SAINT TROPEZ FASHION MAKERS (a firm) v. HIGH FASHION GRAMENTS LIMITED

1986, No. A6080

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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JUDGMENT

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1. The plaintiff and the defendant are both companies engaged in the garment industry. In April 1986 negotiations were commenced between the two parties and oral agreements were reached whereby the plaintiff would manufacture garments for the defendant under 27 contracts, the finished products being for sale to two customers of the defendants in the U.S.A., namely Lizzy N Johnny and Mondial. Subsequently, the oral agreements were reduced to writing, signed by the defendant, and sent to the plaintiff for signature. The contracts were received by the plaintiff on the 8th May 1986.

2. The plaintiff completed manufacture of all of the garments to be produced under the 27 contracts and these were delivered to the defendant. No dispute arises in relation to the 15 contracts completed for the customer Mondial and for 2 of the contracts completed for Lizzy N Johnny. The plaintiff sent invoices relative to the contracts and received from the defendant payments totalling HK$440,000. The third and last payment, of HK$150,000 was made on the 10th October 1986 and was applied by the plaintiff first in payment of invoice No. 155 dated the 9th October 1986 for HK$73,053.60, and then in reduction of the balance outstanding on the other invoices. The balance now owing on the invoices is HK$330,447.26 and the plaintiff seeks judgment for this sum.

3. In respect of this amount the defendant takes issue with two of the invoices.

Invoice No. 155.

4. The history of the goods manufactured under contract No. 1691 which relates to invoice No. 155 is that the garments were the last batch of garments manufactured by the plaintiff for the defendant. The goods were ready for delivery on the 10th October 1986 but the plaintiff refused to do so until the balance then due of HK$480,447.26 (including the invoice No. 155) was substantially reduced. The defendant therefore paid HK$150,000 and the goods were duly delivered with invoice No. 155. Included in the balance due was HK$7,185 for the repacking of the garments under invoice No. 155. The repacking charge was debited at the rate of HK$2.40 per piece. It is the evidence of Miss Hon, a director of the plaintiff, that this was the figure agreed with Mr Chiu, the chief factory manager of the defendant, when he requested the repacking. Mr Chiu does not dispute that he made such a request nor that the plaintiff satisfactorily carried out the work. He says that the price had not been initially agreed and that when he received invoice No. 155 he rang Miss Hon and complained about the repacking charge. It is his evidence that she agreed to this being reduced to $1 per piece. Accordingly, the defendant issued debit note No. 5262 dated 14th October 1986 for a refund of $4,191.60 based on a repacking overcharge of, $1.40 per piece. Miss Hon denies that she ever agreed to such a reduction and I accept her evidence on this point. I do not believe that the plaintiff would have proceeded with the repacking without a figure having been agreed. The cost of packing, which comes from other documents in the bundle, shows $1 per piece to be quite unrealistic. In addition at the time when the invoice was delivered the defendant was desperately anxious to get delivery of the garments to which the invoice related. In those circumstance, I do not believe that Mr Chiu would have been quibbling with miss Hon over such a small sum. I reject his evidence that he did so. The figure of $73,053.60 was not included in the plaintiff's claim as the plaintiff treated invoice No. 155 as having been fully paid from the payment of $150,000. Having found for the plaintiff in respect of the repacking charge there was no need to bring the amount of this invoice back into the calculations.

Invoice No. 151.

5. The defendant alleges that the plaintiff has made an overcharge of HK$5.50 per piece under this invoice in respect of the garments manufactured under contracts No. 1680 and 1688. The written contracts were signed by the defendant and delivered to the plaintiff for a unit price of HK$20 typed in. Miss Hon subsequently deleted the typed figure and wrote in a unit price of HK$25.50. When the garments were ready for delivery she signed the contracts on behalf of the plaintiff and these were returned to the defendant at about the same time invoice No. 151 was sent. Invoice No. 151 is dated the 20th September 1986 and charged for the garments manufactured at HK$25.50 per piece.

