HOP FAT GRAMENTS FACTORY LIMITED v. SIBER HEGNER AND COMPANY (HK) LIMITED

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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BETWEEN

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JUDGMENT

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1. Upon four contracts all dated the 19th March 1985, various goods were agreed to be sold by the plaintiff to the defendant. They are contracts S71/0060, S71/0078, S71/0086 and S71/0094. The plaintiff claims against the defendant for unpaid balance of the price of goods. The plaintiff now limits itself to HK$101,268 which the defendant does not dispute subject to its counterclaim.

2. The defendant's counterclaim involves only three styles under the first three of the four above-mentioned contracts. They are styles 51025 for jackets, 51003 also for jackets and 51016 for jacket/pants sets respectively. I shall call them Style 025, Style 003 and Style 016.

3. For each style, there were intermediate inspections and a final inspection. Style 025 was for 1,400 pieces; 125 pieces out of the whole of 1,400 then available were inspected at the final inspection but only 1,389 pieces were shipped. Style 003 was for 2,000 pieces; 125 out of 2,000 pieces then available were inspected at final inspection and the same quantity of 2,000 pieces was shipped. Style 016 was for 3,000 pieces; 125 pieces out of 3,000 then available were inspected at the final inspection but only 2,904 pieces were shipped. 125 represents slightly over 4% of 3,000. Therefore about 4% was inspected for Style 016 and more than 4% was inspected in respect to the other two styles. No objection has ever been taken of this minimum percentage inspection of slightly over 4% which is prima facie the optimum percentage for cargo inspection in the instant case.

4. The defendant's counterclaim was based on the following alleged defects:

5. In addition, complaints were made as to different shading within one garment i.e. front and back of the pants and bad matching between the jacket/pants in a set for Style 016. Also complained was the presence of oil stains or rather marks left by improper use of detergent and creasiness caused by packaging in cartons.

6. Goods arrived at Hamburg on about the 1st July and were not finally released until about the 23rd August 1985. What happened was : a company called M.P. Promota GmbH acted as a middleman, but these goods would go ultimately to Puma Sportschuhfabriken Rudolf Dassler KG as consignee. In about July, a dispute arose between Promota and Puma. Puma was then negotiating to take over the goods. The dispute between Promota and Puma was settled through, inter alia, the intervention of the defendant. On the 16th August 1985, the defendant signed an agreement with Puma for goods from the plaintiff's contracts, from Taiwan and also from Korea to be taken over by Puma. Goods were to be released within 14 days and an examination was to be arranged.

7. The defendant's counterclaim is said to have arisen in this way: according to Mr. Stephen Lee, a director of the defendant, on about the 12th July 1985, Puma complained to the defendant of defects including those in Styles 003, 016 and 025. Mr. Reiter and Mr. Bukowski were sent over to Germany by the defendant. Mr. Reiter is a textile engineer specialised in quality of goods, fabric, fittings and other technical matters in the garment industry. Mr. Reiter's responsibility was to examine the defects in the complaint of Puma and Mr. Bukowski's was to negotiate with Puma as to the quantum of price reduction, if any. One Mr. Gierling was also invited to assist on account of his connection and experience.

8. The complaint of Puma was made before a settlement was arrived at between Puma and Promota and therefore before the taking over of the goods direct by Puma under the said agreement of the 16th August 1985. Initially, Dr. Illert and his German law firm were consulted on the dispute between Promota and Puma and on how the plaintiff's shipments were to be disposed of. Later legal advice was sought and obtained from the same law firm on the complaints from and the final settlement with Puma.

9. From time to time, so Mr. Reiter maintained, he joined Mr. Francis Ng of the defendant during goods inspection. Styles 003 and 025 were described by Mr. Reiter as of medium quality standard but Style 016 was very disappointing. Mr. Reiter participated in the inspection of Style 016 about three times. He was present at its final inspection and he distinctly warned the plaintiff's supervisor to match the colour between jacket and pants, correct different waist-band heights and remove all the pieces with shading problems. Mr. Reiter claimed to have "a very strong feeling" that knowing the requirements of Puma as he did, there would be a likelihood of a claim. Hence, he demanded from the plaintiff Letters of Guarantee for Styles 016 and 025. Mr. Reiter explained that two guarantees were virtually rushed over to the defendant, and they are pages 57 and 58 in the defendant's Bundle. The defendant's own letter seeking confirmation of a guarantee was on its way to the plaintiff on the same day. See page 59 of the defendant's Bundle. That letter was couched in appropriate terms which the plaintiff was required to and did confirm, in effect, as having agreed "to accept full responsibility" for broken stitches, serious shading, unmatched jacket/pants and different waist-band heights. When Mr. Reiter was in the employ of Rooselvelt Trading before he joined the defendant, no guarantee was sought or demanded for the plaintiff's goods.

