MAYCAS GARMENT MANUFACTURER v. ARIES INVESTMENT LTD AND OTHERS

1988, No.A6514

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D G M E N T

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1. This is an action for damages by the plaintiff against the defendants for breach of contract in respect of four contracts entered into in 1988 between the plaintiff and the 2nd defendant for the sale of men's jeans and boys' pants. Six contracts were originally sued upon but two have been settled. The four contracts in issue will be referred to as the 3rd, 4th, 5th and 6th contracts.

Background

2. Mr  Lam Kwok-hing is the sole proprietor of the plaintiff Maycas Garments Manufacturer which specialises in the manufacture of jeans, pants and other garments. Mr. Leon Spiegel is the President of the 3rd defendant, House of Nations Limited, a company incorporated in New York. He also controls two associate companies, Aries. Investment Limited, the 1st defendant, and Wide World Exports Limited, the 2nd defendant, which are both incorporated in Hong Kong. The 1st defendant owns the quota for the purpose of export to the United States while the 2nd defendant acts as the buying agent in Hong Kong for the 3rd defendant.

3. Both Mr Lam and Mr Spiegel have considerable experience in the garment industry and from about 1970 until 1988, the plaintiff carried out a large number of contracts for the manufacture and sale to the defendants of garments, the material for which was supplied by the 1st defendant. During this period, the relationship between the parties was satisfactory except for one occasion when a dispute resulted in litigation. However, that action was eventually settled.

4. It is common ground that Mr Spiegel is responsible for all major decisions on behalf of the defendants including price, alterations to be made to the specifications and to extensions of time for delivery. However, as Mr. Spiegel spends a great part of his time in the United States, Miss Loretta Cheung acts on his behalf in Hong Kong as the manageress for the 1st and 2nd defendants. Although it was the practice for Mr. Lam to deal with Miss Cheung and other members of the staff of the 1st and 2nd defendants, he knew that all important matters had to be referred to Mr. Spiegel for approval. Likewise, apart from the delegation of production to his wife, Mr. Lam dealt with all major decisions on behalf of the plaintiff.

Conditions of the Contracts

5. The conditions of each contract are the same and are printed on the reverse side of the printed purchase order forms prepared by the 2nd defendant. In the contracts, the 1st defendant is described as the exporter and the 2nd defendant as the buying agent on behalf of the 3rd defendant.

6. The following conditions in the contracts are relevant:-

1. DELIVERY

(a)     The Sellers shall deliver the goods within the time limited by the contract and in this respect time shall be of the essence of the contract. The Buyers are buying the goods for shipment to buyers overseas, so that late delivery may involve the Buyer in a breach of contract with their overseas buyers. Late delivery on any given month where multiple deliveries are contracted with permit cancellation of balance of contract at Buyers option without prejudice to their rights against Sellers failure to deliver on time. This Contract shall be governed by the laws of Hong Kong.

(b)    If the buyers extend the delivery date, time shall still be of the essence of the Contract; and if the Sellers fail to deliver the goods by the date to which the time is so extended by the Buyers the Buyers shall be entitled to reject the goods. Delivery date means on board no later than contracted delivery date.

7.    No alteration or cancellation of part or the whole of this Contract shall be valid unless agreed in writing by the parties hereto. Agreement in writing must be signed by Mr L. Spiegel or Mr Frankie Lau or Mr Tong.

9.    No merchandise may be sub-contracted or manufactured in any other factory, other than the sellers without written approval by the buyers. Buyers may cancel contract if this policy is not adhered to.

10.    In the event the materials are supplied from which the garments, the subject matter of this contract, are to be made the seller shall make payment for the said piecegoods to the supplier at such time as the seller's commercial invoice is negotiated against the buyer's letter of credit, such payment to be in such a manner as the buyer shall notify to the seller. Provided that should the seller fail to carry out his obligations under this contract and should the buyer, as a result, lawfully cancel this contract with the result that the aforesaid commercial invoice is not delivered to the buyer, payment for the piecegoods will be, deemed to have been due as at.the date of delivery of the said piecegoods to the seller.

12.     The terms and conditions of the contract must be strictly observed by the seller. Notwithstanding any indulgence granted by the buyer to the seller in the performance of the contract such indulgence is not to be construed as variation or waiver of the terms and conditions of the contract.

