TOP SUNNY (HONG KONG) LTD v. WESTPEX FASHION LTD

DCCJ 2874/2009

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL JURISDICTION NO. 2874 OF 2009

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BETWEEN

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DECISION

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1.  This is the Plaintiff’s Order 14 summons for final judgment against the Defendant, for the price of goods sold and delivered by the Plaintiff to the Defendant.

2.  The goods were sold under 2 purchase orders which can be found in exhibit “TTK-1” of the 1^st Affirmation of Tung Ting Kong of the Plaintiff.  The goods consisted of garments of various designs and specifications of the Defendant, to be manufactured by the Plaintiff’s factory in Mainland China.  It is not in dispute that an important feature of the garments (or at least most of them) was that they should have certain buttons and/or rivets which were required to be electroplated with nickel, each of which should have a Swarovski rhinestone set into it (referred to as a “glaring stone” in the pleadings).  In a Defence filed on 29 July 2009, the Defendant claims, inter alia, that a significant quantity of buttons and rivets were found to have oxidised or rusted, some of the glaring stones were not properly secured on to the buttons and rivets, and some of the stones were chipped.  The goods were not of merchantable quality or reasonably fit for the purpose of resale, which purpose the Plaintiff well knew.  The Defendant rejected the goods, and was therefore under no duty to pay the price.

3.  The Plaintiff on the other hand alleges that the Defendant had already accepted the goods, and was bound to pay the price.

Evidence

4.  The purchase orders were first placed on about 15 October 2008.  There were subsequent revisions to the purchase orders for a number of reasons, but nothing turns upon those mutually agreed changes.  The final versions of the purchase orders (“the Purchase Orders”) were dated 16 March 2009.  By this time, the original agreed date of delivery had long passed, and no new date of delivery was stated in the revised purchase orders.  Neither party set a new deadline for the delivery of goods.  The goods were agreed to be sold C&F Hong Kong by truck.  The Purchase Orders included the terms “Inspected Required”, and “Shipment quantity 5% more or less within tolerance”.  However, at the top of each Purchase Order, it also stated “This order accept +5% overship, but cannot short ship.”

5.  The buttons and rivets were manufactured by another company called Well Max.  The Plaintiff’s case is that Well Max was nominated by the Defendant to be the manufacturer and supplier of these buttons and rivets for these Purchase Orders, and the Plaintiff had to order and pay for them from Well Max.  Mr Ditto Chan of the Defendant in his affirmation does not accept that the Plaintiff had to obtain the buttons and rivets from Well Max.  He explains that the Plaintiff was free to manufacture these buttons themselves or order from elsewhere, but since the Plaintiff was unable in the earlier stages to produce buttons of the required standard, the Defendant suggested that the Plaintiff should order them from Well Max.  One of the issues between the parties is, if the buttons and rivets were defective, as alleged or otherwise, whether the Plaintiff was responsible for such defects.

6.  After the purchase orders were placed, the Plaintiff proceeded with the manufacture of the goods in question, including sample production and subsequently, bulk production.  On the first 2 inspections, the results did not pass the Defendant’s quality control and were rejected.  The 3^rd inspection took place on 5 March, 9 March and 25 March, in respect of different styles of garments.  The inspection reports appear in exhibit “TTK-3”.  The Plaintiff’s case is that the Defendant accepted the goods by this inspection subject to minor defects to be rectified, which the Plaintiff did.

7.  On 6 March 2009, 80 pieces of the garments were delivered as requested by the Defendant.  Although the Plaintiff claims in its Statement of Claim that 90 pieces were delivered, its own debit note DN009-005 in “TTK-5” refers to only 80 pieces.  Mr Ditto Chan of the Defendant explains that these were samples urgently required by the sub-buyer, and they had been sent before its quality control staff had inspected them.

8.  Subsequently on 26 March 2009 the Defendant gave written instructions to the Plaintiff to make shipment or delivery of the goods.  On the same day, 672 pieces were delivered by the Plaintiff to the Defendant’s own godown in Mainland China.  These were paid for by the Defendant.  Mr Ditto Chan claims that the Plaintiff demanded payment before the Defendant had the opportunity to check the quality of the garments, but the Defendant subsequently found that many rivets were defective.

