MASTER WEAVING LTD v. HANBO ENTERPRISES LTD

HCA 676/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 676 OF 2012

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J U D G M E N T

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1.  The plaintiff sues for unpaid goods. The defendant alleges that the goods were defective; alternatively there had been a collateral agreement to compromise on terms.

THE FACTS

2.  The following facts under this title are largely not disputed and I find them to be true.

3.  The plaintiff is a fabrics manufacturer.  The defendant is a garment manufacturer.  Their end customer was Target.  Target would decide the type of raw fabrics required.  The sample fabrics produced by the plaintiff and sample garments produced therefrom by the defendant had to be tested and approved by Target.

4.  The usual course of dealing was that once Target nominated a fabric supplier, in this case, the plaintiff, the defendant would issue a fabric purchase order (“FPO”).  The description of goods (“the fabric specifications”) would state the type of fabric and its construction (meaning the warp and weft and weight of the fabric before wash). 

5.  The plaintiff would then prepare a sales contract, which provided for payment to the plaintiff by a letter of credit (“LC”) at sight.

6.  On passing the sample test, the plaintiff would go into bulk production.  The defendant’s quality controller (“QC”) would conduct visual inspection and random check of the fabrics. If satisfied as to quality, the QC would give instructions for delivery.

7.  In accordance with the FPO, the plaintiff would then deliver the fabrics with its internal fabric inspection report and internal shrinkage report (“the internal reports”).  The plaintiff would issue a list of yardage (also called a packing list) with the fabrics.

8.  On the list of yardage, it was stated that “any complaint of discrepancy must be notified within 5 days from date of delivery we accept no responsibility after this date or Goods having changed form.”

9.  Samples of fabrics from the plaintiff would be sent to Bureau Veritas (“BV”), Target’s nominated laboratory, for shrinkage test.  Sample garments produced by the defendant with the fabrics would also be sent to BV for various tests.

10.  For such testing, there would be further washing of the fabrics and garments with chemicals.  If the tests failed, the defendant had the option of returning the fabrics, although this had not happened in the past. 

11.  Upon issuance of a cargo receipt by the defendant, the plaintiff would draw against the LC for payment.

12.  The subject matter of this claim concerns fabrics under 2 FPOs (“the Fabrics”).  For the 1st FPO, the plaintiff had received payment under an LC for the sum of US$245,754.89 (“the LC sum”).

13.  For the 2nd FPO, 2 invoices for the total amount of US$52,630.20 were issued but are unpaid to date.

14.  The usual course of dealing was largely followed for the 2 FPOs although there were no internal reports.  The Fabrics were sent to Cambodia whilst the BV tests were carried out.  They were manufactured into garments (“the garments”) which were rejected by Target for having failed BV tests.

15.  The parties held a meeting on 27 March 2007 (“the Meeting”).  It was agreed that the defendant would “hold” payment for the 2nd FPO and the 8 invoices until after resale of the garments (“the resale”).  The dispute was as to the terms of that “holding”.

16.  On the following day, Jimmy sent an email (“Jimmy’s email”) to the plaintiff in the following terms:

“this order [related to the 1st FPO] has been cancelled by buyer due to failure of fabric weight (too light) & agreed with you that you wl response for the fabric cost!

Since the fabric payment of above fabric po already be paid under invoice #20060479 & #20060493 in ttl amount US$245754.89

So you agreed to hold up the below invoice value to compromise above fabric cost!

[9 invoices for a total value of US$250476.63 were set out.]

…

this order [related to the 2nd FPO] also be cancelled by buyer due to failure in seam strength (fabric rupture) & agreed with you that you wl response for the fabric cost!

and to hold the payment of above 2 fabric po under invoice# 20060552 & 20060583R in ttl amount US$52,630.20.

the final settlement will be finalized once stock gmts be sold.”

The plaintiff had never replied to Jimmy’s email. 

17.  Having heard rumours in 2011 about the resale, and having failed to obtain payment from the defendant, the plaintiff took out this action in 2012 to sue under 3 sets of invoices totalling US$303,583.83:

(i) invoice for the 2nd FPO for US$52,630.20;

(ii) 8 invoices issued in 2006 (“the 8 invoices”, which were in effect the 9 invoices referred to in Jimmy’s email); and

(iii) 1 invoice issued in 2009 for US$477.00 (“the 2009 invoice”).

