Kader Industrial Co Ltd v. Ngai Hing Hong Plastic Materials Ltd
Read the full judgment text of HCA 1534/2003 on BabelCite. This High Court CFI judgment was delivered on 30 March 2007.
1. This was the trial of two actions which were ordered to be tried together by an order of Deputy High Court Judge Saunders (as he then was) dated 23 February 2004.
Cites 2 cases
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HCA 1534/2003 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO. 1534 OF 2003 ____________ BETWEEN
and BETWEEN
HCA 1709/2003 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO. 1709 OF 2003 ____________ BETWEEN
(Ordered to be tried together by Order of Deputy High Court Judge Saunders on 23 February 2004) ____________ Before: Hon Barma J in Court Date of Hearing: 11-14, 18-19 and 27 September 2006 Date of Judgment: 30 March 2007 ________________ J U D G M E N T ________________ Introduction 1.This was the trial of two actions which were ordered to be tried together by an order of Deputy High Court Judge Saunders (as he then was) dated 23 February 2004. 2.The first action (HCA 1534 of 2003) is brought by Kader Industrial Company Limited (“Kader”) against Ngai Hing Hong Plastic Materials Limited (“NHH”). By it, Kader claims damages against NHH for having supplied to Kader allegedly defective plastic resins under two contracts entered into between Kader and NHH. According to Kader, as a result of NHH’s alleged breach of contract, it has suffered losses of over US$500,000. For its part, NHH denies liability, and has brought a counterclaim against Kader for HK$160,305, representing the price of the plastic resins supplied under the two contracts and, in addition, the price of a small quantity of similar plastic resins supplied under a third, earlier contract. NHH has also issued third party proceedings against Million Supply Limited (trading under the name “Wah Cheong Hong”) (“WCH” or “the Third Party”), from whom it acquired the allegedly defective plastic resins which it sold to Kader, seeking to be indemnified against any liability it may have to Kader. WCH has in turn issued fourth party proceedings seeking an indemnity for itself against its own supplier, Luen Fung Hong Plastic Materials Company Limited (“LFH” or “the Fourth Party”), from whom it acquired the resins in question. 3.The second action (HCA 1703 of 2003) is brought by NHH against Kader. By it, NHH claims from Kader the sum of HK$643,980, being the amount payable by Kader to NHH under 18 other contracts for the supply of other types of plastic resins, different from those which were the subject matter of the contracts which are the subject matter of the first action. Kader originally raised specific defences in relation to parts of this claim, but its main contention is that it is entitled to set off, against any liability it may have for the unpaid price under these contracts, the damages which it claims in the first action. An application by NHH for summary judgment in the second action met with only limited success, Deputy High Court Judge Saunders giving judgment for some HK$20,852.50 in respect of four of the contracts relied on in the second action, but giving Kader unconditional leave to defend as to the balance of NHH’s claim. It appears that at the application for summary judgment, NHH also abandoned part of its claim to the extent of HK$4,000. 4.At the trial, Mr Zimmern, who appeared for Kader, indicated that Kader would not be pursuing any of its defences to NHH’s claim in the second action except its claim to a set off in respect of the damages it claimed in the first action. Thus, the outcome of Kader’s claim in the first action will be substantially determinative of the second action as well. If Kader is unsuccessful in its claim in the first action, it will be liable to pay NHH for the remaining invoices which are the subject of the second action. Conversely, if Kader were to succeed in the first action, the only question that would need to be determined in the second action would be whether, as a matter of law, it is entitled to set off such damages as it might be awarded against those invoices. 5.I shall therefore focus on the first action. In doing so, I shall first set out the background to the claim, and identify the respects in which Kader alleges that NHH was in breach of contract. I shall then deal with each of the alleged breaches, considering in relation to each the relevant factual and expert evidence that was adduced. I shall then deal, so far as necessary, with questions of damage. I shall then deal with the second action, in the light of my conclusions as to the first action. Finally, having dealt with the position as between Kader and NHH, I shall deal with the third and fourth party claims insofar as they require determination. The parties 6.Kader is a company that is involved in the business of manufacturing children’s toys, principally for the export market. Among the markets to which it sells toys which it manufacturers is the United States of America. It manufactures such toys at its own factory on the Mainland. In order to manufacture toys, it is necessary for Kader to obtain raw materials, in particular plastic resins, which are used in the production of the toys. It obtains such plastic resins from various suppliers in Hong Kong. The person in Kader responsible for the ordering of such raw materials for use at its factory at the relevant time was a Mr Danny Lo Wai Chuen (“Mr Lo”), who was a director of Kader, and appears to have been in charge of its manufacturing operations at the factory. Mr Lo made affirmations in response to NHH’s application for summary judgment in the second action, and in support of Kader’s application for consolidation of the two actions, in which he dealt with the background to the proceedings. However, by the time of the trial, he had left Kader’s employment, and could not be traced. He therefore did not give evidence at trial, but his affirmations were tendered as evidence pursuant to hearsay notices served by Kader in respect of them. 7.NHH is a dealer in industrial plastic resins. It has been, since about 1998, one of Kader’s suppliers. The person at NHH who dealt with Kader in relation to the contracts which underlie the claim in the first action was a Mr Ban Leung Wai Ching (“Mr Leung”), its Sales Manager. The factual background Kader’s contract with Equity 8.Since about 1999, Kader has been manufacturing toys for a United States company called Equity Marketing Inc. (“Equity”). On about 24 June 2002, Kader and Equity entered into a contract under which Kader was to manufacture and ship to Equity in the United States plastic toys, consisting of figures based on the characters from the Simpsons cartoons. Following some revisions in relation of the quantity of toys to be produced, the contract called for the shipment of some 13,113 cases of Simpsons toys, at a total price of US$487,803.60. Among the figures to be produced were models of Lisa Simpson (the younger sister of the cartoon series’ main protagonist, Bart Simpson), and another character called Groundskeeper Willie. The toys were ultimately to be distributed in Burger King fast food outlets in the United States, apparently as part of a promotion where they would be given away to customers ordering children’s meals. As the toys were to be distributed to children, Equity required the toys to be tested prior to shipment, mainly to ensure that small pieces would not break off from the toys as this would present a choking hazard to small children playing with them. Kader’s search for raw materials 9.Although the toys were to be made of plastic, different parts of the toys were to be made from different types plastic resins. The toys consisted of a figure, a screen providing a backdrop and a base. The figure and the screen both fitted into the base. The screen had a protruding tab, called a screen tab, to enable it to fit securely into the base. For present purposes, the relevant parts of the toys are the screen tab and the base, both of which were, according to Kader, manufactured using polypropylene. The other parts of the toys were manufactured using other resins, which are not material to these proceedings. 