LUCKY LINK TRADING LTD. t/a CHONG KAI LEATHER MANUFACTORY v. BANHORS INDUSTRIAL LTD.

1992, No. A 1171

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. The plaintiff company, of which Mr. Cheung Hung Shan has been a director since 1989, manufactures leather goods. In November or December 1990 they were first contacted by the defendant company, of which Mr. Roy Chan Siu Yuen is the proprietor and general manager who trade wholesale in leather handbags under the product name of "Dickens". Discussions took place and the defendants provided sketches of the style of handbags they wished made, together with raw materials, so that samples could be made, and subsequently approved. Orders were then given to the plaintiff from time-to-time, initially in writing, but later verbally or by fax, adopting the same procedure for the different orders and styles of items. The defendant supplied the raw materials, both leather and metalwork such as clasps and decoration, so that the plaintiff charged only for the work of manufacture. Invoices, of which P 41/42 is an example were thereafter raised charging for the different styles of item at the agreed price, but then deducting the value of the raw materials, in this example some 1774 feet of leather used, totalling $35,490 and 365 pieces of metalwork totalling $1095, so arriving at the net invoiced amount due of $15,545. Mr. Cheung explained to me that under the terms of their trading the defendant was allowed 45 to 50 days to pay after receipt of the goods.

2. In November 1991 the plaintiff having first manufactured the goods delivered an invoice 3846 (p. 53) to the defendant apparently totalling $212,420 but which the parties at trial agreed, had the arithmetic been correctly done, should have totalled $225,303. ltem 1 therefor relates to 800 pieces whose correct total was agreed to be $130,383. It is common ground that these goods were ordered and delivered but liability to pay for these 800 items is in dispute between the parties. The remainder of that invoice, correctly totalling $94,920, is not in dispute. Nor are unpaid invoices 3730 ($1749), 3742 ($288), 3790 ($2078), and 3859 ($133,330). These figures are agreed between the parties to total $362,784 (as shown on the agreed document headed Re: HCA NO.A1171 of 1992 helpfully provided to me by both counsel during the trial) but subject to the resolution of the dispute as to the sum of $130,383 on invoice 3846 and to the counterclaim. It is further agreed, as finally shown on the above agreed document as amended, that deductions from these figures to reflect the net cost- value of material supplied by the defendant of $194,165,80 is due, thus making the total claimed by the plaintiff after that deduction to be $168,582.20. These figures with the supporting documentary references to the plaintiff's bundle can be seen in the plaintiff's document handed in as Annex A to Mr. Mak's final submission.

Terms of the Contract

3. The terms pleaded in paragraphs 3(a) and (b) of the Re-re- amended statement of claim are admitted in the defence. It is clear too that the implied terms of merchantable quality and reasonable fitness for the purpose, in the absence of any express exclusion clause, also are applicable. But in issue is whether the printed clause is to be found on the bottom of the plaintiff's invoices, namely.

"Claims will only be accepted within 14 days after delivery" was incorporated in to the contract by the course of dealing between the parties, and, if it did apply, what was meant by "delivery" i.e. whether to the defendant in Hong Kong or to their customer abroad. The evidence revealed, and I accept, that it was known to both parties that in most cases the goods bought by the defendant were for export, and that in the case of the disputed 800 pieces the plaintiff was told they were for the Singapore market, though in fact they were for Taiwan, the defendant lying so as to conceal the identity of the end-purchaser to present the risk of poaching. It was the common intention that the handbags be packed inside cartons, individually wrapped in cotton bags, each placed inside a box; there were some 30 cartons containing the 800 pieces. Consequently I find that the place for examination intended under the contract was at the premises abroad of the sub- buyer, and that "delivery" is to be so understood. Mr. Cheung told me that "normally" the defendant would open a carton to check the quantity of goods supplied and inspect "one or two handbags" to check their quality, and Mr. Chan agreed that had he wished to do so he had the opportunity to inspect at his premises; but in my view the reference to "normally" and the fact that so few were inspected indicates that this was not intended to be the contractual inspection of the entire consignment for quality, for to do so would involve unwrapping each handbag. This was not the intention of the parties. It follows that the plea of waiver and estoppel raised in the amendment to paragraph 5 of the Amended Reply made at trial fails.

