YU CHIU WOON JACKY trading as EVER GAIN (HK) ENTERPRISE V. RAYTRON (H.K.) CO., LIMITED

DCCJ 4087/2010

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 4087 OF 2010

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JUDGMENT

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Introduction

1.  This is a dispute about the sale and purchase of an electronic component commonly known as “Roms”.

2.  The Plaintiff (“Mr Yu”) as the buyer of the Roms with model No. ROM-N338 (“ROMs”), sues the Defendant (“Raytron”) as the seller for the consequential loss in the sum of $532,078 suffered by him as a result of the alleged defective ROMs supplied in 2005. On the other hand, Raytron counterclaims Mr Yu for unpaid purchase price of the ROMs supplied by it in 2007 in the sum of $288,152.

3.  Since the counterclaim is not disputed by Mr Yu, the only remaining and agreed issues for my determination in this trial boil down to:

(1) Whether the ROMs supplied by Raytron in 2005 to Mr Yu were defective?

(2) If so, what are the damages of Mr Yu?

4.  On these issues, Mr Yu and Raytron’s managing director, Paul Cho (“Mr Cho”) and factory manager (“Mr Kim”) gave evidence in the trial.

5.  No expert report was commissioned to examine the alleged defective ROMs for the purpose of this trial. But Raytron has produced 6 reports after testing about 100 ROMs returned to it between late 2006 and early 2007. The content and authenticity of these 6 reports are agreed by the parties. 

Background Facts

6.  At all material times, Raytron was, and still is, a manufacturer of ROMs.

7.  Mr Yu is a former sales staff of Raytron between 2003 and early 2005. At that time, one of Raytron’s clients was Shenzhen Coship Electronics Company Limited (“Coship”). Coship purchased the ROMs for making its digital video broadcasting boxes (機頂盒) (“DVB Boxes”) which enable traditional TV sets to receive digital broadcasting.

8.  In 2005, Mr Yu left Raytron and set up his own trading company. Since then, Coship became Mr Yu’s client. Mr Yu purchased the ROMs from Raytron and then sold them to Coship for a profit. It is not disputed that in 2005 – 2006, over 4.5 million pieces of ROMs were sold by Raytron to Mr Yu for sub-sale to Coship.

9.  Both Raytron and Coship have put in place their own quality control system of the ROMs. On Coship’s side, for each batch of ROMs that were supplied by Raytron via Mr Yu, it would select a certain portion for checking and an AQL report (來料檢驗報告) would be compiled. If the selected portion could not pass the quality check of Coship, the whole batch of the ROMs would be returned to Raytron for replacement.

10.  From the two AQL reports prepared in September and October 2006 and disclosed by Mr Yu, it can be seen that Coship would check the ROMs on the same or the following day after they were delivered to Coship.

11.  Between November 2006 and early 2007, a number of DVB Boxes were returned by its customers to Coship due to failure in receiving signals. It is a common ground that the returned DVB Boxes were made of the ROMs supplied by Raytron in late 2005.

12.  Coship at once made a complaint to Mr Yu who in turn notified Mr Cho of Raytron.

13.  As a result of Coship’s complaint, about 4 meetings were held among Raytron, Mr Yu and Coship to find out the cause of the problem, during which about 100 ROMs (some with DVB Boxes) were given to Raytron for testing (“Returned ROMs”). A total of 6 reports were compiled by Raytron.

14.  Despite various tri-parties meetings and the 6 reports, the problem of the DVB Boxes or ROMs could not be solved satisfactorily. Mr Yu alleged that as a result of the defective ROMs supplied by Raytron, Coship refused to pay for the ROMs that were delivered to it between December 2006 and March 2007 in the total price of $537,150 (but Mr Yu will claim for $532,078 as pleaded or $243,926 after setting-off $532,078 against the counterclaim sum of $$288,152).

The 6 Reports

15.  Raytron has altogether compiled 6 reports as follows:

(1) an analysis report dated 11 December 2006 (“1^st Report”);

(2) an analysis report dated 5 January 2007 (“2^nd Report”);

(3) an analysis report dated 11 January 2007 (“3^rd Report”);

(4) an analysis report dated 1 February 2007 (“4^th Report”);

(5) a QC report dated 23 April 2007 (“5^th Report”);

(6) a technical analysis report dated 23 April 2007 (“6^th Report”)

16.  The 1^st to 4^th Reports were compiled as a result of the complaint about “burnt out” of the IC [integrated circuit]. Fewer than 50 Returned ROMs were tested in these 4 reports (the 4^th Report was compiled after testing on the DVB Boxes together with the ROMs). In gist, it was said in these reports that the Returned ROMs were defective due to “burnt out” of the IC caused by “surge” (ie sudden current) from external source(s), such as excessive voltage or excessive current during assembly. The 4^th Report also gave preventive measures of “surge” by, for example, enhancing the capacity of zener diode [a semi-conductor].

