MEI SHENG TEXTILES VIETNAM CO. LTD. v. CHINA GRACE GARMENT LTD

HCA 2311/2013

[2018] HKCFI 1688

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2311 OF 2013

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REASONS FOR DECISION

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Introduction

1.  This was the adjourned hearing of the plaintiff’s application for summary judgment in the sum of US$196,747.50 plus interest and costs, pursuant to Order 14, rule 1, Rules of the High Court (“RHC”).

2.  The defendant did not appear.  I heard only submissions from the plaintiff’s counsel, Mr Wong Cho Lik.

3.  After hearing from Mr Wong, I made an order that the defendanthave leave to defend on the condition of payment into court of the judgment sum within 28 days.

4.  I indicated that I would provide reasons for my decision, which I now do.

Procedural history

5.  The action was commenced in 2013, and pleadings closed in 2014.  The parties filed Timetabling Questionnaires.  In 2016 the plaintiff filed a List of Documents, but the defendant did not.  In April 2017, the plaintiff took out its summons seeking summary judgment.

6.  Both parties filed evidence in respect of the summary judgment summons. That summons first came on for substantive argument before Deputy High Court Judge Sakhrani on 11 January 2018 (the “January Hearing”).

7.  The events at the January Hearing are set out in the learned judge’s Reasons for Decision dated 6 February 2018 [1].  On that occasion, both parties appeared by counsel and solicitors.  The court heard and rejected the defendant’s summons dated 4 January 2018 seeking leave to file further evidence to oppose summary judgment. Since the defendant’s said application took up all of the time which had been reserved, it was necessary to adjourn the summary judgment summons, which was later re-fixed for hearing before me. 

Proceeding in the defendant’s absence

8.  Since the January Hearing, Master KW Wong made an order dated 9 April 2018 that on compliance with the requirement in Order 67, rule 6(1) of the RHC, the defendant’s former solicitors cease to act for the defendant.  On 10 May 2018 those solicitors filed a Certificate of Service of Order Ceasing to Act. 

9.  Subsequently, the defendant has not filed a notice of appointmentof solicitor, nor has leave been granted for the defendant to be represented byone of its directors.  The defendant was absent from the hearing before me.

10.  Under Order 32, rule 5(1), where a party to a summons fails to attend, the court may proceed in his absence if, having regard to the nature of the application, it thinks it expedient to do so.  Order 32 rule 5(2) provides that before so doing, the court may require to be satisfied that the summons or notice of the time appointed for the resumed hearing was duly served on the absent party. 

11.  The defendant attended the January Hearing by solicitors and counsel.  After that hearing, notice of the date and time of the adjourned hearing fixed before me, was sent by the Registrar to parties’ solicitors on 24 January 2018 (before the defendant’s former solicitors ceased to act).  Although I do not have evidence to this effect, it seems likely that the defendant’s former solicitors would have informed the defendant, when they ceased to act, of the date appointed for the adjourned hearing. 

12.  In addition, the day prior to the hearing before me, the plaintiff filed an affirmation stating that the hearing bundles, plaintiff’s skeleton submissions and list of authorities, had on 22 June 2018 been served by the plaintiff’s solicitors on the defendant by leaving at the defendant’s registered office.

13.  In the above circumstances, I was satisfied that sufficient steps had been taken to bring the hearing to the defendant’s attention and that it was appropriate to proceed in the defendant’s absence.  I so directed at the hearing.

Background facts and issues

14.  The plaintiff’s evidence in support of summary judgment is contained in two affirmations of its director, Wong Pui Ching (“Wong”). The defendant’s substantive evidence in opposition is contained in the affirmation of its director, Chun Kwok Leung, Deavy (“Chun”).  The background facts and issues appear from the pleadings and those affirmations.  

15.  The plaintiff is a company incorporated in Vietnam, which carries on the business of the production and sale of yarn and fabrics.

16.  The defendant is a company incorporated in Hong Kong, which carries on the business of the purchase of fabrics and the production and sale and of garments. 

