NAN HAI SHI JIU AND OTHERS v. NEWRY LTD

DCCJ4651/2004

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 4651 OF 2004

JUDGMENT

1.  The plaintiff is a company incorporated in the People’s Republic of China (“the PRC”) in the business of manufacturing of garments.  The defendant is a company incorporated in Hong Kong carrying on the business of trading in garments.  The plaintiff, Gong Cheng Zhi Yi (公誠制衣), and the defendant, Newry Limited (新洋), began their business dealings since 2002.

2.  In the present action the plaintiff claims against the defendant under two contracts, both for the manufacturing of garments.  The first contract was under the purchase order No. P03/J009676 (hereinafter referred to as the “first P.O.”).  The second contract was Purchase Order No. P03/F010863 (hereinafter referred to as the “second P.O.”).

The first P.O. Contract No. PO3/J009676

3.  It is the plaintiff’s case that under this 15 July 2003 contract, the defendant placed an order for 36,000 pieces of Mama denim jeans from the plaintiff to be shipped in one 40-foot container.  It is stated, on the last page of the purchase order “The shipment must be adjusted to full fill 1 x 40 feet container, or +/- 5 per cent for shipment”. 

4.  The plaintiff duly manufactured 36,675 pieces of Mama jeans which, according to the plaintiff’s interpretation, was 36,000 pairs of jeans plus or minus 5 per cent, in this case, over 36,000 pairs.  However, not all of the jeans produced by the plaintiff could be fitted into one 40-foot container.

5.  The plaintiff adduced evidence from its witness, Mr Chow, who worked with the plaintiff assisting him in his business.  He has a base in Hong Kong, and he has a company named 宜億 Trading Company Limited.  Mr Chow claimed that he had, prior to the production of this order, informed the defendant’s staff in charge of the order, Miss Irene Chan, that the 36,000 pieces of jeans would not all fit into the 40-foot container.  He was nevertheless instructed by the defendant to proceed to production of the order.  He claimed he had suggested packing more pieces of the jeans in each carton box so that more of the 36,000 pairs of jeans would go into the 40-foot container or, alternatively, using a larger size container, such as a 45-foot container instead of the 40-foot container, to hold all of the jeans to be shipped.  This suggestion was made in August 2003 when the plaintiff informed Miss Chan that the container could hold 24 carton boxes of Mama jeans only.  Miss Chan rejected Mr Chow’s suggestion and maintained the goods should go into one 40-foot container and the remaining jeans to be shipped under the orders from other departments of the defendant company. 

6.  The plaintiff further produced a memorandum from the defendant’s Miss Doris Yu, sent to the plaintiff by fax on 20 September 2003, which stated that the defendant’s customer would not accept a reduction of the order placed under the first purchase order, or to ship the jeans in a 45-foot container.  Its customer had insisted that the goods be shipped in a 40-foot container, and the remaining goods produced would go with other goods from the defendant’s company (see at page 31 of bundle B).

7.  It is Mr Chow’s evidence that the transport cost of a 45-foot container was not much higher than the 40-foot container, although the 45-foot container was not as popular and common as the 40-foot container.  In any event, neither Miss Chan nor Miss Doris Yu had ever suggested it was because of the higher cost of transport that the defendant insisted the using of the 40-foot container.  Mr Chow was merely instructed to carry out the defendant’s decision; it was never suggested by the defendant that the defendant would not pay for those 5,760 pairs of jeans left over.

8.  Referring to the fax dated 20 September from Miss Doris Yu, the document stated:

“剛收到客人回覆，客人絕不接受減數量/改走1 x 45櫃，並回覆如下，一、櫃種類跟合同一樣，照走1 x 40尺 HQ，二、剩餘的尾數會於其他部門夾貨走。”

The Defendant’s case

9.  The defendant, on the other hand, claimed that their contract was for one 40-foot container of Mama jeans.  The defendant relied on the term, on page 13 of bundle B, that the shipped quantity must be adjusted to full fill “1 x 40-foot HQ container or plus or minus for shipment”. 

