NICK GARMENT FACTORY LTD. v. WINDA WINDA LTD. AND OTHERS

1989, No. A1551

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. In this action the plaintiffs claim $634,727.18 against the defendants in respect of the manufacturer by the plaintiffs for the defendant of 1,600 dozen ladies jeans.

   The defendants deny that they ever entered into a contract with the plaintiffs and alleged that in fact they entered into a contract with the 2nd Third Party.

2. There is no dispute that the jeans were in fact manufactured by the plaintiffs at their factory premises. There is no dispute that a contract was made out by the defendants in the name of the plaintiffs. There is no dispute that the defendants paid the plaintiffs a sum of money on account. The argument that leads to the conclusion that the plaintiffs never entered into a contract with the defendants is the sort of argument that brings the law into disrepute in the minds of the ordinary man in the street.

3. The plaintiffs called one witness, namely Mr. Fu who is the Managing Director of the plaintiffs. He told me that he had known the lst Third Party (Law) for some years. In mid-September 1988, Law approached Mr. Fu and told him that he had some contracts from the defendants which were not yet signed. He said that be could not undertake to manufacture all these goods, and he asked Mr. Fu whether the plaintiffs would be prepared to take over one such contract: for ladies suspender jeans. Law said that time constraints prevented him from doing this job, and he wanted Mr. Fu to do it. Mr. Fu expressed interest. but he too said that the time factor was a problem. He doubted that he could manufacture 2, 200 dozen jeans in the time-scale allowed.

4. Law told Mr. Fu to contact the defendants and discuss timing. Mr. Fu. tells me that at the end of September 1988 he rang the defendants, and he says that he spoke to Rita Lai who was a merchandiser with the defendants.

5. At this Juncture a curiosity arises. I am quite satisfied that Mr. Fu was a witness of truth, and I accept his evidence. I am satisfied that he did phone the defendants and did have a discussion with a woman. However, on the evidence I have heard I am equally satisfied that Rita Lai had not commenced employment with the defendants at the end of September 1988, and that Mr. Fu could not have spoken to her. She confirmed this as did 2 other witnesses for the defendants. It is clear that Rita Lai eventually took over supervision of this contract when she did join the defendants, and I am quite satisfied that she and Mr. Fu spoke and met after she joined.

6. Mr. Fu was given every opportunity to change his evidence after he had heard that Rita Lai was not employed by the defendants in September 1988. Nevertheless, he stuck to his guns and did not seek to tailor his recollection with the evidence which he had heard. He is quite convinced that he spoke to Rita Lai at the end of September. I am convinced that he is wrong about that, but I am equally convinced on all the evidence that I have heard that he did speak to someone at that time, and did discuss this contract and its terms. Both Madam Tong, the defendants' controlling shareholder and Brenda Chui were present in September 1988, and both denied that they spoke to Mr. Fu on the 28th of September or thereabout.

7. It seems to me far more likely than not that Mr. Fu spoke to Madam Tong. She appeared to run the business, and both Rita Lai and Brenda Chui (who has since left) were very much under her control. I, therefore, conclude that Mr. Fu did have. a conversation with a woman from the defendants on or about 28th September, and I think it more likely than not that it was with Madam Tong despite her denial. She was clearly concerned to get these jeans manufactured in Hong Kong because she had contracts for sale of these items to a customer in California.

8. The dispute as to this conversation can be better understood when the conversation is recounted. When Mr. Fu rang the woman to whom he spoke, she apparently knew why he was ringing because she had been so informed by Law.

9. As Law had had discussion with Madam Tong this lends some support for the probability that she was the person to whom Mr. Fu actually spoke. All Mr. Fu was interested in was the time for delivery as he was aware of the other details such as price and quantity. Mr. Fu made it clear that he could only do his best and that he could not guarantee the delivery date sought. He was told that this was acceptable because it was better than having no one at all. He had made it clear during this conversation that he was Nick Garment Factory Ltd. Nothing that he said during that conversation could or should have led the defendants to think that there was any legal connection between the plaintiffs and Main Century, save that Mr. Fu and Law were friends and that the introduction clearly came from Law. I do not accept Madam Tong's evidence that after agreeing to make these jeans Mr. Law then said that he would need help and that was when the plaintiffs were first mentioned. I do not accept that Mr. Law said that this was just a question of documents.

