DAEDALUS BLU LTD. v. LESHONS ENTERPRISES LTD.

1993, No. C.L. 155

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

COMMERCIAL LIST

____________

__________________

J U D G M E N T

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1. The Plaintiff who is a buyer of garments entered into a contract with the Defendant for the manufacture of anoraks and vests.

2. It is common ground between the parties that the original terms of the contract are as recorded in the Defendants sales confirmation dated the 13th May 1993. The Defendant was aware that the goods had to be shipped to Italy for sale there by the Plaintiff's purchaser and that the goods were to be in accordance with specification which had been given. The goods were to be shipped by the 26th July 1993.

3. It is also agreed that delays occurred in the manufacture of the goods and that the terms of the contract between the parties were amended to reflect the changed circumstances.

4. Put simply when it became apparent that it would not be possible to ship the goods on the 26th July it was agreed that time should be extended on the basis that the goods would be air freighted to Italy and that the additional cost of this would be defrayed by the Defendant.

5. There was some issue between the parties as to the extent of the extension of time. The Plaintiff claimed that the extension was to early August whereas the Defendant claimed that it should be the middle of August.

6. It is the Plaintiff's case that the garments which were manufactured by a sub-contractor of the Defendant were of defective quality and when it became apparent that the defects could not be made good within a reasonable period of time they accepted the Defendant's repudiatory breach of contract.

7. Put shortly the Defendant's case is that the reason for the problem which had arisen was that the Plaintiff had failed to open a letter of credit within a reasonable period of time.

8. There was no specific stipulation in the contract providing for the date for the opening of a letter of credit. The Defendants argued that business efficacy dictated that a letter of credit should be issued at least 10 days prior to the shipment and the payment thereunder should be made within 10 days after the shipment.

9. The Plaintiffs agreed that the opening of a letter of credit must be implied under the contract but they contended that the relevant periods should be 4 days not 10 days.

10. They went on to contend that in the circumstances of the present case it was immaterial whether it was 4 days or 10 days as it was manifest that the Defendant was unable to comply with the terms which were orally agreed between the parties as they had never been in a position to ship goods of a reasonable quality.

11. The Plaintiff claimed the profit they would have made had the contract been satisfactorily performed and a declaration that they were entitled to an indemnity from any claim made by Fashion Box for losses occasioned by them as a consequence of the Defendants breach of contract.

12. The only witness to give evidence for the Plaintiff was Mr. Pozzi its Managing Director.

13. He gave evidence of the back ground I have above described. He also referred to the 3 occasions when he had attended to inspect the garments. On the 1st occasion this had been in China. He had been very concerned about the poor quality of the workmanship. He had also inspected the goods in Hong Kong at premises of Lai Wing a sub-contractor of Prime International an Associate Company of the Defendant in early August. He had at that time been prepared to extend the date for the shipment of the garments so as to enable the necessary remedial work to be undertaken.

14. When he attended at Lai Wing's premises on the 10th August it was apparent that no satisfactory steps had been undertaken to remedy the serious defects and it was at this time that he realized that the Defendant would be unable to fulfil its contractual obligations. He had then attempted to put forward an alternative proposal to the Defendant. What he had proposed was that there should be part shipments on a consignment basis and that payment thereunder should only be affected by his buyer in Italy Fashion Box after inspection of the goods. These negotiations did not lead anywhere.

15. Mr. Pozzi was cross-examined at some length by the Mr. Fung for the Defendant. His evidence was never seriously shaken. He insisted that he had kept open the option of extending the letter of credit which had been opened by Fashion Box but implicit in this was the requirement that he would need to be satisfied that the quality of goods was acceptable prior to shipment and that an Export Licence had been issued by the Hong Kong authorities.

16. The question of the licence had been a matter of concern to him because when he had conducted the inspection in China he had observed that labels had been attached to the goods indicating that they had been manufactured in Hong Kong.

17. The whole question of the completion of the modified arrangements with the letter of credit were dependant upon the goods being ready for shipment on an agreed dated and being of satisfactory quality and having an Export Licence which would enable the Italian Authorities to issue an Import Licence.

18. Mr. Pozzi was an excellent witness and in all important respects his evidence was in conformity with the contemporaneous documentation. I accepted him as being a truthful and reliable witness.

