TACK FAT MANUFACTURING FACTORY LTD v. THE LABELS SPECIALIST CO LTD

DCCJ 4753/2005

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 4753 OF 2005

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JUDGMENT

1.  In late 2004 to early 2005, Tack Fat, the Plaintiff, bought a bulk of leather labels for garments from Labels Specialist, the Defendant.  Tack Fat now alleges defects in the goods and claims for the return of the payment made.  It also claims damages for the alleged loss and damage suffered as a result.  Labels Specialist denies liability and claims by way of counterclaim the cost of some other goods sold and delivered at Tack Fat’s request in May and June 2005.

2.  Both parties used to be legally represented.  Labels Specialist and Tack Fat ceased to have legal representation last April and November respectively.  Tack Fat has not appeared since then.  Since the trial date was fixed when Tack Fat was still legally represented, it must have had notice of the trial.  I have no reason to suspect otherwise.  I allowed Labels Specialist to proceed.

AGREED FACTS

3.  Pursuant to O.23A, r.11 of the Rules of the District Court, the parties have agreed on the following facts:

(1) Tack Fat is and was a garment manufacturer mainly in the business of manufacturing denim jeans and swimwear.

(2) Labels Specialist is and was a supplier of labels and patches.

(3) Tack Fat and Labels Specialist had had a course of dealings since about March 2000.

(4) By a purchase order dated 15 December 2004, Labels Specialist agreed to sell and Tack Fat agreed to buy 19,450 pieces of leather label at the unit price of HK$1.30 and the total price of HK$25,285.00.

(5) Before the issuing of the purchase order, Tack Fat had approved a design sample with artwork and a sample material for making the leather labels in question.

(6) The delivery date as per the purchase order was 22 December 2004.  The leather labels were delivered in 2 lots on 19 December 2004 and 8 January 2005 respectively.

(7) Upon receipt of the leather label, Tack Fat sent them to its factory in Cambodia for manufacturing garments.

(8) On or about 26 February 2005, Tack Fat shipped the garments (woven pants) to its overseas customer.

(9) Tack Fat paid Labels Specialist HK$15,860 and HK$9,425 (or a total sum of HK$25,285) on or about 5 March and 8 April 2005 respectively for the leather labels in question.

(10) In about May 2005, Tack Fat received complaint from its overseas customer about colour fading problem of the leather label patches sewn on the woven pants.

(11) Tack Fat commenced the present action on 26 September 2005.  Labels Specialist filed its defence and counterclaim on 4 November 2005.  The invoices for the other goods supplied to Tack Fat set out in paragraph 13 of Labels Specialist’s pleading are yet to be settled by Tak Fat.

ISSUES

4.  Pursuant to O.22, r,18, parties have agreed on the following list of issues in dispute:

(1) Whether “要防致癌物料  要環保料  要用化驗四度以上咸水陽光磨擦” appearing on Tack Fat’s purchase order was a term of contract.

(2) Whether the leather labels are of merchantable quality and/or reasonably fit for the purpose of Tack Fat under the implied conditions as to quality under the Sale of Goods Ordinance, Cap.26.

(3) Whether there was colour-fading problem in the leather labels supplied by Labels Specialist in breach of the express term mentioned in (1) and/or implied conditions mentioned in (2) above.

(4) Whether Tack Fat knew that the leather label patches, which were made of genuine leather, would have colour fading/cross staining problem.

(5) Whether Labels Specialist knew that the leather label patches supplied would be sewn onto Tack Fat’s garment products.

(6) Whether the leather label patches delivered were produced from two different lots of materials and at different production times.

(7) Whether Tack Fact had duly accepted the leather label patches by payment in full respectively on 5 March and 8 April 2005 and is estopped from denying that it had accepted the goods.

(8) Whether Labels Specialist can rely on the disclaimer/exclusion of liability clause in its invoices issued to Tack Fat.

(9) Whether there was a practice adopted by Tack Fat and Labels Specialist that Labels Specialist’s invoices would be settled at 3% discount and thus reducing Labels Specialist’s counterclaim from HK$324,480.50 to HK$314,746.08.