10. Mr. Fu made it clear that finances were tight and so it was agreed (and there is no dispute about this in principle) that the defendants would pay for the material and deduct it from the plaintiffs making price in due course. That is in fact what happened. 3 deliveries of fabric were made to Main Century, and 2 to the plaintiffs. The reason why 3 deliveries were made to Main Century was that Law had agreed to assist the plaintiffs by storing some of the material before it was required.

11. At pp. 21/2 of the bundle can be found the defendant's contract made out to the plaintiff for 1,000 dozen jeans. It is dated 9th September 1988. The reference to approval on or before the 15th of September 1988 related only to some samples to confirm styling. Although dated 9th September Mr. Fu says, and I.accept, that he did not get this contract until mid September. At pp.23/4 is a revised contract made out to the plaintiffs whereby the price is reduced to US$8.75 from because the defendants agreed to supply the quota themselves. At p.29 can be found the contract for the second 1,000 dozen jeans.

12. Mr. Fu was shown p.58 which is a document dated 28th September 1988 from the defendants addressed to the fabric supplier, Fai Kee, requesting them to send the first 25,000 yards of fabric to the plaintiffs. However, the address given is that of Main Century. Mr. Fu did not see this document until discovery.

13. There are other documents showing the delivery by the defendants to the plaintiffs of labels (p.83), button moulds (p.100) and buttons (p.106).

14. The plaintiffs started manufacture of these jeans at the beginning of October 1988, and by early November a number had been manufactured and Rita Lai came on the 9th November to inspect the goods. There were some minor problems and so she returned on the 11th of November, and took away 900 dozen and she asked Mr. Fu to hurry up with the rest. He said he would do his best.

15. The defendants returned between the 15th and 19th November and took away a further 900 dozen. So by this time the defendants had accepted delivery of 1,600 dozen out of the total order of 2,200 dozen.

16. In fact the plaintiffs had manufactured 2,350 dozen. 1,600 dozen had been accepted and there was thus a balance of 750 dozen. 446 dozen were still at the plaintiffs' factory. 304 dozen were still at the washing factory which Mr. Fu tells me were specified by the defendants.

17. On 12th November, the plaintiffs sent the defendants an invoice for 900 dozen at US$8.75 per piece which came to US$94,500 (p.148).

On 21st November, the plaintiffs sent the defendants an invoice for 700 dozen at US$8.75 which came to US$73,500 (p.168).

18. At p.218(a) one finds the plaintiffs' account which I set out in full:

"STATEMENT OF ACCOUNT OF WINDA WINDA LIMITED

Re: Ladies' 100% Cotton woven pants

Quantity shipped out 1600 dozen As per out invoice no:

	US$
INV-001/88	94,500.00
INV-1002/88	73,500.00
	US$168,000.00
	HK$
@HK$7.80...................	1,310,400.00

Less: Your Debit Note

	HK$
WDN-5445/88	3,172.50
WDN-5348/88	312.50
WDN-5349/88	8,700.00
WDN-5450/88	1,169.36
WDN-5451/88	43,338.00
WDN-5248/88	19,552.74
WDN-5350/88	21,839.88
WDN-5282/88	188,142.83	286,277.81

Balance amount due to us .. 1,024,172.19

Proceed received on

28/11/88...................	389,455.01
HK	$634,727.18
	========

The cheque for $389,445.01 appears at p.186. All but the last debit note relates to deductions for buttons, labels and moulds which are agreed. The debit note for $188,142.83 is the proper deduction for material supplied, and it relates to the 1,600 dozen which were manufactured and accepted.