6. Miss Hon says that the amendments were made in agreement with Dr Chiu. He denys any such agreement. It is his evidence that any amendments to the contracts were required to be initialed by him. In contract No. 1721 an amendment was made to the unit price by deleting US$22.50 and substituting US$34.63, the amendment being initialed by the defendant. Miss Hon's explanation for the absence of initials to the amendments on contracts No. 1680 and 1688 is that these were Hong Kong dollar contracts and that Mr Chiu had authority to approve amendments in respect of Hong Kong dollar contracts. The 27 contracts were split into contracts payable in Hong Kong dollars and contracts payable in U.S. dollars. The Hong Kong dollar contracts were to be manufactured in Hong Kong and the U.S. dollar contracts were to be manufactured in China. Amendments to contract No. 1721 being a U.S. dollar contract had therefore to be initialed by the defendant. Mr Chiu, in his evidence, did agree that with regard to contract No. 1691 (to which invoice No. 155 relates) the method of packing had been changed but that no amendment to the written contract had been made to this effect. He further agreed that no such amendment was necessary because the work was to be completed in Hong Kong, thereby indirectly confirming the evidence of Miss lion on this point. It is, however, the actions taken by the defendant in relation to these charges which cause me considerable disquiet. The defendant issued a debit note, addressed to the plaintiff claiming HK$12,000 being an overcharge of HK$5.50 per piece under invoice No. 151. It is the plaintiff's case that the debit note was never received by it and that it is in fact a sham. The debit note is No. 5276 dated 9th October 1986. The debit note issued by the defendant to claim on the alleged overcharge on repacking is No. 5262 and is dated 14th October 1986 - i.e. 14 debit notes before No. 5276 yet dated 5 days later. Miss Lam from the defendant's accounts department attempted to explain away how this could have come about. She says that one debit notebook was kept in the custody of a colleague in the Sales Department, and that when she needed to issue a debit note she would ask that colleague for one. However, some department heads could tear out and keep a store of loose debit notes to issue as and when required. Miss Lam says that she can recall that on the 14th October 1986 she could not find her colleague who had custody of the debit notebook nor did she have any loose sheets in store. She therefore found a fellow department head who gave her one of the loose sheets. This, she says, is how debit note No. 5262 comes to be dated 5 days later than debit No. 5276. Having seen and heard Miss Lam I am in no doubt that she is not telling the truth about this matter. No complaint of an overcharge was made when the goods were delivered on or about the 20th September 1986. On the 10th October 1986 the defendant, after being pressed for a payment to reduce the outstanding amount, which included the amount claimed in invoice No. 151, paid to the plaintiff HK$150,000. I am satisfied that the defendant has fabricated debit note No. 5276 dated 9th October 1986 and attempted to lead the court to believe that it had claimed an overcharge before mating part payment on invoices which included invoice No. 151. I am satisfied that Miss Hon is telling the truth when she says that the charge in contracts No. 1680 and 1688 reflects the agreement made between her and Mr Chiu.

7. The defendant's claim for a setoff in respect of the invoices 151 and 155 fails.

8. The defendant counterclaims under two heads:

9. As stated earlier, following the initial discussions which took place on or about the 14th April 1986, the defendant prepared, signed and delivered written contracts to the plaintiff for signature. These were received by the plaintiff on the 8th May 1986. The contracts provided for delivery under contract No. 1714 on the 25th May 1986, under contract No. 1723 on the 15th May 1986 and under contracts No. 1715, 1717, 1718, 1753 and 1761 on the 30th May 1986. These are the contracts which relate to the dispute over late delivery. The contracts provided for the garments to be manufactured in 100% polyester, georgette fabric which was to be provided by the defendant, along with accessories it is an agreed fact that the fabric required for these contracts was supplied on the 4th May 1986, 7th May 1986, 13th May 1986, 30th May 1986, 6th June 1986, and 9th June 1986. It is Miss Hon's evidence that at the initial discussions it was agreed that the defendant would supply the necessary fabric within two to three days. She accordingly booked space with a factory in China, No. 3 factory Shun Take, where the Lizzy N Johnny garments were to be manufactured, anticipating that manufacture would take place in April/May with delivery to be made in May. The initial delivery days typed into the contracts by the defendant reflect that Miss Hon's evidence, in this regard, is accurate as it is her evidence that she needed about one month from supply to complete manufacture. Mr Chiu agrees that the initial agreement was for the defendant to supply fabric within two or three days after the oral agreement had been reached and that this was about the 14th April 1986. Problems arose for the plaintiff as a result of the defendant not supplying material as undertaken. As can be seen from the dates of supply the first batch was not delivered until the 4th May 1986. Miss Hon says that as a result of this the factory in China would not continue to keep the booked space available and that this subsequently caused delays. She says that as a result she suggested to the defendant that some of the contracts be cancelled but was requested by the defendant to assist it and to continue to do the best she could to complete the manufacture of the garments as soon as possible. It is very clear that, as a result of the delay by the defendant in supplying material, the plaintiff could not meet with the delivery dates initially typed into the contracts. I accept Miss Hon's evidence that because of this fact she did not sign the contracts in the form delivered to her.