10.  The defendant claimed that it had paid up fully for the goods ordered and that the plaintiff had wrongly estimated the capacity of a 40-foot container resulting in the overproduction by 5,760 pairs of jeans under this order.  Furthermore, the defendant failed to mitigate its loss by selling the excess production. 

11.  The defendant denied that the letter of 20 September, from Miss Doris Yu, was a waiver of the contract or a variation of the terms of the contract.  It further denied that Miss Yu had been authorised to make the decision accepting the excess jeans in any event. 

The second purchase order (Contract PO3/F010863) 

12.  Under Purchase Order PO3/F010863 dated 19 November 2003, delivered to the plaintiff on 20 November 2003, the defendant placed an order for 16 items of ladies cotton twill pigment Capri trousers, hot pants and mini skirts, to be delivered on 21 February 2004.  The delivery date was later amended to early March 2004.  It was agreed between the parties that the garments ordered were to be manufactured in accordance with the fabric colour samples and style samples supplied by the defendant.

13.  On 18 December 2003 the defendant confirmed the acceptance of the quality of the fabric sample supplied by the plaintiff.  On 19 February 2004 the defendant sent a fax to the plaintiff commenting on the washed fabric samples sent by the plaintiff, asking for a softer hand-feel of the bulk sample.  It requested for the date of receipt of the approval samples, reminding the plaintiff further of the delivery date. 

14.  It is the plaintiff’s evidence that not only were these swatch samples approved, the plaintiff had sent a production sample for the defendant’s approval, and it was duly accepted by the defendant.  On 5 March 2004, the defendant informed the plaintiff that no further samples should be produced except for the skirt sample pending approval of the earlier samples sent by the plaintiff to the defendant, who had forwarded these samples for its customers’ approval.

15.  The defendant further informed the plaintiff that the plaintiff would be notified in due course the date of production.  This document, on page 58 of bundle A, is as follows:

“一、由於我司已將貴廠的樣辦寄給客人批核，貴廠暫不用就我司之評語再做辦，除了裙款外，待客人回覆評語後，我司便會通知貴廠安排再辦或生產。

二、我司已將貴廠的洗水褲筒四個顏色寄出給客人，請告知我司何時才可收到yellow黃色的洗水褲筒？

商安，請即回覆，特急!何，五月三日二零零四年”

to which letter Mr Kwan replied by endorsing on the same document on page 58 of bundle A:

“何小姐，你好! 關於黃色褲筒因停電問題影響，要在星期日寄出給你。二零零四年三月五日”

16.  On 16 March 2004, the defendant informed the plaintiff that the March production can commence, requesting the fabric in grey, khaki, yellow and camel colour to be softer (see page 1 to 2A bundle A and page 82 of bundle B).  On the same document faxed to the plaintiff, Miss Helen Ho further informed the plaintiff that delivery should be no later than 20 April 2004. 

17.  It was Mr Kwan’s evidence that he had called up Miss Monica Chu and informed her that the notice was too short for production to be completed by 20 April 2004 and that the plaintiff required up to 30 April 2004 to make delivery.  Miss Chu accepted the request on the phone.  On 26 April, Mr Chow informed the defendant by fax that the product was ready for delivery, requesting for inspection  (see page 85 of bundle B).

18.  Miss Chu of the defendant replied on the same day, on the same document faxed back to Mr Chow, stating the following:

“周生，客戶將下星期到我司批核船樣，故客戶確認船樣後，我司將馬上安排驗貨，特此告知。謝。朱小姐。二零零四年四月二十七日。”

thus Miss Chu had informed the plaintiff that her customer would personally inspect and examine the shipment sample when the customer arrived in Hong Kong, and bulk sample inspection would be arranged at a later date.

