CHINA NATIONAL ZHENUA IMPORT AND EXPORT CORPORATION GUANZHOU CO. v. LAW PO FUN t/a ACHIEVER DEVELOPMENT CO.

HCA 2049/1996

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2049 OF 1996

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J U D G M E N T

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1. This is the trial of an action whereby the Plaintiff claims against the Defendant for payment of two lots of goods supplied to the Defendant. The total claim comes to the amount of HK$514,331.09. The Defendant counterclaims and says that in relation to four lots of goods, the Plaintiff ought to be liable to the Defendant.

2. The facts of this case are somewhat unusual which I will try to describe briefly. The Plaintiff is a Chinese National corporation which has a right to export garment overseas and as part of its right, it would gain from the Chinese government a rebate tax of something like 10% of the sale price. Wing Hung is a company in China which manufactures garments but which does not have the right to export garment.

3. The 2nd Defendant, Ms. Lun trading as Achiever Development Company which I will, for the purpose of identification, call the Defendant, is a buyer of garments in its trading activity and the Defendant has previously purchased garment goods from Wing Hung. In the mid-1994, the Defendant and Wing Hung found that they wanted to do business in relation to a number of garment goods and that was how the Plaintiff came into the picture because Wing Hung went to the Plaintiff and asked the Plaintiff to act as seller to the Defendant as buyer in relation to certain goods of garment which were to be manufactured by Wing Hung.

4. There was an important conversation between Ms. Lun of the Defendant and Mr. Tong of the Plaintiff and with Wing Hung, whereby it was agreed that the Defendant would purchase from the Plaintiff but Wing Hung would manufacture the garments and supply them to the Defendant. The Defendant would open the appropriate LC to the Plaintiff for shipment of the goods to the Defendant in Hong Kong, that the quantity of the goods would be subject to the LC quantity and further order by the Defendant to Wing Hung and that Wing Hung alone would be responsible to the Defendant for the quality of the garments and for the timing of the shipments and that the Plaintiff would not have such responsibility. This agreement I would describe in this judgment as the August Agreement. The term of this August Agreement was disputed by the Defendant.

5. It should be observed that this August Agreement is somewhat unusual and the reason for this is that the Plaintiff was really interested in the financial side of the whole arrangement and its profit was, in essence, the tax rebate of the 10% from the Chinese government. This arrangement, therefore, left the dealings in relation to the actual performance of the contract between the Defendant and Wing Hung.

6. Following upon this August Agreement, there came into being the first order and that is the sales contract and its accompanying LC in relation to 7,000 shirts. The sales contract can be seen at p.22 and the LC of that sales contract can be found at p.20. What happened with this sales contract was that the contract was faxed by Ms. Zhao of the Plaintiff to the Defendant which contained in Clause 10, the statement that the quality and timing of shipment are the responsibility of Wing Hung. This document was faxed to the Defendant and the Defendant signed this and faxed it back to the Plaintiff (p.22). The evidence given before the court on this Clause 10 was in conflict because Ms. Zhao on one hand said this was a valid clause and pursuant to August Agreement of the parties whereas Ms. Lun said to the contrary and alleged that the oral conversation between her and the Plaintiff's officers was that the clause was to be of no effect. I will have something more to say about this when I come to assess the credibility of the witnesses and the significance of the August Agreement.

7. The goods under this first order were manufactured by Wing Hung after it received full payment by the Plaintiff. In the course of the manufacture and just before shipment, the goods were inspected and there were inspection certificates of October which showed the goods as having been passed by the Defendant. The goods were duly shipped for Hong Kong on 28th October 1994 and it was a very long time afterwards when questions were raised by the Defendant with the Plaintiff as to the quality. This is the first order.

