SUNBO CONTRACTS LTD v. LI YIM CHIU t/a CHIEF WAI ENGINEERING CO

DCCJ 2520 / 2006

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 2520 OF 2006

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JUDGMENT

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Introduction

1.  The Plaintiff (“Sunbo”) sold various quantities of upholstery fabrics to the Defendant (“Chief Wai”) under two confirmed quotations made respectively in March 2002 and February 2003.  The fabrics were upholstered by Chi Wai’s appointed factory onto sofas and chairs, which were eventually shipped to a hotel in California, United States, known as the Roosevelt Hotel.

2.  Sunbo now claims against Chief Wai the sum of HK$221,500.00, being the outstanding balance of the purchase price under the two orders.

3.  Chief Wai defends the claim on the principal basis that it is not liable to pay the full price of the fabrics as (a) Sunbo was in breach of the sales contract in failing to provide fabrics with fire retardant coating that complied with the standards of the relevant Californian regulations known as in short CA 117, (b) Sunbo was in breach of the sales contract in failing to provide CA 117 fire proof certificates for the fabrics, and (c) the fabrics provided by Sunbo were found to be defective by the hotel and thus were not of merchantable quality. 

4.  Further, Chief Wai also counterclaims Sunbo, and seeks to set-off against Sunbo’s claim, the sum of US$54,726.00 (equivalent to HK$342,012.80). This sum was deducted by its direct customer Team HC from the purchase price of the furniture and sofas supplied by Chief Wai on the alleged basis that the furniture and sofas were defective and needed to be remade. 

5.  It is also part of Chief Wai’s case that Sunbo had agreed to give it a 30% discount on both orders in return for Chief Wai’s introduction of Team HC as a customer to Sunbo.  As such, Chief Wai says Sunbo’s claimed outstanding sum should in any event be subject to the agreed deduction.

6.  In light of the above contentions, the issues that need to be determined at trial are:

(1)	Whether it is a term of the sales contract that (a) Sunbo had to provide the fabrics with a fire retardant coating satisfying CA 117 requirements, and/or (b) Sunbo had to provide CA 117 compliance certificates for the fabrics.
(2)	Whether Sunbo supplied to Chief Wai fabrics which were not of merchantable quality being defective as alleged.
(3)	If the answers to (1) and/or (2) above are affirmative, whether Chief Wai is thus not liable to pay the balance of the purchase price and/or whether Sunbo ’s breaches caused Chief Wai’s loss of US$54,726.00.
(4)	Whether there is an agreement between the parties that there would be a 30% discount on the sale price of the two orders.

Background

7.  Unless otherwise stated, the following background facts are largely undisputed or not controversial.

8.  Sunbo carries on the business of trading, including furniture fabrics.  Mr Tong Chi Kin is one of its directors. 

9.  Mr Li Yim Chiu (trading as Chief Wai) was formerly an apprentice of Mr Tong’s father.  Chief Wai carries on the business of manufacturing furniture.

10.  Team HC Ltd placed certain orders with Chief Wai for the supply of various hotel furniture for the Roosevelt Hotel in California.   The furniture included, inter alia, various types of fabric upholstered sofas, sofa beds, chairs and cushions.

11.   In early 2002, Mr Won Yiu Kwan acting on behalf of Chief Wai approached Mr Tong to negotiate for Sunbo’s supply of furniture fabrics to Chief Wai for the manufacture of sofas and chairs.  It is hotly disputed at trial as to whether during the negotiations, Mr Li had told Mr Tong specifically that the fabrics sought were to be used to manufacture furniture to be shipped to the Roosevelt Hotel in California. 

12.  Sunbo through Mr Tong agreed with Mr Won for the supply of the fabrics.  The order was confirmed by way of Sunbo’s quotation no. 1635/02 and dated 28 March 2002 for the supply of a total of 3,050 metres of furniture fabrics for a total sum of HK$274,850.00.   The only terms and conditions stated on this quotation are:

(1)	There should be a 50% deposit of the purchase price upon confirmation and the balance was to be paid by cash on delivery.
(2)	The delivery time was 30 days from the date of the receipt of the deposit.
(3)	The delivery was to be made in Hong Kong.