5.  It is Tack Fat’s burden to prove its claim.  Though it was absent, I was not minded to dismiss its claim without regard to the documentary evidence adduced by the parties and what Labels Specialist had to say about the claim.  But since Tack Fat did not appear, the witness statements filed on its behalf were certainly disregarded.

6.  On behalf of Labels Specialist, 3 witnesses gave evidence.  Chan was the sales representative who dealt with Tack Fat.  Lai was the bookkeeper.  Ng was the director of the supplier of the leather of which the labels in question were made.  The witnesses confirmed and adopted their statements as their evidence.

THE EVIDENCE

7.  According to Chan, Labels Specialist has been in business since 1984.  Its customers are primarily garments manufacturers including those for various well-known international brands.  The business practice is that the customers would first select the materials such as genuine leather, paper, PVC (i.e., plastics) and PU (i.e., man-made leather).  The materials would be used to make the labels in accordance with the customers’ designs and specifications.  The design would be based on the artwork supplied by the customers and printed or burnt onto the label patches, depending on the type of material used.

8.  Tack Fat had been Labels Specialist’s customer for years.  According to Chan, Labels Specialist supplied goods to Tack Fat almost every month and there had never been any quality dispute between the parties.  She also explained the practice between the parties in their previous course of dealings.  Briefly, Tack Fat would supply an artwork of the labels required and specify the make of the labels as well as the quantity required.  Labels Specialist would then supply a few samples of the materials for the labels to Tack Fat.  Tack Fat would carry out for its own test of the samples for its purpose such as the after washing effect required.  At this stage, Labels Specialist might have to supply more materials for choice or to modify the materials supplied.

9.  Upon Tack Fat’s approval of the sample material, parties would discuss the other terms such as the price.  Labels Specialist would then issue a formal quotation and Tack Fat would follow by issuing a formal purchase order.  Chan would liaise with Tack Fat, particularly if there was any difference between the terms of the order and the parties’ understanding.  The parties never insisted on further documentation when the differences were resolved.

10.  Regarding the transaction in question, the merchandiser of Tack Fat by the name of Jackie telephoned Chan in late November 2004, asking for samples for labels to be made.  Chan collected the artwork for the labels from Jackie who requested Labels Specialist to use the same leather material for a previous order placed by Tack Fat (for the brand “Adventure”) for making this new label.  Labels Specialist then produced 25 samples, 20 of which were sent to Tack Fat and 5 were retained for record.

11.  In December 2004, a merchandiser of Tack Fat, Paul, informed Chan that the samples had undergone test washing in their factory in Cambodia and their buyer was satisfied with the result.  The parties then discussed the other terms including the price and the delivery schedule.  Labels Specialist issued the quotation and Tack Fat issued the purchase order in question.  It was apparently an urgent order as the leather labels in question were required to be delivered quickly.

12.  Among other things, Chan found the specification “要防致癌物料  要環保料  要用化驗四度以上咸水陽光磨擦” (meaning anti-cancerous materials, environmental materials and testing of colourfastness by salt water and sunlight at grade 4 or above required) stamped on the face of the purchase order.  Chan then had no idea from Tack Fat about any specific requirements like that, particularly in the case of genuine leather labels.  Chan therefore telephoned and pointed this out to Paul.  Paul confirmed that testing or warranty of the after washing effect would not be expected.  Chan did not sign or return the purchase order.

13.  The labels were delivered in 2 lots on 29 December 2004 and 8 January 2005.  On 23 February 2005, Paul informed Chan that the labels had shrunk and changed shape after washing by Tack Fat’s garment factory in Cambodia.  Chan visited Paul at his office and inspected some of these labels.  She explained that washing and/or drying the label at too high a temperature could damage the genuine leather material.  Since then, nothing further had been heard about the labels supplied.

14.  As mentioned above, Tack Fat incorporated the labels as part of its garments and shipped the garments in February 2005.  Tack Fat also paid for the labels in full in March and April 2005.

15.  In May 2005, Paul and Jackie of Tack Fat informed Chan that its overseas customer had complained about serious colour fading problem of the label which also stained the garments when washed by the customer.  Jackie suggested sending their early shipment sample of the garments for laboratory test.  Considering the long-standing business relationship between the parties, Chan readily agreed.  Subsequently Jackie reported that the test result was unsatisfactory.  However the test report was not provided to Labels Specialist.