10.Initially, Kader intended to use a type of polypropylene called AV-161 to manufacture the screen tab and base of the toys. However, by the latter part of July 2002, AV-161 was in short supply, and Kader’s was having difficulty sourcing any AV-161. At this point, Mr Lo approached Mr Leung of NHH. When Mr Lo contacted Mr Leung on about 23 July 2002 seeking to purchase AV-161 for Kader to use in producing the Simpsons toys, he was told that NHH did not have any AV-161 in stock. Mr Lo says that he asked Mr Leung if there were any alternative polypropylene resins that might be suitable. He affirmed that he informed Mr Leung that the resin was needed for manufacturing parts of toys to be shipped to the United States, and that the finished product would need to satisfy what he called the standard tests. Mr Leung (who gave evidence for NHH at the trial) disagreed with this, saying that Mr Lo did not mention what the polypropylene was needed for. It was, however, common ground that Mr Leung suggested, as a possible alternative to AV-161, a polypropylene resin known as PPZ-451. Mr Leung says that he told Mr Lo that the properties of PPZ-451 were similar to those of AV-161, but that it was not quite as strong, and recommended that Mr Lo should test a sample of PPZ-451 to make sure that it was suitable for use in whatever Kader was intending to manufacture with it. 11.It seems that Mr Leung’s suggestion was taken up, as NHH supplied Kader with a bag of PPZ-451 at no charge on about 27 July 2002 for preliminary testing purposes. Thereafter, at the end of July or beginning of August 2002, Kader ordered a further six bags of PPZ-451 in order to carry out pre-production testing. On 9 August 2002, Kader placed a purchase order with NHH for 640 bags (or 16,000 tonnes, each bag weighing 25 kilograms) of PPZ-451. These were delivered the same day, and NHH duly invoiced Kader for this order. Thereafter, on around 22 August 2002, Mr Lo telephoned Mr Leung saying that Kader required a further 800 bags of PPZ-451, with purchase orders for 640 bags and 160 bags being sent to NHH on about 24 August 2002. The 160 bags of PPZ-451 were delivered on 27 August 2002. However, before the 640 bags of PPZ-451 were delivered, Kader concluded after further testing, and part of its production run, that PPZ-451 was not suitable for use in the manufacture of the screen tabs and bases of the Simpsons toys after all. Mr Lo then called Mr Leung, informed him of this, and asked whether the undelivered balance of the order could be cancelled. Mr Leung agreed. 12.It seems that Mr Lo then asked Mr Leung again whether or not there was any AV-161 available at this time. Mr Leung then made a thorough check of NHH’s stock records, and found that NHH did have some AV-161 in stock, but only 160 bags. Mr Lo immediately placed an order for this. According to Mr Lo, this happened on 29 August 2002. Mr Leung thinks that it might have been a couple of days earlier, but nothing turns on that. The supply by NHH of Moplen EP-332K 13.On 29 August 2002, Mr Lo again asked Mr Leung for alternatives to AV-161, and this time, Mr Leung suggested a product called Moplen EP-332K, manufactured by a company called Basell. Mr Leung says that he again told Mr Lo that Kader should test this product and satisfy itself that it was suitable for its needs. Mr Lo then ordered six bags of Moplen EP-332K at a total price of HK$1,005 for testing purposes. According to Mr Lo, the testing took place the same day. A delivery order issued by NHH in respect of the 6 bags, addressed to its warehouse in Hung Hom in Kowloon, is time stamped “Aug 29 PM 3:23", indicating that it was presented at about that time in order to take delivery of the 6 bags. The bags were then transported to Kader’s factory on the Mainland. The initial testing appeared to be successful, and Mr Lo telephoned the next day, 30 August 2002, to order 360 bags of Moplen EP-332K from NHH. 14.The 360 bags were not all delivered in one lot. Kader took delivery of 280 bags on 30 August 2002, as appears from another NHH delivery order which was time stamped “Aug 30 PM 2:36", and of the remaining 80 bags the next day. It appears that both deliveries were sent on to the Kader factory promptly, and were used in the production of the Simpsons toys shortly after their arrival at the factory. The formal purchase orders and invoices in respect of this order were not issued until 4 September 2002, when Kader faxed its purchase order to NHH and NHH issued its invoice to Kader. Tests of the toys manufactured with Moplen EP-332K 15.According to Kader, it carried out tests on Simpsons toys manufactured using the 6 bags of Moplen EP-332K delivered on 29 August 2002, and also on Simpsons toys manufactured using the 280 bags of Moplen EP-332K delivered on 30 August 2002. Records said to represent the results of such testing were produced at the trial. According to Kader, the toys so tested were entirely satisfactory, with all toys tested passing the standards required. The tests consisted of the following:-
16.The toys manufactured using the EP-332K were also tested by Specialised Technology Resources (H.K.) Limited (“STR”), an external quality testing company appointed by Equity to conduct tests on samples of toys produced by Kader prior to shipment. Reports issued by STR on 5 September 2002 in relation to each of the Lisa Simpson and Groundskeeper Willie Toys indicate that both toys passed STR’s testing with a 100% success rate. Order for a further 660 bags of Moplen EP-332K and supply of Profax 7533 17.Meanwhile, on about 31 August 2002, Kader ordered a further 660 bags of Moplen EP-332K from NHH. This amounted to a full container load of Moplen EP-332K. Shortly before this, on about 27 August 2002, NHH had ordered the same quantity of Moplen EP-332K from WCH. WCH had in turn ordered the same quantity of resins from LFH some time earlier. It appears that WCH effected delivery of the Moplen EP-332K to NHH by delivering shipping documents in relation to a container which contained the goods. NHH in its turn arranged for Kader to take delivery of the goods directly from WCH, and Kader obtained delivery of the container containing the goods in Hong Kong on 5 September 2002, and sent it directly to its factory in the Mainland. 18.The following day, 6 September 2002, Kader opened the container of which it had taken delivery. It found that although there were 660 bags of plastic resins in the container, they were not, apparently, Moplen EP-332K, but a resin labelled as “Profax 7533". According to Mr Lo’s affirmation, he contacted Mr Leung to complain that what was delivered was not Moplen EP-332K, but Profax 7533. He says that Mr Leung told him that in fact, Profax 7533 was the same product as Moplen EP-332K, and that this was the former name of Moplen EP-332K. Mr Lo says that Mr Leung also faxed him a document emanating from Basell, the manufacturer of the resins, which appeared to confirm this. According to Mr Lo, this was a certificate issued by Basell China Limited dated 1 May 2002, which stated that Profax 7533 had been re-named Moplen EP-332K. According to NHH, on hearing from Mr Lo, it raised the question with its own supplier, WCH (through another of NHH’s employees, Mr Lam Lik-chung (“Mr. Lam”), who was involved on the purchasing side of NHH’s business), and was itself told by WCH that Profax 7533 and Moplen EP-332K were one and the same product. Mr Lam also produced (with his supplemental witness statement) a different (and more detailed) document from a different Basell entity, Basell International Asia Pacific, dated 15 December 2001, describing the change of name of Profax 7533 to Moplen EP-332K, but emphasising that the product was the same and had the same specifications, and that this was a change of nomenclature only. It is not clear that this more detailed document was sent to Mr Lo at the time, but I do not think that anything really turns on this. 19.Mr Lo says that he was satisfied by this, and relying on what he was told, gave instructions for the Profax 7533 to be used for the production of the Simpsons toys. Mr Leung says that he also recollects telling Mr Lo that if Mr Lo was concerned, he could do some more tests before going into production with Profax 7533. Mr Lo, however, made no reference to any such suggestion in his affirmations. Tests of toys manufactured using Profax 7533 20.On 14 September 2002, Kader was notified by STR that the latest batch of Simpsons toys, produced using Profax 7533, had failed the tests which STR had conducted. The respects in which the toys were said by STR to be defective were detailed in four reports produced by STR, all dated 14 September 2002. These indicated that the toys which had been tested had failed STR’s testing in the following respects:-