10. After the defendant started to deliver fabric the plaintiff commenced manufacture at the factory in China. It is the evidence of Mr Lam Fu-wah, the managing director of the defendant, that in late flay 1986 after considerable negotiation with Lizzy N Johnny he received from that firm a fax dated the 27th May 1986 detailing quantities, patterns and C.M.T.Q. prices for the garments to be manufactured. The fax showed a delivery day between the 10th June and the 30th June. The quantity shown in the fax do hot relate directly to the quantities detailed in the 27 contracts, an inconsistency that was never adequately explained in evidence. It is, however, Mr Lam's evidence that Miss Hon was told that the garments would have to be supplied on the 15th, 20th and 25th June. He did not give evidence as-to-which of the contracts had to be supplied on which of the dates and there were no records or correspondence produced to show that this was an arrangement between Lizzy N Johnny and the defendant and between the defendant and the plaintiff. Mr Lam claims that cargo space was booked for these dates but again no documentary evidence was produced to support this claim. He refers to the Letter of Credit which had a presentation date of 30th June. He conceded, however, that provided the customer accepted delivery of the goods the Bank would pay on the Letter of Credit despite the date being later than 30th June-which in fact did happen. He also says that Miss Hon was told that if delivery dates were not met the plaintiff would be liable for any consequential losses suffered by the defendant. It was never put to Miss Hon in cross-examination that these dates had ever been suggested to her let alone agreed by her. Given that the defendant was still delivering materials as late as the 30th July, 6th June and 7th June the allegation that the plaintiff had agreed to deliver by the 25th June the total number of garments to be manufactured is, in my view, quite ridiculous. It is true that following a visit to China in mid-June by Mr Lam, Mr Chiu and a representative from Lizzy N Johnny they recommended to Miss Hon that three additional factories be engaged in an attempt to expedite manufacture. It is Mr Lam's evidence that the customer agreed to extend the delivery dates by 7 to 10 days which would have made the last day of delivery the 2nd to the 5th July. He says this was advised to Miss Hon but again this was never put to her in evidence and no notice or correspondence or record of any kind to this effect was produced by the defendant. What is, however, most surprising about Mr Lam's evidence on these issues is his claim that Mr Chiu was a party to the discussions with Miss Hon as to the delivery dates and as to her agreement to them. Mr Chiu, in his evidence, made no reference whatsoever to the delivery dates of the 15th, 20th and 25th June nor to any discussion With Miss Hon about these dates. He says that when they approached the three factories in China in June they had not given those factories any completion dates. It was his evidence that as the original delivery dates were long passed there was then no fixed delivery date. This comes from the representative of the defendant company responsible for negotiating terms of the contracts with the plaintiff. His evidence, on this point, is in accord with that of Miss Hon. She says that under the renegotiated terms she was to continue with the manufacture of the garments and delivered the same as soon as she was able to complete, given that she was aware that there was urgency as a result of the late start in manufacture brought about by the defendant's default. She sent a large number of sewing machines to China in an attempt to assist. For Mr Lam to say that he put the plaintiff on notice regarding late delivery when the problem had arisen as a result of his company's failure to perform its obligations is, quite unbelievable. The plaintiff proceeded with production and as each contract was nearing completion Miss Hon amended the typed delivery date in consultation with the defendant's shipping department and inserted the date upon which the goods could be delivered. The plaintiff then signed the contract and delivered the same to the defendant at about the same time as the invoice relating to the goods in the contract. The defendant accepted the contracts in the amended form and made no complaint at the time. The goods under the 7 contracts in dispute were delivered on the following dates:- Contract No. 1714 on the 26th July 1986, Contract No. 1761 on the 23rd July 1986, Contract No. 1717 on the 24th July 1986, Contract No. 1753 on the 26th July 1986, Contract No. 1718 on the 30th July 1986, Contract No. 1723 on the 15th July 1986 and Contract No. 1715 on the 15th July 1986. Goods in respect of three of the contracts were airfreighted to the U.S.A but were not uplifted by Lizzby N Johnny. They were, in due course, shipped back to Hong Kong. The goods in respect of the other 4 contracts were kept in Hong Kong by the defendant. All the garments manufactured by the plaintiff under the 7 contracts were sold by the defendant in Hong Kong.