9.  Further deliveries were made on 1 April 2009, 3 pieces of which were, according to Mr Ditto Chan of the Defendant, “fit samples” or size samples, and another 54 pieces were delivered to a forwarder in Hong Kong for shipment to a customer of the sub-buyer in Africa.  Again Mr Ditto Chan claims in his affirmation that the Defendant had not had an opportunity of examining the goods before they were shipped.

10.  Save for the delivery made on 26 March 2009, these partial deliveries have not been paid for.  I shall return to these partial deliveries at a later stage of this judgment.

11.  The remainder of the garments were sent by the Plaintiff by truck from Mainland China to Hong Kong, as instructed by the Defendant, to be delivered to 3 different warehouses in Hong Kong.  On 3 April 2009, the Plaintiff notified the Defendant that the goods would be sent to Hong Kong on that day.  It was then that the Defendant requested another inspection, and after the truck arrived in Hong Kong, it was stopped somewhere in San Po Kong and an initial inspection took place by the side of the road, and the inspection continued on 7 April 2009.

12.  Mr Ditto Chan in his affirmation complains that a significant portion of the garments were found to have buttons and rivets which were defective, although he never specifies in his affirmation what defects they were, and what portion of the garments were found to have defective buttons and rivets.  He has however exhibited copies of photographs of the alleged defective buttons and rivets, and referred to the email correspondence between the parties in around mid-April 2009 in which staff from the Defendant made allegations of oxidation of the buttons and rivets, which allegations were however denied by the Plaintiff’s staff at the time.  In any event, he relies on the Plaintiff’s admission in the correspondence and in the Plaintiff’s affirmation evidence, that scratches were found on 209 buttons or rivets on 200 pieces of garments, although of course scratches are entirely different as a defect from oxidation.

13.  The parties then proceeded to certain open negotiations.  It is not necessary for me to give the full details, except as follows.  The Plaintiff was prepared to replace those buttons and rivets which were found to have been scratched.  The Defendant insisted that all buttons and rivets should be replaced.  The Plaintiff was not prepared to replace all buttons and rivets unless the Defendant promised that they would make payment of the price, which the Defendant would not agree.  There is no evidence that the Plaintiff re-tendered the goods with the scratched buttons and rivets replaced, or with all of the buttons and rivets replaced.  The result was, the Defendant claims, that the Plaintiff had repudiated the contract which repudiation was accepted by the Plaintiff in a telephone call on 30 April 2009 between the parties’ representatives.

Submissions

14.  Mr Vincent Lam, counsel for the Plaintiff, submits that the Defendant had already accepted the goods after the 3^rd inspection.  He points out that the inspection reports, which were prepared by a member of staff of the Defendant, were all stated to be “final”.  Although there were minor defects found on some of the inspection samples, which the Defendant required the Plaintiff to rectify and which the Plaintiff did, the Defendant had given their approval to the quality of the goods.  He further points out that although the inspection was done by way of sampling, the sample pool was not a small percentage of the total number of garments.  Rather, the inspection involved one-third of each style of garments, a significantly large portion of the goods.  In any event, whatever proportion the Defendant chose to inspect, the important point is that the Defendant had the full opportunity of inspecting the goods.  The Defendant must be deemed to have accepted the goods, and indeed, Mr Lam submits, the evidence does show such acceptance.  He refers to the inspection reports, and relies on the Defendant’s instructions to the Plaintiff on 26 March 2009 to make delivery.  Mr Lam points out that the significance of this evidence is that the goods had to be packed as required by the Defendant for shipment and also for the purpose of customs inspection on the China-Hong Kong border.  This shows that it was never the intention of the Defendant to reserve the right of a further inspection in respect of any of the goods, because it had already accepted them, part of which had prior to 3 April 2009 been delivered to the Defendant.

