Icon Datacom Ltd v. Solarbrite Electronics Ltd
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HCA985/2005 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO. 985 OF 2005 ---------------------
Before : Deputy High Court Judge Burrell in Court Dates of Hearing : 19-21 and 24-25 January 2011 Date of Judgment : 16 February 2011 ------------------------ J U D G M E N T ------------------------- 1.The plaintiff and the defendant are both companies in the electronics industry. One of the plaintiff’s products was a NetPos-2000. This was a ‘point of sale’ machine commonly seen in banks and retail outlets into which a credit card was put and information then appeared on an illuminated window on the machine. 2.This case concerns the merchantability of a small component inside the machine which was supplied to the plaintiff by the defendant. The component in question was an “EL panel”, short for electronic luminescent panel. An EL panel is a rectangle of plastic through which an electronic current is passed which causes it to light up and thereby illuminate the window on the POS machine. The cost of each EL panel was under HK$4. Background to the contract 3.The parties first met in 2002. 4.At that time the representative of the defendant who had discussions with the plaintiff’s representative was a Mr Kenneth Kong. He spoke and had meetings with Mr Augustine Fung, the general manager of the plaintiff, Ms Yip Wan Ching, a marketing executive of the plaintiff and Mr Tam Pui Tat, the engineering manager of the plaintiff. All three of these plaintiff’s witnesses made statements and gave evidence at the trial. 5.For the defence however Mr Kenneth Kong neither made a statement nor gave evidence. Neither did his successor Mr Jeff Lee (who took over in 2004) and neither did Mr Thomas Tse nor Mr Victor Chan who were referred to as the bosses of Mr Kong and Mr Lee. The defendant’s main witness was Mr Kwong Chi Wai, the marketing director who was senior to all the above named but who had had no personal dealings with the contract at the material time. 6.The content of the discussions which took place in 2002 are of importance. I shall refer to them in more detail later. I merely note at this stage that only the plaintiff’s witnesses can give first hand evidence of what transpired and what was said at that early stage of contractual relations. Events leading up to the April 2004 order 7.After the initial discussions the defendant, in October 2002, supplied two sets of sample ELs to the plaintiff. One set was of 3 panels, the second was of 120 panels. The samples were intended to comply with a diagram prepared by Mr Kong which also referred to a model number EL108CF. The diagram itself merely showed the dimensions of the panel. Further requirements had been discussed, according to the plaintiff, at the meetings. Mr Kong had also been given an LCD module together with a plastic mounting to work to. 8.Both the set of 3 samples and the set of 120 samples were fully tested over a two-month period. The plaintiff was satisfied with them and, in October 2003, an order for 1,200 panels was placed and in January 2004 a further 2,000 panels. All these were the same EL108CF and all worked properly. 9.In March 2004, the plaintiff placed another order for 5,100 panels. The POS terminals into which these panels were to be put were intended for a Taiwanese customer. The order had been received from the plaintiff’s Taiwan agent “Chia Hsin”. The ultimate customer in Taiwan was the Tai Shin Bank. 10.It is this batch of 5,100 which is the subject matter of this claim. They were sent to the plaintiff in two batches of 1,100 on 6 April 2004 and 4,000 on 27 April 2004. They were then sent to the plaintiff’s manufacturing sub-contractor, Surface Mount Technology Ltd (“SMT”) for assembly into the finished POS terminals. After the first twenty panels had been installed SMT noticed some problems in five of them. Those five were returned to Mr Kong who sent them off for testing. After receiving the ‘defect report’ from the manufacturer he acknowledged them to be problematic. However as a result, it seems, of certain assurances made by Mr Kong the production of terminals continued. The manufacturer had stated that the “mistake” would be avoided in future. 11.The entire Taiwanese consignment, 3,100 terminals, was factory tested and all were approved. They left the factory, therefore, in good working order having been subjected to a 8-hour “burn in” test. The evidence further stated that Chia Hsin, in Taiwan, conducted further tests, as a matter of routine, before delivery to the customer. This test was a 65‑hour test. Again no faults were detected and accordingly the terminals were distributed to the various branches of the Tai Shin bank in Taiwan. The problems with the 5,100 order 12.Within weeks, in May 2004 and increasingly in June 2004, problems with terminals were reported back. There were two types of problem; firstly, “snowflaking” which was the appearance of black vertical lines at random places on the screen which distorted the words and figures thereon and secondly, a failure of the panel to light up so that the screen was either dim or had no backlight at all. In round terms, the failure rate of the panels in the whole batch exceeded 60% (later tests indicated). 13.Subsequent events can be stated shortly. The bank took a quick and unilateral decision to reject the entire consignment. They were returned via the agent, Chia Hsin, without much further discussion or negotiation. Moreover the agent stipulated that if they were repaired or reworked they could not be marketed through them into Taiwan. 14.The plaintiff gathered them in and arranged for new EL panels, supplied by Solarbrite, to be inserted. The reworked terminals proved to work properly thereafter and they were resold to a customer in the PRC for a much reduced overall price. 