13.     If the goods delivered by the seller are rejected by the buyer or the buyer's overseas. principal by reason of breach of contract of  the seller, the buying agent is entitled to recover from the seller the commission it would otherwise received from its overseas principal if the goods were accepted. The commission is based on the present agreement with its buyer of the F.O.B. invoice costs of the goods to be shipped or shipped by the buyer in accordance with the order of the overseas principal."

The Issues

7. In respect of the 6th contract, the defendants placed reliance upon condition 9 of the contract that the plaintiff had, without the approval of the defendants, sub-contracted the manufacturing of the goods or part of the goods. However this allegation was withdrawn by the defendants at the hearing.

8. The issue in this case is therefore restricted to whether the defendants were entitled to repudiate the contracts on the grounds of late shipment by the plaintiff.

9. The 3rd and 4th contracts for 180 dozen and 240 dozen boys' canvas pants were entered into on the 25th April 1988 with a delivery date fixed for the 30th June 1988. The 6th contract for 900 dozen boys' canvas pants was entered into on the 6th April 1988 with a delivery date for the 15th June 1988. The 5th contract for 2,470 dozen men's jeans was entered into on the 20th May 1988 with a delivery date for the 30th July 1988.

10. In respect of each contract, the plaintiff alleges that the original specifications were altered by the 2nd defendant which affected the plaintiff's manufacturing schedule that caused delay and resulted in extensions of time being granted by the 2nd defendant for delivery. However, the contracts were subsequently cancelled by the 2nd defendant for which the plaintiff claims damages. The plaintiff was informed by the 2nd defendant's fax of the 28th June 1988 that the 3rd, 4th and 5th contracts were cancelled.

11. By the defence, it is alleged that the plaintiff in each case informed the 2nd defendant that it would be unable to make delivery on the agreed dates. This resulted in the cancellation of the 3rd, 4th and 6th contracts by the 2nd defendant while the 5th contract was cancelled by mutual agreement. There is a counterclaim by the defendants for loss of commission and loss of profit arising from the cancellation of the contracts.

Evidence for the Plaintiff

12. Mr Lam gave evidence that in previous dealings with the defendants, condition 7 of the contracts that provides for no alteration or cancellation to be made unless agreed in writing signed by Mr Spiegel, Mr Lau or Mr Tong, was ignored in practice. He said that he would comply with instructions given to him by the 2nd defendant to change specifications even if the agreement was not in writing. He claimed that the response of the defendants with regard to previous dealings when changes were made to ecifications was merely to request the plaintiff to arrange another shipment so that the plaintiff could continue production. At no time, according to Mr Lam, did the defendants say they would not take delivery.

13. An extension of time for delivery for the 3rd, 4th and 6th contracts was granted by the 2nd defendant to the plaintiff in a fax dated the 25th June 1988.

14. With regard to the 3rd contract, Mr Lam said problems arose during mass production for the front and back rise did not match the garment as the zipper was too short whilst the shape of the pocket and belt loop were not correct. By the fax of the 25th June 1988, details of the alterations to the specifications are set out while the delivery date was extended to the 12th July 1988. Mr Lam agreed that he requested changes to be made in the specifications and conceded that the contract was running late. Nevertheless, he denied that he had been told on the 24th June 1988 that the extension for delivery to the 12th July was granted on condition that US$3.00 per dozen was to be deducted from the contract price. He went on to say that if such a request had been made, he would have agreed to the reduction as Mr Spiegel was a good friend. The 3rd contract was cancelled by the 2nd defendant by a telex to the plaintiff dated the 28th June, 1988. The goods relating to this contract are still in the possession of the plaintiff.

15. The delivery date for the 4th contract was extended until the 15th July 1988 and was cancelled by the 2nd defendant's telex of the 28th June 1988. None of the goods in respect of this contract were manufactured by the plaintiff, but the material has been returned to the 2nd defendant although according to Mr Lam, it was not done so willingly. Mr Lam also admitted that this contract was running late and that he had been informed by miss Cheung on the 28th June before he received the telex that a reduction of US$3 was required for this contract in consideration of the extension.