THE PARTIES’ CASE

18.  The defendant claims that it was entitled to rescind the 1st FPO because of defects in the Fabrics.  It pleads an implied term for the defendant to use standing credit (being money held under letters of credit for goods that did not pass the laboratory test) to settle other invoices due to the plaintiff.  It also claims that the LC sum was held on trust by the plaintiff which should be applied to set off any amount due under the 2nd FPO in accordance with the implied terms.

19.  The defendant also alleges that there was a collateral agreement made at the Meeting whereby in consideration of the defendant agreeing not to claim the loss and damage suffered from the defective Fabrics, the plaintiff agreed to bear the costs of the defective fabrics and use the LC sum to set off the 2006 invoices.  In respect of the 2009 invoice, the defendant denies liability.

20.  The plaintiff denies that the Fabrics were defective.  It pleads that the defendant has accepted the Fabrics. It also denies the existence of the collateral agreement or that it should bear the fabric costs.

ISSUES

21.  The issues that need to be resolved are:

A. Whether the Fabrics under the 1st set of FPO were defective?

B. Whether the Fabrics under the 2nd set of FPO were defective?

C. Whether the Fabrics had been accepted by the defendant?

D. Whether a collateral agreement was entered into?

E. Whether the defendant was liable under the 2009 invoice?

22.  It is not necessary to deal with the defendant’s pleas of trade custom and implied term, as no factual basis have been laid for the former and the contracts were effective without the latter:  Kensland Realty Ltd v Whale View Investment & anor [2002] 1 HKC 243 at 253 B-C.  Mr Sung for the defendant places no reliance on the 2 pleas either.

CREDIBILITY OF WITNESSES

23.  Mr Rono Tam (“PW-Tam”) and Mr Marco Lee (“PW-Lee”) gave evidence for the plaintiff and Mr Peter Cheng (“DW-Cheng”) for the defendant.  The merchandizing manager for the defendant at the relevant time was Jimmy Ho (“Jimmy”) who left employment of the defendant about 4 years ago.  He has declined to be a witness.  However, his email was a contemporaneous document and his absence as a witness can hardly undermine its effect. 

24.  I find PW-Tam to be straightforward and honest.  He is careful and would not give answers that he is not sure of.  His answers to the questions posed by the bench are spontaneous and frank.  Unless otherwise specified, I accept his evidence.

25.  PW-Lee is generally frank and straightforward.  However, his evidence on the Meeting was contradicted by PW-Tam and did not tally with the contemporaneous email of Jimmy.  Save for these 2 aspects, I accept his evidence.

26.  I find DW-Cheng to be a truthful witness.  He is clearly a decisive and pragmatic businessman.  He is honest in admitting eg that washing might affect the Fabrics although at times his views might not be legally correct (eg in thinking that the plaintiff was bound by the BV requirements).  He might have exaggerated when he stated that the business with the plaintiff had grown to over tens of millions of HK dollars, but that has no impact on his overall credibility. Unless otherwise specified, I accept his evidence.

27.  Having heard the 3 witnesses, I find, without disrespect, that English was not their forte. 

A.  Whether the Fabrics under the 1st FPO were defective?

28.  With regard to the 1st FPO, 100% cotton fabrics (“the 1S Fabrics”) were used, to be dyed into 3 colours: bonjour brown, yankee blue and dirt.  It is not in dispute that there were no internal reports. 

29.  There had been 4 sets of relevant BV Reports commissioned by the defendant:

Date out of Reports	Tests	Results
8 November 2006 (“the 2006 Fabrics Reports”)	Shrinkage	Satisfactory
9 to 27 November 2006 (“the Garment Reports”)	Various	Unsatisfactory
8 to 17 January 2007 (“the 2007 Fabric Reports”)	Various	Satisfactory
22 January 2007 (“the Garment Reports”)	Various	Unsatisfactory

30.  According to DW-Cheng, whose evidence I accept, Target had rejected the garments produced with Fabrics under the 1st FPO in about November 2006.  The defendant then obtained some sample fabrics for the 2007 Fabrics Reports. However, it was too late as Target had already terminated the contract with the defendant.  As admitted by DW-Cheng, the 2007 Fabrics Report was more to redeem the defendant’s reputation.

31.  I accept Ms Lui’s distinction between defects in fabrics and in garments.  The evidence before me shows that there were no defects in the 1S Fabrics.  The reasons are as follows.

32.  Firstly, the defendant’s QC (Cheng Fuyou) had done visual inspection at the plaintiff’s factory.  He did a random check of 5% of the finished Fabrics and recorded his findings in a world recognized “Four Point Fabric Inspection System” form.  To fill in each page of that form, the QC had to inspect 6 rolls of Fabrics, making a total of 54 rolls.  It was not a cursory inspection.

