VINCENT SINA TRADERS(H.K.) LTD. v. CHIAP WAH TRADING CO.(a firm)

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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BETWEEN

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JUDGMENT

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1. The plaintiff is a trading company which exports garments to buyers in the Middle East. The defendant is a firm that sells in Hong Kong garments manufactured in the People's Republic of China (China). The plaintiff claims US $52,696, which it says it spent in settling the claims of 2 Middle East customers to whom it contracted to supply trousers ordered from the defendant, which it alleges proved defective and unmerchantable. The defendant denies that the trousers were defective or unmerchantable and counterclaims $100,000 in respect of a dishonoured cheque received in payment for some of the trousers and a further $130,900 outstanding for trousers supplied to the plaintiff.

2. The pivotal issue is whether the trousers were unmerchantable or defective. The relevant facts as I find them, and without going into unnecessary detail, are as follows.

3. About the beginning of 1983 Mr. Cheng Chor Bin, a partner of the defendant firm, who effectively operates it on his own, left samples of trousers manufactured in China with the plaintiff. In due course the plaintiff placed orders with the defendant for 7,000 dozen trousers, which it had contracted to supply to the 2 Middle East customers, under 3 contracts.

4. The first of these contracts was dated 7th February 1983 and was for 1,000 dozen trousers at $150 per dozen for delivery on 23rd April 1983. The trousers were intended for a customer in Kuwait.

5. The other 2 contracts were dated 14th March 1983 and were for a total of 6,000 pairs of trousers priced at $144 per dozen for 4,000 dozen trousers and $175 per dozen for the remainder; 1,500 dozen of the former and 500 dozen of the latter were to be delivered at the end of April 1983 and the remainder on 10th June 1983. The trousers under these contracts were for a Port Said customer.

6. There was also another contract for 150 dozen trousers with which this action is not directly concerned.

7. The goods were received by the defendant in stages by several consignments from China. As they were received, Mr. Cheng placed them in his storage units in Kwai Chung, inspected them and then notified the plaintiff which arranged for its representatives to also inspect the consignments, and then for them to be collected and shipped. By the end of May the majority of the goods had been shipped and payment for them made by the plaintiff to the defendant.

8. Miss Lo, the managing director of the plaintiff, says that in mid May 1983 she received a long distance telephone call from a Mr. Mustafa, a representative of her Kuwait customer with whom she normally dealt complaining that the Broods did not conform to sample. She asked him to send details by letter or telex. On 31st May she received a telex claiming that the material had been completely changed, the stitching was very bad, the lining was all mixed, that the goods had been wet, and finally that the ultimate purchaser had made a complaint and claim.

9. On 16th June Mr. Cheng asked for a further payment of $100,000 for the preceding lot of goods collected. He happened to need money and asked for a cash cheque. He was given a cheque for $100,000 by the plaintiff's accountant. The cheque was not crossed. However the bank refused to cash it because of an existing arrangement, which the accountant had overlooked, whereby cheques of and over $100,000 were not paid in cash but only into an account. Before the matter could be resolved, Miss Lo became aware of the cheque and countermanded it because of the Kuwait complaint.

10. Angry meetings and exchanges followed. Mr. Cheng did not believe the goods were defective. Samples of the trousers complained of were sent to Hong Kong and eventually survey reports, not prepared by authorised professional surveyors, but of the only sort, according to Miss Lo, that could be procured in the Middle East. Miss Lo flew to Kuwait and Port Said where she says she had 4 sealed cartons opened in her presence besides being shown samples of the defective trousers which satisfied her that they were defective and unmerchantable.

11. Eventually she worked out a settlement with her customers under which the loss would be taken at the contract price less, in the case of Kuwait, the proceeds of the defective goods, some of which unlike the Port Said goods it was possible to auction. It was also agreed that one half of such loss would be borne by each side. As the plaintiff had been paid in full under letters of credit, it was also agreed that the plaintiff would pay its share by supplying the customers with the garments they selected to the appropriate value i.e. the total sum of US $52,969. In this way it was considered the customers would be able to sell the trousers at a profit and recover a further part of their losses. The customers selected jeans and the plaintiff bought quantities of these to the approximate requisite value and shipped them.

