Aqua-leisure Industries Inc. and Another v. Champ Fair Manufactory Co. Ltd.

HCA004819/1992

HCA8833/1991

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.8833 OF 1991

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(CONSOLIDATED PURSUANT TO THE ORDER OF
MASTER CANNON DATED 6 APRIL 1993)

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Coram: Deputy High Court Judge Muttrie in Court

Dates of Hearing: 7 - 10 May 2001

Date of Judgment: 30 May 2001

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J U D G M E N T

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Background

1. Aqua-Leisure Industries, Inc. ("Aqua") is a supplier of swimming and diving gear and accessories and Greyland Trading Ltd. ("Greyland") is its Hong Kong subsidiary. They are the plaintiffs in both the consolidated cases.

2. Champ Fair Manufactory Co. Ltd. ("Champ Fair"), is a manufacturer of swimming and diving gear and accessories. Mr Lo Shing Ching ("Mr Lo") is its major shareholder and director. He effectively owns it. He also effectively owns Funmakers International Ltd. which was incorporated in August 1991.

3. Between 13 January 1989 and 7 September 1991, Mr Lau Chun Ming, Stephen ("Mr Lau") worked for Greyland.

4. Aqua, Greyland and Champ Fair had on 22 March 1986 entered into a written manufacturing agreement whereby Champ Fair was appointed authorised manufacturer of some of the plaintiffs' products for a period of 7 years. Under the agreement, Champ Fair agreed not to manufacture, disclose or deal with the plaintiffs' designs and to manufacture the products exclusively for the plaintiffs, and not to sell the products directly, or in competition with the plaintiffs.

5. A dispute arose in late 1991 when the plaintiffs complained that Mr Lau and Mr Lo got together to set up in competition against them and "poach" their business. They found out that Mr Lau and a Mr Ardan To were sending faxes to some of their customers and competitors soliciting business away from Aqua and Greyland and stating that they were having quality control and shipment problems.

6. Accordingly the plaintiffs raised the action HCA8833/1991, seeking, inter alia injunctions and damages against Mr Lau and Funmakers. They obtained an Anton Piller order on 16 November 1991 and executed it two days later at the offices of Funmakers. In January and February 1992, Mr Lo approached Aqua to try to settle this action. However this was not successful. Eventually he was added as the third defendant in that action.

7. In the meantime, Champ Fair continued to supply goods to the plaintiffs, although according to the plaintiffs the defect rate on the products supplied had been high. They say that they had been receiving complaints and returns of defective goods from their customers since June 1991. Champ Fair continued to supply goods until the end of April 1992.

8. On 17 July 1992 plaintiffs raised the action HCA4819/1992 against Champ Fair, in which they averred that Champ Fair had sold and supplied to Funmakers and/or Mr Lau products the same as or similar to some of the plaintiffs' models, contrary to the exclusivity clause in the contract. They claimed damages for breach of contract and an injunction. On 14 September 1992, Champ Fair filed a defence and counterclaim. It pleaded that that the products it had made were not the subject of the Agreement and that the 1st plaintiff had repudiated the contract by non-payment of invoices for goods sold and delivered, amounting to HK$1,403,474.30. It did not at this stage claim payment, but only a declaration that the contract had been repudiated. The plaintiffs at this stage admitted that some goods had not been paid for, but claimed set-off against the damages it claimed for breach of contract.

9. There were some negotiations between Champ Fair and Aqua for renewal of the contract which was to expire in March 1993 but they were unsuccessful. The two actions were consolidated. They were set down for trial in November 1994. However, Mr Lo consented to judgment against him in HCA8833/1991 for injunctions and damages to be assessed. Judgment was also entered against Mr Lau. In HCA4819/1992, Champ Fair consented to judgment for an injunction and damages for breach of contract to be assessed. The matter was then to go forward for trial of the plaintiff's claim for damages for breach of contract.

