FOREGREAT ENTERPRISES (HONG KONG) CO LTD v. PRECIEUX GARMENT MANUFACTORY CO LTD

HCA797/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 797 OF 2009

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BETWEEN

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J U D G M E N T

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1.  This is an appeal from an order of Master Levy dated 7 May last entering judgment under Order 14 in favour of the plaintiff in the amount of €63,149.01 and dismissing the defendant’s application for summary judgment on its counterclaim.

2.  In the appeal, Mr Tze, who appears for the defendant, is asking me to allow the appeal and give the defendant unconditional leave to defend based on the existence of a set-off against the claim which is reflected in the defendant’s counterclaim.

3.  The case concerns the supply by the plaintiff to the defendant of fabric, out of which the defendant was to manufacture garments to the order of Esprit, a well-known clothing retailer. 

4.  The supply of the fabric which was manufactured by the plaintiff is the subject matter of three contracts in writing between it and the defendant, two of which are dated 11 June 2008 - that is pages 102 and 106 - and the third dated 23 June 2008 - page 110.

5.  The chronology of events can be briefly stated.

6.  In early July 2008, the plaintiff delivered a total of 101,803 yards of fabric to the defendant, for which it issued two invoices of €147,979.05 and €111,618.60 - that is pages 103 and 107. 

7.  It is the defendant’s case that 52,631 yards of fabric was defective.  This quantity was returned by it to the plaintiff, who agreed to take it back without admission as to the alleged defects.  In turn, the plaintiff delivered the fabric to another garment manufacturer, who made up the fabric into the garments that Esprit had ordered from the defendant, which Esprit accepted without complaint as to the quality of the made up garments.  As will emerge presently, it is this which will form the crucial feature of the appeal.

8.  The remaining 49,172 yards of fabric delivered by the plaintiff to the defendant, and accepted by it, was manufactured and delivered by the defendant to Esprit, and also accepted without complaint.

9.  The defendant has refused to pay the plaintiff for the cost of the 52,631 yards of fabric, the agreed purchase price of which is €125,388.60.

8.  On 31 July 2008, the defendant paid the plaintiff ¥642,939.94  in respect of fabric manufactured by it to the defendant’s order under the third contract.  The plaintiff has attributed this amount as partial payment of the outstanding €125,388.60 and has sued the defendant for the outstanding balance, €63,149.01 in respect of which it has obtained judgment from the Master. 

9.  The defendant has sought to defend the case on the basis that the returned fabric was indeed defective and has pleaded a counterclaim based on loss of profit on its use of this fabric to make up garments that it was contracted to make for Esprit as well as for it to be indemnified against claims made against it by Esprit for its failure to deliver the garments to it.  Suffice it to say that its counterclaim greatly exceeds the amount of the claim for which the plaintiff has sued and obtained judgment.

10.  The law is that if the defence of set-off is raised, the defendant is entitled to unconditional leave to defend up to the amount of the set-off claimed (see paragraphs 14/4/14, page 234, Hong Kong Civil Procedure 2010).

11.  What is at issue in this appeal is whether the defendant’s evidence as to the allegation that the plaintiff had delivered to it 52,631 yards of fabric that was defective is such as will raise a triable issue, in which circumstances the defendant would be entitled to unconditional leave to defend.

12.  What I am satisfied about is that once the plaintiff had taken back with no admission as to defect the 52,631 yards of fabric, it received, at the direction of Esprit, an order from Suxing, another manufacturer, for this returned fabric, who then proceeded to make it up into the garments that Esprit had originally ordered from the defendant.  Suxing delivered the garments to Esprit, who accepted the order without complaint as to quality. 

13.  There is no question that Suxing used the same fabric that the defendant had returned to the plaintiff.  I have seen the purchase order numbers which stand as proof of this fact.

14.  This, submits Miss Lau on the plaintiff’s behalf, amounts to incontestable evidence that the 52,631 yards returned by the defendant was not defective, and if confirmation of this were needed, it is to be found in the defendant’s own evidence.  I had been referred to all of the defendant’s own quality analysis reports which overwhelmingly show that in terms of quality the pieces of fabric that were examined passed muster in terms of what had been specified in the purchase orders.

15.  This being said, Mr Tze has drawn my attention to a number of  reports where the box for a “pass” has not been ticked, but equally neither has the one for a “fail”, although he tells me that there are comments in Chinese in the body of these reports indicating some defect. 

16.  Nevertheless, it is fair to say that, taken as a whole, all of these reports indicate that the fabric that was returned by the defendant was up to contract specification and quality. 

17.  The fact that the fabric was made up by Suxing and accepted by Esprit serves to conclusively put an end to the defendant’s case on defect. 

18.  Where this evidence leads to therefore is that the defendant has been quite unable to show that there is a triable issue on defective quality, and that if anything at this stage the evidence is the other way in that there can be no complaint by the defendant on defective quality.  Without this evidence, the whole justification for non-payment by the defendant must go, as must the counterclaim at this stage being set up as a set-off to the plaintiff’s claim.

19.  It seems to me that in these circumstances the Master was correct to have entered judgment as she did and the appeal therefore must stand dismissed with costs.

20.  I should mention that some other points have been argued by both sides but these were entirely subsidiary to the main issue upon which I have been able to base my judgment so I do not propose to say anything further about these which simply do not now arise for consideration given the outcome on the issue as to defective quality.