33.  Secondly, as DW-Cheng agreed, if the QC considered the Fabrics alright after inspection, the Fabrics could be delivered.  That was exactly what happened when Sandy (staff of the defendant) emailed the plaintiff on 13 October 2006, attaching the QC’s inspection report and asking for the packing list.

34.  Thirdly, the email of the QC dated 16 October 2006 expressly stated, “經縮水厰洗水後，縮率符合我司要求。”  This was confirmed by the 2006 Fabrics Reports.

35.  Fourthly, the 2007 Fabric Reports also showed test results of the Fabrics to be satisfactory.

36.  The Answer to Request for Further and Better Particulars of the Defence pleaded that the Fabrics were unsatisfactory by reason of (i) fabric underweight; (ii) fabric rupture under pocket strength test; and (iii) fabric torn under tear strength test.  However, in my view, save for item (i), the FPO and contracts did not require the Fabrics to meet the tests in items (ii) and (iii).

37.  Counsel on both sides have helpfully agreed upon a table of defects, based on the Garment Reports, which I accept to be true.  I have sorted the defects into the following categories:

(i) Colour fastness to non-chlorine bleach or chlorine bleach.  Color change did not meet requirement of 4 or 5.  BV proposed to have this rectified by adding “Do Not Bleach” to the garment label.

(ii) Labelling: unsatisfactory bleaching instruction.

(iii) Fibre content: body 100% cotton but waistband was 92.8% cotton, 2% spandex.

(iv) Fibre weight fell below the requirement of 159gram/sq m +/- 5%.

(v) Tearing strength: weft fell below minimum requirement.

(vi) Pocket strength/reinforcement (bartack strength for all pockets): Fabric rupture at pockets; sewing thread breakage.

(vii) Seam strength/failure in sewn seams: sewing thread breakage.

(viii) Tensile strength: below requirement

(ix) Fabric construction/fabric count of woven fabric fell below the requirement of 190 +/- 10%.

(x) Fabric rupture at seam.

(xi) Button attachment with base fabric rupture.

38.  With regard to categories (i) to (ii), DW-Cheng testified that since the Fabrics did not meet the care instructions, new care labels had to be ordered. However, Target had “overridden” the problem by having the defendant change the garment labels.  I am of the view that, at best, the defendant could only claim for remedial costs for making new labels but not to refuse payment under the 1st FPO.

39.  With regard to category (iii), making a waistband with the wrong material was the garment manufacturer’s responsibility.

40.  With regard to category (iv), the FPOs specified fabric weight to be 152g, but BV applied the weight of 159g in the tests.  The reference to 149g on another test report was agreed by DW-Cheng to have been a mistake and the result could be disregarded.  It was never a term of the contract that the plaintiff had to satisfy the BV tests.  The plaintiff was not in breach of the fabrics specifications.

41.  DW-Cheng agreed under cross-examination that the Fabrics would be washed several times by BV and during the manufacturing process.  In the washing process, enzymes would be involved, which might affect the fabric construction, tearing strength, tensile strength and pocket strength. The sewing process might likewise have impact in categories (v) to (xi).

42.  With regard to categories (vi) and (vii), DW-Cheng admitted that “sewing thread breakage” was something that could be improved and was not a fabric problem.

43.  With regard to category (ix), in DW-Cheng’s view, the use of sub-standard fabrics (偷料) had caused the problem.  However he also admitted that washing could have caused the problem.

44.  In summary, the plaintiff was not in breach of the fabric specifications. Nor could the defendant show that the defects were more probably caused by the plaintiff’s poor workmanship or inherent quality of the Fabrics, as opposed to the washing or sewing process outside the plaintiff’s control.  The complaint of defects fails as regards the 1st FPO.

B.  Whether the Fabrics under the 2nd FPO were defective?

45.  Under the 2nd FPO, the fabrics were 98% cotton and 2% spandex (“the 2S Fabrics”), to be dyed into pure white and ebony.

46.  Ben Chan of the defendant emailed PW-Tam on 23 November 2006 confirming that the pre-shipment sample of the white fabric was “marginal accept” (sic) and urgently asked the plaintiff to send the packing list.  There was no QC inspection report from the defendant.  By another email from Ben Chan dated 20 December 2006, the plaintiff was informed that the defendant accepted the pure white 2S Fabrics.