15.  Mr Liu Man Kong, counsel for the Defendant, submits that the 3^rd inspection did not amount to an acceptance of the goods, as the Defendant’s representative preparing the inspection reports made it clear in the comments section that the Plaintiff had to re-check 100% of the garments to make sure that all the buttons and rivets were up to standard, and that the Plaintiff would be responsible for any sub-standard quality.  He also submits that the Plaintiff did not in fact re-check all the goods after the 3^rd inspection, as the Plaintiff’s evidence is that they only corrected the “minor defects” which were found in respect of the samples inspected (Affirmation of To Hiu Hung para 32).

16.  Mr Liu further submits that irrespective of the Defendant’s allegation of oxidation, on the Plaintiff’s own case, 209 buttons and rivets, on 200 pieces of garments, were found to have been scratched.  There were in all 2719 pieces of garments still left in the possession of the Plaintiff which were about to be delivered as instructed by the Defendant.  200 pieces would amount to about 7.35% of the goods.  Even assuming that the Purchase Orders allowed for short shipment, this was over the tolerance limit of 5% as stated therein.  Therefore, the Defendant was entitled to reject the goods.

17.  Mr Liu further relies on a report prepared by Intertek Testing Services HK Ltd which was commissioned by Well Max, and exhibited to the 1^st Affirmation of Tung Ting Kong of the Plaintiff, marked “TTK-8”, and to the affirmation of Chen Chun Wai, a director of Well Max, filed in support of the Plaintiff’s application.  In that test (which was a salt spray test), only 2 samples of rivets were used, and in respect of one of them, “color change was observed after testing.”

18.  Mr Liu also submits that there is a special feature in this action which gives rise to another reason that the matter should go to trial.  The parties had been in discussion on a jointly appointed surveyor to check the quality of the buttons and rivets before the Plaintiff took out the present summons on 7 September 2009.  By late September 2009, the parties managed to agree on a joint surveyor, and received a quotation from the joint surveyor, which was accepted by both parties.  The inspection by the joint surveyor commenced on 20 October 2009.  On 23 October 2009, the Defendant’s solicitors unilaterally wrote to the joint surveyor and terminated the inspection.  Mr Liu submits that the findings of the joint surveyor during the partial inspection and why the Plaintiff disallowed further inspection are matters which ought to be investigated.  I do not regard this matter as giving rise to any reason for giving leave to defend.  If there is any evidence from the aborted joint inspection which may support the Defendant’s substantive defence, such evidence is not before the court.

Discussion

19.  To maintain an action for the price, the Plaintiff has to show that the property in the goods has passed to the Defendant: Sale of Goods Ordinance section 51(1).  This is so even where it is the wrongful act of the buyer which prevents the passing of property.  See Benjamin’s Sale of Goods (7^th ed, 2006) para 16-023.  As it has never been Mr Liu’s argument that property in the goods has not passed to the Defendant, I do not intend to spend too much time on this issue, save to observe that I am satisfied that all the goods in question had been appropriated to the contract with the assent of the Defendant, and property in the goods delivered on 3 April 2009 passed upon “shipment” (by truck in this case).

20.  It is therefore for the Defendant to show that it has an arguable defence.  It claims that it was entitled to reject the goods which were being delivered on 3 April 2009 for the alleged defects, whereas on the other hand, the Plaintiff argues that the goods had already been accepted after the 3^rd inspection, and therefore no longer had the right to reject the goods on 3 April 2009.  In this regard, the inspection reports for the 3^rd inspection show, in the “RESULT” section, a tick against the word “ACCEPTED”, although each of these ticks had a small back-slash across it.  That was consistent with the comments made by the Defendant on the defects found on some of the goods sampled.

21.  Mr Lam for the Plaintiff relies on Thornett & Fehr v Beers & Sons [1919] 1 KB 486, a case decided on section 14(2) of the Sale of Goods Act 1893, and argues that since the Defendant had examined the goods, there was no condition for merchantable quality as regards defects which such examination ought to have revealed.  However, the equivalent section in Hong Kong, section 16(2)(b), has undergone certain amendments, so that the relevant provision now reads “… there is no such condition if the buyer examines the goods before the contract is made, as regards defects which that examination ought to reveal …”  Firstly, the examination must take place before the contract is made.  Secondly, the defects ought to be revealed by that examination, not “such examination”, so that there remains a condition for merchantable quality in respect of goods not examined during a particular inspection.  See Benjamin on Sale of Goods, above, at 11-042.