19.  On 5 May 2004 the plaintiff sent to the defendant bulk samples of the production for approval.  On the same day, the defendant replied by fax that his customer was unhappy with the hand feel, thickness and colour of the samples and his customer was unwilling to accept delivery.  The letter suggested that if the plaintiff would give a 15 per cent to 20 per cent discount, it would try to persuade the customer to take delivery of the order.  This letter can be found on page 86 of bundle B, and it stated as follows:

“由於大貨船樣的手感太硬，而且布的厚度、顏色及效果均與要求的相差較遠，客人非常不滿，亦不願意接受此批貨品。如貴廠願意接受15 - 20% 折扣，我司可嘗試說服客人接受走貨。敬請盡快回覆。商安。”

20.  On 6 May 2004 the plaintiff sent to the defendant some revised bulk samples by courier service at the defendant’s request.  The defendant further treated the garments again and sent to the plaintiff  a further revised bulk sample on 31 May 2004.  Meanwhile, the plaintiff’s Mr Kwan wrote to the defendant requesting the defendant to take delivery, and on 2 June he requested the defendant to take delivery of the goods and stated that he would accept 50 per cent of the purchase price of the goods upon delivery and the balance of the purchase price to be ascertained under a separate agreement at a later date.

21.  On 7 June 2004 the goods, under the second order, were duly delivered in Hong Kong to the defendant upon the execution of the export and import documents by the defendant to the plaintiff.  The defendant duly gave instructions to its bank to execute the transfer of US$40,296.27 to the plaintiff through the plaintiff’s designated receipt agent, Guangdong Nan Hai Foodstuff Import and Export Company Limited, on 9 June 2004.  Evidence of the payment was faxed to the plaintiff on the same day by the defendant’s Miss Monica Chu, with the remarks “Please note that transfer charges have been deducted from the payment”.  It is also the evidence of Mr Chow that the remarks of PO3/F010863, part payment for goods, was endorsed by the defendant (see page 108 of bundle B).

22.  In the present claim, the plaintiff asks for the balance of the payment under this contract.  The invoice amount for the goods was US$81,095.93.  After the part-payment of US$40,296.27 the plaintiff claims the sum of $40,799.66.

The Defendant’s case

23.  The evidence of the defendant’s witness, Miss Flora Tam, was that bulk production of the goods should not have taken place until both pigmented swatch samples (meaning the colour fabric samples) and production samples were supplied and approved.  The defendant claimed the plaintiff had failed to produce a pre-production or production sample of the garments for the defendant’s approval.  Only the swatch samples and the styling samples had been sent to the defendant by the plaintiff.  She amended her witness statement of 13 January 2005, paragraph 6, at the time she gave her evidence in court.  It was her evidence that the defendant did not accept the plaintiff’s delay in delivery beyond the agreed date of 20 April 2004.

24.  In early May 2004, the defendant’s customer from Venezuela in South America arrived in Hong Kong and inspected the bulk samples at the defendant’s office.  They found the washing effect and the texture of the goods to be unsatisfactory.  This information was related by the defendant’s Miss Helen Ho to Mr Kwan and Mr Chow by fax.  In this faxed letter Miss Ho asked if the plaintiff would accept a discount of 15 to 20 per cent and the defendant would try to convince its customer to accept delivery.

25.  According to Miss Tam’s evidence, Mr Kwan had agreed to the discount but the defendant’s customer had refused to accept the goods.  Miss Tam claimed that she had a meeting with Mr Kwan and Mr Chow on 2 or 3 June 2004 and they had a discussion about this contract.  Eventually, the defendant had agreed to advance 50 per cent of the purchase price to the plaintiff and, in return, the defendant would hold the goods as security for the loan so that the defendant would look for another buyer for the goods on the plaintiff’s behalf.

26.  Miss Tam further claimed that Mr Chow had informed her before the meeting that in fact Mr Kwan would accept a discount up to 50 per cent of the purchase price.  It was also her evidence that in spite of the efforts made by her and the defendant, the defendant’s customer refused to accept delivery of the goods.  A firm refusal was communicated to the plaintiff on 14 June 2004, orally to Mr Chow and by fax to Mr Kwan on the same day.

Findings

The first Purchase Order.