16.  In June 2005, Jackie informed Chan that its overseas customer had returned all the garments.  Chan visited Tack Fat’s office again.  On this occasion, Chan came to realise for the first time that the garments on which Tack Fat sewed the labels were white or light-coloured cotton pants.  However she noticed that the alleged colour-fading problem on the pants in some darker colour (e.g., sand) pants was hardly visible.  She was told that nevertheless all the garments were returned, because Tack Fat’s customer did not wish to take any chance.

17.  Nothing further was heard.  In August 2005, Chan sent a reminder by e-mail to Jackie chasing for settlement of Labels Specialist’ other invoices for other good supplied (subject matter of the counterclaim).  This met with Jackie’s refusal and claim for Labels Specialist’s alleged breach.  It was only then Tack Fat supplied a copy of a laboratory test report to her.  Further correspondence and eventually this action followed.

18.  I accept Chan’s evidence and find the above to be the facts.

THE CLAIM

The alleged term as to quality

19.  The documents show that the specification “要防致癌物料  要環保料  要用化驗四度以上咸水陽光磨擦” invariably appeared in the purchase orders that Tack Fat had placed with Labels Specialist.  But Chan explained that this was never even understood or accepted as an applicable term to the contract between the parties for the supply of genuine leather labels.

20.  Chan explained that the reference to environmental materials was incompatible with the fact that the labels were made of genuine leather.  The reference to testing by salt water and sunlight also appeared to be more in line with testing of materials for swimwear, which Tack Fat admittedly also manufactured in its business.  In the absence of contrary evidence, I find Chan’s explanation to be convincing.

21.  Chan’s evidence is also in line with Labels Specialist’s position as stated in its invoices to its customers including Tack Fat.  I accept that from the previous course of dealings, Tack Fat must be aware of the following standard provision contained in these invoices:

“The company is not liable, responsible, for the after washing effects on labels or materials supplied.”

22.  Insofar as the terms as to quality implied by law is concerned, I think there should be no real dispute that the leather labels supplied by Labels Specialists should be of merchantable quality.  The real dispute is whether they too should reasonably fit the purpose of Tack Fat.  This depends on whether Labels Specialist knew that the labels would be sewn onto the garments that Tack Fat would be manufacturing.

23.  I find that Label Specialist ought to know that Tack Fat would use the labels for manufacturing garments.  The labels were basically like those that one normally finds on denim jeans.  But Chan went on to explain that Labels Specialist did not manufacture but sourced the leather materials from its supplier.  It is common knowledge that genuine leather is colourless and has to be treated and dyed in order to give it colour.  Colour could fade.  The extent to which the colour fades after washing varies.  The extent to which the colour might stain the fabrics on which the labels are sewn or affixed depends on the type of fabrics.  So would the visibility of staining, if any.  The leather materials for making the labels in question were treated and dyed before they were supplied to Labels Specialist.

24.  Chan explained that samples were provided to and tested by Tack Fat.  Tack Fat confirmed acceptance of the materials before placing the purchase order.  Not knowing the type of fabrics on which the labels would be sewn or affixed and the washing method and effect (as in the case of denim) that Tack Fat (or its customer) desired, there was no way Labels Specialist would be in a position to warrant the colourfastness of the leather patches in conformity with the specific requirements of Tack Fat (or its customer).

25.  I accept Chan’s explanation and doubt whether the implied term as to fitness for purpose in the present case should reasonably be extended to cover the specific colourfastness of the leather labels that Tack Fat did not actually specify.

The alleged breach

26.  Even assuming that the conditions as to quality, whether express or implied, applied, Labels Specialist contends that it was not in breach.  The major complaint by Tack Fat was colour-fading from the labels which stained the fabric of the pants.

27.  It should be noted that Tack Fat specifically requested Labels to use the same leather for the labels under the previous order for the brand “Adventure”.  It is safe to infer that Tack Fat must have approved such leather material for that previous order.  In any event, there is no allegation at all about the quality of the “Adventure” labels.

28.  Tack Fat’s garment factory in Cambodia had carried out its own test washing of the samples.  Except for the feedback regarding the shrinkage and change of shape, there was no complaint about colourfastness or colour fading problem.  The samples were accepted.  Only then did Tack Fat place the purchase order.