15.Thus, all the facts, in a nutshell, produce a somewhat puzzling outcome. The early consignments, in 2003, the subject consignment in April 2004 and the replacement consignment in July 2004 all passed both the factory testing and the agent’s testing and were deemed to be of merchantable quality and suitable to be distributed into the market place. However, within weeks serious problems materialized with the middle consignment whereas no such problems ever arose with the other two consignments. They were all made in the same factory. Legal basis of plaintiff’s case 16.Following discussions at trial, in spite of the absence of any reference to the Sale of Goods Ordinance, Cap. 26 in the pleadings, I accept the defence submission that the plaintiff’s case is one of breach of implied terms as to merchantability and fitness for purpose as provided by section 16 of Cap. 26. No evidential basis has been established for a case based on a contract for sale by sample which would invoke section 17 of Cap. 26. 17.Section 16(2) and (3) provides as follows :
18.“Merchantability” is defined by section 2(5) as follows :
19.The key issue is therefore the EL panels’ fitness for the purpose for which they were intended. It is therefore now important to consider the evidence relating to :
Question (b) will involve a consideration of the expert evidence. Early discussions 20.In their written statements Mr Augustine Fung and Mr Tam Pui Tat stated as follows on this issue :
21.In his oral testimony Mr Fung further stated that he had “made it clear” to Mr Kong that the EL panels were to be fitted into the NetPos system for use in banks and should have a 5-year life span. He also remembered telling Mr Kong that the ‘SIPEX’ driver would be used in the system. He specifically remembered Mr Kong mentioning an alternative driver but Mr Fung rejected the alternative in favour of the SIPEX with which the EL panels would have to be compatible. 22.Mr Tam’s oral testimony was that in addition to the drawing of the panel later sent by Mr Kong and approved by the plaintiff he told Mr Kong at the early meetings the size, colour, mounting method, the use of the SP4422 SIPEX driver, that the end user was a bank and that a 5-year life span was expected. 23.As already mentioned there was no evidence from the defence on this issue. 24.Mr Abraham Chan, counsel for Solarbrite submitted that little weight should be attached to the oral testimony because it did not appear in the same detail in the written statement, there was no documentation to support much of it and the conversations took place eight years earlier. 25.I am satisfied however that the plaintiff’s evidence does reflect the truth of what took place. The witnesses more detailed oral evidence is, I am satisfied, an elaboration of remarks such as “I informed Mr Kong of the … drive characteristics and the purpose of …” and “Mr Tam explained the technical requirements of the EL panel which was necessary to fit …” which are very likely to have been said between these two parties to this contract. The recollection that Mr Kong mentioned an alternative driver supports this finding. Mr Kong was more than a mere salesman. 26.Thus Solarbrite had specific and technical knowledge of the purpose for which the EL panel was to be fit. What were the characteristics of the panels from the batch of 5,100 which caused the Taiwan bank to return 3,100 terminals? 27.There is no doubt that a significant proportion of the terminals developed problems after a short time which caused the end-user, the bank, to return 3,100 of them. 28.The plaintiff must satisfy the court that the problems were, on the balance of probabilities, attributable to the EL panels. 29.Other possible explanations have been advanced by the defendant. Explanations such as exposure to moisture, negligent handling, non-compatibility with other components or other environmental reasons. 30.On the technical side it has also advanced the argument that some variations in the manufacture of EL panels is inevitable and the production of “electronic noise” is also inevitable. Accordingly, the plaintiff’s design of its terminal should have been more robust so as to accommodate such variations and should have included increased “shielding” which would have minimized the problems associated with the inevitable “electronic noise”. 31.Before addressing these issues however it is necessary to review the expert evidence to try and answer the question ‑ what was wrong, if anything, with the EL panels in the 5,100 batch? Expert evidence 32.The court was assisted by two expert witnesses. Dr Chi Kwong Li, associate professor of the Hong Kong Polytechnic University, for the plaintiff and Professor Kwok Hoi Sing of the Hong Kong University of Science and Technology for the defendant. Both had impressive C.V.s, both endeavoured to assist the court and in many respects agreed with each other. 33.Dr Li had carried out extensive tests on two sets of samples. Six panels were randomly selected from the batch said to be defective and six from the batch which was problem free. They were subjected to various tests to see what differences there were in the two sets of samples. The testing commenced in August 2008 and it was finally concluded in December 2008. Dr Li found the two sets of six samples each to have markedly different physical properties. His conclusions were that (1) the “defective” EL backlight caused the LCD display to be corrupted, (2) the degrading and failure of the EL backlight causes glitches on the signal lines of the LCD interface, and (3) the “defective” batch aged more rapidly and had a reduced life when subjected to an accelerated life test. 34.Dr Li described the differences in the data obtained from the tests, in some cases, as “huge”. He opined that the defective batch was not suitable to be put in the market place. 