One area of dispute which has now arisen, is whether the defendants can debit the plaintiffs for material supplied in relation to the balance of 750 dozen which have not been accepted. The problem is this. When the garments were sent to the washing company specified by the defendants they re-appeared in a discoloured form which made them unacceptable. This fault could lie with the fabric itself or with the washing company. It seems inconceivable that the plaintiffs could have caused it merely by the process of cutting. Madam Tong's suggestion that a piece from each roll ought to have been wash tested was not even put to Mr. Fu. The defendants took the point that this fabric was delivered to the plaintiffs and they are entitled to charge for it. The plaintiffs do not mind paying for it if at the same time, they get paid for the balance of 750 dozen which clearly the defendants are not prepared to do.

In an endeavour to sort out this impasse, a meeting was arranged at the end of October 1988 at the premises of Wing Tai Bleaching & Dying Factory. Madam Tong, Rita Lai and a Mr. Lee attended on behalf of the defendants. Mr. Steven Chan attended on behalf of the fabric supplier, Mr. Tong and Mr. Lam for the laundry company. Also in attendance were Law and his wife. The meeting is pleaded in para. 15A of the amended Defence and Counterclaim. It is alleged that it was agreed by all parties since no precise attribution of some defectively coloured goods could be made the defendants, "the manufacturer'' and the piece goods supplier agreed to share equally the loss sustained by reason of the defective goods."

19. Long after this meeting, the defendants faxed the plaintiffs on the 21st December 1988 with their statement of account which showed that after crediting the plaintiffs with $117,015.00 which resulted from the alleged agreement at the washing factory, and debiting the plaintiffs for all the material supplied there was a sum due to the plaintiffs of $292,955.02.

20. This proposal was never accepted by the plaintiffs. Mr. Fu was not present at the washing factory meeting and he denied, as did Law, that Law had any authority to enter into any agreement on the plaintiffs' behalf. Having heard Mr. Fu and Law as well as Madam Tong, I am quite satisfied that no agreement binding on the plaintiffs was entered into at the washing factory.

21. Paras. 3-5 of the Statement of Claim plead the contractual telephone conversation between the plaintiffs and the defendants on the 28th September 1988. Mr. Fu stated that he made quite clear that the delivery schedule was tight, and he further made it clear that although he would do his best he could not accept liability for any shortfall in the 2,200 dozen on or after 15th November. Mr. Fu's expectation was that any shortfall in the 2,200 would automatically be cancelled. I must make it clear that no evidence was given to support the first sentence in para.8 of the Statement of Claim which dealt with quality. I am quite satisfied that apart from the last point the conversation was as pleaded and as confirmed by Mr. Fu in evidence.

22. As I have made clear I accept Mr. Fu's version of events. I am satisfied that the defendants did agree to accept as many of the jeans as the plaintiffs could manufacture by the latest date acceptable to the defendants' United States buyer. In my judgment, there can be no question of the plaintiffs being' liable for damages in respect of any shortfall in delivery. The defendants claim loss of profits in the sum of $73,000.00 on 600 dozen jeans and $132,000.00 in respect of unused quota for 600 dozen. In my judgment, this Counterclaim has to fail. I should make it clear that the claim for belts and 'others' in the Counterclaim was abandoned.

23. So the outstanding issue is who is to be liable for the cost of the material that went into the 750 dozen jeans? It is important to appreciate that the defendants case is based upon a failure to deliver the balance of 600 dozen (2200-1600) by the agreed date. I am satisfied that it was agreed that the plaintiffs would not be liable for such failure as they had agreed only to make as many as they could. Thus no claim can be made against the plaintiffs for failure to deliver the additional 600 dozen jeans. The material used for the balance would in normal circumstances have been paid for by the plaintiffs by being set off against the making price. Either the material was defective or the laundry factory was negligent. The material was ordered by the defendants and washed at a laundry specified by them. A faint suggestion was made that perhaps the plaintiffs used the wrong material, but I reject that on the evidence I have heard as being quite fanciful. The plaintiffs have not pleaded any term to the effect that they do not have to pay if the material is defective or if the washing was done negligently. Madam Tong mentioned in evidence that the plaintiffs should have ensured that a piece from each roll should have been tested for defects before manufacture. Again this is not pleaded. Also, neither the supplier nor the laundry factory has been made a party to these proceedings.

