WONG CHAN KI (I AND E) CO. LTD. v. ALTAI CO. LTD.

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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BETWEEN

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JUDGMENT

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1. The plaintiff company claims the sum of $103,200 from the defendant company in respect of the contract price for the manufacture of 6,000 children's dungarees of which the defendant refused to take delivery.

2. The defendant admits that it repudiated the contract but contends that it was entitled to do so as the dungarees did not correspond in quality with approved samples supplied by the plaintiff. The defendant also counterclaims in the sum of $9,000 being its loss of profit as a consequence of the intended sale of the goods to its customer in England having to be cancelled.

3. There is no dispute that the contract was one of sale by sample and that it was an implied term that the bulk of the dungarees should correspond in quality with the sample. It is also agreed that it was an express term of the contract that 3,000 of the dungarees would be ready for shipment by the "Liverpool Bay" on 29th September 1985 and that the remaining 3,000 would be ready for shipment by air at or before the end of September 1985.

4. Although in its reply and defence to counterclaim the plaintiff pleaded that it did not know that the dungarees were for resale by the defendant to a company named Celigna Ltd., the import agent of Tesco Store Ltd. in England, it is plain from the foregoing and from the contract itself that the plaintiff well knew that the defendant had ordered the dungarees for sale to a customer in England. Indeed, the plaintiff made no attempt during the course of the trial to assert the contrary.

5. The dispute between the parties centred on whether the defendant had been justified in repudiating the contract on the basis that the dungarees ultimately presented to it by the plaintiff failed to correspond in quality with the agreed samples.

6. Although at the conclusion of counsel's addresses on the last day of trial I had come to a concluded view on the case, I informed the parties that due to the lateness of the hour - it being almost 5 p.m. on a Friday afternoon - I would hand down my judgment after the weekend. This I now do.

7. Having heard testimony from witnesses for both parties and having compared a number of the finished dungarees with the agreed samples I have not the slightest doubt that the quality of the goods fell far short of that required.

8. Mr. and Mrs. Kung, directors of the defendant, were manifestly truthful and reliable witnesses and I have no hesitation in accepting their version of the events that occurred. Likewise I accept the evidence of a Mr. Lui, a former employee of the defendant, who personally examined the finished products at the plaintiff's packing warehouse in Macao. Apart from the most favourable impression he created when giving evidence, I could find no reason why he, being no longer employed by the defendant, should render anything other than a truthful account of the material matters with which he had been concerned.

9. I am perfectly satisfied that the defendant had been pressing the plaintiff to complete the order by the agreed date, but that as time passed it became apparent that it was unlikely that the defendant would be able to do so. Ultimately, in expectation that the goods might well not be ready for the sea shipment on 29th September, the defendant obtained its customer's consent to defer that shipment until 8th October.

10. However, still hoping that manufacture would be completed in time to catch the "Liverpool Bay" on 29th September, the defendant sent two of its employees, Mr. Liu and Mr. Yick, to Macao on 26th September to inspect the goods.

11. Mr. Liu found that only several hundred dungarees, instead of 3,000, were available for inspection and that of approximately 40 dungarees that he personally inspected on a random basis most were defective.

12. He found no less than seven types of defect, namely, the front bib pocket was irregular in shape, the two front pockets were not in line with each other, one being higher than the other, triangular motifs on the back were incorrectly positioned, there were many loose threads, legs of the dungarees were twisted, stitches on the legs were uneven and crooked, and button holes had frayed edges and loose threads.

13. Mr. Liu considered that the defects were serious and showed the dungarees he had inspected to the person in charge of the packing section and enumerated all the defects that he had discovered. The person in charge displayed embarrassment and promised to have the defects rectified.

14. While Mr. Liu had been carrying out his inspection Mr. Yick was performing his own independent inspection. Mr. Liu subsequently observed that the dungarees that Mr. Yick had examined were also defective. Bearing in mind that 3,000 dungarees were to be ready for shipment on 29th and the nature and number of defects in those inspected, Mr. Liu concluded that there was no possibility that they could be shipped on 29th September.