17.  It is common ground that the plaintiff sold to the defendant certain fabrics (the “Fabrics”) in 2013.  The Fabrics were to be delivered from Vietnam overland by container trucks to Cambodia.

18.  The Fabrics were ordered by 11 documents signed by the defendant entitled “Purchase Contract”, with dates ranging from 18 February to 25 March 2013. The plaintiff issued and signed a document entitled “Contract of Sale” dated 14 March 2013, and a revised version dated 2 April 2013.

19.  The defendant caused two letters of credit to be opened in the plaintiff’s favour.  The first was issued on 11 April 2013 by First Commercial Bank Taipei in the amount of US$248,833.55.  The second was issued on 15 April 2015 by Hong Kong and Shanghai Banking Corporation Limited (“HSBC”) in the amount of US$299,611.33.

20.  It is the plaintiff’s case that the Fabrics were shipped in ten shipments, and that it has been paid for the first seven of those shipments, whether by telegraphic transfer (in respect of the first two shipments)or by successfully drawing on the letters of credit (in respect of the next five shipments).

21.  However, the plaintiff has not been paid, it says, for the last three shipments, shipped on 21 and 22 May 2013, despite them being delivered and received by the defendant’s consignee in Cambodia.

22.  The plaintiff’s claim for US$196,747.50 comprises the purchase price for the last three shipments.  The plaintiff says that it was unable to draw on the letters of credit for those three shipments, because the defendant refused to issue cargo receipts despite repeated requests.

23.  The defendant denies liability and counterclaims for damages of US$773,030.48, plus interest and costs.  The defendant accepts that it made partial payment for the Fabrics, and that it has withheld payment of US$196,747.50.  The defendant pleads that it was entitled to do so due to the plaintiff’s breaches of contract by delivering defective samples and/or goods, and late delivery.

24.  In particular, the defendant alleges that:

(1)  Since early 2013, the defendant entered into a series of contracts with Carrefour Global Sourcing Asia Ltd (“Carrefour”), for the supply by the defendant to Carrefour of garment products.  The defendant was required to deliver the garment products from Cambodia to various global destinations including in Europe.

(2)  The Fabric bought from the plaintiff was for the purpose of fulfilling the defendant’s contracts with Carrefour.

(3)  The Purchase Contracts between the parties included terms that the fabric quality must meet certain specified Carrefour quality standards (“Carrefour Quality Standard”).  They required the plaintiff to provide samples for testing (including for a “Fabric Performance Test” and “ECO Test”). They also provided that “Late delivery is not allowed”.

(4)  In breach of contract, certain of the samples and/or Fabrics were unable to comply with the Carrefour Quality Standard and/or to pass the Fabric Performance Test and ECO Test.  Despite repeated requests, improvements to quality were not made.

(5)  In further breach of contract, certain of the Fabrics were delivered late.

(6)  The plaintiff’s repeated breaches amounted to a repudiation of the Purchase Contracts, which the defendant accepted.

(7)  As a result of the plaintiff’s breaches of contract, the defendant suffered loss and damages as particularised (see further below). 

Applicable principles

25.  The principles applicable on an application for summary judgment are very well known, and I will not here set them out in detail.  They are summarised in Hong Kong Civil Procedure 2018 including at §§14/4/4, 14/4/8 and 14/4/9 – 9B.

26.  The defendant must show that there are triable issues. He or she must satisfy the court by credible evidence that there is a fair probability or reasonable grounds that a bona fide defence exists.  If the defendant raises credible, triable issues, the matter should go to trial. The court will not conduct a mini-trial on affidavits on complicated factual issues. 

27.  However, mere assertion in the defendant’s affidavit does not, ipso facto, justify leave to defend.  The court will not take the defendant’s evidence at face value, but will test it against the affidavit evidence and contemporaneous documents, and any inherent improbability.  The defendant’s evidence must condescend to particulars; sufficient facts and particulars must be given to show that there is a triable issue.

