DCCJ2629/2007

DCCJ 2629/2007 &
DCCJ 2630/2007
(CONSOLIDATED)

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 2629 OF 2007

____________

BETWEEN

JUDGMENT

1.  This action was consolidated under the order of Master S.T. Poon (as he then was) of 19 July 2007. The Plaintiff, Pearl Pond Ltd. in DCCJ 2629 of 2007 claimed against the Defendant, Tung Ga Linen & Cotton Mills Limited, on 16 June 2007. On the same day, Tung Ga Linen & Cotton Mills Limited issued a writ against Pearl Pond Limited under DCCJ 2630 of 2007. After the consolidation of the two actions, the Statement of Claim and Defence were amended accordingly.

2.  Both the Plaintiff and the Defendant are companies incorporated in Hong Kong under the Companies Ordinance Cap. 32 Laws of Hong Kong.  The Plaintiff, Pearl Pond Limited (“Pearl Pond”) is and was a manufacturer and supplier of garments.  The Defendant, Tung Ga Linen & Cotton Mills Limited (“Tung Ga”) is and was a supplier of fabrics. 

3.  Pearl Pond claimed against Tung Ga for the recovery of loss and damage under five heads of claims:

(a) Claim 1: the sum of $804,131.25 for two mistaken payments against two invoices from Tung Ga, namely:

(i) invoice TGC270062 for $323,553.75;

(ii) invoice TGC270079 for $518,505.00.

Pearl Pond claimed that the two invoices were meant to be paid by Keys International Limited (“Keys”), they were erroneously settled by Pearl Pond.

(b) Claim 2: the sum of $37,927.50 was set-off by mistake under Debit Note No. 218139 from the mistaken payments under claim 1. 

(c) Claim 3: $125,273.89 air freight cost.  Due to the late delivery of fabrics by Tung Ga, Pearl Pond incurred extra expenses under 4 Maersk Logistic invoices.

(d) Claim 4: $86,430.91 loss of profit.  The loss suffered by Pearl Pond as a result of missing or defective goods.

(e) Claim 5: $292,997.25, due to Tung Ga’s failure to refund an agreed sum (‘the credit note’).

4.  Pearl Pond claimed that the aforesaid sums are to be settled against the Tung Ga’s invoices in the sum of $684,261.88.  After commencement of the trial, Pearl Pond abandoned part of claim No. 4 on loss of profit under the cancelled Marks and Spencer order in the sum of $38,276.40.  It is now claiming the sum of $48,275.18 under claim 4, the cost of wasted accessories for the cancelled order.  Tung Ga also agreed to Pearl Pond’s claim 5, the pending credit note in the sum $292,997.25.  The total claim for Pearl Pond therefore is $624,343.90 after setting off against Tung Ga’s invoices in the Counterclaim. 

5.  Tung Ga denied Pearl Pond had wrongly paid the two invoices (No. TGC270061 (R-1) and TGC270079) (“the two invoices”) in the sum of HK$285,626.25 and HK$518,505 after the deduction of HK$37,927.50 (“the error payments”). Tung Ga counterclaimed against Pearl Pond in the sum of $903,482.82 under a number of invoices for goods delivered to Pearl Pond by Tung Ga between November 2006 and May 2007.  The total sum of the invoices unpaid amounted to $1,196,480.07.  Credit is given under the credit note from Pearl Pond of HK$292,997.25.  Therefore, the remaining sum claimed under the Counterclaim is HK$903,482.82 (para. 22 of the Defence and Counterclaim at p. 47 & 48 of the Bundle). 

6.  Pearl Pond agreed and admitted that out of the twenty invoices set out in para. 22 of Tung Ga’s Counterclaim, a total sum of $684,261.88  to be set off against Pearl Pond’s own claim against Tung Ga, leaving the remaining seven invoices in dispute.  Pearl Pond claimed they are related to goods supplied to Keys International in the total sum of $512,218.19.  There are also the error payments Pearl Pond alleged were mistakenly paid in the sum of $804,131.25 which Pearl Pond claimed should be set off against Tung Ga’s Counterclaim. 

7.  It is Tung Ga’s defence that the two invoices were in fact fabrics delivered to Keys pursuance to Pearl Pond’s instructions, therefore, Pearl Pond is obliged to settle the payment for the fabrics.  Tung Ga further claimed it was instructed by Pearl Pond to issue proforma invoices to Keys for payment of fabrics delivered to Keys.  Even though Keys had issued a number of cheques to settle the proforma invoices, they were all dishonoured.  Tung Ga therefore turned to Pearl Pond for payment of fabrics delivered to Keys on the instructions of Pearl Pond.  Pearl Pond then settled the payment of the two invoices.  Consequently, the major dispute between the parties on the Defendant’s Counterclaim is whether Tung Ga should turn to Pearl Pond for payment for fabrics delivered to Keys International.