10. Mr. Reiter was in Germany between 24th to the 26th July 1985. He spent one whole day in a bonded warehouse. He saw, on his way in, on the right hand side, garments hanging up for "a very very long way". He met a lady technical staff and an officer from Puma. He also discussed with a surveyor from S. G. S. i. e. Societe Generale Surveillance for half a day about the alleged defects. The surveyor from S.G.S. was seen inspecting goods and writing a report.

11. The evidence of Mr. Reiter on his inspection of goods in Germany was brief. He prefaced it by giving meanings of various terms, such as "Obvious/Serious Shading", "Bad Matching Jacket/Pants" and "Different Waistband Height". He explained that when the front and the back of a pair of pants did not match, it would be almost impossible to find substitute matching parts for remedy. Likewise, for bad matching between jacket and pants in a set, the same difficulty would be experienced. His opinion was that in those two cases, the articles would not be saleable. Then, he gave a running commentary of Puma's complaints which I have earlier set out. Mr. Reiter acknowledged that the trimmings were not the plaintiff's responsibility, that creasiness was not seriously pursued and that the oil stain complaint was virtually confined to Style 016, which concerned "a couple of sets" shown to him in Germany. As for Style 003, the "Navy" colour complaint was "not severe" and therefore not really a problem and the shading complaint was a minor fault, much exaggerated. As for Style 016, I shall return to its zippers and "Navy" colour. But for shading, Mr. Reiter recalled: "Mr. Kircher told me in Germany" "that he could not run the risk of selling this garment under normal conditions." Puma "discovered a large quantity of colour deviation within pants and jackets and pants do not match the jacket at all". "In Germany they showed me quite a number of pieces of these problems." He was referring to shading problems. As for Style 025, Mr. Reiter conceded that "trimmings" and "back lengths" were not sustainable and that "shading" occurred in very few pieces.

12. Having recounted the complaints of Puma, Mr. Reiter proceeded to state Puma's views as given or otherwise known to him, but his own inspection in Germany was brief and scanty. I should set it out in full to highlight its deficiency:

"Just a guess, I would say I examined between 50-80 pieces per article. In general, I was satisfied with the genuineness of Puma's complaints although shading problems in 003 were exaggerated. With the other points, I had to agree."

Then he produced a jacket from Germany and a newly acquired zippper from Y.K.K. for the comparison of the zipper colour. Contract for Style 016 called for the supply of "Top YKK nichel steel No. 5 colour matching to knitted". No description was given of the zipper so produced. Mr. Reiter also produced a pair of pants kept by the defendant in Hong Kong and a jacket from Germany to illustrate his point of the bad matching in colour. He concluded: "Same problem I saw in Germany."

13. That is the totality of his evidence of the inspection in Germany. He was asked by counsel baldly :

14. Whilst Mr. Reiter's evidence of his Germany inspection is monumentally deficient, apparently being conscious of the importance of matters such as the nature, extent and percentage of the alleged defects, counsel asked bluntly for his view of the settlement. Mr. Reiter's answer cannot be, in my view, of any real assistance.

15. Then in cross-examination, Mr. Reiter described his encounter with the surveyor from S.G.S. on several points, particularly the measurements of the back length. He conceded that he did not know whether the whole consignment was before him for inspection. In any case, he was able to say that a certain quantity was available.

16. Mr. Reiter also claimed that he saw "most of the" garments in the plaintiff's factory, and he seemed to rely on what he knew about their condition at the time of the shipment. It would seem that Mr. Reiter personally attended only at the last inspection of Style 016. In any case, he never suggested to have inspected any goods between the last inspections and shipment.

17. And on that brief evidence of inspection, the Court is asked to pronounce that the settlement by the defendant with Puma on those three styles was a reasonable one.

