether the dolls, or what they bore or contained, was "toxic". This word, as far as relevant, is said to "apply to any substance ...which has the capacity to produce personal injury or illness to man through ingestion, inhalation, or absorption through any body surface."

138. 16 CFR says that definitions from the FHSA are repeated for convenience and that "some of these statutory definitions are interpreted, supplemented or provided with alternatives in paragraph (c) of this section. . ." The regulations then go on to say -

"To give specificity to the definition of "toxic" ... the following supplements that definition: "Toxic" means any substance that produces death within 14 days in half or more than half of a group of [white rats and rabbits when the substance is administered as provided]."

139. It is further provided that " 'Toxic' also applies to any substance that is 'toxic' on the basis of human experience." Mr Locker said that the "human experience" referred to here was "human experience" as reported in "the scientific literature and by learned medical experts".

140. The definition of "hazardous substance" is also supplemented. 16 CFR says that "'substantial personal injury or illness' means any injury or illness of a significant nature. It need not be severe or serious. What is excluded by the word 'substantial' is a wholly insignificant or negligible injury or illness." And "'proximate result' means a result that follows in the course of events without an unforeseeable, intervening, independent cause." And further, "'reasonably foreseeable handling or use' includes the reasonably foreseeable accidental handling or use, not only by the purchaser or intended user of the product, but by all others in a household, especially children."

141. 16 CFR also provides -

"Reliable data on human experience with any substance should be taken into account in determining whether an article is a "hazardous substance" within the meaning of the act. When such data give reliable results different from results with animal data, the human experience takes precedence.

Experience may show that an article is more or less toxic to man than to test animals. It may show other factors that are important in determining the degree of hazard to humans represented by the substance ..."

142. The "specificity" definition in relation to death in animals was not put to Mr Locker when he gave evidence, and I gave leave to introduce a letter from him explaining his view. In this letter, Mr Locker states his view that it is not necessary for the CPSC to conduct the tests mentioned as a basis for proceedings against a "toxic" substance. He says that the "Troxler decision is clearly indicative of the fact that the Commission is not limited to conducting tests on white rats to determine that a product is a toxic substance." On my reading of that decision, it is not indicative of anything of the sort. The court expressly held that "the issue of whether [the product concerned] is, in fact, a 'banned hazardous substance' is a question to be later determined in a hearing on the merits in the condemnation proceedings". Mr Locker does not know whether the Commission was proceeding on animal data, reliable data from human experience or, indeed, whether it had any justifiable basis at all. So, in my view, the Troxler decision does not indicate anything of use in the case before me. A case that is of some assistance is that brought in the United States by the Toy Manufacturers Association against the Commission, in which Mr Locker appeared as counsel for the TMA. In that case, the court held that "the legislative history appears clear in favoring general prescriptive regulations of the broadest, most comprehensive type and would favor case-by-case proceedings only where such general prescriptive regulations prove impossible." In other words, the legislation and the courts support general prescriptive regulations regarding products contaminated by microbes, rather than a case-by-case approach, unless this was impossible. There are no general prescriptive regulations governing microbial contamination. There is nothing impossible in prescribing inappropriate levels on microbes on products; this is done in other areas. Mr Locker does not suggest that it is impossible; he says the Commission have not done this because it has not seen a need. Such prescription may be difficult, and, to some extent, it would need to be arbitrary, but it would be nowhere near impossible.

143. It cannot be, of course, that this Standard prohibits the import of a toy contaminated by a single microbe, even if it is recognised pathogen, an opportunistic pathogen or a sensitizer. I say this in spite of the fact that it is the view of Dr Schlesinger that this is the effect of the US Standard, although he seemed to slide away from this and ascribe his view as based on some manuals used by some manufacturers. Mr Locker also agreed with the allegation in the statement of claim; that the presence of any pathogen, opportunistic pathogen or sensitizer would breach this Standard. I do not understand why they say this. No one has suggested that a single microbe of any kind could cause a "substantial illness" in anyone, even the most susceptible. Even the most virulent microbes require an infectious dose of more than one to cause illness.

144. If one were to interpret this Standard as prohibiting the importation of products that contain or bear but one microbe that is a pathogen, opportunistic pathogen or sensitizer, I think, on the evidence, there would be very few products imported into the United States that did not breach the Standard.

145. So, if one microbe does not breach the Standard, how many do? One might say that the answer to that is a sufficient number to cause "substantial illness". But "substantial illness" in whom? An adult, fit, with all his immune systems intact? In which case, the evidence says, the number of microbes would be high, and only of certain types. Or a child suffering from Acquired Immune Deficiency Syndrome? In which case, a comparatively few microbes of many more types would be all that would be required. And, if only one item in a package containing a much larger number of items bears upon it one pathogen, or one opportunistic pathogen or one sensitizer, which may have been the case here, are all the items in the package prohibited, or only the one with the microbe? The Standard do not answer these questions. Is this sort of uncertainty acceptable in a contractual obligation? Would such uncertainty be acceptable for the purposes of a criminal offence in the United States? In my view, this is just the sort of problem that the court in the Toy Manufacturers Association case had in mind when it favoured, and said the legislation favoured, prescriptive regulations against ad hoc intervention.

146. I do not accept that it has been proved that the dolls were in a condition, when delivered to Galco, that breached this Standard. Nor do I accept that this Standard, without the appropriate general prescriptive regulations, is intended to or is capable of dealing with the sort of case before me.

147. In so far as my findings in this aspect of the case differ from the evidence of Mr Locker, I reject that evidence. I was not entirely happy with the manner in which Mr Locker gave his evidence. I do not think he was totally frank with me. For example, he knew very well that to be a "strong sensitizer" within the definition of "hazardous substance", it was necessary that the substance should be so designated. He knew that there has been no such designation, yet drawing this out of him was a little like extracting a molar with a deep root. As an expert in the subject, Mr Locker must also have known about the "specificity" definition, but he did not draw attention to it. And when he was permitted to explain, he argued a spurious case on the basis of the Troxler decision. My impression of Mr Locker's evidence was that he gave it as a lawyer arguing a case for a client, and, even then, not following the ethic of drawing the court's attention to the law that was against his argument. I was, however, with his assistance, able to read and interpret the relevant US law.