21.In each report, it was stated that small parts were detected in each case, indicating that when the toy broke, small fragments were detached from the toy. Although not stated in the report, the significance of this was no doubt that the presence of small detached parts would present a choking hazard to children playing with the toys. The report also commented on the material that was (according to STR) used to manufacture the part in question, suggesting that the material used was PVC rather than polypropylene, and offering observations as to possible reasons for the failure. There were also further remarks on other toys tested which, although not failing the tests, showed signs of damage at the end of the tests, with similar comments as to the material used and possible reasons for the damage. 22.It will be evident from the tests that there was little margin for error, with as little as a single failure constituting a failure of the test. This is also apparent from the earlier test reports in which the toys all passed the test, as they indicate that what was required was that none of the 75 samples tested by the torque and tension tests and the drop test should fail at the end of the tests. Rejection by Equity of the toys and cancellation of other orders 23.The consequence of these failures was that Equity rejected the batches of toys from which these samples were taken. Moreover, citing concerns as to Kader’s manufacturing and quality control procedures, Equity proceeded a few days later to cancel the balance of the order for the Simpsons toys. Kader says that, at the time that the cancellation was communicated to it, it had already manufactured all the toys that had been ordered, but had only shipped a relatively small portion of the overall order, having shipped some 622,000 toys with a value of US$115,692, as against the total order value of US$487,803.60. 24.In addition, Equity later (in early October 2002) cancelled an order which had been placed with Kader on about 15 August 2002 for the manufacture of certain other toys known as Nintendo Superstars, which had a value, according to Kader, of US$719,947.50, and declined to discuss further with Kader a further contract for production of toys known as Beyblades, which Kader claims had a potential order value of over US$1 million. 25.Following the notification by STR that the latest batch of toys manufactured using Profax 7533 had failed its tests, Kader conducted its own tests in relation to such toys in mid-September 2002. According to documents that were produced by Kader at the trial, some 2,000 pieces of the toys were tested, with a significant number failing one or other of the tests, with 8 Lisa Simpson toys failing the torque test, 75 Lisa Simpson toys failing the tension tests, 7 Groundskeeper Willie toys failing the torque test and 47 Groundskeeper Willie toys failing the tension tests. It seems that a number of samples also failed to satisfy the drop test. 26.Kader then took the matter up with NHH. After obtaining the results of its own testing, it is said that Mr Lo contacted Mr Leung and told him that Profax 7533 had turned out to be unsuitable for the use to which Kader had put it. There then followed a number of meetings between Kader and NHH, at which the parties were unable to resolve their differences, resulting in the commencement by Kader of the first action. Tests of Moplen EP-332K and Profax 7533 27.Also following the problems that had arisen, Kader made arrangements to have various tests carried out, at least in part with a view to trying to establish whether or not Moplen EP-332K and Profax 7533 were in fact the same product, as Kader says it was led to believe. Kader commissioned the Materials Testing Laboratory of the Hong Kong Productivity Council (“the HKPC”) to carry out such tests. For the purpose of carrying out the tests, Kader supplied the HKPC with a quantity of unused Profax 7533 from the container load which it had purchased from NHH. However, as Kader had already used up all of the Moplen EP-332K which it had acquired from NHH in the course of manufacturing the Simpsons toys which were accepted by and shipped to Equity, it had to obtain fresh supplies of Moplen EP-332K from NHH, which supplied two bags of Moplen EP-332K to Kader for this purpose. Following the tests, two test reports setting out the results of such testing, respectively dated 9 and 11 December 2002 were issued by the HKPC. Each of these test reports was signed by Dr Kinny L.K. Yeung (“Dr Yeung”), who was described as the General Manager - Materials Technology Division. A third report, also signed by Dr Yeung, which sought to interpret the results of the values obtained in respect of one particular property of the materials tested (that of elongation at break) was issued on 7 March 2005. Subsequently, a further report dated 30 August 2006, commenting on these reports and the first three reports obtained by NHH (to which I refer below), was issued by Dr C.C. Lam, Senior Consultant - Materials Technology Division, of the HKPC. 28.The results of the tests carried out by the HKPC appeared to suggest that although both Moplen EP-332K and Profax 7533 had almost identical physical, chemical and mechanical characteristics in most respects, there was a noticeable difference in relation to one mechanical property, that of elongation at break. In this respect, the results of the tests conducted by the HKPC indicated that the average elongation at break of Moplen EP-332K was in the order of 167.21%, whereas that of Profax 7533 was some 106.34%. It was common ground that elongation at break was a measure of ductility of a material, and that the higher the value for elongation at break, the more ductile was the material in question. It was therefore suggested by Kader that Moplen EP-332K and Profax 7533 (or at least the Profax 7533 supplied by NHH to Kader) were different in this respect, with Moplen EP-332K being substantially more ductile, and thus less brittle, whereas, conversely, the Profax 7533 supplied by NHH to Kader appeared to be more brittle. Kader contended that this difference in ductility or brittleness was the reason why the Simpsons toys manufactured using Profax 7533 had failed STR’s and Kader’s tests, when the toys manufactured earlier using Moplen EP-332K had passed such tests without any problems. 29.NHH also caused tests to be conducted on Moplen EP-332K and Profax 7533. NHH commissioned four sets of tests, all of which were eventually put in evidence before me. These were:-
30.The results of the tests carried out by HKU, Rapra and City University were said by NHH to show that Moplen EP-332K and Profax 7533 were the same product, and that they had virtually identical chemical, mechanical and physical characteristics. Kader’s case against NHH 31.Kader’s case against NHH is that NHH was in breach of various implied conditions arising under the contract for the sale by NHH to Kader of the 660 bags of propylene sold under the description Moplen EP-332K. Implied terms arising in sale by sample 32.In particular, Kader alleges that having regard to the fact that NHH initially sold 6 bags of EP-332K to Kader so that Kader could test the Moplen EP-332K for suitability, that and the subsequent contracts for the purchase of 360 and 660 bags of Moplen EP-332K were contracts for sale by sample, the sample consisting of the initial 6 bags of Moplen EP-332K that were supplied. That being so, Kader alleges that the contracts were subject to the implied conditions mentioned in section 17(2) of the Sale of Goods Ordinance (Cap. 26) (“the SGO”), which, so far as material is in the following terms:-
33.Although Kader refers, in paragraph 5(b) of its Amended Statement of Claim to a term that the goods should be free from any defect (not apparent on reasonable examination of the sample) that would render them or their quality “unsatisfactory”, the condition that is to be implied under section 17(2)(c) of the SGO relates to merchantability, and not (insofar as it may be different) unsatisfactory quality. 34.Merchantability is defined by section 2(5) of the SGO in the following terms:-
35.Kader alleges that NHH was in breach of the implied condition as to correspondence with sample because:-
