GOLD FOUNTAIN KNITTERS LTD v. CONQUEST CO LTD

DCCJ2204/2005

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 2204 OF 2005

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JUDGMENT  

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1.  Appearances can be deceptive. The Defence and Counterclaim do not show clearly what this case is all about. In both, the Defendant put the Plaintiff to “strict proof of all the claims under the statement of claims.” As the evidence unfolded, it became apparent that the Plaintiff’s claims were not in dispute. All that the Defendant wanted was to claim set-off and counterclaim.

2.  I give judgment to the Plaintiff for the claimed amount of HK$253,170.07 with interest at judgment rate from 12 May 2005 (date of writ). I dismiss the Defendant’s claim for set-off and counterclaim. I make an order nisi that costs of the whole proceedings (including any costs reserved) be paid by the Defendant to the Plaintiff, with certificate for Counsel. Such costs are to be taxed if not agreed.

3.  I will now explain my decision. Since this case is really concerned with the Defendant’s set-off and counterclaim, I will thus focus on Defence case. There is no dispute that at all material times the Plaintiff was and still is a manufacturer of garments with factories in Mainland China and the Defendant had been placing orders with the Plaintiff since around 2000 (when the Defendant was trading under another name).

4.  Set-off

The Defendant claims set–off in relation to 6 invoices issued by the Plaintiff. In relation to invoices CO 206, C2-111, C2/070, the set-off is on the basis that the relevant goods were already paid for (by the Defendant) but were not delivered. In relation to invoices GYRN33051, GYRM33049 and GCLM33055, the set-off is on the basis that the relevant goods had not been delivered “and so no payment could be demanded” (paragraph (1) b) of Defence). These latter 3 invoices form part of the claim by the Plaintiff but not the former 3.  It is not easy to see how the concept of set-off has any application in the case of the latter 3 invoices. On the pleadings, it seems a simple defence of “no delivery, no payment”. I should add that none of these “invoices” was ever produced in Court. All that can be found in the Trial Bundle are “debit notes” issued by the Plaintiff bearing designations corresponding to those of the invoices stated in the Defence (see respectively Trial Bundle page 105, 108, 106, 156/ 220, 226 and 245). 

5.  However, it is clear from the evidence of the parties that:

a)    all the goods mentioned in the aforesaid debit notes belong to the Defendant;

b)   the goods in debit note GCLM33055 are woollen caps manufactured for the Defendant. The Plaintiff did its part in manufacturing the caps but the Defendant then cancelled the order. The Defendant has not taken delivery of the caps. The Plaintiff wants to be paid for work done. The Defendant is willing to pay provided the caps are delivered to them. Goods in debit notes GYRN33051 and GYRM33049 consist of yarns that the Plaintiff purchased to carry out orders placed by the Defendant. The Defendant subsequently cancelled the orders. The Plaintiff wants to be paid for the cost of the yarns and transportation fees. The Defendant is willing to pay provided the yarns are delivered to them;

c)   the goods for debit note CO 206 (described as “Italian yarns” in the evidence),  C2-111 and C2/070 consist of yarns left over from previous orders of the Defendant. The Defendant wants to take delivery of such yarns;

d)   the Italian yarns were kept by the Plaintiff in Hong Kong. All the other goods were kept at the Plaintiff’s factory in Mainland China. Through the arrangement of solicitors for the parties, 230 kilogrammes of the Italian yarns were returned to the Defendant on 26 January 2007 (see receipt at Trial Bundle page 306). Save for this, the rest of the yarns and the woollen caps (“the Unreturned Goods”) can no longer be found; and

e)   there is no dispute about the quantity or value of the Unreturned Goods. Such can be gleaned from the relevant debit note (one must of course bear in mind the recent return of 230 kilogrammes of the Italian yarns).

6.  Parties fought the set-off on the basis of the Unreturned Goods.  There is no need to be concerned over references to “invoices” (and not debit notes) in the Defence or non-production of the invoices. 

7.  Counterclaim 

The Defendant has a major client in Japan called Conquest Co., Ltd. (“Conquest Japan”). Despite the similarity in names, the Defendant and Conquest Japan are separate and unrelated entities. The Defendant can be regarded as some sort of agent for Conquest Japan. Conquest Japan has its own clients in Japan including DKNY Jeans and 23 Ku. DKNY Jeans and 23 Ku will place orders for garments with Conquest Japan which in turn will order from the Defendant. The Defendant will then place orders with the Plaintiff.