EN71

EN71 is very specific as to certain standards required of toys, and, in some cases, the tests to be applied. There is no specific reference to microbial contamination. The only provision that is said by Galco to be relevant specifically is this -

"3	Requirements

Materials

Toys shall be so designed and manufactured as to meet the requirements of hygiene and cleanliness in order to avoid any risk of infection, sickness and contamination.

Materials shall in particular be visually clean and free from infestation."

148. This is European law. I do not know if I am supposed to have an expert in European law to assist me in interpreting this provision. There was none.

149. Although this Standard speaks of "any risk" of illness, as opposed to "may cause substantial illness", Dr Mosley was sensible enough not to contend that the presence of a single microbe would breach the Standard. His evidence on this point, which is also relevant to the US Standard, was this -

"Q. Do you go so far as to saying that the presence of one CFU of a pathogenic micro-organism would be a breach of EN-71?

A. On the basis of experience, I couldn't say that, no.

Q. You see, if the presence is invisible, how is a manufacturer or importer to know what the acceptable or unacceptable level is?

A. By performing a microbiological analysis. A microbiological analysis has to be performed on a variety of materials where mould is not visible: potable water, milk -- an analysis has to be performed.

Q. Surely, the question of what is acceptable or unacceptable will depend firstly on the nature of the micro-organism, would you agree with that?

A. It will depend on the nature of the organism, yes.

Q. So that, for example, one would probably take a different approach to Salmonella typhi to Aspergillus fumigatus.

A. Possibly, yes.

Q. Because the former is a far more dangerous micro-organism than the latter.

A. I suppose in the terms of the number of people infected, yes. Aspergillus fumigatus is a potential pathogen which does cause serious illness.

Q. Yes, but as I think you have commented somewhere in your Report, 'would not normally cause serious illness to a healthy person'.

A. That's not correct.

Q. It is on page l0 at 4.8. It is dated September l994. You stated in your Report that:

"... the risk of potential infection was considered unlikely, but ..." -

you say:

"EN-71 clearly states that any risk of infection is to be avoided."

We were looking at this a few moments ago, do you remember?

A. Yes, yes.

Q. So, are you not saying there that although it may be considered unlikely, because EN-71 has such low threshold one could still be in breach?

A. Well, EN-71 doesn't have a threshold at all.

Q. That, I think, is the point, because not only does it depend, do you agree, on the nature of the micro-organism, but it also depends on the physical condition of the person who is using the toy.

A. It might do, yes.

Q. So that you would have a different requirement in respect of some children from other children.

A. Yes and that's precisely why it's so difficult to generalise on what's acceptable.

Q. And it's for that reason, would you agree, that it cannot be said that EN-71 enables a manufacturer to determine whether or not any presence of micro-organisms on these toys are acceptable or unacceptable. That's the document itself.

A. EN-71?

Q. EN-71.

A. No, it is not possible to tell from EN-71 what is acceptable or what is unacceptable in terms of measured enumerated micro-organisms."

150. It follows, in my view, that one cannot, even if it was so intended, apply a Standard of such uncertainty to a contractual obligation. In my judgment, this standard imports only the obligation that the toys should be visually clean. There is no evidence on which I can find that the dolls were not visually clean when delivered to Galco. On the contrary, the evidence of the pre-shipment inspections by Galco's employees says that, in fact, they were visually clean at that stage.

Safe for Whom?

151. Galco argues that the obligation on Kader was to manufacture toys that were safe, not only for children with normal tolerances, but for those who were especially susceptible to attack by microbes, such as those with Acquired Immune Deficiency Syndrome, bone-marrow patients and others whose immuno-mechanisms have artificially lowered to lessen the possibility of rejection or were otherwise immuno-deficient. One might have thought that, if Galco believed that a manufacturer should so make toys, then it should design toys with the same range of susceptible children in mind. But apparently not. Dr Schlesinger accepted that the design of these dolls, with their water function, was such that they would become contaminated under normal use by a child. I do not accept that a manufacturer, any manufacturer, making things for normal use by ordinary people, without any specification that the thing should be suitable for use by a small, specifically disabled group, is obliged to cater for these very special needs. Indeed, it would be impossible, the evidence says, to avoid some degree of contamination in the ordinary manufacturing process. Dr Mosley told me this, and I accept it. If that is so, a manufacturer, if he were to be bound to cater for this special group, would be obliged to make the dolls in a very specialised, sterile environment, similar to a germ-warfare establishment, and then ensure that the dolls were sealed in a microbe-proof container. That would be totally unreasonable. Even then, of course, as soon as the container was opened, unless this was done in a completely sterile environment, the doll would be liable to be contaminated.

152. We no longer live in a self-reliant society; more and more, we expect others to protect us from our own actions, but it seems to me that the parent or guardian of a child who has reached the age of three years, the age for which these dolls were recommended, would well know if the child is ill so that he is especially subject to microbial infections, and will know what measures to take, as far as reasonably possible, to lessen the risk of such infections. One of the things such a parent or guardian of such a child will not do, one can be sure, is to buy for him, and allow him to play with, a doll that is designed to be used with copious amounts of water. That is no more than common-sense and the most basic of precautions.

Result on Liability

153. In the result, I find that Galco has not proved its claim, and it is dismissed.

Damages

154. On my findings, the question of damages does not arise, but, in case the matter goes further, as I have little doubt it will, I should set out my views on the damages claimed by Galco. The claim for damages falls under a number of different heads, but I will first deal with a general submission made by Kader.

Failure to Sort

155. Mr Barlow argues that Galco should have arranged for the dolls to be sorted out into those with visible mould and those without, pointing out that, in some cases, the percentage of those with visible mould was low. The argument is that those without visible mould could then be sold. This approach, it is argued, should result in the damages being "discounted" by 50%. I do not accept this. One cannot assume that the proliferation of the microbes had reached a static state; the evidence is that is was dynamic. In my view, the findings relating to the microbes of the dolls was such that any prudent businessman should have withdrawn all the dolls from the market. I do not think Galco can be criticised for instituting a total recall.

Mitigation of Damages

156. Kader allege that Galco and Galoob failed to mitigate their loss. I will deal with this later, but, under each head claimed, I will indicate the effect if this plea succeeds.

