WISTAR ENTERPRISES LTD v. PACIFIC GARMENTS LTD

DCCJ 5634 / 2006

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 5634 OF 2006

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BETWEEN

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JUDGMENT

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Introduction

1.  The Plaintiff is and was at all material times a Hong Kong incorporated company engaged in the business of manufacturing and selling bags made of different materials. The Defendant is also a Hong Kong incorporated company. It placed the agreements in question with the Plaintiff on behalf of a French company called S.A.S. Top Baggage International (“TBI”). TBI is engaged in the business of, inter alia, the purchasing of bags for resale to its customers.

2.  The Defendant denies that it was the agent of TBI. The Defendant alleged that TBI had been contracting directly with the Plaintiff until around mid 2004 and for reasons that the Defendant and TBI did not disclose as they felt it was irrelevant to this action, TBI started using the Defendant in 2004 to effect payment for goods ordered from TBI’s Asian suppliers including the Plaintiff.

3.  The claims relate to two set of agreements entered into between the parties :

(1)  an agreement (the “3960 Agreement”) entered into on or about 26 May 2005 for the manufacture and supply of 17,000 French military bags (the “Military Bags”); and

(2)  two agreements (the “Mail Bag Agreements”) entered into in 2005 for the manufacture and supply of a total of 195,000 French mail bags (the “Mail Bags”)

4.  The Plaintiff’s claims are for the Defendant’s breach of the 3960 Agreement and the Mail Bag Agreements.  The claims consisted of the following :

(1)  loss of profit of US$17,850 under the 3960 Agreement;

(2)  loss of profit of US$12,539 under the Mail Bag Agreements;

(3)  costs of 2 heat slitter machines in the sum of RMB50,000;

(4)  abrasion testing machine in the sum of RMB22,000;

(5)  transportation costs of US$9,200. This claim, together with claims under sub-paragraphs (3) and (4) above are in relation to the Mail Bag Agreements;

(6)  US$28,965.78 (out of US$30,291.78) under the Plaintiff’s debit note WDN 1080 for accessories purchased by the Plaintiff pursuant to the 3960 Agreement and the Mail Bag Agreements;

(7)  US$1,299 (out of US$1,904.84) under the debit note WDN 1091;

(8)  US$3.00 per cubic meter for the storage, calculated from November 2006 at 73 cubic meters; and

(9)  simple interest pursuant to section 49 of the District Court Ordinance.

5.  At the beginning of the trial, the Plaintiff confirmed that they would not pursue the following claims for the reasons set out below :

(1)  US$13,497.90 under order WS 4679 and invoice WI 4679 and interest thereon as they had been settled by the Defendant after the commencement of the present proceedings;

(2)  US$27,600 under the debit note WDN 1090 in relation to a claim by Quanzhou City Liangxing Textile Trading Co. Ltd. (“Liangxing”) for the costs of fabric supplied. The debit note had been settled by the Defendant directly with Liangxing;

(3)  US$1,476 out of US$30,291.78 under debit note WDN 1080 dated 18 October 2006 as the Plaintiff received a payment of US$1,326 from the Defendant after the Defendant had used 5,100 buckles that were referred to in item CM4736/1 in WDN 1080 in a completely separate project of the Defendant. The Plaintiff also confirmed that the Defendant had paid US$150 charged under the debit note in respect of the costs of developing a new mould; and

(4)  The Plaintiff also confirmed that they will not claim the sum of US$605.84 under debit note WDN 1091, being the interest payable for the amount due under debit note WDN 1080. 

6.  During the closing submissions, the Plaintiff informed me that they would not pursue the following claims :

(1)  Claims under sub-paragraphs 4 (3), (4) (5) and (8) above; and  

(2)  Storage fee of US$99 under debit note WDN 1090 referred to in sub-paragraphs 4 (7) above.

7.  The Defendant’s case was amended seven times and is contained in the Re-re-re-re-re-re-amended Defence and Counterclaim. Numerous points were taken by the Defendant in defending this case.  In a nutshell, the Defendant alleged that it was the Plaintiff who was obliged to secure the main fabric and materials for the manufacture of the bags under the 3960 Agreement and the Mail Bag Agreements.  The Defendant alleged that it was due to the Plaintiff’s failure to supply suitable fabrics under the 3960 Agreement and the Mail Bag Agreements that caused the bags supplied being rejected by the ultimate customers.  The main dispute in this case is therefore who was responsible to secure suitable fabrics under the 3960 Agreement and the Mail Bag Agreements.

8.  The Defendant also counterclaims the Plaintiff for the loss of commission that it would otherwise have received from TBI had the 3960 Agreement and the Mail Bag Agreements not been cancelled by the ultimate customers.

The Pleaded Case

The 3960 Agreement

9.  In relation to the 3960 Agreement, it was alleged by the Plaintiff that the agreement was entered into between the parties on or about 26 May 2005.  It was contained in or evidenced by emails and facsimiles transmissions between TBI and the Plaintiff between 13 August 2004 and 22 November 2005 and the Plaintiff’s sales contract 3960 dated 26 May 2005. 

10.  The Plaintiff alleged that it was an expressed or implied term of the 3960 Agreement that the Defendant was to secure supply of suitable fabric for the manufacture of the Military Bags.  

11.  On the other hand, the Defendant alleged that the 3960 Agreement is partly contained in the Plaintiff’s sales contract 3960 issued on 26 May 2005 and partly in divers emails between the Plaintiff and TBI on 24 to 26 May 2005 (or documents mentioned in those emails).  The Plaintiff further alleged that the terms of the 3960 Agreement are more particularly evidenced by emails between the Plaintiff and TBI between and including 31 May 2005 to 22 November 2005. 

12.  According to the Defendant, the 3960 Agreement contained the following terms :

(1)  the Plaintiff was to provide the Defendant, TBI and the French Military with acceptable samples; and

(2)  the 17,000 Military Bags were to be shipped by the Plaintiff to the Defendant by 15 August 2005 (time being of the essence).

13.  The Defendant also alleged that there are the following implied terms :

(1)  a condition that the Plaintiff had to provide the Acceptable Military Bags Samples; and/or

(2)  that the samples had to be shipped by the Plaintiff by 15 August 2005 and before the actual shipment of the Military Bags (time being of the essence).

14.  The Defendant argued that by reason of certain evidence in this case and the operation of section 16(3) of the Sale of Goods Ordinance (“SOGO”), the 3960 Agreement also contained an implied condition that the Plaintiff would use, in manufacturing the Military Bags and the samples thereof, materials (including fabrics) which would be reasonably fit for the purpose of creating the acceptable samples and the Military Bags.

The Mail Bags Agreement

15.  It is the Plaintiff’s case that the Mail Bag Agreements was entered into between the Plaintiff and the Defendant on or about 26 May 2005. It was contained in or evidenced by :

(1)  the Plaintiff’s sales contract 3976 which was for only for labour and costs) and related invoices being WI3976/1 to 3976/5.

(2)  the Plaintiff’s sales contract 3999 dated 15 June 2005; and

(3)  emails between TBI and the Plaintiff between May and December 2005.

16.  On the other hand, the Defendant alleged that the Mail Bag Agreements is partly contained in :

(1)  the Plaintiff’s sales contract 3999 dated 15 June 2005;

(2)  the Plaintiff’s sales contract 3976 issued in or about June 2005  (save that the unit price of the Mail Bags stated therein did not reflect the agreement between the parties); and

(3)  emails between the parties in May and June 2005.

17.  The Defendant alleged that the terms of the Mail Bag Agreements are evidenced by emails between TBI and the Plaintiff in May, June and July 2005.

18.  The Defendant argued that the Mail Bag Agreements contained the following express terms :

(1)  As per sales contract 3999, 125,000 Mail Bags were in any event to be shipped by the Plaintiff by 25 August 2005;

(2)  As per sales contract 3976, 70,000 Mail Bags were in any event to be shipped by the Plaintiff by 5 September 2005;

(3)  The fabrics required for the Mail Bag Agreements would be directly purchased by the Defendant so as to enable the Plaintiff to use it in manufacturing the Mail Bags; and

(4)  As a result of matters set out in sub-paragraph (3) above, the price of the Mail Bag would be US$0.69 per Mail Bag.