47.  The 2S Fabrics were delivered on 25 November 2006 and 9 December 2006 respectively.  Since Target’s rescission was in November, there was no evidence that it was related to the 2S Fabrics.

48.  All the BV Reports related only to the white fabrics under the 2nd FPO. The results were as follows:

Period	Tests	Results
13 & 14 December 2006 (“the 2006 Fabrics Report”)	Dimensional stability	Satisfactory
20 December 2006 to 26 January 2007 (“the Garment Reports”)	Various	Unsatisfactory
17 January 2007 (“the 2007 Fabrics Report”)	Fabric weight, tensile strength and seam strength	Satisfactory
26 January 2007 (“the Garment Report”)	Fabric construction/fabric count, fabric weight	Unsatisfactory

49.  The alleged defects were similar to those of the 1S Fabrics.  The analyses under paragraphs 36-44 equally apply.  The Fabrics Reports also showed satisfactory results.  The complaint of defects as regards the 2S Fabrics likewise fails.

C.  Whether the Fabrics had been accepted by the defendant

50.  Sections 37(1), (2) of the Sale of Goods Ordinance, Cap 26 (“the Ordinance”) provides as follows:

“(1) Subject to subsection (2), the buyer is deemed to have accepted the goods –

(a) when he intimates to the seller that he has accepted them; or

(b) when the goods have been delivered to him and he does any act in relation to them which is inconsistent with the ownership of the seller.

(2) Where goods are delivered to the buyer, and he has not previously examined them, he is not deemed to have accepted them under subsection (1) until he has had a reasonable opportunity of examining them for the purpose-

(a) of ascertaining whether they are in conformity with the contract; and

(b) [inapplicable as concerning sale by sample].”

51.  The visual inspection by the QC and instructions to the plaintiff to deliver the Fabrics could not be treated as acceptance by the defendant.  This was because the plaintiff well knew that BV tests on the Fabrics would follow.  Anyhow, it anticipated that the defendant might return defective fabrics as provided for in the list of yardage. 

52.  On an objective test, I do, however, find 3 acts of acceptance by the defendant’s conduct: (1) using all Fabrics to manufacture garments; (2) paying the LC sum to the plaintiff; and (3) applying for another LC for the 2nd FPO.

53.  Regarding the first act of acceptance, on the defendant’s own evidence, at the latest by 20 November 2006, the Garment Reports in respect of the 1st FPO had shown unsatisfactory results.  By then, the defendant had had a reasonable opportunity of examining the Fabrics for the purpose of ascertaining whether they were in conformity with the contracts: section 37(2)(a) of the Ordinance.

54.  Once the defendant discovered the defects, it should not have continued to use the Fabrics, otherwise it could not recover damages from the plaintiff. In Benjamin’s Sale of Goods (8^th ed) §17-059, it is said that,

“Where the seller delivers goods which fail to meet the contractual description or standard, the buyer may not immediately discover the defect or the failure of the goods to satisfy the description. As soon as the buyer knows of the defect, he will be unable to recover damages for any further or consequential loss which he ought reasonably to have avoided by taking remedial or precautionary steps. …

After the buyer knows of the defect, he cannot, by reselling the goods to a third person, increase the original seller’s liability by holding him liable for the buyer’s own responsibility towards his sub-buyer. …”

55.  Despite Target’s rescission in about November 2006, the defendant never returned the Fabrics to the plaintiff or asked for replacement goods.  Nor did it call a stop to the delivery under the 2nd FPO.  With knowledge of the defects, the defendant had used up the Fabrics under both FPOs to manufacture garments. 

56.  DW-Cheng claimed (for the first time in the witness box) that Jimmy had obtained consent from the plaintiff to continue manufacturing garments using the 1S Fabrics.  That was denied by PW-Lee.  DW-Cheng was unable to identify the person in the plaintiff who had given the consent.  Having regard to the different manufacturing roles of the plaintiff and the defendant, I do not accept that the defendant needed to ask for consent, nor would the plaintiff have agreed to give consent to a process that it was not familiar with. 

57.  I find that the defendant had done an act in relation to the Fabrics which was inconsistent with the ownership of the plaintiff: section 37(1)(b) of the Ordinance.

58.  Regarding the second act of acceptance, the plaintiff sought payment under the 1st FPO after expiry of the LC, such that Dah Sing Bank Limited had to seek payment instructions from the defendant.  The defendant nevertheless issued a cargo receipt on 4 December 2006 (ie after Target’s rescission), in accordance with the LC, in these terms:

“We hereby certify that the above mentioned goods [ie the 1S Fabrics] are received in good order and condition from [the plaintiff].”

