FUTURE GARMENT LTD. v. YIU WAH LEUNG'S CO. LTD.

HCA 11405/1997

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 11405 OF 1997

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J U D G M E N T

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The Background:

1. The plaintiff is a garment manufacturer and seeks to recover cost of work done and materials supplied to the defendant in the sum of $221,127.70. The defences are that Ricky & Company, belonging to a staff of the plaintiff has replaced the plaintiff as the contracting party to the contract, that Ricky & Company has agreed to compensate the defendant for defective work, that Ricky & Company has cancelled some of the orders as a result of which the defendant suffered damages in having to re-contract at a higher price, and that the defendant incurred packing and transportation costs for some of the goods which should have been packed and transported by Ricky & Company.

2. Prior to the hearing, on 14 August, a director of the defendant company wrote to this Court to authorise its employee, Ms Li Po Lin, to represent the defendant company because he would be out of Hong Kong. The defendant was duly advised to apply to the Registrar for leave to be represented by one of its directors and of the requirements under Order 5 rule 6(2). On 28 August, Li filed an affirmation, together with an authorisation signed by two of the defendant's directors and applied to represent the defendant company. The reason for authorising Li to represent the defendant was because the two directors would be out of Hong Kong and that Li was familiar with the dispute. The defendant was advised that the application was refused and that unless the application complies with Order 5 rule 6(2) it will not be entertained. The defendant was warned that the proceedings will be conducted as scheduled in their absence if they are not represented. At the hearing, the defendant was not legally represented and none of its directors appeared. Li sought to represent the defendant saying that the defendant could not afford the cost of legal representation; but she produced no accounting documents in support. Her application was refused. She was informed that the proceedings will proceed in the absence of the defendant and that the defendant may apply to set aside whatever judgment as may be awarded on such conditions as the Court may think fit, including payment into court of the judgment sum and security for costs.

The plaintiff's case:

3. On 27 January 1997, Mr Shum, on behalf of the defendant, contracted with Mr Ricky Chan of the plaintiff company for the manufacture of seven lots of garments. Under the agreement, the defendant would supply the fabric and threads to the plaintiff's factory in China and the plaintiff would turn the fabric into shorts or pants, press, iron and pack them into carton boxes and transport the finished product to the defendant in Hong Kong. The contract price was between $132 and $180 per dozen. The production time was 40 days. Shum said that the fabric for the 1st and 2nd lots of garments would be delivered to the plaintiff on 5 March and Ricky Chan confirmed that the garments would be delivered to the defendant on or before 15 April. These terms were reduced into writing by Ricky Chan in a memorandum dated 27 January 1997 to the defendant.

4. On or about 27 February, Shum informed Ricky Chan that the fabric for the 1st, 2nd and 3rd lots of garments would be delivered on or before 5 March while the fabric in respect of the 4th to 7th lots would be delivered on or before mid March. Hence the delivery date for these four lots of garment was fixed on 25 April. It was also agreed during that discussion that the plaintiff was entitled to charge at the normal rate for defective garments produced as a result of defective fabric supplied by the defendant, but the defective goods should be separated from the normal goods. Based on the above discussion, the defendant issued 7 purchase orders dated 27 February 1997. The delivery dates of the finished garments were listed in the purchase orders but not the date of delivery of the fabric.

5. Despite repeated demands, the defendant failed to supply the fabric for the 1st and 2nd lots of garments as scheduled. Eventually, Shum proposed canceling the order for the 1st lot of garments. He then placed an order for the 8th lot of garments, i.e. 5,400 pairs of shorts at $147 per dozen.

6. The fabric for the 2nd lot of garments was delivered late. It was delivered in ten batches from 15 March to 9 April. As the plaintiff required 40 days to produce the garments, it became clear that as a result of the defendant's delay, the plaintiff could not produce all the 26,052 pieces of garments by 15 April. On 3 April, Ricky Chan had a meeting with Shum and Li of the defendant in the plaintiff's office in Kowloon. Shum and Li proposed to cancel the orders for the 4th and 7th lots. As the delivery of the fabric for the 2nd lot was delayed, the defendant cancelled 992 dozens of garments from that order and agreed to compensate the plaintiff the customs and transportation fee incurred in respect of the fabric at the rate of $20 per dozen and the cost of pocket lining and packing materials for these garments. Because of the late delivery of the fabric for the 5th and 6th lots, the delivery of these garments was rescheduled to 1 May. Ricky Chan reduced this agreement into writing and faxed it to the defendant on 4 April. The fax was duly signed by Shum as acknowledgement of the agreement.

7. It was subsequently discovered that the plaintiff's factory in China had already cut and trimmed the fabric of 200 dozen pieces out of the 992 dozen pieces to be cancelled. Hence the quantity of garments to be cancelled was revised to 792 dozens.