10. On 20 December 1994 Champ Fair filed an amended defence and counterclaim adding a prayer for payment of HK$1,403,474.30 on the unpaid invoices. The plaintiffs filed an amended reply and defence to counterclaim particularising the losses they claimed by reason of defective goods supplied and claiming set-off. On 31 January 1998 Champ Fair filed a re-amended defence and counterclaim, and on 10 February 1998 the plaintiffs filed a re-amended reply and defence to counterclaim, adding a counterclaim to the re-amended counterclaim.

11. The upshot of all this is that the plaintiffs now have in HCA4819/1992 a judgment for damages for breach of contract to be assessed; the defendant is counterclaiming against that for HK$1,403,474.30 on the unpaid invoices; and the plaintiffs are counterclaiming against the counterclaim for loss of profits plus freight and handling costs plus damages for loss of business and goodwill. It is all rather unwieldy so far as the pleadings go but in simple terms the plaintiffs have not paid the defendants for goods worth HK$1,403,474.30 and now have to establish their counterclaim against that. Leaving aside the question of damages for loss of profits and goodwill, the final figure prayed for in the counterclaim to counterclaim is US$200,932.50. However, this appears to be an error because the total pleaded in paragraph 4A is US$209,105.31 and this is the figure given in evidence. I take it that the counterclaim is for the latter figure.

The issue

The issue is whether and to what extent Champ Fair supplied defective goods to the plaintiffs, and if it did, whether the plaintiffs are entitled to the damages claimed.

12. The plaintiffs' case is that in mid-1991 the defendant was the sole supplier to them of eight products, specifically five varieties of swimming mask, a set of diving sticks (weighted batons for children to dive for in a swimming pool game), a set of swimming rings and a pool basketball game. From mid-1991 the defendant supplied large numbers of defective goods, either to Aqua's warehouse in the USA for sale from there, or directly to Aqua's customers. Many defects came to light when the ultimate consumers got the products. They were returned to Aqua. The returned products were worthless. Aqua had to bear the cost of the returns and recompense their customers directly or by giving credit or discounts against future sales. They also lost business and goodwill because of the returns.

13. The defendant's case is that no, or very few defective products were supplied, and the plaintiffs' whole claim is false. In effect it is a made-up claim which only came into being after the negotiations to continue the business relationship had broken down. There were very few complaints before that and they were dealt with in the normal course of business.

14. There is also a time-bar defence which arises from the fact that the defects were only pleaded in the amendments dated 10 February 1998. The defendant says that any claim arising from defects discovered more than six years before that date would be time-barred.

15. It is necessary to look at the plaintiffs' evidence carefully. It often happens that a claim for payment for goods sold and delivered will be met by a defence and counterclaim for goods not of merchantable quality, which only surfaces after the writ has been issued, is supported by no believable contemporary documents, and ultimately turns out to be totally bogus. In this case, the allegation of goods not of merchantable quality did not surface until some time after the writ was issued. That is why I have set out the history of litigation at such tedious length. No doubt Champ Fair and Mr Lo were dishonest in their dealings with the plaintiffs over Funmakers and the obviously dishonest Mr Lau, and as will appear below, I do not find Mr Lo a credible witness but I still have to be satisfied on the balance of probabilities that the plaintiff's claim is genuine before any order can be made in its favour.

Evidence

16. The evidence for the plaintiffs comes from Mr Paul Hoiriis and Mr Samuel Berenson. Mr Hoiriis is the Chief Financial Officer of Aqua and Mr Berenson is its President.

17. Mr Hoiriis joined Aqua in 1993, so he could not give any direct evidence of what happened at the relevant time. However, he said that he had been through the company's financial records and extracted the information which he was putting forward in his evidence. He also said that he was familiar with the company's workings, including those of the refurbishment department, and with the procedures for dealing with returned goods.

18. He said that Aqua's business season runs from May to May. Marketing starts in May; orders come in at the end of the year and in the beginning of the next year, the bulk of the goods are shipped to the customers, with a view to retailing them for the summer. The goods are retailed by various retailers including large chain stores in the USA such as Wal-mart. Some goods are shipped direct to these customers through Greyland, using letters of credit. Some are shipped to the Aqua warehouse at Avon, Massachusetts for domestic sales from there.