8.  So far as the Plaintiff’s claim against the Defendant is concerned; claim 1 referred to the two mistakenly paid invoices; claim 2 referred the alleged error deduction of $37,927.50; claim 3 referred to extra freight charges incurred due to the wrongful detention by the Customs Office of the People Republic of China; claim 4 referred to the costs of wasted accessories for the cancelled Marks and Spencer order of $48,275.18.

The Issues

9.  The issues identified are as follows:-

(1) Was it Pearl Pond or Keys who ordered the fabrics delivered to Keys? And, who is liable to pay for fabrics delivered to Keys?

(2) Were the two invoices mistakenly settled by Pearl Pond?

(3) Was Tung Ga liable for the wrongful detention of the fabrics by the PRC Customs Office?

(4) Was Tung Ga liable for the wasted accessories suffered by Pearl Pond as a result of Tung Ga’s failure to replace the defective fabrics?

Background

10.  Tung Ga was a designated supplier of fabrics of Marks & Spencer and Pearl Pond was the designated manufacturer of garments of Marks & Spencer. When Marks & Spencer placed an order for garments to be manufactured by Pearl Pond, it would instruct Pearl Pond to order fabrics from its designated fabric supplier, Tung Ga. 

11.  Keys was a garment manufacturer that Pearl Pond had from time to time outsourced production of garments ordered by its customers.  Keys was not a designated garment manufacturer of Marks & Spencer.  On 31 October 2007, Keys was wound up pursuant to the order of the Court. 

12.  It is not disputed that between October 2006 and February 2007, Pearl Pond placed various purchase orders for fabrics with Tung Ga for the production of garments ordered by Marks & Spencer (“M&S”).  Pearl Pond outsourced some of the M&S orders to Keys while manufacturing the remaining orders in its own factory in Shenzhen, China. 

The Plaintiff’s Case

13.  It is the evidence of Pearl Pond’s witness Mrs. Irene Wong Da Souza (“Irene”) that Pearl Pond introduced Keys to Tung Ga so that Keys could obtain fabrics directly from Tung Ga for the garments ordered by M&S.  Irene claimed that Pearl Pond had paid no role in any of the dealings between Keys and Tung Ga. 

Claim 1 Error Payments of HK$804,131.25

14.  Pearl Pond claimed that between January and February 2007, Tung Ga sent two invoices to Pearl Pond, invoice Nos. TGC270062 (R-1) and TGC270079) (“the two invoices”) demanding payment of HK$323,553.75 and HK$518,505 in the total sum of HK$842,058.75.  Pearl Pond claimed that these invoices should have been addressed and sent to Keys for settlement but were wrongly addressed to Pearl Pond.  Due to a clerical error, Pearl Pond’s accounts staff mistakenly settled the two invoices with two cheques.  The first cheque for settlement of TGC270062 (R-1) was in the sum of HK$285,626.25 after the deduction of the sum of HK$37,927.50 in relation to a debit note No. 218139.  The second cheque No. 416647 in the sum of HK$518,505 was payment against Invoice No. TGC270079. These payments were made in or about March 2007.  On 23 May 2007, over 2½ months after the aforesaid payments, Irene e-mailed Elaine Chow informing her that Pearl Pond had settled the two invoices by mistake because the fabrics were not delivered to Pearl Pond or Pearl Pond’s factory in China but to Keys.  Pearl Pond then issued a debit note for the recovery of the said amount.  Irene further suggested to Tung Ga it should take out proceedings against Keys for the outstanding invoices and for the dishonoured cheques issued by Keys to Tung Ga. 

Claim 2

15.  Due to the error payments, Pearl Pond claimed the debit note 218139 of HK$37,927.50 was wrongly set off against invoice No. TGC270062 (R-1). 

Claim 3

16.  Pearl Pond claimed the air freight charges of $125,273.89 was incurred due to late delivery of fabrics by Tung Ga to Pearl Pond’s factory in Shenzen, PRC under purchase orders PP-11872/11871/11436 (p. 154 of Bundle C).  The purchase orders specified the delivery date of 15 March 2007, for the purchase order of 15 January 2007, revised on 28 February 2007. 