Paragraph 17(i)

157. This is in respect of loss of profit on cancelled orders that Galco would have derived from the sale of the dolls in 1990. This claim was for US$84,419, but reduced to US$75,722.

158. It must be said that Galco's case on this head of claim was, initially, a complete mess, but it did a good salvage job. At the end of the day, I was satisfied that the orders were cancelled as a result of the contamination problem, and that the claim had been made out. I would have awarded US$75,722 under this head.

159. This claim will be affected if the plea of failure to mitigate succeeds.

Paragraph 17(iii)

160. There is no paragraph 17(ii). Paragraph 17(iii) claims the profit it would have derived from the sale of all BB dolls and another line, Bouncin' Kids, in Europe in 1991. This is a claim for general damages and has been quantified in the sum of US$1,224,186.

161. Mr Barlow argues that there was no legal obligation on either party to place or accept further orders. That is so, of course, but is nothing to the point. The probability is that, if Galco could sell the products, it would place orders, and, if orders were placed, Kader would accept them.

162. The claim is in respect of possible sales in Europe only because it was the intention of Galco to discontinue the line in the US and Canada at the end of 1990.

163. Having considered all the evidence carefully on this head, I am satisfied that there is a legitimate claim here, but it is based on estimates that are highly optimistic. If Kader is responsible for the contamination problem, its actions effectively destroyed the BB line in Europe. I do not take any account of the Bouncin' Kids line. Any claim under this aspect is, in my view, very speculative. Doing the best I can with some very unsatisfactory evidence and estimates, I assess general damages under this head at US$250,000.

164. This claim will also be affected if Galco and Galoob failed to mitigate.

Paragraph 17(iv)

165. This claim was made on the basis that Lewis Galoob lost profit on unsold units in the sum of US$377,734 and on cancelled orders in the sum of US$465,417, and Galco is liable to indemnify it. Galco no longer pursues the sum of US$377,734. The sum now claimed in respect of cancelled orders is US$436,787.

166. Of the figure of US$436,787, Mr Gaudie, who gave evidence for Galco, agreed that there were no supporting documents for other than 14,712 pieces amounting to US$71,866.65. Mr Bleach argued that the evidence of the computer print-out relating to the other pieces, although not verified by supporting documents, was evidence itself of the truth. That is so; it is evidence of the facts mentioned therein, but I am not satisfied that it is reliable evidence. The reliability of evidence contained in a computer depends, of course, on the reliability of the in-put. It appears to me, in this area, as in others, Galco and Galoob have not been as efficient and dependable in its record keeping as one is entitled to expect. It is for Galco to prove its claim. Its evidence in this area has left me suspecting its reliability, and that of Galoob. Mr Gaudie himself accepted that whoever had been responsible for preparing the documentation did not know what he was doing. In the result, I am prepared to accept only the evidence that is properly verified.

167. Under this head, I would have awarded US$71,866.65.

168. Failure to mitigate will also affect this claim.

Paragraph 17(v)

169. This is in respect of losses represented by payments or credits to customers in the sum of US$406,359. Under this head, the claim in respect of the payment to Rainbow of US$78,707 is not pursued, and the claims in respect of finance charges in respect of all customers is not pursued.

170. The claim in respect Siso is US$45,940.96, being the cost of the dolls of US$36,395 and US$9,546 in respect of expenses and storage. Kader does not dispute the amount of US$ 36,395. There are no documents verifying that Siso paid the sum of US$9,546. The sum was probably paid to Siso by Galco, and it may be that Galco was satisfied that some of the expenses had been incurred by Siso. I can understand, of course, that Galco would not wish to antagonise a customer by appearing to be finicky about documents, but it for me, not Galco, to be satisfied that Galco was liable to Siso for this amount. I cannot be so satisfied unless I see the documentation establishing that Siso paid the amount claimed, or some of it. Accordingly, I find that Galco has not established its claim in respect of the sum of US$9,546 under this head. The sum that would have been due to Galco here is US$36,395

171. The claim in respect of Ideal is US$161,830.17, reduced to US$152,221. Of this, Galco accept liability of US$99,530.11, but say that Galco has not established liability in respect of the sums of US$14,690.38 for "warehousing", US$46,272.04 for "freight, Labtest, Further warehousing charges and customs" or US$1,338 for "Finance Charges". The claim for finance charges is not pursued. Again, there is no way in which I can examine any documentary or other evidence to satisfy myself that Ideal legitimately incurred these latter charges to establish a liability by Galco, other than in respect of "Labtest" of US$2,053. The amount due here would be US$101,583.11.

172. The next claim here is US$69,020 in respect of "cost of goods" (US$61,123), "handling charges" (US$272), "return freight" (US$395) and "storage" (US$7230). In closing submissions, this claim was reduced to US$63,188. Kader concede US$61,395.35. There is no evidence to satisfy me relating to "return freight" or "storage", particularly storage, as claimed, up to January 1993. There is acceptable evidence of storage charges at the rate of US$280 per month. I accept that these are payable up to October 1991, giving a total sum of US$1,400. The amount that would be due here is US$62,795.35

173. Then there is the claim in respect of Joker for US$40,380, reduced to US$39,500, of which US$37,922.35 is conceded by Kader. Mr Barlow says that there is no documentation in respect of "advertising fees", but there is. I would allow this claim in the sum of US$39,500.

174. Next, there is the claim in respect of Eggeling for US$10,480.46, of which Kader concede US$8,206.05. There are no documents supporting the fact that Eggeling paid what it says it paid. This claim I would allow in the sum of US$8,206.05.

175. The claim in respect of Rainbow is not pursued.

176. Under this head, I would have allowed US$248,479.51

177. Refund of the prices paid by customers will be affected if the failure to mitigate plea succeeds.

Paragraph 17(vi)

178. It is alleged that Galoob incurred losses in respect of the shipment of dolls which were unsold in the sum of US183,639, and that Galco is liable to indemnify Galoob. This claim is not pursued.

Paragraph 17(vii)(a)

179. This claim is for the sums of US$14,694 for the sterilisation and freight of fabric, which is not pursued, US$132 for the shipment of water bottles, and US$20,656 for freight for returned dolls. Kader concede the sum of US$20,788.80. I would have awarded this sum of US$20.788.80.

