BAR CODE SYSTEMS CO LTD v. TAG IT PACIFIC LTD

DCCJ 3041/2012

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 3041 OF 2012

____________

____________

_______________________________________

JUDGMENT

_______________________________________

Introduction

1.  Bar Code Systems Company Limited (“Bar Code”) sues Tag-it Pacific Limited (“Tag-it”) for the unpaid price of goods sold and delivered in the total sum of US$45,974.28. Tag-it counterclaims for a sum of US$42,587.50 being its loss allegedly caused by poor quality of certain goods supplied by Bar Code.

2.  At the outset of the trial, Mr Yu, counsel for Tag-it, confirmed that Tag-it admits the claim of Bar Code and the counterclaim is the only live issue. Hence I directed Tag-it to open its case on its counterclaim.

Uncontroversial Factual Background

3.  Both Bar Code and Tag-it are locally incorporated companies trading in garment accessories. Tag-it has its parent company in California called Talon International Inc. (“Talcon”). Since 2006, Tag-it had purchased stickers from Bar Code and resold the same to the nominated manufacturers of Talcon for the purpose of the Talcon’s end customers in the United States.

4.  The stickers supplied by Bar Code to Tag-it were to be stuck on a new garment to be manufactured by Talcon’s nominated manufacturers. Such stickers usually bore a trademark, size information, washing instructions and manufacture details relating to the new garment. They were to be torn off from the new garment before the end users wear the same.

5.  Bar Code caused to be produced different styles of stickers for Tag-it over the years and each style of stickers was assigned a unique serial number. The stickers under complaint are referred to as leg stickers with the serial number of IGBRLS0A01 (“the Leg Stickers”).

6.  As with all other stickers, Tag-it first sent all the essential information including its size, specification and all the artwork of the Leg Stickers to Bar Code for the purpose of production of a sample Leg Sticker for its approval. Bar Code would proceed to make a sample and in doing so, Bar Code would purchase a particular adhesive from its supplier known as On Wah. The adhesive was manufactured by Zhongshan Fuzhou Adhesive-Product Co., Ltd. (“ZFAPC”) with a code number No.9 (“Adhesive No.9”). According to the catalogue of ZFAPC, Adhesive No.9 is suitable for cloths only. The Adhesive No.9 was used in all the stickers including the Leg Stickers supplied by Bar Code to Tag-it.

7.  On 1 February 2011, Bar Code sent a sample of the Leg Stickers (with Adhesive No.9 applied thereto) to Tag-it. Tag-it approved the same on 1 March 2011. Approval of the sample Leg Sticker was also granted by Talcon by way of its approval sheet dated 27 February 2011.

8.  The Leg Stickers under complaint were supplied to Tag-it under three separate invoices (V1100714, V1100715, V1100716) (“the said invoices”). Bar Code delivered the Leg Stickers on 20 April 2011 pursuant to the purchase orders placed by Tag-it on 1 April 2011. They were no different from all other previous Leg Stickers save that some style changes and the same Adhesive No. 9 was applied to the same to make them adhesive. Tag-it made no complaint about all other Leg Stickers supplied both before and after the Leg Stickers under complaint.

9.  Tag-it settled the said invoices on 3 June 2011 without any complaint about the quality of the Leg Stickers.

10.  In fact, Tag-it delivered the Leg Stickers supplied by Bar Code to Kavi International Ltd (“Kavi”) in April 2011. Kavi then sent the Leg Stickers to its factory in Bangladesh to be applied on the jeans to be manufactured by its factory. Then the finished products would be shipped to the end customer of Talcon in the Unites States, namely, Destination Maternity Corporation (“DMC”).

11.  On 22 September 2011, Talcon received a complaint from DMC by way of its email of the same date. DMC pointed out that it was nearly impossible to remove the Leg Stickers from the jeans and when it was done, there was a residue left on the jeans. DMC received from the jeans from the factory of Kavi with the Leg Stickers applied thereto.

12.  On 23 September 2011, Kavi also made a complaint to Tag-it about the quality of the adhesive of the Leg Stickers as raised by DMC. Kavi held Tag-it liable for all claims from DMC.

13.  On 24 September 2011, Talcon asked Tag-it to send it some shipment samples of the Leg Stickers. Talcon also asked Tag-it to send some garment fabrics sample to Talcon.

14.  On 26 September 2011, Tag-it sent to Talcon some samples of the Leg Stickers kept in its sample library. They were also supplied by Bar Code under the said invoices and were kept in the sample library for future references.

15.  On 27 September 2011, Tag-it sent Kavi an email and it asked for a few yards of garment fabrics for its investigation of the quality issue of the Leg Stickers. It also asked Kavi the temperature and humidity of its warehouse where such Leg Stickers had been stored. The reply of Kavi in its email on the same date was that the Leg Stickers were stored properly in the same way that they had been handled for more than a decade.