17.  Pearl Pond claimed that Tung Ga’s driver had failed to complete customs clearance procedures on the date of delivery of the fabrics to Pearl Pond’s Shenzhen factory.  As a result, the cargo of fabrics was detained by the PRC Customs Office between 19 April 2007 and 11 May 2007.  She produced a report from the PRC Customs Office on the investigation of the cargo detained by the Customs Office on 14 April 2007 in Shenzhen (p. 156 of Bundle C).  She further produced invoices from Maersk Logistic and airway bills for four follow-up cargoes, the first two were  dispatched on 31 May and 2 June and two further lots on 12 June 2007 by air freight to M&S in London (p. 158-173 of Bundle C).  The extra air freight charges after deduction of sea freight was $125,273.89.

Claim 4

18.  Pearl Pond claimed that Tung Ga had agreed under a number of oral agreements made between 27 March to 23 May 2007 to supply a total of 113,901 yards of linen viscose woven fabric to Pearl Pond or to its designated factory in the PRC.  However, Pearl Pond had received only 102,442 yards of the 113,901 yards ordered (Garment Contract Nos. PP11872/11871/11436).  As some of the fabrics supplied by Tung Ga were of inferior or defective quality, they were returned to Tung Ga between 11 May to 19 May 2007.  As a result of short delivery and the defective fabrics, Pearl Pond claimed it failed to deliver 8,000 pieces of garments to M&S.  At the same time, Pearl Pond had incurred losses for the purchase of accessories and trimming valued at $48,154.51.  It claimed the recovery of this sum from Tung Ga.

Claim 5

19.  The claim of $292,997.25 as agreed by Tung Ga for the refund for defective goods is not disputed by Tung Ga. 

20.  Pearl Pond claimed it is entitled to set off the aforesaid amount against Tung Ga’s invoices which the Plaintiff admitted to be $684,261.88. This leaves the amount of $624,343.90 outstanding to Pearl Pond by Tung Ga.

The Defence Case

21.  Tung Ga’s Counterclaim is set out in the agreed schedule of the parties on their respective claim and counterclaim submitted to Court on 16 September 2010.  It is as follows:-

	Invoice No.	Accepted by P (set-off amount)	Disputed by P	Nature of the invoice
(1)	DN170077		5,500.00	Keys related
(2)	DN170142		12,300.00	Keys related
(3)	DN170153	166.50
(4)	DN170175	3,500.00
(5)	DN170179	793.50
(6)	DN170181	2,900.00
(7)	DN170203		3,000.00	Keys related
(8)	DN170214	1,200.00
(9)	DN170231	2,400.00
(10)	DN170252	193.00
(11)	DN170253	345.15
(12)	TGC270083	17,608.50
(13)	TGC270052(R3)		247,854.75	Keys related
(14)	TGC270074		120,315.00	Keys related
(15)	TGC270104	17,637.75
(16)	TGC270105	253,305.00
(17)	TGC270106 (Outstanding balance)		44,546.44	Costs of Trucking, Customs Clearance and Terminal Handling Charges which D refused to pay
(18)	TGC270123		78,702.00	Keys related
(19)	TGC270137	272,658.75
(20)	TGC270185	111,553.73
	Sub-total	684,261.88	512,218.19
	Total amount due:		1,196,480.07
	LESS: Pending Credit Note which D agreed to pay		(292,997.25)
	Total Amount Counterclaimed		903,482.82

22.  The main claim involved the outstanding payments for fabrics delivered to Keys.  Tung Ga claimed they should be borne by Pearl Pond because the contracts for the supply of fabrics were made between Pearl Pond and Tung Ga. Keys was only an agent of Pearl Pond in accepting the delivery of fabrics, there was no contract for purchase between Keys and Tung Ga.  Delivery of fabrics were made to Keys on the direction and instruction of Pearl Pond. 

23.  Tung Ga pointed to the purchase orders placed by Pearl Pond (p. 1-13 of Bundle B) which showed the orders for fabrics were placed by Pearl Pond and accepted by Tung Ga, the supplier.  References made in the document appeared at p. 10 of Bundle B (the same as the document on p. 175 in Bundle A) for purchase order No. PP-11872/11871/11436.  The Defence further referred to p. 177 in Bundle B, a commercial invoice issued by Tung Ga on 3 January 2007, referring to invoice No. TGC270062 (R-1) which appeared at p. 132 of Bundle A. Apparently, the invoice on page 132 of Bundle A had been sent to Pearl Pond and payment was settled by Pearl Pond on 15 March 2007.  The page 177 Bundle B document was endorsed with a chop marked “Irene Wong’s team” recording the purchase order No. 11871/11872/11436.  Upon payment approval by Pearl Pond’s staff Maggie and Irene, and after deduction of the sum of $37,927.50 under a debit note (p. 14 of Bundle B), the cheque in the sum of $285,626.25 was paid to Tung Ga (“the 1^st error payment”).  The Defence claimed it was under similar circumstances that the cheque in the sum of $518,505 (“the 2^nd error payment”) was paid to Tung Ga and presented by Tung Ga to the bank for payment on 27 March 2007. 