Paragraph 17(vii)(b)

180. It is said Galoob incurred further costs and expenses for which Galco is liable to indemnify it. These are US$75,671 in respect of radiation, freight and storage for 26,256 returned dolls, US$27,712 in respect of expenses for dolls returned by retailers (of which only US$20,062 is pursued), US$46,246 in respect of testing fees and US$310,818 in respect of retailer penalty charges, advertising and legal fees of US$14,982 (of which only US$11,012 is pursued).

181. Of the sum of US$75,671, the sum of US$39,718 in respect of storage charges is no longer pursued. The radiation charges are in respect of 78,924 dolls, but, as the statement of claim says, the number of returned dolls was only 26,256. I accept that it may have been necessary to radiate somewhat more than the number actually required, but the number radiated is so much greater than that required that a proper explanation should have been given to me. It was not. The radiation charges should be reduced by half; that is US$17,976.

182. Under the claim for US$20,062, I accept that, although there are no cheques showing payment of US$5,805, as a matter of probability that this was paid. I accept also the other items under this head. As to the claim for US$46,246 for testing fees, minor criticisms can be made here, but I accept this claim.

183. Under the claim for US$310,818, there is a sub-claim of US$40,000 relating to a payment to Sears Roebuck. I am not satisfied that there was a legal liability to pay this. I think it was paid to keep a good customer sweet.

184. There is also a sub-claim of US$255,835 in respect of advertising costs incurred by Galoob for which, it is said, Galco is liable. Mr Barlow says that Galco cannot recover this and lost profits. That would be so if this cost was taken into account in the calculation of lost profits. As far as I can see, it is not.

185. The advertising costs were in respect of television commercials made during January 1990. The cost of making the commercials for the BB dolls was US$377,124. There were three separate commercials. They were for "Sisters", "Drink 'n Cry/Drink 'n Wet and Twins", and "Drink 'n Cry/Drink 'n Wet - Splashing". They were of the same length, and the amount attributable to each is US$125,708; being US$251,416 for two. There were additional expenses of US$3,737.02 and US$682.78, making up the claim of US$255,835.

186. The hearsay evidence is that "no media was aired in the fourth quarter of 1990 for any doll in the Bouncin' Babies line" and "neither the Drink 'n Wet and Drink 'n Cry TV commercials ... were ever aired on television".

187. The evidence is strong that a person engaged in the toy trade, like Kader, would have within his contemplation that, if a defective product was made that could not be put on the market, his customer, and his customer's customers, would lose money on expenses, such as advertising. It follows, in my view, that these losses, including Galco's liability to Galoob, flow naturally from a breach.

188. Although there unsatisfactory aspects of the evidence regarding this claim, on balance I find it proved. I would have awarded US$255,835 under this sub-head, except that it is not a valid claim if the replacement dolls had been accepted because there would then have been no reason to cancel the advertising.

189. The last sub-claim here is an amended claim for US$11,012 for legal fees. I accept this.

190. I would have awarded a total sum of US$331,131.

Paragraph 17(viii)

191. Galco claims losses incurred by Galoob in selling other dolls in the BB line at a reduced price in respect of which Galco is liable to indemnify Galoob. These amount to between US$551,000 and US$643,000 being 60% to 70% of an estimated loss of US$919,013.

192. It is said by Galco that, because Galoob had to cancel the advertising campaign, there was nothing to drive the sales of the BB line, and so there was a large stock left at the end of 1990.

193. I do not think that, at the time when the contract was made, this sort of loss would have been in the contemplation of a reasonable man in Kader's position. It is easy now to trace these losses to a breach, but I do not think that, when the deal was struck, any reasonable businessman in Kader's situation would have thought it at all reasonably possible that, if he did not make the dolls according to contract, Galoob might have to sell other dolls at a reduced price.

194. In any event, I am not at all satisfied that Galco has established that the reason why Galoob had to sell the other BB dolls at a reduced price was because of the alleged breach. Business, certainly for Galoob, was not good at that time, and Galoob believed that the BB line in the US and Canada had just about reached the end of its useful life. Other toys, totally unconnected with the BB line, suffered a similar fate.

195. I would not have accepted this claim.

196. It would also not be acceptable if the plea of failure to mitigate succeeds.

Paragraph 17(ix)

197. Galco claims losses incurred by Galoob in giving retailers credit to enable them to sell other dolls in the BB line at a reduced price in respect of which Galco is liable to indemnify Galoob. These amount to between US$1,242,822 and US$1,420,368 being 70% to 80% of an estimated loss of US$1,775,460.

198. For reasons similar to those mentioned immediately above, I would not have accepted this claim either. It seems to me that the losses suffered here, if they were suffered, were not sufficiently connected with the alleged breach to be recoverable in law. They were ex gratia payments Galoob was not obliged to make in a legal sense, although it might have been unable, in a practical sense, to avoid them because of the great buying power of those that demanded them.

199. This claim would fail also if Galco and Galoob failed to mitigate.

Paragraph(xi)

200. Galco claims an indemnity against other claims in respect of which it may become liable to other customers.

201. I would not have granted this. The alleged breach and its alleged consequences happened a long time ago. Any reasonably possible claims would have surfaced by now.

Paragraph (xii)

202. This claims US$126,166.66 in respect of redundant moulds. It is not pursued.

Credit for Sale of Re-worked Dolls to Ideal

203. On the evidence, the profit on the sale of the reworked dolls to Kader was US$14,286. This should be deducted from the damages payable.

Mitigation of Damages

204. Mr Barlow submits that Galco failed to mitigate its loss because it did not accept an offer by Kader to provide replacement dolls. There is no dispute that the offer was made by Mr Ting, by telephone to Mr Goldman, during the middle of September 1990. And Mr Goldman of Galoob does not dispute that Kader was capable of re-starting production immediately. Mr Goldman's evidence on 15 May 1996 was -

Q. If you go please to page 106 in Volume 10.1, this is August 13th. There had been a fire at Kader's factory plant. This is setting out and telling Mr Novak, a member of your team, what the start-up would be. "The fire was at the plant of making Drink & Wet, Drink & Tear and Gift Set. All the component included the packaging for Drink & Wet and Gift Set were damaged (There is no affected on Drink N Tear). Fortunately they got enough fabric materials to cover existing on hard order," you see? [This communication is from an employee of Galco.]