17.  The 5^th and 6^th Reports were compiled after testing of 19 Returned ROMs, the complaint of which was related to “wire opening”. According to the 5^th Report, “wire opening” took place when there was thermal shock during “soldering process”. Thus the 6^th Report explored on the wire bonding methods in order to find out the best solution for better reliability. Altogether, 4 related wire bonding methods were tested, including “normal”, “second ball”, “double” and “new Raytron” (See diagram on p511 of trial bundle). “New Raytron” was found to be the most reliable wire bonding method. Therefore, the 5^th Report suggested that the wire bonding method be changed from “normal” (1 bonding point) to “new Raytron” (3 bonding points) in order to increase bonding ability.

18.  It is not disputed that Raytron has in fact changed the wire bonding method from “normal” to “new Raytron” since or about early 2007 in the manufacturing of the ROMs.

Whether the ROMs were Defective

19.  It is the evidence of Mr Yu that the ROMs supplied by Raytron in 2005 were defective. Essentially, he said that Raytron first tried to put the blame on Coship by alleging that the “burnt out” problem was caused by “surge”. But Raytron finally admitted in the 5^th and 6^th Reports that the real cause concerned wire bonding. He referred to the 5^th Report and explained that by introducing the counter measure of using an improved wire bonding method, Raytron in fact admitted that the wire bonding of the ROMs was defective; otherwise, Raytron would not have changed its wire bonding method. Mr Yu further pointed out that the testing result in the 5^th Report (that by applying 200℃ for 5 seconds on the Returned ROMs, wire opening was found) clearly showed that the ROMs failed to meet their standard specification which allowed maximum soldering condition to be 275℃ for 5 seconds.

20.  It is also the evidence of Mr Yu that Raytron made admission on the defectiveness of the ROMs and wire bonding method by various emails issued by Mr Cho between November 2006 and March 2008, for example admitting that there was no more quality issue from customers since Raytron changed the wire bonding method (an email dated 15 July 2007), or asking Mr Yu to provide related information if quality problem caused any loss in Mr Yu or Coship’s side (am email dated 28 August 2007).

21.  In his closing oral submission, Mr Wong, Counsel for Mr Yu, concedes that there is no primary facts to support the defective allegation in this case.

22.  As a matter of facts, no expert report to examine the alleged defective ROMs is produced by Mr Yu. It is not done because Mr Yu thought that his company was a small trading company and thus should not take up Raytron’s responsibility to prepare any QC report. This is clearly a misconception of Mr Yu because the burden of proof lies squarely on him, not Raytron, to prove that the ROMs were defective as alleged.

23.  Mr Wong, nevertheless, invites me to draw inference from secondary evidence. In particular, he draws my attention to the allegation that after Raytron’s change to a new wire bonding method, the “wire opening” problem has subsided, and that Raytron did not consider or review its own manufacturing process but just put the blame on Coship’s soldering process.

24.  I should begin by noting that despite Mr Yu’s evidence that the 5^th Report contained admission of defectiveness of the ROMs, it was submitted for him that “the 5^th Report seemed to say the soldering process of Coship created the problem”. On a closer reading of the 5^th Report (as well as the rest of the 6 reports), I cannot see any alleged confession or admission by Raytron that the ROMs were defective.

25.  The testing done in the 5^th Report by applying heat of 200℃ for 5 seconds on the Returned ROMs can merely show that the Returned ROMs (only 19 of them) were defective, which is a sea difference to saying that all the ROMs supplied by Raytron in 2005 were defective or did not conform with their standard specifications (the standard specifications are agreed by Counsel for both sides as to the content and authenticity) (see p443 to 488 of trial bundle).

26.  In fact, Mr Cho (whom I found to be honest and truthful) has explained in his evidence that these 19 Returned ROMs were likely to have been damaged during Coship’s soldering process by overheating (ie by applying heat of about 300℃ which was more than the maximum heat endurance stated in the standard specification) which, according to his years of experience, was common in Chinese factories.

27.  Further, even if the Returned ROMs were tested and found to be defective, the evidence is not clear as to whether the ROMs were defective during Raytron’s manufacturing process, or during Coship’s production process, or at any other stages from the production of the ROMs to the usage by the end-customers. And in my view, it must be the burden of Mr Yu to prove that the ROMs were by themselves defective during Raytron’s production; it is not for Raytron to show the otherwise.