59.  With that cargo receipt, the LC sum was released to the plaintiff on 8 January 2007. 

60.  The defendant has never reserved its right, eg to claim for damages from the plaintiff.  It mattered not that the cargo receipt was prepared by the accounts department as a matter of routine or that the defendant’s practice was not to delay payment to its supplier in view of the upcoming Chinese New Year. On an objective view, the defendant had intimated to the plaintiff that it has accepted the Fabrics under the 1st FPO: section 37(1)(a) of the Ordinance.

61.  Regarding the third act of acceptance, on 19 January 2007, long after Target’s rescission, the defendant applied for an LC which included the price for the 2nd FPO.  The irrevocable LC was issued on 30 January.  Again, it mattered not that it was done by the defendant’s accounts department as a matter of routine.

62.  In summary, even if the defects had been caused by the plaintiff, the defendant had knowingly accepted the Fabrics.

D.  Whether a collateral agreement was entered into?

63.  The collateral agreement was the main part of the defendant’s case, as confirmed by Mr Sung.  The defects were really something in the background.  He submits that the collateral agreement was a compromise which barred the plaintiff from suing.  That collateral agreement was evidenced by Jimmy’s email.

64.  In deciding whether there was a collateral agreement, I shall apply an objective test and interpret Jimmy’s email having regard to the factual matrix.  In  Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLE 896 at 912H, Lord Hoffmann gave his famous speech on interpretation of a document:

“(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.

(2) The background was famously referred to by Lord Wilberforce as the "matrix of fact," but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.

(3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them.

(4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax….

(5) The “rule” that words should be given their "natural and ordinary meaning" reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in Antaios Compania Naviera S.A. v. Salen Rederierna A.B. [1985] A.C. 191, 201:

“if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense.” ”

D1.  The factual matrix

65.  According to DW-Cheng, he was tired of tracing the BV Reports.  Target did not say at that stage that it would not sue the defendant. He, however, wanted a settlement with the plaintiff and “clear” the LC sum.  The terms in Jimmy’s email were agreed with PW-Lee. He further explained that if the resale price could cover the defendant’s production costs (including sub-contractor’s production charges, shipment and material costs), the defendant might pay the plaintiff something.  In the meantime, the LC sum would be set off against other invoices for a corresponding amount.  The specific invoices were identified in Jimmy’s email on the following day.

66.  I accept DW-Cheng’s evidence that the parties then were on good terms.  There was no dispute that fabrics to the value of HK$8m were to be delivered by the plaintiff in stages subsequent to the Meeting and the defendant would settle payment for the same as usual. 

67.  According to PW-Lee, the meeting was short.  It was agreed that the defendant could withhold payment of the 2006 invoices until it managed to sell its defective garments when it had to pay for the Fabrics in full.  The plaintiff denied ever agreeing to bear the costs of the Fabrics or letting the defendant use the LC sum to set off the 9 invoices.

68.  I have taken into account the following matters in deciding whose version to believe.

69.  Firstly, many factors were in favour of the plaintiff by March 2007.  There had been no complaint as to quality of the Fabrics and no request by the defendant for their return or replacement.  The 2006 Fabrics Reports and the 2007 Fabrics Report were in favour of the plaintiff.  In January 2007 it issued a statement of account to pursue payment which the defendant had not responded to for about 2 months. 

70.  Secondly, the parties only had about 3 years’ business relationship by then.  The price due under the 2 FPOs comprised about 10% of the plaintiff’s turnover for 1996/1997.  The plaintiff would hardly have agreed to wait for an indefinite period for the defendant to resell the garments before receiving an unknown amount. 

71.  Thirdly, however, Jimmy’s email was stated to be a “recap” of the Meeting and yet the plaintiff never replied to it for 4 years until 2011 when it demanded for payment.  In the witness box, PW-Lee even said that Jimmy’s email tallied with the mentality at the Meeting (與開會的意識一樣).

72.  Fourthly, the plaintiff’s denial that it had agreed to bear the Fabrics costs was inconsistent with Jimmy’s email.  The natural and ordinary meaning of the words “you wl response for the costs of the fabrics” (“the phrase”) could not have been anything other than the dictionary meaning that PW-Tam understood it to be, ie that the plaintiff should be responsible for the costs of the fabrics.