36.Kader alleges that NHH was in breach of the implied condition as to freedom from undiscoverable defects rendering the goods unmerchantable because the Profax 7533 was substantially more brittle than the Moplen EP-332K, that this was a defect which was not reasonably discoverable on inspection of the goods, and which rendered the Profax 7533 unmerchantable. 37.In paragraph 12 of its Amended Defence and Counterclaim, NHH admits that the initial 6 bags of Moplen EP-332K sold by it to Kader were sold as samples. It therefore follows that the implied conditions mentioned in section 17(2) of the SGO were conditions of the later contracts for the supply of Moplen EP-332K, notwithstanding that NHH does not in terms admit them, admitting only that it was an implied term that the bulk of the goods “should [be] reasonably correspondent with the sample”. In any event, at the trial, Mr Chong, who appeared for NHH, confirmed that the contracts for the supply of Moplen EP-332K were contracts of sale by sample, and did not suggest that the implied conditions arising pursuant to section 17(2) of the SGO were inapplicable. NHH denies, however, that there was any breach of these implied conditions. Implied term as to fitness for purpose 38.Kader also alleged, in paragraph 8 of its Amended Statement of Claim, that it was an implied term of the contracts that the polypropylene resins that were supplied by NHH should be fit for the purpose of manufacturing the moveable parts of the Simpsons toys that were to manufactured from them to the requisite safety standards stipulated by Equity - in effect, that the parts of the toys manufactured from such resins should satisfy the various torque, tension and drop tests to be carried out by STR for Equity. This implied condition was based on the premise that Mr Lo had informed Mr Leung of the use to which the polypropylene resins Kader was purchasing from NHH were to be put, and of the need for the toys manufactured using the resins to meet the standards specified by Equity. However, at the beginning of the trial, Mr Zimmern informed me that as Mr Lo was not available to give evidence, Kader would not actively pursue a claim on this basis, although he suggested that I could make a finding in Kader’s favour on this matter if I felt able to do so in the light of Mr Lo’s affirmation, and such evidence as might be given by Mr Leung. 39.NHH denied that any condition as to fitness for purpose should be implied, contending that, on the evidence before me, Kader could not bring itself within section 16(3) of the SGO, which sets out the circumstances in which such a condition will be implied into a contract for the sale of goods. Section 16(3) is in the following terms:-
Other implied terms admitted by NHH 40.NHH also admitted that there were implied terms of the sale contracts in respect of Moplen EP-332K that the bulk of the goods supplied would comply with their contractual description as “Taiwanese Polypropylene Moplen EP-332K”, and that they would be merchantable (paragraphs 13 and 15 of NHH’s Amended Defence and Counterclaim). Although Kader did not in terms rely on a breach of either of these implied conditions (which arise pursuant to sections 15(1) and 16(2) of the SGO), it seems to me that the compliance with description point was effectively raised by the first alleged breach of the implied condition as to correspondence with sample (see paragraph 35(1) above) and the merchantability point by the second alleged breach of that implied condition (see paragraph 35(2) above), and also the alleged breach of the implied condition as to freedom from defects rendering the goods unmerchantable (see paragraph 36 above). Misrepresentation 41.Kader also alleges that NHH was guilty of misrepresentation when Mr Leung informed Mr Lo, in the course of their telephone conversation after the Profax 7533 was delivered, that Profax 7533 was the same resin as Moplen EP-332K, and that Kader relied on that representation by manufacturing the Simpsons toys using the Profax 7533. NHH denies having made the representation, or that (if it was made) it was either false, or relied upon by Kader. Damages 42.So far as damages are concerned, the damages which Kader alleges it has suffered are set out in paragraph 14 of the Amended Statement of Claim. They included the following items:-
There was also a claim for general damages for the damage to Kader’s reputation caused by the problems that were experienced with the Simpsons toys. 43.NHH does not admit the loss and damages alleged, and contends that they are in any event too remote to be recoverable. 44.At the trial, Mr Zimmern indicated that the claim for loss of profits on the potential Beyblades order and the claim in respect of the storage charges would not be pursued, as Kader did not have evidence of those alleged losses. He also stated that the claim for general damages would not be pursued. So far as the laboratory test costs were concerned, he indicated that the figure required updating to take account of the further work done by the HKPC in relation to the 2005 and 2006 reports, and suggested that this item could either be dealt with as part of Kader’s damages, or alternatively as an element of the costs it would be awarded if it were successful in its claim. The issues for determination 45.As I see it, therefore, the issues that arise for determination so far as NHH’s liability to Kader for breach of contract are concerned can be stated as follows:-
The witnesses 46.At the trial, Kader relied on the evidence of the following factual witnesses:-
47.So far as expert evidence was concerned, Kader relied on the various reports produced by the HKPC and the report and oral evidence at trial of Dr Lam. 48.For its part, NHH called three factual witnesses. These were:-
49.NHH also called two expert witnesses, namely Dr Holding and Dr Li. NHH’s preliminary objection to hearsay evidence 50.Before dealing with the evidence relevant to the issues which I have identified, it is necessary first to dispose of a preliminary objection that was taken by Mr Chong for NHH to the evidence of (in particular) Mr Au Yeung and Mr Li. Mr Chong submitted (correctly) that much, if not virtually all, of the evidence of these two witnesses was hearsay, in that it was based on information that was not within their own personal knowledge, but on information obtained by them, either from other persons at Kader or from documents of Kader. Mr Chong pointed out (again, correctly) that in most cases (apart from that of information obtained from Mr Lo), little indication was given either in their witness statements or their evidence as to the identity of the persons from whom they obtained the information which they placed before the court, and that at no time prior to the trial did Kader serve any hearsay notices in respect of any parts of their evidence, the only hearsay notices served by Kader being in respect of the affirmations made by Mr Lo. Mr Chong submitted that in these circumstances, I should disregard their evidence as inadmissible. 51.While it is correct that the bulk of the evidence given by these two witnesses was, strictly, hearsay in nature, and that no hearsay notices were given, this does not render their evidence ipso facto inadmissible. The admissibility of hearsay evidence in civil proceedings is governed by sections 47 to 49 in Part IV of the Evidence Ordinance (Cap. 8). Section 47 provides that evidence shall not be excluded in civil proceedings on the grounds that it is hearsay unless objection is taken to its admission and the court is satisfied that the exclusion of the evidence is not prejudicial to the interests of justice. Section 47A provides for the procedures to be followed where a party wishes to adduce hearsay evidence in civil proceedings. These include the giving of notice of the intention to do so, and the provision of particulars as to the evidence to enable the other party to deal with it, so far as practicable. Section 47A(4) specifically provides that a failure to comply with the requirement to give such notice, or to comply with relevant rules of court, shall not affect the admissibility of the evidence, but may be taken into account by the court, inter alia, as a matter adversely affecting the weight to be given to the evidence in accordance with section 49. Section 49, in turn, sets out factors to which the court may have regard in estimating the weight, if any, to be given to hearsay evidence. These factors include any circumstances from which any inference can reasonably be drawn as to the reliability or otherwise of the evidence (see section 49(1)), and in particular the following factors mentioned in section 49(2):-