13.  It is also common ground that Chief Wai asked for the fabrics to be delivered to 龍華偉興傢俬咕臣有限公司 (“Lung Wah”), a factory in Shenzhen engaged by Chief Wai for the manufacture of the furniture.

14.  Sunbo delivered the fabrics to Lung Wah.  They were upholstered by Lung Wah onto sofas and chairs built by it.  These fabrics were also treated with fire-retardant materials by Sunbo’s contractor.  Lung Wah then shipped these sofas and chairs together with other furniture were then shipped to the Roosevelt Hotel.

15.  In about early February 2003, Mr Won was informed by Team HC that the furniture (including the sofas and chairs) supplied to the Roosevelt Hotel had various defects, including rusty and oxidation of the zippers.  Mr Won went to the hotel to inspect the furniture on 2 March 2003.  Some pictures of some of the sofas were taken for record purpose.

16.  At the same time, also in about early February 2003, Chief Wai sought to place a further order with Sunbo for 875 metres of the same fabric materials under the first order.  Sunbo sent Chief Wai a quotation numbered 1712Y03 and dated 28 February 2003 in relation to this further order.  The contract price was HK$76,650.00 and this quotation contained the same express terms as the first quotation.

17.  This second order fabrics were delivered to Lung Wah and upholstered onto sofas and chairs.  Lung Wah also shipped them to the Roosevelt Hotel later.

18.  Team HC by a letter dated 7 May 2003 wrote to Chief Wai to set out in writing its complains about various problems of the furniture.  It also asked for evidence of the upholstered fabrics’ fire retardant coating specification and certification, and questioned whether the coating had complied with the CA117 requirements.  Team HC required Chief Wai to resolve the problems.

19.  By another letter dated 7 November 2003, Team HC wrote to Chief Wai again complaining that it had not received any reply or response from Chief Wai concerning the problems.   Team HC further stated that it would deduct US$54,726.00 from the balance of Chief Wai’s invoice as compensation for the cost of reproducing the sofas by a new supplier.

20.  It is Sunbo’s case that altogether Chief Wai had paid it HK$130,000.00 leaving a balance of HK$221,500.00 outstanding under the two orders.  Sunbo now claims for this sum in this action.

The terms of the sales contract

21.  It is common ground that the second order is a repeat order of the first one.  As mentioned above, it is Chief Wai’s case that it is an oral term of the sales contract that (a) Sunbo was to provide fabrics with fire retardant coating complying with CA117 requirements, and (b) Sunbo was to issue CA 117 certificates for the fabrics.

22.  Sunbo denies that there were these terms to the contract. It is Sunbo’s pleaded case that the printed terms of the quotations represent all the terms of the sales contract as agreed between the parties.

23.  At trial, Mr Tong gives evidence for Sunbo, while Mr Won gives evidence for Chief Wai.

24.  Mr Won says in his oral evidence that before Chief Wai and Sunbo entered into the sales agreement, he had told Mr Won the name and location of the Roosevelt Hotel as the end user of the sofas, and he had specifically told Mr Tong that the fabrics had to be coated with CA117 compliant fire retardants, and that certificates of compliance needed to be provided.

25.  On the other hand, although denying in his witness statement that he was informed by Mr Won of the name or country of origin of the end user, and any specification concerning fire retardants requirements, Mr Tong under examination-in-chief and cross-examination confirms and accepts that:

(1)	When he was negotiating with Mr Won, he was told by Mr Won that the fabrics were to be used to make sofas to be shipped to a hotel in California, USA, although he was not informed of the exact name and address of the hotel.
(2)	He was told by Mr Won that the fabrics needed to be coated with fire retardant.
(3)	Although he did not know what standards of fire coating were required in California, USA and was not told by Mr Won of the same, he had discussed with and asked Sunbo’s fire-coating contractor to provide a coating of the highest standard, one which was higher than the Hong Kong standard.