73.  Fifthly, the plaintiff had actual knowledge of the phrase. Both PW-Tam and PW-Lee had read Jimmy's email upon receipt but there was conflict in their evidence as to how they reacted to the phrase. 

74.  According to PW-Tam, he checked the dictionary and learnt that the plaintiff was to be responsible for the cost of the Fabrics.  Ms Lui submits that it was not clear when he checked the dictionary.  I have no doubt about it.  Clearly it was done soon after receipt of Jimmy’s email and PW-Tam was so concerned as to the plaintiff’s liability that he asked PW-Lee whether to issue a reply to Jimmy. PW-Lee replied in the negative.  PW-Tam left PW-Lee, the 90% majority shareholder, to decide what to do.

75.  PW-Lee denied that PW-Tam had talked to him about replying to Jimmy's email.  However, PW-Tam’s version was an admission against the plaintiff’s interest which I find to be more probably true.  The failure to reply to Jimmy’s email was an informed decision.

76.  Sixthly, the plaintiff’s denial that it had agreed to set off the LC sum was inconsistent with PW-Lee’s own evidence and the contents of Jimmy’s email.

77.  In his witness statement, PW-Lee gave the impression that he placed emphasis only on part of Jimmy's email.  He said,

“As quite a large number of emails are sent to me on a daily basis regarding all of the Plaintiff’s transaction, I had not paid a great deal of attention to each and every word in the March Email. My focus had been on the words ‘hold up’ and ‘hold the payment’, as well as the concluding line: ‘the final settlement wl be finalized once stock gmts be sold.”

78.  However honest, it was a selective view.  He overlooked that the words “hold” or “hold payment” were qualified.  There was to be a hold up of 9 invoices for totally unrelated goods as “compromise” for the Fabrics costs.  In the witness box, PW-Lee admitted that at the Meeting, it was mentioned that the defendant would “hold” payment for some invoices yet to be identified.  It supported DW-Cheng’s evidence on setting off.

79.  Seventhly, if the plaintiff merely agreed to defer the time for payment without compromise as to amount, it would not be necessary to mention a settlement to be finalized after the resale.  Clearly the parties contemplated some kind of future accounting.  DW-Cheng’s version of paying the plaintiff something if the resale price could cover production costs was more probably true.

80.  Eighthly, the parties gave Jimmy’s email to its own account officer for record.  Jimmy’s email was prepared on DW-Cheng’s instruction.  I find that to be a sensible move having regard to the volume of emails passing through the defendant’s company, the number of merchandising managers, merchandisers, and fabric mills (about 40) working with the defendant and the volume of the defendant’s business (about a million garments produced per month). 

81.  Likewise, PW-Tam confirmed that in accordance with his practice, he would likely have printed out Jimmy’s email for the accounts staff.  PW-Tam would not have passed it on to the accounts staff if the plaintiff had not agreed to the contents.

82.  PW-Lee’s denial in paragraph 67 was not credible.  I find that the plaintiff had, at the Meeting, agreed to the terms as described by DW-Cheng and set out in Jimmy’s email.

83.  Assuming I am wrong in finding that the plaintiff had agreed to the terms at the Meeting and the defendant had put forth “new” terms in Jimmy’s email or pressed on with terms that the plaintiff had not agreed to right after the day of the Meeting.  There was ample opportunity for the plaintiff to put errors right or to reconsider the matter.

84.  There was no obligation on the defendant to draw the “new” terms to the attention of the plaintiff.  In Roe v R A Naylor Ltd  [1917] KBD 712, the plaintiff claimed that he had looked at the sold note, saw that it agreed with the specification, but did not notice the clause in dispute and he did not know that the condition in that clause was a term of the contract.  It was held that,

“If the buyer accepts the sold note without reading it he does so at his own risk. He is bound by any conditions which may be in the note even if he has not read them. (per Bailhache J, at page 714)

…

When the question is whether a particular document has been assented to as containing contractual terms two points arise for consideration: First, has a contract been entered into on the terms of the written document? In order to decide that the question to be considered is, did the party offering the document convey to the other party that there were some written terms in the document? If the other party did not know of the existence of those written terms, then the question arises whether the first party took reasonable steps to inform him that the document contained some writing which was part of the contract. But there is another class of case in which by a clear course of business between the parties a certain document is understood to be the contract or to be record of the terms of the contract. In that case the only question which can arise is whether the terms have been assented to. If a party signs the document he is taken to have assented to the terms contained in it. If, although he has not signed the document, he has receive it without dissent, he would also prima facie be taken to have assented to the terms. But in both cases the issue might arise whether a particular clause was one of the terms so assented to. In that case, the question would be, was the document in such a form that a reasonable man reading the document with reasonable care might and did fail to see that the particular clause in question formed part of the contractual terms? That is a question of fact. It is within one’s experience that a document sometimes incorporates other documents containing statements in such a form that a printed contractual term might possibly be overlooked.” (Atkin J, at pp 715-716)