19.  The Defendant also argued that by reason of certain evidence and the operation of section 16(3) of SOGO, the Mail Bag Agreements contained an implied condition that the Plaintiff would use, in manufacturing the Mail Bags, materials (including fabrics) which would be reasonably fit for the purpose of creating the Mail Bags.

20.  The Defendant also relied on section 17(2)(a) of the SOGO to imply a condition that the Mail Bags would correspond to the samples supplied. 

Issues in this case

21.  The issues in this case are as follows:

(1)  Who was contractually responsible for securing suitable fabric under the 3960 Agreement and the Mail Bag Agreements;

(2)  Who and what caused the failure to supply suitable fabric under the said agreements;

(3)  Whether the Plaintiff can claim loss of profit and other damages; and

(4)  Whether the Defendant is entitled to counterclaim the Plaintiff for loss of commission as a result of the Plaintiff’s alleged breach of its obligations under the 3960 Agreement and the Mail Bag Agreements. 

List of witnesses

22.  At the trial, the Plaintiff called Mr. Eric Tavernier (“Mr. Tavernier”), who is a director of the Plaintiff.  ET adopted his witness statement filed herein as evidence in chief and were cross-examined by the Defendant’s counsel, Mr. Hew, for almost 4 days.

23.  The Defendant called one witness, Mr. Thierry Jean Claude Clerc (“Mr. Clerc”), who is the purchase manager of TBI.  Mr. Clerc adopted four witness statements he had filed herein as evidence in chief and had been cross-examined. No employee or office bearer of the Defendant gave evidence in these proceedings.

Evidence of Mr. Tavernier

3960 Agreement

24.  Mr. Tavernier said that in 2001, TBI approached the Plaintiff for the manufacturing of mail bags, mainly bicycle bags, for postman in France.  To secure the confidentiality of TBI’s development and to impose a non competition restriction on the Plaintiff, an agreement dated 18 April 2001 (the “1^st Collaboration Agreement”) was signed between the Plaintiff and TBI in relation to products set out in an annexure to the agreement. Under the agreement, TBI was obliged to place a minimum order of US$150,000 per year and agreed not to manufacture the relevant products elsewhere in China other than with the Plaintiff.  In return the Plaintiff recognized the exclusivity of the French and main European markets for TBI for the relevant products.

25.  The 1^st Collaboration Agreement was terminated by the Plaintiff in about June 2005 but shortly afterwards in July 2005, another collaboration agreement was entered into between the Plaintiff and TBI.

26.  Between 2001 and May 2004, Plaintiff entered into 60 contracts for the manufacturing of bags with TBI. Since May 2004 and at the request of TBI, the Plaintiff had entered into about 49 agreements with the Defendant instead of TBI, for the manufacturing of bags. On a case by case basis, TBI would instruct the Plaintiff to pay commission to the Defendant.

27.  The Defendant is a HK$2 company and it had no staff in Hong Kong.  The Defendant played no role in the agreement with the Plaintiff.   The Plaintiff was asked to deal with the staff from TBI instead of the Defendant. They include Mr. Clerc and Mr. Cedric Le Bellegard of TBI who undertook the negotiation with and gave instructions to the Plaintiff. Mr. Tavernier said the Defendant was managed and controlled by TBI. He also did not know the reason why TBI had to channel all purchases through the Defendant and that he had no knowledge of any agreement between the Defendant and TBI.

28.  Mr. Tavernier said TBI had been purchasing bags and they had the capability of sourcing and analyzing materials from the suppliers and testing bags or the material used in the Bags.  

29.  The 3960 Agreement was contained in, inter alia, the Plaintiff’s sales contract WS 3960 dated 26 May 2005. It was for the supply of 17,000 military bags at a unit price of U$7.15 (totaling US$121,550).  Shipment date was 15 August 2005.  The Plaintiff was responsible for sourcing all the necessary accessories and to supply labour to manufacture the bags. However, Mr. Tavernier alleged that it was the Defendant (acting through TBI) who was responsible to secure the fabrics. This is the main issue in this case.  

30.  The Military Bags order arouse as a result of an agreement between TBI and the French Military in August 2004 (the “FM Agreement”) for the supply of 17,000 military bags within one year, namely August 2005. 

31.  On 13 August 2004, Mr. Clerc emailed Mr. Tavernier and his colleague Jack Zhu re the order of 17,000 military bags. In that email, Mr. Clerc asked the Plaintiff to check the ideal fabric width for the production of the relevant fabrics. TBI required the information in order to send it to their fabric supplier in Korea called Gum Kwang to finalise the fabric development. Mr. Clerc also said they would handle Gum Kwang directly on fabric development. Mr. Clerc instructed the Plaintiff to produce new samples based on TBI’s original sample and with the material and components supplied by TBI. Mr. Clerc also instructed the Plaintiff to source components such as webbing and accessories.

32.  On 30 August 2004, Mr. Clerc emailed the Plaintiff saying, inter alia, that the fabric width had been communicated directly to Gum Kwang for them to prepare approval yardage for the order of 17,000 bags.  

33.  The Plaintiff said this shows that before the 3960 Agreement, TBI had already engaged its own fabric supplier, namely Gum Kwang in Korea. The negotiation on price and the fabric development were handled by TBI directly with Gum Kwang.  According to Mr. Tavernier, it also shows that the fabric supplier was chosen by TBI and the price of fabrics was determined by TBI. TBI also undertook to handle Gum Kwang directly in relation to fabric development. 

34.  In October 2004, TBI went to the Canton Trade Fair in China to look for fabric suppliers.  TBI found many fabric suppliers in China at the Canton Trade Fair and they asked the Plaintiff to follow up with them regarding the sample fabric that TBI had talked to them during the Fair. Names and business cards of the fabric suppliers were provided by TBI to the Plaintiff.

35.  By an email dated 17 November 2004 from Mr. Clerc to the Plaintiff, Mr. Clerc stated that he was surprised that there was no feedback since 3 November 2004. On 23 November 2004, Mr. Clerc sent a complete list of suppliers TBI met in the Canton Trade Fair and he asked the Plaintiff to contact those suppliers. Mr. Tavernier maintained that it was not a contractual obligation of the Plaintiff to assist TBI in sourcing fabrics.

36.  In about March 2005, Mr. Clerc had asked the Plaintiff to arrange a visit by him to the factories of the two fabric suppliers, namely, Jiangsu Textile and Jiangsu Qin Ying.  The visits took place on about 26 March 2005. It was attended by Mr. Clerc and Mr. Tavernier.  The purpose of the visit was for TBI to validate the factory and negotiate the price for the supply of fabric by Jiangsu Textile.

37.  Mr. Tavernier said TBI took control over the selection of the fabric supplier and the approval of fabrics samples. TBI visited Jiangsu Textile to ensure that it was equipped with testing laboratory and gave direct instructions to Jiangsu Textiles.

38.  Soon after the validation meeting at Jiangsu Textile, Mr. Clerc wrote to Mr. Fu of Jiangsu Textile with copy to Mr. Tavernier and others in the Plaintiff.  It was pointed out to me that that email not only shows that the price of the fabric was agreed between TBI and Jiangsu Textile, it was a follow up to do list from Mr. Clerc to Mr. Fu for the fabric samples to be tested and the result to be sent to Mr. Clerc’s email directly. Mr. Clerc also asked for the other sample to be sent by express mail to TBI’s office in France for validation.

39.  Since then certain samples but not all of the required samples were sent by Jiangsu Textile for testing.  By 25 May 2005, the other components had been validated and the only outstanding component that required validation was the fabric.

40.  On 25 May 2005, Mr. Clerc wrote to the Plaintiff in the following terms :

“Please note following order of Qty : 17,000 pcs items WA 13290/1, based on price agreed in March.

Please send urgently sales contract, in order to sign back to-morrow.

As discussed with Eric to-day, priority is to place order to M. FU as soon as

possible, and open L.C.

Updated technical specifications for fabric will be sent to WISTAR in order to be used in L.C.

Please confirm all,

Best regards,

Thierry

P.S. Please note that we need to receive 6 complete and new approval samples, please check and confirm if you have enough material and accessories.”