4. Moreover I find that the clause limiting claims to within 14 days was not incorporated into the contract. It is contained in non- contractual documents each coming into existence after the individual contract to which they refer. No evidence was given to suggest the term was ever discussed with or drawn to the attention of Mr. Chan or any of the defendant's personnel more senior than the accounts clerk who processed the invoices. No course of previous dealing make them terms of the later contracts.

5. Accordingly I find that under section 36 of the Sale of Goods Ordinance the defendant was not deemed to have accepted the goods until he had a reasonable opportunity after delivery to the sub-purchaser in Taiwan of examining them to ascertain whether they were in-conformity with the contract.

Were the 800 pieces defective?

6. Mr. Cheung Hung-Shan told me that at no time from their delivery on 13/11/91 prior to the start of the action was complaint made to the plaintiff that the bags were defective. He and Mr. Lai Yau-kun each described a visit they made to the defendant's premises to seek payment on 31st January 1992; they described how Mr. Chan sought to hide from them and said that he could not pay them as it was close to Chinese New Year and he was short of money. They said no complaints were made. Mr. Chan Siu Yuan gave very different evidence. He said he complained of the defective goods on the telephone to Mr. Cheung at the end of December 1991 having received a complaint from his customer and that Mr. Cheung was unhappy about the complaint and suggested that the defective goods be returned to the plaintiff, and that in January he contacted Mr. Lai both on the telephone and fact-to- face, whose response was the same. Whilst agreeing that he had met them on 31st January he says there was an angry dispute in which Mr. Cheung and Mr. Lai asked "Are you really not to pay?"

7. On the issue of whether complaint was made I prefer the evidence of Mr. Chan who gave me the impression that he was telling the truth on this issue: I did not believe Mr. Cheung and Mr. Lai when they denied any complaint was made to them in December and January. I take into account also, that on 18th December 1991 the defendant had received Exhibit D16 by fax from their customer stating that "there are great problem with the quantity" (sic) - a misprint for quality - then describing four classes of defect, and stating "we are shocked to the inconceivable poor quality of the goods". As a result further correspondence ensued, and he went to Taiwan and on 10th February 1992 by fax the customer listed the 800 pieces as the rejected goods. The probabilities also favour therefore Mr. Chan contacting his supplier, the plaintiff, as he said he did, after receipt of the complaints from his customer, and after his visit to Taiwan.

8. I accept also the evidence of Mr. Chan that he went to Taiwan, inspected almost 75% of the disputed items, and found a lot of faults. When Mr. Cheung was cross-examined a number of handbags were produced to him in cross-examination (Exhibits D1- 11). He accepted that nearly all the defects pointed out to him on the bags were unacceptable: they covered matters such as loose stitching, nameplate upside-down, stitches too tight crumpling the leather, and scratches on the leather. He did not accept that the goods left his factory in that condition as he had a large quality- control staff, and also he had inspected a few in each style himself at his factory, and suggested only that it was inevitable that a very few in each batch might have defects. He agreed that if, as was put to him, 70% of the bags had defects of the sort shown to him in cross-examination, then "if so consignment not acceptable".

9 Mr. Chan, who produced D1-11, said he had picked them at random out of the returned goods. In Taiwan he had examined nearly 600 of the bags over two days. He told me that the defects listed on the fax D16 were justified, and that he estimated that 100% of the bags were the wrong colour (defect A), defect B, about the zippers were rectified, 20% of the bags had defect C, namely damaged and wrinkled leather caused by incorrect stitching, and 50% had defective stitching, the overlap between C and D being that 40% had both defects.

10 I have carefully considered the above evidence, and the manner in which it was given. I prefer and accept that of Mr. Chan. Moreover its effect is buttressed by the defects to be seen on the bags produced in Court, as accepted by Mr. Cheung, and by the tenor of the correspondence with Cute Leather Products Ltd., in Taiwan.

11. Clearly defects C and D were the fault of the manufacturer. However so far as defect A was concerned it was the defendant who under the contract provided the raw material, so if the wrong colour was provided to the plaintiff, that was the defendant's own responsibility. I accept the evidence of Mr. Cheung that the leather his firm used to manufacture the bags on this occasion was that sent to the plaintiff by the defendant through their sub-contractor. He told me, and I believed him, that no other customer had complained as to the colour, which would have been likely had the plaintiff used some other customer's material by mistake. It is significant also that Mr. Chan said he had not offered to repair the bags for his customer because "they could not be rectified due to wrong colour" and that 100% were the wrong colour.