29.  It was only in June 2005 when Tack Fat first complained about the colour-fading problem.  There was no complaint about any colourfastness problem when Tack Fat manufactured the garments.  Either Tack Fat had not put the finished garments together with the labels on them to test washing during the manufacturing or, if it had, it did not consider there was any quality problem then.

30.  The issue of whether the labels were made of different supplies of leather patches and therefore of different quality was not pleaded but raised in the witness statements filed on behalf of Tack Fat.  As those statements are now disregarded, there is strictly nothing to initiate the discussion of such allegation.  In any event, Chan and Ng, the supplier of leather materials, gave evidence and rebutted the allegation.  In the absence of contrary evidence, I accept their evidence.

31.  I am not satisfied that the alleged breach on the part of Labels Specialist is proved.

Right to reject

32.  In my view, Tack Fat had accepted the labels and lost its right to reject them.  Tack Fat’s payment for the labels in full might be one indication of acceptance.  But more importantly, by incorporating the labels as part of the garments that it manufactured and by shipping the same to its overseas customer, Tack Fat had dealt with the labels in a way inconsistent with the retention of any right to reject the same.

33.  In the circumstances, the claim for the return of the payment for the labels is bound to fail.  Any breach, if proved, will be that of warranty entitling Tack Fat to damages only.  But as discussed above, I am not satisfied that the alleged breach is proved.

Exclusion of liability

34.  Labels Specialist relies on the following provisions in its invoices:

“Any complaints or adjustments to or against this invoice must be made within three (3) days from date of invoice.

……

The company is not liable, responsible for the after washing effects on labels or material supplied.

……”

35.  I tend to agree that Tack Fat must be aware of these provisions from the previous course of dealings between the parties.  In view of the matters discussed above, I also tend to find that the provisions are reasonable.  However, as the alleged quality problem is not proved, there is no need for Labels Specialist to resort to these limitation-of-liability clauses.

THE COUNTERCLAIM

36.  The counterclaim is not in real dispute.  The amount claimed (HK$324,480.50) is proved.

37.  Chan in her evidence did not dispute that Labels Specialist had in the past accepted settlement of its invoices at 3% discount as alleged by Tack Fat.  However she explained that this was on account of the ongoing business relationship with Tack Fat and prompt settlement by Tak Fat.  This was never an agreed term of contract between the parties.  As Tack Fat has failed and refused to settle these invoices and the parties’ business relationship had no doubt come to an end, Chan stated that Labels Specialist sees no reason to extend such discount in favour Tack Fat any more.  I accept her evidence in this regard.  I find that Tack Fat is not in a position to insist on or to enforce the 3% as a contractual discount as alleged.

38.  By pleading, Tack Fat alleges that it had paid laboratory test expenses on Labels Specialist’ behalf and for which it issued the debit note for HK$378 dated 30 June 2005 to Labels Specialist.  This was the laboratory test in May 2005 mentioned above.  Chan explained that Jackie represented that he had difficulty in getting Tack Fat to pay for the test.  Chan said that the parties’ relationship then had yet to break down.  In fact, Tack Fat was still placing orders with Labels Specialist during that period.  Chan therefore consulted her director and eventually agreed to bear such expenses.  It was then understood to be just a few hundred dollars.  This accounted for Tack Fat’s subsequent debit note in June.  In court, it was confirmed that Labels Specialist is still prepared to honour such agreement by giving credit to this sum.

39.  In the premises, I find that the counterclaim is proved and Labels Specialist is entitled to judgment in the sum of HK$(324,480.50 – 378.00) = HK$324,102.50.

CONCLUSION AND ORDER

40.  Tack Fat’s claim is dismissed.  I give judgment on the counterclaim in the sum of HK$324,102.50.

41.  After the close of pleading in early December 2005, the proceedings in this action have somehow come to a halt until notice of intention to proceed was filed in early May 2007.  It does not appear to be just to award interest for this period.  Interest on the judgment sum shall therefore run at the judgment rate from the date of the filing of the counterclaim until full payment but excluding the period between 4 December 2005 and 7 May 2007 inclusive.

42.  Labels Specialist shall have the costs of this action, including any costs reserved.  Costs shall be taxed if not agreed.