41.  Later on the same day, Mr. Clerc sent another email to the Plaintiff confirming the price of USD7.15 and the compulsory shipment date in mid-August 2005.  He also asked the Plaintiff to send the sales contract to them urgently. 

42.  The sales contract was sent to Mr. Clerc on 26 May 2005 and it was signed by Mr. Clerc for the Defendant.

43.  By an email dated 31 May 2005, Mr. Clerc sent the quality specification documents to Mr. Tavernier to enable the Plaintiff to prepare the order to be placed with Jiangsu Textile and the condition for letter of credit under the order.

44.  According to Mr. Tavernier, the following were the material terms of the 3960 Agreement :

(1)  The Plaintiff shall supply the Defendant 17,000 Military Bags for the sum of US$121,500 which was inclusive of the price of the fabric of Jiangsu Textile as negotiated by TBI;

(2)  Shipment was to be made by 15 August 2005;

(3)  The fabric for manufacturing the Military Bags should be sourced and furnished by TBI on behalf of the Defendant; and

(4)  The Plaintiff would source all the necessary accessories (except the fabric) and to supply labour for manufacturing the Military Bags.

45.  On or about 13 July 2005, Mr. Clerc requested the Plaintiff to confirm purchase of other components necessary for the manufacture of the Military Bags. Pursuant to Mr. Clerc’s request, the Plaintiff purchased the buckles and accessories. 

46.  The fabric produced by Jiangsu Textile failed the standards specified by the French Military and as a result TBI was not able to perform the FM Agreement.

47.  Mr. Tavernier does not deny that the Plaintiff had helped TBI to find fabric supplier.  Due to language barrier and time difference between France and China, TBI required the Plaintiff to assist them in liaising with the fabric suppliers. Mr. Tavernier said it was actually in the Plaintiff’s interest to help TBI so that the FM Agreement can be carried out.  However, Mr. Tavernier strongly denied that the Plaintiff had assumed responsibility for the supply of the fabrics. Mr. Tavernier was adamant that it was TBI’s fault that at the time they had tendered and obtained a contract for the supply of the military bags, TBI had not yet developed the fabrics required to satisfy their contractual obligation to their customer.

The Mail Bag Agreements

48.  The Plaintiff’s evidence was relatively straight forward. On 4 June 2005, Mr. Clerc asked Mr. Tavernier via email to send a sales contract for 50,000 Mail Bags on an urgent basis for the price of US$0.69 per bag and that the fabric price would be confirmed by TBI separately.  The quantity was later increased to 70,000 pieces.

49.  On 14 June 2005, Mr. Clerc confirmed by email another order for 125,000 Mail Bags. Again the Plaintiff was requested to send a sales contract urgently at the same unit price of US$0.69.  The price was for labour and costs of accessories other than fabric.  The sales contract for 125,000 Mail Bags (No WS 3999) were sent by the Plaintiff on or about 15 June 2005.

50.  The sales contract for the 70,000 bags (No. WS3976) were sent by the Plaintiff on or about 28 July 2005. The unit price was stated to be US$3.04 which included the costs of the fabrics. This was corrected by a subsequent credit note from the Plaintiff WCR 251 to reflect the correct unit price of US$0.69 as the Plaintiff was not responsible for the supply of fabrics.

51.  According to Mr. Tavernier, the Mail Bag Agreements contained the following material terms :

(1)  The Plaintiff shall supply the Defendant 195,000 Military Bags for the unit price of US$0.69;

(2)  The Defendant (through TBI) would be responsible for sourcing and furnishing the necessary fabric;

(3)  The Plaintiff would supply labour and source all the accessories (save the fabric) for the manufacturing of the Mail Bags.

52.  There were two suppliers for the Mail Bags fabric, namely Eun Ha Textile Co. Limited (“Eun Ha”) in Korea and Liangxing in China.  Eun Ha was at that time represented by its agent Hehyoon International (“Hehyoon”). At the latest in March 2005, TBI had already been liaising with these two suppliers for the production of the fabrics for the Mail Bags. Except on one occasion where the Plaintiff was requested by TBI to place an order with Liangxing, TBI had direct dealings with Eun Ha and Liangxing and it was TBI who sourced the fabrics directly from these two suppliers.

53.  On 7 September 2005, the Plaintiff was informed by TBI that fabric was available in Korea and China for the production of 90,000 Mail Bags and they would be seeking their customer’s validation on the fabric and they aimed at sending the fabric to the Plaintiff in mid September 2005.

54.  The Plaintiff also relied on a sales contract entered into between Liangxing and the Defendant for the supply of the fabric to the Plaintiff to manufacture the Mail Bags. The contract was entered into between late July 2005 and mid September 2005 and it was paid by the Defendant between 15 September 2005 and 15 August 2008.

55.  Mr. Tavernier said that upon the instructions of TBI, the Plaintiff cut the fabric supplied by Liangxing.  By an email dated 10 September 2005, Mr. Clerc told the Plaintiff that the fabric from Eun Ha have been rejected and they would not use it. 

56.  The fabric supplied by Liangxing was similiarly rejected and thus the Mail Bag Agreements were cancelled. Mr. Tavernier said the Plaintiff was asked to go ahead to order the accessories when the fabric had not been approved. As a result, the Plaintiff had suffered loss in relation to costs incurred in preparation of the production which could not be used or resale.

Evidence of Mr. Clerc

57.  Mr. Clerc has been the purchase manager of TBI since 1997.  TBI is in the business of producing different kinds of fabric bags including fireman’s bags and military bags. Mr. Clerc is the only person in TBI who does sourcing and his job was to source components for bags which were produced in France as well as supplier (usually in Asia) for complete bags.  TBI had a factory in France with about 40 employees, which dealt with small orders of different items, including bags.

58.  The Plaintiff was one of TBI’s suppliers in Asia.  In their dealing with the Plaintiff, TBI’s role was to design and market bags to European entities for their professional use. Due to the small size of TBI, they relied on the Plaintiff to fulfill their large orders, including the sourcing of materials and the manufacture of the bags. The Plaintiff’s role was to produce bags to meet the quality and specifications of TBI’s end customers. In each order, the Plaintiff would create and send to the Plaintiff a design dossier for the bag. Based on the dossier, the Plaintiff would give TBI a quotation for the unit price of the bag and to prepare a bill of material setting out the various expenses required to produce the bags.

59.  TBI would use the quotation from the Plaintiff to submit a tender for the contract to produce bags. If they were successful in their tenders, they would send an order to the Plaintiff either directly or since 2004, through the Defendant. TBI and the Defendant expected and relied on the Plaintiff to carry out the sourcing, initial selection, recommendation, and the technical testing of the fabric and other components used.

60.  From mid 2004, TBI started using the Defendant to effect payment for goods ordered from TBI’s Asian suppliers. The only role of the Defendant was to pay the Plaintiff after the relevant invoice has been validated. Pursuant to an agreement dated 10 July 2001 between TBI and the Defendant, TBI would pay the Defendant commission of between 6.5 to 10 percent of the value of the purchase order. 

61.  Mr. Clerc said he told the Plaintiff that it had won the FM Agreement.  Although TBI did not send the Plaintiff a copy of the FM Agreement, Mr. Clerc alleged that he had discussed the general requirements under the FM Agreement with Mr. Tavernier over the phone on numerous occasions from August 2004 to mid- May 2005.  He also alluded to them in the emails of the parties. Mr. Tavernier was well aware that TBI had 12 months to comply with the FM Agreement and all the components used for manufacturing and the samples were subject to validation by the French Military.     

62.  Mr. Clerc said that Gum Kwang was introduced and recommended by the Plaintiff in late October 2003. He admitted that there were exploratory and initial discussions between TBI and Gum Kwang about the development of the fabric for the Military Bags. However, as Gum Kwang had increased their prices by 50% from 2003, Mr. Tavernier told Mr. Clerc that the Plaintiff would stick with their usual strategy of sourcing and purchasing directly from Chinese suppliers.  Mr. Tavernier also said that he was confident that the fabric to be sourced in China would be able to meet the requisite standards.