8.  The Counterclaim contains 3 items:

a)   damages for breach of copyright  -  DKNY Jeans designed a particular style of garment and placed an order for manufacture with Conquest Japan. Conquest Japan ordered from the Defendant which in turn placed an order with the Plaintiff to manufacture those garments bearing the DKNY Jeans label/ brand name. The garments were duly manufactured and delivered to DKNY Jeans. Sometime in February or March 2004, a consumer in Japan found one such garment in a DKNY Jeans retail shop but it bore another brand name “ONG”. DKNY Jeans suspected that their style had been illegally copied and claimed damages against Conquest Japan in the amount of Jp ¥1,182,560. Such amount was deducted from sums DKNY Jeans had to pay Conquest Japan. Conquest Japan turned to the Defendant for compensation and the Defendant paid the same amount to Conquest Japan. The Defendant therefore claims against the Plaintiff;

b)   damages for late deliveries  -  goods covered by 18 invoices ( Paragraph (16) of the Defence and Counterclaim at Trial Bundle page 29) should have been delivered by the Plaintiff in September or October 2003 but were only delivered in November or December 2003. As a result of such late deliveries, 23 Ku claimed damages against Conquest Japan in the amount of US$50,000. Conquest Japan in turn claimed the amount against the Defendant. The Defendant had a running account with Conquest Japan and allowed deduction from sums to be paid by Conquest Japan. The Defendant claims this amount from the Plaintiff and

c)   damages for wire-like objects in garments  -  on each of 3 occasions in 2003, i.e. 15 August, 2 September and 30 September, a wire-like object was found in a garment manufactured by the Plaintiff. Conquest Japan had to pay compensation in the amount of Jp ¥1 Million to the ultimate buyer, DKNY Jeans. Conquest Japan claimed the amount from the Defendant. The Defendant paid Conquest Japan and thus claims against the Plaintiff.

(The e-mail from Conquest Japan at Trial Bundle page 266 to 268 can be interpreted to mean that one wire-like object was found in one garment on each occasion. As far as I could see, parties conducted this part of the case on such basis.)

9. Matters considered

The only witness for the Plaintiff was its sales manager, Mr. Owen Ma (“PW1”) who joined the Plaintiff in 2002. PW1 took over from a Miss Candy Ip (“Miss Ip”). Miss Poon Lai Ngo (“DW1”) , one of the directors of the Defendant who dealt with the Plaintiff, was the only witness for the Defendant.

10.  The Unreturned Goods 

Paragraph 5 above refers. As far as the Italian yarns are concerned, I accept that PW1 had at one time and in a jocular way asked the Defendant to retrieve the same. The evidence does not indicate when this was done. DW1 mentioned that in 2001 one of the proprietors of the Plaintiff, Mr. William Ma (“Mr. Ma”), and Miss Ip requested DW1 to take back the Italian yarns. DW1 asked them to keep the yarn first in case there were further orders requiring their use.  Mr. Ma and Miss Ip agreed.

11.  Though PW1 mentioned the Unreturned Goods (including the recently returned Italian yarns) were useless to the Plaintiff, he agreed that the yarns were kept by the Plaintiff in the hope of further orders. He, however, qualified this by saying that such retention was not meant to be for so many years. I note that the Italian yarns have been kept by the Plaintiff since 2001. The other yarns and the yarn caps have been kept by the Plaintiff since 2003 (see dates of the relevant debit notes). PW1 went on to explain that the yarns and yarn caps kept on the Mainland could no longer be found because their factory had moved a number of times. PW1 also mentioned something to the effect that Mainland Chinese Customs would check annually to ensure that raw materials were not stockpiled.

12.  The evidence indicated that the Plaintiff was a gratuitous bailee of the Unreturned Goods. As such, the Plaintiff owed a duty to take care of them. “The standard of care has often been described as the care that a man of ordinary prudence would under similar circumstance take care of his own goods of the same kind (see, for example, China National Silk Import & Export Corporation v Kong Lok Wharf (a firm), HCCL6 of 1990). “…the onus is always upon the bailee, whether he be a bailee for reward or a gratuitous bailee to prove that the loss of any goods bailed to him was not caused by any fault of his or of any of his servants or agents to whom he entrusted the goods for safe keeping…”(per Lord Salmon, Port Swettenham Authority v T. W. Wu and Co. (1979) A.C. 580, 590). There is no evidence to show what care the Plaintiff took towards the Unreturned Goods.