18. Mr. Reiter suggested that it was usual for a buyer to claim reduction if the major defects reached merely 3 to 4% subject to the buyer's right to deduct the price of any, even one single garment if it had been rendered wholly unsaleable by defects. Mr. Reiter further claimed that 7% of major faults would entitle the buyer to reject the entire consignment as being unacceptable. He seemed to suggest that for some firms minor faults up to 7% might be regarded as no good cause for total rejection.

19. Mr. Reiter returned to Hong Kong, conveyed his information to Mr. Mak of the plaintiff and implored Mr. Mak to visit Germany for a personal inspection. A taunting offer was made that if Mr. Mak was not convinced of the defects on his visit, the defendant would pay for his passage. According to Mr. Reiter, Mr. Mak gave him an impression that the plaintiff would settle all satisfactorily, and it was only later that the plaintiff had second thought and instituted this action against the defendant for the unpaid balance.

20. It is noteworthy that Puma's complaints were only general without particulars. Together with Puma's complaints in other areas, a DM110,000 reduction was demanded.

21. The defendant negotiated with Puma, and of the DM111,000 initially claimed by Puma, a settlement was reached at a global sum of DM55,000. Complaints on the plaintiff's portion, as assessed by Puma, should attract DM29,500. That represents about 53 to 54% of the global settlement. According to Mr. Lee, the director of the defendant, of all the cargo in question the plaintiff's goods were about 59%, and therefore the defendant is claiming against the plaintiff 59% of legal and other expenses incurred.

22. Mr. Chain, counsel for the defendant submitted that because of Mr. Reiter's attendance at the inspections before shipment, particularly the last inspection of Style 016, the defendant's then complaints and instructions to the supervisor, the grave disappointment of Mr. Reiter with Style 016, the Letters of Guarantee, the same defects complained of by Puma, the defects noted by Mr. Reiter in Germany as an expert, the negotiation conducted by Mr. Bukowski, the need to seek the assistance of Mr. Gierling and legal advice and the positive reception of these complaints on the part of Mr. Mak, the defendant has established defects in a fair portion of these goods. Mr. Chain readily admitted that the defendant had a quantum problem in the sense that the precise extent of defects was not satisfactorily proved. Mr. Chain invited me to bear in mind the status of the defendant and Puma, the personal integrity and expertise of Mr. Reiter, the almost natural sequence of events flowing from actually observed defects and culminating finally in a comparatively small claim as contrasted with the price of the bulk, and a settlement of less than half of the claimed reduction. All in all, including the surrounding circumstances, counsel submitted that there should be enough to satisfy me that the settlement reached with Puma was a reasonable one. Hence the plaintiff must be responsible.

23. Judges would be living in a bed of roses, troubled perhaps only by their own conscience, if ever they were allowed such wide latitude. Liability must be proved as "reasonable settlement" has to be proved on the balance of probabilities.

24. In Biggin & Co. Ltd. v. Permanite Ltd. ⁽¹⁾ ,Somervell and Singleton, L.J.J. took the same view that evidence must be adduced in order to enable the Court to determine whether the settlement was a reasonable one. There must be, the Lord Justices observed, "evidence on which (the court) can act". Somervell, L.J. stated the obvious that evidence called may not have to "strictly prove every item of damage claimed". What is envisaged to be proved are, as in the words of the Lord Justice at p. 321, "facts which the witnesses themselves proved and ............. what would probably be proved" if Puma had proceeded to a final solution against the defendant. A settlement reached under legal advice is obviously one of the considerations. At p.p. 325 and 326, Singleton, L.J. concluded that "if upon the evidence, the Judge is satisfied that the damages would be somewhere around the figure at which a plaintiff had settled, he would be justified in awarding the settlement figure."

25. What is reasonably clear from Biggin & Co. Ltd. v. Permanite Ltd., ibid.   is that there must be evidence of the probable extent of liability owed by the defendant to Puma, attributtable to breaches of the contracts between the plaintiff and the defendant. There must also be evidence of the likelihood of success. Such evidence is lacking in the instant case.

26. Mr. Reiter was not involved with the signing of the four contracts. He joined the defendant afterwards in April 1985 but before production. He was aware that colour swatches and samples had been delivered and approved but he did not claim to have personally seen any of them. He only joined Mr. Francis Ng, in his own words, "from time to time" for the inspection. His description of the results of these inspections is without details. He merely made a general assertion that Style 003 and Style 025 were of medium quality standard and Style 016 was very disappointing to a point close to cancellation.  He was concerned enough to consult Mr. Bukowski who was then in Germany as to the possibility of putting an end to Style 016. He explained that as Puma had fully committed itself in promotion, it was impossible to be put a halt to for Style 016. Moreover the plaintiff implored him to allow the shipments to be released including Style 016. Reluctantly he finally agreed, with both he and Mr. Bukowski having decided to take the risk.