28.  Hence, the fact that Raytron did not review its own manufacturing process of the ROMs cannot possibly be interpreted as a piece of evidence against Raytron, least to say that it tried to conceal the truth as submitted by Mr Wong.

29.  On the other hand, the fact that Raytron has changed its wire bonding method from “normal” to “new Raytron” since or about early 2007 is not conclusive in showing that the “normal” wire bonding method must be defective. As explained by Mr Cho, the industry standard is to use “normal” wire bonding method and this is the method still adopted by many Roms manufacturers in the industry nowadays. Mr Cho further added that the change of wire bonding method was only for improvement or upgrade of the reliability of the ROMs, which Raytron has constantly worked on. In fact, as at the trial, Raytron has further improved the wire bonding method and no longer used “new Raytron” wire bonding. I accept such evidence of Mr Cho, for he gave his evidence in a clear and direct manner without hesitation and convolution.

30.  As to Mr Yu’s allegation of Raytron’s admission in various emails, my view is that these emails must be read in context and against the background under which they were written. And when that done, I do not see any admission of fault on the part of Raytron as alleged by Mr Yu in any of these emails. Further, Mr Cho was able to give a direct and satisfactory explanation (which I accept) on these emails. For example, in the emails respectively dated 28 August 2007 (where he wrote, “If Quality problem caused any loss in your or your customer side, please provide me related information. I will compensate it as much as I can.”) and 28 March 2008 (where he wrote, “I am really sorry if Coship delayed the payment in related with our Quality problem”) (emphasis added), he explained that Raytron would compensate Mr Yu only if the ROMs were defective. But he added that he was confident with the quality of the ROMs. In my view, the ordinary and natural meaning of the emails clearly points to a hypothetical scenario; nothing close to an admission can be read from them.

31.  Pausing here, I would add my observations on Mr Yu’s evidence at this stage. Mr Yu does not impress me as an honest and credible witness. He was very evasive when he was questioned on why despite Raytron’s repeated request by emails, he did not ask Coship to return the alleged “dead stock” of ROMs to Raytron or did not provide Coship’s official letter to prove damages.

32.  Further, his evidence is constantly shifting, inconsistent and contradictory. Take for an example, he at first denied providing any view as to how the 6 reports (prepared by Raytron) should be written, but later changed to say that he did not participate in the content of the reports but just commented that the photographs in one of the reports were not sufficient. He changed yet again to give a 3^rd version of evidence that he did give advice on how the report(s) could be better written.

33.  For another example, he stressed repeatedly in his oral evidence that both Coship and he were the victims of Raytron’s defective ROMs and that Raytron was irresponsible for not even making any suggestion/offer as to how to solve the defective problem, despite that the 5^th Report (dated 23 April 2007) showed that there were defects in the ROMs. If that was true, it remains unexplainable and inherently implausible why he would help Raytron to get hold of a “good” SGS report (a testing report done by an independent testing laboratory) (see his email dated 22 May 2008), especially when it was his written evidence that he knew Raytron’s alleged intention of obtaining a SGS report was to evade its liability (see para 53 of his 1^st witness statement).

34.  Last but not the least, I should say something on the AQL reports. Two AQL reports prepared by Coship’s QC department are produced as evidence by Mr Yu in this trial to show that some of Raytron’s ROMs supplied in September and October 2006 (not related to this case) were defective. Yet, no such AQL reports in respect of the alleged defective ROMs supplied in 2005 is disclosed by Mr Yu. In the cross-examination, Mr Yu explained that there was no AQL report in respect of the defective ROMs and there was no need to give the same to Raytron because in the past, whenever Coship said the ROMs were defective, Raytron would take back the ROMs. He added that the defective ROMs of this case were already installed into the DVB Boxes and thus there was no such information.

35.  I find the above explanation of Mr Yu unacceptable. An AQL report showing defects in the ROMs in questions is no doubt a piece of direct and primary evidence to support his case. It should have been easily obtainable by him from Coship. Further, I cannot see Coship would refuse to give it to Mr Yu because, as Mr Yu clarified in his evidence, whenever Coship said the ROMs were defective, Raytron would take back the ROMs.

36.  In my view, the fact that no AQL report in respect of the alleged defective ROMs was produced shows that it is more likely than not that the ROMs were not defective when the same was delivered to Coship in 2005 and tested by its QC department.