63.  Mr. Clerc said that he suggested some possible suppliers that TBI found at the Canton Trade Fair for the Plaintiff to consider because the Plaintiff had difficulty in finding potential suppliers of fabrics. This was done at the request of the Plaintiff and this was in no way an agreement by TBI to select the supplier of fabrics.

64.  Mr. Clerc said that he suggested some suppliers only at the Plaintiff’s request and he never said anything to the effect that TBI would source the fabric.  Mr. Clerc also explained that since late October 2004 when he had given the Plaintiff information of all the suppliers that he had met at the Canton Trade Fair, there was no reason for them to source the fabric as the it was the Plaintiff’s responsibility.

65.  It was alleged by Mr. Clerc that the emails show that it was the Plaintiff who corresponded with and evaluated numerous potential suppliers and at the end selected Jiangsu Textile as the fabric supplier. Mr. Clerc denied that TBI or the Defendant had any part in the selection of Jiangsu Textile.

66.  Mr. Clerc did visit the factory of Jiangsu Textile in March 2005 together with Mr. Tavernier. Mr. Clerc said it was Mr. Tavernier who agreed the price with Jiangsu Textile.  In relation to the email he sent to Jiansu Textile after the visit, Mr. Clerc said he was trying to get further test results from them and new samples for the approval by the French Military.  Also, time was running out and in Mr. Clerc’s experience and in a best case scenario, it would take at least 2 to 3 months from the time the material was ordered from Jiangsu Textile until the delivery of the bags to the French Military.   

67.  In early June 2005, the second batch of fabric samples were rejected by the French Military. By a formal notice dated 13 September 2005, the French Military informed TBI that the fabric must be validated by the end of September 2005. This was communicated to Mr. Tavernier by Mr. Clerc.

68.  Nevertheless, the 3^rd batch of samples were only available in October 2005 by then it was already too late.  On 14 October 2005, the French Military gave notice to terminate the FM Agreement. 

69.  Mr. Clerc said the Plaintiff should be liable as it was their responsibility under the 3960 Agreement to secure suitable fabric for the production of the Military Bags.

Mail Bags

70.  Similar to the case of the Military Bags, Mr. Clerc denied that TBI or the Defendant was contractually responsible for securing the fabrics in relation to the Mail Bag Agreements.   In relation to the allegation that it was TBI or Mr. Clerc who selected and dealt with the fabric suppliers, Eun Hua and Liangxing, Mr. Clerc’s evidence can be summarized as follows.

71.  Mr. Clerc said as early as October 2003, when TBI were considering tendering for the Mail Bags from the French Postal Service, he had already discussed the general requirements of the French Postal Service with Mr. Tavernier. It was Mr. Tavernier who introduced Liangxing’s manager Anna Huang to TBI. In the first half of 2005, three suppliers were proposed by the Plaintiff to TBI, namely, Eun Ha , Liangxing and Ssang Leong Bulk Handling Ltd based in Jiangsu, China. The samples TBI used to make the Mail Bags during the tender process were obtained from Eun Ha and Liangxing.

72.  A total of 195,000 bags were ordered under the Plaintiff’s sales contracts WS 3999 and 3976.  However, due to the cash flow problem of the Plaintiff, the Defendant agreed to pay Liangxing directly for the fabric in the period between July 2005 and September 2005.  That was the reason, according to Mr. Clerc, that the unit price for each mail bag under sales contract WS 3999 dated 15 June 2005 was only US$0.69 as it did not include the costs of the fabrics. The unit price should be the same in sales contract WS3976 for the supply of 70,000 bags but the Plaintiff did not bother to update the unit price of US$3.04 which included the costs of the fabric.    

73.  Mr. Clerc said that it was in the above context that the Defendant paid Liangxing a total of US$69,115.93 for the Mail Bags fabric between September 2005 and August 2008.

74.  Due to the problem with the quality of the fabric, the original delivery schedule on various dates between August 2005 and November 2005 were not met. As a result of the quality issue and the delay, the French Postal Service issued a letter dated 12 December 2005 reducing the outstanding orders to 35,000 bags. As to the bags that have been delivered a 35 percent discount on the price were given due to quality issue.  At the end only a total of about 51,000 Mail Bags were delivered. 

Approach

75.  In assessing the factual disputes in this case, I have taken into account the inherent probabilities of the assertions of the parties.  I have also assessed the assertions against the conduct of the parties and the contemporaneous documents.  The matters in question happened many years ago and this might have an impact on the witnesses’ recollection.  However, the main mode of communication between the Plaintiff and TBI was by way of emails. Numerous emails were produced at the trial and they formed an important part of the evidence in this case.

76.  Although demeanour is relevant in assessing the credibility of a witness, no undue reliance has been placed on demeanour.  My assessment on credibility has also taken into account the inherent probabilities of the parties’ assertions and the contemporaneous documents.

77.  In assessing the issues in this case, I have taken into account all the evidence before me at trial. I have also considered all the points made by Mr. Hew and the Plaintiff’s counsel, Mr. Yip, in their respective submissions. I do not consider necessary to address the numerous points raised by the parties in this judgment and it does not mean that I have not considered them in coming to my decision.

Relationship between TBI and the Defendant

78.  The evidence shows that the Defendant’s role was to enter into contract with the Plaintiff as directed by TBI and to pay the Plaintiff’s invoices when they were validated by TBI.  No employee or office bearer from the Defendant gave evidence at trial.  The only oral evidence tendered by the Defendant was from TBI’s purchase manager, Mr. Clerc. None of the email correspondence before the Court was sent by or to the Defendant. Also, all the instructions to the Plaintiff were given by TBI and not the Defendant.  On the evidence, I find that TBI had always been representing the Defendant in dealing with the Plaintiff in respect of the 3960 Agreement and the Mail Bag Agreements.

Findings

79.  I set out below my findings on the four issues in dispute. 

Who was contractually responsible for securing suitable fabric

3960 Agreement

80.  This is the most important issue in this case.  Based on the parties’ final submissions, the parties’ case can be summarized as follows :

(1) The Plaintiff alleged that it was an expressed or implied term of the 3960 Agreement that the Defendant was responsible for securing suitable fabric for the manufacture of the Military Bags and any samples thereof;

(2) The Defendant’s case is that they had relied on the Plaintiff’s skill and judgment to source, recommend, develop, secure, and select components (including fabric) reasonably fit for the purpose of manufacturing the Military Bags and samples thereof, and it was therefore an implied term, either by reason of section 16(3) of SOGO or common law, that the Plaintiff would use, in manufacturing the Military Bags and samples thereof, such reasonably fit materials. 

81.  I would first look at is the period up to the time when the FM Agreement was entered into between TBI and the French Military in August 2004 for the supply of 17,000 Military Bags.  Fabric was the most important material for the manufacture of the Military Bags and the French Military had their specific requirements on the quality of the fabrics.  At the time of the FM Agreement, the fabric supplier had not been confirmed.  However, TBI had been in discussion with Gum Kwang regarding the supply of fabric.

82.  By an email dated 13 August 2004 from Mr. Clerc to the Plaintiff, Mr. Clerc communicated the positive news about the production of the 17,000 Military Bags. In preparation of the production, Mr. Clerc urgently asked the Plaintiff to check the ideal fabric width so that TBI can communicate the information to Gum Kwang “to finalise the fabric development”.   

83.  Mr. Clerc also said that in the email :

“Please note that we have also sent directly fabric yardage to GUM KWANG, and will handle directly with them the fabric development.”

84.  The ideal fabric width was provided by the Plaintiff to TBI on 16 August 2004 and Mr. Clerc confirmed by his email dated 30 August 2004 that the information was communicated by him directly to Gum Kwang to enable them to prepare sample fabric for approval. 

85.  The Defendant alleged that it was the Plaintiff who introduced Gum Kwang to them in about October 2003. I accept this allegation as there were email exchanges between Mr. Clerc and the Plaintiff regarding the introduction. However, the introduction was made because TBI wanted to visit fabric suppliers in Asia.    