16.  On 30 September 2011, Tag-it received from Kavi some garment fabrics sample and Tag-it did not send the same to Talcon.

17.  On 11 October 2011, Talcon sent the sample Leg Stickers (disputed by Bar Code) to an independent laboratory in the United States known as Bureau Veritas Lab (“BV Lab”) for testing. On 14 October 2011, BV Lab issued a report (“the 1^st Report”) and its finding was that the Leg Stickers failed the test.

18.  On the other hand, on 1 November 2011, DMC wrote to Talcon and demanded a total sum of US$89,061.25 as compensation. DMC further stated that it had purchased the Leg Stickers from Talcon for over 18 months without issue.

19.  On the following day, Tag-it placed an order with another sticker supplier, namely Samson Label Industrial Limited (“Samson Label”), for supplementary warning stickers to be supplied to DMC. The total cost including freight charges was US$2,858.00 (“the Additional Cost”). In the two invoices issued by Samson Label dated 3 November 2011 and 7 November 2011 respectively, the subject matters were “wash before wearing stickers”. 

20.  On 8 December 2011, for unknown reason, Talcon sent the shipment samples to BV Lab for another test. On 16 December 2011, BV Lab issued another report (“the 2^nd Report”). The 2^nd Report showed that the Leg Stickers again failed the test.

21.  On 24 January 2012, after intensive negotiation, by way of a letter, DMC indicated that the damages and costs payable to DMC by Talcon arising from the Leg Stickers should stand at the sum of US$39,677.5 (“the Settlement Sum”).

22.  Tag-it then turned to Bar Code for an indemnity and seek to recover the Additional Cost as well. On 8 February 2012, Mr Scott Alesbrook (“SA”), Vice President of Tag-it, sent an email to Bar Code and asked whether Bar Code accepted to pay the Settlement Sum and the Additional Cost within three months.

23.  Bar Code simply denied liability and refused to accede to the demand of Tag-it. Tag-it later by way of an email dated 20 February 2012 offered to absorb the Additional Cost itself and demanded the Settlement Sum only. Eventually Bar Code turned down this offer.

Issues and Defence’s Case

24.  There is no express or implied term relating to the quality of the Leg Stickers and hence its breach pleaded in the Defence and Counterclaim. Mr Yu, not being the author, accepts this deficiency.

25.  Nevertheless, given the clear and unambiguous complaint of Tag-it, the parties are happy to resolve their differences by reference to the following three issues:

               (1)       Whether the Leg Stickers supplied under the said invoices were not of merchantable quality?

               (2)         Whether the Leg Stickers have already been accepted by Tag-it and so the risk of the Leg Stickers has been passed to it?

               (3)       Whether Tag-it has failed to mitigate its loss?

26.  Before dealing with the three issues in turn, I note that though the pleaded case of the defence (not verified by a Statement of Truth) is that Tag-it paid the Settlement Sum to DMC, there is no evidence at all, oral or documentary, in support of such a payment. I am not satisfied that the Settlement Sum was actually paid.

27.  Further, the claim of DMC was made against Talcon in the United States and not Tag-it. If it was settled by way of the payment of the Settlement Sum, it should be done by Talcon and not Tag-it. I fail to see how Tag-it can claim the Settlement Sum against Bar Code in any event. On this ground alone, the counterclaim of Tag-it insofar as the Settlement Sum is concerned should be struck out.

28.  As regards the quality issue, Tag-it bears the burden of proof to show that the Leg Stickers were not of merchantable quality. The only independent evidence adduced by Tag-it in this regard consists of the two reports issued by BV Lab. I am not impressed by its evidence in this regard.

29.  SA is the only witness testified for Tag-it. I find him to be an honest and reasonable witness trying to tell this court all he knew about the counterclaim. I accept his evidence that the Leg Stickers under complaint were all supplied by Bar Code and not other suppliers despite the challenge by Ms Siu, counsel for Bar Code.

30.  SA accepted, as shown by the concern in the email from Tag-it to Kavi dated 27 September 2011, the quality of Adhesive No.9 may change due to temperature and humidity. He further accepted that it would react differently with different fabrics.

31.  Whilst SA insisted that the sample Leg Stickers to be sent to Talcon subsequently were kept in normal condition in the sample library of Tag-it, he frankly admitted that he had no idea how the Leg Stickers were handled before they were applied to the garments by Kavi in Bangladesh. Nor did he know how the courier handled the samples in its delivery of the same to Talcon from Hong Kong to the United States. He knew nothing about the way Talcon and BV Lab handled the Leg Stickers before the two tests too.