16. An extension of time for delivery in respect of the 6th contract was granted to the 3rd July 1988 which arose as a result of a delay caused by washing the material. However, by the telex of the 28th June 1988 Mr Lam claimed that a further extension was granted for three days until the 6th July 1988 which was described as the latest date for which the goods could be accepted. Mr Lam stated that by the 6th July 1988, part of the goods had been completed to all stages and that they were finally finished on the 8th July 1988 when a final inspection of the goods by a quality controller employed by the 1st defendant was made. This contract was extended because the defendants required an alteration to the front pocket. The plaintiff was allowed to continue with the manufacture of these goods and the extension to the 6th July was granted with this in mind. Mr Lam contends that by virtue of the inspection on the 8th July 1988, the defendants had waived any right to reject the goods under the 6th contract.

17. With regard to the 5th contract, Mr Lam states that the delivery date was varied by a memorandum from the 1st defendant of the 20th June 1988 whereby the original date, the 30th July 1988, was retained for delivery of part of the goods totalling 1,270 dozen, but the date for the remaining 1,200 dozen was changed to the 10th August 1988. By a fax dated the 24th June 1988 from the 2nd defendant, the plaintiff was requested to change the shape of the back pocket. However, the telex of the 28th June 1988 purported to cancel the 5th contract which was subsequently confirmed by a cancellation notice of the 11th July 1988. Manufacture in respect of the 5th contract was not started by the plaintiff while the piece goods have been returned to the defendants.

18. With regard to the reduction in price for the 3rd and 4th contracts referred to by Miss Cheung, Mr Lam says that he saw Mr Spiegel when he came to Hong Kong in July 1988 when the proposed reduction was confirmed. Mr Lam was not prepared to agree, but eventually said that he would consider the matter. Nothing further happened until Mr Lam received a letter from Mr Spiegel dated the 18th August 1988. This letter reads as follows :-

"Dear Mr Lam,

We agreed to accept the cancelled goods S 16588 180 DZ providing you reduce the price by 6 dollars per dozen.

However be aware that if the goods are not shipped by August 30th, 1988 then we would require 12 dollars per dozen discount and the deadline shipment must be September 15th, 1988 or we will sue for damages.

This proposal if not accepted within 24 hours will be null and void.

Very truly yours,

(Sd. Leon Spiegel) President"

 

Mr Lam did not accept this offer and did not reply to the letter.

19. It is significant that all the correspondence in this case emanated from the defendants apart from one fax from the plaintiff. Mr Lam explained that he always communicated with_.the defendants by way of telephone as he does not regard his English as sufficiently good to communicate in writing.

20. Mrs Lam testified that the plaintiff produced a sample for approval with regard to the 6th contract that required a slanting pocket upon which production was commenced, but later the defendants required the pocket to be changed to a curved or J-shape pocket. She claimed that the goods were completed by the 8th July 1988 when they were rejected by the defendants.

21. Mrs Lam corroborated Mr Lam's evidence with regard to the changes in the specifications that were required for the 3rd and 4th contracts. She states that before the 28th June 1988, she had spoken to Miss Cheung who mentioned that a reduction in price was required for the 3rd and 4th contracts in the sum of US$3 per dozen, but that she did not refer to any extension of time. She did not inform Mr Lam about her conversation with Miss Cheung concerning the reduction in the price.

Evidence for the Defendants

22. Both Miss Cheung and Mr Spiegel gave evidence for the defendants.

23. Miss Cheung said that Mr Lam informed her that there was a problem with the specifications for the 3rd contract as the size of the front and back rise was incorrect as it did not match the size of the zipper. As a result, Miss Cheung informed Mr Spiegel and upon receiving his instructions confirmed in a fax to the plaintiff of the 20th June 1988 that the specifications suggested by the plaintiff were in order, but requested to be informed whether the shipment was still on time. Mr Lam replied by telephone requesting an extension to the 15th July 1988 for the 3rd and 4th contracts. Miss Cheung informed Mr Lam that a reduction in price of US$3 per dozen was required for the 3rd and 4th contracts on the 24th June 1988 as a condition for the extension. Upon being told of the US$3 reduction, Miss Cheung claimed that Mr Lam understood the position and said that he wanted to discuss the matter with Mr Spiegel.

