Cross Protection (M) Sdn. Bhd. v Ids Medical Systems Sdn. Bhd. (BA-22NCvC-208-04/2018)

IDS MEDICAL SYSTEMS SDN BHD (No. Syarikat : 950311-P)

TAN GAIK CHEW (No. K/P: 770826-07-5510)

CHAN HOE HOCK (No. K/P: 770909-08-6901 …DEFENDAN-DEFENDAN (dalam tindakan balas) 18/04/2023 10:57:04 BA-22NCvC-208-04/2018 Kand. 139 S/N 38nKadlzx0mZiFS9nlfJaA GROUNDS OF JUDGMENT Introduction [1] The Plaintiff’s claim arises from an exclusive distribution agreement entered into with the Defendant for the sale of its medical products.

Defendant agreed on a 1st order with the minimum purchase worth of RM 8 million of the Plaintiff’s products, to be paid in 4 equal instalments at specified intervals. For the 1st year of the agreement, the Defendant was to order a minimum of RM 6.6 million worth of goods. For the 2nd year, the order was to be increased to RM 8.4 million. All payment for orders were to be made on a 100% basis after 45 days of the delivery order, failing which a 10% interest per annum penalty shall be imposed. [6]

the stock worth over RM 3.8 million was fast moving stock, when in reality they were slow moving items; S/N 38nKadlzx0mZiFS9nlfJaA

(ii) the Defendant would be able to achieve a minimum sales target of RM 7.6 million for the first year, and 9.6 million for the second year inclusive of profit; and

(iii) failed to disclose fact that the Plaintiff’s stock comprising of shoe covers, compressed towel, bandages, sleeves and other items were unregistered medical devices, potentially exposing the Defendant to criminal chargees. [12] The directors had also promised but failed to provide the sales data of the Plaintiff, and this impeded its ability to sell the products. In addition, they had given false assurances that the business was a profitable one. Although the Defendant was appointed the Plaintiff’s exclusive distributor, it acted in breach of the EDA when it sold its products directly to the dental market. [13] Consequent to the misrepresentation, the Defendant claims damages against the Plaintiff and both its directors. A further sum of RM 71,601.00 is sought as loss of 15% gross profit margin. [14] The Plaintiff’s termination of the EDA caused the Defendant to be left with excess stock worth RM 2.8 million in its warehouse which it is unable to dispose of. The Plaintiff is obliged to buy back the remaining stock. The stock is presently stored in a warehouse. The Defendant claims against the Plaintiff storage charges of RM 433,876.00. S/N 38nKadlzx0mZiFS9nlfJaA Defence of the Plaintiff to the counterclaim [15] In response to the misrepresentation allegations made by the Defendant, the Plaintiff claims that they are baseless and an afterthought merely to avoid its liability. There were no complaints of defective goods raised at the time the goods were supplied. All other complaints were resolved by the Plaintiff. The Plaintiff even assisted the Defendant to sell some of the products, in particular to the dental market. Further, the medical products supplied to the Defendant do not require registration with the Medical Device Authority. [16] The Plaintiff had also provided the Defendant with the relevant data and necessary information to enable it perform its obligations under the EDA. [17] The Defendant’s inability to make the distributorship a profitable venture resulted from its own internal problems and mismanagement. Issues for determination [18] The contention of the parties gives rise to the following factual issues for determination by this court, broadly stated as follows:-

whether the goods supplied comprised of stocks which were defective, had a short shelf life and were unregistered medical devices;

(ii) whether there was a failure to provide sales data; S/N 38nKadlzx0mZiFS9nlfJaA

(iii) whether the Plaintiff acted in breach of the EDA by selling its products directly to the dental market;

(iv) whether there was misrepresentation on the part of the directors of the Plaintiff; and

whether the Plaintiff is liable to buy back the remaining stock. Analysis and decision of this court [19] The law on the burden of proof in civil cases is settled. The burden of proof lies with the Plaintiff, on a balance of probabilities, if it is to succeed in its claim, and the Defendant, if it makes a counterclaim. Coupled with this basic principle is another equally important principle that the party who asserts a fact bears the burden to prove it. (See: sections 101 and 102 of the Evidence Act, 1950 and Letchumanan Chettiar Alagapan (as executor to SL Alamelooo Achi (Deceased) & Anor v Secure Plantation Sdn. Bhd.) [2017] 5 CLJ 418). [20] I shall now deal with the specific allegations below. Stocks which were defective, had a short shelf life, and were unregistered medical devices [21] At paragraph 5 of the Defendant’s Amended Defence and Amended Counterclaim, details of the allegation were set out by reference to the stock description, the specific complaint in relation thereto and the value of the stocks. S/N 38nKadlzx0mZiFS9nlfJaA [22] The Plaintiff, through its witnesses PW1 and PW 2, adduced evidence to rebut the allegations. They are the directors of the Plaintiff and co-defendants in the counterclaim action. I had considered the material aspects of their evidence in response to the allegations as follows:-

