During negotiations over the next few months to put in place a repayment instalment plan, Darlie continued sending six shipments to Singapore worth about $834,000.
Szu Ming managed to pay back some $1.5 million by the end of 2006 but then defaulted again.
When all the sums were worked out, the Hong Kong company, through lawyer Adrian Tan from Drew & Napier, took the local distributor to court, claiming a debt of $6.45 million.
Szu Ming's managing director Lee Peng Shu claimed Hawley & Hazel Chemical's managing director Eddie Niem made an oral pact with him in March 2002 that they would 'take steps to prevent or stop parallel imports of the product into Singapore'.
But Mr Lee, the son of Mr Lee Szu Yin, who was the one who first brought in the toothpaste brand in 1951, claims the manufacturer did nothing.
He claimed that his company lost an estimated $2.18 million due to parallel imports between 2002 and 2006.
Darlie, which was previously known as Darkie until a merger between the manufacturer and the Colgate-Palmolive group in 1985 brought about the name change, was the No. 1 toothpaste brand in Singapore with a 56 per cent market share in 1984.
Sales subsequently began to drop when, among other things, parallel imports of the paste from Thailand and Hong Kong gnawed into Darlie's dominance.
According to a market survey published by market-research company Nielsen, Darlie's share in the Singapore market was 30.7 per cent last year.
Dealers are able to sell parallel imports at lower prices as they do not have to pay the cost of overheads like marketing faced by the appointed distributor.
Lawyers said this case raised for the first time the issue of whether a manufacturer was obliged to stop parallel imports from entering a market where a distributor had been appointed.
Justice Lai Siu Chiu in her judgment held there was 'no legal and/or contractual obligation on the plaintiff's part to stop parallel imports of the product into Singapore'.
She noted, among other things, the Hong Kong manufacturer 'could not guarantee that dribs and drabs of parallel imports would not slip through as loose cargo'.
Szu Ming is appealing against Justice Lai's ruling.
It argued among other things that Hawley & Hazel Chemical had terminated their contract without adequate notice.
However, Justice Lai pointed out that there was no contractual notice of termination as the working relationship between the two parties had never been formalised in any written document.
All agreements had been made orally.
Szu Ming, represented by lawyers Julian Tay and Yeo Lih Wei from Lee & Lee, argued that reasonable notice of termination of two months would have helped it to avoid losses of up to $2 million.
This, the judge said, would be left to Szu Ming's counterclaim at a later stage. However, Justice Lai expressed 'grave doubts on its merits'.
Szu Ming's MD, Mr Lee, said yesterday, when contacted, that he would reserve comment till a more appropriate time.
Diethelm Singapore now distributes Darlie products here.