A. Yes.

Q. And then he sets out what the existing on hard order is, namely, a total of 92.3 thousand. You see?

A. Yes.

Q. And then "Kader will re-start molding all plastic parts this week and will start painting/tampo next week upon replacement of tooling ready. Replacement of packaging will avail on 8/25. Re-start of packout should be in the week of 8/27. Below is the weekly schedule on dolls." And you will see that on the first of the week ending 1st September, that's 24th August - 25th August you had 4.5 million.

A. Thousand.

Q. Thousand, sorry. By 15th September 31.5, by the 29th 68.5 and by 6th October the entire 92.3. So apart from repacking there was a manufacturing facility available, was there not?

A. There was a manufacturing facility available but not one whose goods we would accept.

Q. Subsequently as you remember from your letter to Mr Ting you were anxious to restart Baby Talk.

A. Yes.

Q. The way that Baby Talk was restarted was this, was it not, that the costumes were taken to Japan and sterilised.

A. Correct.

Q. Brought back and fitted, and Baby Talk was then sent on its way.

A. Correct.

Q. That was all worked out as a satisfactory way of dealing with Baby Talk.

A. There was a mistake on my part.

Q. It may be but nevertheless off it went.

A. Off it went, it should not have gone.

Q. And was sold and no complaints.

A. No complaint except I made a mistake. I should not have let that product go.

Q. What was your mistake?

A. With the benefit of having done the review -- I don't understand why it did not occur to me that these dolls had levels of contamination that I shouldn't let go out. There were pathogens reported on them, I should not have done that. I should have performed the same process on Baby Talk that I did on Bouncin' Babies.

205. Mr Goldman does not argue that Kader could not produce the dolls. He does not challenge that they could produce them on the time scale suggested. He simply says that he was not prepared to accept the dolls from Kader.

206. On the unchallenged schedule mentioned above, we have the situation in which Kader could have delivered 4,500 dolls within 12 days, 31,500 within a further 20 days, 68,500 within a further 14 days and 92,300 within a further 7 days; that is, by 6 October. At this rate of production - about 1,740 dolls per day - about another 42,000 dolls could have been produced by the end of October, making a total of 134,300 dolls by that time, and an additional 64,000 odd by early December. The 17 purchase orders cover 225,000 dolls. About 159,400 dolls had been shipped. I do not know if Galco would have accepted all the dolls covered by the orders. It was common for Galco to cancel orders, and for Kader to accept this.

207. There is some shilly-shallying in Galco's evidence about the so called "drop-dead" date; that is, the latest date on which dolls could be shipped for the Christmas market, but the clearest evidence is that of Mr Goldman himself. He says -

"I was told that they said that they needed a guarantee of replacement product on a schedule from early November to early December with a complete replacement of their order. There were discussions about that and our inability to meet their guarantee requirement. At this stage we were in no position to guarantee anything. So the conclusion was that we had no ability to replace the dolls internationally at this juncture for the balance of 1990. With respect to the United States, my position was that given the significant problem of contamination, given the nature of it, the only responsible thing that I could do in managing the recall was to first collect all of the dolls that had previously been shipped to retail and get them back in my possession before shipping replacement goods, my concern being that the distribution channels are easily confused and to have a very similar product going in and coming out of the channel differentiated only by perhaps a small label on the box. But to do that, given the nature of the problem, was risking confusion and mixing up the product that I wanted to withdraw with the product that I wanted to distribute. So as a result of that conclusion and recognising the amount of time it would take for my retail customers in the United States to return the product to me, I realised it was now too late in the United States to replace the product. So the conclusion reached was that as we were there in September 4th of 1990 we would be unable to replace any of these dolls in any of the markets and, as a result, the programme for 1990 for Bouncin' Babies was essentially dead."

208. This evidence is consistent with that of Mr Boyle. He said that retailers sell the vast majority of their toys in December; many in late December. He said the "cut-off" date for this season was "on average, probably, mid-November". Here, Mr Boyle is referring to the date on which the goods should be in his possession. He said he would not be able to despatch goods to customers later than the first week, possibly the second week, in December.

209. On this evidence, as a matter of probability, with a little ingenuity, flexibility and effort, the dolls could have reached the market, by instalments despatched from the middle of September, in time for the Christmas season.

210. Galco's attitude was not that Kader could not supply the dolls to satisfy its customers; it was that, firstly, there was a significant problem with contamination, and, secondly, if Galco waited until the recalled dolls reached Galco, it would then be too late to supply replacement dolls. Mr Goldman's statement that "as we were there in September 4th of 1990 we would be unable to replace any of these dolls in any of the markets" is, of course, patently untrue. About 13 August 1990, Galoob knew that a large number of the dolls could be replaced if they chose to order re-start of production. Ms Sharon Duncan certainly knew this. On 15 August 1990, she sent a fax to Siso, referring to the DC and DW dolls, saying "We will be able to replace above product within 4 - 6 weeks.". However, on 7 September 1990, shortly after the Galoob meeting of 4 September 1990, when Mr Goldman and others decided "that as we were there in September 4th of 1990 we would be unable to replace any of these dolls in any of the markets and, as a result, the programme for 1990 for Bouncin' Babies was essentially dead", Galoob wrote to their customers and said "Given the time available before Christmas, and the quality assurance issues now being resolved with our orient vendor, we will not be in a position to replace these dolls with identical ones this year". On 7 September 1990, Galoob also wrote to Rainbow saying "We expect to resume production of affected dolls in December at a new production site. We cannot guarantee replacement of identical dolls in time for the Christmas sales season. We may have limited replacement dolls available to ship by end November." On 12 September 1990, Fred Mills-Winkler wrote to Bill Radin, with copies to, amongst others, Ms Silfies, Mr Novak and Mr Ting, that he had "spent all day Tuesday September 11 . . . reviewing action steps required for production restart of "Baby Talk" and "Bouncin' Babies" with Mr Yik Lin, Production Manager." On 17 September 1990, Galoob wrote to Ideal saying "Regret very much that we are not in a position to guarantee shipment - whether air freight or ocean freight - by November 20th. In fact, while we may have some production by November 30th this date also cannot be guaranteed. The best we can commit to is a resumption of production within December".