15. He took five or six dungarees with him to show his boss Mr. Kung who had accompanied him and Mr. Yick to Macao but had not attended the inspection. Immediately on their return to Hong Kong. Mr. Kung unsuccessfully attempted to contact someone at the defendant's office. He then made an overseas telephone call to a Mr. Tranter of Celigna Ltd. telling him of the result of the inspection and that the nature of the defects was so serious that the date of shipment would probably be delayed.

16. As Mr. Tranter had already arranged to come to the Far East to purchase goods he informed Mr. Kung that he would advance his trip and arrive in Hong Kong around 2nd October so that he could personally inspect the goods to decide whether to accept them.

17. The following day Mr. Kung attempted through his subordinates to arrange for Mr. Chik and Mr. Wong, directors of the plaintiff, to come to his office so that he could show them the dungarees taken from the Macao factory and attempt to have matters rectified.

18. As it turned out neither Mr. Chik nor Mr. Wong was in Hong Kong at that time, and it was not until later, probably the following Monday 30th September, that they attended at Mr. Kung's office.

19. Mr. Remedios for the plaintiff contends that I should disregard the evidence relating to this meeting because in answers to questions in a request for further and better particulars, the defendant had stated that the telephone call to the defendant during which the meeting was arranged was made on 27th September and that the meeting occurred on that same day.

20. Mr. Remedios submitted on behalf of the plaintiff that the defendant must be bound by his pleadings and that unless the evidence relating to matters dealt with in the answers to a request for further and better particulars is completely congruent with those answers it should not be admitted or, if given, should be ignored. I do not agree. I accept however that any such departure may be relevant to the credibility of testimony given on behalf of the defendant.

21. Having received the further and better particulars the plaintiff was able to produce proof that both Mr. Chik and Mr. Wong were absent from Hong Kong on 27th September Mr. Remedios sought to persuade me that therefore the meeting did not occur and that this is consistent with the plaintiff's case that the bulk of the dungarees corresponded in quality with that of the samples and that the defendant had merely wanted to find an excuse for not taking delivery. The point certainly commands consideration. However, I accept Mr. Kung's explanation that he had been mistaken in his recollection that the date of the telephone call and the meeting was the 27th September. I do not find it surprising that in all the circumstances such an error might have occurred. This matter does not affect my assessment of Mr. Kung as being an entirely truthful witness. I attach no importance to this discrepancy and an satisfied that the meeting did take place.

22. What happened at the meeting was that Mr. Kung showed the dungarees to Mr. Chik and Mr. Wang and pointed out the various defects. He made it plain that he doubted whether it would be easy to rectify some of the defects and expressed the hope that the balance of the dungarees that had not yet been manufactured would be properly made and would conform to sample.

23. Mr. Chik and Mr. Wong promised to do their best but added that they doubted whether the goods would be ready for shipment on 8th October. Mr. Kung then undertook to endeavour to persuade his buyer to defer the date of shipment. At the conclusion of the meeting he handed the five or six dungarees to Mr. Chik and Mr. Wong so that they would be able to discuss the defects with their manufacturers in Macao.

24. Mr. Chik and Mr. Wong testified that such a meeting did not take place on 27th September or at any other time. I simply do not believe them.

25. It seems to me that had Mr. Kung wanted to repudiate the contract, there was no necessity for him to invent a reason for doing so for it is plain on the evidence before the court that the plaintiff had failed to complete the contract by producing the required 6,000 dungarees by the end of September as agreed. Even at the inspection on 8th October the goods produced for examination fell far short of 6,000 and no air shipment had been made by the end of September.

26. Moreover it is plain from Mr. Tranter's affidavit received in evidence pursuant to section 47 of the Evidence Ordinance and Order 38 that when he, Mr. Kung and Mr. Liu visited the defendant's packing warehouse in Macao on 8th October, he found the dungarees to be unacceptable in that they did not correspond with the quality of the approved samples. Although Mr. Tranter was not available for cross examination and therefore less weight can be given to his affidavit on that account, it serves as some confirmation of the testimony of Mr. Kung and Mr. Liu not only that the defendant was anxious to complete the contract but that the majority of such dungarees as the plaintiff had produced for inspection was seriously defective.