19. Mr. Luk was the 1st witness to give evidence for the Defendant. He is a Director of Prime International Ltd. who according to him was a joint venture Company with the Defendant. He claimed that the Defendant would be responsible for financial arrangements in the present case and Prime would be responsible for production.

20. Mr. Luk was cross-examined on the manufacture of the garments which were the subject matter of this Litigation. He claimed not to know the extent to which manufacturing operations had been conducted in Chain. He said that he thought that the raw materials had been sourced from Korea and had found their way to China. He also thought that the garments had been assembled in Hong Kong. Besides this he seemed to have very little recollection concerning manufacture. All he was prepared to state with any measure of certainty was that he had inspected the garments in early August and that in his opinion they were in conformity with contractual requirements.

21. The main thrust that Mr. Luk's evidence was that the reason for the non fulfilment of the contract was the failure of the Plaintiff to provide the letter of credit for the payment of the goods.

22. Mr. Harris for the Plaintiff took him through the relevant correspondence which had been exchanged between the parties which seemed to strongly support the Plaintiff's contention that the reason why the letter of credit had not been amended to provide for a later shipment of the goods was the failure of the Defendant to comply with the new conditions which the Plaintiff had proposed to safe guard their interests. In particular his attention was drawn to the Plaintiff's fax dated 27th July.

"DAEDALUS BLU LIMITED

Tel: 5655255   Telex: 51744   DILHK Fax: 5165550

FACSIMILE MESSAGE

TO: LESHONS ENTERPRISES	FAX TO: 7961136
ATTN: MR JOHNNY HON	C.C. MS EDITH SO
FROM: MARIO POZZI	YR REF:
DATE: JULY 27, 1993	OUR REF: 07126

NO. OF PAGE INCLUDING COVERING PAGE: 1

If this message is not received properly, please let us know.

___________________________________________________

Re: "879" & 881" Bulk Shipment

(1) Re Export Licence

We are very annoyed by your way of handling the Export Licence. Italy will be on holiday for the whole month of August and buyer need to apply for the Import Licence in advance. Then if your Licence can only be ready on July/29 afternoon, how our buyer can get the Export Licence in time to apply for the Import documents? Then if the goods will arrive in Italy and there is not Import Licence they will stay at forwarder's wharehouse. Who will be responsible for this extra cost? Leshons? Please try to push for the Export Licence for tomorrow latest, so we can give to Isa to handcarry to Italy.

(2) Re Delay of the Bulk Shipment

As the shipment will be delayed again to Early August, please confirm by return fax that you will bear the airfreight cost. (Buyer's preference is to use Avandero as forwarding agent, but if by any chance you want to change and use other agent, please make sure that when the goods will arrive in Italy, Avandero would have no problem in receiving and clearing the goods or you will have to be responsible for the consequences.)

(3) Re Way of Setting Payment after L/C Expire

We will need all the above to be settled first before to discuss this point, but we will honour all the term if the goods will be acceptable and there will be not any cancellation due to your poor performances.

Regards,

Mario Pozzi"

23. Mr. Luk said that he had not seen this Fax until the commencement of the present litigation.

24. It is quite clear from the correspondence taken as a whole that the reason for the withholding of the amendment of the letter of credit was the inability of the Defendants to supply goods conforming to contractual terms within the specified time and extensions to it or to obtain the issuance of an Export Licence which would enable the Italian Authorities to issue an Import Licence.

25. Another aspect of Mr. Luk's evidence which was not very satisfactory was his evidence concerning the issuance of the Export Licence.

26. The copy documents in this respect had only been made available shortly before the trial. The explanation given for this by Mr. Luk was that his company had changed offices and personnel and all documents had been lost. He had contacted ex-colleagues and the only documents he had been able to retrieve were the copy licences which had been produced to the Court.

27. He said that the reason for the reference to ladies items of clothing was that the Trade Department had insisted upon this description. None of this could be taken to a conclusion as Mr. Fung decided that the interests of the defence case would not be best served by putting the witness subpoenaed from the Trade Department in the witness Box.

28. Mr. Harris took Mr. Luk through the conditions which have to be complied with before a licence will be issued.

29. Mr. Luk said that a firm belonging to one of his associates Rare Species would be providing the necessary quota. It was quite clear from the answers given to the questions which were put to him that Rare Species was unable to comply with the conditions which were imposed.