86.  TBI had been working with Gum Kwang directly in relation to the development of the fabric for the Military Bags.  At about the time when TBI won the FM Agreement, TBI was communicating directly with Gum Kwang in relation to fabric development. Mr. Clerc admitted that TBI had visited Gum Kwang’s factory and had discussed the specifications with them.  He also obtained some preliminary quotes and sample from Gum Kwang and he passed the pricing to the Plaintiff to enable them to work out a bill of material. It was based on that TBI arrived at a price used in the tender for the FM Agreement.  Mr. Clerc also said that the reason for not using Gum Kwang was due to their increase of fabric price by about 50 per cent.

87.  Apart from the introduction, there was no evidence to show that the Plaintiff had been dealing with Gum Kwang in relation to the supply of suitable fabric.   

88.  On the evidence, I find that it is inherently more probable that at the time when TBI was bidding for the FM Agreement in August 2004, TBI (and not the Plaintiff) had found Gum Kwang as a potential supplier of the Military Bags fabric. It was TBI who had been discussing with Gum Kwang for the supply of the fabric and they had obtained quotation for the fabric from Gum Kwang to enable TBI to submit a tender for the FM Agreement.

89.  Mr. Hew argued that even if TBI had selected Gum Kwang as the fabric supplier in about August 2004, it did not follow that it had selected Jiangsu Textile or other supplier from October 2004 which was a totally separate process.  I disagree that one can ignore what happened prior to October 2004 in looking at the parties’ conduct and intention.

90.  In relation to the period from October 2004 onwards, it was common ground that the Defendant went to the Canton Trade Fair in October 2004.  TBI met a number of fabric suppliers at the fair who might be able to supply the fabric for the Military Bags.  The email correspondence shows that TBI requested the Plaintiff to contact the suppliers that TBI had found at the Fair about the fabric sample. A complete list of suppliers (including Jiangsu Textile) was also given to the Plaintiff by the TBI.  Throughout November 2004, Mr. Clerc had been in communication with the Plaintiff regarding the status of the inquiry. The Plaintiff also gave the information obtained from the suppliers to Mr. Clerc. Such information included the price, production lead time, provision of sample for testing and color fastness. 

91.  Since then, there were numerous email communications between Mr. Clerc and the Plaintiff regarding the discussion the Plaintiff had with the suppliers and the testing of the sample fabrics received.

92.  Mr. Clerc alleged that it was Mr. Tavernier who recommended that they sourced and purchased from Chinese fabric supplier and that TBI relied on the Plaintiff’s expertise in finding the fabric supplier.  On the other hand, Mr. Tavernier alleged that the Plaintiff was merely helping TBI in view of the language and time zone issues.  However, Mr. Tavernier maintained that the Plaintiff had never assumed the responsibility of securing suitable fabrics.

93.  By March 2005, Jiangsu Textile was identified as a likely supplier.  In end of March 2005, Mr. Clerc and Mr. Tavernier visited the factory of Jiangsu Textile.  The purposes of the visit was to validate the factory and to negotiate the price for the supply of the fabrics.  At the visit, the price for the supply of the fabrics was agreed with Jiangsu Textile.

94.  Mr. Tavernier said that as it was TBI’s responsibility to secure suitable fabric, they had to validate the factory of Jiangsu Textile. Also, it was Mr. Clerc who negotiated and agreed the price with Jiangsu Textile. Mr. Clerc on the other hand, said that TBI and the Defendant did not play any part in selecting Jiangsu Textile as the fabric supplier.

95.  On this first issue, each party has sought to put the responsibility for finding suitable fabric on the other. On the entirety of the evidence, I find that Mr. Tavernier to be credible.  I have observed him whilst he was being cross-examined by Mr. Hew for almost 4 days. I find that generally he was able to give straightforward answers to the questions and that he was not evasive.  As I shall explain, I also find his evidence to be inherently more probable in the light of the conduct of the parties and the contemporaneous documents.

96.  Mr. Hew invited me to reject Mr. Tavernier’s evidence due to the incorrect statements that Mr. Tavernier had made in his witness statement.  I have looked at those statements and I do not consider the mistakes to be so significant that would persuade me to treat Mr. Tavernier’s evidence as incredible.

97.  Mr. Clerc said TBI placed reliance on the Plaintiff because the Plaintiff was located much closer to the suppliers than TBI. Also, unlike the Plaintiff, TBI lacked the capability and resources to do the sourcing. Accordingly, for large orders, TBI would rely on the Plaintiff to source and recommend the components for the manufacture of the bags. TBI would only perform non-technical and very basic tests.

98.  I find it incredulous that Mr. Clerc and TBI did not have the capability and resources to do the sourcing and TBI had to rely on the Plaintiff to source and recommend fabric for the manufacture of bags. :

(1)     TBI admitted that their business was in the production of various types of fabric bags and the French Postal Service had been their major customer since 1997.  In the memorandum of understanding signed between TBI and the Plaintiff in 2005, it was stated that in the last fifteen years, TBI had acquired a marketing, technical and relational know-how to design, manufacture and commercialise a whole series of products adapted to a professional usage. TBI also had a factory in France which produced small quantity of bags.

(2)     Mr. Clerc had been in the job of purchasing manger of TBI since 1997. He was responsible for, inter alia, sourcing bag components and suppliers in Europe and Asia. He accepted that he could read test reports.  

(3)     The email evidence shows that Mr. Clerc had, as part of his job, visited and validated fabric suppliers in at least Europe, Korea and China. It was not disputed that Mr. Clerc had dealt directly with fabric suppliers;

(4)     When being cross examined, Mr. Clerc accepted that in the factory visits, he would check, inter alia, if the suppliers were using the right machines and processes. He would also check their production capacity as well as to see if their price was competitive.  Mr. Clerc also accepted that TBI’s decision to engage a fabric supplier was based on their own observation and assessment.

(5)     It is undisputed that in August 2004, Mr. Clerc was dealing with Gum Kwang directly on fabric development;

(6)     On many occasions, Mr. Clerc’s advice was sought by the Plaintiff on the information they had obtained from fabric suppliers; 

(7)     Very specific instructions were given by Mr. Clerc to the Plaintiff on their dealing with fabric suppliers.  Immediately after the validation visit to Jiangsu Textile in March 2005, Mr. Clerc wrote directly to Jiangsu Textile setting out a list of tests to be performed and samples to be sent to TBI. He also asked for the test result to be sent to him directly rather than to the Plaintiff.  

99.  On the evidence, I find it inherently more probable that Mr. Clerc and TBI had the capability and resources to source fabric suppliers, discuss with them on fabric development, validate their factories, negotiate with them on the price of the fabric and in analyzing test results.  Such capability and resources are necessary to enable them to secure suitable fabric for the production of various types of bags for their customers. 

100.  I also find that it is inherently more probable that the Plaintiff’s role was to assist TBI to find and validate fabric suppliers. For example, in October 2003, Mr. Clerc asked the Plaintiff to prepare a list of suppliers and organize visit by him to their factories so that he can assess the suppliers. Similarly, after the Canton Trade Fair, Mr. Clerc asked the Plaintiff to contact the suppliers for specific information that he required for assessment.

101.  Having considered the evidence, I find that it is inherently more probable that it had always been the common intention and understanding between the parties that it was the responsibility of TBI and the Defendant for securing suitable fabrics for the Military Bags :  

(1)  I have already found that it is inherently more probable that TBI had found Gum Kwang as a potential supplier of the Military Bags fabric. Furthermore, on the evidence, I find that there was no change in the responsibilities of the parties when TBI turned to China to source suitable fabric;

(2)  TBI’s attendance at the Canton Trade Fair was consistent with their assumption of responsibility to secure suitable fabric.  Discussion did take place between TBI and the potential suppliers in relation to the fabric for making the Military Bags. Mr. Clerc accepted that TBI had asked the suppliers about their technical knowhow, the kind of fabrics they produce and what kind of test they could make to ensure that the fabrics would be compatible with TBI’s requests. It is common ground that at the end, TBI was able to find a number of potential suppliers, including Jiangsu Textile and the Plaintiff was requested to follow up with the suppliers.  I find incredible Mr. Clerc’s evidence that they provided the list of suppliers to the Plaintiff because the Plaintiff had difficulty finding suppliers and it was only at the Plaintiff’s request that TBI suggested some suppliers.  I find it more probable that as TBI could no longer source from Gum Kwang and in view of the obligation under the FM Agreement, TBI was eager to find alternative supplier. That was the reason why they attended the Canton Trade Fair;