27.  The First Purchase Order.  The issue is whether the contract between the parties was for 36,000 pairs of Mama jeans or a 40-foot container of jeans.  Under the contract, it was stipulated that the shipment quantity must be adjusted to fully fill a 40-container with a 5 per cent plus or minus difference.

28.  It was Mr Chow’s evidence that he had 30 years of experience in this field and had warned Miss Irene Chan before the production of the insufficiency of the 40-foot container for 36,000 pairs of Mama jeans.  He relied on his calculation of the number of carton boxes and the size of the carton boxes, and the number of pairs of jeans that would go into each box.  It is clear with these requirements and the calculations the numbers of jeans that can go into a 40-foot container could be estimated exactly.

29.  The plaintiff claimed that in spite of this warning it was instructed by the defendant to produce the 36,000 pairs of jeans without reduction in numbers and that the 40-foot container should not be changed to a 45-foot one.  This instruction was stated in the 20 September 2003 letter faxed by Miss Doris Ho to the plaintiff.  Under this instruction, the plaintiff had no choice but to deliver the goods in two consignments, the first by a 40-foot container and the second to be the balance in the second consignment to be shipped with the defendant’s other goods from its other departments.

30.  I find the defendant’s instructions under the letter faxed on 20 September 2003 to be quite clear and plain.  The plaintiff had no choice but to comply with this instruction and it was not allowed to reduce its production.  It follows, therefore, that the defendant must be liable to take delivery and pay for the balance of the goods under the second consignment of the 5,760 pairs of Mama jeans.  The value under the contract was $173,387.17.

31.  The plaintiff, I find, is entitled to treat the contract as still continuing, in spite of the defendant’s delay in taking delivery of the second consignment.  Under section 39 of the Sale of Goods Ordinance, Cap. 26, the plaintiff was ready and willing to deliver the goods and requested for delivery of the goods but the buyer had failed to take delivery within a reasonable time.  The buyer is therefore liable to the seller for any loss suffered by the seller and charge a reasonable fee for the care and custody of the goods.

32.  Consequently, the plaintiff shall recover the value of the goods and the cost of warehousing the goods at 180 RMB per month from November 2003 to the date of taking of delivery by the defendant and for patent purposes.  Up to the end of December 2005 it will be 25 months and the warehousing charge would come to 4,500 RMB.

The second PO contract  (PO3/F010863)

33.  There are clear and unequivocal evidence adduced by the plaintiff that it was given the go-ahead to manufacture the garments under this contract.  The first piece of documentary evidence of the acceptance of the fabric quality was the 18 December 2003 confirmation sent by the defendant to the plaintiff (see page 71 of bundle B).  The second piece of documentary evidence was the 16 March 2004 approval of the swatch samples, which specified on each piece of colour fabric the particular equivalent of softer hand-feel and the colour; but more importantly, the approval for production at the top left corner of that document is apparent.  It says:  “ok 生產”.

34.  Although the instruction on this 16 March 2004 fax stated the delivery date to be 20 April 2004, the plaintiff’s evidence was that because of the delay in approval of the samples it would not be able to meet the 20 April 2004 deadline and had asked for a delay of delivery to 30 April 2004, and according to the plaintiff’s evidence this was orally consented to by the defendant’s Miss Chu.

35.  The plaintiff duly completed production on 26 April 2004 and requested for inspection.  The defendant did not inspect the bulk product and had only shown the bulk samples sent by the plaintiff to its customer on 5 May 2004.  The samples were rejected with the proviso the hand-feel of the garments to be hard and requiring a softer product.  The plaintiff tried to comply and sent two further batches of samples on 6 May 2004 and 31 May 2004, each time after treating the samples with softener.  However, the defendant refused to take delivery, claiming that its customer rejected the goods.  It was not until the parties reached certain agreement on or about 2 or 3 June 2004 that the goods were delivered to the defendant by the plaintiff on 7 June 2004 and the defendant paid 50 per cent of the purchase price, or an amount close to 50 per cent of the purchase price, to the plaintiff.