26.  After assessing all the evidence presented before the Court, I reject Mr Won’s evidence that Mr Tong had agreed with him to supply fabrics coated with fire retardant of CA 117 required standard, and that certificates of such compliance would be provided.  My reasons for rejecting Mr Won’s evidence are as follows:

(1)	Given Mr Won’s own evidence that it was a very important condition of the sales that the fabrics must be of CA117 standards and be issued with such compliance certificates, if there had in fact been such an agreement, it is hard to believe that Chief Wai would have accepted the goods without the certificates or any proof that the fabrics fire coating complied with CA117 standards.  This is particularly so as it is common ground that this was the first business dealing between the parties.
(2)	Under cross examination, Mr Won explains that he had in fact asked Mr Tong repeatedly for the certificates when the fabrics were delivered and before the sofas were shipped, but he was repeatedly told by Mr Tong that Sunbo was in the process of obtaining the certificates.  He thus trusted Mr Tong and shipped the goods without the certificates or any evidence of CA117 compliance.
(3)	I do not accept Mr Won’s explanation:
	(a)	This important part of the evidence is not contained in his witness statement without any good reasons.  This in my view makes this part of the oral evidence unreliable, and suggests strongly that it is an afterthought.
	(b)	Further, since Mr Won accepts that the issue of the certificates is based upon laboratory tests carried out on the fabrics as raw materials before they are upholstered onto the sofas, it is difficult to accept his evidence that he still trusted Mr Tong’s reassurance that the certificates would follow later after the shipments.  There is nothing to wait for before the certificates could be issued.  The more likelihood is thus that he had never asked for the certificates and Mr Tong had not said that they were coming.
(4)	It is Mr Won’s own evidence that he had not shown to Mr Tong the complaint letter from Team HC dated 7 May 2003 concerning the absence of CA117 certificates and the lack of evidence of CA117 compliance.  It is also his evidence that he found the complaints a very serious matter as Team HC had reserved its rights to claim loss and damage.  As such, in my judgment, this is contrary to common and commercial sense that, if Mr Tong had in fact agreed that the fabrics must comply with CA117 regulations and that CA117 certificates would be issued, Mr Won would not have shown Mr Tong this complaint letter to alert Sunbo of its breach of the sales contract.   It is thus more likely that Mr Tong had not agreed to these two terms as alleged, and that was why Mr Won did not find it necessary to show Mr Tong the complaint letter.
(5)	Mr Won explains that although he had not shown the letter to Mr Tong, he had orally informed Mr Tong Team HC’s complaints and thus he did not find this necessary to show or give a copy of the letter to Mr Tong.  I also reject this explanation:
	(a)	It is Mr Won’s evidence that after Team HC’s complaints and when he alerted Mr Tong of Sunbo’s potential breach of the sales agreement, Mr Tong denied any wrongdoing on the parts of Sunbo. If that were the case, the more natural and reasonable thing for him to do is to show Mr Tong Team HC’s complaint letter instead of not showing.
	(b)	It is also Mr Won’s evidence that he himself did not understand much the contents of the letter as they were written in English.  He needed his colleague to interpret the same to him.  As such, again in my view the more natural and reasonable thing for him to do is to show Mr Tong the letter instead of simply telling Mr Tong the complaints.

27.  In the premises, Chief Wai has failed to prove to my satisfaction that it was an agreed term of the sales agreement that (a) the fabrics to be supplied by Sunbo should be coated with fire retardant in compliance with CA117 regulations, and (b) the fabrics should be accompanied with CA117 certificates.

28.  At the same time, in light of Mr Tong’s own evidence as set out in paragraph 25 above, I also find that Sunbo through Mr Tong had agreed with Chief Wai through Mr Won that the fabrics were to be coated with fire retardant of a higher standard for use in California, albeit without any reference to the CA117 specifications.

Were the fabrics defective as alleged

29.  Chief Wai pleaded that the fabrics were of the following defects rendering them not of merchantable quality or in breach of the conditions of the agreement:

(1)	There was oil like chemical/substance rubbing off from the fabric, which attached to the clothing of the users of the sofas, leaving a strange smell and irritation caused upon friction against the users’ skin.
(2)	The chemical substance of the coating of the fabric caused metal/hardware which was in contact with it such as zippers to oxidize and rust, causing stains to materials coming in contact with the metal part.
(3)	The fabrics did not comply with the fire retardant coating requirements of CA117.
(4)	The fabrics did not have CA117 certificates.