24. In respect of the 5th contract, the sample provided by the plaintiff was incorrect so that the plaintiff was asked to amend his records. However, due to delay that arose with regard to the 3rd, 4th and 6th contracts, the defendants did not have confidence that the plaintiff would complete the 5th contract. This led to the cancellation of the contract by mutual agreement and for the return of the piece goods. Miss Cheung states that no complaint was made by the plaintiff with regard to the cancellation nor to the return of the piece goods.

25. The goods relating to the 5th contract were passed to another manufacturer at the same price agreed with the plaintiff but the goods in respect of the 4th contract were transferred to another manufacturer at a higher price.

26. Mr Spiegel emphasised, and it was not disputed by Mr Lam, that time was of the essence of the contracts and in particular, the goods for the boys' pants were required for the back-to-school season in the United States at the beginning of the new year. Mr Spiegel testified that at the meeting that he had with Mr Lam which he said took place on the 21st July 1988 Mr Lam requested him to take the goods that had been cancelled and put forward a revised shipping schedule, taking into account the reduction per dozen if the goods were to be taken back. He confirmed that the terms that were proposed at the meeting were set out in the letter of the 18th August 1988 to which I have already referred.

27. It is not in dispute that no discussion took place about the 5th contract at this meeting.

Conclusions

28. Where the evidence conflicted, I have no hesitation in accepting that of Mr Spiegel and Miss Cheung and reject that of Mr and Mrs Lam. Apart from the viva voce evidence, the documentary evidence did not support the plaintiff's testimony.

29. Time was clearly of the essence of the contracts and on numerous occasions this was impressed upon Mr Lam both orally and in the documentary evidence that was produced. Mr Lam was clearly aware that the time for delivery under the contracts was of the essence and stated frankly that when he agreed to a delivery date, he had taken into account all contingencies that may occur such as machines breaking down, workers being absent due to illness and other factors. Although a great deal of time during the trial was taken up as to whether the plaintiff or the defendants were responsible for the incorrect pecifications, and the shape of the pockets, it does not in any event matter, for at the end of the day, the issue to be determined is whether the delay in delivery justified the cancellation by the defendants of the contracts. However, on the documentary evidence and the evidence of the defendants' witnesses, I am satisfied that the defendants' version is correct. I therefore find as a fact that the problems that arose were due to the plaintiff's failure to carry out the defendants' instructions. Indeed Mr Lam admitted that he was running behind time for the 3rd and 4th contracts, and I accept the defendants' evidence that the goods could not have been completed by the time prescribed in the contracts so that the defendants were justified in cancelling them. Although the defendants were prepared to extend the time for delivery, I am quite satisfied and find that it was to be on condition for a reduction in the price. Mr Lam never accepted this reduction nor did he respond to the letter from the defendants of the 18th August 1988. I am also sure that he was well aware of the increase suggested at the time when Miss Cheung had spoken to his wife. Accordingly, I find that the plaintiff was in breach of the 3rd and 4th contracts.

30. The plaintiff also failed to complete the goods for the 6th contract by the time prescribed in the contract and Mr Lam has admitted that the goods were not ready on the 6th July 1988 following the variation made in the date. The contention that the final inspection by the defendants on the 8th July 1988 amounted to a waiver was without foundation. I accept the evidence of the defendants' witnesses that it was necessary for an inspection to take place for the goods were the property of the 2nd defendant and the 2nd defendant had to inspect them to ascertain their condition. I therefore find that the plaintiff was in breach of the 6th contract.

31. The defendants' concern about the 5th contract arose following the delays concerning the other contracts. Mr Lam accepts that he did not discuss the 5th contract with Mr Spiegel at the meeting in July 1988. Whether or not the meeting was held on the 21st July 1988 as stated by Mr Spiegel or earlier, according to the evidence of Mr Lam, is immaterial. However, I am satisfied on the evidence that Mr Spiegel was right with regard to the date. I also accept that Mr Lam agreed, albeit with some reluctance, to return the piece goods to the defendants. I therefore find that the 5th contract was cancelled by mutual agreement.

32. Finally, I do not accept the evidence for the plaintiff that condition 7 in the conditions of contract was ignored in previous dealings with the parties.

33. Accordingly, the plaintiff's claim will be dismissed and there will be judgment for the defendants.

34. I will hear the parties upon the defendants' counterclaim for damages and costs.