19. If goods are alleged to be defective and returned by a customer they are checked by Aqua's refurbishment department to see if they can be fixed. What cannot be fixed is recorded as "merchandise thrown away". It is worthless. This process was in 1990 and 1991 done by two ladies named Cathy Baker and Diane Fisher; the latter is still with the company.

20. Mr Hoiriis produced two sets of "merchandise thrown away" sheets, one for 1990-1991 and the other for 1991-1992, which he said had been produced by these ladies. The sheets were produced monthly and showed the model numbers of the goods returned and the major defects in them.

21. He said that when defective goods were returned, the customer would have to be compensated for the cost it had paid for them. This would be done either by a debit memorandum against a later order, which might be for unrelated items, or by a general discount on goods supplied in the following season, or in a relatively small number of cases by direct cheque payment. The customer would also demand "re-stocking charges" to cover their cost of processing the goods returned to them by the retail customers, and returning them to Aqua and these would vary between 5% and 15% of the cost of the goods. Aqua would also have to pay their return freight costs, and bear its own costs of processing and disposing of the defective goods.

22. Mr Hoiriis was not in a position to prove each and every item of debit or payment, though he did produce some samples to show how the system worked. He had however worked out from the actual records of "merchandise thrown away" what the returns shown thereon had cost Aqua. This was a rather complicated process.

23. Basically Aqua would not know which returned goods had been supplied from Greyland directly against letters of credit and which had been supplied domestically from the Avon warehouse. So Mr Hoiriis had developed a weighted average from the statistics of the proportions in which the various different goods were supplied, whether directly or through the warehouse, to the major retailers and applied this to the total figures of "merchandise thrown away". He then applied the weighted average to the various goods to estimate the percentages supplied directly and domestically. The sale prices were different; for those supplied domestically the cost of shipping to Avon would have to be added, whereas those supplied directly would be charged F.O.B. Hong Kong. He applied these different sale prices accordingly, and he also added an further elements for return freight costs, customer handling charges and internal handling costs.

24. The resulting loss of gross profits, according to his calculations, came to a figure of over US$64,000 for 1990/1991 and over US$105,000 for 1991/1992 and to these were added the figures for freight costs, etc., up to the sum sued for on the counterclaim.

25. Mr Hoiriis was cross-examined at some length. In particular he was asked about examination of the goods either at the factory or Greyland's warehouse, and the possibility of damage to goods in transit. According to him examination of the packed goods would mainly be external; there would not be any significant examination of the goods themselves, once packed. As to damage he thought this unlikely given the manner of packing the goods.

26. He was also asked about the various fax messages which passed between Aqua and Champ Fair in 1990, complaining about defective goods. The defendant's position is that fax messages from the Chairman and Managing Director of Aqua, a Mr Fireman, complaining about defective goods in 1990, were never received by Champ Fair. The copies produced by Aqua are different in format from other copies, in particular those dealing with the matter of "poaching" by Funmakers. The complaints about defects are on plain paper and appear to come from "Mr Fireman" whereas the others are on letter-headed paper and bear to come from "The Honorable Simon Fireman". (Mr Fireman is apparently entitled to this honorific because he has held a U.S. presidential appointment.) The defendant's position is that the plain paper faxes were never received, and the copies must have been made up after the event to support the plaintiff's case.

27. It is of course unfortunate that Mr Fireman, who is still with Aqua, did not give evidence. Mr Hoiriis, who was not with the company at the relevant time could not really assist save by giving general evidence that in his experience faxes could be sent on plain or headed paper, depending on which assistant was sending them.