30. Mr. Luk tried to surmount this problem by claiming that Rare Species had a further role in that they were required to undertake the shipping or air freighting arrangements. He said that Prime had entered into a contract with Rare Species on this but that he did not have copies of any documentation evidencing in this.

31. I regret that I obtained a poor impression of Mr. Luk as a witness. His evidence was not convincing and was definitely at variance in many respects of matters clearly established in the correspondence.

32. This next witness to give evidence was Mr. Johnny Hon, a Director of the Defendant.

33. His approach to the case was a comparatively simple one. He claimed that his participation was minimal. All was he would get would be a commission of 5% of the purchase price. In effect he assumed the role of introducing Mr. Pozzi to his friend Mr. Victor Luk. This being the case he had very little contact with what had transpired. He had delegated all of his responsibilities to his assistant Edith So and it was she who liaised with Mr. Pozzi and Mr. Luk.

34. For example, he claimed that he did not even know where the garments were being manufactured. He did, however, repeat on several occasions that his main concern was that no goods should be shipped unless a letter of credit was in hand so that the Defendant's interests were secured.

35. He also attempted to distance himself from the correspondence which had been exchanged between the Plaintiff and the Defendant.

36. His evidence in this respect was not altogether convincing. A good example of his involvement can be seen from the letters written by Edith So on the subject of "Submarining". This is the colloquial term used to describe the practice of smuggling goods manufactured in China to Hong Kong and then representing that they have been manufactured in Hong Kong.

37. Mr. Hon was invited to comment on the two different versions of Edith So's faxes of the 22nd May 1993 to the Plaintiff. The version in the Plaintiffs bundle of documents read as follows:-

"FAX NO. 852-7961136

TO: DAEDALUS BLU LIMITED

ATTN: MS. ISA WIEGAND & MR. MARIO POZZI

FAX: (852) 5165550

TELEFAX NO. 305/221	Page: -1- of -1-pages
FROM: EDITH SO	DIV.: GARMENT	cc. JH/JL/ES

Date: 22nd MAY, 1993

_____________________________________________________

DEAR ISA & MR. MARIO,

Re: 879 & 881

- Lab Dips/Care Label/Flag Tag have been approved as per your fax stated yesterdays.

- Padding - 40gm approved as the swatch which I sent on yesterday. Fabric Finishing - approved as the swatch which I sent on 12/5/93.

(i.e.) 210T+210T/Navy+Navy

Fabric Quality - confirmed as 210T+190T.

Re: Mr. Mario's Fax on 21/5/93

- Please refer to your Shirley & Isa since we have clarify all the necessary points regarding this order.

- We would like to clarify that PRIME is not black-listed by the Trade Dept. and they have just only in a recent shipment being investigated by Trade Dept. for a whole day because they cannot submit supporting document for pt. 1 out of the 6 conditions set by the Trade Dept. Therefore, we need the consignee/agent to apply the Agent Letter so as to avoid any unwanted trouble.

- The Agent Letter is the only accepted document which is issued by the Trade Dept.

- In the above mentioned case, PRIME has just being investigated for a whole day and the shipment has already been shipped to the consignee in last month.

- We all (LESHONS/PRIME/FACTORY) have operated on this "submarine" basis for more than 3 years and no problems has been created except for that whole day investigation. Please understand the situation and open the L/C immediately.

- On the other hand, your 1st P/C is wrong for quantity. Our S/C will copy to PRIME, the reason why we need your L/C & P/C opened to PRIME is because of Trade Dept's restriction. Kindly sign back our S/C and open the L/C, P/C to PRIME then send to us at soonest.

Best regards,

Edith

c.c. PRIME"

The version in the Defendants bundle read:-

"FAX NO. 852-7961136

TO: DAEDALUS BLU LIMITED

ATTN: MS. ISA WIEGAND & MR. MARIO POZZI

FAX: (852) 5165550

TELEFAX NO. 305/221	Page: -1- of -1- pages
FROM: EDITH SO	DIV.: GARMENT	cc. JH/JL/ES

Date: 22nd MAY, 1993

__________________________________________

DEAR ISA & MR. MARIO,

Re: 879 & 881

- Lab Dips/Care Label/Flag Tag have been approved as per your fax stated yesterdays.