The mixing bowl, sterile gauze sponge and impression tray were delivered as far back as 9.11.2016. Upon delivery, they were inspected, verified and approved by the Defendant’s representative. No issues and complaints were received by the Plaintiff in respect of these items;

(ii) The Defendant complaint that the saliva ejector and sterile flat reel delivered by the Plaintiff was rusty is an afterthought. The Plaintiff was informed that the Defendant could not sell the equipment. The Plaintiff then agreed to assist the Defendant by taking it back. It was subsequently sold to one of Plaintiff’s customers for RM 158,970.00. The Defendant’s complaint about the rusty saliva ejector was raised and received by the Plaintiff via an email only after the equipment had been sold off;

(iii) Via an email dated 1.8.2017, the Defendant made a complaint to the Plaintiff about wrong labelling with respect to cotton wool and cotton ball. However, the Defendant added that it will carry out investigations and update the Plaintiff on the results. There was no follow up by the Defendant with the Plaintiff on the issue. Apart from the wrong labelling issue with respect to S/N 38nKadlzx0mZiFS9nlfJaA these items, no other complaint on defective goods were received;

(iv) The Defendant also alleged that defective surgical gowns were delivered to Pharmaserv. However, the Plaintiff never received any complaint from Pharmaserv. Instead, the Plaintiff was appointed by Pharmaserv to supply surgical gowns to the company by three letters of awards dated 8.2.2017;

The alleged defective surgeon caps was not a complaint with respect to the quality of the goods, rather it was a specification and design issue as it was not in accordance with that required by Pantai Hospital. The problem was resolved by the Plaintiff subsequently replacing the caps with the new designs of the Plaintiff. The Plaintiff then requested the Defendant to provide it with information on other hospitals which had similar complaints. There was no response from the Defendant to this request;

(vi) In the Defendant’s Amended Defence and Counterclaim, it alleged that stocks of RM 410,042.00 with a short shelf life was supplied to the Defendant. However, the Defendant did not specify the type of products. Sometime in 2017, the Defendant wrote to the Plaintiff to inform that certain products supplied were expiring in 2017 and 2018. The Defendant alleged that the parties had an agreement that stocks supplied were to have an expiry date in

The Plaintiff replied to deny the existence of such a term S/N 38nKadlzx0mZiFS9nlfJaA in the EDA. It further stated that some of the products had no expiry dates and items such as reel, cup and pouch can last for as long as 7 years. Further, the Packing List accompanying the delivery of the goods contain information on the expiry dates of the products. The Defendant accepted the goods when they were delivered to the Defendant’s premises without raising any issue as to short expiry dates; and

(vii) The products sold by the Plaintiff comprising shoe covers, compressed towels and sleeves do not constitute a medical device under the Medical Device Act 2012. In any event, the products of the Plaintiff had undergone the assessment and audit by SGS Malaysia Sdn Bhd, a registered Conformity Assessment Body pursuant to the Medical Device Act 2012. SGS had confirmed that the Plaintiff have complied with the statutory requirements for the Plaintiff to operate its business at the material time. As for bandages, it is exempt from registration under the Medical Device Act 2012 pursuant to a circular issued by the Medical Device Authority dated 22.5.2014. Before entering into the EDA with the Defendant, the Plaintiff had, on 7.8.2015 made an application to the Medical Device Authority (“MDA”) for the registration of the bandage. In the interim period pending its approval, the MDA allowed the Plaintiff to continue dealing with its products. The approval was eventually given for the period from 26.4.2017 to 25.4.2022. S/N 38nKadlzx0mZiFS9nlfJaA [23] Having considered the evidence adduced on behalf of the Plaintiff, particularly that of PW2, I find allegations of the Defendant with regard to the stocks supplied to be sufficiently rebutted. Her evidence was backed by documentary evidence. Her evidence was weighed against that of DW2, the operations manager. His evidence were mainly oral assertions. I find PW2’s evidence to be more believable. Failure to provide sales data [24] The Defendant alleged that the Plaintiff failed to provide its sales data to assist the Defendant in the business. I find this allegation to be but a bare allegation. There is no evidence to convince me that it was part of the agreement between the parties. Having also scrutinized the terms of the EDA, I find nothing to suggest such an obligation exists on the part of the Plaintiff. [25] PW2 in her evidence said that although it was not the obligation of the Plaintiff to provide the sales data, nonetheless out of goodwill, such data was provided upon the request of DW2. This request for data was made on 4.8.2016 through an email sent by DW2 to PW2. I note that this request was made after the EDA was entered into. This evidence fortifies the Plaintiff’s contention that there was no contractual obligation to furnish the data. [26] In any event, PW2 gave evidence that the information was provided on various dates in August and September 2016. The details of the data provided are as follows:-