28. Mr Berenson adopted a statement which covered facts about the plaintiff companies and their business generally as well as the defective goods and the alleged loss of business and goodwill which it caused. In particular he mentioned defective goods returned from the customers Canadian ABC, Canadian Tire Corporation Ltd., Kay Bee Toys, J.C. Penny, McKesson, Toys-R-Us, Wal-mart, Fred Meyer Inc. and Target Stores.

29. He stated in his statement that Aqua had lost all business with one of Canadian ABC's outlets, as well as Kay Bee Toys, J.C. Penny, McKesson and Wal-mart. They had lost some business from Fred Meyer Inc. and Target.

30. However, he said in his oral evidence that he wished to clarify this and said that it was not wholly accurate. There was a drop in business, and complaints, and customers who threatened to withdraw their business; but there were a number of reasons for this, which were difficult to distinguish and he could not say for certain that the problems were caused entirely by the supply of defective goods by Champ Fair.

31. He said that Champ Fair had first started producing goods for the plaintiff in about 1985, and in 1990 to 1992 was the only supplier of the eight models concerned in this case. When customers had told him that they were being offered the same products more cheaply, he said that by a process of elimination, these had to come from Champ Fair because only Champ Fair had the moulds to make them.

32. He gave evidence about complaints received from a large number of customers. He identified various correspondence between complaining customers and himself, and between himself, Steven Lau and Champ Fair at the relevant time. He said that the documents referred to in this case were pretty much what his company could find. They had moved location in 1992 or 1993.

33. Mr Berenson said that when Aqua had trouble with defects in goods produced by Champ Fair, he was the one who handled the customer complaints as they came in. Mr Fireman, who was the Chairman and Managing Director, would handle faxes going to the Orient, including to Champ Fair and Steven Lau. He said that he had certainly sent the fax messages which went out under his name, both to Mr Lo at Champ Fair and to Mr Lau, and he characterised as "hogwash" the suggestion that those sent under Mr Fireman's name were never sent.

34. As to why some faxes were on letter-headed paper and others on plain paper, he said that there was no particular reason for this. It depended on who sent them. He said that when his office put the fax through the computer it would often be printed on plain paper and sent with a cover sheet.

35. He also spoke to the system in use in the refurbishment department, which he had had a hand in setting up; and explained the meaning of the various defects recorded in the "merchandise thrown away" sheets.

36. Cross-examined, Mr Berenson confirmed that there had been a system of quality control which covered among others Champ Fair; there were girls going from factory to factory doing spot checks. Normally the buyers would not inspect the goods. Re-examined he confirmed that mostly, inspection done for inspection certificates was merely external, to check the carton, labelling and total quantity. He explained the method of packing goods which involved boxes within boxes, blister packs, shrink packs and the like.

37. He was also asked at some length, in cross-examination and re-examination about a fax sent from Mr Fireman to Mr Lo of Champ Fair following the discovery of the "poaching" exercise by Funmakers. At this time the parties were trying to keep a business relationship going. The fax refers to "switching" some orders for three particular models, on which the plaintiffs say there had been many defects, to Champ Fair. Obviously this suggests that Champ Fair was not the only maker of these products; but Mr Berenson said that it could not have this meaning because Champ Fair was the only maker.

38. For Champ Fair the only witness was Mr Lo. He said that Champ Fair had a factory in China with 400 workers and 100 managerial and other staff, which was making about 10 products for Aqua and Greyland at the relevant time. He had set up Funmakers in 1991 and the plaintiffs had obtained an injunction against it. After that there had been a lot of correspondence between them. He referred to the various faxes, and said that he had admitted his wrongdoing. He had been asking for a long term business relationship. There was indeed a question, at that time of switching production of some masks to Champ Fair, which was not the sole manufacturer of them. He named four other companies which, according to him, had been making these same masks for the plaintiffs. He also referred to correspondence between himself and Mr Fireman at this time, about payment due to Champ Fair; and indeed it appears that in some faxes, payment was promised.

39. Turning, however, to the faxes on plain paper, he denied that he had ever received any of them. This included those under Mr Fireman's name, and those under the names of Mr Berenson and another officer, Mr Housman. He accepted that there had been some defects in the goods Champ Fair produced but he said that these were very few.