28.  Where the defendant raises a set-off or counterclaim, the principles are as summarised in Shenzhen Baoming Ceramics Co Ltd v Companion-China Ltd [2000] 2 HKLRD 288 per Keith JA at 293 – 294 and Hong Kong Civil Procedure 2018 at §§14/4/14 – 14B.  If the defendant can show an arguable and bona fide set-off, or counterclaim arising out of the same subject-matter as the claim, the usual order is unconditional leave to defend.

Application of principles: alleged defence and counterclaim

29.  Mr Wong, for the plaintiff, argued that the alleged heads of defence and counterclaim were not credible in light of the contemporaneousdocuments.  Further, the defendant had failed in its evidence to condescend to sufficient particulars. 

30.  One of Mr Wong’s arguments was that there was no evidence that the defendant rejected any of the Fabrics shipped.  The uncontroverted evidence was, he said, that all of the Fabrics had been accepted by the defendant and used for production of garments for on-sale.

31.  It is true that there is no evidence of complaint by the defendant at the time of the deliveries themselves, until a letter dated 16 August 2013 (the “August Letter”).  The August Letter sets out certain of the defendant’s complaints (in outline) and purports to accept the plaintiff’s repudiation of the Purchase Contracts.

32.  Further, the defendant’s position appears (from the nature of the losses claimed by counterclaim) to be that the Fabrics were in fact incorporated into garments which were on-sold to Carrefour.  In these circumstances, it is somewhat difficult to see that a claim for repudiation and termination of the sale contracts could be maintained. 

33.  However, this point is not necessarily fatal to a counterclaim for damages, or a set-off.  Even where goods have been accepted, that does not bar a claim for breach of warranty for defective or late delivery: see for example section 55 of the Sale of Goods Ordinance (Cap 26).

34.  Below, I consider the credibility of, and supporting evidence adduced in respect of, each of the defendant’s complaints turn (ie defective samples/goods and late delivery), followed by the defendant’s claimed losses.  

Alleged defective samples and goods

35.  The Purchase Contracts contain express terms which require compliance with a Carrefour Quality Standard, by reference to provisions ofa particular Carrefour manual.  They also require the plaintiff to provide samples including for a Fabric Performance Test and ECO test.

36.  Chun’s affirmation states that since March 2013, some samples were delivered, but were of poor quality and could not comply with the Carrefour Quality Standard.  Part of the samples were unable to pass the Fabric Performance Test and/or the ECO Test in that: (i) the weight and quantity of some samples were out of tolerance allowed under the purchase orders; (ii) the colour of some samples was incorrect; and (iii) the width of some samples was too long.  Since about March 2013, the defendant’s staff complained to the plaintiff by telephone and email over the quality of the samples. However, improvements were not made, and most samples/‌Fabrics were still unable to meet the standard and pass the tests. 

37.  Wong’s 2^nd affirmation, for the plaintiff, accepts that various samples were sent to the defendant since around March 2013 for testing, and that the defendant made some requests to improve the fabrics; though Wong says there was never reference to the Carrefour Quality Standard or disclosure of any test results.  The Fabrics were improved in terms of weight and width, which was subsequently approved by the defendant.  Wong denies that any of the shipped fabric was defective. 

38.  On the face of the affirmations themselves, there is a dispute as to whether the samples and/or Fabrics shipped were defective.

39.  However, I consider that the documentary evidence adduced by the defendant to support its complaint, is thin.

40.  First, there is an exchange of emails in March 2013 (up to 26 March), in which the defendant raises certain complaints on fabric quality, including some references to weight, handfeel and width.  As Mr Wong for the plaintiff pointed out, this appears to relate to samples supplied prior to shipment, rather than the actual Fabrics delivered pursuant to the Purchase Contracts.  The emails make no reference to the Carrefour Quality Standard nor to any specific test having been failed.

41.  Second, there is next the August Letter (dated 16 August 2013) referred to above, which sets out some of the defendant’s complaints regarding the Fabrics, including allegedly defective quality.  There is again no reference to the Carrefour Quality Standard or tests said to have been failed, and virtually no particulars are given as to the alleged defects.  

