WING TAT HABERDASHERY CO LTD v. ELEGANCE DEVELOPMENT & INDUSTRIAL CO LTD

CACV 126/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 126 OF 2011

(ON APPEAL FROM DCCJ NO 775/2007)

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J U D G M E N T

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Hon Yeung VP (giving the Judgment of the Court):

Introduction

1.  The plaintiff (Wing Tat Haberdashery Co Ltd) claimed against the defendant (Elegance Development & Industrial Co Ltd) for the balance of the price of goods sold and delivered in the sum of $357,366.94 which was adjusted to a lesser sum of $338,477.74.

2.  The defendant did not dispute the plaintiff’s claim, but counterclaimed for $411,579.60 as loss and damages for breach of contract on the basis that the goods supplied by the plaintiff were defective.

3.  The dispute went before Judge H C Wong (“the judge”) in the District Court for adjudication.  In the judgment handed down on 16 November 2010, the judge, despite the concession by the defendant that it should be liable for the plaintiff’s claim in full, reduced the plaintiff’s claim to $283,982.82 on the basis that some of the goods delivered by the plaintiff were defective.

4.  The judge appeared to have found that the defendant had accepted the goods, but as some of the goods were defective, the defendant was entitled to counterclaim against the plaintiff for damages, including the costs of replacing the defective goods.

5.  The judge found the plaintiff and the defendant equally to blame for the defendant’s damages, and only awarded the defendant half of its counterclaim, namely $205,789.80. 

6.  The judge’s decision was premised on her finding that parts of the defendant’s damages could have been avoided if it had taken reasonable precautionary steps.  The judge, however, did not analyze the nature and extent of the defendant’s damages, and did not find which items of the defendant’s damages could have been avoided if reasonable precaution had been taken.

7.  The net result of the judgment was that the defendant should pay the plaintiff $78,193.02.  The judge further made a costs order that the defendant do pay the plaintiff’s costs of the claim and the plaintiff pay 50% of the costs of the defendant’s counterclaim.

8.  With leave granted by the Court of Appeal (differently constituted) on 7 July 2011, the defendant appeals against the judgment.

The Judgment below

9.  The Court of Appeal, when granting leave, had set out the judgment below in succinct terms and we wish to repeat it here:

“8. The plaintiff’s claim was for the price of certain colour dyed tapes sold and delivered by it to the defendant. The defence was that a portion of the colour dyed tapes did not conform to sample.

9. The judge rejected the defendant’s argument that it was a contractual term that the colour dyed tapes must pass two particular light tests, namely the cool white fluorescent test and the A light test (‘Issue (b)’). However, the Judge held that there were colour variances in three of the five colour dyed tapes delivered by the plaintiff to the defendant. Despite the absence of a loss adjuster’s or survey report, she inferred from the fact that the plaintiff agreed to re-dye the colour dyed tapes of the three colours in which colour variances profound that there were defects in those colour dyed tapes (‘Issue (a)’).

10. The Judge found that the majority of 83.9% of the tapes could be used and were used in the garments manufactured by the defendant’s customer. The white and Alamance khaki colour dyed tapes were fully accepted by the defendant’s customer and only some 16.1% of the total, in three colours, had to be replaced. She found that the plaintiff was persuaded to re-dye the colour dyed tapes to meet the requirements of the defendant’s customer. However, she also found that the defendant was warned and knew that there would be problems with the re-dyed tapes from colour bleeding and unevenness but that the defendant accepted the re-dyed tapes and sent them to its customer for garment manufacturing. The Judge found that the defendant had not taken any remedial or precautionary steps, upon discovering the defect in the colour dyed tapes, before supplying them to its customer (‘Issue (c)’).

11. The Judge found the plaintiff and the defendant to be equally responsible for the consequences of the supply of the defective colour dyed tapes to the defendant’s customer. She calculated the plaintiff’s loss and damage on the basis that 83.9% of the tapes were accepted by the defendant so that the defendant should be liable for that proportion of the plaintiff’s claim, namely 83.9% of HK$338,477.74, i.e. HK$283,982.82. So far as the defendant’s counterclaim was concerned, she held that the claim in the sum of HK$411,579 should be borne by the plaintiff and the defendant equally ‘because [the defendant] should have detected defects in the bulk goods at an early stage before delivery to [its customer] to avoid further loss’ (‘Issue (d)’).

12. The Judge’s conclusion was that, setting off 50% of the defendant’s counterclaim against the plaintiff’s claim (i.e. HK$205,789.80), the plaintiff was entitled to judgment in the sum of HK$78,193.02.”

The Parties’ Respective Positions

10.  The defendant does not challenge the plaintiff’s successful claim.  Indeed, Mr Kenneth YF Wong, counsel for the defendant, concedes that the judge should not have reduced the plaintiff’s claim, and he had difficulty explaining why the judge, on the one hand, had allowed the defendant the costs for replacing the defective goods, and on the other hand, had decided to reduce the plaintiff’s claim by reason of the defective goods.