211. I reject as totally unreasonable the attitude that Galco had to wait until the recalled dolls reached it before delivering replacements. Any reasonable businessman, faced, as Galco says it was faced, with a potentially disastrous situation in which it and its parent company, it says, would lose millions of dollars would have been anxious to avoid this loss. I have no doubt that it was not beyond the wit of any reasonable man, let alone a sophisticated, experienced wholesale dealer in toys, faced with this situation, to devise a plan that would avoid any confusion between the recalled dolls and those being delivered as replacements. They would be, after all, travelling in different directions, and, even when they were not travelling in different directions at the same time, it would be simple to ensure that they were stored in different places.

212. As for the problem of contamination, Karen Silfies had already advised Mr Mills-Winkler not to continue with the 100% water testing; she instructed "water test only under QC AQL and destroy samples"; that is, to test only samples and discard these. With that procedure, the problem would have disappeared, and, with any additional hygiene precautions that Galco wished to introduce, there should have been no reason in Galco's mind why production should not have restarted, and restarted much earlier than mid-September, when Mr Ting made his offer. It was Galco that had ordered production to stop, and it was Galco who was in a position to restart whenever they chose with whatever safeguards it wished to introduce.

213. Mr Goldman's reasons for refusing Mr Ting's offer are set out in his letter of 18 September 1990. He added nothing of significance during his evidence. He says -

(i) the offer is inadequate since such replacement would cover only a portion of the losses Galoob will bear as a result of the defective merchandise. . ." This, of course, is no reason at all for failing to take proper steps to mitigate damage.

(ii) " ... replacement of these dolls may not be commercially possible during this year, or in the future." (My emphasis.) I do not know what Mr Goldman meant by "commercially possible", although he is clearly qualifying "possible". I think it must be a reference to what he says later suggesting the recall itself might "kill" the line.

(iii) "Shipment of replacement dolls to our international and domestic customers can not commence until after we have retrieved the dolls that are now subject to recall." I have already dealt with this reason.

(iv) " ... if the consumer recall is required, then the dolls will not have a chance to succeed at retail, and the replacement of the recalled dolls will not be possible." "Resumption of production at this time would be premature until Galoob knows if these dolls will be saleable at retail subsequent to the completion of the recall." This seems to be suggesting that the recall itself may "kill" the demand. This does not ring true. Galoob was, according to its evidence, exerting itself greatly to find ways to sterilise, re-work or replace the dolls. This, of course, would be only because, if this was done, they thought they could sell them. These efforts were quite pointless if Galoob thought they would not be able to sell the dolls in any event. Indeed, they did re-work some of the dolls and sell them to Ideal.

(v) "Until Kader has identified the sources of the organisms affecting the dolls, and has put in place controls to prevent a reoccurence of the problems, including sample laboratory testing, Galoob will be unable to accept a resumption of production." This reason is not genuine. Galco had already done what any reasonable person might have thought necessary to avoid the problem, and Galco was in a position to require Kader to do whatever Galco thought fit, include sample laboratory testing, to give it the assurance and comfort it might reasonably want.

214. The truth of the matter, in my view, although Mr Goldman chose not to convey this to Mr Ting, is that Galoob had already decided to "kill" the BB line, and Mr Goldman was not the slightest bit interested in re-starting production, whatever Kader did or offered to do.

215. It is instructive to compare Galoob's attitude to replacing the BB dolls with that towards the Baby Talk dolls. There was, in Galoob's mind, a similar problem of contamination of the Baby Talk dolls, but this did not prevent them from pulling out all the stops to clear any difficulties away. I know Mr Goldman says this was some kind of mistake, but the fact remains that, when Galoob put its mind to it, some of the excuses it uses to say that it could not solve the BB dolls problems disappeared in the case of Baby Talk. I am left with a strong impression that Galoob was going through the motions of seeking to solve the BB dolls problems, but, for their own reasons, did not really want the replacement dolls. Certainly, I am satisfied, on the probabilities, that Galco and Galoob had the opportunity, that a reasonable man would have accepted, to salvage the situation and obtain replacement dolls, but it spurned this for reasons that are unsatisfactory, unacceptable and untrue. Galco and Galoob failed to mitigate their loss, and cannot recover any damages that would not have been suffered if they had taken the opportunity to obtain replacement dolls.

Counterclaim

216. In its amended counterclaim. Kader claims -

(i) $1,113,585.76 in respect of the sale and delivery of DW and DC dolls;

(ii) $207,000 in respect of the sale and delivery of BB gift sets;

(iii) $2,011.64 in respect of the sale and delivery of certain samples;

(iv) $1,957,067.79 in respect of reimbursement for the costs of materials, parts and inventory relating to Micro Machines;

(v) $558,755.79 in respect of a similar reimbursement relating to BB;

(vi) $1,250 in respect of a similar reimbursement relating to lip paint;

(vii) $593,218, up to 10 December 1991, and continuing at the rate of $52,890 per month, in respect of storage charges relating to these goods; and

(viii) $6,242, up to 10 December 1991, and continuing at the rate of $5,441 per year, in respect of insurance charges in respect of the same goods.

Galco's Defence

Claims i. and ii.

217. The defence here is that the goods were defective. It is accepted by Galco that, if I find that Kader is not liable, I should award these sums. I do so.

Claim iii.

218. Galco's defence is that it was agreed that the samples would be supplied free of charge. I accept that this is so. This claim is dismissed.

Claim iv.

219. I will deal with this claim later

Claim v. and vi.

220. Galco accepts that these claims stand or fall with Galco's claim. I have found that Galco's claim has fallen, so these claims are allowed.

Claim vii.

221. This claim was recalculated during the evidence. It is now $576,200.

222. Kader stored the goods itself. I am not satisfied that Kader has established any loss under this head. I dismiss the claim.

Claim viii.