42.  As submitted by Mr Wong, the timing of this letter sits poorly with the defendant’s position, given that on the defendant’s case the “1^st Batch” of Fabrics was delivered between 18 April and 22 May 2013. There is no evidence of any contemporaneous complaint being made by the defendant on receipt of the Fabrics, until several months later in August 2013.  

43.  Third, and of particular importance, the defendant exhibited no primary documents (such as a technical report or test result or even photographs) to substantiate its complaint of defective quality or failure to pass specified tests.

44.  I regard this as a significant deficiency.  If the defendant had valid, arguable complaints on defective quality and failure of specific tests, it ought to have been in a position to produce evidence of this nature at the summary judgment stage to lend credence to its defence.

Alleged late delivery

45.  Each of the Purchase Contracts specifies a date for fabric delivery ranging from 22 March 2013 to 19 April 2013 ex Vietnam.

46.  It is common ground between the parties that there was an agreement to extend the delivery dates for the Fabrics.

47.  According to the plaintiff’s pleadings and affirmations, after the issuance of the letters of credit there was an agreement to extend the latest shipment date to 20 May 2013.

48.  According to the defendant’s pleadings and affirmation, at the request of the plaintiff, the defendant extended the contractual delivery dates for some of the Purchase Contracts to 30 March 2013.

49.  The defendant complains that in breach of the terms of the Purchase Contracts, certain of the Fabrics (described as the “1^st Batch Delivery”) were delivered late on dates ranging from approximately 7 April to 22 May 2013.

50.  Again, there is a dispute on the face of the affirmations, as to the agreed time for delivery and whether there was late delivery.  However, for the reasons submitted by Mr Wong, I consider that the documentary evidence supports the plaintiff’s position.

51.  The First Commercial Bank of Taipei letter of credit originally specified an expiry date of 7 May 2013 and a latest date of shipment of 22 April 2013.  The HSBC letter of credit originally specified an expiry dateof 15 May 2013 and a latest date of shipment of 30 April 2013.  On 13 May2013, both letters of credit were amended to specify an expiry date of 9 June 2013 and a latest date of shipment of 20 May 2013. The amendments would have been made at the defendant’s behest, and are consistent with the plaintiff’s case as to the revised latest shipment date.    

52.  Conversely, I am not aware of any documentary evidence to support the defendant’s version of events of a (partial) amendment of delivery dates to 30 March 2013.

53.  Further, there is no evidence of any contemporaneous complaint of late delivery prior to the August Letter.  The defendant sent that letter approximately three to four months after it claims to have received late delivery of the 1^st Batch.  The defendant also accepts that payment was made for most of the Fabrics shipped (ie even in respect of goods which, on the defendant’s case, were received long after the revised delivery date of 30 March 2013).

54.  I consider that these features significantly undermine the credibility of the defendant’s complaint that there was substantial late delivery leading to the losses claimed.

55.  There is also, on the face of the affirmations, a factual dispute as to which party was at fault for a particular delay in obtaining Cambodian import permits. However, I accept Mr Wong’s submission that this issue isof limited relevance if any for present purposes; since if the plaintiff is correct as to the revised date for shipment, there is in any event little or no lateness.  

Alleged losses

56.  The losses which the defendant claims to have suffered as a result of the plaintiff’s alleged breaches of contract are particularised at §6(p) of the Defence and Counterclaim, as follows:

“                                                                         PARTICULARS

(i) Additional air shipment cost in the sum of US$236,938.33 for delivering garment to Paris, Madrid and Brussels for use by Carrefour was incurred. However … a partial sum of US$192,853.72 was withheld by the Defendant. Therefore,a sum of US$44,084.61 is still outstanding (‘Outstanding Additional Air Shipment Cost’);

(ii) Additional cutting and making cost in the sum of US$42,466.78 was incurred due to the employment of subcontractor (‘Additional CM Cost’);

(iii) Additional FOB cost loss in the sum of US$33,979.05 was incurred due to the lack of replenishment from the Plaintiff forbroken size ratio noted on the finished garment (‘Additional FOB Cost’);

(iv) Trim cost lost for the accessories purchased in the sum of US$39,679.53 was incurred due to the cancellation of some orders as a result of the Defendant’s breach of the Purchase Contracts (‘Trim Lost’);

(v) Additional transportation cost in the sum of US$12,820.51; and

(vi) Termination of business relationship with Carrefour and the consequential loss of profit is US$300,000 per season and profit loss of 2 seasons is incurred.”