52.Rather than ruling, on a blanket basis, that all of the evidence of Mr Au Yeung and Mr Li that was hearsay in nature should be excluded, I propose to consider the evidence in question, but only giving it such weight as it should properly be accorded in the circumstances of this case. 53.I now consider in turn each of the issues which I summarised at paragraph 45 above. Issue (1)(a): Correspondence with sample - wrong goods supplied? 54.The first issue is whether NHH was in breach of the implied condition as to correspondence with sample because it supplied to Kader bags of resin labelled as and containing Profax 7533 instead of Moplen EP-332K. 55.As to this the most relevant evidence is, in my view, the evidence of Mr Cherry, whose evidence I had no difficulty in accepting. He was clearly an independent witness, able to speak to the matters which he dealt with. His evidence was that as part of a major re-branding exercise, Basell decided to give uniform names to the various polymer products which it sold through its own marketing network in the Asia Pacific region. In connection with this, the product formerly sold by Basell as Profax 7533, which was manufactured by TPP in Taiwan, was re-named Moplen EP-332K. Mr Cherry explained that because TPP had developed its own reputation for its products, particularly in Taiwan, TPP wanted to continue to package and sell this product as Profax 7533. Basell, which licensed the technology and manufacturing process for the manufacture of this (and other) polymer products to TPP had no objection to this. As a result, from 2002 onwards, although Basell sold this particular product as Moplen EP-332K, TPP marketed it in Taiwan as Profax 7533. When TPP manufactured this product, it would either sell the product to Basell for on sale by Basell, or sell it itself. In the former case, the product would be packaged and sold in bags marked “Moplen EP-332K”, whereas in the latter case, it would be packaged and sold as “Profax 7533”. 56.The evidence was that the Moplen EP-332K sold by NHH to Kader under the contract for the sale of the 6 sample bags, and for the first sale of 360 bags was acquired by NHH from Basell, which meant that it was packaged and sold as “Moplen EP-332K”. On the other hand, the containerload of 660 bags sold under the later contract was acquired by NHH from WCH, which had acquired it from LFH, which had, in turn, purchased it from TPP. As the sale was a sale of the product by TPP directly, it was packaged and sold as “Profax 7533”. 57.The two notices issued by Basell in December 2001 and May 2002 also indicate that Moplen EP-332K is in fact the same product as Profax 7533. 58.Further, although the tests carried out by the various experts were not, perhaps, absolutely to the point in terms of a comparison of the sample of Moplen EP-332K to the Profax 7533 supplied under the contract for the sale of 660 bags, because it was not possible to make a comparison with the actual sample, all of which had been consumed in the course of manufacturing the Simpsons toys, and because the tests were performed in respect of different goods manufactured at different times, these tests do, in my view, establish that on the balance of probabilities (to put it no higher, although in my view the combined effect of the evidence was to put this beyond any real doubt), Moplen EP-332K and Profax 7533 are one and the same product , leaving aside the question (which I deal with next) as to whether the apparently more brittle nature of the Profax 7533 tested by the HKPC (as compared to the Moplen EP-332K which it tested) constituted a defect so as to amount to a breach of the implied condition as to correspondence with sample. 59.I say this because with the sole exception of the data obtained by the HKPC in relation to elongation at break, all the data obtained by the different experts who examined and compared samples of Moplen EP-332K and Profax 7533, obtained at different times, from different sources, found no apparent distinguishing features between the two. Thus, the FT-IR Spectroscopy results obtained by the HKPC, HKU and City University all resulted in almost perfectly identical readings and graphs, which indicate that Moplen EP-332K and Profax 7533 are the same type of polymer. Similarly, the mechanical properties measured by the three institutions were, with the exception of the elongation at break values obtained by the HKPC were extremely close to one another. Similarly, other tests carried out by HKU and City University, comparing the melt flow indices, viscosity and DSC analyses (which measure the amount of energy required to melt the product), and the thermogravimetric analysis carried out by City University’s Dr Li (which enables the tester to identify whether the products compared contain ifferent additives) also indicate that there is no apparent difference between the two. Finally, the gel permeation chromatography tests conducted by Rapra indicate that the distribution of polymer chain lengths in Moplen EP-332K and Profax 7533 are virtually identical (as the graphs depicting the results for the two overlap almost perfectly), again suggesting that the products tested are in all material respects identical, in both chemical composition and mechanical properties (leaving aside, as I have said, the apparent anomaly in relation to the elongation at break in the samples tested by the HKPC). 60.In coming to this conclusion, I do not overlook the fact that different batches of Moplen EP-332K and Profax 7533 were tested by the various laboratories which conducted the tests. However, it seems to me that the fact that such similar results were obtained in respect of Moplen EP-332K and Profax 7533 produced by TPP (from where all the samples, with one exception, which was produced by Polymirae, a Basell joint venture in South Korea, were sourced), notwithstanding the fact that the samples were obtained at different times between 2002 and 2006, suggests that the two products are in fact the same thing, and that they are, in general terms, produced to a consistent standard over time. 61.Finally, it seems to me that there is one further piece of evidence which is consistent with Moplen EP-332K and Profax 7533 being the same resin. This arises from the lot numbers recorded in Certificates of Quality issued by TPP in respect of the resins supplied by NHH to Kader, and shown on a photograph of bags of the Profax 7533 supplied to Kader, of which complaint is made in this action. A certificate of quality issued by TPP on 21 August 2002 in respect of the lot of Moplen EP-332K which was sold by it to Basell China Limited (which on-sold it to NHH) indicates that the lot number of the lot from which the product was packaged was lot number 24948. A later certificate of quality dated 28 November 2002 provided by TPP in respect of other lots of Profax 7533 indicate that the lots covered by that certificate bore the lot numbers 24944, 24945, 24945, 24949 and 24950. A photograph of the Profax 7533 complained of shows an imprint on the bag of a number that appears to read 24944 (although the last digit is not clear). This would indicate that the Profax 7533 supplied to Kader was from lot number 24944, while the Moplen EP-332K supplied to Kader was from lot number 24948. Mr Cherry’s evidence was that the process of manufacture by TPP involved the polymer being stored in separate lots in silos, with each lot being given a sequential lot number. He indicated that the process of production was continuous, with a new lot being produced every 10 hours or so. This would imply that the Profax 7533 obtained by Kader under the contract for the 660 bags was produced a matter of two or three days prior to the EP-332K which it obtained under the earlier contracts for the 6 sample bags, and the 360 bags. Bearing in mind also that the two lot numbers immediately after that of the Moplen EP-332K appear to relate to Profax 7533, it seems improbable, to say the least, that a different product would have been manufactured in the midst of a production run of Profax 7533. To my mind, this is a further indication that the products were in fact one and the same thing. Although Mr Cherry did accept that there would be variations in manufacture over the course of manufacture of a typical batch of polypropylene, the fact remains that the various chemical and mechanical analyses that were conducted at different times indicate that there was a considerable degree of consistency in the manufacture of this product. 62.I therefore conclude that Moplen EP-332K and Profax 7533 are in fact the same resin, and that there was therefore no breach of the implied term as to correspondence with sample simply because the goods supplied under the contract for 660 bags were labelled Profax 7533 resin, instead of being labelled Moplen EP-332K. It seems to me that the evidence establishes that whatever the label may have been, the contents of the bags were the same resin. Issue (1)(b): Correspondence with sample - goods supplied defective? 63.I consider next the question of whether or not the Profax 7533 supplied to Kader was defective, in that it was significantly more brittle than the Moplen EP-332K that had been supplied by way of sample, and under the earlier contract for 360 bags of the resin. 