22.  What does require consideration is, where a buyer has conducted a partial examination of the goods, as did the Defendant in this case, he may, in certain circumstances, be held to have waived his right of examination.  However, at the bottom of each inspection report is a statement which reads: “The above inspection result reflect findings based on random sampling checks, the release of this shipment does not relieve the manufacturer from their responsibilities and/or liabilities that may arise from our final client after checking of the said merchandise in their premises.”  It is arguable that the Defendant has not waived its right of full examination.  Given the ambiguity of the evidence as to whether the 3^rd inspection amounted to an acceptance of the goods, and given the statement at the bottom of each inspection report, I find that it is at least arguable that the Defendant has not accepted the goods by virtue of the 3^rd inspection, and therefore that it was still open to the Defendant to reject the goods thereafter.

23.  It is then necessary to consider whether the Defendant was justified in rejecting the goods as it purported to do.  As I noted previously, the Defendant’s witnesses in their affirmations refer to “defects” in the goods, although they fall short of describing what those defects were.  Although the defects have been particularised in the Defence already filed, it still behoves the Defendant in an Order 14 application to particularise its allegations including alleged defects, and depose to the truth of those allegations, in the affirmation evidence.  Its own evidence also fails to particularise what portion of the goods it alleges were defective.

24.  The Defendant, rather late in the day, applied to adduce a further affirmation from Ditto Chan which included a statement that about 20% of the goods contained defective buttons or rivets.  The remainder of that affirmation dealt with matters already covered by Ditto Chan in his first affirmation and added little to the evidence.  At the hearing, I decided that the affirmation should not be allowed as it was made very late.  More importantly, there was no explanation how the figure of 20% was arrived at, especially when no mention of such figure was ever made either in the Defendant’s previous affirmation, or in the contemporaneous email correspondence between the parties in April 2009.  I would therefore dismiss the Defendant’s summons for the filing of the affirmation, with no order as to costs.

25.  Although the Defendant has also exhibited photographs of buttons and rivets which it alleges were “defective”, it is not possible to see from those photographs what the defects were.

26.  There is, however, the Intertek report made in respect of 2 samples of rivets, which shows that one sample underwent a colour change after the salt spray test.  Given the very small number of samples used, this evidence is not conclusive, but it at least provides some support for the Defendant’s allegation of oxidation.

27.  There is also the Plaintiff’s own admission that 209 buttons or rivets were found to have been scratched, on 200 pieces of garments.  Although the Defendant’s case is that the defect went further than mere scratching (since its allegation is that the buttons and rivets had been oxidised), this evidence remains evidence on which the Defendant can rely.  200 garments would be over 7% of the 2719 garments involved in the delivery on 3 April 2009.  Even if one takes into account the garments already delivered (using the Plaintiff’s figures, 3538 pieces in total), 200 garments would still be over the 5% allowed under the Purchase Orders.  Therefore it is arguable that the Plaintiff’s tender of goods on 3^rd April was not in accordance with a condition of the contract and liable to be rejected.

28.  Mr Lam for the Plaintiff also submits that since it was the Defendant who nominated Well Max to be the supplier of the buttons and rivets, even if the buttons and rivets were defective, it was not the Plaintiff’s contractual responsibility, and the Defendant could only look to Well Max for redress.  Where a buyer specifies to a seller certain parts to be used for the assembly of the final product, there is no invariable rule that the seller is not responsible for defects as regards those specified parts.  It is a question of what the parties intended under the contract in each case, and I cannot at this stage rule out the possibility that the Plaintiff remains liable for any defects in the buttons and rivets, under the Purchase Orders.

29.  I also need to address the issue as to whether or not the Defendant had accepted part of the goods (under earlier deliveries prior to 3 April 2009), and if so, whether the Defendant had thereby lost the right to reject the remainder of the goods. 