11.  Mr Wong nevertheless argues that the defendant should be entitled to its counterclaim in full.  He points out that in the Amended Reply and Defence to Counterclaim, the plaintiff alleged that there was no defects in the colour dyed tapes and that the defects were caused by the defendant’s request for re-dyeing in order to satisfy certain tests which were not part of the terms of the contract.  As the judge had found that the defects to the colour dyed tapes were apparent before re-dyeing, the plaintiff’s defence to the counterclaim failed.

12.  Mr Wong emphasizes that as the plaintiff had never pleaded that the defendant had failed to mitigate its loss and its witnesses had not made that allegation, it was wrong for the judge to reduce the defendant’s counterclaim on the basis that it had failed to mitigate its loss.

13.  Mr Chan Chung, on behalf of the plaintiff, argues that there was no inconsistency in the judge’s findings.

14.  Mr Chan emphasizes that the defendant had not properly checked the goods before making delivery to its customers and had therefore failed to act reasonably.  Mr Chan argues that the defendant’s failure to act reasonably had led to some of the damages it suffered and therefore the judge was entitled to apportion the damages equally between the plaintiff and the defendant.

15.  In the course of his submission, Mr Chan disclosed that he was prevented by the judge to question the defendant’s witnesses in order to demonstrate that parts of the damages allegedly suffered by the defendant were not reasonably incurred and could have been avoided.  Mr Chan, however, accepts that the absence of cross appeal or a respondent’s notice makes it impossible to challenge the judge’s findings adverse to the plaintiff.

Discussion

16.  The defendant had contended that it was a contractual term that the colour dyed tapes must pass two light tests.  It was the defendant’s case that prior to placing the orders with the plaintiff, samples of the various required colour dyed tapes had been sent to the plaintiff. Therefore the contracts in question were sales by sample.  As the colour dyed tapes delivered to the defendant did not conform to the samples, the plaintiff was in breach of the express term.  It was also the defendant’s case that the colour dyed tapes delivered to the defendant were not reasonably fit for the purpose that they were required and were not of merchantable quality.

17.  Whilst the judge rejected the defendant’s case that the colour dyed tapes must pass the two light tests, the judge had clearly found that there was something wrong with the bulk goods.  The judge said at paragraphs 25 and 27:

“… the readiness of (the plaintiff) in agreeing to re-dye three of the four colour tapes even though (the defendant) did not obtain a survey report on the bulk goods showed that (the plaintiff) had accepted there was something wrong with the bulk goods or (the plaintiff) would not have agreed to re-dye the tapes at no extra charge to (the defendant).

… (the plaintiff) had accepted some of the tapes should be         re-dyed to meet its customer’s requirement, this indicated the colour variance must be apparent to (the plaintiff).”

18.  On the other hand, the judge appeared to have found that (the defendant) had accepted the re-dyed tapes as it had sent them to its customer (Leading Garments) for garment manufacturing.  The judge took the view that once the buyer discovered the defect, he “has a duty to see that the defective goods are not sent to his sub-buyer to avoid further or consequential loss which he could have avoided by taking precautionary steps”.

19.  Section 55 of the Sale of Goods Ordinance Cap 26 stipulates:

“(1) Where there is a breach of warranty by the seller, or where the buyer elects, or is compelled, to treat any breach of a condition on the part of the seller as a breach of warranty, the buyer is not, by reason only of such breach of warranty, entitled to reject the goods; but he may –

(a) set up against the seller the breach of warranty in diminution or extinction of the price; or

(b) maintain an action against the seller for damages for the breach of warranty.

(2) The measure of damages for breach of warranty is the estimated loss directly and naturally resulting, in the ordinary course of events, from the breach of warranty.

(3) In the case of breach of warranty of quality, such loss is prima facie the difference between the value of the goods at the time of delivery to the buyer and the value they would have had if they had answered to the warranty.

(4) The fact that the buyer has set up the breach of warranty in diminution or extinction of the price does not prevent him from maintaining an action for the same breach of warranty if he has suffered further damage.”

20.  The normal measure of damages for the supply of defective goods is the value of the goods as warranted less their value as they are, both values being taken at the contractual time for delivery.  “If the value at actual delivery is nil, then the market value of the goods as warranted forms the measure of damages; conversely, the damages are nil if the breach of warranty does not affect the value of the goods.” (See McGregor on Damages 18^th Edition para 20-059)

21.  If the colour dyed tapes delivered by the plaintiff were defective as they did not conform to the samples and were not reasonably fit for the purpose for which they were required and were not of merchantable quality, the normal damages would be the costs of replacing those defective goods.