64.This, I think, gives rise to two distinct issues. The first is whether or not there was in fact a difference between the brittleness (or ductility) of the Profax 7533 and the Moplen EP-332K. The second is whether, if there was such a difference, it was one which could be said to constitute a defect in the Profax 7533. Sub-issue (i): Whether Profax 7533 more brittle than Moplen EP-332K 65.As to the first of these issues, Kader’s evidence has two aspects to it. First, Kader points to the results of the tests carried out by the HKPC and says that these demonstrate that the Profax 7533 with which it was supplied was more brittle to a significant degree than the Moplen EP-332K with which it had previously been supplied. Second, Kader points to the fact that whereas the Simpsons toys manufactured with Moplen EP-332K were entirely acceptable, and passed both its own and STR’s testing, the toys manufactured using Profax 7533 did not pass such tests, and displayed an unacceptably high failure rate. 66.However, I do not think that either of these aspects of the evidence establish that there was, in fact, on the balance of probabilities, a difference in the ductility of the Profax 7533 as compared with the Moplen EP-332K with which Kader was supplied. The expert evidence 67.Looking first at the test results obtained by the HKPC, it is clear that these appear to indicate that there is a marked difference between the figures in respect of the elongation at break of the batch of Profax EP-332K. The value for elongation at break measures the extent to which a test bar made from the polypropylene in question will stretch or elongate before it breaks into two pieces. The values obtained by the HKPC indicated that whereas 10 test bars made from EP-332K had their elongation at break measured at between 122.1% and 232.2%, with a mean value of 167.21%, the 10 test bars made from Profax 7533 had lower elongation at break values, measured at between 71.64% and 132.23% with a mean value of 106.34%. This, said Dr Lam (Kader’s expert witness), indicated that the two samples tested had different elongation properties, or levels of ductility. 68.Both parties’ expert witnesses had experience in dealing with polyproplyene and polymers, but it is fair to say that NHH’s expert witness, Dr Li, was more of a specialist in this field. Where his evidence differed from that of Dr Lam’s, I preferred his evidence, having regard to his greater expertise. 69.Dr Li pointed out that the values for elongation at break obtained in the course of testing by both HKU and City University did not differ to such an extent, and in fact were rather similar for both products in each set of tests, with HKU obtaining mean elongation at break values of 64.5% for Moplen EP-332K and 68.4% for Profax 7533, and City University obtaining mean elongation at break values of 95.1% for Moplen EP-332K and 94.5% for Profax 7533. He also pointed out in his report that all the properties for the two resins measured in a given laboratory were nearly the same, such properties including tensile properties (with the exception of the elongation at break figures obtained by the HKPC), rheological properties, thermal properties, high temperature degradation properties and molecular structures (obtained from FT-IR Spectroscopy and gel permeation chromatography). In his report, he stated that it was not possible to comment on or provide an explanation for the differences in the elongation at break values obtained by the HKPC, as HKPC’s reports did not provide any description of the mould temperature conditions used in the production of the test bars that were used for testing by the HKPC. 70.In his evidence at the trial, Dr Li suggested that the fact that the HKPC’s own tests indicated that, in all respects other than elongation at break, Moplen EP-332K and Profax 7533 appeared to display markedly similar properties, one might question whether, rather than concluding that the two samples tested were different, it might not be more appropriate to question whether there was something in the testing process that might have gone wrong. 71.The question of the mould temperature settings used by the HKPC was explored with Dr Lam at the trial. Both Dr Lam and Dr Li explained that in the process of injection moulding, which was the process used by Kader to manufacture the parts of the Simpsons toys made with polypropylene, very hot melted polypropylene is injected into the moulds which shaped the pieces being manufactured. In order to ensure consistency in production of the finished product, the mould temperature is generally regulated by a continuous flow of water around the mold. The water is generally set at a particular temperature, and the effect of the constantly circulating water at that temperature around the mould during the course of production is to regulate the temperature of the mould itself. Dr Li also indicated that the flow rate of the water around the mould might also have an effect on the maintenance of the mould temperature. 72.Although the annex to the HKPC reports of December 2002 which indicated the mould settings used for the production of the test bars which were required for the tests that were carried out called for various temperatures and other settings to be recorded, there was no temperature recorded in respect of what was described as the mould water temperature, where there was a space to record the temperature of the water in the “cooling tower”, which was the water storage tank from which water circulated around the injection moulding machine. 73.Dr Lam was asked why the HKPC’s reports did not record the temperature of the water in the cooling tower in the space where that information should have been recorded. His evidence was that, because Kader had not provided any information to the HKPC about the temperature which should be set for the water which circulated around the moulds during the injection moulding process, no setting was in fact used. This meant that the water temperature would vary during the course of the process of manufacture of the test bars, starting from the ambient temperature of the water (governed by the outside air temperature, as the tank was, according to Dr Lam, located on the top of the building in question). Given that the tests were carried out in December, this temperature would not have been likely to have exceeded 20 odd degrees centigrade. As the water circulated around the hot mould, the water temperature would have increased, although the rate of increase could not be known given that the flow rate of the water was not indicated. As no setting was applied to the water temperature, the water temperature would not have been maintained at a stable temperature throughout. Dr Lam said, however, that he would not have expected the water temperature to have exceeded 50 degrees centigrade during the course of manufacturing the test bars, all of which were, he said, made on the same day. That said, however, it appears that the water temperature, and hence the mould temperature, would have varied during the course of the manufacturing process. 74.Dr Li, whose evidence in this regard I accept, said that the failure to set a temperature setting for the water flowing around the injection mould may well have affected the test bars produced. He explained that where the mould temperature is low, the result of the hot melted polypropylene flowing into the colder mould is to cause the polypropylene to solidify more quickly at the outside than if the mould temperature were higher. The effect would be that a less perfect crystalline structure is formed at the outside of the product than on the inside (which being on the interior, insulated by the solidifying polypropylene at the outside of the product, cools more slowly). This, said Dr Li, could affect the mechanical properties of the product, so that the failure to maintain a constant temperature throughout the process of manufacturing the test bars could result in variations in the quality of the product. 75.I do not think that Dr Lam really disputed this, although he suggested that the difference in mechanical properties might not be as significant as Dr Li indicated they might be. In this respect, however, I prefer the evidence of Dr Li. 76.Although Dr Lam suggested that the temperature would not have varied greatly during the process of manufacturing the test bars, in the absence of any records as to what the temperature was at various points during the manufacturing process, I am not prepared to draw this conclusion. 