8. This first order of 5th September was followed quickly by a second order in relation to 10,800 pants and the accompanied LC which is to be found at C.24. There was the sales contract although the copy of which faxed by the Plaintiff to the Defendant was not signed and returned by Defendant. Again, two versions were given. One was given by the Plaintiff with Ms. Zhao giving the reason why she felt it was right for the order to go forward notwithstanding the non-receipt of a signed contract from the Defendant. The other different version was given by Ms. Lun who said she objected to the Wing Hung liability clause in the draft contract and Ms. Zhao accepted that therefore the 2nd order was on basis of deleting the Wing Hung liability clause.

9. The history of that 2nd order in relation to 10,000 pieces of the pants was similar to that of the first order, namely that the Plaintiff made payment to Wing Hung for the order and there were inspections of the goods by the Defendant. There was a reduction of the quantity and eventually some 3,348 pieces were shipped in late December 1994. Again, it would seem that with this order there was no complaint to the Plaintiff until very much later.

10. The 3rd order was for 31,000 T-shirts. That came a little bit later on 21st November 1994. There was the issue of the LC by the Defendant in favour of the Plaintiff and the T-shirts were shipped in two lots. The first lot was at the end of November, some 10,696 pieces and the second lot at the end of 27th December, 16,086 pieces. Again, it was only much later that there was complaint to the Plaintiff about the quality of the goods or shortage.

11. Then there was finally the 4th order, namely 48,400 pieces of shorts. What happened with this order by the Defendant is that the Defendant issued the LC which was received on 3rd January 1995 by the Plaintiff. The Plaintiff's case is that it rejected this order because by that stage in January, the Plaintiff had been chasing for payment in relation to the 2nd order, namely the pants and the 3rd order in relation to the T-shirts, and the Plaintiff said to Wing Hung and the Defendant that it was not interested in the 4th order as it has still been unpaid by the Defendant in relation to the 2nd and 3rd orders. The matter therefore was left on the basis that the Plaintiff refused to accept that order.

12. The history which developed after the rejection of the 4th order was that the Plaintiff by letter dated 24th February chased the Defendant for payment of the goods under the 2nd and 3rd orders. It is interesting to note that in the letter dated 27th February 1995 from the Defendant to the Plaintiff in response to the Plaintiff chasing for the money (p.129), there was no allegation there by the Defendant complaining about defect of the goods or any short delivery of the goods or that the Plaintiff was responsible to the Defendant for damages suffered by the Defendant in relation to the goods. What the Defendant then said was that it needed time to sort out the problem with Wing Hung. Apparently there was later constant chasing by the Plaintiff against the Defendant for the money. Eventually it led to a meeting on 24th August 1995 when the Plaintiff's Mr. Chun came with Mr. Ho of Wing Hung to Hong Kong to talk with Ms. Lun of the Defendant. The discussion was almost exclusively, according to the minutes which was produced to the court, between the Defendant and Wing Hung as to their respective responsibilities and rights or wrongs. The net result of the discussion was that the Defendant did not pay the Plaintiff and I think the matter then took its natural course with the Plaintiff suing the Defendant for the money outstanding.

13. Before I turn to the various issues for consideration, I need first to give my view as to the credibility and value of the evidence given by the three witnesses at the trial. Ms. Zhao was the first witness and gave evidence for the Plaintiff. She described her involvement with the August Agreement, with the orders and the execution and the documentation, and also her various conversations with Ms. Lun. Ms. Zhou is a quiet lady who is intelligent and responsible. She gave her evidence well. She is, in my judgment, a highly reliable and honest witness. I accept her evidence without hesitation.

14. Her evidence was followed by that of Mr. Chun. His involvement was more limited. He was also a witness who did not exaggerate or try to distort his evidence. He is a highly responsible witness and I also accept his evidence.