40. It appears that he had received a fax from Greyland dated 14 April 1992 demanding replacement free of charge of defective items. He was prepared to do that, but he had sent a reply to denying defects, explaining the quality control system and suggesting that some other factory's goods were misconceived to be those of Champ Fair.

41. He was cross-examined at length. After some hesitation he admitted that he had set up Funmakers to compete with Aqua and Greyland. He would not admit that he had invited Steven Lau to leave Greyland and work for him. He admitted that Lau had worked for him in Greyland, but only on commission. He could not explain why Funmaker's headed paper, used by Lau in sending out various faxes, bore the same fax number as Champ Fair's but a totally different address; he said that Lau had in fact been working out of Champ Fair's Tuen Mun office where the fax line was, but he did not know anything of what Lau had been up to in sending messages to competitors and customers of the plaintiffs.

42. Overall his evidence was that everything that had been done through Funmakers was Lau's fault; he had not planned it with Lau; he had only condoned what was happening. He thought, because of this, that he should be responsible.

43. He was asked about quality control. He said that after Champ Fair had finished producing the goods, Greyland would come and inspect about 25% of the goods by taking them out of the packaging to inspect the individual items. To do this, they had to tear open the cartons. They were not simply inspecting the packaging for quantity and labelling. After this exercise Champ Fair would pack up the inspected goods again.

44. He was constrained to admit that some of his messages to Aqua contained lies; in particular those where he denied (in late 1991) supplying goods to Lau and Funmakers. He agreed that in 1992, when the plaintiffs and the defendants were still negotiating with a view to carrying on their business relationship, he had still been representing that he as not really involved in the wrongs perpetrated by Lau in the name of Funmakers, but that he had eventually "come clean".

45. He was taken through the various plain paper faxes and denied receiving any of them. He said that he would only have had to replace about 500 items a year. Later in cross-examination, however he effectively increased this figure. Shown a fax to Mr Fireman dated 19 August 1991, in which he appears to have admitted that there was a problem with two particular models of mask, in reply to faxes from both Mr Fireman and Mr Berenson complaining about these models, he was constrained to admit that there was some problem; and there had been discussions about making new moulds for them.

46. He maintained that he had not been the sole supplier of two models of mask out of the eight concerned in this case. It appears that the basis for this was what he was told by another manufacturer, whom he identified; but there is no better evidence than that.

47. There were various other instances where Mr Lo could not or would not explain matters satisfactorily under cross-examination. I do not think it is necessary to detail any more of them here.

The contemporaneous documents

48. It is necessary to look at the contemporaneous documents relating specifically to defects. In 1991 this began on 3 June with a plain paper fax from Fireman to Lo complaining of a high defective rate on the products. This was followed three days later by a fax from Fireman to Lau at Greyland about customer complaints of leaking masks, and a further fax from Fireman to Lau on 17 July complaining that Lau was "shielding" Lo.

49. There then appears a fax dated 19 July from a customer, Fred Meyer, Inc. to Berenson stating that all E1500 masks are to be returned as defective. There is a fax from Target Stores to Berenson dated 26 July complaining of leaking masks, model E1503. Both of these are on the headed paper of the sender. These are followed by faxes dated 30 July from Berenson to Lau and Lo passing on the complaints.

50. Then at the beginning of August there is a fax from Fireman to Lau estimating defective losses at US$50,000 plus additional costs and stating that he finds Lau's excuses for Lo to be suspicious. At the same time there is a fax - on headed paper - from Berenson to a customer, Bradlees, agreeing to accept the return of large numbers of defective items of five different models and give 100% credit plus return freight and handling charges.

51. On 14 August there is a plain paper fax from Berenson to Lo complaining of customer complaints being at an all-time high in respect of several different items. On the same date Berenson complains to Lau and Lau replies saying that Lo will take care of defective items with replacement or credit.