27. At the inspection on 8th October there were approximately 1,000 dungarees on display. Mr. Kung was unable to give a precise figure because of the movement of the dungarees from trimming benches to pressing benches where the packing was being performed. However, I am satisfied that his estimate of 1,000 dungarees is probably correct. Even allowing for a fair margin of error in his estimate it is plain that the number fell far short of 6,000. Moreover, the plaintiff did not dispute Mr. Kung's estimate in cross examination.

28. Mr. Kung and Mr. Tranter examined at random between 200 to 300 dungarees over a period of 1½ to 2 hours and found that most of them were defective. In addition to the defects discovered by Mr. Liu on his visit on 26th September, Mr. Kung found that many dungarees were overstitched and that some had missing buttons or motifs or damaged motifs.

29. At Mr. Tranter's request a female member of the warehouse staff escorted Mr. Kung and Mr. Tranter to a small workshop nearby where the goods were allegedly manufactured.

30. Although Mr. Kung and Mr. Tranter walked around the workshop Mr. Kung was unable to see any dungarees being manufactured. Instead both denim and corduroy jeans for adults were in the process of being manufactured. The quality of the workmanship on these jeans was very good. These factors lead Mr. Tranter to suspect that the dungarees had not been manufactured in Macao by the plaintiff but had been subcontracted to a manufacturer in China. When Mr. Kung asked the female staff member who had accompanied them whether it would be possible to get the production records for the dungarees she replied that she did not know.

31. On returning to the packaging warehouse they enquired from a Mr. Luk if it would be possible for him to produce the production records. Without attempting to look for these records Mr. Luk replied that he could not find them. On being told by Mr. Kung that Mr. Tranter suspected that the dungarees had been manufactured in China, Mr. Luk displayed no change of facial expression and remained silent.

32. Mr. Tranter then announced that his customer Tesco Store Ltd. would not accept goods of such poor quality and that he therefore rejected them. Following on this Mr. Kung informed Mr. Luk that the order was cancelled. On leaving the warehouse Mr. Tranter and Mr. Kung asked to be given samples to show their end buyer. Mr. Luk then wrapped up 15 dungarees and handed them to them.

33. These dungarees were later tested by Labtest Hong Kong Ltd. and a report was prepared and placed before the court. It is plain from the report that the workmanship on the dungarees was defective and that they were unacceptable when compared with the approved control sample. Indeed my own visual examination of these goods and the approved sample left no doubt in mind as to the poor quality of all the dungarees taken from the warehouse in Macao.

34. Although one of the major submissions made by counsel for the plaintiff was that the findings as to the poor quality of the items before the court did not prove that the bulk of the dungarees in the warehouse were defective, I have no doubt from the testimony of Mr. Liu and Mr. Kung that the great majority of the goods inspected at random in the warehouse was defective.

35. There was a great deal of cross examination of the defendant's witnesses on peripheral matters in an attempt to destroy their credibility but, notwithstanding the industry and skill demonstrated by Mr. Remedios in this regard, I was left in no doubt that these witnesses were all telling the truth. Indeed Mr. Liu is no longer employed by the defendant and has no apparent motive to give false testimony.

36. I do not propose to elaborate on all the various points sought to be made in cross examination of the defendant's witnesses. I shall however refer briefly to three matters.

37. The first is that much was made of the fact that the defendant did not write a letter to the plaintiff immediately after the inspection of 26th September setting out all the alleged defects. Since Mrs. Kung had agreed she made a practice of recording all important matters, it was suggested that the absence of such a letter indicated that no defects had existed.

38. I accept the explanation, however, that the defects had been clearly indicated to the defendant's representative in Macao on 26th September and that every attempt was made by Mr. Kung to arrange a meeting with senior staff of the defendant as soon as possible after that inspection. This seems to me to have been an entirely sensible way of dealing with the problem. There was no need to write a letter.