57.  The evidence adduced by the defendant to support these alleged losses, is very thin.

58.  The losses are dealt with in a few short paragraphs towards the end of Chun’s affirmation.  For most of the items of loss, no explanation is given beyond the contents of the defendant’s pleading.

59.  The only document regarding losses exhibited to Mr Chun’s affirmation, is a two-page table described as containing a breakdown of the costs incurred as a result of the plaintiff’s breaches.  The table is undated.  It is unclear who prepared it, though it is presumably the defendant’s internal document.

60.  The table contains details of various costs and expenses, which apparently correspond to some of the defendant’s pleaded heads of loss (eg the Additional CM Cost, Additional FOB Cost, Trim Lost, and Additional Air Shipment Cost).

61.  No primary documentation is provided, to substantiate that these costs were actually incurred and were related to fabrics shipped by theplaintiff.  For example, there is no underlying air shipment documentation tosupport the alleged Additional Air Shipment Cost.  There are brief references in the pleading and table to non-acceptance and cancellation by a buyer, but no documentation supports this, such as correspondence from the buyer.

62.  I consider that the table, of itself, adds little in terms of substantial evidence supporting a bona fide counterclaim.

63.  The final, and largest, item of loss claimed is for the alleged termination of business relationship with Carrefour (ie US$600,000 for two seasons’ loss of profit).  As Mr Wong submitted, this item is essentially based on Chun’s bare assertion.  No document or correspondence has been exhibited to show that the said business relationship was terminated nor, for example, to evidence any complaint by Carrefour.

64.  In its affirmations, the defendant attempts a brief explanation for the dearth of documents proffered.  These arguments have, in effect, already been rejected in the Reasons for Decision of Deputy High Court Judge Sakhrani dated 6 February 2018, at §§30 to 37.

65.  In short, the proceedings have been on foot for several years, and the defendant pleaded its losses as early as February 2014.  The defendant ought to have been in a position to adduce sufficient documentary evidence to give credence to its claimed losses.

Conclusion

66.  In my view, on the basis of the materials and arguments presented, this case is not quite suitable for summary judgment on the plaintiff’s claim. 

67.  The defendant’s evidence does raise some spectre of arguable defences and triable issues.  

68.  However, as set out above, the defendant’s evidence is thin to say the least, and I conclude that the defence and counterclaim are “shadowy”.  Compare, for example, Xpoly Recycling Ltd v Gold Leader Enterprises Ltd [2011] 4 HKLRD 230 per Johnson Lam J (as he then was) at §§28 and 29.

69.  Of course, one does not expect a defendant on summary judgment to include in its affidavit of opposition the totality of the evidence which might be relied on at trial.  However, a defendant can be expected to file evidence which goes beyond mere assertion, which condescends to appropriate particulars, and with sufficient documents to support a credible and believable defence or counterclaim.

70.  For the above reasons, I considered it appropriate to grant conditional leave to defend. 

Disposition

71.  I made an order that unless the defendant pays the sum of US$196,747.50 (or the Hong Kong dollar equivalent at the time of payment)into court within 28 days from the date of the order:

(a)  the plaintiff may enter final judgment against the defendant for the amount set out in the plaintiff’s summons dated 19 April 2017 with interest thereon as claimed, and costs; and

(b)  the costs of the plaintiff’s application for summary judgment be to the plaintiff to be taxed if not agreed.

72.  I further made orders as to the costs consequences and directions for further conduct of the main action, in the event that the defendant complies with the condition imposed.