223. This claim was also recalculated during the evidence, and is now $9,564.31.

224. It seems to me on the evidence that the insurance premiums paid covered all Kader's relevant assets. I do not believe that Kader has established that it has paid any additional premium, and, if so, what. I do not believe that Kader has established that it has suffered any loss under this head. This claim is dismissed

Claim iv.: Micro Machines

225. Kader alleges that Galco is liable to reimburse it in respect of the cost of materials, parts and inventory incurred by Kader on account of Galco, which were incurred as a result of Galco's "adjustments, reduction and/or cancellation of orders placed with Kader in respect of certain goods". Particulars are contained in debit notes of which details are given.

226. One of these debits notes (3459 (R-2)) dated 19 June 1990 in an amount of $1,957.067.79 is in respect of Micro Machines. In respect of this, Galco says that, if it did promise to reimburse these costs, that agreement was superseded by an oral agreement made on or about 14 September 1990 between Mr Goldman and Mr Ting under which Galco would pay the sum of $3,015,415.08 by three instalments in September, November and December 1990 in full satisfaction of Kader's claim in respect of Micro Machines. Upon payment of the first one-third instalment, Galco had the right to demand, and Kader would comply with this demand, delivery of one-third of the Micro Machines inventory. If Galco required delivery of more than one-third of the inventory before payment of the second instalment, Galco would pay for that additional inventory at that time. In compliance with this agreement, the sum of $1,058,347.29 was paid and, early in October 1990, William Radin of Galco demanded delivery of 12,759 Micro Machines to enable Galco to fill an order from a customer. It is alleged that Kader refused to deliver, and Galco claims damages. This claim for damages appears in Galco's re-amended defence to the re-amended counterclaim, but that is of no significance.

227. In his statement, confirmed by his evidence, Mr Goldman says that the agreement followed a proposal to the effect mentioned in the last paragraph by Mr Ting, and he authorised the payment of the first instalment. In the third paragraph of a letter dated 22 October 1990 to Mr Ting, Mr Goldman recited the terms of the agreement he says was reached. The paragraph reads -

"Kader's refusal to release Micro Machines inventories is directly in conflict with the agreement between our companies wherein Galoob agreed to pay for such inventories on the earlier Kader's release of inventories in response to Galoob's request (such requests which Kader agreed to promptly honor) or in three instalments occurring in September, November and December 1990. As you know, within days of reaching that agreement Galoob delivered the cheque in the amount set out which represented the agreed upon September payment. Kader's refusal to release Micro Machines comes at a time when Galoob's inventories are approaching zero, and therefore we are once again losing sales and are unable to supply our customers."

228. Mr Goldman also referred to a message to him from Bill Radin dated 24 October 1990. This read, as far as relevant here -

"I spoke to Kenneth who seemed either a little confused by your proposal or simply did not want to talk about. However I was able to talk to him about Micro Machines.

1. Micro Machines

I explained to him it did not make any sense for Galoob to make a second payment when Galoob cannot get delivery on the inventory which was paid for. He did not realise the amount we paid was in excess to the 95,000 cars we asked for and he said he would look into it. I also explained the same to MK later in the afternoon and he will discuss with Kenneth. There is no way I would pay more after being refused delivery unless they deliver immediately."

229. In his statement dated 19 December 1994, confirmed in evidence, Mr Ting refers to Mr Goldman's letter of 22 October 1990, but he does not deal specifically with Mr Goldman's allegation of an agreement in that letter. He says that, in September 1990, he raised the fact that Kader had suggested payment of the Micro Machines inventory by three instalments at the end of August, in mid-October and in mid-December. He says that he remarked that the August payment had not been made. Mr Goldman said he was aware of the problem and was embarrassed. He said he would look into the matter with Mr Radin. Mr Ting says that he never mentioned anything about delivering up any inventory. As will be seen, in his evidence, Mr Ting says that his understanding was that the instalments were to be paid, one in September, one in October and one in December.

230. In his evidence in chief on 2 July 1996, Mr Ting dealt with this matter in this way -

"Q. And then he says, and his evidence was that this was a proposal from you that upon payment of the first or further instalment, Galco had the right to demand and Kader would immediately comply with such demand, for delivery up of one-third of the Micro Machines inventory.

A. No, that was not the case. I never discussed that - proposed to him. I think it will be very foolish for me to do that, because they had been withholding this payment for a long time, if I just agreed to that, that means they got what they wanted, and Kader was left with the two-thirds remaining unpaid merchandises which we can do nothing about it.

Q. Would you have made such a proposal at any time?

A. No, I would not, no, because Benjamin Chung had already sort of given a proposal to him - Benjamin was feeling that he had already got the approval agreement from Radin. It's only get the final approval from Mark Goldman. So why should I - no - get a worse scenario if I had already got a better one? I mean Benjamin had got a one from Galoob.

Q. By this time, what was the attitude of Mr Goldman when he was speaking to you?

A. He's trying to make the thing, you know, very big, you know, Bouncin' Baby very big, and then it would be very detrimental to Kader if they released this information - very threatening.

Q. Was he speaking softly or in what way?

A. I think a very demanding way.

Q. Politely?

A. Very stern.

Q. Very ...?

A. Very stern."

231. In cross-examination, on 3 July 1996, Mr Ting gave evidence about Mr Goldman's letter of 22 October 1990 -

Q Could I then ask you please to turn to page 138. This was a long letter that Mr Griffiths took you through in respect of certain highlights . The paragraph that I am interested in is the third one on the first page. What Mr Goldman was saying was he was making a specific allegation of two things. First of all there had been an agreement in respect of Micro Machines. Secondly, Kader was refusing to deliver up pursuant to that agreement.

A. That is what he claimed.

Q. When you read this paragraph, you had no doubt as to what he was alleging.

A. Yes.

Q. If you turn on to your response at page 263. What was the purpose of sending this letter?

A. First is to respond to Mark Goldman's letter. I just tell him that he is trying to put the blame on us. I don't agree with what Mr Goldman was saying that we had an agreement in the sense of what he claims.

Q. Was the purpose of the letter in short to deal with various points that Mr Goldman had raised?

A. Yes.

Q. As I understand your evidence, you have been quite adamant there was no agreement between the two companies in respect of Micro Machines along the lines set out by Mr Goldman in his letter of the 22nd.