15. Ms. Lun gave her evidence for the Defendant extensively. She of course laboured under considerable handicap because she was also acting in person and was therefore acting as the spokesperson for the Defendant. She is no doubt an experienced business woman. She had been in the garment business for long time. She knows English. She is highly literate. She was definitely not shy or lacking in assertion of her position. But I do not find her a satisfactory witness. She is evasive, she is obstructive, she is very much alert to how to improve her position by changing her evidence or by producing suddenly documents which had never been disclosed and the authenticity of which are highly suspect. I do not find her an honest or reliable witness. Whenever there is a conflict between her evidence and that of the Plaintiff's witnesses, I prefer the evidence of the Plaintiff's witnesses. I find it very difficult to accept any of the evidence of Ms. Lun.

16. The main issue in this case really boiled down to one very narrow one, the existence of the August Agreement and whether by the August Agreement between the Plaintiff and the Defendant, the normal responsibility of a seller for the quality and the timing of the shipment is varied so that it did not rest with the seller but rested with the manufacturer who supplied it to the buyer. It was an unusual arrangement and I think Mr. Leung of the Plaintiff conceded it was an unusual arrangement. It is something that one does not come across very often in a sales of goods situation.

17. And because it is unusual, I have subjected it to considerable scrutiny and I am convinced that it does and did exist as contended by the Plaintiff. The rationale behind that contractual arrangement is the tripartite relationship whereby the Plaintiff derived the financial benefit of the 10% tax rebate but took no part in the detail of the contractual performance in terms of the quality of the garment and the timing of the shipment. For that the buyer looked directly to Wing Hung and only to Wing Hung. In turn, it would seem to me that the Plaintiff as buyer from Wing Hung also could not look to Wing Hung for responsibility as to the quality of the garment and for the timing of the shipment. These matters were something directly between the Defendant and Wing Hung.

18. This being the case with this contractual arrangement, it seems to me that there is simply no scope for Wing Hung to be acting as agent for the Plaintiff in relation to quality or shipping dates because Wing Hung, being responsible directly to the buyer, was dealing directly with the buyer.

19. I have to confess that the evidence on this is not wholly satisfactory because Mr. Tong did not come to give evidence before me. There is the witness statement of Ms. Zhao on the August Agreement which is supported powerfully by the contemporaneous first contract containing Clause 10, The evidence of Ms. Lun on Clause 10 is that because the box above that under Clause 9 was not crossed therefore she was led to the belief, which she attributed firstly to Ms. Zhao and later when pressed to Mr. Tong, that it was really of no effect. It should be noted that in this connection, her witness statement is very different from her oral evidence. But as I said earlier, I do not accept the evidence of Ms. Lun and on this aspect I find her evidence to be incredible. How could the court accept the evidence of someone who said she believed the other side was sending a fax containing a specially written clause which was agreed to be non operative. The August Agreement was powerfully supported by that first contract whereas I do not accept the evidence of Ms. Lun. I hold therefore that the August Agreement as contended by the Plaintiff has been established. It follows therefore that strictly speaking, this should be the end of the case because the Counterclaim cannot be established in the face of this August Agreement. The Plaintiff must succeed on the claim. However, for the purposes of further elaboration and as much evidence had been given, I will now proceed to consider each of the contracts in turn.

20. The first contract is the first order of 7,000 shirts. The chronology is set out in para.16 of Mr. Leung's skeleton argument. The counterclaim in relation to this is that (1) there was delay and (2) that the goods were defective. So far as delay is concerned, it is only for a few days and as I understand the ultimate buyer had not made any claim against the Defendant for such delay. In any event, I am not satisfied that the Plaintiff knew about the on sale of the goods by the Defendant. So far as defect is concerned, it is I think, common ground that the Defendant had been active in inspecting the goods, in the course of cutting, production and prior to shipment. The inspection report of 26th October at p.C41 shows that the goods had been passed by the Defendant and the Defendant's own inspection certificate which the Defendant had used to obtain payment under the Canadian buyer's LC also shows the shirts as being fine and complying with the contract. I really find no basis to suggest that when the goods were received by the Defendant in Hong Kong that they were seriously defective or not merchantable. A particular shirt alleged to be defective was shown to me exhibit D9, and as far as I am concerned I cannot see why this shirt should be said to me non-merchantable. The problem for the Defendant is that the quality complaint was not raised by the Defendant with the Plaintiff until August 1995 when Mr. Chun came to Hong Kong for the meeting. The goods were sent by the Defendant from Hong Kong to Canada and I have very serious doubt as to genuineness of any of the defects in the goods found in Canada.