13.  The Unreturned Goods were kept by the Plaintiff on the vague expectation of both parties that there might be further orders from the Defendant. The Plaintiff did not receive any reward for keeping the Unreturned Goods. The Plaintiff was not in the warehouse business. The Defendant was aware of this. The Defendant was also aware that the Plaintiff, being a manufacturer of garments in Mainland China, could not without breaching Mainland Chinese law transport raw material like yarns from the Mainland to Hong Kong. The Defendant never asked for return of the Unreturned Goods until the present case (see also paragraph 14 below). In such circumstances, it must be an implied term of the bailment that the Plaintiff will not keep the Unreturned Goods for other than a reasonable period and that the Defendant will relinquish its claim to them after that period. I think that reasonable period is long past. I do not think the Defendant is now entitled to lay claim or set-off based on the Unreturned Goods.

14.  According to DW1, she came to an agreement over the telephone with Mr. Ma sometime in August 2004 concerning sums outstanding from the Defendant ($470,000 odd before deducting $100,000 paid by the Defendant in July 2004. See Trial Bundle page 263). By this time, all the claims for compensation or discount by clients in Japan for late deliveries and breach of copyright were already known.

DW1’s evidence was that Mr. Ma asked the Defendant to i) pay another $120,000 and ii) ask the Japanese clients to decrease their claim to only $200,000 (I understood this to mean the part of compensation to be borne by the Plaintiff). This would then leave a balance of $50,000 outstanding ($470,000 - $100,000 - $120,000 - $200,000). DW1 mentioned that the Defendant wanted to take back the Unreturned Goods and then the Defendant would pay the balance of $50,000. The conversation ended by Mr. Ma agreeing with DW1 and requesting DW1 to negotiate further with the Japanese clients to claim only $150,000 (against the Plaintiff). DW1 went on to say in evidence that she had written to the Plaintiff asking when the Defendant could retrieve the Unreturned Goods.

The Defendant did pay the $120,000 (see Trial Bundle page 264). In the present case, the Plaintiff has given credit to the Defendant for their payment of $220,000 ($100,000 + $120,000. See paragraph 6 of Statement of Claim at Trial Bundle page 5. See  also Trial Bundle page 278).

I consider such evidence of DW1 material. For one thing, it might form the basis for arguing that there had been accord and satisfaction. The evidence also indicated that at least in August 2004, the Defendant had asked for the Unreturned Goods. This evidence of DW1, however, only came out during her cross-examination and was elaborated upon in re-examination. When queried why this was so, DW1 pointed to paragraphs 25 and 26 of her second witness statement (Trial Bundle page 102). Those 2 paragraphs and paragraph 27 read :

“25.  In or about August 2004, the Defendant reluctantly agreed to bear part of the damages to the extent that the Plaintiff needed only pay HK$200,000.00.

26.    In reply, the Plaintiff made further request to us that they wanted to pay $150,000.00 only. That, however, was not acceptable to us because our Japanese office had already suffered greater loss than the Plaintiff.

27.   On 26 August 2004, I therefore wrote a letter to them informing them, among others, that the Defendant could not reduce the amount further from HK$200,000.00 to HK$150,000.00. The Plaintiff, however, did not make any reply to this letter.”

DW1explained that she considered communicating with Mr. Ma as being the same as communicating with the Plaintiff. Hence, there was no reference to Mr. Ma in paragraphs 25 and 26 of her statement.

I note that the letter DW1 said she sent asking for when the Unreturned Goods could be retrieved and the letter referred to in paragraph 27 of her witness statement were never produced in Court. There was no explanation for this.  If that part of DW1 ’s statement was really referring to what she said when giving evidence, one is entitled to be surprised that she did not condescend on particulars. There is no mention in her statement of such matters as the Plaintiff’s request for payment of $120,000, the balance of $50,000 or the return of the Unreturned Goods.  I reject this part of DW1’s evidence - both her version in Court and that contained in paragraphs 25 to 27 of her witness statement.