30.  Sunbo denies there were any defects of the fabrics as alleged.

31.  The burden rests on Chief Wai to prove the defects.    Chief Wai seeks to prove them by the following evidence:

(1)	The complaint letters from Team HC dated respectively 7 May 2003 and 7 November 2003, and from the Roosevelt Hotel dated 15 January 2007.
(2)	Photographs of the sofas and cushions attached to Team HC’s complaint letter dated 7 May 2003.
(3)	Mr Won’s own evidence of his inspection of the sofas in California.

32.  I reject this evidence as sufficient proof of the defects of the fabrics.  My reasons are as follows.

33.  First, the photos of the sofas and cushions do not in fact show any of the alleged problems or defects of the upholstered fabrics.  All they show is that the zippers of the sofa and cushion covers were oxidized with a white powdery look.   This does not amount to any material evidence to prove that the fabrics were defective as alleged.

34.  Secondly, Mr Won’s evidence is that, after the inspection, he came to the view that the problems complained of by Team HC were caused by the defects of the fabrics.  I find his evidence unreliable and incredible:

(1)	If he really believed that the fabrics caused the problems as alleged, it is beyond commercial and common sense that he had not brought back from the hotel at least one or two sets of the sofa and cushion covers made with the fabrics to Mr Tong to confirm that they were defective.  This is particularly so as (a) Mr Won says he regarded this a very serious matter and he did expect that Mr Tong might not accept the accusations, and (b) the photos do not show any of the alleged defects or problems of the sofa and cushion covers.  The fact that he did not see fit to bring back any of these covers to Mr Tong for Mr Tong’s inspection suggests that he did not believe the problems were caused by the defects of the fabrics.
(2)	He himself admits under cross-examination that he has little and limited experience with fabrics.  As such, his view that the fabrics were defective in causing the alleged problems is simply unreliable.
(3)	The fact that he has never shown Mr Tong Team HC’s complaint letters and the photos attached to them further show that he himself did not find that the fabrics were defective.
(4)	Under cross-examination, he accepts that the problems complained by Team HC could possibly be caused by problems of the zippers themselves but not of the fabrics.

35.  Thirdly, the complaint letters of THC and the Roosevelt Hotel are inconclusive as to whether the fabrics were defective: 

(1)	They simply listed out the various state of problems found of the furniture and sofas. These problems included the poor construction of the furniture, the separation of the fabric covers’ seams and the breaking down of the joints of the sofa wooden frames. They also included allegations of problems as set out in paragraphs 29(1) and (2) above.
(2)	However, the letters do not themselves show that the cause of the problems was from any defects of the fabrics.  They at best amount to a speculation that the fire retardant of the fabrics might have been the cause of some of these problems.   For example, in Roosevelt Hotel’s letter dated 15 January 2007, in summarizing the problems concerning the fabrics, it is stated as follows:
	“	Questionable fire code compliance
		…
		Low fabric rub count resulting in unsightly wear
		…
		Fabric resistant to cleaning, resulting in damaged fabric and required massive reupholstering
		…”
(3)	As such, I do not think these letters alone, without the makers coming to give evidence and without the support of any other expert evidence, could prove on a balance of probabilities that the fabrics were defective as alleged.

36.  For the above reasons:

(1)	I am not satisfied that Chief Wai has proved the pleaded defects under paragraphs 29(1), (2) and (3) above.
(2)	Further, although it is common ground that no CA117 certificates have been issued, in light of my finding at paragraphs 27 and 28 above, I further conclude that this is not a defect of the fabrics nor is it an element rendering the fabrics not of merchantable quality or in breach of the sales contracts.

Whether Chief Wai has suffered any loss or damage by reason of Sunbo’s breaches

37.  As I have found that Sunbo is not in breach of the sales contract nor were the fabrics of defective quality to render them of unmerchantable quality, there is no question that Chief Wai has suffered the loss of US$54,726.00 as a result of Sunbo’s breaches.

Was there a 30% discount on the sales price for all the purchase orders placed

38.  It is undisputed that Chief Wai had introduced Team HC as a customer to Sunbo at around the time of the first sales contract between the parties.  It is also Mr Tong’s own evidence that he agreed to give a commission to Chief Wai for the introduction in the form of deduction from the sales price of the fabrics sold to Chief Wai. 