77.It is also noticeable that in the case of the tests conducted by HKU and City University, where the mould temperature appears to have been carefully controlled, the variance in elongation at break between the two samples tested was insignificant. 78.In these circumstances, therefore, it seems to me that the testing process undertaken by the HKPC was compromised by the failure to set a water temperature in respect of the coolant flowing around the injection moulds used to manufacture the test bars, resulting in a failure to maintain a steady temperature of the coolant and the mould. This being so, I do not think that the differences in the elongation at break values obtained by the HKPC are such as to establish to the necessary standard of proof that the Moplen EP-332K and the Profax 7533 tested by the HKPC did, in fact, have significantly different elongation at break properties, or would have had such different properties had the temperature of the moulds been carefully controlled throughout the manufacture of the test bars. The factual evidence 79.What of the evidence from the tests carried out on the Simpsons toys by STR and Kader? In my view, these are not conclusive in Kader’s favour either. In coming to this view, I have not taken account of three particular criticisms of such tests and the reports thereof made by Mr Chong. These are:-
80.That said, however, the difference in the test results cannot, in my view, be said to be so clearly due to a difference in the mechanical properties of the resins supplied as to lead to the inference that, on a balance of probabilities, such failures were due to a higher degree of brittleness on the part of the Profax 7533 that was supplied to Kader. 81.This is because the failure of the toys manufactured using Profax 7533 to meet the standards required by Equity, whether as reflected in the results of the STR tests or of the later internal tests conducted by Kader could have been due to at least two causes. The first, espoused by Kader, is that the Profax 7533 was more brittle than the Moplen EP-332K. The second, denied by Kader, is that there may have been a problem in the course of production. The only evidence as to the method of production used by Kader in manufacturing the Simpsons toys (both using Moplen EP-332K and Profax 7533) came from Mr Au Yeung. He asserted that both production runs were manufactured in the same way, using the same machines, calibrations and settings. However, Mr Au Yeung had no personal knowledge as to this, as he was, on his own admission, not involved in the production process. His evidence as to this was, and had to be, based on something he was told by someone else, or that he had seen in documents of Kader. Unfortunately, Mr Au Yeung was not able to specify the precise source of his information. 82.The question therefore arises as to whether this hearsay evidence should be excluded altogether, or whether it is sufficient to admit it, subject to an assessment of the proper weight to be given to it. On balance, I consider that it would be appropriate to adopt the latter course. 83.What weight should be given to this evidence of Mr Au Yeung’s? In my view, the evidence should be given a relatively low degree of weight. I say this for a number of reasons. First, although this evidence was clearly hearsay coming from Mr Au Yeung, no hearsay notice in respect of it was served. This put NHH at a disadvantage, in that NHH was not in a position to call for the source of the information to be produced for cross-examination if it were a fellow employee of Mr Au Yeung, or for consideration if it were documentary. Moreover, in his evidence, whether in his statement or at trial, Mr Au Yeung did not give details of his sources of information. This increased the disadvantage under which NHH laboured, for obvious reasons. In addition, it would not, it seems to me, have been unduly difficult for Kader to have either tendered for cross-examination a witness who could have spoken to the manufacturing process from his own knowledge, or at least to have produced records (if they existed, and there was nothing to suggest that they did not) of the conditions and processes pertaining at the time of manufacturing, particularly in relation to the settings of the machinery used for the manufacture of the relevant parts of the Simpsons toys. Mr Au Yeung’s source of evidence, if it were a fellow employee, would have been giving him that information after the problems had come to light (since Mr Au Yeung was not, on his own evidence, involved until after the problems had arisen), and any information then provided would not have been contemporaneous with the manufacture of the relevant parts of the toys. Similarly, if there had been any problems with the manufacture, there may well have been a reason for any employees concerned to conceal or misrepresent matters. 84.For all of these reasons, I am of the view that little weight should, in the circumstances, be given to Mr Au Yeung’s assertion that the production of the apparently defective parts of the Simpsons toys using Profax 7533 was carried out in exactly the same manner, using the same calibrations and settings as the earlier production of the apparently good parts of such toys with Moplen EP-332K. Certainly, I do not think that it would be appropriate to give this assertion so much weight as to result in a finding that, on the balance of probabilities, the reason for the difference in the test results was due to some difference in the mechanical properties of the Profax 7533 as compared to the Moplen EP-332K. 85.I would also add, as an aside, that it is slightly curious that having apparently tested the earlier PPZ-451 resin supplied by NHH with satisfactory results, Kader should some three weeks or more later have informed NHH that the PPZ-451 resin had turned out to be unsuitable for its purposes. This may suggest, and I put it no higher, that Kader’s testing and production procedures were not entirely infallible. 86.I therefore am not prepared to conclude that the Profax 7533 supplied to Kader was, on the balance of probabilities, more brittle to an appreciable extent than the Moplen EP-332K that had been supplied earlier. Sub-issue (ii): Whether difference in brittleness a defect? 87.Even if I had come to a different conclusion on this point, it would still be necessary, I think, to consider whether or not any difference as there may have been in the elongation at break characteristics of Moplen EP-332K as compared to Profax 7533 could properly be considered to be a defect. 88.In my view, having regard to the expert evidence of Dr Li, which I accept so far as it is material to this point, it could not. 89.In Dr Li’s evidence, reference was made to a handbook on testing of polymer - Handbook of Plastic Test Methods, 3rd edition - edited by Roger Brown, the chief editor of the journal “Polymer Testing” and the “Standard Test Method for Tensile Properties of Plastics, publication D 638-03 published by ASTM International, an established American materials testing institute. As Dr Li pointed out, these indicated that while the quality of elongation at break was a measurable mechanical quality of plastics manufactured using the injection moulding process, the values obtained for it were not generally regarded as meaningful or particularly useful, given that even in respect of tests conducted on a single batch of plastics were likely to give rise to highly variable data, which were not easily reproducible. Dr Li explained the problem in this way. When subjected to tensile forces, a piece of plastic made from polypropylene will stretch until a certain point is reached, after which it will be deformed. Until this point is reached, the plastic will, when released from the tensile forces, resume its original shape and dimensions. However, once this point is passed, the plastic will not revert to its original state, and will be permanently deformed. This extent of elongation at this point is known as elongation at yield. When the plastic yields in this way, it “necks” - that is to say, there is the formation of a neck, at the point where it begins to yield. This necking occurs randomly at any point along the central section of the plastic test bar, and once it occurs, the plastic will stretch away from the point at which the neck is formed. It may do so in either direction (or possibly both directions at the same time), and depending on where along the central section the neck forms, and in which direction it stretches, different values for elongation at break will be recorded. The extent of such differences in elongation at break values can be significant. According to Table 6 in the ASTM publication, elongation at break values obtained in respect of tests of polypropylene conducted at a number of different laboratories exhibited values so different that their standard deviation was as high as 50 - indicating that one could expect a deviation from the mean values of as much as 50% in either direction. 