(3)  Although it was the Plaintiff who took on the task of contacting the suppliers, I accept Mr. Tavernier’s evidence as inherently more probable that the Plaintiff was trying to help TBI to liaise with the suppliers and to have their fabric validated.  I also accept Mr. Tavernier’s evidence that it was in the commercial interest of the Plaintiff to help. It was clear from the email correspondence that the Plaintiff was gathering the requisite information for TBI, who closely monitored the work of the Plaintiff;

(4)  It is undisputed evidence that the Plaintiff was responsible for securing accessories other than the fabric. However, the level of attention and control that TBI had put on the Plaintiff’s work in liaising with the fabric supplier were much higher than what they had done in relation to the Plaintiff’s sourcing of the other accessories.  For instance, the email correspondence shows that the Plaintiff had kept Mr. Clerc closely informed on the status of their contact with the fabric suppliers.  In January 2005, the Plaintiff reported to Mr. Clerc the progress and issues relating to the production of sample fabrics by two fabric suppliers, one of whom was Jiangsu Textile.  When the Plaintiff had questions relating to the production of sample fabrics, they would ask Mr. Clerc for his instructions. By an email from the Plaintiff to Mr. Clerc on 21 February 2005, Mr. Clerc was asked to choose which one of the two fabric samples would they choose for production and they got Mr. Clerc’s reply the following day.  However, the sample fabric was not up to the standard required by the French Military and they were rejected. On 24 February 2005, the Plaintiff was asked by Mr. Clerc to contact the supplier immediately regarding the rejection of the sample. At all times, Mr. Clerc had closely monitor the progress in the sourcing of fabric supplier and the validation of the sample fabric;  

(5)  In relation to the validation of Jiangsu Textile’s factory by TBI, I find it inherently more likely that the price was negotiated and accepted by TBI. After all, the price of the fabric could have a significant impact on the contract and it can be demonstrated by what happened in the case of Gum Kwang;

(6)  Immediately after the validation visit to Jiangsu Textile, Mr. Clerc wrote the following email directly to Mr. Fu of Jiangsu Textile :

“Dear Mr. Fu,

We want to thank you again for the meeting and visits in NANJING.

During this meeting, we noted following points :

- Color tests to be made on our customer’s fabric sample, from your factory’s color testing machine.

Tests results to be sent directly to my e-mail. (cf copy attached showing your document).

- 4 sets of lapdips to be sent by express mail to T.B.I. for customer’s validation of color

T.B.I. factory address below

Tests expected on fabric ready in your office :

- Tests results on color fastness to be sent to T.B.I. to be communicated this week by e-mail (delay 7 days, starting the 24^th March).

- Water column tests results to be communicated this week by e-mail (delay 4 days, starting the 24th of March).

Target is to receive all results before end of this week, together with color lapdips, please.

Please confirm complete address, phone & fax number of China Commodity Inspection Bureau.

- Price confirmed USD3,03 for width 46’ order to be placed before 31^st of May 2005

- Product details, 58% cotton + 42% Polyester, weight = 435 g/m” Thickness = 0,59 mm, PU 2 times

- Production delay 50 days after WISTAR order.

Please check in details this e-mail and give complete feedback asap.

Best regards

Thierry CLERC

Sourcing manager

Top Bagage International”

Soon after the visit by TBI, Mr. Clerc wrote to Jiangsu Textile confirming the terms relating to the order of the fabric. Mr. Clerc also advised Jiangsu Textile of the various tests required to be performed and the deadline for completing the tests.  Such conduct is inconsistent with the Defendant’s allegation that it was the Plaintiff’s responsibility to source fabric and the Defendant as well as TBI relied on the skill and expertise of the Plaintiff.  Furthermore, I find Mr. Clerc’s explanation incredible that the letter was written to expedite the process. In my view, it shows that TBI was in control of the process of sourcing suitable fabric.  

(7)  What happened in end of May 2005 was also relevant. By end of May 2005, all the materials for making the Military Bags had been approved except for the fabrics. Nevertheless, on 25 May 2005, Mr. Clerc sent the following email to the Plaintiff requesting the Plaintiff to send him on an urgent basis a sales contract for their signature.

“Dear Jack,

Please note the following order of Qty : 17,000 pcs items WA 13290/1, based on price agreed in March.

Please send urgently sales contract, in order to sign back tomorrow.

As discussed with Eric to-day, priority is to place order to M. FU as soon as possible, and open L.C.

Updated technical specifications for fabric will be sent to WISTAR in order to be used in L.C.

Please confirm all,

Best regards,

Thierry

P.S. Please note that we need to receive 6 complete and new approval samples, please check and confirm if you have enough material and accessories.”

(8)  Later on the same day Mr. Clerc sent another email confirming the price for the sales contract at US$7.15 and the shipment date in mid- August 2005. Mr. Clerc reminded the Plaintiff to send him the sales contract urgently.  On 26 May 2005, the Plaintiff sent their sales contract WS3960 to TBI and the contract was signed by Mr. Clerc on behalf of the Defendant.  On 31 May 2005, Mr. Clerc sent the quality specifications of the fabric to Mr. Tavernier to enable the Plaintiff to put them in the letter of credit for the order to be placed with Jiangsu Textile. It is common evidence that by 31 May 2005, the fabric produced by Jiangsu Textile had not been approved by the French Military. 

(9)  Although the fabric had yet to be approved, TBI requested urgently for the sales contract from the Plaintiff and had provided all the information required including the quality specification to enable the Plaintiff to open a letter of credit to Jiangsu Textile.  The lead time from placing the order with Jiangsu Textile to delivery of the finished bags would take at least two to three months. The delivery date was mid-August 2005.  In other words, there was very little time left for the development of the fabric to be finalized and for the sample fabric to be validated.  The Plaintiff would have taken a huge risk to agree to supply the bags as they could not be certain if the fabric would be validated in time for the production, especially when the development of the fabric fell entirely in the hands of Jiangsu Textile. I find Mr. Tavernier’s evidence on this more probable when he said that the Plaintiff would not have entered into the agreement if they had to be responsible for the supply of fabrics. On the evidence, I find it inherently more probable that the Plaintiff was prepared to issue a sales contract in these circumstances because it was the common understanding and intention of the parties that it was TBI and the Defendant who were responsible for securing the supply of the fabric; and

(10)       I also refer to my finding above in relation to TBI’s capability and resources in connection with the sourcing and validating of fabric supplier as well as the development of fabric.

102.  It is accepted by the parties that there is no express term in the 3960 Agreement which dealt with the responsibility for securing suitable fabric.  However, it is trite law that the Court will imply a term to a contract where the term implied represents the obvious, but unexpressed, intention of the parties; or where it is necessary to give business efficacy to the contract.  Furthermore, it must be reasonable and equitable to imply a term and the term must be capable of clear expression : Chitty on Contract, Volume 1, 30^th edition, para 13-001 – 13-008.

103.  I am satisfied that TBI and the Defendant had always assumed the responsibility for securing suitable fabric for the manufacturing of the Military Bags. I also find that it was the common intention of the parties that the Defendant would be responsible for securing suitable fabric for the Military Bags.  I have no difficulty in finding that there is an implied term to the 3960 Agreement that the Defendant was responsible for securing suitable fabric for the manufacturing of the Military Bags. On the evidence, I also find that the parties must have intended that term to form part of their contract.

104.  Having considered the entirety of the evidence and in view of my above findings, I am not satisfied that TBI had relied on the Plaintiff’s skill and judgment to source and secure fabric reasonably fit for the purpose of manufacturing the Military Bags.  It was also not reasonable for the Defendant to place such reliance on the Plaintiff’s skill or judgment.

105.  In the premises, I am of the view that section 16(3) of the SOGO does not operate to imply a term that the Plaintiff would use, in manufacturing the Military Bags and samples thereof, such reasonably fit materials.      

Mail Bag Agreements

106.  Different from the 3960 Agreement, when TBI asked P to issue a sales contract for the Mail Bags in June 2005, TBI had requested P to exclude the costs of the fabric.  Accordingly the unit price for the Mail Bag was only US$0.69 which represented the costs of the accessories (except fabric) and the labour for manufacturing the bags.