15. Damages for breach of copyright

It is noted that only one garment was found objectionable. This garment was produced as Exhibit D2 and one of the genuine articles was produced as Exhibit D1. The 2 garments look the same until their labels are checked. To put it simply, a number of labels that should be present in a genuine article are absent from Exhibit D2. Exhibit D2 had on a number of labels that should not appear in a genuine article. DW1 also mentioned there being a piece of thread at the inside rib of Exhibit D2. I understood her to mean that presence of the thread indicated that the DKNY washing instruction label originally sewn there had been removed. This in turn indicated an intentional act to alter the garment. However, DW1 admitted in cross-examination that she did not know what label had been there in the first place. She merely guessed it should have been one used by DKNY Jeans. I considered DW1’s views or conclusions based on this piece of thread to be no more than guesswork.

16.  PW1 could not explain Exhibit D2. The best he could do was to suggest that since sewing workers in the Plaintiff’s factory would be sewing different labels to different brands or styles of garments during the day, the wrong labels were put on Exhibit D2 by mistake. PW1 admitted, however, that it really should not have happened. 

17.  The Plaintiff had been on good terms with the Defendant for some 4 years (up to this particular incident). PW1 described the Defendant as a major client of the Plaintiff. “ONG” was a Korean client of the Plaintiff. “ONG” would, presumably, have its own line of clothing. Was there some collusion or conspiracy involving “ONG” and the Plaintiff to copy from DKNY jeans? If there was any deliberate copying of the DKNY Jeans design or style, I do not think it probable that the Plaintiff was party to it.  I consider this claim against the Plaintiff to be based on mere suspicion. The Plaintiff should not be held liable for Exhibit D2. In any event, I do not think the probability of mistake in sewing on labels can be ruled out.

18.  Only one garment, Exhibit D2, was found objectionable. 

The claimed amount of Jp ¥1,182,560 represented the price Conquest Japan was charging DKNY Jeans for the whole consignment of garments of that style. DW1 explained that DKNY Jeans decided on this figure as their compensation because they felt it possible the Plaintiff had sold more than that quantity of infringing garments to others.  It is not easy to follow this line of reasoning. I will simply say that I am not satisfied that damages in the amount claimed has been proved. It appealed to me that Conquest Japan paid DKNY Jeans and the Defendant paid Conquest Japan simply because each was eager to keep a major client happy.

19.  Damages for late deliveries

When the Defendant placed an order with the Plaintiff, certain paperwork would be generated. The Defendant would issue a Map Order that stated, inter alia, the style of garment, the quantity and the shipping date. This shipping date was merely tentative. At a subsequent time, the Plaintiff would issue a Sales Confirmation that  indicated, inter alia, a shipping date. Parties were at issue whether the shipping date in the Sales Confirmation was a firm one. DW1 insisted that it was. In the earlier stages of his evidence, PW1 said that the shipping date in the Sales Confirmation was merely copied from the Map Order. He said that the Sales Confirmation merely acted as some sort of memorandum for the parties and that the shipping date therein was still tentative and subject to change. He gave examples when this date might be altered. The examples included the Defendant being late in approving samples, the Defendant being late in providing tags or labels for the garments or the Defendant asking a particular order to be rushed through and another order put on hold. Ultimately, however, I understood that PW1 was willing to agree the shipping date in the Sales Confirmation would be the date or deadline for shipping but the date could be subject to negotiation and further agreement. In the light of this evidence, I concluded that the dispute between the parties on this score was more apparent than real.

I understood PW1 to mean that if a particular consignment was sent by air (and the Plaintiff would then have to shoulder the air-freight), it would be because the Plaintiff was late in making delivery. I understood DW1 to say the same. 

20.  PW1 was not too clear whether there had been late delivery. Defence alleged that the Plaintiff was late in relation to 18 invoices (see also paragraph 8 b) above). In going through the relevant invoices, DW1 said that Invoice 32129 was delivered by the Plaintiff to the godown/ warehouse. Later, she said there was a chance the goods were sent by air. DW1 confirmed that delivery for Invoice 32130 was not late. In relation to Invoice 32132, DW1 said that airfreight might have been paid. DW1 said that it was possible that the goods in Invoice 32139 went by either ship or air. In the light of such evidence, I consider that the Defendant failed to show there was late delivery for these 4 invoices.