30.  The partial deliveries were made on 6 March (80 pieces), 26 March (672 pieces, which had been paid for) and 1 April 2009 (3 pieces and 54 pieces in 2 separate deliveries).  The theme of Mr Ditto Chan’s evidence in relation to these deliveries were that the Defendant had not had a chance to examine the goods before they were shipped or delivered, and in respect of the 672 pieces on 26 March 2009, they were paid for before the Defendant properly examined them.  A buyer is not deemed to have accepted goods which he has not had a reasonable opportunity to examine, or merely because the goods have been delivered to another under a subsale.  See Sale of Goods Ordinance section 37(2) and (6).  Nevertheless, these partial deliveries had been in the possession of the Defendant and/or its customer for a long time since those deliveries, and there is no evidence that the Defendant ever purported to reject them.  In particular, the Defendant on its own evidence caused repairs to be made to the 672 pieces and retained them, and sought to charge the Plaintiff for the cost of repairs under a debit note allegedly referred to in an email dated 13 May 2009, which never appears in the evidence, despite paragraph 29(b) of Ditto Chan’s affirmation.  These 672 pieces have been paid for in any event, but the fact remains that on the evidence, the Defendant has accepted, or is deemed to have accepted, these partial deliveries made prior to 3 April 2009.

31.  A buyer who has accepted part of the goods in a contract of sale which is not severable can no longer reject the goods, and can only treat any breach of condition as a breach of warranty.  See Sale of Goods Ordinance section 13(3).  Where a contract provides for delivery by stated instalments to be separately paid for, it is a question in each case whether the contract is severable or not: section 33(2).  The parties proceeded by way of instalments (even though the Purchase Orders did not expressly so provide), which were separately invoiced by the Plaintiff.  It is arguable that the contract between the parties was a severable one, in which case, even though the Defendant had accepted part of the goods, it had not lost the right to reject the remainder of the goods.

32.  Therefore, although I find the Defendant’s evidence unsatisfactory in a number of ways, there is, on the basis of the evidence adduced, an arguable defence that the Defendant remained entitled to reject the goods delivered on 3 April 2009, and there is evidence which I cannot dismiss at this stage of defects in the buttons and rivets, in relation to those goods.

33.  However, there remain the partial deliveries which have been accepted, but not paid for, by the Defendant: HK$14,383.20 (80 pieces on 26 March 2009, invoice DN009-005), HK$415.74 (3 pieces on 1 April 2009, invoice DN009-008) and HK$9,621.61 (54 pieces on 1 April 2009, invoice TSIN-154).  Even assuming in the Defendant’s favour that the contract was a severable one, the Defendant having accepted the partial deliveries, is bound to pay for them, even though it might still be entitled to reject the remainder.  The Defendant has a claim for the cost of repairs for the 672 pieces delivered on 26 March 2009, the amount of which has not been stated anywhere in the Defendant’s evidence.  There is no evidence supporting or quantifying any counterclaim for damages for defective goods or loss of profit, on which the court can act.  The Plaintiff is entitled to be paid the price of those partial deliveries.

34.  Therefore there should be judgment for the Plaintiff in the sum of $24,420.55, while the Defendant should have leave to defend as to the residue.  As the Plaintiff has obtained judgment for part of its claim, albeit a small part, but the Defendant has leave to defend the rest of the claim, the costs of this application should be costs in the cause, and I do not propose to give a certificate for counsel.  Normally consequent upon leave to defend being given, the court should give directions on the further conduct of the action.  However, the present case is slightly unusual, in that pleadings had already been closed prior to the summons.  Having said that, from the way arguments have been put before me, one or more of the parties may in due course find it necessary to amend their pleadings.  I therefore propose not to give any directions at this stage.

35.  In the light of the above conclusions, I make the following orders:

(a) There be judgment for the Plaintiff in the sum of $24,420.55, with leave to defend as to the residue;

(b) An order nisi for interest on the judgment sum at the Hong Kong dollar prime rate plus 1% from the date of the writ to the date of judgment, and thereafter at the judgment rate until payment;

(c)  An order nisi that the costs of the Order 14 application be costs in the cause.