11. No complaint of late delivery, either verbal or written, was made by the defendant to the plaintiff until after the plaintiff had issued proceedings. Mr Chiu gave evidence of being aware of the letter of guarantee procedure which would have required the plaintiff to indemnify the defendant for any damages incurred as a result of late delivery. The plaintiff was never asked to supply such a letter of guarantee. The defendant made a payment of $150,000 on the 10th October 1986 but at that time made no mention of a claim for late delivery. Mr Lam's reason for not having done so is that the plaintiff was, up to that time, still manufacturing goods for the defendant and that on the 10th October had requested a substantial payment before agreeing to release the last batch of goods. The defendant was, therefore, reluctant to raise controversial matters at that time.

12. I do not accept Mr Lam's evidence that the delivery dates were fixed for the 15th, 20th and 25th June 1986 - extended by 7 to 10 days. I am satisfied that the delivery dates in the contract were not able to be met because of the default of the defendant and that accordingly the contracts were not signed in their original form by the plaintiff. I am further satisfied that the delivery dates were renegotiated and that the plaintiff was asked by the defendant to complete the manufacture of the garments as soon as she was able to do so. The defendant unconditionally accepted the delivery of the goods on the amended dates shown in the contracts. I find that the defendant has failed to establish that there was a breach of contract by the plaintiff in respect of delivery of the garments.

13. The counterclaim made by the defendant in respect of defective goods relates to goods manufactured under contracts 1716, 1719 and 1720. These were delivered to the defendant on the 15th July, 22nd June and 7th July respectively.

14. The plaintiff was obligated under the terms of the contracts to manufacture the goods in accordance with specifications and in fabrics provided by the defendant. The plaintiff produced samples which were approved by the defendant's customer and these became the approved samples from which the garments were to be cut. The burden is on the defendant to prove that the garments delivered under the three contracts were defective and that the defects were due to the plaintiff not manufacturing the goods in accordance with the approved samples. There is no allegation of poor workmanship.

15. The garments complained of were manufactured at No. 3 Factory Shun Tak and there were three different styles involved. During the manufacturing process the defendant's quality controller Master Tang visited the factory to inspect the work in progress. The plaintiff had its own quality controller on site. Mr Chiu described Master Tang as being responsible to see to the quality of the final products. He said Master Tang had a sample which he used to compare the manufactured goods to. If defects were found faster Tang would advise the plaintiff's quality controller and it was blaster Tang's task to ensure that the defects were remedied before the goods were accepted. Master Tang gave evidence of having inspected the first batch of 40% of the garments made under the three contracts. He says he had a feeling that there was something wrong with the lapels and that he asked the resident quality controller for the samples. The quality controller told him the samples had been misplaced. He says he asked the quality controller to check the lapels against the samples to ensure that they were' in accordance with sample. He claims he did not inspect that batch of 40% of the garments again nor did he inspect the second batch of 60% of the garments when they were ready for delivery. The reasons given by him were that he was too busy at the time with other matters and that he trusted the plaintiff's Q.C. to comply with his directions.

16. Following receipt of the goods by the defendant they were sent to Lizzy N Johnny in the U.S.A. and accepted by that firm. Approximately two months later Mr Lam was asked by Lizzy N Johnny to attend a meeting in New York "to discuss the garments. He says that at that meeting three garments in different styles were modeled and that it was apparent there was something wrong with the lapels in that they did not adequately cover the breast area. He says the customer had the approved sample, that he compared this to the three garments and that he found the garments did not match the sample. He then inspected a large number of garments at the warehouse and was satisfied that these too were defective. His evidence is that he immediately agreed to compensate Lizzy N Johnny and that the sum of US$55,177.25 was paid. This figure was based on the C.M.T.Q. price plus some transport and customs costs. Mr Lam then returned to Hong Kong and called a meeting of his staff who had been involved with the contracts. He brought with him the three garments which had been modeled for him in New York and these were produced as defence exhibits l, 2 and 3. Very surprisingly he did not bring back to Hong Kong the approved sample which he claims was available in New York at the time of inspection of the garments. Having paid the compensation to Lizzy N Johnny he was perfectly entitled to bring back the sample which would seem to be the obvious thing to do. Even more surprisingly after the issue of proceedings by the plaintiff in October 1986 he made no effort to get back the sample from his customer in New York. When questioned, he agreed that the production of the approved sample would quickly have established whether or not the garments had been manufactured in accordance with sample.