52. Significantly there appears a fax from Lo to Fireman, dated 19 August 1991, on Champ Fair letterhead paper, stating that he will accept defective products and fix defects in the mould for the masks model nos. E1500 and 1503.

53. Further correspondence ensues between Fireman and Lau, in which Fireman question's Lau's loyalty. As I have noted, Mr Lau left Greyland on 9 September 1991.

54. There follows a fax from Fireman to Lo stating that the losses on Champ Fair's defective items could be as high as US$50,000 and demanding immediate attention. This is dated 25 September 1991.

55. Chronologically there followed various faxes from Funmakers and Mr Lau attempting to "poach" business and the obtaining and execution of the Anton Piller order. Then on 7 January 1991 there appears a fax from Richard Housman of Aqua to Lo of Champ Fair providing a summary of defective problems with Champ Fair products, quantities and costs involved.

56. In late 1991 and early 1992, the various messages on headed paper passed from Fireman to Lo, as well as from Lo to Fireman, regarding attempts to settle the dispute between them and carry on business as before. In these, Fireman promises to pay outstanding invoices from Champ Fair.

57. At this time also there is the mention of "switching" production, which was the subject of cross-examination of Mr Berenson as well as argument. On 31 December 1991 there is a fax from Lo to Fireman in which Mr Lo expresses regret for what happened with Funmakers and promises not to sell Aqua's products to anyone else. He hopes for "more business especially on Item E1100, E1180 and 1195 as Champ Fair had shared 50% of the mould cost with ALI (Aqua)".

58. Fireman's reply on the same date indicates that he has "contacted Greyland to give you additional business with Items E1100, and E1180" and states that he has given Champ Fair all his orders for Item E1195. Then on 3 January 1992 Fireman writes:

"We are reviewing our orders on E1100, E1180, E1195 and will be switching some of these orders to you, per your request".

59. Plain paper messages about defects begin again in April 1992. On 14 April there is a fax from Greyland to Champ Fair (on headed paper) setting out a list of defective products from Champ Fair for that season and giving specific model numbers. This is followed by a fax from Lo on the same date querying the complaint and suggesting that products made by others have been mistaken for those made by Champ Fair.

60. In May 1991 there appear complaints on headed paper from the customers Wal-mart and Toys-R-Us to Aqua specifically complaining about the mask model no. E1500 and some other items. In June there are complaints from the customers Caldor and Cotter. There are replies from Berenson to all of these, all on headed paper, as well as a reply to a customer Bradlees listing specific model numbers and items of which return is accepted.

61. On 26 June 1991 there is a fax from Fireman to Lo complaining of defects generally and stating that Aqua will continue to hold back open invoices until all problems are resolved to their satisfaction.

62. Then on 9 September 1992 there appears a fax, again on plain paper, from Housman at Aqua to Riley at Greyland listing defects in Champ Fair products and instructing the withholding of US$50,351,33 in respect of them, plus US$31,183.42 in respect of defective products in 1991.

Evaluation

63. So far as the plaintiffs' evidence is concerned, both Mr Hoiriis and Mr Berenson appeared to be believable witnesses.

64. Mr Hoiriis' evidence of the losses is, essentially, based on estimates, but he seems to have been very thorough and fair in the making of those estimates; he did not go for the highest possible figure but worked out the averages of what was referable to direct sales, and what to domestic sales, and applied prices based on averages of what various customers had been paying. His whole approach seemed reasonable, assuming of course that the defects existed in the first place and bearing in mind that he only came on the scene later.

65. I note that his estimates come to more than double those estimated at the time, particularly in the fax dated 9 September 1992, referred to above. However this is perhaps not too surprising given that it is not clear how these latter figures were arrived at whereas Mr Hoiriis was working from specific records and according to a specific system which he has explained.

66. Mr Berenson was quite forthright in his evidence and admitted that he could not really establish the claim for loss of business and goodwill with any certainty. He was with Aqua at the relevant time. He can speak directly to some of the faxes, which were sent out under his name, and some of the correspondence between himself and various customers. He can also say from his own knowledge what items were produced solely by Champ Fair.