39. Secondly it was suggested that the sole ground of complaint advanced by the defendant in a letter written to the plaintiff on 8th October was that the goods had not been made in the Macao factory, and that there was no reference in that letter to the defects of which complaint is now made. The inference that I was invited to draw from this is that the evidence given on behalf of the defendant that the goods were defective is pure concoction.

40. This argument is based on a mistaken interpretation of the letter. It is plain to me that the letter opens by referring to the fact that the goods had been rejected, and then goes on to state that the defendant was particularly distressed to find that all the goods had been subcontracted and not made in the plaintiff's factory in Macao.

41. Whilst it is true that the letter does not catalogue the defects that the defendant's representative found in the dungarees it is simply not correct to say that the defendant was there alleging that the reason why it had rejected the goods was that they had not been made in the plaintiff's factory in Macao.

42. Mr. and Mrs. Kung testified that in fact a comprehensive list of all the defects had been typed on a separate sheet of paper and had been enclosed with the letter of 8th October. I accept their explanation that the list had been typed on the same day but at a different and probably later time than the letter and that it was for this reason that the word "Encl." did not appear at the bottom of the letter.

43. Finally, Mr. Remedios submitted that the testimony of Mr. Kung as to what had occurred at the inspection on 8th October was suspect because he had said that he and Mr. Tranter had inspected between 200 and 300 dungarees within a period of 1½ to 2 hours. This meant that calculating from each extreme, the two men would have inspected on average one pair of dungarees every 18 or 36 seconds.

44. During the course of the trial, Mr. Tang of Labtest Hong Kong Ltd. was asked by Mr. Remedios to say whether the defect in what Mr. Remedios obviously considered to be the least defective of the exhibits rendered that pair of dungarees unacceptable. Mr. Tang took no longer than 30 seconds to examine the exhibit before giving his answer in the affirmative.

45. Since this exhibit was one of less obviously defective pairs of dungarees and since Mr. Kung and Mr. Tranter were familiar with the goods, the estimate given by Mr. Kung of the number of dungarees that he inspected at the warehouse on 8th October is perfectly realistic. Having examined the exhibits for myself, I have no doubt that there is no force in this submission.

46. Neither these matters nor other matters raised in cross examination of the defendant's witnesses caused me to doubt their veracity. On the other hand, I found the plaintiff's witnesses, particularly Mr. Chik and Mr. Luk who both gave extensive testimony, to be tentative and unconvincing.

47. I do not believe Mr. Luk's evidence that at the inspection on 26th September Mr. Liu had merely pointed out two types of defects to him and had asked that they be rectified.

48. Mr. Chik told the court that Mr. Luk had informed him that complaint had been made only as to two types of defect. I find it difficult to believe that Mr. Luk passed on such limited information but, if it is true, it may perhaps explain why the plaintiff brought this action against the defendant.

49. Even if Mr. Luk had failed to inform Mr. Chik of all the complaints that had been made, thus giving him a false impression of the full extent of the remedial action that had to be taken, no or no sufficient action was in fact taken to rectify those two types of defect before 8th October because the same defects were found in many of the dungarees inspected on that day.

50. The testimony of the plaintiffs witnesses stood in stark contrast to that of the defendant's witnesses on all material matters. Wherever there was a conflict I found no difficulty in resolving it in favour of the defendant. I also found Mr. Chik's evidence on the question of mitigation of damages to be quite unpersuasive.

51. I reject the plaintiff's claim for damages and find that the defendant succeeds in its counterclaim for loss of profit in respect of the cancellation of the sale of the dungarees to its customer Celigna Ltd. in England.

52. I therefore dismiss the plaintiff's claim and give judgment for the defendant on the counterclaim in the sum of $9,000. Other than the costs incurred by reason of an adjournment for a half a day which the defendant has agreed to pay, I award the costs of the action on the claim and counterclaim to the defendant.