List of Customers data; S/N 38nKadlzx0mZiFS9nlfJaA

(ii) Customers data on Dental Clinic;

(iii) Customers data on Hospital, University, Government and Dealer;

(iv) Item Master Product Lists; and

Item Master Revised Products Lists. [27] DW2 in his evidence said that the data given was insufficient and unspecific for the Defendant to run the business effectively. He complained that the data given was unhelpful as the list of products therein was numerous with no specific product breakdown for the respective customers. It is my view that in the absence of any contractual obligation to provide the data, the Plaintiff cannot be made responsible to provide the data in a manner to suit the Defendant. I do not find merit in the Defendant’s allegations on the Plaintiff’s failure to provide data. Acted in breach of the EDA by selling its products directly to the dental market [28] The Plaintiff explained that there were instances when it was compelled to sell the products directly to its customers as the Defendant did not have the requisite stocks. The Plaintiff received feedback from customers stating that the Defendant was not able to supply the stock. The Plaintiff then informed the Defendant that it will supply the stocks directly to these customers to avoid disappointing them. No objection was received in response to the Plaintiff’s action. [29] As for dental products, the Defendant encountered problems in selling the stocks. The Defendant was also overdue in its payment to the Plaintiff then. The Plaintiff agreed to assist by arranging for the purchase S/N 38nKadlzx0mZiFS9nlfJaA of these stocks by Tunas Warisan, a dental distributor. Tunas Warisan initially agreed to purchase the stocks from the Defendant. However, the parties could not reach an eventual agreement on the detailed terms. The Plaintiff then informed the Defendant that as it had fallen into arrears on the payment due, the Plaintiff will not supply any new order or shipment to the Defendant. Instead, the Plaintiff will supply directly to the customers who require the goods. [30] Several emails were referred to substantiate the Plaintiff’s version of events. Having viewed the emails, I find the contents to be consonant with the Plaintiff’s evidence, and lends credibility to its explanation. Negligent and fraudulent misrepresentation on the part of the directors of the Plaintiff. [31] The Defendant’s case of misrepresentation with regard to the goods supplied has been dealt with above. I shall now deal with the other particulars of misrepresentation. [32] The Defendant claims it was induced to enter into the EDA as a result of being told it was a profitable business. The directors of the Plaintiff painted a rosy picture of a big market for its products. It was told that there would be only 20%-30% of slow-moving stocks. Upon entering into the market, the Defendant found it to be otherwise. The stocks were in fact dead stocks. [33] Both PW 1 and PW2 gave evidence to deny this particular claim of the Defendant. They stated that the Plaintiff had been in this business since 1999, with more than 23 years of dealing in medical products. Prior S/N 38nKadlzx0mZiFS9nlfJaA to the execution of the EDA, the Plaintiff’s revenue for 2015 was RM 11,720,551.00. The EDA was entered into after lengthy discussion and negotiation. The Defendant conducted its own independent market survey, and agreed to do due diligence before entering into a collaboration with the Plaintiff. The Defendant’s inability to sell the Plaintiff’s products resulted from its own internal problems, rather than any misrepresentation as to the Plaintiff’s products. [34] I find the evidence of the Plaintiff to be plausible. The Defendant’s inability to sell the products and to meet its targeted sales cannot be reasonably attributed to any misrepresentation by the Plaintiff’s directors. The Defendant’s failure to achieve the sales volume is an operations issue and a matter beyond the Plaintiff’s control. [35] The Defendant also claims that the directors had misrepresented on the profitability of the business and the sales target it was likely to achieve. This was denied by the Plaintiff through its directors. I do not find the Defendant’s allegation to be supported by any documentary evidence. As there is only oral evidence adduced by both parties, I am required to weigh the testimony given by both parties and to conclude whom it favours. Having done so, I am more persuaded by the evidence of the Plaintiff. Also, the profitability of a business venture is ordinarily a risk one takes and not by relying wholly on any representation concerning the sales volume. [36] I therefore do not find the allegations of misrepresentation proven. [37] For the sake of completeness, I shall deal with one other matter. The Defendant submitted that the corporate veil ought to be lifted in order S/N 38nKadlzx0mZiFS9nlfJaA to pin liability on the directors PW1 and PW2. However, the issue of lifting of the corporate veil does not arise here in view of my findings that the allegations of misrepresentation have not been made out. Proposal by the Defendant to settle the debt amicably [38] A material evidence to consider is an undated letter by the Defendant’s managing director, one Sunny Lim to the Plaintiff, titled Outstanding balance of RM 586,646.06. In the letter, Sunny Lim proposed to pay the net amount due of RM 541,400.32 in 6 monthly instalments commencing 15.11.2017, of RM 90,000 for first 5 instalments and the last, RM 91,400.32. [39] This email was sent after the Plaintiff terminated the EDA through its solicitor’s letter dated 26.10.2017. Mr. Bryan (DW1), the finance manager of the Defendant, testified that he prepared the letter of settlement for the managing director, one Sunny Lim to sign. He agreed in cross examination that the letter was prepared to settle the amount owing to the Plaintiff. As the company was experiencing some financial difficulties, a settlement plan was proposed to the Plaintiff. Mr. Sunny Lim then sent a text message to PW2 to enquire if the payment terms proposed was acceptable. [40] I find that the letter to be a clear and unequivocal admission of the Defendant’s liability. The Defendant’s own witness confirmed that it was signed by the managing director. In any event, there is no dispute as to the due execution of the letter. It is also significant that there is no mention as to any complaint on the goods supplied. S/N 38nKadlzx0mZiFS9nlfJaA [41] The admission serves to lend credibility to the Plaintiff’s claim. Remaining stock in the Defendant’s warehouse [42] The Defendant claims that it is now saddled with stock worth of RM