8. As the plaintiff does not have any bank account with Chinese banks, Ricky & Company was appointed as the plaintiff's agent for issuing invoices and collecting payment for the plaintiff. Ricky & Company is a company own by Ricky Chan. The defendant made payment to Ricky & Company in respect of the purchase orders save the 7 invoices in respect of certain quantities of garments under the 2nd, 5th, 6th and 8th lots and transportation fee, pocket lining materials and packing materials for the garments in respect of the cancelled orders.

Whether Ricky & Company had replaced the plaintiff as contracting party:

9. In its defence, the defendant alleges that Ricky Chan said that the plaintiff was reluctant to take up the contract and his company, Ricky & Company, took over the contract in early March. The only evidence in support of that allegation was the invoices issued by Ricky & Company and the defendant's payment to that company.

10. On the other hand, the production of the garments were carried by Ngai Tat Factory in China, which is wholly owned by the plaintiff. There were numerous correspondence exchanged between the plaintiff and defendant after March about these purchase orders. There was documentary evidence showing delivery of fabric and threads by the defendant or their suppliers, on the defendant's behalf, to the plaintiff. All these suggest that the plaintiff remained as the contracting party to the contract. I accept the evidence of Ricky Chan as witness of both the plaintiff and of Ricky & Company that the role of Ricky & Company was just to collect payment as the plaintiff's agent.

Whether the plaintiff should compensate the defendant for 848 pieces of defective garment:

11. The defendant's defence and counterclaim is that the plaintiff should compensate the defendant the selling price of 848 pieces of defective garments in the amount of $67,204.80. This compensation was only raised by the defendant on 3 July 1997. However, prior to that, the defendant had been issued an invoice dated 24 April expressly in respect of 122 pieces of defective garments. This invoice was settled without question. This supports Ricky Chan's evidence that there was an agreement that production costs in respect of defective garments produced as a result of defective fabric supplied by the defendant would be paid for at normal rate. Further, according to Ms Angel Cheung, a director of the plaintiff, Li requested in June that the defective garments should be separately invoiced. It is implicit in that request that the defendant would pay for the defective garments, but would require separate documentation. Accordingly, Angel Cheung arranged for revised invoices to be issued. These invoices are contemporaneous documents which support the evidence of Angel Cheung and Ricky Chan that the defendant would pay the cost of production in respect of garments made from defective fabric.

12. The defendant also alleged that Ricky & Company had agreed to accept this amount of $67,204.80 as part payment. This agreement was not documented and was denied by Ricky Chan. There is also no evidence from defendant of defective workmanship. I dismiss this defence as an unsupported bare assertion.

Whether defendant should be compensated for other defects:

13. The defence alleges that Ricky & Company has agreed to pay compensation for another 1,205 pieces of defective garments in the amount of $101,220. The allegation is contained in a memo dated 4 August 1997, which invited the plaintiff to sign as acknowledgement and stated that upon signing and returning the memo, the defendant would pay the balance of $52,702.91. The memo had not been signed and returned by the plaintiff and the amount of $52,702.91 had not been paid. This is inconsistent with there being any such agreement by Ricky Chan to compensate. Ricky Chan also denied having so agreed. The garments had been inspected by the defendant before delivery and there was no complaint of defect. In view of the above, I dismiss this defence as mere assertion and unsupported by the evidence.

Whether plaintiff should compensate the defendant for 792 dozens of the garments under the 2nd lot:

14. The defendant counterclaims damages for the cancellation of the manufacture of 792 dozens of garments under the 2nd lot. The cause for the cancellation of this quantity of garments is the delay in the supply of the fabric by the defendant. About a third of the fabric was delivered just 12 days before the scheduled date of delivery. Given the 40 days production time, it was impossible for the plaintiff to meet the delivery date. I accept Ricky Chan's evidence that the cancellation was at the request of the defendant and on a no liability basis on either party. The defendant's claim for compensation at the rate of $400 per dozen is unsupported by any documentary evidence. I reject that counterclaim as unfounded.

Whether defendant incurred packing cost and transportation cost for 2,400 pieces of the 2nd lot of garments:

15. The defendant counterclaims packing cost at the rate of $120 per dozen and round-trip transportation cost of 15,000 for 200 dozens pairs of pants which it took over from the plaintiff. The contracted price was $147 per dozen, inclusive of packing. The claim of $120 packing cost is certainly excessive. It is also unsupported by documentary evidence. In its invoice for these 200 dozens pairs of pants, the plaintiff has discounted an appropriate amount for packing and transportation. I reject the counterclaim as being unsupported by any documentary evidence.

Conclusion:

16. In conclusion, I am satisfied that the plaintiff has proved its claim. I therefore enter judgment in favour of the plaintiff against the defendant in the amount of $221,127.70 as claimed with interest at judgment rate with effect from 27 October 1997 and with costs to be taxed, if not agreed.