A. Correct.

Q. It is correct, is it not, that nowhere in your letter of the 29th you asked him what agreement he is referring to, when it was made, who it was made between, or indeed do you say you are wrong to suggest there was any such agreement, that is correct, isn't it?

A. No.

Q. Can you point to me in your letter please.

A. Correct in the sense I did not mention in this letter. But that doesn't mean I agree with what his letter says.

Q. Had this letter also been considered, before it went out, by Mr Kenneth Tsang?

A. Yes, most likely.

Mr Ting makes no attempt to explain why he did not deny, or in any way deal with, the allegation of the agreement by Mr Goldman. There was no misunderstanding in his mind as to what Mr Goldman was saying. If there was no such agreement, and he knew there was no such agreement, it is very strange that he did not deal with the unfounded allegation. This calls for an explanation, and none has been given. It is especially strange that Mr Ting did not deny what was, on his case, a clear mis-statement of the facts in the light of the fact that he believed that Mr Goldman's letter had been "drafted by an attorney". It is also clear, from his evidence and his written reply, that he did not treat Mr Goldman's letter casually. His letter says that he took a "considerable time to read through" it.

Dealing with Mr Radin's note to Mr Goldman of 24 October in cross-examination on 3 July 1996, Mr Ting's evidence is -

Q. What Mr Radin tells Mr Goldman is that "I spoke to Kenneth who seemed either a little confused by your proposal or simply did not want to talk about. However I was able to talk to him about Micro Machines and Baby Talk. I explained to him it did not make any sense for Galoob to make a second payment when Galoob cannot get delivery on the inventory which was paid for. He did not realise the amount we paid was in excess to the 95, 000 cars we asked for and said he would look into it. I also explained the same to M.K. later in the afternoon and he will discuss with Kenneth. There is no way I would pay more after being refused delivery unless they deliver immediately." This document is also shown to Mr M. K. Chan who confirmed, though he couldn't remember the precise date, that Mr Radin had indeed spoken to him about Micro Machines. Did he speak to you about Micro Machines?

A. I do not recall exactly whether he talked to me or not. Because usually I don't talk to Mr Bill Radin for some other reasons. Most likely he did call me on this occasion.

Q. Most likely he did call you?

A. Yes.

Q. In respect of that conversation did you indicate to him that you did not realise that the amount that Galco would pay was in excess of the cars they had asked for?

A. The point is that in the previous occasion during the telephone conversation my understanding is that Galoob had agreed to pay their overdue payment in three instalments, one in September, one in October and one in December. In September Mark Goldman did pay up one third. I was expecting the second payment on October 15th. There is no demand for delivery in the agreement, so I was really puzzled why he asked for the 95, 000 cars or Micro Machines. I think that is what he is referring to.

Q. Are you saying that you do remember the nature of the conversation that you had with Mr Radin?

A. No. I say that it appears that I had talked to him but I do not remember exactly whether I had gone through all these details with him. I am saying that the agreement I have in mind reached with Mark Goldman was the agreement that Benjamin had proposed that first instalment is 15th of September, second instalment in October and the last in December. I think in Mark Goldman's letter to me on the 18th he said that it is a gesture of goodwill that he gave this amount. I don't know how goodwill is that. He has owed me for such a long time. I take it that he agreed with the agreement, so I assume that he will carry out the agreement.

Q. Hadn't Mr Chung told you that although he, Mr Chung, had made the suggestion to Mr Radin, he had not come to any agreement with Mr Radin at all?

A. I think I said yesterday that Galoob had always declined or postponed payment and argued about numbers and after a long time, finally they agreed to a number. They had a problem with payment. There were proposals and counter-proposals. Bill Radin did not object to Benjamin Chung's proposal. He said that he would talk to America, which I assume is Mark Goldman. When Mark Goldman pays the sum, I assume that the agreement has been carried out.

Q. Is the answer to the question that Mr Chung did tell you that he had made the proposal but it had not been accepted by Mr Radin?

A. No. I think Benjamin tells me that his last proposal - Bill Radin will bring it to the States because he is going to the States.

232. It is clear from this evidence that Mr Ting concedes, inadvertently or otherwise, that Mr Radin did ask for delivery of the Micro Machines.

233. Mr Chan Ming-Kwong, a former executive director of Kader and giving evidence on its behalf, said on 25 June -

Q. Well, isn't it right, that towards the end of October, you had a conversation with Mr Radin about delivery of Micro Machines?

A. Yes.

Q. And during that conversation, didn't Mr Radin ask for delivery up of some Micro Machines because part payment, that is the one million-odd, had already been paid?

A. I can't recall exactly what had been said but it's something like that.

Q. And you have confirmed that at least one person, namely Mr Radin, had spoken to you asking for delivery.

A. Yes.

234. I find that there was an agreement as alleged by Galco, that Galco demanded delivery in accordance with that agreement, and that Kader was in breach of the agreement by failing to so deliver.

235. Mr Barlow argues that, if there was such an agreement, it is not enforceable because there was no consideration provided by Galco. I do not accept this. Galco disputed its liability to pay Kader's claim in respect of Micro Machines and, indeed, still does. I accept that the evidence is to the effect that Galco accepted its liability to pay, and that, after some discussion, Galco did not dispute the quantum claimed. On this basis, I would have found that Kader had established its case. But the fact remains that, although Kader had an excellent chance of establishing its claim at the time when the agreement between Mr Goldman and Mr Ting was entered into, at that time Galco's liability was not clear beyond dispute. The agreement settled the dispute in precise terms, and that is sufficient consideration.

236. This claim by Kader is dismissed. Galco has proved the agreement alleged, and its breach. It is entitled to damages for that breach. I grant judgment in favour of Galco for damages to be assessed.

The Overall Result

237. The main claim by Galco is dismissed.

238. The counterclaim by Kader succeeds to the extent I have indicated above.

239. The counterclaim by Kader in respect of the Micro Machines is dismissed.

240. Galco is entitled to damages to be assessed in respect of the failure by Kader to deliver the Micro Machines as agreed.

Costs

241. There is no reason obvious to me why costs should not follow the event. Accordingly, I make an order nisi that Kader have its costs on the main claim by Galco and the counterclaims on which it has succeeded, and that Galco have its costs on the counterclaims that Kader has failed to prove and on the claim in respect of the Micro Machines.