36.  It is unfortunate that none of the defendant’s staff in charge of this purchase order gave evidence except Miss Tam.  The staff in charge were Miss Helen Ho and Miss Monica Chu.  Neither of them were called to give evidence in court.  Miss Tam was initially not involved with this purchase order until a very late stage.  The court has consequently heard evidence only from Miss Tam and another of the defendant’s witnesses from the accounts department over the payment of 50 per cent of the purchase price.

37.  I found Miss Tam’s evidence to be unreliable.  Not only did she change her evidence over the matter of the production sample in the witness statement of January 2005 in court; she shifted her evidence throughout the cross-examination and she was found to be evasive.  While I appreciate that it is not easy for Miss Tam to speculate as to what her former colleagues had said or done at the time, she should never have speculated.  She should give evidence according to her own knowledge.  Further, her evidence should make sense and should support the documentary evidence and her witness evidence.

38.  I find that Miss Tam had failed to satisfy me that the evidence she gave was credible.  She claimed that the payment of 50 per cent purchase price was a loan, but the letter of 24 August 2004 referred to the payment as a deposit.  She tried to explain away the difference of a deposit and a loan in her evidence in court under cross-examination, her explanation was unconvincing.  In her evidence in court, she claimed that Mr Chow had informed her on 2 June 2004 that Mr Kwan was willing to accept 50 per cent of the purchase price for the goods.  This clearly was contrary to her witness statements and is not credible because, in Mr Kwan’s own letter of 2 June - the same date of the telephone call from Mr Chow to Miss Tam - Mr Kwan stated that he would accept the payment of 50 per cent of the purchase price and the defendant can take delivery of the goods, and the balance would be subject to an agreement by the parties to be negotiated and confirmed.

39.  The meaning of this letter is quite clear.  It does not say that he is willing to give a 50 per cent discount.  The balance of the price was subject to agreement.  There was no subsequent agreement reached after the defendant took delivery of the goods.  I cannot find any support either for this so-called “loan” because there is no evidence of a loan agreement.

40.  On the defendant’s allegation that the acceptance of the goods was subject to its customer’s acceptance of the samples, this was not a term of the contract between the parties.  The contract was between the plaintiff and the defendant, subject to approval of the swatch samples and the production sample.  These were clearly accepted on 18 December 2003 and 16 March 2004.  Bulk samples were, after production had completed, repeatedly improved and sent to the defendant according to the defendant’s instruction.  The defendant repeatedly refused to take delivery until 7 June 2004.  Under the letter of 5 May, it is quite clear from this letter from Miss Helen Ho what the defendant demanded was a 15 to 20 per cent discount and the defendant would persuade his client to accept delivery.  There was no suggestion of a 50 per cent discount.

41.  I am satisfied that on a balance of probabilities the defendant had accepted delivery of the goods and paid the plaintiff 50 per cent of the purchase price.  The balance of the price was to be negotiated and agreed upon; as no agreement was reached, the original contract price remained.  Further, the endorsement on the payment instructions is clear evidence that the amount was paid as part-payment of the contract.  There was no suggestion of loan in this particular fax of the bank instructions from the defendant.

Section 37(1)(a) and (4) of the Sale of Goods Ordinance

42.  The defendant had accepted the goods for over two months, under Section 37(1)(a) and (4), it would be a reasonable period of time for the plaintiff to construe that the defendant had accepted the goods and not rejected them.  Because of the plaintiff’s repeated demand for payment of the balance of the purchase price, Miss Tam by a letter of 24 August 2004 claimed that the goods were rejected.

43.  I am satisfied that upon acceptance of the delivery and part-payment by the defendant of all the goods, followed by silence of over two months of the defendant, the defendant is deemed to have accepted the goods. 

44.  For the aforesaid reasons, I find the defendant to be liable to pay the balance of the purchase price for the goods at US$40,799.66, equivalent to HK$317,400, with interest at half judgment rate from the date of writ to the date of judgment and thereafter at judgment rate. 

45.  Costs to the plaintiff, to be taxed if not agreed,  with certificate for counsel.  The defendant’s counterclaim is dismissed.