24. In all the circumstances, I find it impossible to see how the plaintiffs can effectively refuse to pay for the material supplied to them in relation to the balance of jeans manufactured over the 1600 dozen. They agreed to pay for it and they should have joined those responsible for the fact that the goods made up from the material are worthless. In the absence of any pleaded express or implied term in relation to this matter, it seems to me that the plaintiffs must be kept to their bargain however unfair this may be. It is of course open to them to take this matter up with the laundry factory or fabric supplier but I am not concerned with that.

25. In the fax dated 21st December 1988 at p.196, which was about a month after the meeting at the washing factory, Madam Tong recorded an agreement or a proposal whereby the plaintiffs would be credited with $117,015 against the cost of the additional material. However, Mr. Fu has steadfastly denied that Law had any authority to bind him at this meeting and has effect vely refused to accept this ciedit. This is unfortunate but I must deal with the case upon the evidence presented to me.

26. Although I have found that the plaintiffs are not liable for failure to deliver the balance of 600 dozen that is not the same thing as saying that they do not have to pay for the material supplied to them in the absence of any term dealing with the situation that has in fact arisen.

27. As I have made clear, I am quite satisfied that the contract was made between the plaintiffs and the defendants, and that the defendants were not under any misapprehension as to with whom they were contracting. I reject the arguments to the contrary including the one based on agency. In my judgment, the argument that the plaintiffs were never in direct contractual relationship with the defendants should never have been made, and it has only caused this case to be more complicated and expensive.

28. As between plaintiffs and defendants the position is as follows. This plaintiffs' claim is for $634,727.18 from which must be deducted $396,624.00 in respect of the balance of the material price. The result is that there is a balance in the plaintiffs' favour of $238,103.18. There will, therefore, be judgment for the plaintiffs against the defendants for that sum. On this basis, the plaintiff is entitled to possession of the balance of 750 dozen if they so wish and they are entitled to keep whatever they can get from the disposal of these jeans.

29. The plaintiffs claim interest which I propose to award on $238,103.18 at the rate of 2% over prime during the period from the 1st December 1988 until handing down of this judgment. No doubt the parties will agree what this figure should be.

30. I propose to make a costs order nisi in favour of the plaintiffs against the defendants.

31. The defendants Counterclaim against Main Century, based on Main Century being the manufacturer fails as I have found that the contract was between the plaintiffs and the defendants. I am quite satisfied that the defendants knew with whom they were contracting and the terms of such contract were as set out above. Neither Main Century nor Law can be liable in respect of any failure to deliver the balance of 600 dozen jeans on time or at all.

32. I am not satisfied on the evidence that Law was in breach of warranty of authority as alleged or at all. His involvement in this matter was simply as the person to whom the defendants initially turned for the manufacture of these goods. When he decided, for whatever reason, that he would not or could not make the goods he introduced his friend Mr. Fu to the defendants. I am further not satisfied that the defendants have any cause of action against Main Century or Law arising out of anything that happened at the laundry factory. I have awarded the defendants the cost of the material delivered. Although, Madam Tong says that she agreed that Mr. Fu should have the credit of $117,015.00 following the laundry meeting as I have already said Mr. Fu would have none of it, and says that Law was not authorised to agree anything. I have therefore declined to give the plaintiffs credit for this alleged compromise figure. I am not satisfied on the evidence I have heard that any binding agreement was entered into at the laundry meeting. In the light of all that, I fail to see what cause of action the defendants have against Main Century or Law, and I therefore dismiss the Counterclaim against them with a costs order nisi.

33. It follows also that I dismiss the defendants' Counterclaim against the plaintiffs'. As I have already said, there will be judgment for the plaintiffs for $238,103.18 together with interest at the rate of 2% above prime from the 1st December 1988 until the date of handing down this judgment.