22.  It was the defendant’s case that because of the defects of the colour dyed tapes delivered by the plaintiff, the defendant had to order replacements (already dyed) from Pak Lee Hong at $147,902.20 and other non-dyed replacements from Sumirtex at $30,960 with the additional dyeing costs of $19,814.40.

23.  Prima facie, the defendant’s loss due to the supply of defective goods by the plaintiff was limited to the sums of $147,902.20+$30,960+$19,814.40=$198,676.60.

24.  However, the defendant further contended that as the plaintiff knew that the colour dyed tapes would be sold to its customer after attaching them to belts to be sewn on garments as an accessory, the plaintiff should be responsible for the extra costs, including the labour costs of sewing the defective colour dyed tapes to garments, the additional shipping costs, costs of damaged cotton belts, extra labour costs for sewing colour dyed tapes to replaced belts and additional transportation costs.

25.  It appears to be the defendant’s case that after the re-dyeing of the tapes, they supplied some of them to its customer and processed the others by sewing them onto belts before supplying them to its customers. As the re-dyed colour tapes were defective, the belts that had been processed had to be discarded and additional belts had to be ordered.  Hence extra costs were incurred.

26.  With respect, when the re-dyed colour tapes were delivered to the defendant and if they were defective, the defendant should not have further supplied them to the sub-buyer for processing once the defects were discovered.  The defendant certainly should not have processed the defective colour dyed tapes by sewing them onto belts at their own factory where the defects should have been discovered after a reasonable time.  

27.  The defendant should be able to notice the defects and if the defendant were to refrain from using the defective colour dyed tapes, some of the consequential losses and damages could have been avoided.

28.  The judge did not reduce the defendant’s counterclaim on the basis that the defendant had failed to mitigate its loss, but on the basis that parts of the defendant’s damages were not the direct and natural result from the breach of warranty.  The judge was entitled to take the view that if the defendant had taken reasonable steps, it should not have sent the goods to its sub-buyer for processing or processed defective tapes by applying them to belts.

29.  It is, in our view, highly arguable some of the extra costs were not reasonably incurred as they could not be loss directly and naturally resulting in the ordinary course of events from the breach of warranty (that is, the goods supplied by the plaintiff did not conform with samples and/or were not reasonably fit for the purpose and/or that they were not merchantable).

30.  However, whether and which of the items of the defendant’s counterclaim were reasonable and recoverable depended on evidence and the judge’s findings thereon.  The judge should not have simply picked a figure from the air and halved the defendant’s counterclaim without any evidential basis for doing so.

31.  With respect, having made the findings in paragraph 36 of the judgment, namely that: “Once he discovered the defect, the buyer has a duty to see that the defective goods are not sent to his sub-buyer to avoid further or consequential loss which he could have avoided by taking precautionary steps”, the judge should then proceed to make further findings as to what were the consequential damages that could be avoided before adjudicating on the defendant’s counterclaim.

32.  This was not a case where the damages to the defendant were incapable of exact quantification and apportionment.

33.  Unfortunately, the judge did not do so, possibly hampered by the facts that she had disallowed the plaintiff from cross-examining the defendant’s witnesses on those issues.

34.  The plaintiff could have challenged the judge’s decision not to allow cross-examination on the defendant’s counterclaim to demonstrate that parts of its damages could be avoided.

35.  The plaintiff could have cross-appealed on the deduction of its claim, as the judge at the same time, allowed the defendant’s claim for the costs of replacing the defective goods, and on the judge’s failure to make findings with regard to the items of the defendant’s counterclaim that could be avoided.

36.  The plaintiff chose not to and only at the late stage of the hearing, through Mr Chan, asks half-heartedly, for indulgence to re-open those issues.

37.  The judge found that the defendant had suffered loss and damages to the extent of $411,579.60 and there was no valid basis for the judge to half that amount.  There is no cross appeal or respondent’s notice to challenge the judge’s findings.

38.  We feel compelled, in the circumstances, to allow the defendant’s appeal by allowing its counterclaim of $411,579.60 in full.  After reducing the plaintiff’s claim of $283,982.82 as found by the judge, there should be judgment in favour of the defendant against the plaintiff in the sum of $127,596.78.

39.  Despite certain offers made, the defendant had not conceded the plaintiff’s claim and the plaintiff had to prove its claim before the judge.  The judge was entitled to award the plaintiff the costs of its claim.

40.  As we have allowed the defendant’s appeal on its counterclaim, the defendant should be entitled to the costs of the counterclaim in full and the costs of the appeal.

Conclusion

41.  The defendant’s appeal is allowed to the extent indicated.  The costs order of the judge is varied to the extent that the defendant is entitled to the costs of the counterclaim in full.  We also make an order nisi that the plaintiff is to bear the defendant’s costs of the appeal to be taxed if not agreed.