107.  Furthermore, letter of credits were issued by the Defendant/ TBI to Eun Ha and Liangxing for the purchase of the fabric. In about late July 2005 to September 2005, the Defendant/ TBI communicated directly with Liangxing for the supply of fabric for the Mail Bag Agreements.  The price of those fabric was paid by the Defendant/ TBI.  

108.  Mr. Tavernier alleged that Eun Ha was TBI’s contact in Korea and they had been doing business since about 2001. It was TBI who was in direct contact with Eun Ha and Liangxing with regard to the production of fabric for the Mail Bags.  On the other hand, Mr. Clerc alleged that Anna Huang of Liangxing was introduced to TBI by Mr. Tavernier and it was the Plaintiff who proposed three suppliers to them, including Eun Ha and Liangxing. Mr. Clerc said it was due to the Defendant’s awareness of the Plaintiff’s cash flow problem in May or June 2005 that the Defendant agreed to pay Liangxing directly for the fabric.

109.  The email evidence shows that Liangxing was introduced to TBI by the Plaintiff in 2003 and Eun Ha was introduced by Peter Huang of Hehyoon.  Irrespective of who made the introduction, I find that it is inherently more probable that TBI dealt with Liangxing and Eun Ha directly for the supply of fabric for the Mail Bags :

(1)     The emails produced at trial show that in February 2004 to March 2004, Mr. Clerc contacted Anna Huang of Liangxing directly to set up a visit to their factory to discuss the fabric for the Mail Bags;

(2)     In the email from Mr. Clerc to the Plaintiff on 2 March 2005, Mr. Clerc told the Plaintiff that TBI were pushing Eun Ha and Liangxing hard to prepare and finish fabric in time;

(3)     On 10 March 2005, Mr. Clerc sent an email to Liangxing regarding the laboratory test result of the mail bag fabrics used by TBI’s major competitor, which was the same material TBI sent to Liangxing as sample. At the end of the email, Mr. Clerc asked Liangxing to check if their suppliers can produce the fabric with the same composition. 

(4)     When being cross-examined by Mr. Yip whether it was TBI who was in the driving seat in dealing with Eun Ha and Liangxing, Mr. Clerc said that TBI had contributed a lot.   

110.  There were numerous email communication between TBI and Eun Ha’s agent Hehyoon between December 2005 in relation to the supply of fabric.  When the relationship between TBI and Eun Ha turned sour in about December 2005, it was Mr. Clerc who tried to salvage the relationship. He even went to Korea to meet the supplier to sort out the issues and to prepare for the orders in 2006.  In December 2005, Mr. Clerc decided, for the reason of keeping the shipment in time, to accept the shipment by Eun Ha of the Mail Bags fabric even though at that time, the further test result had not been released.  

111.  Furthermore, there were various emails in September 2005 between Mr. Clerc and Liangxing discussing the details of the order for the fabric, payment terms and matters relating to the production of the fabric.  The evidence clearly shows that Mr. Clerc had been in the forefront in dealing with the fabric suppliers.

112.  Mr. Clerc sought to explain his active involvement of TBI by pointing to the internal issue that the Plaintiff at that time.  Mr. Clerc alleged that as a result of the internal issue, there was “no pilot in the plane” in the Plaintiff’s company. He therefore stepped in to help.

113.  On the entirety of the evidence, I do not find Mr. Clerc’s explanation credible. In my view, it is inherently more probable that Mr. Clerc’s dealing with the fabric supplier was the result of the common intention and understanding between the parties that it was TBI who was responsible for securing suitable fabric for the Mail Bags.  It is against commercial sense that the parties would have intended that the Plaintiff was responsible for the fabric when the sale contracts issued by the Plaintiff did not include the supply of fabric, the price of the fabric was not negotiated by the Plaintiff, the discussion on fabric development, production and payment were dealt with by TBI instead of the Plaintiff.

114.  I find that it is inherently more probable that it was the common intention and understanding that the Defendant and TBI were responsible for securing suitable fabric in relation to the Mail Bag Agreements. I also find that there was no reliance by TBI and the Defendant on the Plaintiff to source the fabric for the Mail Bags.  It is also not reasonable, in the circumstances of this case, for the Defendant and TBI to place such reliance on the Plaintiff.

115.  In the premises, I find that it is an implied term of the Mail Bag Agreements that the Defendant was responsible for securing suitable fabric for the production of the Mail Bags and I also find that the parties must have intended that term to form part of their contract.

116.  In relation to the Mail Bag Agreements, I hold that that sections 16(3) and 17(2) of the SOGO have no application.

Who and what caused the failure to supply suitable fabric

117.  The parties agree that the answer to this issue would generally follow the outcome and my findings on the first issue.  

118.  In summary, the fabric produced by Jiangsu Textile, Liangxing and Eun Ha, were rejected by the ultimate customers of TBI.  I have already found that the Defendant was responsible for the failure to supply suitable fabrics for the production of bags under the 3960 Agreement and the Mail Bag Agreements.  

The Plaintiff’s claims for loss of profit and other damages

119.  The first argument of the Defendant is based on the “prevention principle”, namely, the Plaintiff is not entitled to take advantage of his own wrong in violating the agreement for not securing suitable fabrics.  By reason of my finding that it was the Defendant who was responsible for securing suitable fabric, this argument can be dismissed easily.

120.  The claims that remain for me to determine are as follows :

(1)  loss of profit of US$17,850 under the 3960 Agreement;

(2)  loss of profit of US12,539 under the Mail Bag Agreements;

(3)  US$28,965.78 (out of US$30,291.78) under the Plaintiff’s debit note WDN 1080 for accessories purchased by the Plaintiff pursuant to the 3960 Agreement and the Mail Bag Agreements;

(4)  US$1,200 (out of US$1,904.84) under debit note WDN 1091 in relation to the Mail Bag Agreements;

(5)  interest pursuant to section 49 of the District Court Ordinance.

121.  In relation to the loss of profit under the 3960 Agreement, the Plaintiff’s claim is calculated as follows :

(US$7.15 – US$6.10) x 17,000 = US$17,850

US$7.15 being the selling price of the Military Bags under the 3960 Agreement; US$6.10 being the costs of manufacturing and labour, overhead of the Plaintiff in Hong Kong and development expense; and 17,000 being the total number of bags to be sold under the agreement.

122.  The Plaintiff relied on the Plaintiff’s sales contract 3960 and a bill of material for the Military Bags which set out the costs per bag.  Mr. Tavernier had also given evidence on and was cross-examined in relation to the bill of material. I accept Mr. Tavernier’s evidence that TBI had seen the bill of material and was aware of the unit cost of the bag when they entered into the 3960 Agreement. I am satisfied that the Plaintiff has proved the loss of profit in the sum of US$17,850.  

123.  In relation to the Mail Bag Agreements, the Plaintiff’s claim is based on the selling price of US$0.69 per bag less costs. The costs consist of manufacturing and labour in the sum of US$0.5 per bag; overheads in Hong Kong and development expense in the sum of US$0.09 per bag.  In other words, the loss per bag is US$0.69 – US$0.59 = US$0.1. The Plaintiff alleged that had the Defendant fulfilled the contract, they would have made a profit of U$0.1 x 125,390 bags = US$12,539. 

124.  Strong objections were raised by the Defendant against the loss of profits claim under the Mail Bag Agreements.  The Defendant submitted that in the Plaintiff’s Amended Answers to the Defendant’s 2^nd Request for Further and Better Particulars of the Plaintiff’s RE-Amended Statement of Claim, the overhead and development expenses of US$0.09 per bag was calculated based on the production of 500,000 bags.  In the Amended Answers, the Plaintiff stated that the US$0.09 would cover the purchase of the machinery:

“3(ii)(b) The USD0.09 referred to above would cover the purchase of the machinery. USD0.09 x 500,000 pieces = USD45,000. 40% of this amount would have been applied for the purchase of the heat slitter and the flat abrasion machines. The remaining 60% would cover the development charges and HK overhead.

125.  The Defendant argued that since only 195,000 bags were actually ordered, the costs would be much higher and this would wipe out the alleged profit margin of US$0.1.