12. I turn now to the pivotal issue of whether the trousers were defective. Mr. Paul Fok for the defendant sought in his final address to submit that there was a conspiracy on the part of the plaintiff and its customers to defraud the defendant. However, since fraud had not been pleaded as required by Order 18 rule 12 of Rules of the Supreme Court, I did not permit him to do so. Nevertheless, Mr. Fok submitted, as he is in my view entitled to do, that the evidence in point shows that the goods were hot defective.

13. Only Mr. Cheng gave evidence for the defendant. He was not in my finding a wholly truthful witness and for instance I do not believe his denial that he had no knowledge that the goods were intended for export, nor do I believe his claim that there was ample room in his storage units for both storage and inspection of the goods (though I do not accept that he prevented proper inspection). Nevertheless, having carefully considered his demeanour, in general I see no reason why much of his evidence should not be accepted. I accept that he inspected the goods as they arrived from China.  However, on his own admission he did not examine more than relatively a very small quantity on each occasion, and his evidence in conjunction with the other evidence does not in my finding establish a probability that his inspections should necessarily have revealed the poor quality lining material, and the substandard workmanship established in the samples produced. A fortiori they would not reveal the mould produced by damp for at those early stages that would not have had time enough to form and cause discolouration.

14. The immediately following inspections carried out by the plaintiff in my finding equally do not establish a probability that the defects or damp should have been discovered. I do not accept Mr. Cheng's evidence that about 20% of the cartons were opened and inspected by the plaintiff's representatives on each occasion. It is true that the last one or two inspections were carried out by a Mr. Siu, the plaintiff's accountant, after the complaints had surfaced and he had in consequence been warned by Miss Lo to be careful. But accountancy and the like were his trade and not garments and I do not accept that his examination should on the probabilities have revealed the defects. As I have indicated, the major fault was the mould and that would not by then have, appeared. Likewise the examination, somewhat cursory at that, of relatively so few of the trousers could have allowed the defective pairs to slip through. In addition they might have pre-dominated in the earlier as opposed to the later shipments.

15. Then there is the manufacturer's certificates of inspection of the garments. As to damp and mould, I do not consider these certificates to be of assistance for the like reason as applies to the plaintiff's and defendant's inspections. But the certificates must be regarded as being of some evidential value as to the quality of the lining material and of the workmanship, even if in the circumstances, that might not amount too much.

16. While on the matter of inspection, I should mention that special condition 4 of the contracts provided that "an inspection of the goods by the buyers before shipment does not in any way free sellers from any responsibility for which they may be liable" under the contracts. Inspection by the plaintiff was accordingly only canvassed at the hearing as evidence that the goods were not defective and not as constituting legal exoneration from liability.

17. To proceed to the positive evidence of the trousers being defective, there is first the complaints of the customers by telex and letter, second the samples produced as exhibits, third the survey reports, fourth the evidence of Hiss Lo, fifth the affirmation of Mr. Mustafa the manager of the commission department of the Kuwait purchaser, and sixth the Chinese Manufacturers' Association Testing Laboratory reports on the samples submitted to it, which on the probabilities I believe came from the contracted consignments.  As to the telexes and written complaints of the Middle East purchasers, the defendant's counsel could only suggest that they were party to a conspiracy. The existence of the telexes and letters was not disputed. Whether they were genuine complaints or fabricated must be considered in conjunction with Miss Lo's evidence of the substandard and damaged goods she says she found in Kuwait and Port Said.

18. I was not wholly impressed with Miss Lo's evidence. She was vague and evasive about her meetings with Mr. Cheng after the first telephone complaint she claims to have received as early as mid May 1983.  I have some considerable doubt as to whether she ever offered to fly Mr. Cheng to the Riddle East at her cost and to procure a visa for him, as she claims. I do not believe her evidence that in regard to the complaint of damp and mould, Mr. Cheng told her it had been very wet in China at the time; on the contrary Mr. Cheng seems to have unswervingly denied that the goods were defective. Nevertheless I do accept Miss Lo's evidence of the condition of the garments she was shown in Kuwait and Port Said. But it is not necessary to rely upon her evidence to arrive at the conclusion that the goods were defective and unmerchantable. The other evidence I have detailed can only be explained away on the basis of a conspiracy, and I have no hesitation, on the balance of probability, in rejecting that possibility.