90.Because of this high variability, said Dr Li, elongation at break was not generally regarded as a useful mechanical property in relation to injection moulded plastics, and was not generally recorded in specifications for polymers that were to be processed by injection moulding. Moreover, as items produced by this method were generally rigid, the item would be considered to have failed once it became deformed and unable to revert to its original dimensions. By contrast, elongation at break was a quality that was recorded in specifications for polymers to be used in blow moulding, to produce plastic films and plastic bags, which were stretchable, and where the relevant quality was how far the item could be stretched before it would break. 91.Dr Lam accepted the comments and warnings contained in the ASTM publication and the handbook, although he considered that there might be cases in which a manufacturer might be concerned to know the elongation at break value for a resin that was to be used in injection moulding. 92.In my view, the effect of the evidence as to the high degree of variability in elongation at break values that can be obtained in relation to tests conducted on a single batch of polypropylene indicates that such variability is part of the inherent characteristics of the product, such that it cannot be said that simply because there may be a variation in elongation of break values recorded from one batch to another that one batch, exhibiting lower elongation at break values, is to be considered defective. 93.Thus, even if I had been satisfied that there was some difference in the ductility of the Profax 7533 supplied to Kader as compared to the Moplen EP-332K supplied earlier, I would not have concluded that this meant that the Profax 7533 was defective. 94.I am therefore of the view that NHH was not in breach of the implied term requiring that the Profax 7533 supplied by it to Kader should correspond with the sample of Moplen EP-332K it had supplied earlier. Issue (2): Whether Profax 7533 contained an undiscoverable defect which rendered it unmerchantable? 95.I turn to consider whether or not the Profax 7533 contained a defect which rendered it unmerchantable, which could not have been detected on a reasonable inspection of the sample of Moplen EP-332K. I agree with Mr Zimmern that there is no real difference between this and the previous question, and in the light of the views I have expressed on the preceding issue, I do not think that it can be said that the Profax 7533 contained a defect that rendered it unmerchantable. 96.In my view, having regard to all the circumstances, I do not think that it can be said that the possible unsuitability of the resin supplied (whether Moplen EP-332K or Profax 7533) for the purpose to which it was put by Kader was such as to render it unmerchantable. It seems to me that the resins supplied were fit for the purpose of manufacturing products using the injection moulding process, which would be a purpose for which goods of that type are commonly bought. Indeed, there is nothing to suggest that the resins supplied were not suitable for use in the manufacture of toys by an injection moulding process, although they may not have been suitable for use in the manufacture of the particular parts of toys that Kader used them for. In seeking to suggest that their possible unsuitability for such use rendered the resins unmerchantable, it seems to me that Kader is seeking, illegitimately, to equate the issue of merchantability with that of fitness for purpose. Issue (3): Fitness for purpose 97.Turning to the question of fitness for purpose, this aspect of Kader’s claim was not pressed by Mr Zimmern, and I do not think that Kader is able to establish, on the evidence available to it, that there was any implied condition that the Profax 7533 (or, for that matter, the Moplen EP-332K) should be fit for the purpose of manufacturing the relevant parts of the Simpsons toys so that the toys so produced would satisfy the requirements and standards demanded by Equity. Although Mr Lo said in his affirmation that he informed Mr Leung that the resins he was seeking to buy were to be used for the manufacture of toys for the US market, and that the toys would need to satisfy the standard tests for that market, it does not appear that he ever told Mr Leung which particular parts of the toys Kader intended to use the resins supplied to manufacture, or that he provided Mr Leung with any details of the tests that the toys would need to pass. Mr Au Yeung’s evidence was that he would not have expected such information to be disclosed to someone in the position of NHH. In these circumstances, whatever Mr Lo may have told Mr Leung, it did not go far enough to support the implied condition that Kader must establish if it is to succeed on this part of its claim. Issue (4): Misrepresentation 98.So far as the alleged misrepresentation is concerned, I am satisfied that Mr Leung informed Mr Lo that Profax 7533 was the same product as Moplen EP-332K. However, for the reasons which I have given in paragraphs 54 to 62 above, I am satisfied that this was not a misrepresentation. Issue (5): Damages 99.In the circumstances, Kader’s claim against NHH fails on all the bases on which it is advanced. It is therefore unnecessary to consider the question of damages suffered by Kader. However, for completeness, I shall briefly indicate my views as to this aspect of the matter, as follows:-
100.In the light of my conclusions on liability and damages, the question of set off does not arise. Counterclaim 101.It follows that NHH’s counterclaim succeeds. Conclusion on first action 102.The consequence is, therefore, that Kader’s claim in the first action is dismissed, and that judgment will be given in favour of NHH on its counterclaim, with interest on the amount of the counterclaim at 1% over the prime lending rate of the Hong Kong & Shanghai Banking Corporation Limited (“HSBC”) from the dates of the respective invoices until judgment and thereafter at judgment rate. The second action 103.As Kader did not dispute its liability to pay NHH in respect of the outstanding invoices issued by NHH in respect of goods supplied by it to Kader, and no question of set off now arises, there will be judgment for NHH on its claim in the second action. So far as the amount of that judgment is concerned, it should, I think, be for the sum claimed by NHH (HK$643,980), less the amount of the judgment already given in the summary judgment proceedings (HK$20,852.50) and the small part of the claim that was abandoned (HK$4,000.00), giving a total of HK$619,127.50. I shall also award interest to NHH on this amount at the commercial rate of 1% over the prime lending rate of HSBC from the dates of the respective invoices until the date of judgment, with interest thereafter at judgment rate. The third and fourth party proceedings 104.A further consequence of the dismissal of Kader’s action is that the third and fourth party proceedings will also be dismissed, as the question of the liability of WCH to indemnify NHH, and of LFH’s liability in turn to indemnify WCH, does not arise. Costs 105.So far as costs are concerned, I do not propose to make an order nisi as to costs, but will invite the parties to make written submissions as to the appropriate costs orders in relation to the two actions and the third and fourth party proceedings. It seems to me that the most convenient course to adopt as to this would be to invite all the parties to lodge such written submissions within 28 days, with liberty to lodge further written submissions in response to any other parties’ submission, if desired, within 14 days thereafter.
Mr Richard Zimmern, instructed by Messrs Clifford Chance, for the Plaintiff in HCA 1534/2003 & the Defendant in HCA 1709/2003 Mr K. M. Chong & Mr Daniel Chan, instructed by Messrs Christine M Koo & Ip, for the Defendant in HCA 1534/2003 & the Plaintiff in HCA 1709/2003 Mr George Lam, instructed by Messrs D.S. Cheung & Co., for the Third Party (in HCA 1534/2003) Mr. M.C. Law, instructed by Messrs Tsang, Chan & Wong, for the Fourth Party (in HCA 1534/2003) |
Cases cited in this judgment
Further hearings and rulings under HCA 1534/2003