21.  The fact that there had been late delivery (for goods covered by 14 invoices) does not necessarily mean damages have been occasioned. I consider this to be so despite the evidence from DW1 that timing is crucial in selling garments viz. fashion for one season will not sell when that season is over. The fact is that DW1 does not know whether 23 Ku actually suffered any loss. Apart from DW1 saying that 23 Ku claimed against Conquest Japan which in turn claimed against the Defendant, there is simply no evidence of whether 23 Ku incurred losses, the circumstances of this happening or the amount. One can further ask whether the US$50,000 took into account Invoices 32129, 32130, 32131 and 32139 the delivery of which have not been proved to be late. It appealed to me that Conquest Japan compensated 23 Ku because it did not want to antagonise an important client. Likewise, the Defendant compensated Conquest Japan because it did not want to offend a major client. Whilst I am willing to accept that the Plaintiff was late in delivery for 14 invoices, I am not satisfied that damages have been proved either in fact or in quantum.

22.  PW1’s evidence was that if delivery were late, there would be negotiation and agreement on payment of airfreight or discount (compensation) before shipment. DW1’s evidence was that in November 2003 she had already informed a merchandiser of the Plaintiff who was handling the relevant invoices, a Mr. Samuel Chan (“Chan”), of the possibility of clients claiming discount for late deliveries. Chan had already left the Plaintiff and was not called to give evidence. PW1 was not in a position to refute such evidence of DW1. I accept DW1’s evidence on this score. I thought, however, that even if DW1 had not so mentioned to Chan, it did not preclude the Defendant from claiming damages for late delivery.

23.  According to DW1, she knew in the beginning of February 2004 that Conquest Japan might claim discount or compensation. Towards the end of February, DW1 learned that there was such a claim and it was for US$50,000. It was pointed out that the alleged late invoices were all paid for by the Defendant to the Plaintiff - 15 of them in January 2004 and 3 in March 2004 (see Trial Bundle page 259 and 262). DW1 explained that payment was made because the Defendant was contractually bound to pay the Plaintiff within so many days of shipping. I considered that such payments did not indicate waiver on the part of the Defendant to sue for damages or in any way precluded the Defendant from so doing. This was particularly when DW1 had already informed Chan of the possibility of clients asking for compensation or discount.

24.  Damages for wire-like objects in garments

We are here concerned with 3 episodes happening on 15 August, 2 and 30 September 2003. There was some dispute during trial whether the foreign objects allegedly found in garments manufactured by the Plaintiff could properly be described as “needles”. I do not see the need to be bogged down by descriptions. Regarding the episode of 2 September, the foreign object is that attached to Exhibit P1, a Needle Detector Machine Report. The evidence is not clear what foreign objects were found for the other 2 episodes. Based on the relevant e-mail of Conquest Japan (Trial Bundle page 266 to 268), I feel entitled to proceed on the basis that those objects were similar to that in Exhibit P1. It is not in dispute that regardless of how one described the objects, they should not be present in the garments.

25.  DW1 does not have personal knowledge of what happened. Her knowledge was gained via e-mail from Conquest Japan (Trial Bundle page 266 to 268). PW1 does not dispute that such wire-like objects were found but queries whether the fault lies with the Plaintiff. PW1 suggested that the wire-like objects might have come from tags used by merchants in Japan to tie or bind things.

26.  There is a dearth of information (not to say evidence) about what happened to the relevant garments on arrival in Japan e.g. whether they were unpacked and repacked, the circumstances of their storage or display. There is also nothing to show the circumstances in which the wire-like objects were found. I see only bald assertions that the presence of the wire-like objects is due to the fault of the Plaintiff.

27.  The amount of damages claimed is Jp ¥1,000,000. DW1 valiantly tried to explain that this represented the expenses of Conquest Japan in, for example, collecting back the garments from their clients for checking, the cost of such checking and re-packaging. DW1 said she had visited Conquest Japan in the past and knew something about their modus operandi. In any event, DW1 could not explain how the Jp ¥1,000,000 should be allocated to each of the 3 episodes or how much was spent on each head of expense. I regarded this explanation as no more than an educated guess on the part of DW1.

28.   I do not accept that there is sufficient evidence to show loss or the quantum thereof. It seems to me the figure of Jp¥1,000,000 was plucked out of the air to act as some sort of penalty (see also e-mail from Mr. Hiroto Sano of Conquest Japan at Trial Bundle page 266). I am not satisfied that loss or damages have been proved. I cannot help but again feel that Conquest Japan paid DKNY Jeans and the Defendant paid Conquest Japan simply because each wanted to mollify and please an important client.