35.Professor Kwok was aware of the test results and was shown a demonstration of the performance of both the ‘good’ panels and the ‘bad’ panels. He stated that the difference in performance was due to the variations in the electrical characteristics between the two batches. He stated that the system designer should take variations in performance into account and produce a “robust” design. The question for the court is whether the variations in performance are too great to be accounted for and thus the ‘bad’ panels were outside the performance parameters of even a more robust design. 36.Professor Kwok added that the EL panels were a “passive” component and provided they emitted light, the suppliers’ job was done. It was agreed between the experts that both batches were capable of emitting light. The difference was that the “bad” batch required a lot more electricity to maintain the light and as a result the durability and reliability were diminished. 37.The expert evidence was illuminating. Ultimately the difference between them came down to their respective opinions about whether or not the ‘bad’ batch could have been used commercially or not. This, of course, is a question for the court. 38.I was satisfied, firstly, that the panels as tested in 2008 were in the same or similar condition as they had been in 2004. The “good” batch had been good in 2004 and remained good when tested in 2008. Their luminescence and durability were both commercial. By the same token the ‘bad’ panels did not perform adequately in 2008 and I am satisfied the results were a reasonably reliable indication of how they had performed in 2004. 39.I am also satisfied that their failings, or their poor performance, were not matters that the plaintiff’s design should have catered for. All other batches both before and after the ‘bad’ batch performed well but the bad batch became dim or expired and caused ‘snowflaking’ very early on in their lifespan. I reject the defence submission that a terminal should have been designed that would accommodate such wide differences as were detected in the ‘bad’ batch. 40.Applying these findings to the overall facts I am satisfied that the defendant supplied the plaintiff with panels that breached section 16 of Cap. 26 in that they were not reasonably fit for the purpose which was known to the defendant. 41.Given that all other batches worked well, given that the returned terminals worked well after the EL panels were replaced and given that samples for the ‘bad’ batch, after testing in 2008 were shown to have significantly different properties from the sample from the ‘good’ batch, I am satisfied that, on the whole of the evidence, it is more likely than not that :
42.On the issue of causation, Mr Chan submitted that the “most likely” cause of the NetPos display problems was the inadequate design of the LCD interface. Given the above findings the plaintiff’s design of the entire terminal should not be criticized. Mr Chan continues that the court should not exclude “other possibilities” such as poor storage of this particular batch, or poor handling by the end users or quality problems with other NetPos components. On the evidence these are speculative and cannot, in my judgment, disturb the key factors that the significantly different properties in the bad batch in 2004 are very likely to have been the real cause. Damages 43.The issue of quantum of damages is also by no means straightforward. Bearing in mind the claim for $2.84 million arises from goods originally costing less than $20,000 it is easy to understand why the defendant’s initial reaction to the claim was that it was “out of all proportion”. Particularly when they had replaced all the returned panels. When considering the question of what damages flowed from the breach which were reasonably foreseeable some factual issues should be revisited :
Approach to quantum 44.The plaintiff claims under six headings :
Item (e) 45.In my judgment selling 2000 NetPos system for under $200 as PIN pads (i.e. simple PIN readers) when they were worth about $1,500 each was not responsible. I disallow item (e) because a reasonable effort should have and could have been made to achieve 100% mitigation. It is noted that the 1,000 that were sold to the PRC were sold at a higher price than some that had gone to Taiwan. Moreover I agree with the criticism of the methodology employed in that no attempt has been made to quantify the net loss of profit, if any. Items (b), (c) and (d) 46.I consider these to be reasonably foreseeable consequences of supplying defective EL panels. Items (a) and (f) 47.The invoices supporting item (a) are described as ‘Maintenance Service Charges’ and ‘Technical Support Charges’. In the absence if any other evidence explaining why it is a reasonably foreseeable loss it should not be allowed. 48.Item (f) relates to the purchase of surplus (different) modules which could not be sent to Taiwan after the main order had been cancelled. They were re-sold the following year at a reduced price. The purchase of these different modules did no more than provide the plaintiff with good stock which was never ‘dead’ as claimed but merely sleeping. In the context of this action I consider it to be too remote to be met by the defendant. Moreover, no explanation was given as to why it was resold at a reduced price. 49.Items (b), (c) and (d) total $370,885. 50.In rejecting items (a), (e) and (f) I have taken into account the general matters outlined above. Conclusion 51.I give judgment to the plaintiff in the sum of $370,885 together with interest from 27 May 2005 to be agreed. 52.As to costs, I direct the parties to file brief written submissions informing the court of all matters which may be relevant to the issue of costs, on or before 22 February 2011. Thereafter I shall hand down a final costs order.
Mr C. Yuen, instructed by Messrs So, Lung & Associated, for the Plaintiff Mr Abraham Chan, instructed by Messrs Robin Bridge & John Liu, for the Defendant | |||||||||||||||||||||||||||||||||||
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