67. It is unfortunate that Mr Fireman has not given evidence. There has not even been an attempt, so far as I can see, to have a statement from him introduced under the old rules as to hearsay, on the basis that he is beyond the seas. As the author of the faxes which, on the plaintiff's case were sent to Champ Fair complaining about defects - and there are several of them, couched in strong terms - his would have been the best evidence. In particular he would have been able to explain why he mentioned "switching" production to Champ Fair of certain masks, which Mr Lo says were not all made by Champ Fair. He would have been able to explain why, in all the faxes he sent on headed paper about the Funmakers matter and the possibility of continuing the business relationship, there was no mention of defects.

68. The mention of "switching" does at least raise suspicion that Mr Lo may be telling the truth when he says that he was not the sole supplier of two of the items mentioned. Having said that, it seems to me that the mention of "switching" does not necessarily mean switching from other suppliers, when one looks at the earlier fax which simply mentioned giving Champ Fair additional business on two of the items mentioned. Further Mr Lo was claiming that the two companies had shared the cost of the mould. There is no further explanation about this but it seems unlikely that, if Aqua shared the mould cost with one supplier it would get the same product for another. If it had to share the mould cost again with another supplier that would be uneconomical. If the other supplier bore the mould cost then it would be uneconomical not to give the full production to that supplier.

69. Mr Lo's evidence that other suppliers told him they were also making the same products for Aqua is hearsay. It is not supported by any witness or document.

70. It is also unfortunate that the plaintiffs have not brought Diane Fisher, the author of some of the "merchandise thrown away" records who is still working for them. The records are the subject of a hearsay notice which specifies that she is beyond the seas but it does seem a little surprising that no statement is forthcoming. Better still, of course, would have been her presence. It would not have cost too much in this day and age to bring her as well as Mr Fireman to Hong Kong for the trial.

71. The "merchandise thrown away" records however look normal enough, and appear to have been written at different times, by different people and in different inks, during the months for which each one is dated.

72. I accept Mr Hoiriis' evidence that he found these among the company records. There is nothing concrete to suggest that they might have been made up fraudulently for the purposes of this action. I accept that they are a true record of merchandise thrown away in the relevant periods.

73. I accept Mr Berenson's explanations as to how the company sent out some faxes on letterhead paper and some on plain. It is normal enough for persons sending faxes to waste paper on A4 fax cover sheets. These are not the only copy faxes in the bundles which are written on plain paper; for instance those from Aqua to Greyland were similar. It could well be that those on headed paper were intended to be more formal. Certainly the language used in some of the plain paper faxes is more straightforward and there is some use of slang and blunt, if not bad language to drive the point home.

74. I have no hesitation in accepting his evidence of the complaints which he received from the customers. It is of course true enough that one can easily make a forgery with a fax machine. I recently had to decide a criminal case in which the accused had done just that. However, having seen and heard Mr Berenson, I do not think that happened here. I further accept his evidence of the faxes sent under his name to Mr Lo and Mr Lau complaining in turn of these defects.

75. I also accept his evidence that Champ Fair was the sole supplier of all eight items which are the subject of the plaintiff's claims.

76. Turning to the evidence of Mr Lo, it is quite clear that he acted dishonestly over the matter of Funmakers and the "poaching" of the plaintiffs' business. He really cannot deny this, much as he tried to play down his role. His evidence was in my view far from forthright. The whole tenor of what he said under cross-examination was evasive. Though he denied that there had been any serious defects, his estimate of the number varied and he really cannot explain away the fax from Greyland requiring specific replacements, or his fax of 19 August 1991 to which I have referred.

77. Overall I find that Mr Lo's evidence is not credible. In particular I do not believe him when he says that he never received the faxes from Mr Fireman and Mr Berenson, the copies of which are before me. I also do not believe his evidence that other suppliers were making the same products for Aqua.