85.  Having regard to paragraphs 73-79, I find that the plaintiff had actual knowledge and understanding of all the material terms in Jimmy’s email.  It decided not to reply to it and let its accounts staff keep a copy of the email.  Its failed to pursue payment under the 2 FPOs for 4 years (even in 2009 when business was worst).  The failure to seek payment of the 9 invoices for 4 years was consistent with the agreement to set off the LC sum.

86.  Although PW-Lee claimed that there had been other statements of account to chase for payment, none other than the one in January 2007 were produced.  I disbelieve that Jimmy had told him not to include past receivables in the statements of account to avoid confusing Ms Kwok the accountant.  The plaintiff called up the defendant as soon as the plaintiff learnt of the resale, consistent with Jimmy’s email.

87.  The plaintiff had accepted the terms in Jimmy’s email by conduct if not already at the Meeting.  I find that a collateral contract containing a compromise was reached.  The defendant’s decision not to counterclaim was in honour of the compromise.

88.  Ms Kwok, accountant of the defendant, clearly made a mistake in her email dated 17 November 2011 when she said that fabrics under the 8 invoices were defective and issued a debit note dated April 16, 2007 to a wrong address of the plaintiff in 2011.  It was not a move to mislead as she had attached Jimmy’s email for the plaintiff’s reference.  Her mistake did not undermine the fact that a compromise was reached.

D2.  Effect of compromise

89.  Once a compromise was reached, it is binding and a party cannot relitigate the antecedent dispute.  In Chitty on Contracts (31^st ed) Vol 1, at §22-013,

“Where a claim is asserted by one party which is disputed by the other, they may agree to compromise their dispute on terms mutually agreed between them. Once a valid compromise has been reached, it is not open to the party against whom the claim is made to avoid the compromise on the ground that the claim was in fact invalid, provided that the claim was made in good faith and was reasonably believed to be valid by the party asserting it. Conversely, the claimant cannot avoid the compromise on the ground that there was in fact no defence to the claim, provided that the other party bona fide and reasonably believed that he had a good defence either as to laibilty or as to amount. In order to establish a valid compromise, it must be shown that there has been an agreement (accord) which is complete and certain in its terms, and that consideration (satisfaction) has been given or promised in return for the promise or actual forbearance to pursue the claim. It is a good defence to an action for breach of contract to show that the cause of action has been validly compromised.”

90.  Further, in § 29-197, it is said that

“Recovery will also be denied if there has been a compromise of the claim. A compromise involves some degree of concession (or consideration) on each side, and this can include the forbearance to sue. Again, it may be binding regardless of the validity of the claim. This, of course, assumes that in cases where the only pressure on the party who makes the payment is the probability of being sued, the claimant bona fide believes he has a fair chance of success. A compromise may be invalidated by a mistake, but not where the compromise was agreed on the basis of an erroneous assumption about the law.”

91.  The court has an interest in upholding agreements to compromise disputes.  In Colchester Borough Council v Smith [1992] Ch 421, it was held that

“Where parties to a dispute reach a compromise which brings that dispute to an end and avoids the need for litigation or further litigation, such a compromise is a valuable part of the resolution of disputes within the machinery of the administration of justice. The compromise has to be genuine, entered into freely by all parties to it without concealment of essential information or undue advantage taken by one party of another party, and preferably with the assistance of lawyers. Consequently, an agreement to compromise an action or a dispute which may lead to litigation is binding and is enforceable against the party seeking subsequently to repudiate it. As Roskill L.J. said in Binder v. Alachouzos [1972] 2 Q.B. 151, 160, "Any other course would cause very great difficulty in the administration of justice."

In my view the courts have an interest in upholding agreements to compromise disputes.” (per Butler-Sloss LJ at page 435)

92.  Ms Lui submits:

(i) That the defendant was not under risk of being sued by Target for breach of contract, as DW-Cheng admitted that Target did not sue the defendant for loss and damage and agreed that the cancellation of the orders themselves was punishment enough;

(ii) That the defects were not proved and the plaintiff did not accept the defects.

There was thus no consideration for the compromise.