12. - I find accordingly that so far as the disputed items were concerned, the entire consignment was unacceptable to Cute Leather Limited. So far as fault is concerned, the blame for the 50% with defects C and D lies with the plaintiff, whilst the blame for the remaining 50% that were the wrong colour lies with the defendants. It follows in my judgment that after inspection the defendants were entitled as they did, to reject the 50% of the consignment having unacceptable defects, and the plaintiff is not entitled to claim for their manufacture. So far as the remaining 50% are concerned, the defendant was not entitled to reject solely on the ground of their wrong colour, but must pay for their manufacture. The consequence is that the plaintiff's total claim, which is for $168,582.20, must be reduced by $65,191.50, and, subject to the counterclaim, I give judgment to the plaintiff on their claim for $103,390.70.

Counterclaim

13. The first claim by the defendant is for loss of profits. The situation as I find it is this: the Taiwanese buyer was entitled to and, as Mr. Chan shows, did in fact reject because of the wrong colour of leather: the defendant therefore was left with 800 bags of which 400 had defects being the fault of the plaintiff which made them unacceptable: had the only defect been a wrong colour specification the entire consignment would have been re-saleable at, possibly, some small discount: but the remaining 400 bags with the manufacturer's defects were unsaleable save at some very low price. It follows that the defendant has lost the value of 400 bags.

14. I accept Mr. Chan's evidence that the price Cute Leather would have paid for the entire consignment was US$25,044.80, and after paying the plaintiff's manufacturing charges, the defendant's profit would have been $64,966.44. Consequently, the lost profit chargeable to the plaintiff is half that sum, namely $32,484.22.

15. Exhibit D21 identifies that of the goods returned from Taiwan 280 pieces were sold for in total $55,496. The evidence did not reveal whether these were the colour-faulty bags, or the other defective bags, or some of both. Mr. Chan said the retail sale price of his bags varied between $200 to $700. The wholesale prices in D21 indicate to me that, the probability is that these bags were in fact likely to have the colour-faulty bags. It follows that the defendant does not therefore have to give credit for this amount to the plaintiff in all the circumstances as I have found them.

16. The second limb of the counter-claim was in respect of materials supplied to the plaintiff by the defendant which allegedly have not been returned unused. Unhappily the evidence on this issue was unclear. However the plaintiff conceded liability to pay $17,025 in respect of document D page 94.

17. So far as the other debit notes in issue, which are listed on defendant's Schedule 1 are concerned, the evidence of Mr. Cheung was that items 1,2,3,5,6,7,8,10,11 and 13 were in respect of leather and other materials to make samples. I accept this evidence, and the quantities involved are consistent with that. So far as item 4 was concerned he said this had been paid by set-off on lnvoice 3191 at P page 48. I do not accept this and consequently, the items being conceded to have been received, I conclude the defendant is entitled to $3705 in respect thereof, there being no evidence of payment. ltem 9 Mr. Cheung claimed to be extra raw material, but no evidence was given as to when or where it was used, if at all, and I award therefore $1220 to the defendant. Item 12 Mr. Cheung claimed to have set-off in a debit note, but later it was accepted by the plaintiff that this sum of $17,025 was unpaid (see above).

18. So far as the items relating to samples were concerned I accept the evidence of Mr. Cheung who said "The raw material at D pages 1-2 was to make sample goods prior to the production run. I would return the sample to the defendants and so would not have to pay for the raw materials. I sometimes charged for (making) samples, sometimes not". This evidence accords to my mind with the nature of the commercial relationship and the probabilities. Accordingly the defendant is not entitled to payment in respect thereof. I reject Mr. Chan's evidence to the contrary.

19. It follows that in respect of the items on Schedule 1 the defendant is entitled to be paid $21,950 by the plaintiff. In addition it was accepted that the defendant was entitled in respect of rejected goods DN/1005-92 and DN/1006-92 to be paid $12,134.

The consequence is that in total the counterclaim succeeds in the sum of $66,567.22.

Conclusion

20. The plaintiff succeeds on its claim in the sum of $103,390.70, and the defendant on the counter-claim in the sum of $66,567.22, the balance in the plaintiff's favour being $36,823.48.

Costs

21 Each party has succeeded to some extent. Both have succeeded in part or both claim and counter-claim. But the plaintiff has had to come to Court to recover the undisputed invoices 3730, 3742, 3790, and 3859 and the balance on the disputed claim and counter-claim. I make an order nisi that the plaintiff shall recover the costs of the action, and the defendant the costs of the counter- claim.