37.  For the matters aforesaid, I do not believe in Mr Yu’s evidence. I find Mr Cho and Mr Kim (whose evidence is not challenged by Mr Wong at all) honest and credible witnesses. I accept their evidence. It also becomes clear that there lacks any so-called secondary evidence to support Mr Yu’s claim that the ROMs were defective. It follows that the ROMs supplied by Raytron in 2005 were not defective.

Damages to Mr Yu

38.  Since I have ruled that Mr Yu has failed to prove that the ROMs supplied by Raytron were defective, it follows that he should not be entitled to any damages.

39.  But in case (just assumed) that I was wrong in my above findings and that Mr Yu had succeeded in proving defectiveness of the ROMs, should he then be entitled to damages?

40.  One should note that Mr Yu is not claiming in this action for refund of the purchase price of the alleged defective ROMs supplied in 2005; rather he is claiming for price of those ROMs supplied to Coship in January to March 2007 in the amount of $537,150 (but Mr Yu will claim for $532,078 as pleaded) that Coship had withheld payment to him. He explained in court that among the said sum of $532,078, Coship had confirmed that $172,162 worth of ROMs (representing 156,511 pieces) were defective. But he has no idea if the balance, ie $359,916 worth of ROMs, were defective or not.

41.  Mr Wong quotes me section 55(2) and (3) of the Sale of Goods Ordinance, Cap 26 and Bence Graphics International Ltd v Fasson UK Ltd [1998] QB 87. He submits that where the goods in question would be used in making another product to be sold on, the prima facie method for assessment of damages (namely the difference between the value of ROMs at the time of delivery and its true value if without the quality problem) should be displaced. He further adds that as Mr Yu and Raytron both contemplated that the ROMs were delivered to Coship for manufacturing DVB Boxes, Coship’s deduction of any amount owed to Mr Yu is a foreseeable consequence if quality problem arose.

42.  Putting aside the above submission on “foreseeable consequence” (which in fact I have grave reservation on) and even it was assumed (just assumed) that it was a foreseeable consequence that Coship would deduct any amount owed to Mr Yu if defective ROMs were found, it is my judgment that Mr Yu has failed to prove his damages.

43.  Up to this trial, Mr Yu has not produced any evidence to show that the alleged deduction of $532,078 was made by Coship, despite repeated demands made by Mr Cho in his emails from June 2008 to November 2009 requesting for an official letter from Coship to prove the said deduction. All Mr Yu had sent to Mr Cho was a commercial invoice and a debit note both dated 16 June 2008 in the sum of $532,078 and $172,162 respectively but issued by Mr Yu himself only, together with a dead stock cargo table allegedly given by Coship (see pp 195 to 197 of trial bundle).

44.  It goes without saying that the commercial invoice and the debit note are just self-serving and bears minimal, if any, weight.

45.  Even more so, Mr Yu’s oral evidence on these documents is totally unbelievable. It was recorded in the debit note that defective cost of Coship would be charged in the next “statement”. When asked by court on the “statement”, Mr Yu confirmed that there were monthly statements issued between Mr Yu and Coship by emails. He said that in the monthly statement of February 2007, the balance was zero. When asked if the balance was zero, how he could know that Coship had deducted $532,078 from the amount owed to him. He said that Coship had by email told him to add up all outstanding invoices and the total sum would be $532,078. Yet when asked why this monthly statement of February 2007 and this email of Coship was not disclosed or sent to Mr Cho, Mr Yu conveniently resorted to the excuse that the monthly statement was misplaced several years ago.

46.  I do not find this answer plausible, for it was also Mr Yu’s evidence that only the print-out copies of the email/monthly statement were misplaced; the “original” copy were still retained in his computer undeleted. If that was the case, it remains unexplainable and impossible that they were not disclosed. In fact, Mr Yu was unable to provide any answer on this point.

47.  For the matters set out above, I do not believe in Mr Yu’s evidence on damages. I find that he fails to prove that Coship had deducted $537,150 or any part of it from the amount due to him.

Conclusion

48.  Due to my above finding on liability, I will dismiss Mr Yu’s claim against Raytron.

49.  I will enter judgment for Raytron in respect of its counterclaim in the sum of $288,152 together with interest thereon at judgment rate from the date of Writ to the date of judgment and thereafter at judgment rate until payment.

50.  Costs should follow the event. I will make a costs order nisi that Mr Yu do pay Raytron’s costs of this action, with certificate for Counsel, to be taxed if not agreed. If no application is made to vary the costs order nisi, it will become absolute within 14 days from the date of this judgment.