32.  As accepted by SA, he had no personal knowledge of what the fabrics tested by BV Lab were. Though his colleague Ms Joanne Wong received the garment samples from the factory of Kavi in Bangladesh, SA understood that they were not sent to Talcon for testing purposes. Only sample Leg Stickers were sent. SA just believed that due diligence was exercised by his colleagues in the headquarters in the United States to make sure that they were those supplied by Kavi. Nevertheless, there is no evidence that Talcon received any garment samples from Kavi and/or DMC. I am not convinced that the fabrics sent to BV Lab were those actually used by Kavi.

33.  In the circumstances, I cannot accept that the condition of the Leg Stickers remained the same throughout after they were dispatched by Bar Code to Kavi and by Tag-it to Talcon. Further, the Leg Stickers might work unsatisfactorily only because of the fabrics under the test. I have no idea the quality of the jeans to which the Leg Stickers were to be applied. I am not unable to conclude that the quality of the Leg Stickers was not merchantable just because of the complaints of Kavi and the findings of BV Lab. The quality could well have changed after the sale.

34.  Further, though I accept that the BV Lab is an independent examiner, it is unclear as to how the tests were conducted. All in the evidence of Tag-it is that the testing method CPSD-SL-31052-MTHD was employed but there is no explanation about this house testing method. In the 1^st Report, apparently three samples of the Leg Stickers were put under test and they were stuck onto some pairs of jeans. The jeans were not provided by Tag-it. It was found that for all the three samples, visual or non-visual adhesive residue present on the fabric after they had been removed from the fabric whereas there was not any noticeable change in the physical appearance of the fabric or cover fabric. There was no colour change of the fabric, either. Without any elaboration, the conclusion in the 1^st Report is that the sample Leg Stickers failed the test.

35.  I cannot accept the conclusion even if I am to accept that the sample Leg Stickers were representative of those supplied to Tag-it by Bar Code. I have no idea how much visual or non-visual residue was found. I do not accept in the absence of trade evidence that there is a zero tolerance of such residue for a sticker to be of merchantable quality. As said, I have no idea where the jeans under test came from and the alleged failure might be due to the jeans and not the sample Leg Stickers.

36.  I have no idea why Talcon found it necessary to commission BV Lab to conduct the second test. The 2^nd Report, if anything, even gave lesser information save that it is apparent that the same testing method was adopted. For the same reasons, I refuse to accept the conclusion in the 2^nd Report.

37.  On the contrary, the evidence of Bar Code in the form of the testimony of Mr Siu Fat Chi is that Adhesive No.9 had long been used in the stickers to be supplied to Tag-it and there had been no complaints about such stickers save those supplied under the said invoices. It worked well with all ranges of fabrics. I accept his evidence and I am not convinced by the evidence of Tag-it to the effect that the Leg Stickers were of defective quality.

38.  Given my rejection of the allegation that the Settlement Sum was paid by Tag-it and the factual finding of the quality of the Leg Stickers, I would only be brief in dealing with the remaining two issues raised by Bar Code. Ms Siu submits that the sale of the Leg Stickers was a sale by sample and she further relies on section 37 of the Sales of Goods Ordinance, Cap.26 to submit that Tag-it had already accepted the Leg Stickers after having a reasonable opportunity of examining them to ascertain whether they conformed with the samples.

39.  I do not think that this section is relevant to the present dispute at all. Tag-it does not seek to reject the goods altogether. It is entitled to claim damages for the defective quality of the goods (if proved) even after it has accepted the goods.    

40.  As regards the alleged loss of Tag-it, as explained above, to start with, I am not convinced that Tag-it has the locus to recover any payment of the Settlement Sum even if made to DMC by Tag-it on behalf of Talcon. Nor am I convinced that the Additional Cost was incurred reasonably. I fail to see how such “wash before wearing stickers” were necessary to remedy the situation.

41.  Further, the fact that the Settlement Sum was arrived at after lengthy negotiation between Talcon and DMC does not mean that it was a reasonable sum. I am not convinced that it was. Nor am I persuaded about the merits of the claim of DMC. I have no idea how the auxiliary stickers were necessitated by the allegedly poor quality of the Leg Stickers. 

42.  In the circumstances, I do not accept that Tag-it has made a reasonable effort to mitigate its loss, if any.

Conclusion and Orders

43.  The counterclaim is not supported by cogent and reliable evidence. There are far too many holes and/or missing links in the evidence of Tag-it and its credible witness in SA could do little to assist. In the result, the counterclaim falls to be dismissed.

44.  As liability in respect of the claim of Bar Code is accepted, I allow the claim of Bar Code and judgment is entered in its favour in the sum of US$45,974.28. I would further order that interest is to run on the said sum from 30 August 2012 (date of the Writ) until judgment, thereafter judgment rate until payment.

45.  There is no reason why costs should not follow the event. I order that Bar Code is to be paid by Tag-it its costs of the action including the counterclaim with certificate for counsel. This is a costs order nisi subject to the parties’ application(s) to vary within 14 days.   

46.  It remains for me to thank both counsel for their conscientious efforts.