17. After the meeting with the staff at which D1, D2 and D3 were modeled Mr Chiu says that he rang Miss Hon to discuss the defects. Miss Hon has no memory of such a conversation but she did agree that a Miss Lam from the plaintiff 's company might have attended a meeting with Mr Chiu and taken a paper pattern with her. Mr Chan and Master Tang both say that such a meeting took place and that a paper pattern was produced by Miss Hon. The paper pattern was checked against the garments and it is their evidence that the lapels were found not to be in accordance with the paper pattern. The production of the paper pattern would have been strong evidence to support the defendant's claim. However, it is the evidence of Mr Chiu that the pattern was lost when the company moved its premises. He was well aware of the plaintiff's claim at this time and of the value of the pattern to the defendant's case, yet he says it was lost.

18. In summary, Master Tang, a very experienced quality controller, says he felt there was something wrong with the first batch of 408 of the garments that he inspected, he claims to have made no further inspection of that batch nor of the second batch of 60% of the pieces which were subsequently delivered. He agrees it was his responsibility to have done so. Mr Lam agrees that he signed a completion certificate in respect of the garments but claims this was done purely as a matter of form for the bank and not as a result of any genuine inspection. He says that he had in his hands in New York the sample which would have resolved the dispute as to defects yet he left the sample in New York and made no attempt to retrieve it. Mr Chiu and Master Tang say that they had in their hands a paper pattern which again would have helped to resolve the dispute over defects but that this paper pattern was lost. I find this evidence unbelievable and I am satisfied that the witnesses are not telling the truth about these matters. The defendant produced, in the course of the trial, a live model to show the garments Dl, D2 and D3 and it was clear and not disputed that the lapels did not fully cover the breast area. However, the extent of the problem became difficult to gauge when it was revealed later in the hearing that the model was a larger fitting than the garments that she had been asked to model. This, in my view, is indicative of the defendant's, approach to the evidence in this case. The only sample which was in fact produced came from the plaintiff's exhibit P2 which was a first sample and not an approved sample. However, when Mr Chiu was asked to compare this with the defendant's exhibit D2 he could find no difference between the sample and the finished product.

19. The plaintiff further submits that Mr Lam has not been totally honest with the court in regard to his dealings with Lizzy N Johnny. The defects must have been apparent immediately after receipt of the garments yet there was a lapse of approximately two months from delivery to the time when a complaint was made to Mr Lam. Following the meeting in New York Mr Lam made no inquiry of the plaintiff concerning the alleged defects but immediately paid a substantial sum in compensation. Lizzy N Johnny had supplied the fabric for the manufacture of the garments yet in the compensation figure no allowance was made for this factor. It is Mr Lam's evidence that he paid US$55,177.25 to Lizzy N Johnny. Evidence from Miss Lam of the defendant's accounts department shows that in fact Lizzy N Johnny made a substantial payment to the defendant in respect of outstanding invoices, and that deduction was made for the amount of the compensation. There clearly was discussions with Lizzy N Johnny concerning accounts which Mr Lam made no mention of in his evidence. When questioned about Lizzy N Johnny's financial standing, Mr Lam conceded that the firm has filed under Chapter 11, a piece of legislation which protects financially troubled companies from their creditors. There are certainly grounds to arouse suspicions as to just what did take place in the discussions between Lizzy N Johnny and Mr Lam. I do not believe he can be relied on as credible on this issue just as I do not accept his evidence as true in relation to the late delivery issue.

20. I find that the defendant has failed to show that the goods manufactured by the plaintiff under contracts 1716, 1719 and 1720 were not made in accordance with the approved sample. The counterclaim fails and is dismissed with costs to the plaintiff. There will be judgment to the plaintiff in the sum of HK$330,447.26 together with costs.