19. Mr. Fok relied upon the inspections of the plaintiff and defendant and the certificate of the manufacturers. Those I have already dealt with. Mr. Fok also argued that the defendant would not have been a party to the defective goods in his first ever contract with the plaintiff. That is not a consideration of much weight in my view, but it does not arise as it is probable that the defendant was not privy to defective goods being consciously supplied, though unfortunately he must now accept legal responsibility so far as the plaintiff is concerned. Mr. Fok also pointed out that if it succeeds, the plaintiff will emerge unscathe, indeed with its full profit on the original contracts. That is not entirely accurate as the plaintiff must have incurred some expenditure by way of overhead expenses and the costs of travel to the Middle East.  Even so I am not able to see that this consideration is of relevance in determining the issues involved. As to Mr. Fok's contention that Miss Lo should have produced a sealed carton, or photographs of the sealed cartons opened for her, or many more samples, while in hindsight that may have proved advantageous, I do not think failure to do so is fatal.  Needless to say I have taken the point into consideration.

20. Mr. Fok's most telling point however was that the purchasers in Port Said and Kuwait had paid the full f.o.b. price of the goods and that in addition they must have incurred other expenses like customs duties, handling charges, storage costs and so on and that finally they lost the profit they would have made.  Yet, according to the plaintiff, they were prepared to accept a settlement based merely on one half of the f.o.b. price. As businessmen, Mr. Fok plausibly argued, they would not simply have accepted half their losses or less in settlement; that, he says, even if not permissible as evidence of fraud, is evidence that the goods were never defective. I have considered the submission carefully on its own and in conjunction with the other submissions. I am satisfied that the customers in the Middle East did complain of the condition of the goods and rejected then. If the goods were not defective the actions of those customers could only be explained by substitution of the goods or by a conspiracy to which the customers were party. I reject both those possibilities as incredible and in my finding wholly inconsistent with the evidence. As I have already said I have no hesitation in coming to the conclusion that the preponderance of probability is clearly that the goods complained of were defective i.e. that they did not conform to the contract samples and specifications, that they were discoloured and spotted with mould and that they were unmerchantable.

21. The point has not been taken that the major and decisive defect was clearly the mould which affected the garments, that this on the probabilities had not formed at the time of delivery in Hong Kong, and that accordingly the goods were not defective at the time of delivery.  Nevertheless, I think it would be disposed of by the finding I make that in the circumstances the defendant must have known that the goods were purchased for the purpose of export. And for that purpose, they were in my finding unmerchantable.

22. The goods being defective and unmerchantable, the defendant as vendor is liable in damages.

23. Although the defendant was initially not disposed to accept the purchase of the jeans under the plaintiff's terms of settlement with its customers as a genuine business transaction in pursuance of the settle-ment, following the evidence of the Macau manufacturer who supplied the jeans, that the price paid was entirely reasonable and reached after bargaining, which I accept, counsel for the defendant wisely decided not to challenge it. The cost of purchasing the jeans did not amount to quite the sum of US $52,969 claimed, but Miss Lo's assertion that shipping, insurance and other expenses exceeded the balance was not seriously challenged by the defendant. In the circumstances I accept that the total cost of settling the claims of the purchasers was US $52,969.

24. It is convenient at this point to proceed to consideration of the defendant's counterclaim of $230,900. $100,000 of this is in respect of the cheque that was countermanded. The cheque was part payment for the trousers. It follows from my finding that the trousers were defective and unmerchantable that the defendant was not entitled to payment of that $100,000 nor to the remaining $130,900 which likewise was part payment for the goods, and that there was a total failure of consideration for the cheque. In any case the plaintiff would have been entitled to set off.

25. In the result the counterclaim is dismissed, but since the plaintiff was paid in full by its overseas purchasers and has not paid the defendant $230,900, of the contract price, the latter amount must be deducted from the plaintiff's claim of US $52,969; that is common ground having regard to section 55 of the Sale of Goods Ordinance (Cap. 26). I also understood the parties to accept an exchange rate of $7-80 to the US dollar. There will be judgment for the plaintiff on this basis. That on my reckoning produces a net sum of $182,258.20 due to the plaintiff. I will hear counsel upon the mathematical and exchange accuracy of that sum and also on interest and costs.