78. Nor do I believe his evidence that Greyland would have sent inspectors to Champ Fair had 25% of the goods taken out of their packaging for inspection. It is true that the plaintiff's witnesses have accepted that there would have been some inspections but they say that there would have been external only. This makes sense. Stripping out 25% of goods from blister or shrink packs, within boxes of 12, within larger cartons, and re-packaging them does not make any kind of practical or commercial sense. Further, when it comes to inspecting diving masks for leakage this sort of inspection would do no good. As appears from the evidence the only way one can tell if a swimming mask leaks is when someone puts it over his face and submerges. Just taking the goods out of their packaging would be ineffective as any kind of quality control check without a test in water.

Finding

79. As I have indicated there are some defects in the plaintiffs' evidence but they are far outweighed by those on the defendant's side. I have considered carefully whether the plaintiff's claim could be a bogus one, made up after the event but I do not see any real probability of this.

80. The plaintiff has argued that defective goods were supplied as part of the plot to set up Funmakers and steal the plaintiff's business. Much reliance has been placed on the terms of Mr Lau's fax messages, to the customers indicating that Aqua and Greyland would have difficulties with delivery and quality. I do not think there is any evidence on which I could be satisfied that defective goods were deliberately supplied. Having said that, the content of these faxes does suggest that defective goods were being supplied. If they were not, why would Mr Lau, who had just left Greyland and would know the position, have used that in support of his argument that the customers should give their business to Funmakers?

81. Overall I am satisfied that it is more probable than not that the plaintiffs did suffer the losses of which they complain, and that these were caused by defects in the goods produced by the defendant.

82. The claim for loss of business is, it seems, abandoned in the light of Mr Berenson's oral evidence that he could not be certain of the causation.

Damages

83. The measure of damages should be the difference in value of the goods, when delivered to the plaintiffs or to the plaintiff's customers and the value they would have had if they had not been defective, plus any other costs flowing from the defects such as return freight and handling. In fact the defective goods were worth nothing. They had to be thrown away and the plaintiffs had, one way or another, to credit back the price they had received. So the difference in value would be the actual figure which the plaintiffs had received and had to credit back.

The time-bar defence

84. The discovery of defective goods in the 1992 season came after 22 May 1992, i.e. within the limitation period. The defects in the 1991 season were discovered between 31 May and 27 September 1991. Counsel for the plaintiffs does not appear to deny that the limitation period could apply to these but says that if it does it still cannot apply to the defence of set-off based on such defective goods. The plaintiffs will therefore rely on the 1991 claims only for the defence of set-off and not for the Counterclaim to Counterclaim.

85. This argument must, it seems to me, be right, given that defects, and set-off in respect thereof were pleaded in the plaintiff's Amended Reply and Defence to Counterclaim dated 30 January 1995. It follows that the plaintiff can use the 1991 defect claims by way of set-off if not by way of Counterclaim against Counterclaim.

Judgment

86. It follows that the defendant is entitled to judgment for HK$1,403,474.30 on its counterclaim. There has never really been any dispute about that. The plaintiffs are entitled to set off the cost of the 1991 defective products, and associated costs, amounting to US$79,912.31 against that figure.

87. The plaintiffs are also entitled, on their counterclaim against counterclaim for judgment for the cost of the 1992 defective products and associated costs amounting to US$129,192.97. This will also be set off against the defendant's counterclaim.

88. This will produce a final balance in favour of the plaintiff. Each party has been kept out of its money for a long time. I think the best way to deal with the interest will be to allow it at prime rate plus 1% on the final balance in the plaintiff's favour, from the date of the writ to the date of judgment.

89. The plaintiff is the overall winner so the costs of the action (nisi) will be awarded to the plaintiff to be taxed if not agreed.

Representation:

Ms Selina Lau, instructed by Messrs Lovells for the Plaintiffs

Mr Richard Leung, instructed by Messrs Pang, Wan & Choi, for the Defendants