93.  With respect, I do not agree.  The fact that Target had rescinded the contract did not mean that it would not sue the defendant for damages.  The risk of litigation existed at the Meeting.  Nor did it mean the defendant could not sue the plaintiff. 

94.  The reference to fabric weight, seam strength and fabric rupture in Jimmy’s email could honestly be seen as defects of the Fabrics in March 2007.  There was discussion of responsibility.  As PW-Lee testified, he had told DW-Cheng, “製衣以你呢啲技術, seam 位喺可以配合, 例如洗水唔好咁重, 又或加貼紙。” 

95.  I find that the defendant, bona fide, believed that the plaintiff was responsible for the defects.  Forbearance to sue and hence avoidance of the risk of litigation was consideration flowing from each party.

96.  I find the compromise to be genuine, entered into freely by both parties without concealment of essential information or undue advantage taken by one party of another.  When DW-Cheng learnt of the plaintiff’s demand for payment, he reminded PW-Lee of the compromise.  The fact that Target had not sued the defendant eventually, or that the plaintiff has now shown itself to have valid defences to the defendant’s allegations are not sufficient to avoid the compromise and reopen the underlying dispute.

D3.  The final settlement to be finalized

97.  That, however, is not the end of the matter.  A compromise is enforceable in accordance with its terms.  The last sentence in Jimmy’s email meant that there would be further accounting between the parties after the resale.

98.  I accept DW-Cheng’s evidence that he told PW-Lee that the garments were all sold out at US$0.5 to US$1 odd, but PW-Lee queried why the resale price was so low.  The FOB price for one garment was US$6.90.

99.  It may not be surprising for garments to be resold at a low price.  PW-Tam agrees that he had heard of returned garments being resold at 70% of the original sale price.  PW-Lee agrees that, with some further treatment, returned fabrics could be sold at the original sale price. 

100.  Although documentary evidence was not complete, DW-Cheng’s evidence was not a bare assertion. There was evidence of emails between the defendant and the Cambodian factory between 2009 and 2010 which referred to 12,120 pieces of garments being sold at 50 cents each.  The defendant could not find the documents of resale at a similar price for the remaining 87,939 pieces.  He also stated the production cost to be US$13.89 and US$12.27 per piece.

101.  The plaintiff has no evidence as to a reasonable resale price.  Accordingly, there was nothing to show that the resale price exceeded the production cost so that the defendant had to pay the plaintiff something.

D4.  The 8 invoices

102.  There is no dispute that the goods under these 8 invoices were delivered and not defective and that these 8 invoices have not been paid.  However, they were covered by the terms of the compromise despite their total value exceeding the LC sum by US$4,721.74.

E.  Whether the defendant was liable under the 2009 invoice?

103.  The defence merely pleaded that the defendant did not admit liability to pay this invoice.  No positive case has been pleaded.

104.  An email from Ms Kwok of the defendant to the plaintiff stated that the defendant had paid for the invoice.  As the merchandiser had left, the defendant did not have record. 

105.  The defendant has not proved payment. It was only at the trial that DW-Cheng first claimed the subject matter of this invoice were fabrics to make up for defective rolls previously delivered and paid for.

106.  The plaintiff has produced the relevant record of delivery.  PW-Tam testified that “補布”stated on the invoice merely meant that fabrics were further delivered when the defendant discovered that those already delivered did not meet its manufacturing needs

107.  In view of the lack of a positive pleaded case and evidence of payment from the defendant, I find that the defendant has failed to discharge the burden of proving that it had already paid this invoice.

CONCLUSION

108.  The defendant fails to prove on balance of probabilities that there were defects in the Fabrics or that they were caused by the plaintiff.  The plaintiff had agreed to the terms set out in Jimmy’s email at the Meeting or, accepted Jimmy’s email by conduct with actual knowledge of the contents. A collateral agreement in the nature of a compromise was reached.  The resale price of garments was so low that it could not cover the costs of production of the defendant. The plaintiff is not entitled to payment for the invoice under the 2nd FPO and the 8 invoices.

109.  I give judgment to the plaintiff in the sum of US$477 for the 2009 invoice with interest thereon at judgment rate from the date of the writ 27 April 2012 to the date of payment.

110.  The sum of US$477 would have fallen within the jurisdiction of the Small Claims Tribunal.  The defendant is in substance the winner in this action.  I make an order nisi that the defendant should have the costs of this action.

111.  I thank Ms Lui and Mr Sung for their thorough preparation and assistance.