- Padding - 40gm approved as the swatch which I sent on yesterday. Fabric Finishing - approved as the swatch which I sent on 12/5/93.

(i.e.) 210T+210T/Navy+Navy

Fabric Quality - confirmed as 210T+190T.

Re: Mr. Mario's Fax on 21/5/93

- Please refer to your Shirley & Isa since we have clarify all the necessary points regarding this order.

- We would like to clarify that PRIME is not black-listed by the Trade Dept. and they have just only in a recent shipment being investigated by Trade Dept. for a whole day because they cannot submit supporting document for pt. 1 out of the 6 conditions set by the Trade Dept. Therefore, we need the consignee/agent to apply the Agent Letter so as to avoid any unwanted trouble.

- The Agent Letter is the only accepted document which is issued by the Trade Dept.

- In the above mentioned case, PRIME has just being investigated for a whole day and the shipment has already been shipped to the consignee in last month.

- On the other hand, your 1st P/C is wrong for quantity. Our S/C will copy to PRIME, the reason why we need your L/C & P/C opened to PRIME is because of Trade Dept's restriction. Kindly sign back our S/C and open the L/C, P/C to PRIME then send to us at soonest.

Best regards,

Edith

c.c. PRIME"

38. Mr. Hon agreed that he had seen the first version. He had had a discussion with Edith So who had told him that she had been misled by Mr. Pozzi and that was why she had referred to "Submarining". She had then on her own initiative sent the second version with the intention of superseding the first fax. This does not seem to me to be a very convincing explanation. What seems much more likely is that Mr. Hon in fact assumed a much higher profile than he was prepared to admit and that when he saw the first version he would have required Edith So to attempt to retrieve the situation in as much as this was possible.

39. In any event Mr. Hon was forced to accept that paragraph 11 of his statement which was in this form:

"By a fax dated 28th July 1993 from the Defendant to the Plaintiff, I suggested to the Plaintiff that if the Plaintiff intended to ask the Defendant to ship the goods, the Plaintiff should prepare a cheque for payment or amend the letter of credit. Our principle guide line must be to have financial security before shipping the goods. In any event, we did not receive any response from the Plaintiff."

could not be reconciled with the correspondence which had been exchanged between the parties. He was forced to accept that there had indeed been correspondence exchanged on the subject of opening a letter of credit and that the Plaintiff had stipulated that the opening of a letter of credit would be conditional upon the obtaining of an Export Licence and garments conforming to contractual requirements being available for shipment within the extended periods of time agreed by the Italian Importers.

40. Mr. Hon's evidence concerning the condition of the garments was of no value at all as he had no direct knowledge on the subject. The overwhelming impression I gained from Mr. Hon's evidence was his desire to evade responsibility. I did not consider him to be a truthful or reliable witness.

41. The final witness to give evidence for the Defendant was Miss Edith So. She did not accept that she was able to make important decisions without reference to Mr. Hon. It was her evidence that she did receive instructions from him on important matters.

42. She was not though a very satisfactory witness. She was reluctant to admit that she was aware that the garments had been manufactured in China. The explanation she gave concerning the 'Submarine' memos previously referred to was less than convincing. She claimed that the reference in this case to 'Submarine' transactions did not involve any illegality. What she had been referring to was the procedure whereby Mr. Hon obtained orders and then the responsibility for manufacturing was undertaken by Prime.

43. She did though give evidence that she had no knowledge of Rare Species and that they had had a responsibility in connection with the shipping of the garments. She added that if they had had a responsibility she would have expected that she would have known about it.

44. I did not form a favourable impression of Miss So as a witness. I do not think that much reliance can be attached to her evidence and that all that really can be said is that she was the author of the correspondence emanating from the Defendants. I do, however, accept her evidence that it was necessary for her to obtain authority from Mr. Hon before important decisions were made.

45. As I have already indicated I far preferred Mr. Pozzi's evidence to the evidence of any of the defence witnesses. Where there are conflicts of evidence I am satisfied that Mr. Pozzi's evidence is to be preferred to the version being put forward by the Defendant.