27. The goods for Styles 016 and 025 were short-shipped after their respective final inspections. For Style 016, some 86 pieces were short-shipped out of 3,000,and for Style 025, some 11 pieces out of 1,400 were short-shipped. Therefore, Mr. Mak is probably correct that rectification had been attempted between final inspection and despatch on the whole consignments for these three styles. There was every reason for the plaintiff to be cautious before shipment because of the guarantees sought, and there was time for remedy. I accept Mr. Mak's evidence that in between the last inspection and shipment, rectification was made or attempted.

28. The zippers would not then give rise to any problem, even on the defendant's assertion, until much later. Granted that it would be extremely difficult to rectify any shading within one garment or between a set of jacket and pants, but shipments were made in performance of these contracts, and alleged defects after rectification or attempted rectification should be properly proved. I shall come to the "Navy" colour later.

29. As for the Letters of Guarantee for Styles 016 and 025, I do not accept the suggestion from Mr. Chain that there could not have been any attempted rectification after final inspections. Mr. Chain contended that otherwise the identical defects would not have been listed. I have referred to the short-shipments for two styles. If in fact no rectification had been pursued, then the Letters of Guarantee must also have totally failed to take into account possible defects of like kind and percentage in the other 96% or more in the bulk. The defendant themselves would have refused to accept such a guarantee limited to these few items. Moreover, as Mr. Reiter pointed out that the plaintiff hurriedly supplied these Letters of Guarantee which, I find, were merely transplanting words in the final inspection reports without much thought hoping to satisfy the defendant quickly so as to expedite shipping documents and payment. In fact, the defendant was sending over to the plaintiff a suitably worded letter seeking confirmation for an appropriate guarantee.

30. The condition of these three styles after rectification was sought to be proved here almost exclusively by Mr. Reiter's evidence. Mr. Reiter did not appear to have kept any notes. In any case, he referred to or produced none. He agreed that his recollection was imperfect after 2½ years. He inspected only about 50 to 80 pieces and for Style 016 that represents about 2½%. Percentage-wise, it was higher for the other two styles.

31. Puma charged "container demurrage" against the defendant. See page 88 of the defendant's Bundle. Goods were released to Puma on the 23rd August 1985. It was not improbable that the goods or the main bulk of it were still in container. It is questionable whether Mr. Reiter inspected the same goods. Mr. Reiter suggested that presumably Puma had permission to take out all or some of the goods. If all of the goods had been removed from the container, there would have been no justification or warrant for mentioning container demurrage or standing and container charges. There is no evidence that these charges had been paid or even actually demanded, but the documents suggest that a claim for these expenses was contemplated. Mr. Reiter was adamant that he inspected the same goods in the bonded warehouse primarily because of his Hong Kong participation. Puma also held them out as the plaintiff's goods. His Hong Kong involvement was as well intermittent as insubstantial. Identification of these goods leaves much to be desired. Nevertheless, the evidence is just sufficient for me to and I do find that Mr. Reiter examined the plaintiff's goods. But how much percentage-wise was available to him? How was the quantity selected? How was the 50-80 pieces picked? How much and to what extent defects were found in these 50-80 pieces? What kind of examination was conducted? Were any measurements taken? Were any samples used? Where is the evidence of the nature and extent of defects in each garment alleged to have been looked at?

32. The goods seen hanging in "a very very long way" in the bonded warehouse have not been established to be exclusively those of the plaintiff's. At one time, Mr. Reiter referred to "garments from Hong Kong, Taiwan and Korea". Mr. Reiter himself mentioned "a small quantity of garments" for inspection. "My duty to go to Germany was only to see a small quantity of garments and also to try to find a way to minimise the amount that was claimed." He saw "a certain quantity". For shading, he said: "In Germany, they showed me quite a number of pieces of these problems". Did Mr. Reiter examine only those pieces which he was shown? If not, how many of the 50-80 pieces were showed to him by Puma? Where is the evidence that the garments available were a sizeable or representative portion of the bulk? Where is the evidence that the garments hanging up in the bonded warehouse were fairly selected from the bulk so as to be representative? Where is the evidence that Mr. Reiter himself selected these approximately 50-80 pieces at random? Did Mr. Reiter in fact assume faults, as his evidence seems to suggest, because he saw most of them in Hong Kong and "knew how these garments looked like"?