39.  The only battle line between the parties is that it is Sunbo’s case that the agreed commission (and deduction from its invoice to Chief Wai) was a one-off sum of HK$80,000.00, which only applied to the first sales transaction; while it is Chief Wai’s case that the agreed commission was a 30% discount on the sales price of all the fabrics supplied to it by Sunbo.

40.  However, Chief Wai’s case and Mr Won’s evidence in support of it are contrary to the documentary evidence and is not supported by even Mr Won’s own evidence:

(1)	Under cross examination, it is Mr Won’s own evidence that Mr Tong told him that the commission given could be up to 30% discount of the sales price.  This is far from saying that there is an agreement that there would be a 30% discount on the sales price.
(2)	Further, in Sunbo’s invoice numbered 2843Y03 and dated 29 October 2003 sent to Chief Wai, it is expressly set out that there is a deduction of HK$80,000.00 from the invoiced sum of HK$274,850.00.  HK$80,000.00 is not 30% of the invoiced sum.  30% of the invoiced sum is HK$82,455. If there had in fact the agreement to have a 30% discount, there is no good or commercial reason why this sum is not reflected in the invoice.  It is noteworthy that there is no evidence that Chief Wai had objected to this HK$80,000.00 deduction upon its receipt of the invoice.
(3)	Further, there is no evidence that at the time of the negotiation of the first sales contract between the parties, it was anticipated by the parties that there would be further follow-up orders.  It is also Mr Won’s own evidence that at the time when he placed the second repeat purchase order, there was no further discussion between the parties on discount or commission. As such, in my view, the evidence supports that the agreed deduction only applied to the first sales contract but not other transactions.

41.  On the other hand, by reason of the same objective and oral evidence as set out in paragraph 40 above, Sunbo’s case is supported by the document and is inherently and commercially more probable.

42.  For the above reasons, I accept Sunbo’s case and reject Chief Wai’s.

43.  For the purpose of present claim and trial, Sunbo seeks to further contend that the agreed deduction of HK$80,000.00 from its invoice is conditional upon Chief Wai settling of the entire bill.  As Chief Wai has not done so, Sunbo is now entitled not to give the deduction and claim the HK$80,000.00 as part of the outstanding balance of the sales price.

44.  I do not accept Sunbo’s further contention.  Suffice to say that I am not satisfied that there is sufficient evidence to support Sunbo’s case of this conditional agreement on the deduction.  This is not supported by the witness statement of Mr Tong, nor is this pleaded. Also for these reasons, I reject Mr Tong’s oral evidence insofar as it purports to say that it was so agreed between the parties.

45.  In the premises, I find that Sunbo had agreed with Chief Wai to deduct HK$80,000.00 from the sales price under the first sales contract in return for Chief Wai’s introduction of Team HC to it as a customer.  This agreement was not subject to any condition.

A miscellaneous issue

46.  Under the pleaded case, there was originally an issue as to whether the payment of HK$30,000.00 made by Chief Wai to Sunbo in February 2004 was for the purpose of settling part of the outstanding balance.  Chief Wai’s case is that it was, and thus this sum should be further deducted from the outstanding balance of the sales price.     On the other hand, Sunbo says the HK$30,000.00 was made to reimburse its purchase of certain metal frames on behalf of Chief Wai.

47.  However, given that Mr Won in his own oral evidence confirms that he did not intend the HK$30,000.00 to be used to set off the outstanding balance of the sales price, Mr Ng, counsel for Chief Wai, in his closing submissions concedes, I think rightly, that Chief Wai would no longer pursue its case that the said HK$30,000.00 should be further deducted from the outstanding balance. There is thus no longer any issue arising from this sum.

Conclusion

48.  For the reasons set out above:

(1)	I give judgment in favour of Sunbo against Chief Wai for the sum of HK$141,500.00 (that is, HK$221,500.00 – HK$80,000.00).  Sunbo is also entitled to interest on this sum at the rate of 1% above the prime rate as from time to time quoted by the Hongkong and Shanghai Bank from the date of the Writ to the date of this judgment, and thereafter at judgment rate until payment.
(2)	I dismiss Chief Wai’s counterclaim.
(3)	I further grant an order nisi that costs of the action be to Sunbo to be taxed if not agreed, with certificate for counsel.  This order will be made absolute within 14 days unless any of the parties applies to vary it.