21. I now turn to the 2nd order of the 10,000 pants. The material chronology is set out at para.25 of Mr. Leung's skeleton argument. The complaint again is about quality. But the question is whether the 3,348 pieces of pants shipped to Hong Kong were defective or so defective as to be unmerchantable. There had been inspection and the actions of the Defendant speak louder than words. Notwithstanding inspections it accepted them and it took them. There is no survey report or credible evidence produced by the Defendant that there was quality problem with defective pants. She gave various excuses for these inspections not being sufficiently reliable. In this connection, the lack of inspection report is important. The Defendant produces to the court a contract. She said it was made by the Defendant with JTL. It is on the Defendant's own contract form with a signature by purportedly of JTL, a William which looks like a child's signature. But what is, however, more significant is that the contract was dated 3rd December 1996 not 1994, it was supposed to be by LC terms but the Defendant said in fact was not by LC but by TT and it got no shipment date. Now if there had been some contract between the Defendant and JTL and such contract contained the LC term, the LC would have to be produced which it was not. And possibly, the LC would also contain terms of inspection report as the one we have seen in relation to the Canadian LC for the 7,000 shirts. The inspection report if produced might well tell against the Defendant. There was here no inspection report. As I said, there is no persuasive evidence put before me to convince me that there were genuine serious defects with the pants when they arrived in Hong Kong and having regard to my assessment of the credibility of Ms. Lun, I have no doubt that the case of defective goods in relation to the 2nd order has not been made out.

22. I now turn to the 3rd order of 31,000 T-shirts. The claim for the counterclaim in relation to this order is in two parts. The first is that there was a short shipment of 6,000 T-shirts and secondly it is said that the goods shipped were defective. The chronology of this order is set out in para.32 of Mr. Leung skeleton argument. So far as the short shipment is concerned, I can dispose it very quickly. There was no contemporaneous complaint at all about the short shipment. It will be noted that in the correspondence that this was not mentioned. The first time, I believe it was raised was probably at the August 1995 meeting. There was no evidence or report or packing lists or any contemporaneous complaint as to justify this alleged short shipment of 6,000 pieces. So I find this allegation not established. In so far as the defect is concerned, the same factors that cause me to conclude that the goods of the other orders were not defective also apply here. I note that here the Defendant also relies on a suspicious contract with JTL, this at C.52. It suffers from the same defect of unreliability as I had indicated earlier in relation to the other sales contract of the pants with JTL. I have also been shown a number of the T-shirts in the same way as I have also been shown a pair of pants in relation to the pants order. I can only conclude that in my view, they are not unmerchantable: they may have minor defects but they are certainly not such as to cause any substantial loss. I am not however persuaded that the exhibits produced to me are the garments made by Wing Hung the manufacturer or are the goods under the orders in questions. It follows therefore that I also reject the counterclaim in relation to the T-shirts.

23. Finally, in respect of the shorts, the matter is a very simple one. By January the goods had not been paid for under the orders and the Plaintiff simply said "No I don't want to accept the order" and I see no reason why the Defendant is entitled to complain. I, therefore, also reject this counterclaim.

24. The conclusion I reach is that the Plaintiff's claim for the money outstanding under the two orders for the pants and for the T shirts succeeds. I therefore enter judgment in favour of Plaintiff in the sum of HK$514,331.09 with interest thereon at 2% above prime from 16th February 1996 until today. The counterclaim of the Defendant as summarised in the prayers at p.45 in the bundle must be dismissed. The Plaintiff is entitled to the costs of the Action and of the Counterclaim.