Analysis

(1) Was it Pearl Pond or Keys who ordered the fabrics delivered to Keys?  And, who is liable to pay for fabrics delivered to Keys?

24.  As to who ordered the fabrics under the two invoices that had been settled by Pearl Pond allegedly by mistake, the Defence had shown that under invoice No. TGC270062 (R-1) (“the 1^st error payment”), reference was made to purchase orders approved by Maggie who was a member of Irene Wong’s team on p. 177 of Bundle B, that they were fabrics ordered by Pearl Pond.  This showed the purchase orders Pearl Pond produced were all placed by Pearl Pond to Tung Ga, including fabrics delivered by Tung Ga to Keys.  Pearl Pond further produced purchase orders placed for finished garments to be manufactured by Keys for Pearl Pond which bore the same purchase order numbers on the document on p. 177 Bundle B.  As Keys was Pearl Pond’s sub-contractor for garments ordered by M&S, Pearl Pond had instructed Tung Ga to deliver fabrics required for the M&S garments to its sub-contractor, Keys.  The emails exchanged between various parties including Maggie Ho of Pearl Pond and Florence Chan and Elaine Chow of Tung Ga and Candy Wong of Keys between 17 and 31 January 2007 at p. 267-1 to 267-7 clearly showed the relationship between the three parties.

25.  Miss Ng, Counsel for the Defence, submitted that Maggie Ho, who was the Merchandising Manager at Pearl Pond, was the person in charge of co-ordinating the delivery of fabrics by Tung Ga to Keys.  Furthermore, there were references to the three invoices TGC270062, TGC270052 and TGC270074, these were related to records of delivery of fabrics to Keys.  Clearly, it was the subject of the discussion between Edwin Lau of Keys and Irene Wong of Pearl Pond (p. 264-265 of Bundle B).  Page 262 of Bundle B is the statement of account from Tung Ga to Pearl Pond where the three aforementioned invoices were part of the outstanding invoices for settlement demanded by Tung Ga.  The date of the statement was 6 February 2007.  The two invoices also appeared on the statement, i.e. No. TGC270062 for the sum of $323,553.75, and TGC270079 for the sum of $518,505. 

26.  Upon perusal of the purchase orders, the invoices, proforma invoices and the contents of the exchange of e-mails between the three parties on the delivery of fabrics, I am satisfied the two so-called error payments were not settled by mistake.  The email exchanges disclosed that Pearl Pond had an arrangement with Keys that Pearl Pond would settle invoices from Tung Ga for fabrics delivered to Keys as Pearl Pond’s sub-contractor for a finance charge of 4% on top of the invoiced fabric price (see p. 116 of Bundle A).  The e-mail of 12 February 2007 from Irene to Edwin referred to four deliveries of fabrics to Keys which Keys had failed to pay for and Irene took it upon herself on behalf of Pearl Pond to write to Edwin of Keys requesting Keys to settle payment.  It also referred to the contract terms between Pearl Pond and Keys.  The contract terms between Keys and Pearl Pond were strictly between Pearl Pond and Keys, they do not involve Tung Ga, who was only the supplier of fabrics under contract to Pearl Pond.  Hence, these correspondences spoke for themselves showing there was a contract for supply of fabrics between Tung Ga and Pearl Pond and that some of the fabrics ordered were delivered on instructions of Pearl Pond to Pearl Pond’s sub-contractor, Keys.  Therefore Pearl Pond is under contract to settle payments for fabrics that Tung Ga delivered to both Pearl Pond and its sub-contractor, Keys. 

(2) Were the two invoices mistakenly settled by Pearl Pond?

27.  As explained above, I found the two invoices were settled by Pearl Pond not by mistake because Pearl Pond was under contract to Tung Ga to pay for all fabrics supplied by Tung Ga including fabrics supplied to Pearl Pond’s sub-contactor.  There was no contractual relationship between Tung Ga and Keys.

(3) Was Tung Ga liable for the wrongful detention of the fabrics by the PRC Customs Office?