126.  I have trouble accepting the Plaintiff’s calculation of the profit margin of US$0.1 per bag.  Despite the discussion between the parties of a much bigger order, the Mail Bag Agreements were for 195,000 bags. The Plaintiff said the overhead and development costs were in the total sum of US$45,000. If one were to use 195,000 bags (instead of 500,000 bags) to calculate the costs, the unit costs would be about US$0.23.  This would wipe out the Plaintiff’s profit and it means the agreement would not be profitable for the Plaintiff. 

127.  I am not satisfied that the Plaintiff has proved that they would have made any profit from the Mail Bag Agreements.  I dismiss the Plaintiff’s claim for loss of profit in respect of the Mail Bag Agreements.

128.  The Plaintiff claims US$28,965.78 (out of US$30,291.78) under debit note WDN 1080 in relation to the accessories purchased. In the debit note, :

(1)  items CM3769/3, CM4918/3, CM4959/1, CM3025/3 and CM4736/1 were accessories for the production of the Military Bags under the 3960 Agreement. It amounted to a total of US$10,651.78.  Since the Defendant had paid the Plaintiff a sum of US$1,326 in relation to the item CM4736/1, the total outstanding amount is US$9,325.78; and

(2)  items CM5227 and CM 5214 for the total sum of US$19,640 were accessories for production of the mail bags under the Mail Bag Agreements.

129.  In relation to the claim for US$19,640 under the Mail Bag Agreements, it relates to the costs of yarn and strings purchased by the Plaintiff for the production of the Mail Bags.  The other claim of US$1,200 was in relation to the cutting charge for 12,000 pieces of Mail Bags fabric supplied by Liangxing. 

130.  Mr. Hew argued that the accessories purchased in relation to the Mail Bag Agreements and the 3960 Agreement as well as the cutting charge, were part of the Plaintiff’s expenses which was rendered futile by the breach of the agreement. Mr. Hew argued that the Plaintiff is only entitled to claim either loss of profits or the wasted expenses but not both. Mr. Hew relied on the passages in McGregor on Damages 18^th edition paragraphs 2-021 to 025 and 2-040; the cases of Filobake Ltd v. Rondo Ltd [2005] EWCA Civ 563, at para 60-64, Anglia Television Ltd. v. Reed [1972] 1 Q.B. 60 at 63-64 per Lord Denning MR, and CCC Films (London) v. Impact Quadrant Films Ltd. [1985] Q.B. 16 at 32-33,39-40 per Hutchison J.).

131.  It was submitted by the Defendant that should the Court find for the Plaintiff on liability and awarded loss of profit, the Court should not allow the claim for wasted expenses as this would be allowing the Plaintiff double recovery. It was also submitted that where the Court found that the Plaintiff had suffered no loss of profits (as in the case of the Mail Bag Agreements), the wasted expenses should not be allowed as to do otherwise would put the Plaintiff in a better position than if the agreement (which was a bad bargain for the Plaintiff) had been properly performed.

132.  I have considered the evidence in this case and the authorities relied on by Mr. Hew, I am of the view that the Plaintiff is entitled to damages for the wasted expenses as a result of the Defendant’ failure to secure suitable fabric. 

133.  The authorities relied on by Mr. Hew on this issue were all cases concerning the buyer of goods or transferee of licence sought to claim wasted expenditure in addition to loss of profits.  The plaintiff in Filobake sought to claim loss of profits arising from the supply of defective equipment for use in the business of making pastry products.  That plaintiff also claimed, inter alia, the wasted costs in installing the equipment and adapting the premises for it. In the case of Anglia Television Ltd v. Reed, the defendant repudiated a contract to act in a leading role in a television play.  Anglia Television Ltd sued him for the wasted expenses in preparing for the filming of the play.  In both cases, the buyer had made other arrangement in anticipation of the delivery of the goods or services and as a result expenses were incurred.  Had the contract been performed properly, the plaintiff would have made the profit. However, if the contract had been performed, those expenses would have to be incurred by the plaintiff.  I can see the reason why the award of both loss of profit and the wasted costs may amount to double compensation. 

134.  In paragraph 16-086 of Benjamin’s Sale of Goods 8^th edition, the learned author explained why the principles seldom apply in the case where the seller is making a claim :

“Consequential losses and expenses are often claimed by the buyer but seldom by the seller who normally has not made other arrangements which both depend on the fulfillment of the contract and also involve losses or expenses which were within the reasonable contemplation of the parties at the time the contract was made.”

135.  The circumstances of this case are very different from those in the authorities referred to by Mr. Hew. For the reasons stated, I do not consider the authorities helpful in deciding whether the Plaintiff is entitled to recover the wasted expenses.

136.  The basic principle for remoteness of damage is that :

“Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either as arising naturally, i.e. according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it.” (per Baron Alderson in Hadley v Baxendale (1854)9 Ex. 341, p.354)

137.  In the present case, there is no dispute that the Plaintiff was required to source and provide the accessories and the labour in producing the Military Bags and the Mail Bags. Furthermore, it was TBI who requested the Plaintiff to purchase the accessories and cut the fabric supplied by Liangxing, although at that time, the fabric had not yet been approved.  As a result of the breach by the Defendant in failing to secure suitable fabric, the contracts were cancelled. The Plaintiff suffered loss as the accessories were no longer useful for the production of the bags.

138.  I am satisfied that it was within the reasonable contemplation of the parties, at the time of contract, that the accessories for the manufacturing of the Military Bags and the Mail Bags and the cutting costs would be wasted if the Defendant failed to secure suitable fabric to enable the Plaintiff to produce the bags.  There is no double recovery between the claim for wasted expenses and loss of profit.  Also, the award of damages for the accessories purchased and for the cutting costs would not put the Plaintiff in a better position than they would have been in had the relevant agreements been performed.  The Plaintiff is therefore entitled to recover from the Defendant the wasted costs. This is in addition to the entitlement to the loss of profits in the case of the 3960 Agreement.       

139.  For the same reasons, I also reject Mr. Hew’s argument that in relation to the Mail Bag Agreements the Plaintiff is not entitled to recover damages for the wasted expenditure where the Plaintiff had made a bad bargain. Although the Mail Bag Agreements were not profitable for the Plaintiff, compensating them for the costs of accessories would not have put them in a better financial position than if the agreement had been properly performed.

140.  I am satisfied that the Plaintiff has proved the amount of the claim in the sum of US$9,325.78, being the wasted expenses in buying the accessories in relation to the 3960 Agreement.

141.  In relation to the wasted expenses claim under the Mail Bag Agreements, the Defendant invited me to take into account the sale of the strings as scrap for US$2,000 in relation to item CM5214 under debit note WDN 1080 (see paragraph 2(i) of the Plaintiff’s Amended Answers to the Defendant’s 2^nd Request for Further and Better Particulars of the Plaintiff’s Re-Amended Statement of Claim).  I accept that the proceeds of sale of the strings should be taken into account in calculating the damages in relation to the Mail Bag Agreements.  Accordingly, the amount of the claim should be reduced to US$19,640 – US$2,000 = US$17,640.

142.  I also allow the claim for the sum of US$1,200, being the cutting charge for the fabrics under the Mail Bag Agreement.

The Defendant’s counterclaim for loss of commission

143.  In view of my findings against the Defendant on Issues 1 and 2, the Defendant is not entitled to counterclaim for loss of commission.

Judgment

144.  I order that judgment be given in favour of the Plaintiff for :

In relation to the 3960 Agreement

(1)  Loss of profit in the sum of the sum of US$17,850;

(2)  The outstanding amount of the accessories purchased in the sum of US$9,325.78;

In relation to the Mail Bag Agreements

(3)  The outstanding amount of the accessories purchased in the sum of US$17,640;

(4)  The cutting charge for the fabrics in the sum of US$1,200; 

Interest

(5)  Interest on the total amount under sub-paragraphs (1) to (4) above in the sum of US$46,015.78 from the date of the issue of the Writ of Summons to the date of judgment at the rate of 8% per annum and thereafter at judgment rate until payment.

145.  I also make an order nisi that the costs of the action be to the Plaintiff, to be taxed if not agreed. Unless an application is made to vary the cost order nisi, it shall become absolute after 14 days from today.