46. Specifically I find as a fact that the quality of the garments did not conform to contractual requirements when Mr. Pozzi inspected them on the 10th August. I am also satisfied that there was no reasonable prospect of the defects being rectified in time to enable the goods to be shipped on the 15th August the last extended dated for shipment.

47. I am also satisfied that the letter dated 19th August from the Plaintiff's solicitors and the Defendant's reply of the 21st August accurately reflect the true position at that time. These letters read:-

"Dear Sirs,

Purchase Contracts Nos. 07-0493 and 08-0493 dated

7th April 1993 Sales Confirmation S305131 dated 13th May 1993 (together "the Contract" We act for Daedalus Blu Limited.

We are instructed that you have failed to deliver goods to our client pursuant to the terms of the Contract.

We are instructed to accept your repudiation of the Contract. We hereby expressly reserve all our client's rights against you for your wrongful breach of contract.

We are also instructed that the goods manufactured to our client's specifications and containing our client's customer's label are subject to our client's customer's intellectual property rights. Any attempt by you to sell the goods to a third party or otherwise deal with the goods without our express authority is a breach of

those rights. We hold you liable for all losses and damage that may arise under those rights."

Yours faithfully,

Richards Butler

JNG.100/16"

"To: DAEDALUS BLU	Telex Ref: 308/221
Attn: Mr. Mario Pozzi	Page: One only
Fax: 5165550	Date: August 21, 1993
Fm: Edith So	c.c.: Mr. Johnny Hon
	c.c.: Prime

Dear Mr. Mario,

Re. 879 & 881

Please kindly be noted that we will return the bulk main labels, hangtags & the zipper puller mould to you as soon as possible.

Best regards,

Edith"

48. I will now consider the position at law.

49. Mr. Fung argued that the Plaintiffs could not succeed in their claim even if I was disposed to accept Mr. Pozzi's evidence and reject the evidence of the Defendants' witnesses.

50. All the evidence indicated was that the goods may not have been of merchantable quality thus giving rise to a claim under the Sale of Goods Ordinance. This, however, had not been pleaded. It was evident on the Defendants' evidence that the goods were available for shipment on the 10th August and the Defendants had under the amended terms of the contract until the 15th August to ship the goods. Thus they were not in breach of contract.

51. I do not accept this analysis. I consider that Mr. Harris correctly stated the position.

52. The Defendants had not on the available evidence produced goods which were available for shipment. In determining this it was necessary to take cognisance of S.29 of the Sale of Goods Ord.

53. S.29 provides:

"Duties of seller and buyer

It is the duty of the seller to deliver the goods, and of the buyer to accept and pay for them, in accordance with the terms of the contract of sale."

54. In this respect the evidence was virtually all one way. There were serious defects in the garments and the Defendants had failed to make available goods conforming to the contractual terms.

55. I am satisfied that the Plaintiff has indeed made out the case pleaded in the pleadings. This then leads to what is appropriate as relief.

56. There can be no doubt that the Plaintiff is entitled to the damages pleaded in paragraph 9 of the Points of Claim. These amount to US$15,723.10. I am also satisfied that the Plaintiff is entitled to a declaration to be indemnified from any claim which may be made on them in

accordance with the principles propounded by Somervell L.J. at p.303 of Trans Trust S.P.R.L. v. Danubian Trading Co. Ltd. 1952 2 Q.B. 297.

"There may be some cases in which to court can state a principle which makes the subsequent quantification of this damage simple. On the order hand, difficult questions may arise, depending, for example, (1) on any variation of the terms of the contract between B and C as between B and A, (2) on the question whether A took the steps which should have been taken to mitigate damage. No declarations ought to prejudice or preclude a proper determination of these issues, on which the defendants should be entitled to be heard. It might, as it seems to me, be more satisfactory if there were liberty to apply for directions as to the determination of these issues, if any, and quantification of damages under this head as between plaintiffs and defendants, should disputes arise. Some order in this form, at any rate, in some cases, might be more satisfactory than a declaration in the form ordered."

57. Mr. Harris produced a form of draft declaration along the lines of the declaration made by Lewis J. in Household Machines Ltd. v. Cosmos Exporters Ltd. 1947 K.B. 217.

58. I am prepared to make a similar form of declaration in the present case.I will hear the parties on costs.