2.8 million following the Plaintiff’s termination of the EDA. The Plaintiff is obliged to buy back the stock, and pay for the cost of storing the stock. [43] The resolution of this issue requires an examination of the terms of the EDA. The relevant clause on the goods purchased in the event of termination provides as follows,

AFTER TERMINATION AND RETURN The termination of this Agreement shall not release “Distributor” from paying any sum which maybe owing to “Principal” or which have been ordered by “Distributor” before the termination. After termination, “Distributor” shall return to “Principal” all products which are provided at no charges for demo/training purposes. Any return of purchased “Products” is subject to mutual agreement between “Principal” and “Distributor.” [44] Based on the above provision, the Plaintiff is not obliged to buy back the goods upon termination. Any return of purchased goods must be consented to by both parties. Clearly, the Plaintiff has not consented to do so. The claim of the Defendant in this regard must necessarily fail. Consequently, the claim for warehouse storage charges also fails. S/N 38nKadlzx0mZiFS9nlfJaA Conclusion [45] Premised on the foregoing reasons, the Plaintiff has succeeded in proving its claim against the Defendant. The Defendant’s counterclaim fails and is consequently, dismissed. [46] I therefore order as follows:-

the Defendant is to pay the Plaintiff the sum of RM 311,371.55 with interest at the rate of 5% from the date of judgment until realization; and

(ii) costs of RM 35,000 is to be paid by the Defendant to the Plaintiff as costs for the main claim as well as the counterclaim. Dated : 17th April 2023 -sgd- .………………..….... Alice Loke Yee Ching Judge High Court of Malaya at Shah Alam S/N 38nKadlzx0mZiFS9nlfJaA Counsel for the Plaintiff : Mr. Ragumaren Roy Gopal (Mr. David Regumaren with him) Tetuan G. Ragumaren & Co. Counsel for Defendant : Mr. Ramesh Lachmanan Tetuan Nith, Gowri, Lachman & Partners S/N 38nKadlzx0mZiFS9nlfJaA