33. As for the zippers, only one garment was retrieved from Germany for comparison with a new zipper acquired from Y.K.K. three weeks ago. The newly acquired one appears to be more silverish and the one on Exhibit "D1" brought back from Germany more golden - though not very appreciable but there is a difference. However, where is the evidence that the zipper newly acquired "D2" would not change colour in due course of time? Where is the expert evidence apart from the observation of Mr. Reiter, of the cause of change in colour as between "D1" and "D2"? Where is the expert evidence that it must have resulted from improper manufacturing process in not allowing the zippers to cool after steam-ironing before packing them into polybags? Most important of all, where is the evidence to show that the zipper in "D1" is significantly different from any sample? No sample has been produced. There is also no evidence that the sample colour remains the same today.

34. The defendant produced no survey report. No proper enquiry has been made as to whether S.G.S. made any report to Puma so as to enable the defendant to seek production of it. Without survey reports from an independent surveyor, in attempting, to prove these alleged defects, the defendant's evidence must be, in its own way, equally sufficient. In my view, it is not. It would not be open to me to lower the burden for evidence coming otherwise than from professional surveyors.

35. At the end of October 1958 as can be seen in Puma's list of complaint at page 258 of the defendant's Bundle, shading within one garment or between jacket and pants were not subject-matters of complaint. These two complaints were only added in a further list from Puma compiled along time afterwards on the 30th April 1987 at page 266 of that Bundle, items (b) and (d).

36. According to Mr. Reiter, only minor colour deviation in "Navy" in Style 003 was observed unless 20-30 pieces were compared. As for "Navy" colour deviation between Styles 016 and 003, it was generally conceded by Mr. Reiter as indeed it was testified to by Miss Poon and Mr. Mak that slight difference in colour was expected for the varying compositions and yarn counts in the fabrics. There was no sample or swatch produced to substantiate the defendant's claim that the "Navy" colour was paler or otherwise not in accordance with it. It must be noted even in the final Inspection Report for Style 016 at p. 56 of the defendant's Bundle, there was total silence on "Navy", although previously in the intermediate Inspection Report, it was stated: "Navy and Grey Colour Deviates From Approved Cutting".

37. The evidence has not even satisfied me that any garment contained such defects as would justify a claim for reduction of its own price. There were, in substance, mere assertions of Puma in the form of general complaints. Puma themselves disclosed no particulars. It would seem likely that even as at the Agreement of the 16th August 1985, Puma had little information of the true nature and extent of the alleged defects. It would have been strange for the Agreement to omit any reference to a survey report or defects data if any had been available. An examination was also envisaged by that Agreement. Thus, the defendant is, in effect, seeking to confirm a generalised complaint of Puma by Mr. Reiter's less than satisfactory evidence of personal inspection in Germany. Biggin & Co. Ltd. v. Permanite Ltd.⁽¹⁾ suggests that the defendant must first establish the plaintiff's liability before adduce evidence for the alleged "reasonable settlement".

38. In any event, on such material the Court cannot even begin to assess the reasonableness of the settlement itself. The counterclaim therefore fails.

39. Mr. Chain has listed out, in extenso, the individual pages in the defendant's Bundle for legal, travel and other relevant expenses. I find them otherwise all proved. I would otherwise also accept Mr. Chain's 59%. I do not propose to repeat the pagination so carefully presented for my consideration. They are all duly recorded in my notes.

40. In the circumstances, judgment for the plaintiff be entered in a sum of $101,268 with interests from the date of the writ to judgment at 7% per annum. 7% per annum was suggested by Mr. Smith to which there was no response from counsel for the defendant. Mr. Chain was absent and his papers were being held by his pupil Mr. Ng. I would be prepared to re-open the 7% interest should the defendant ever feel aggrieved that further submissions should be received, but 7% as suggested by Mr. Smith does appear to be reasonable and appropriate. Costs, needless to say, would be against the defendant both on the counterclaim and in the action. The counterclaim do stand dismissed.

(1)     [1951] 2 K.B. 314 at P.P. 317 & 325 respectively.

(1)     [1951] 2 K.B. 314 at p. 320