28.  It is apparent from Irene’s e-mail to Edwin copied to Florence Chan and Elaine Chow of Tung Ga on 12 February 2007 (p. 116 of Bundle A) that Pearl Pond admitted it was doing business “FOB Hong Kong”.  The evidence of both parties clearly showed that Tung Ga had delivered fabrics to Pearl Pond’s Hong Kong office through a transportation company hired by Tung Ga.  The delivery was based on a contract of FOB Hong Kong.  The fact that the same driver and truck did not unload the fabrics at Pearl Pond’s Hong Kong office, and, upon obtaining customs declaration documents prepared by Pearl Pond at the Hong Kong office, was directed to deliver the fabrics to either Pearl Pond’s factory in Shenzhen or to its sub-contractors in Guangdong did not extend the duty of delivery by Tung Ga to Pearl Pond to delivery in China.  It is important to note that the customs declaration documents for importing fabrics to China from Hong Kong obtained by the driver was prepared by Pearl Pond at its Hong Kong office. Pearl Pond blamed the detention by the PRC Customs Officers on 19 April 2007 on the driver and Tung Ga.  However, the customs manifest was prepared by Pearl Pond’s Hong Kong office and the manifest was given to the driver of the truck with the fabrics to be delivered to Pearl Pond’s factory in China, this indicated the ownership of the fabrics had passed to Pearl Pond in Hong Kong. The manifest named Pearl Pond as the importer of the fabrics to its factory (or its sub-contractor’s factory) in China.  Consequently, it is incumbent upon Pearl Pond to clarify with the Chinese Customs should the Chinese Customs raised query on Pearl Pond’s cargo and the customs manifest prepared by Pearl Pond.  Indeed, references to Pearl Pond was made in the PRC Customs report (p. 104 to 106 of Bundle B), Tung Ga’s name did not appear in the report whatsoever.  Pearl Pond was named by the Customs Office as the owner of the cargo, this again showed that Pearl Pond was in possession of the cargo when it was imported into China on 17 April 2007.  As such, Tung Ga or the transportation company hired by Tung Ga had no duty to clarify with the Chinese Customs nor were they in a position to do so.  The driver, in particular, had no knowledge or authority to clarify with the PRC Customs the contents of the cargo after submission of the import manifest from Pearl Pond. 

(4) Was Tung Ga liable for the wasted accessories suffered by Pearl Pond as a result of Tung Ga’s failure to replace the defective fabrics?

29.  Tung Ga did not dispute that by 25 May 2007, it had failed to replace 15,016 yards of the defective fabrics delivered earlier.  It is Tung Ga’s defence that it failed to deliver the replacement because Pearl Pond had refused to settle payment for fabrics delivered to Keys.  It is the defence case that Pearl Pond had failed to show the hangers, labels and stickers for garments to be manufactured amounting to $53,891.98 were for garments to be manufactured with fabrics to be replaced by Tung Ga.  It argued that some of the orders for the labels and stickers were ordered as early as December 2006 and January 2007, long before the garments were to be manufactured in May 2007.

30.  I am satisfied that since Pearl Pond was under a duty to settle payment for the fabrics delivered by Tung Ga to Keys under the supply contract between Pearl Pond and Tung Ga, Pearl Pond was in breach of the contract and Tung Ga was therefore entitled to accept the breach and revoke the contract.  It was not under a duty to deliver further fabrics when Pearl Pond failed to settle over half a million dollars worth of fabrics to Pearl Pond’s contractor Keys. On that basis, Pearl Pond has itself to blame for Tung Ga’s failure to deliver replacement fabrics leading to the delay in the manufacture of garments for M&S in the U.K. incurring extra expenses and air freight charges.

Conclusion

31.  I am satisfied that the Defence had shown it is entitled to recover the sum of $903,482.82 from Pearl Pond.  I give judgment to the Defence on the counterclaim in the said sum.  I dismiss the Plaintiff’s claim for the sum of $624,343.90.  I hold Pearl Pond had wrongly refused to settle the payments for fabrics delivered to its contractor by Tung Ga.

Interests

32.  Interests on the Counterclaim from the date of the service of the Counterclaim to the date of judgment at half judgment rate, thereafter at judgment rate until full payment. 

Costs

33.  Costs to follow the event.  The Plaintiff shall pay the costs of the Defendant to be taxed if not agreed with certificate for Counsel.  The order will be made absolute should there be no application on costs within 14 days hereof.

34.  Lastly, I thank counsel for their assistance in this action.